NEWMARKET CORP 10-Q

ITEM 1. Financial Statements NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per-share amounts) Three Months Ended March 31, 2023 2022 Net sales $ 702,789 $ 662,552 Cost of goods sold 504,745 507,389 Gross profit 198,044 155,163 Selling, general, and administrative expenses 39,847 35,622 Research, development, and testing expenses 33,156 36,251 Operating profit 125,041 83,290 Interest and financing expenses, net 10,773 9,406 Loss on early extinguishment of debt 0 7,545 Other income (expense), net 10,880 7,168 Income before income tax expense 125,148 73,507 Income tax expense 27,565 14,189 Net income $ 97,583 $ 59,318 Earnings per share - basic and diluted $ 10.09 $ 5.75 Cash dividends declared per share $ 2.10 $ 2.10 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Net income $ 97,583 $ 59,318 Other comprehensive income (loss): Pension plans and other postretirement benefits: Amortization of prior service cost (credit) included in net periodic benefit cost (income), net of income tax expense (benefit) of $( 171 ) in 2023 and $( 156 ) in 2022 ( 547 ) ( 496 ) Actuarial net gain (loss) arising during the period, net of income tax expense (benefit) of $ 0 in 2023 and $ 7 in 2022 0 16 Amortization of actuarial net loss (gain) included in net periodic benefit cost (income), net of income tax expense (benefit) of $( 118 ) in 2023 and $ 175 in 2022 ( 375 ) 539 Total pension plans and other postretirement benefits ( 922 ) 59 Foreign currency translation adjustments, net of income tax expense (benefit) of $ 207 in 2023 and $ 1,131 in 2022 11,366 ( 3,102 ) Other comprehensive income (loss) 10,444 ( 3,043 ) Comprehensive income $ 108,027 $ 56,275 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) March 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 70,115 $ 68,712 Trade and other accounts receivable, less allowance for credit losses 457,203 453,692 Inventories 566,136 631,383 Prepaid expenses and other current assets 38,107 38,338 Total current assets 1,131,561 1,192,125 Property, plant, and equipment, net 658,092 659,998 Intangibles (net of amortization) and goodwill 125,754 126,069 Prepaid pension cost 310,753 302,584 Operating lease right-of-use assets, net 60,350 62,417 Deferred charges and other assets 64,261 63,625 Total assets $ 2,350,771 $ 2,406,818 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 212,277 $ 273,289 Accrued expenses 72,336 89,508 Dividends payable 17,861 17,850 Income taxes payable 35,248 16,109 Operating lease liabilities 14,948 15,569 Other current liabilities 5,826 11,562 Total current liabilities 358,496 423,887 Long-term debt 957,958 1,003,737 Operating lease liabilities-noncurrent 45,588 46,968 Other noncurrent liabilities 166,929 169,819 Total liabilities 1,528,971 1,644,411 Commitments and contingencies (Note 9) Shareholders’ equity: Common stock and paid-in capital (with no par value; authorized shares - 80,000,000 ; issued and outstanding shares - 9,625,959 at March 31, 2023 and 9,702,147 at December 31, 2022) 0 0 Accumulated other comprehensive loss ( 61,551 ) ( 71,995 ) Retained earnings 883,351 834,402 Total shareholders' equity 821,800 762,407 Total liabilities and shareholders’ equity $ 2,350,771 $ 2,406,818 See accompanying Notes to Condensed Consolidated Financial Statements 6 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (in thousands, except share and per-share amounts) Common Stock and Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity Shares Amount Balance at December 31, 2021 10,362,722 $ 0 $ ( 82,227 ) $ 844,356 $ 762,129 Net income 59,318 59,318 Other comprehensive income (loss) ( 3,043 ) ( 3,043 ) Cash dividends ($ 2.10 per share) ( 21,570 ) ( 21,570 ) Repurchases of common stock ( 115,796 ) ( 597 ) ( 36,750 ) ( 37,347 ) Stock-based compensation 7,777 597 6 603 Balance at March 31, 2022 10,254,703 $ 0 $ ( 85,270 ) $ 845,360 $ 760,090 Balance at December 31, 2022 9,702,147 $ 0 $ ( 71,995 ) $ 834,402 $ 762,407 Net income 97,583 97,583 Other comprehensive income (loss) 10,444 10,444 Cash dividends ($ 2.10 per share) ( 20,292 ) ( 20,292 ) Repurchases of common stock ( 82,486 ) ( 1,223 ) ( 27,525 ) ( 28,748 ) Tax withholdings related to stock-based compensation ( 2,417 ) 0 ( 803 ) ( 803 ) Stock-based compensation 8,715 1,223 ( 14 ) 1,209 Balance at March 31, 2023 9,625,959 $ 0 $ ( 61,551 ) $ 883,351 $ 821,800 See accompanying Notes to Condensed Consolidated Financial Statements 7 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Cash and cash equivalents at beginning of year $ 68,712 $ 83,304 Cash flows from operating activities: Net income 97,583 59,318 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 20,313 21,072 Deferred income tax benefit ( 4,932 ) ( 12,135 ) Loss on early extinguishment of debt 0 7,545 Working capital changes 9,795 ( 66,987 ) Loss on marketable securities 0 2,977 Cash pension and postretirement contributions ( 2,290 ) ( 2,099 ) Other, net ( 10,554 ) ( 2,910 ) Cash provided from (used in) operating activities 109,915 6,781 Cash flows from investing activities: Capital expenditures ( 11,881 ) ( 12,612 ) Purchases of marketable securities 0 ( 787 ) Proceeds from sales and maturities of marketable securities 0 372,846 Cash provided from (used in) investing activities ( 11,881 ) 359,447 Cash flows from financing activities: Net (repayments) borrowings under revolving credit facility ( 46,000 ) 51,000 Dividends paid ( 20,292 ) ( 21,570 ) Repurchases of common stock ( 28,479 ) ( 37,347 ) Redemption of 4.10 % senior notes 0 ( 350,000 ) Cash costs of 4.10 % senior notes redemption 0 ( 7,099 ) Other, net ( 2,280 ) ( 833 ) Cash provided from (used in) financing activities ( 97,051 ) ( 365,849 ) Effect of foreign exchange on cash and cash equivalents 420 867 Increase in cash and cash equivalents 1,403 1,246 Cash and cash equivalents at end of period $ 70,115 $ 84,550 See accompanying Notes to Condensed Consolidated Financial Statements 8 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Financial Statement Presentation In the opinion of management, the accompanying consolidated financial statements of NewMarket Corporation and its subsidiaries contain all necessary adjustments for the fair presentation of, in all material respects, our consolidated financial position as of March 31, 2023 and December 31, 2022, and our consolidated results of operations, comprehensive income, and changes in shareholders' equity for the three months ended March 31, 2023 and March 31, 2022, and our cash flows for the three months ended March 31, 2023 and March 31, 2022. All adjustments are of a normal, recurring nature, unless otherwise disclosed. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the NewMarket Corporation Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report), as filed with the Securities and Exchange Commission (SEC). The results of operations for the three month period ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023. The December 31, 2022 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Unless the context otherwise indicates, all references to “we,” “us,” “our,” the “company,” and “NewMarket” are to NewMarket Corporation and its consolidated subsidiaries. We offer our vendors a supplier finance program, which allows our vendors to receive payment from a third-party finance provider earlier than our normal payment terms would provide. NewMarket and its subsidiaries are not a party to the arrangement between our vendor and the finance provider, and there are no assets pledged as security or other forms of guarantees provided by NewMarket to the finance provider. For those vendors who opt to participate in the program, we pay the finance provider the full amount of the invoices on the normal due date. At March 31, 2023, the amount of confirmed invoices under the supplier finance program was not material. 