NEWMARKET CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion, as well as other discussions in this Annual Report on Form 10-K, 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, our future capital expenditure levels, and our future financial results. 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; and the underperformance of our pension assets resulting in additional cash contributions to our pension plans. Risk factors are discussed in Item 1A. “Risk Factors.” You should keep in mind that any forward-looking statement made by us in this discussion 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 discussion or elsewhere, might not occur. OVERVIEW When comparing the results of the petroleum additives segment for 2024 with 2023, net sales declined 2.0%, resulting primarily from a decrease in selling prices and a small unfavorable foreign currency impact. Product shipments were flat. Petroleum additives operating profit was 15.1% higher when comparing 2024 with 2023, primarily reflecting the favorable impact of lower raw material and operating costs, which were partially offset by the lower selling prices. The lower operating costs reflect our continued focus on operational efficiency. 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 14 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. 25 Table of Contents 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 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 Management's discussion and analysis of our results of operations is presented below for the comparative periods of 2024 versus 2023. The discussion and analysis of our results of operations for 2023 compared to 2022 is available in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. Net Sales Our consolidated net sales for 2024 amounted to $2.8 billion, an increase of $88 million, or 3.3%, from 2023. No single customer accounted for 10% or more of our total net sales in 2024, 2023, or 2022. The following table shows net sales by segment and product line for each of the last three years. The net sales in the table below for the specialty materials segment include sales since the acquisition of AMPAC on January 16, 2024. Years Ended December 31, (in millions) 2024 2023 2022 Petroleum additives Lubricant additives $ 2,246 $ 2,296 $ 2,342 Fuel additives 390 394 412 Total 2,636 2,690 2,754 Specialty materials 141 0 0 All other 9 8 11 Net sales $ 2,786 $ 2,698 $ 2,765 Petroleum Additives - The regions in which we operate include North America (the United States and Canada), Latin America (Mexico, Central America, and South America), Asia Pacific, and the Europe/Middle East/Africa/India (EMEAI) region. The percentage of net sales being generated in the regions has remained fairly consistent over the past three years, with some limited fluctuation due to various factors, including the impact of regional economic trends. In 2024, North America represented approximately 40% of our petroleum additives net sales, while EMEAI contributed approximately 30%, Asia Pacific approximately 20%, and Latin America the remaining amount. As shown in the table above, lubricant additives net sales and fuel additives net sales compared to total petroleum additives net sales have remained substantially consistent over the past three years. Petroleum additives net sales for 2024 of $2.6 billion were approximately 2.0% lower than 2023. The decrease was across all regions. The North America region represented approximately 35% of the decrease in petroleum additives net sales, EMEAI and Latin America represented approximately 22% each, and the Asia Pacific region represented approximately 21%. 26 Table of Contents The approximate components of the petroleum additives decrease in net sales of $54 million when comparing 2024 to 2023 are shown below in millions. Net sales for the year ended December 31, 2023 $ 2,690 Lubricant additives shipments 10 Fuel additives shipments (10) Selling prices (51) Foreign currency impact, net (3) Net sales for the year ended December 31, 2024 $ 2,636 When comparing petroleum additives net sales for 2024 with 2023, the primary driver was lower selling prices along with a small unfavorable foreign currency impact. Lubricant additives shipments were up slightly while fuel additives shipments were lower by the same amount. The primary foreign currencies in which we transact include the Euro, Pound Sterling, Japanese Yen, Chinese Renminbi, and India Rupee. Comparing 2024 and 2023, the United States Dollar strengthened against all of the major currencies in which we transact, except for the Pound and Euro, resulting in the unfavorable impact to net sales for the 2024 and 2023 comparison. The unfavorable impact 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 was flat when comparing 2024 with 2023, with a small increase in lubricant additives offset by a decrease in fuel additives shipments. Both the North America and Asia Pacific regions reported increases in lubricant additives shipments, which were mostly offset by decreases in the EMEAI and Latin America regions. The EMEAI and Latin America regions reported increases in fuel additives shipments, which were more than offset by decreases in the North America and Asia Pacific regions. Specialty Materials - The specialty materials segment comprises the operations of AMPAC, which operates predominantly in the North America region. Total net sales were $141 million for the period that we owned AMPAC during 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 and did not have a