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 or specialty materials markets, other trends in these markets, 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 industries; 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; termination or changes to contracts with contractors and subcontractors of the U.S. government or directly with the U.S. government; 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; 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 acquisitions, or our inability to successfully integrate 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 Part I, Item 1A. “Risk Factors” of our 2023 Annual Report, which is available to shareholders at www.newmarket.com, as well as Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. 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 six months of 2024 with the first six months of 2023, net sales were 2.7% lower, resulting primarily from lower selling prices, which were partially offset by an increase in product shipments of 2.7%. Petroleum additives operating profit was 13.1% higher when comparing the 2024 and 2023 six months periods, primarily reflecting the favorable impact of lower raw material and operating costs, as well as higher shipments, which were partially offset by the lower selling prices. We completed the acquisition of AMPAC for approximately $697 million on January 16, 2024. See Note 2 for further information on the acquisition. The operations of AMPAC since the date of acquisition are reflected in the specialty materials segment in the Results of Operations section below. On January 22, 2024, we entered into a new $900 million revolving credit facility, as well as a $250 million unsecured term loan. Concurrently with the entry into the new revolving credit facility, we terminated our former revolving credit facility. See Note 9 for further information on our debt agreements. We remain challenged by the uncertain global economic environment, but continue to focus on managing our operating costs, our inventory levels, and our portfolio profitability, while continuing our investment in technology. 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. 19 Table of Contents Our business typically generates significant amounts of cash beyond its operational needs. 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. Results of Operations Net Sales Consolidated net sales for the second quarter of 2024 totaled $710.2 million, representing an increase of $25.1 million, or 3.7% from the second quarter of 2023. Consolidated net sales for the first six months of 2024 totaled $1.4 billion, representing an increase of $19.0 million, or 1.4%, from the first six months of 2023. The following table shows net sales by segment and product line. The net sales in the table below for the specialty materials segment include sales since the acquisition of AMPAC on January 16, 2024. Second Quarter Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Petroleum additives Lubricant additives $ 575.2 $ 588.5 $ 1,147.1 $ 1,191.1 Fuel additives 94.6 95.5 200.0 192.9 Total 669.8 684.0 1,347.1 1,384.0 Specialty materials 38.0 0 55.1 0 All other 2.4 1.1 4.8 3.9 Net sales $ 710.2 $ 685.1 $ 1,407.0 $ 1,387.9 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 six months of 2024 with the same period in 2023, as well as with the full year of 2023. Petroleum additives net sales for the second quarter of 2024 were $669.8 million compared to $684.0 million for the second quarter of 2023, a decrease of 2.1%. The decrease for the second quarter comparison was across all regions with North America representing about 55%, Asia Pacific about 23%, EMEAI about 17%, and Latin America about 5%. Petroleum additives net sales for the first six months of 2024 were $1.3 billion, while the first six months of 2023 were $1.4 billion, representing a decrease of 2.7%. Almost all of the decrease for the six months comparison was in the North America region with the Latin America region reporting a smaller decrease, both of which were partially offset by small increases in the EMEAI and Asia Pacific 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 2024 and 2023. (in millions) Second Quarter Six Months Period ended June 30, 2023 $ 684.0 $ 1,384.0 Lubricant additives shipments 8.8 13.5 Fuel additives shipments (2.0) 9.9 Selling prices (18.2) (56.9) Foreign currency impact, net (2.8) (3.4) Period ended June 30, 2024 $ 669.8 $ 1,347.1 When comparing the second quarter of 2024 and 2023, the decrease in petroleum additives net sales was primarily due to lower selling prices, along with smaller impacts from lower fuel additives shipments and an unfavorable foreign currency impact. These factors were partially offset by an increase in lubricant additives shipments. When comparing the first six months of 2024 and 2023, the decrease in petroleum additives net sales was primarily due to lower selling prices, as well as an unfavorable foreign currency impact, which were partially offset by increases in both lubricant additives and fuel additives shipments. The primary