2. Net Sales Our revenues are primarily derived from the manufacture and sale of petroleum additives products. We sell petroleum additives products across the world to customers located in the North America (the United States and Canada), Latin America (Mexico, Central America, and South America), Asia Pacific, and EMEAI (Europe/Middle East/Africa/India) regions. Our customers primarily consist of global, national, and independent oil companies. Our contracts generally include one performance obligation, which is providing petroleum additives products. The performance obligation is satisfied at a point in time when products are shipped, delivered, or consumed by the customer, depending on the underlying contracts. In limited cases, we collect funds in advance of shipping product to our customers and recognizing the related revenue. These prepayments from customers are recorded as a contract liability to our customer until we recognize the revenue. Some of our contracts include variable consideration in the form of rebates or business development funds. We regularly review both rebates and business development funds and make adjustments to estimated amounts when necessary, recognizing the full amount of any adjustment in the period identified. The following table provides information on our net sales by geographic area. Information on net sales by segment is in Note 3. Three Months Ended March 31, (in thousands) 2023 2022 Net sales United States $ 256,398 $ 224,688 Europe, Middle East, Africa, India 204,210 195,987 Asia Pacific 151,949 157,544 Other foreign 90,232 84,333 Net sales $ 702,789 $ 662,552 9 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Segment Information The tables below show our consolidated segment results. The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and related services associated with Ethyl Corporation (Ethyl). Net Sales by Segment Three Months Ended March 31, (in thousands) 2023 2022 Petroleum additives Lubricant additives $ 602,574 $ 570,042 Fuel additives 97,417 90,262 Total 699,991 660,304 All other 2,798 2,248 Net sales $ 702,789 $ 662,552 Segment Operating Profit Three Months Ended March 31, (in thousands) 2023 2022 Petroleum additives $ 132,068 $ 86,922 All other ( 975 ) 98 Segment operating profit 131,093 87,020 Corporate, general, and administrative expenses ( 6,491 ) ( 3,890 ) Interest and financing expenses, net ( 10,773 ) ( 9,406 ) Loss on early extinguishment of debt 0 ( 7,545 ) Other income (expense), net 11,319 7,328 Income before income tax expense $ 125,148 $ 73,507 4. Pension Plans and Other Postretirement Benefits The table below shows cash contributions made during the three months ended March 31, 2023, as well as the remaining cash contributions we expect to make during the year ending December 31, 2023, for our domestic and foreign pension plans and domestic postretirement benefit plan. (in thousands) Actual Cash Contributions for Three Months Ended March 31, 2023 Expected Remaining Cash Contributions for Year Ending December 31, 2023 Domestic plans Pension benefits $ 603 $ 1,808 Postretirement benefits 314 943 Foreign plans Pension benefits 1,373 4,543 10 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The tables below present information on net periodic benefit cost (income) for our domestic and foreign pension plans and domestic postretirement benefit plan. The service cost component of net periodic benefit cost (income) is reflected in cost of goods sold; selling, general, and administrative expenses; or research, development, and testing expenses, according to where other compensation costs arising from services rendered by the pertinent employee are recorded on the Consolidated Statements of Income. The remaining components of net periodic benefit cost (income) are recorded in other income (expense), net on the Consolidated Statements of Income. Domestic Pension Benefits Postretirement Benefits Three Months Ended March 31, (in thousands) 2023 2022 2023 2022 Service cost $ 2,658 $ 4,856 $ 130 $ 260 Interest cost 4,536 3,389 391 289 Expected return on plan assets ( 11,509 ) ( 10,940 ) ( 202 ) ( 204 ) Amortization of prior service cost (credit) 6 68 ( 757 ) ( 757 ) Amortization of actuarial net (gain) loss ( 411 ) 536 ( 76 ) 8 Net periodic benefit cost (income) $ ( 4,720 ) $ ( 2,091 ) $ ( 514 ) $ ( 404 ) Foreign Pension Benefits Three Months Ended March 31, (in thousands) 2023 2022 Service cost $ 1,054 $ 2,360 Interest cost 1,544 1,098 Expected return on plan assets ( 2,841 ) ( 2,635 ) Amortization of prior service cost (credit) 34 37 Amortization of actuarial net (gain) loss ( 6 ) 169 Net periodic benefit cost (income) $ ( 215 ) $ 1,029 5. Earnings Per Share We had 34,579 shares of nonvested restricted stock at March 31, 2023 and 34,349 shares of nonvested restricted stock at March 31, 2022 that were excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive. The nonvested restricted stock is considered a participating security since the restricted stock contains nonforfeitable rights to dividends. As such, we use the two-class method to compute basic and diluted earnings per share for all periods presented since this method yields the most dilutive result. The following table illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share. 