material impact to consolidated net sales when comparing 2024 and 2023. Segment Operating Profit NewMarket evaluates the performance of the petroleum additives and specialty materials businesses based on segment operating profit. NewMarket Services 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 last three years. The amount reported for specialty materials is for the period from January 16, 2024 to December 31, 2024. A reconciliation of segment operating profit to income before income tax expense is in Note 5. Years Ended December 31, (in millions) 2024 2023 2022 Petroleum additives $ 592 $ 514 $ 378 Specialty materials $ 17 $ 0 $ 0 All other $ (2) $ (5) $ (2) Petroleum Additives - Petroleum additives segment gross profit increased $69 million, and segment operating profit increased $78 million when comparing 2024 to 2023. The following table presents petroleum additives cost of goods sold as a percentage of net sales and the operating profit margin. 27 Table of Contents Years Ended December 31, 2024 2023 2022 Cost of goods sold as a percentage of net sales 68.0 % 71.2 % 76.8 % Operating profit margin 22.5 % 19.1 % 13.7 % 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 2024 and 2023, the increase in both gross profit and operating profit primarily includes the favorable impacts of lower raw material and operating costs, partially offset by lower selling prices. As shipment volumes were flat between the two years, the impact of shipments on gross profit and operating profit was negligible. We are maintaining our focus on managing our operating costs, optimizing inventory levels, and enhancing portfolio profitability while continuing our investment in technology to meet our customers' needs. Petroleum additives selling, general, and administrative expenses (SG&A) increased by $5 million, or 4.2%, in 2024 compared to 2023. SG&A as a percentage of net sales was 4.8% in 2024 and 4.6% in 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 year to year, there were no significant changes in the drivers of these costs when comparing 2024 and 2023. Our investment in petroleum additives research, development, and testing (R&D) decreased approximately $13 million when comparing 2024 with 2023. As a percentage of net sales, R&D was 4.7% in 2024 and 5.1% in 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. Substantially all investments in new product development are incurred in the United States and the United Kingdom (U.K.), with approximately 70% of total R&D attributable to the North America and EMEAI regions. The remaining R&D is attributable to the Asia Pacific and Latin America regions and represents customer technology support services in those regions. Our R&D is related to the petroleum additives segment. Specialty Materials - The specialty materials segment reported operating profit of $17 million for the period from the AMPAC acquisition date of January 16, 2024 to December 31, 2024. The specialty materials results include the sale of AMPAC finished goods inventory that we acquired at closing. The acquired inventory, which was recorded at fair value on the acquisition date and was sold during 2024, generated no margin. The following discussion references certain captions on the Consolidated Statements of Income. Interest and Financing Expenses Interest and financing expenses were $57 million in 2024 and $37 million in 2023. The increase in interest and financing expense between 2024 and 2023 resulted primarily from both higher average debt outstanding and a higher average interest rate. Other Income (Expense), Net Other income (expense), net was income of $51 million in 2024 and $43 million in 2023. The amounts for both periods included the components of net periodic benefit cost (income), except for service costs, from defined benefit pension and postretirement plans. See Note 18 for further information on total periodic benefit cost (income). 28 Table of Contents Income Tax Expense Income tax expense was $122 million in 2024 and $100 million in 2023. The effective tax rate was 20.8% in 2024 and 20.5% in 2023. When comparing 2024 and 2023, income tax expense increased $20 million due to the higher income before income taxes and $2 million from the slightly higher effective tax rate. 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. 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 during the year ended December 31, 2024 related to the enactment of these rules. CASH FLOWS DISCUSSION We generated cash from operating activities of $520 million in 2024 and $577 million in 2023. During 2024, we used the $520 million of cash generated from operating activities, along with proceeds from the term loan and net borrowings of $77 million on the revolving credit facility to acquire AMPAC for $681 million (net of $16 million cash acquired), pay dividends of $96 million, fund capital expenditures of $57 million, and repurchase shares of our common stock for $32 million. Cash flows from operating activities included a decrease of $23 million from higher working capital requirements, which is further discussed in the Working Capital section below, and a decrease of $12 million for cash contributions to our pension and postretirement plans. During 2023, we used the $577 million of cash generated from operating activities to make net payments of $361 million on our revolving credit facility, pay dividends of $85 million, fund capital expenditures of $48 million, and repurchase shares of our common stock for $43 million. Cash flows from operating activities included an increase of $134 million from lower working capital requirements and a decrease of $10 million for cash contributions to our pension and postretirement plans. FINANCIAL POSITION AND LIQUIDITY Cash At December 31, 2024, we had cash and cash equivalents of $77 million as compared to $112 million at the end of 2023. Cash and cash equivalents held by our foreign subsidiaries amounted to approximately $71 million at December 31, 2024 and $87 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 of 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. Debt A summary of our debt instruments follows. A full discussion is in Note 14. 