currencies in which we transact include the Euro, Pound Sterling, Japanese Yen, Chinese Renminbi, and Indian Rupee. Comparing the second quarter of 2024 and 2023, the United States Dollar strengthened against all of the major 20 Table of Contents currencies in which we transact, except for the Pound Sterling, resulting in the unfavorable impact to net sales for the second quarter comparison reflected in the above table. For the six months comparison, the United States Dollar strengthened against all of the major currencies in which we transact, except for the Pound Sterling and Euro, resulting in the unfavorable impact to net sales shown above. The unfavorable impact for the second quarter comparison was primarily from the Japanese Yen, Chinese Renminbi, and Euro. The unfavorable impact for the six months comparison was primarily from the Japanese Yen and Chinese Renminbi, which was partially offset by a favorable impact from the Euro. On a worldwide basis, the volume of product shipments for petroleum additives increased approximately 1% when comparing the two second quarter periods and 2.7% when comparing the first six months of 2024 and 2023. For the second quarter comparison, a slight increase in lubricant additives shipments was partially offset by a very small decrease in fuel additives shipments. Both the North America and Asia Pacific regions experienced increases in lubricant additives shipments and decreases in fuel additives shipments for the second quarter comparison, while both the EMEAI and Latin America regions experienced decreases in lubricant additives shipments and increases in fuel additives shipments. For the six months comparison, the increase was in both lubricant additives and fuels additives. Both the North America and Asia Pacific regions reported increases in lubricant additives shipments, which were partially offset by decreases in the EMEAI and Latin America regions. The EMEAI and Latin America regions reported increases in fuel additives shipments, which were partially offset by decreases in the North America and Asia Pacific regions. Specialty Materials Segment The specialty materials segment includes the operations of AMPAC, which operates predominantly in the North America region. Total net sales were $38.0 million for the second quarter 2024 and $55.1 million for the period that we owned AMPAC during the first six months of 2024. 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 and specialty materials businesses based on segment operating profit. NewMarket Services Corporation expenses are charged to NewMarket and each subsidiary pursuant to services agreements between the companies. Depreciation of 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, 2024 and June 30, 2023. The amount reported for specialty materials is for the period from January 16, 2024 to June 30, 2024. Second Quarter Ended June 30, Six Months Ended June 30, (in millions) 2024 2023 2024 2023 Petroleum additives $ 147.8 $ 132.1 $ 298.7 $ 264.2 Specialty materials $ 5.0 $ 0 $ 0 $ 0 All other $ (1.4) $ (1.0) $ (1.5) $ (2.0) Petroleum Additives Segment Petroleum additives segment gross profit increased $12.1 million and operating profit increased $15.7 million when comparing the second quarter of 2024 to the second quarter of 2023. For the first six months of 2024 compared to the first six months of 2023, petroleum additives segment gross profit increased $28.5 million and operating profit increased $34.5 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, 2024 2023 2024 2023 Cost of goods sold as a percentage of net sales 68.9 % 71.3 % 68.6 % 71.5 % Operating profit margin 22.1 % 19.3 % 22.2 % 19.1 % 21 Table of Contents For the rolling four quarters ended June 30, 2024, the operating profit margin for petroleum additives was 20.7%, 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 2024 and 2023, the increase in both gross profit and operating profit primarily included the favorable impacts of lower raw material and operating costs, as well as a favorable impact from higher shipments, which were partially offset by lower selling prices. We remain challenged by the ongoing inflationary environment impacting us. Cost control and margin management remain high priorities for us. Petroleum additives selling, general, and administrative (SG&A) expenses for the second quarter of 2024 were $1.7 million higher than the second quarter of 2023. SG&A expenses for the first six months of 2024 were $1.3 million higher than the first six months of 2023. SG&A expenses as a percentage of net sales were 4.7% for the second quarter of 2024, 4.4% for the second quarter of 2023, 4.7% for the first six months of 2024, and 4.5% for the first six months of 2023. 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 $5.3 million when comparing the second quarter periods of 2024 and 2023 and $7.3 million when comparing the first six months periods of 2024 and 2023. As a percentage of net sales, our R&D investment was 4.3% for the second quarter of 2024, 5.0% for the second quarter of 2023, 4.4% for the first six months of 2024 and 4.9% for the first six months of 2023. 