What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 90 added, 79 removed, 126 unchanged (57% of the section changed)

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and other factors detailed from time to time in the reports that NewMarket files with the SEC, including the risk factors in Item 1A.

“Risk Factors” of our 2022 Annual Report for the year ended December 31, 2022, which is available to shareholders upon request.

“Risk Factors” of our 2022 Annual Report, which is available to shareholders upon request.

You should keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which we make it.

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In light of these risks and uncertainties, any forward-looking statement made in this report or elsewhere, might not occur.

When comparing the results of the petroleum additives segment for the first six months of 2023 with the first six months of 2022, net sales were substantially unchanged, but included significantly higher selling prices, offset by decreases in product shipments and an unfavorable foreign currency impact.

Petroleum additives operating profit was 48.3% higher when comparing the first six months of 2023 with the first six months of 2022, reflecting the higher selling prices that favorably impacted net sales, partially offset by lower product shipments, as well as higher operating costs and raw material costs.

Shipments have been lower than our expectations over the last few quarters, as we continue to experience the effects of customer destocking and global economic weakness.

We continue to operate in a general inflationary environment.

While we have experienced some improvement in the supply chain disruptions which have impacted the petrochemicals industry over the past several years, we expect to continue to be challenged by high costs during 2023.

When comparing the results of the petroleum additives segment for the first nine months of 2023 with the first nine months of 2022, net sales were 1.3% lower resulting from a decrease in product shipments and an unfavorable foreign currency impact, which was partially offset by higher selling prices, including favorable mix.

Petroleum additives operating profit was 54.7% higher when comparing the first nine months of 2023 with the first nine months of 2022, reflecting the selling prices, including favorable mix, partially offset by lower product shipments and higher operating costs.

Raw material costs were stable when comparing the two nine months periods.

Our shipments have been impacted over the last several quarters by the overall global economic weakness and inventory rationalization that is affecting the chemical industry.

While we have experienced improvement in the supply chain disruptions which impacted the petrochemicals industry over the past several years, we continue to be challenged by the ongoing inflationary environment impacting us, including raw material and operating costs.

During this period, we have remained focused on controlling operating costs, continuing our investment in technology, and managing our inventory levels, as well as our customer portfolio.

Despite the challenging economic environment, our financial position remains strong.

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Results of Operations

Consolidated net sales for the second quarter of 2023 totaled $685.1 million, representing a decrease of $38.5 million, or 5.3%, from the second quarter of 2022.

Consolidated net sales for the first six months of both 2023 and 2022 totaled $1.4 billion.

Consolidated net sales for the third quarter of 2023 totaled $667.2 million, representing a decrease of $28.9 million, or 4.2%, from the third quarter of 2022.

Consolidated net sales for the first nine months of both 2023 and 2022 totaled $2.1 billion.

The following table shows net sales by segment and product line.

Second Quarter Ended June 30, Six Months Ended June 30,

Third Quarter Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022 2023 2022

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Petroleum Additives Segment

The regions in which we operate include North America, Latin America, Asia Pacific, and the EMEAI region.

While there is some fluctuation, the percentage of net sales generated by region remained fairly consistent when comparing the first six months of 2023 with the same period in 2022, as well as with the full year 2022.

Petroleum additives net sales for the second quarter of 2023 were $684.0 million compared to $721.0 million for the second quarter of 2022, a decrease of 5.1%.

The decrease for the second quarter comparison was across all regions with Asia Pacific representing about 60%, North America about 20%, Latin America about 15%, and the remainder of the decrease from EMEAI.

Petroleum additives net sales for the first six months of 2023, as well as the first six months of 2022, were $1.4 billion.

While petroleum additives net sales were substantially unchanged between the two six months periods, the North America and EMEAI regions reported significant increases for the first six months of 2023 compared to the first six months of 2022, but these increases were substantially offset by similar decreases in the Asia Pacific and Latin America regions.

The following table details the approximate components of the changes in petroleum additives net sales between the second quarter and first six months of 2023 and 2022.