29 Table of Contents 2.70% Senior Notes - On March 18, 2021, we issued $400 million aggregate principal amount of 2.70% senior notes due 2031 at an issue price of 98.763%. We used the net proceeds from the offering for the repayment and redemption of our 4.10% senior notes and for general corporate purposes. We incurred financing costs in 2021 of approximately $4 million related to the 2.70% senior notes, which are being amortized over the term of the notes. We were in compliance with all covenants under the indenture governing the 2.70% senior notes as of December 31, 2024 and December 31, 2023. 3.78% Senior Notes - On January 4, 2017, we issued $250 million in senior unsecured notes in a private placement with The Prudential Insurance Company of America and certain other purchasers. These notes bear interest at 3.78% with interest payable semiannually. We made the first principal payment of $50 million on January 4, 2025 and have four remaining principal payments of $50 million due January 4 of each year through 2029. We have the right to make optional prepayments on the notes at any time, subject to certain limitations. We were in compliance with all covenants under the 3.78% senior notes as of December 31, 2024 and December 31, 2023. Term Loan - On January 22, 2024, we entered into a credit agreement for an unsecured $250 million term loan (the Term Loan Credit Agreement), which matures on January 22, 2026. We borrowed the entire $250 million available under the Term Loan Credit Agreement and paid financing costs of $0.4 million, which are being amortized over the term of the agreement. We are required to repay the principal amount borrowed under the term loan in full at maturity. We may, in our sole discretion and subject to the conditions set forth in the Term Loan Credit Agreement, prepay, without penalty, amounts borrowed under the term loan, together with any accrued and unpaid interest, prior to maturity. Any amounts prepaid prior to maturity are not available for additional borrowings by us. The Term Loan Credit Agreement contains certain customary covenants, including financial covenants, which require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Term Loan Credit Agreement) of no more than 3.75 to 1.00 except during an Increased Leverage Period (as defined in the Term Loan Credit Agreement). At December 31, 2024, the Leverage Ratio was 1.33. We were in compliance with all covenants under the term loan as of December 31, 2024. Revolving Credit Facilit y - On January 22, 2024, we entered into a credit agreement for a $900 million revolving credit facility (the Revolving Credit Agreement). The revolving credit facility matures on January 22, 2029 and includes a $500 million sublimit for multicurrency borrowings, an initial letter of credit sublimit of $25 million, and a $20 million sublimit for swingline loans. The Revolving Credit Agreement includes an expansion feature allowing us, subject to certain conditions, to request an increase in the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $450 million. We may also request an extension of the maturity date as provided for in the Revolving Credit Agreement. Certain of our foreign subsidiaries may, from time to time, become borrowers under the Revolving Credit Agreement. The obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by NewMarket. Concurrently with entering into the Revolving Credit Agreement, we terminated our former revolving credit facility dated as of March 5, 2020. Upon termination, we repaid the amount then outstanding under the former revolving credit facility, plus accrued and unpaid interest. Outstanding borrowings under the revolving credit facility amounted to $77 million at December 31, 2024. There were no outstanding borrowings under the former revolving credit facility at December 31, 2023. Outstanding letters of credit under the applicable revolving credit facility amounted to approximately $4 million at December 31, 2024 and $2 million at December 31, 2023. The unused portion of the applicable revolving credit facility amounted to $819 million at December 31, 2024 and $898 million at December 31, 2023. The average interest rate for borrowings under the applicable credit facility was 6.5% during 2024 and 6.2% during 2023. 