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 costs, 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. Specialty Materials Segment The specialty materials segment reported operating profit of $5.0 million for second quarter of 2024, resulting in operating profit of $5 thousand for the period from the AMPAC acquisition date of January 16, 2024 to June 30, 2024. The specialty materials results for the second quarter and first six months of 2024 include the sale of AMPAC finished goods inventory that we acquired at closing. This inventory was recorded at fair value on the acquisition date and, when sold during the first half of 2024, generated no margin. While we may experience substantial variation in quarterly results for AMPAC on an ongoing basis due to the nature of its business, we anticipate full year 2024 results to be consistent with our pre-acquisition expectations. The following discussion references certain captions on the Consolidated Statements of Income. Interest and Financing Expenses, Net Interest and financing expenses were $15.9 million for the second quarter of 2024, $10.3 million for the second quarter of 2023, $31.6 million for the first six months of 2024, and $21.0 million for the first six months of 2023. The increase for both the second quarter and six months comparisons resulted primarily from both higher average debt outstanding, as well as a higher average interest rate. Other Income (Expense), Net Other income (expense), net was income of $12.0 million for the second quarter of 2024, $10.7 million for the second quarter of 2023, $24.5 million for the first six months of 2024 and $21.6 million for the first six months of 2023. The amounts for both the 2024 and 2023 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. See Note 5 for further information on total periodic benefit cost (income). Income Tax Expense Income tax expense was $31.4 million for the second quarter of 2024 and $25.1 million for the second quarter of 2023. The effective tax rate was 21.9% for the second quarter of 2024 and 20.1% for the second quarter of 2023. Income tax expense increased $3.7 million due to higher income before income tax expense and $2.6 million due to the higher effective tax rate. Income tax expense was $61.3 million for the first six months of 2024 and $52.7 million for the first six months of 2023. The effective tax rate was 21.9% for the first six months of 2024 and 21.1% for the first six months of 2023. Income tax expense increased $6.5 million due to higher income before income tax expense and $2.2 million due to the higher effective tax rate. 22 Table of Contents 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 effective dates in 2024 or 2025. We are continuing to monitor the legislation in these jurisdictions and have recognized an immaterial impact to our effective tax rate and income tax liabilities related to the enactment of these rules for the first six months of 2024. Cash Flows, Financial Condition, and Liquidity Cash and cash equivalents at June 30, 2024 were $87.6 million, a decrease of $24.3 million since December 31, 2023. Cash and cash equivalents held by our foreign subsidiaries amounted to $80.1 million at June 30, 2024 and $86.5 million at December 31, 2023. 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 including planned short-term and long-term capital expenditures. Cash Flows – Operating Activities Cash provided from operating activities for the first six months of 2024 was $217.8 million, including $40.7 million of higher working capital requirements. The $40.7 million excluded a favorable foreign currency impact to the components of working capital on the balance sheet. The working capital of AMPAC is included in our consolidated balance sheet at June 30, 2024. Excluding the impact of AMPAC working capital, when comparing the June 30, 2024 balances with those at December 31, 2023, the most significant changes in working capital included increases in trade and other accounts receivable, inventory, and accounts payable. The increase in trade and other accounts receivable primarily reflects higher sales during the second quarter of 2024 compared to the fourth quarter of 2023. The increase in inventory reflects increased production during the second quarter of 2024 as compared to our planned inventory rationalization that took place in 2023. The increase in accounts payable is primarily the result of increased purchases during 2024 and normal invoice payment timing. 