(in millions) Second Quarter Six Months

Period ended June 30, 2022 $ 721.0 $ 1,381.3

The regions in which we operate include North America, Latin America, Asia Pacific, and EMEAI.

While there is some fluctuation, the percentage of net sales generated by region remained fairly consistent when comparing the first nine months of 2023 with the same period in 2022, as well as with the full year 2022.

Petroleum additives net sales for the third quarter of 2023 were $663.7 million compared to $692.7 million for the third quarter of 2022, a decrease of 4.2%.

The decrease for the third quarter comparison was in both the Asia Pacific and EMEAI regions, with the Asia Pacific region representing about 70% of the decrease in those two regions.

Small increases in the North America and Latin America regions partially offset the decreases in Asia Pacific and EMEAI.

Petroleum additives net sales for the first nine months of 2023 were $2.0 billion, while the first nine months of 2022 were $2.1 billion, representing a decrease of 1.3%.

Similar to the third quarter, the Asia Pacific and EMEAI regions reported decreases for the first nine months of 2023 compared to the same 2022 period, with the Asia Pacific region representing almost all of the decrease.

A substantial increase in the North America region, along with a small increase in the Latin America region, partially offset the decreases in the other regions.

The following table details the approximate components of the changes in petroleum additives net sales between the third quarter and first nine months of 2023 and 2022.

(in millions) Third Quarter Nine Months

Period ended September 30, 2022 $ 692.7 $ 2,074.0

Lubricant additives shipments (55.7) (251.0)

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Foreign currency impact, net 2.5 (11.8)

Period ended June 30, 2023 $ 684.0 $ 1,384.0

When comparing the second quarter of 2023 and 2022, the decrease in petroleum additives net sales was primarily due to lower lubricant additives shipments, as well as smaller impacts from lower fuel additives shipments and an unfavorable foreign currency impact.

These factors were partially offset by increased selling prices in the second quarter comparison.

When comparing petroleum additives net sales for the first six months of 2023 and 2022, both lubricant additives and fuel additives shipments were lower, along with an unfavorable foreign currency impact, but all were offset by higher selling prices.

Comparing the second quarter of 2023 and 2022, the United States Dollar strengthened against all of the major currencies in which we transact, except for the Euro, resulting in the unfavorable impact to net sales for the comparative periods.

The United States Dollar strengthened against all of the major currencies in which we transact for the six months comparison of 2023 with 2022.

The unfavorable impact for both the second quarter and six months comparison was predominantly from the Chinese Renminbi, Indian Rupee, and Japanese Yen, while the Euro also unfavorably impacted the six months comparison.

On a worldwide basis, the volume of product shipments for petroleum additives decreased 16.7% when comparing the two second quarter periods and 16.1% when comparing the first six months of 2023 and 2022.

Petroleum additives shipments for the second quarter comparison reflected decreases in both lubricant additives and fuel additives with all regions contributing to the decrease in lubricant additives shipments, while North America was the primary contributor to the decrease in fuel additives

For the six months comparison, both lubricant additives and fuel additives shipments were lower in 2023 than in 2022.

The decrease in lubricant additives shipments when comparing the first six months of 2023 with the same period of 2022 was across all regions with around 30% of the decrease in each of the North America, EMEAI, and Asia Pacific regions and the remaining decrease in the Latin America region.

The six months comparison for fuel additives shipments reflected decreases in all regions with about 60% of the decrease in North America, 20% in Latin America, and the remainder about evenly split between Asia Pacific and EMEAI.

The “All other” category includes the operations of the antiknock compounds business and certain contracted manufacturing and related services.

Period ended September 30, 2023 $ 663.7 $ 2,047.7

When comparing the third quarter of 2023 and 2022, the decrease in petroleum additives net sales was primarily due to lower lubricant additives shipments, along with a smaller impact from lower fuel additives shipments.

The lower shipments were partially offset by increased selling prices, including favorable mix, in the third quarter comparison, as well as a small favorable foreign currency impact.