30 Table of Contents The Revolving Credit Agreement contains certain customary covenants, including financial covenants, which require us to maintain a consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) of no more than 3.75 to 1.00 except during an Increased Leverage Period (as defined in the Revolving Credit Agreement). At December 31, 2024, the Leverage Ratio was 1.33. We were in compliance with all covenants under the applicable revolving credit facility as of December 31, 2024 and December 31, 2023. Other Borrowings - Two of our subsidiaries, one in Singapore and one China, have access to separate short-term lines of credit of $10 million each. There was no activity on these lines of credit in 2024 or 2023. *** We had long-term debt of $971 million at December 31, 2024 and $644 million at December 31, 2023. As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt percentage increased from 37.4% at the end of 2023 to 39.9% at the end of 2024. The change resulted primarily from the increase in outstanding term loan and revolving credit facility borrowings, partially offset by an increase in shareholders’ equity. The increase in shareholders' equity primarily reflects our earnings and an increase in the funded position of our retirement plans, partially offset by dividend payments, repurchases of shares of our common stock, and an unfavorable change in the impact from foreign currency translation adjustments. Generally, we repay any outstanding long-term debt with cash from operations or refinancing activities. Working Capital Including cash and cash equivalents and the impact of foreign currency on the balance sheet, at December 31, 2024, we had working capital of $655 million, resulting in a current ratio of 2.75 to 1. Our working capital at December 31, 2023 on the same basis was $675 million, resulting in a current ratio of 2.85 to 1. The working capital of AMPAC is included in our consolidated balance sheet at December 31, 2024. Other than the impact of AMPAC working capital, the most significant change in working capital since December 31, 2023 included a decrease in trade and other accounts receivable offset by an increase in inventories. In addition to these items, cash and cash equivalents decreased as outlined in the cash flows discussion above. The decrease in trade and other accounts receivable primarily represents lower sales levels along with the collection of value added taxes at one of our foreign subsidiaries. The increase in inventories reflects planned increased production to allow for normal maintenance outages and changes in production units as compared to our planned inventory rationalization that took place in 2023. Capital Expenditures Capital expenditures were $57 million for 2024 and $48 million for 2023. We estimate capital expenditures in 2025 will be in the range of $60 million to $70 million as we anticipate spending on several improvements to our manufacturing and R&D infrastructure around the world. We expect to continue to finance capital spending through cash provided from operations, as well as with borrowing available under our revolving credit facility. Environmental Expenses We spent approximately $37 million in 2024 and $41 million in 2023 for ongoing environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures. These environmental operating and clean-up expenses are included in cost of goods sold. We expect to continue to fund these costs through cash provided by operations. Liquidity and Contractual Obligations We have both current and long-term obligations that have known payment streams and are discussed throughout this Annual Report on Form 10-K. These include debt-related obligations, lease obligations, purchase commitments, including those for property, plant, and equipment, contributions to pension and postretirement benefit plans, and environmental dismantling and decontamination. 31 Table of Contents The debt-related contractual obligations include both principal payments on outstanding long-term debt and the related interest payments. The maturity dates and interest rates, as well as information on the repayment of the principal on our long-term debt is detailed above in the Debt section, as well as in Note 14. At December 31, 2024, all of our long-term debt was at fixed rates, except for the revolving credit facility and the term loan agreement. A discussion of interest rate sensitivity is in Item 7A. Interest is paid semi-annually on our fixed rate long-term debt agreements. Note 17 provides information by year on our lease obligations which have commenced, as well as any lease commitments which have not yet commenced. Note 18 includes information on contributions to pension and postretirement benefit plans, as well as benefit payments to participants. Benefit payments under these plans are predominantly paid from assets held in trust. Further information on purchase commitments, including those for purchases of property, plant, and equipment, is in Note 21. The annual operating expenses and capital expenditures associated with compliance with environmental, health, and safety regulations are included in Item 1, Governmental and Environmental Regulations. In addition to these costs, there are expected cash flows for dismantling and decontamination of environmental sites. At December 31, 2024, these costs were estimated at approximately $1 million in each of 2025 through 2029 and $9 million thereafter. We expect that cash from operations, together with borrowing available under our credit facilities, will continue to be sufficient for our operating needs and planned capital expenditures for both a short-term and long-term horizon. Pension and Postretirement Benefit Plans Our U.S. and foreign benefit plans are discussed separately below. The information below for our U.S. plans applies to all of our U.S. benefit plans on a combined basis. Our foreign plans are quite diverse, and the actuarial assumptions used by the various foreign plans are based upon the circumstances of each particular country and retirement plan. We use a December 31 measurement date to determine our net periodic benefit cost (income) for all of our pension