11 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended March 31, (in thousands, except per-share amounts) 2023 2022 Earnings per share numerator: Net income attributable to common shareholders before allocation of earnings to participating securities $ 97,583 $ 59,318 Earnings allocated to participating securities ( 306 ) ( 175 ) Net income attributable to common shareholders after allocation of earnings to participating securities $ 97,277 $ 59,143 Earnings per share denominator: Weighted-average number of shares of common stock outstanding - basic and diluted 9,643 10,290 Earnings per share - basic and diluted $ 10.09 $ 5.75 6. Inventories March 31, December 31, (in thousands) 2023 2022 Finished goods and work-in-process $ 455,168 $ 497,652 Raw materials 89,873 113,484 Stores, supplies, and other 21,095 20,247 $ 566,136 $ 631,383 7. Intangibles (Net of Amortization) and Goodwill The net carrying amount of intangibles and goodwill was $ 126 million at both March 31, 2023 and December 31, 2022. The gross carrying amount and accumulated amortization of each type of intangible asset and goodwill are presented in the table below. March 31, 2023 December 31, 2022 (in thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizing intangible assets Formulas and technology $ 6,200 $ 5,942 $ 6,200 $ 5,683 Contract 2,000 1,250 2,000 1,200 Customer base 5,440 4,397 5,440 4,350 Goodwill 123,703 123,662 $ 137,343 $ 11,589 $ 137,302 $ 11,233 All of the intangibles relate to the petroleum additives segment. The change in the gross carrying amount between December 31, 2022 and March 31, 2023 is due to foreign currency fluctuation. There is no accumulated goodwill impairment. Amortization expense was (in thousands): Three months ended March 31, 2023 356 Three months ended March 31, 2022 355 12 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Estimated amortization expense for the remainder of 2023, as well as estimated annual amortization expense related to our intangible assets for the next five years, is expected to be (in thousands): 2023 $ 551 2024 390 2025 390 2026 390 2027 190 2028 140 We amortize formulas and technology over 6 years, the contract over 10 years, and the customer base over 20 years. 8. Long-term Debt (in thousands) March 31, 2023 December 31, 2022 Senior notes - 2.70 % due 2031 (net of related deferred financing costs) $ 392,958 $ 392,737 Senior notes - 3.78 % due 2029 250,000 250,000 Revolving credit facility 315,000 361,000 $ 957,958 $ 1,003,737 Senior Notes - The 2.70 % senior notes, which were issued in 2021, are unsecured with an aggregate principal amount of $ 400 million. The offer and sale of the notes were registered under the Securities Act of 1933, as amended. The 3.78 % senior notes are unsecured and were issued in a 2017 private placement with The Prudential Insurance Company of America and certain other purchasers. We were in compliance with all covenants under all issuances of senior notes as of March 31, 2023 and December 31, 2022. Revolving Credit Facility - The revolving credit facility has a borrowing capacity of $ 900 million, a term of five years , and matures on March 5, 2025. The obligations under the revolving credit facility are unsecured. The average interest rate for borrowings under the credit agreement was 5.8 % during the first three months of 2023 and 3.5 % during the full year of 2022. We were in compliance with all covenants under the revolving credit facility as of March 31, 2023 and December 31, 2022. Outstanding borrowings under the revolving credit facility amounted to $ 315 million at March 31, 2023 and $ 361 million at December 31, 2022. Outstanding letters of credit amounted to approximately $ 2 million at both March 31, 2023 and December 31, 2022. The unused portion of the credit facility amounted to $ 583 million at March 31, 2023 and $ 537 million at December 31, 2022. 9. Commitments and Contingencies Legal Matters We are involved in legal proceedings that are incidental to our business and may include administrative or judicial actions. Some of these legal proceedings involve governmental authorities and relate to environmental matters. For further information, see Environmental below. While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows. 13 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Environmental We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities, or at third-party sites where we have been designated as a potentially responsible party. While we believe we are currently adequately accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact on our consolidated financial position, results of operations, and cash flows. Our total accruals for environmental remediation, dismantling, and decontamination were approximately $ 10 million at both March 31, 2023 and December 31, 2022. Of the total accrual, the current portion is included in accrued expenses and the noncurrent portion is included in other noncurrent liabilities on the Condensed Consolidated Balance Sheets . Our more significant environmental sites include a former plant site in Louisiana and a Houston, Texas plant site. Together, the amounts accrued on a discounted basis related to these sites represented approximately $ 7 million of the total accrual above at March 31, 2023 and $ 8 million at December 31, 2022, using discount rates ranging from 3 % to 9 % for both periods. The aggregate undiscounted amount for these sites were $ 10 million at both March 31, 2023 and December 31, 2022. 10. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss The balances of, and changes in, the components of accumulated other comprehensive loss, net of tax, consist of the following: (in thousands) Pension Plans and Other Postretirement Benefits Foreign Currency Translation Adjustments Accumulated Other Comprehensive (Loss) Income Balance at December 31, 2021 $ 1,522 $ ( 83,749 ) $ ( 82,227 ) Other comprehensive income (loss) before reclassifications 16 ( 3,102 ) ( 3,086 ) Amounts reclassified from accumulated other comprehensive loss (a) 43 0 43 Other comprehensive income (loss) 59 ( 3,102 ) ( 3,043 ) Balance at March 31, 2022 $ 1,581 $ ( 86,851 ) $ ( 85,270 ) Balance at December 31, 2022 $ 54,562 $ ( 126,557 ) $ ( 71,995 ) Other comprehensive income (loss) before reclassifications 0 11,366 11,366 Amounts reclassified from accumulated other comprehensive loss (a) ( 922 ) 0 ( 922 ) Other comprehensive income (loss) ( 922 ) 11,366 10,444 Balance at March 31, 2023 $ 53,640 $ ( 115,191 ) $ ( 61,551 ) (a) The pension plan and other postretirement benefit components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income). See Note 4 in this Quarterly Report on Form 10-Q and Note 18 in our 2022 Annual Report for further information. 11. Fair Value Measurements The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets, as well as the fair value, was $ 70 million at March 31, 2023 and $ 69 million at December 31, 2022. The fair value is classified as Level 1 in the fair value hierarchy. No material events occurred during the three months ended March 31, 2023 requiring adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis. 14 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long-term debt – We record the carrying amount of our long-term debt at historical cost, less deferred financing costs related to our 2.70% senior notes. The estimated fair value of our long-term debt is shown in the table below and is based primarily on estimated current rates available to us for debt of the same remaining duration and adjusted for nonperformance risk and credit risk. The estimated fair value of our 2.70% senior notes included in the table below is based on the last quoted price closest to March 31, 2023. The fair value of our debt instruments is classified as Level 2. March 31, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt $ 957,958 $ 882,023 $ 1,003,737 $ 906,891 15 Table of Contents