When comparing petroleum additives net sales for the first nine months of 2023 and 2022, both lubricant additives and fuel additives shipments were lower, along with an unfavorable foreign currency impact, which were mostly offset by higher selling prices, including favorable mix.

Comparing the third quarter of 2023 and 2022, the United States Dollar weakened against both the Euro and the Pound Sterling resulting in a favorable impact to net sales for the comparative periods.

The United States Dollar strengthened against the Indian Rupee, Chinese Renminbi, and Japanese Yen for the same third quarter comparison, which partially offset the favorable impact on net sales from the Euro and Pound Sterling.

For the nine months 2023 versus 2022 comparison, the United States Dollar strengthened against all of the major currencies in which we transact, except for the Euro, resulting in the unfavorable impact to net sales for the comparative periods.

On a worldwide basis, the volume of product shipments for petroleum additives decreased 7.7% when comparing the two third quarter periods and 13.5% when comparing the first nine months of 2023 and 2022.

Petroleum additives shipments for the third quarter comparison reflected decreases in both lubricant additives and fuel additives with the Asia Pacific and EMEAI regions contributing to the decrease in lubricant additives shipments, which was partially offset by an increase in the North America region.

The decrease in fuel additives shipments for the third quarter comparison was primarily in the North America region, with smaller decreases in the Latin America and Asia Pacific regions, which were partially offset by an increase in the EMEAI region.

For the nine months comparison, both lubricant additives and fuel additives shipments were lower in 2023 than in 2022.

The decrease in lubricant additives shipments when comparing the first nine months of 2023 with the same period of 2022 was across all regions with about 40% of the decrease in the Asia Pacific Region, 30% in the EMEAI region, 25% in the North America region, and the remaining decrease in the Latin America region.

The nine months comparison for fuel additives shipments reflected decreases in the North America, Asia Pacific and Latin America regions.

The North America region reflected about 70% of the decrease with the remaining decrease split about evenly between the Asia Pacific and Latin America regions.

The EMEAI region had a small increase in fuel additives shipments for the nine months comparison.

The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and related services associated with Ethyl.

Segment Operating Profit

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Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets and lease right-of-use assets, is included in segment operating profit.

The following table reports segment operating profit for the second quarter and six months ended June 30, 2023 and June 30, 2022.

Second Quarter Ended June 30, Six Months Ended June 30,

The following table reports segment operating profit for the third quarter and nine months ended September 30, 2023 and September 30, 2022.

Third Quarter Ended

September 30, Nine Months Ended

September 30,

(in millions) 2023 2022 2023 2022

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Petroleum Additives Segment

Petroleum additives segment gross profit increased $9.8 million and operating profit increased $40.9 million when comparing the second quarter of 2023 to the second quarter of 2022.

For the first six months of 2023 compared to the first six months of 2022, petroleum additives segment gross profit increased $46.0 million and operating profit increased $86.1 million.

Petroleum additives segment gross profit increased $54.3 million and operating profit increased $56.8 million when comparing the third quarter of 2023 to the third quarter of 2022.

For the first nine months of 2023 compared to the first nine months of 2022, petroleum additives segment gross profit increased $136.8 million and operating profit increased $142.9 million.

The following table presents petroleum additives cost of goods sold as a percentage of net sales and the operating profit margin.

Second Quarter Ended June 30, Six Months Ended June 30,

Third Quarter Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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Operating profit margin 21.1 % 12.0 % 19.7 % 12.6 %

For the rolling four quarters ended June 30, 2023, the operating profit margin for petroleum additives was 16.8%, which is within our historical range of operating profit margin.

For the rolling four quarters ended September 30, 2023, the operating profit margin for petroleum additives was 19.1%, which is within our historical range of operating profit margin.

While operating margins will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry as a whole are unchanged.

When comparing both the second quarter and first six months of 2023 and 2022, both gross profit and operating profit included the favorable impact of significantly higher selling prices, partially offset by lower shipments and higher operating costs.

