NEWMARKET CORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This report contains forward-looking statements about future events and expectations within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” “expects,” “should,” “could,” “may,” “will,” and similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding future prospects of growth in the petroleum additives market, other trends in the petroleum additives market, our ability to maintain or increase our market share, and our future capital expenditure levels. We believe our forward-looking statements are based on reasonable expectations and assumptions, within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control. Factors that could cause actual results to differ materially from expectations include, but are not limited to, the availability of raw materials and distribution systems; disruptions at production facilities, including single-sourced facilities; hazards common to chemical businesses; the ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; sudden, sharp, or prolonged raw material price increases; competition from other manufacturers; current and future governmental regulations; the loss of significant customers; failure to attract and retain a highly-qualified workforce; an information technology system failure or security breach; the occurrence or threat of extraordinary events, including natural disasters, terrorist attacks, wars, and health-related epidemics such as the COVID-19 pandemic; risks related to operating outside of the United States; political, economic, and regulatory factors concerning our products; the impact of substantial indebtedness on our operational and financial flexibility; the impact of fluctuations in foreign exchange rates; resolution of environmental liabilities or legal proceedings; limitation of our insurance coverage; our inability to realize expected benefits from investment in our infrastructure or from future acquisitions, or our inability to successfully integrate future acquisitions into our business; the underperformance of our pension assets resulting in additional cash contributions to our pension plans; 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, 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. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, any forward-looking statement made in this report or elsewhere, might not occur. Overview 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. We have sufficient access to capital, if needed, and do not anticipate any issues with meeting the covenants for all our debt agreements for the foreseeable future. Our operations generate cash that is in excess of the needs of the business. We continue to invest in and manage our business for the long-term with the goal of helping our customers succeed in their marketplaces. Our investments continue to be in organizational talent, technology development and processes, and global infrastructure. The chemical industry and our products are essential for transportation of people, goods and services. Our business continuity planning process focuses our efforts on managing through this challenging time and helping our customers do the same. 16 Table of Contents Results of Operations Net Sales 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. Third Quarter Ended September 30, Nine Months Ended September 30, (in millions) 2023 2022 2023 2022 Petroleum additives Lubricant additives $ 562.7 $ 582.6 $ 1,753.8 $ 1,775.6 Fuel additives 101.0 110.1 293.9 298.4 Total 663.7 692.7 2,047.7 2,074.0 All other 3.5 3.3 7.4 8.2 Net sales $ 667.2 $ 696.0 $ 2,055.1 $ 2,082.2 Petroleum Additives Segment 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) Fuel additives shipments (13.2) (31.9) Selling prices 37.4 268.4 Foreign currency impact, net 2.5 (11.8) 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. 17 Table of Contents 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. All Other 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 NewMarket evaluates the performance of the petroleum additives business based on segment operating profit. NewMarket Services Corporation expenses are charged to NewMarket and each subsidiary pursuant to services agreements between the companies. 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 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 Petroleum additives $ 139.8 $ 83.0 $ 404.0 $ 261.1 All other $ (0.8) $ 0.0 $ (2.8) $ (0.2) Petroleum Additives Segment 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. Third Quarter Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of goods sold as a percentage of net sales 69.6 % 78.7 % 70.9 % 77.9 % Operating profit margin 21.1 % 12.0 % 19.7 % 12.6 % 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 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. 18 Table of Contents 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 $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. Our approach to R&D investments, as it is with SG&A, is one of purposeful spending on programs to support our current product base and to ensure that we develop products to support our customers' programs in the future. R&D investments include personnel-related costs, as well as costs for internal and external testing of our products. The following discussion references certain captions on the Consolidated Statements of Income. Interest and Financing Expenses, Net 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 $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 nine months of 2022 also included a loss on marketable securities of $3.0 million. Income Tax Expense 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 $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. Several jurisdictions in which we operate have adopted or are in the process of adopting this global minimum tax, with planned effective dates in 2024 or 2025. We are continuing to monitor the legislation in these jurisdictions and any potential impact to our effective tax rate and related income tax liabilities in future years. Cash Flows, Financial Condition, and Liquidity Cash and cash equivalents at September 30, 2023 were $102.6 million, an increase of $33.8 million since December 31, 2022. 19 Table of Contents 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. We do not anticipate significant tax consequences from future distributions of foreign earnings. A portion of our foreign cash balances is associated with earnings that we have asserted are indefinitely reinvested. We plan to use these indefinitely reinvested earnings to support growth outside of the United States through funding of operating expenses, research and development expenses, capital expenditures, and other cash needs of our foreign subsidiaries. We expect that cash from operations, together with borrowing available under our revolving credit facility, will continue to be sufficient to cover our operating needs and planned capital expenditures for both a short-term and long-term horizon. Cash Flows – Operating Activities 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, 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 $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. We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our revolving credit facility. Cash Flows – Financing Activities 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. Debt 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. All of our senior notes and the revolving credit facility contain covenants, representations, and events of default that management considers typical of credit arrangements of this nature. The covenants under the 3.78% senior notes include negative covenants, certain financial covenants, and events of default which are substantially similar to the covenants and events of default in our revolving credit facility. 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 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. 20 Table of Contents 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. The increase in shareholders’ equity primarily reflects our earnings and the impact of foreign currency translation adjustments, partially offset by dividend payments and the repurchases of our common stock. Generally, we repay any outstanding long-term debt with cash from operations or refinancing activities. Critical Accounting Policies and Estimates This Form 10-Q and our 2022 Annual Report include discussions of our accounting policies, as well as methods and estimates used in the preparation of our financial statements. We also provided a discussion of Critical Accounting Policies and Estimates in our 2022 Annual Report. There have been no significant changes in our critical accounting policies and estimates from those reported in our 2022 Annual Report. Recent Accounting Pronouncements There have been no recent accounting pronouncements which have not been adopted and may have a significant impact our financial statements. Outlook Our stated goal is to provide a 10% compounded return per year for our shareholders over any five-year period (defined by earnings per share growth plus dividend yield), although we may not necessarily achieve a 10% return each year. We continue to have confidence in our customer-focused strategy and approach to the market. We believe the fundamentals of how we run our business - a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, and world-class supply chain capability - will continue to be beneficial for all of our stakeholders over the long term. We expect our petroleum additives segment to experience impacts to its operating performance during 2023 due to the uncertain economic environment in which we operate, as we continue to see challenges with inflationary trends impacting our operating costs and raw material prices. As a result, we will continue to focus on cost control and operating profit margin recovery throughout the year. We expect over the long-term that the petroleum additives market will grow annually in the 1% to 2% range. We plan to exceed that growth rate. Over the past several years we have made significant investments in our business as the industry fundamentals remain positive. These investments have been and will continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability and geographic expansion. We intend to utilize these investments to improve our ability to deliver the solutions that our customers value, expand our global reach, and enhance our operating results. We will continue to invest in our capabilities to provide even better value, service, technology, and customer solutions. Our business generates significant amounts of cash beyond its operational needs. We regularly review our many internal opportunities to utilize excess cash from technological, geographic, production capability, and product line perspectives. We believe our capital spending is creating the capability we need to grow and support our customers worldwide, and our research and development investments are positioning us well to provide added value to our customers. Our primary focus in the acquisition area remains on the petroleum additives industry. It is our view that this industry segment will provide the greatest opportunity for solid returns on our investments while minimizing risk. We remain focused on this strategy and will evaluate any future opportunities. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk At September 30, 2023, there were no material changes in our market risk from the information provided in the 2022 Annual Report.