and postretirement benefit plans and related financial disclosure information. Additional information on our pension and postretirement plans is in Note 18. U.S. Pension and Postretirement Benefit Plans —The average remaining service period of active participants for our U.S. plans is 13.1 years, while the average remaining life expectancy of inactive participants is 22.3 years. We utilize the sex distinct Pri-2012 table with separate rates for annuitants, non-annuitants, and contingent annuitants, projected generationally using Scale MP-2021 in determining the impact of mortality on the U.S. benefit plans in our financial statements. Investment Return Assumptions and Asset Allocation - We periodically review our assumptions for the long-term expected return on pension plan assets. As part of the review and to develop expected rates of return, we considered an analysis of expected returns based on the U.S. plans’ asset allocation as of both January 1, 2025 and January 1, 2024. This analysis reflects our expected long-term rates of return for each significant asset class or economic indicator. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. The asset allocation for our U.S. pension plans is predominantly weighted toward equities. Through the ongoing monitoring of our investments and review of market data, we have determined that we should maintain the expected long-term rate of return for our U.S. pension plans at 8.0% at December 31, 2024. An actuarial gain on the assets occurred during 2024 and 2023 as the actual investment return for all of our U.S. qualified pension plans exceeded the expected return by approximately $54 million in 2024 and $47 million in 2023. Investment gains and losses are recognized in earnings on an amortized basis over a period of 5 years. The amortization of the actuarial net gain is expected to be approximately $4 million in 2025 resulting primarily from the actuarial gain related to the investment gains on plan assets and the actuarial gains associated with the increase in the discount rate. We expect that there will be continued volatility in net periodic benefit cost (income) for our pension plans as actual investment returns vary from the expected return, but we continue to believe the potential long-term benefits justify the risk premium for equity investments. At December 31, 2024, our expected long-term rate of return on our postretirement plans was 4.0%. This rate varies from the pension rate of 8.0% primarily because of the difference in investment of plan assets. The assets of the postretirement plan are held in an insurance contract, which results in a lower assumed rate of investment return. 32 Table of Contents We expect to have net periodic benefit income for our pension and postretirement plans during 2025, as the expected return on assets and amortization is higher than the offsetting benefit costs. Net periodic benefit cost (income) for the pension and the life insurance portion of postretirement plans are sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 7.0% for pension assets and 3.0% for postretirement benefit assets (while holding other assumptions constant) would reduce the forecasted 2025 income for our U.S. pension and postretirement plans by approximately $8 million. Similarly, a 100 basis point increase in the expected rate of return to 9.0% for pension assets and 5.0% for postretirement benefit assets (while holding other assumptions constant) would increase forecasted 2025 pension and postretirement income by $8 million. Discount Rate Assumption - We develop the discount rate assumption by determining the single effective discount rate for a unique hypothetical portfolio constructed from investment-grade bonds that, in the aggregate, match the projected cash flows of each of our retirement plans. The discount rate is developed based on the hypothetical portfolio on the last day of December. The discount rate at December 31, 2024 was 5.875% for all plans. Net periodic benefit cost (income) for pension and postretirement benefit plans is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to 4.875% (while holding other assumptions constant) would reduce the forecasted 2025 income for our U.S. pension and postretirement benefit plans by approximately $6 million. A 100 basis point increase in the discount rate to 6.875% (while holding other assumptions constant) would increase forecasted 2025 pension and postretirement benefit income by approximately $5 million. Rate of Projected Compensation Increase - We have maintained our rate of projected compensation increase at December 31, 2024 at 3.5%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future. Liquidity - Cash contribution requirements to the pension plan are sensitive to changes in assumed interest rates and investment gains or losses in the same manner as pension expense. While we do not expect to make a cash contribution to our U.S. qualified pension plans, we expect our aggregate cash contributions to the U.S. pension plans will be approximately $4 million in 2025. We expect our contributions to the postretirement benefit plans will be approximately $1 million in 2025. Foreign Pension Benefit Plans - Our foreign pension plans are quite diverse. The following information applies only to our U.K. pension plan, which represents the majority of the amounts recorded in our financial statements for our foreign pension plans. The average remaining service period of active participants for our U.K. plan is approximately 15 years, while the average