The comparison for the six months periods also included the impact of higher raw material costs during 2023.

While raw material costs, along with other operating costs, increased throughout 2022, we were able to make adjustments to selling prices, which are reflected in our results for the second quarter and first six months comparisons between 2023 and 2022.

We have experienced some stabilization of raw material costs during 2023, but nonetheless remain challenged by the ongoing inflationary environment impacting our operations.

When comparing both the third quarter and first nine months of 2023 and 2022, both gross profit and operating profit included the favorable impact of higher selling prices, including favorable mix, partially offset by lower shipments and higher operating costs.

The comparison for both the third quarter and nine months periods also included the impact of raw material costs, which were favorable for the third quarter comparison and were stable for the nine months comparison.

Nonetheless, we remain challenged by the ongoing inflationary environment impacting us, including raw material and operating costs.

Cost control and margin management remain high priorities for us.

Petroleum additives selling, general, and administrative expenses (SG&A) for the second quarter of 2023 were $0.6 million lower than the second quarter of 2022.

SG&A expenses for the first six months of 2023 were $1.0 million higher than the first six months of 2022.

SG&A as a percentage of net sales was 4.4% for the second quarter of 2023, 4.2% for the second quarter of 2022, and 4.5% for both the first six months of 2023 and 2022.

Petroleum additives selling, general, and administrative expenses (SG&A) for the third quarter of 2023 were substantially unchanged from the third quarter of 2022.

SG&A expenses for the first nine months of 2023 were $1.0 million higher than the first nine months of 2022.

SG&A as a percentage of net sales was 4.6% for the third quarter of 2023, 4.4% for the third quarter of 2022, 4.5% for the first nine months of 2023, and 4.4% for the first nine months of 2022.

Our SG&A costs are primarily personnel-related and include salaries, benefits, and other costs associated with our workforce, including travel-related expenses.

While personnel-related costs fluctuate from period to period, there were no significant changes in the drivers of these costs when comparing the periods.

Our investment in petroleum additives research, development, and testing (R&D) decreased approximately $1.4 million when comparing the second quarter periods of 2023 and 2022 and $4.5 million when comparing the first six months periods of 2023 and 2022.

As a percentage of net sales, R&D was 5.0% for the second quarter of 2023, 4.9% for the second quarter of 2022, 4.9% for the first six months of 2023, and 5.2% for the first six months of 2022.

Our investment in petroleum additives research, development, and testing (R&D) decreased approximately $2.5 million when comparing the third quarter periods of 2023 and 2022 and $7.0 million when comparing the first nine months periods of 2023 and 2022.

As a percentage of net sales, R&D was 4.8% for the third quarter of 2023, 5.0% for the third quarter of 2022, 4.8% for the first nine months of 2023, and 5.1% for the first nine months of 2022.

Our R&D investments reflect our efforts to support the development of solutions that meet our customers' needs, meet new and evolving standards, and support our expansion into new product areas.

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Interest and Financing Expenses, Net

Interest and financing expenses were $10.3 million for the second quarter of 2023, $7.1 million for the second quarter of 2022, $21.0 million for the first six months of 2023, and $16.5 million for the first six months of 2022.

The increase for both the second quarter and six months comparisons resulted primarily from a higher average interest rate.

Average debt was also higher for the second quarter comparison, while the six months comparison reflected slightly lower average debt.

Both comparison periods included a favorable impact from lower amortization and fees, as well as higher capitalized interest.

Interest and financing expenses were $9.2 million for the third quarter of 2023, $8.4 million for the third quarter of 2022, $30.2 million for the first nine months of 2023, and $24.9 million for the first nine months of 2022.

The increase for both the third quarter and nine months comparisons resulted primarily from a higher average interest rate, which was partially offset by lower average debt.

Both comparison periods included a favorable impact from lower amortization and fees.

Capitalized interest had a favorable impact on the nine months comparison and was substantially unchanged for the third quarter comparison.