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 $695.7 million at June 30, 2024 and $675.4 million at December 31, 2023. The current ratio was 2.66 at June 30, 2024 and 2.85 at December 31, 2023. Cash Flows – Investing Activities Cash used in investing activities totaled $710.0 million during the first six months of 2024, comprised of the acquisition of AMPAC for $681.5 million (net of cash acquired) and capital expenditures of $28.5 million. We expect that our total capital spending during 2024 will be in the $50 million to $70 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 provided from financing activities during the first six months of 2024 amounted to $470.5 million. These cash flows primarily included net borrowings of $279.0 million on the revolving credit facility and proceeds of $250 million from the term loan, partially offset by cash dividends of $48.0 million. Debt Our long-term debt was $1.2 billion at June 30, 2024 compared to $643.6 million at December 31, 2023. On January 22, 2024, we entered into a new $900 million revolving credit facility, as well as a $250 million unsecured term loan. Concurrently with the entry into the new revolving credit facility, we terminated our former revolving credit facility. See Note 9 for additional information on the 2.70% senior notes, 3.78% senior notes, term loan, and revolving credit facility, including the unused portion of our revolving credit facility. All of our senior notes, the term loan, 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, as well as the term loan, 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. 23 Table of Contents 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, 2024, the Leverage Ratio was 1.71 under the revolving credit facility. At June 30, 2024, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, term loan, and revolving credit facility. As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt increased from 37.4% at December 31, 2023 to 48.7% at June 30, 2024. The change resulted primarily from the increase in outstanding revolving credit facility and term loan borrowings, partially offset by the increase in shareholders' equity. The increase in shareholders’ equity primarily reflects our earnings, partially offset by the impact of foreign currency translation adjustments and dividend payments. 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 2023 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 2023 Annual Report. The following provides an update to the information related to intangibles, net of amortization, and goodwill provided in the Critical Accounting Policies and Estimates section of our 2023 Annual Report. We have certain identifiable intangibles amounting to $383.5 million and goodwill amounting to $379.9 million at June 30, 2024 that are discussed in Note 8. Of these identifiable intangibles and goodwill, $124.5 million relate to our petroleum additives business and $638.9 million relate to the specialty materials business. The amortizable identifiable intangibles have remaining lives of up to approximately 17 years. We continue to assess the markets related to the intangibles and goodwill, as well as their specific values and evaluate the intangibles and goodwill for any potential impairment when significant events or circumstances occur that might impair the value of these assets. We have concluded the values are appropriate, as are the amortization periods for the intangibles. However, if conditions were to substantially deteriorate in the petroleum additives or specialty materials markets, it could possibly cause a decrease in the estimated useful lives of the intangible assets or result in a noncash write-off of all or a portion of the intangibles and goodwill carrying amounts. A reduction in the amortization period of the intangibles would have no effect on cash flows. We do not anticipate such a change in market conditions in the near term. Recent Accounting Pronouncements For a full discussion of the more significant recently issued accounting standards, see Note 13. Outlook Our goal is to provide a 10% compounded return per year for our shareholders over any ten-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. Our petroleum additives segment may experience impacts to its operating performance during 2024 due to the uncertain global economic environment in which we operate, as we continue to see challenges from inflationary trends. 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 up to 2%. We plan to exceed that growth rate in our petroleum additives segment. Over the past several years we have made significant investments in our petroleum additives 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. We anticipate continued strength in our petroleum additives segment in 2024 and also look forward to the ongoing integration of AMPAC into our business during the year. While we may experience substantial variation in quarterly results for AMPAC 24 Table of Contents on an ongoing basis due to the nature of its business, we anticipate full year results to be consistent with our pre-acquisition expectations. Our business typically 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. While our recent AMPAC acquisition is outside of our core petroleum additives business, we believe it is an excellent opportunity to provide long-term value for our shareholders. Nonetheless, our primary focus in the acquisition area remains on the petroleum additives industry. It is our view that the petroleum additives industry 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.