remaining life expectancy of inactive participants is 21 years. In determining the impact of mortality on the U.K. pension plan in our financial statements, we utilize the S3PxA mortality tables weighted by 92% for males and 100% for females and allow for future projected improvements in life expectancy in line with the CMI 2023 model with the core smoothing parameter, an initial addition to mortality improvements of 0.3% per year, and an experience weighting of 0% on both 2020 and 2021 data and 20% on both 2022 and 2023 data, with a long-term rate of improvement of 1.65% per year for males and 1.15% per year for females based on the membership of the plan. Investment Return Assumptions and Asset Allocation - We periodically review our assumptions for the long-term expected return on the U.K. pension plan assets. The expected long-term rate of return is based on both the asset allocation and yields available in the U.K. markets. The target asset allocation in the U.K. is 40% in pooled equities funds, 40% in pooled government bonds, and 20% in pooled diversified growth funds. The actual allocation at the end of 2024 was 51% in pooled equities funds, 27% in pooled government bonds, 21% in pooled diversified growth funds, and 1% in cash. Based on the actual asset allocation and the expected yields available in the U.K. markets, the expected long-term rate of return for the U.K. pension plan was 7.7% at December 31, 2024. An actuarial gain on the assets occurred during both 2024 and 2023 as the actual investment return exceeded the expected investment return by approximately $1 million in 2024 and $4 million in 2023. An actuarial gain of $16 million occurred during 2024 and an actuarial loss of $3 million occurred during 2023 on plan liabilities primarily due to changes in the assumptions. Investment and liability gains and losses are recognized in earnings on an amortized basis over a period of years. The combined gains result in an expected amortization of net gain of $0.8 million in 2025. We expect that there will be continued volatility in the net periodic benefit cost (income) for our U.K. pension plan as actual 33 Table of Contents investment returns vary from the expected return, but we continue to believe the potential benefits justify the risk premium for the target asset allocation. We expect to have pension income during 2025 related to our U.K. plan, as the expected return on assets is higher than the offsetting pension costs. Net periodic benefit cost (income) for the U.K. pension plan is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 6.7% (while holding other assumptions constant) would decrease the forecasted 2025 income for our U.K. pension plan by approximately $2 million. Similarly, a 100 basis point increase in the expected rate of return to 8.7% (while holding other assumptions constant) would increase forecasted 2025 pension income by approximately $2 million. Discount Rate Assumption - We utilize a yield curve based on AA-rated corporate bond yields in developing a discount rate assumption. The yield appropriate to the duration of the U.K. plan liabilities is then used. The discount rate at December 31, 2024 was 5.50%. Net periodic benefit cost (income) for the U.K. pension plan is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to 4.50% (while holding other assumptions constant) would decrease the forecasted 2025 income for our U.K. pension plans by approximately $400 thousand. A 100 basis point increase in the discount rate to 6.50% (while holding other assumptions constant) would increase forecasted 2025 pension income by approximately $300 thousand. Rate of Projected Compensation Increase - Our rate of projected compensation increase at December 31, 2024 is 3.5%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future. Liquidity - Cash contribution requirements to the U.K. pension plan are sensitive to changes in assumed interest rates and investment gains or losses. We expect our aggregate U.K. cash contributions will be approximately $3 million in 2024. 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 2025 due to the uncertain global economic environment in which we operate; however, we anticipate continued strength from this segment. As a result, we will continue to focus on cost control and operating profit margin management 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, focused on operational efficiencies, organizational talent, technology development and processes, as well as global infrastructure, including technical centers, production capabilities, 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 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 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 34 Table of Contents evaluate any future opportunities. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following discussion highlights some of the more critical areas where a significant change in facts and circumstances in our operating and financial environment could cause a change in future reported financial results. Income Taxes We file United States, foreign, state, and local income tax returns. Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. Any significant impact as a result of changes in underlying facts, law, tax rates, or tax audits could lead to adjustments to our income tax expense, effective tax rate, financial position, or cash flow. Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities, as well as for net operating losses and tax credit carryforwards. When recording these deferred tax assets and liabilities, we must estimate the tax rates we expect will apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. In addition, we may record valuation allowances to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Judgment is required as we consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. If our estimates and assumptions change from those used when we recorded deferred tax assets and liabilities, the effect on our results of operations and financial position could be material. The income tax returns for our entities in the United States and in foreign jurisdictions are open for examination by tax authorities. We assess our income tax positions and record a liability for all years open for examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. The economic benefit associated with a tax position will be recognized only if we determine it is more likely than not to be upheld on audit. Although we believe our estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our results of operations and financial position. At each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Our provision for income taxes is impacted by the income tax rates of the countries where we operate. A change in the geographical source of our income can affect the effective tax rate. Significant judgment is involved regarding the application of global income tax laws and regulations when projecting the jurisdictional mix of income. Additionally, interpretations of tax laws, court decisions, or other guidance provided by taxing authorities influence our estimate of the effective income tax rate. As a result, our actual effective income tax rate and related income tax liabilities may differ materially from our estimated effective tax rate and related income tax liabilities. Intangibles (net of amortization) and Goodwill We have certain identifiable intangibles amounting to $371 million and goodwill amounting to $379 million at December 31, 2024 that are discussed in Note 11. Of these intangibles and goodwill, $124 million is attributable to the petroleum additives segment and $626 million to the specialty materials segment. The identifiable intangibles are being amortized over periods with up to approximately 17 years of remaining life. The water rights are indefinite-lived and non-amortizing. We estimate fair value for these identifiable intangibles using an income valuation approach for customer bases, formulas and technology, and trademarks and trade names. The cash flow projections included significant judgments and assumptions relating to revenue growth rates; earnings before interest, taxes, depreciation, and amortization; discount rate; contributory asset charges; and customer attrition rate for customer bases and revenue growth rates; royalty rates; and discount rate for formulas and technology and trademarks and trade names. We use a market valuation approach for estimating water rights and our significant judgements and assumptions included comparable sales data. We continue to assess the market 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 35 Table of Contents 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 material 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 or write-off of the intangibles would have no effect on cash flows. We do not anticipate such a change in the market conditions in the near term. Pension Plans and Postretirement Benefits The impact of the pension and postretirement benefit plan obligations recorded in the financial statements is dependent upon utilizing actuarial methods and requires the use of estimates and assumptions. These assumptions include the discount rate, rate of projected compensation increase, and the expected long-term rate of return on plan assets. A change in any of these assumptions could cause different results for the plans and therefore, impact our results of operations, cash flows, and financial condition. We develop these assumptions after considering available information that we deem relevant. Information is provided on the pension and postretirement plans in Note 18. In addition, further disclosure of the effect of changes in these assumptions is provided in the Financial Position and Liquidity section of Item 7. Environmental and Legal Proceedings We have disclosed our environmental matters in Item 1 of this Annual Report on Form 10-K, as well as in Note 21. Our estimates for costs that will be incurred to satisfy our obligations related to environmental matters are affected by many variables, including our judgment regarding the extent of remediation that will be required, future changes in and enforcement and interpretation of laws and regulations, current and future technology available, and timing of remediation activities. While we currently do not anticipate significant changes to the many factors that could impact our environmental requirements, we continue to keep our accruals consistent with these requirements as they change. Also, as noted in the discussion of Legal Proceedings in Item 3 of this Annual Report on Form 10-K, while it is not possible to predict or determine with certainty the outcome of any legal proceeding, it is our opinion, based on our current knowledge, that we will not experience any material adverse effects on our results of operations, cash flows, or financial condition as a result of any pending or threatened proceeding. RECENTLY ISSUED ACCOUNTING STANDARDS For a full discussion of the more significant recently issued accounting standards, see Note 23.