Other Income (Expense), Net

Other income (expense), net was income of $10.7 million for the second quarter of 2023, $9.1 million for the second quarter of 2022, $21.6 million for the first six months of 2023, and $16.3 million for the first six months of 2022.

The amounts for both the 2023 and 2022 second quarter and six months periods primarily reflect the components of net periodic benefit cost (income), except for service cost, from defined benefit pension and postretirement plans.

Other income (expense), net was income of $11.3 million for the third quarter of 2023, $10.0 million for the third quarter of 2022, $32.9 million for the first nine months of 2023, and $26.2 million for the first nine months of 2022.

The amounts for both the 2023 and 2022 third quarter and nine months periods primarily reflect the components of net periodic benefit cost (income), except for service cost, from defined benefit pension and postretirement plans.

See Note 4 for further information on total periodic benefit cost (income).

The first six months of 2022 also included a loss on marketable securities of $3.0 million.

The first nine months of 2022 also included a loss on marketable securities of $3.0 million.

Income Tax Expense

Income tax expense was $25.1 million for the second quarter of 2023 and $19.1 million for the second quarter of 2022.

The effective tax rate was 20.1% for the second quarter of 2023 and 22.4% for the second quarter of 2022.

Income tax expense was $23.2 million for the third quarter of 2023 and $17.1 million for the third quarter of 2022.

The effective tax rate was 17.3% for the third quarter of 2023 and 21.3% for the third quarter of 2022.

Income tax expense increased $11.5 million due to higher income before income tax expense and decreased $5.4 million due to the lower effective tax rate.

Income tax expense was $52.7 million for the first six months of 2023 and $33.3 million for the first six months of 2022.

The effective tax rate was 21.1% for the first six months of 2023 and 20.9% for the first six months of 2022.

Income tax expense increased $19.0 million due to higher income before income tax expense with the remaining $0.4 million of the difference caused by the higher effective tax rate.

The decrease in the effective tax rate for the second quarter of 2023 as compared to the second quarter of 2022 was primarily caused by a tax benefit applicable to prior years.

The slight increase in the effective tax rate for the six months comparison was primarily the result of an increase in the U.S.

tax on foreign earnings and a reduction in the foreign-derived intangible tax benefit, which was partially offset by a tax benefit applicable to prior years.

Income tax expense was $75.9 million for the first nine months of 2023 and $50.4 million for the first nine months of 2022.

The effective tax rate was 19.7% for the first nine months of 2023 and 21.1% for the first nine months of 2022.

Income tax expense increased $30.5 million due to higher income before income tax expense, which was offset by a $5.0 million decrease caused by the lower effective tax rate.

The decrease in the effective tax rate for both the third quarter and nine months comparisons was primarily caused by a retroactive delay by the U.S.

Treasury in the effective date of more stringent foreign tax credit rules, which had been considered in determining the tax rates in prior periods, along with other favorable prior year tax items.

On October 8, 2021, almost all members of the Organisation for Economic Co-operation and Development (“OECD”) reached an agreement on a two-pillar approach to international tax reform, including the establishment of a 15% global minimum tax for large multinational entities.

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Cash Flows, Financial Condition, and Liquidity

Cash and cash equivalents at June 30, 2023 were $130.9 million, an increase of $62.2 million since December 31, 2022.

Cash and cash equivalents held by our foreign subsidiaries amounted to $127.5 million at June 30, 2023 and $65.3 million at December 31, 2022.

Cash and cash equivalents at September 30, 2023 were $102.6 million, an increase of $33.8 million since December 31, 2022.

Cash and cash equivalents held by our foreign subsidiaries amounted to $100.1 million at September 30, 2023 and $65.3 million at December 31, 2022.

Periodically, we repatriate cash from our foreign subsidiaries to the United States through intercompany dividends and loans.

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Cash Flows – Operating Activities

Cash provided from operating activities for the first six months of 2023 were $262.4 million, including $52.5 million reflecting lower working capital requirements.

Cash provided from operating activities for the first nine months of 2023 was $405.2 million, including $71.9 million of lower working capital requirements.

The $71.9 million excluded an unfavorable foreign currency impact to the components of working capital on the balance sheet.

The most significant changes in working capital included decreases in trade and other accounts receivable, inventories, accounts payable, and accrued expenses.

The decrease in trade and other accounts receivable primarily represents the refund of value added taxes at some of our foreign subsidiaries.

The decrease in inventories reflects our planned destocking in response to lower demand and destocking by our customers.

The decrease in accounts payable is primarily the result of destocking and lower production levels.

The change in accrued expenses reflects normal rebate payments to customers.

Including cash and cash equivalents, as well as the impact of changes in foreign currency exchange rates on the balance sheet, we had total working capital of $791.1 million at June 30, 2023 and $768.2 million at December 31, 2022.

The current ratio was 3.27 at June 30, 2023 and 2.81 at December 31, 2022.

The most significant changes in working capital included decreases in trade and other accounts receivable, inventories, accounts payable, accrued expenses, and income taxes payable.

The decrease in trade and other accounts receivable primarily represents the refund of value added taxes at some of our foreign subsidiaries along with lower sales levels.

The decrease in inventories reflects our planned inventory rationalization in response to lower demand and inventory rationalization by our customers.

The decrease in accounts payable is primarily the result of the same inventory rationalization and lower production levels.

The change in accrued expenses reflects normal rebate payments to customers, as well as normal timing of interest payments on our long-term debt.

The change in income taxes payable is primarily the result of timing of payments.

Including cash and cash equivalents, as well as the impact of changes in foreign currency exchange rates on the balance sheet, we had total working capital of $733.4 million at September 30, 2023 and $768.2 million at December 31, 2022.

The current ratio was 3.21 at September 30, 2023 and 2.81 at December 31, 2022.

Cash Flows – Investing Activities

Cash used in investing activities totaled $26.0 million during the first six months of 2023 for capital expenditures.

Cash used in investing activities totaled $34.8 million during the first nine months of 2023 for capital expenditures.

We expect that our total capital spending during 2023 will be in the $50 million to $60 million range and will include several improvements to our manufacturing and R&D infrastructure around the world.

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Cash Flows – Financing Activities

Cash used in financing activities during the first six months of 2023 amounted to $175.7 million.

These cash flows included net payments of $88.0 million on the revolving credit facility, $42.9 million for repurchases of 119,075 shares of our common stock, and cash dividends of $41.9 million.

Our long-term debt was $916.2 million at June 30, 2023 compared to $1.0 billion at December 31, 2022.

Cash used in financing activities during the first nine months of 2023 amounted to $335.5 million.

These cash flows included net payments of $225.0 million on the revolving credit facility, cash dividends of $63.5 million, and $42.9 million for repurchases of 119,075 shares of our common stock.

Our long-term debt was $779.4 million at September 30, 2023 compared to $1.0 billion at December 31, 2022.

See Note 8 for additional information on the 2.70% senior notes, 3.78% senior notes, and revolving credit facility, including the unused portion of our revolving credit facility.

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The revolving credit facility contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the agreement) of no more than 3.75 to 1.00, except during an Increased Leverage Period (as defined in the agreement) at the end of each quarter.

At June 30, 2023, the Leverage Ratio was 1.70 under the revolving credit facility.

At June 30, 2023, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt decreased from 56.8% at December 31, 2022 to 50.6% at June 30, 2023.

At September 30, 2023, the Leverage Ratio was 1.33 under the revolving credit facility.

At September 30, 2023, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt decreased from 56.8% at December 31, 2022 to 44.5% at September 30, 2023.

The change resulted primarily from the decrease in outstanding revolving credit facility borrowings, along with the increase in shareholders' equity.

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Quantitative and Qualitative Disclosures About Market Risk

At June 30, 2023, there were no material changes in our market risk from the information provided in the 2022 Annual Report .

At September 30, 2023, there were no material changes in our market risk from the information provided in the 2022 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis