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, 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, including tariffs and trade policy; 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 2024 Annual Report, which is available to shareholders at www.newmarket.com. 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 three months of 2025 with the first three months of 2024, net sales declined 4.7%, resulting primarily from lower product shipments, which were partially offset by favorable product mix. Petroleum additives operating profit decreased 5.8% when comparing the 2025 and 2024 three-months periods, primarily reflecting lower product shipments and higher operating costs, which were partially offset by lower raw material costs and favorable product mix. The specialty materials segment reported both higher net sales and higher operating profit for the first three months of 2025 as compared to the same period in 2024, resulting primarily from higher product volumes, as well as favorable product mix. Specialty materials sales and operating profit for the first three months of 2024 reflect financial results since the acquisition of AMPAC on January 16, 2024. We are monitoring the uncertain macroeconomic environment in which we operate, particularly the changes in international trade relations and tariffs, and are assessing the potential impacts to our operations. These impacts could include supply chain disruptions, lower customer demand, and higher inflation. Investing in technology to meet customer needs, enhancing our operational efficiency, and improving our portfolio profitability will remain priorities throughout 2025. 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. 19 Table of Contents Results of Operations Net Sales Consolidated net sales for the first three months of 2025 totaled $700.9 million, representing a slight increase of $4.2 million, or 0.6%, from the first three months of 2024. The following table shows net sales by segment and product line. The net sales for the first three months of 2024 in the table below for the specialty materials segment include sales since the acquisition of AMPAC on January 16, 2024. Three Months Ended March 31, (in millions) 2025 2024 Petroleum additives Lubricant additives $ 559.2 $ 571.9 Fuel additives 86.3 105.4 Total 645.5 677.3 Specialty materials 53.7 17.0 All other 1.7 2.4 Net sales $ 700.9 $ 696.7 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 three months of 2025 with both the same period in 2024, as well as with the full year of 2024. Petroleum additives net sales for the first three months of 2025 were $645.5 million compared to $677.3 million for the first three months of 2024, a decrease of 4.7% across all regions. The Asia Pacific region decreased 8.5%, EMEAI decreased 5.9%, North America decreased 2.2%, and Latin America decreased 1.0%. The following table details the approximate components of the changes in petroleum additives net sales between the first three months of 2025 and 2024. (in millions) Three Months Period ended March 31, 2024 $ 677.3 Lubricant additives shipments (19.2) Fuel additives shipments (21.2) Selling prices, including product mix 14.0 Foreign currency impact, net (5.4) Period ended March 31, 2025 $ 645.5 When comparing the first three months of 2025 and 2024, the decrease in petroleum additives net sales was due to lower product shipments, along with a small unfavorable foreign currency impact. Partially offsetting these factors was an increase to net sales driven by favorable product mix. The primary foreign currencies in which we transact include the Euro, Pound Sterling, Japanese Yen, Chinese Renminbi, and Indian Rupee. Comparing the first three months of 2025 and 2024, the United States Dollar strengthened against all of the major currencies in which we transact, resulting in the unfavorable impact to net sales for the first three months comparison reflected in the above table. The unfavorable impact was predominantly from the change in the exchange rate of the Euro. On a worldwide basis, the volume of product shipments for petroleum additives decreased 7.2% when comparing the first three months periods with decreases in both lubricant and fuel additives. Both the North America and Asia Pacific regions experienced decreases in lubricant additives shipments, while the EMEAI and Latin America regions reported small increases in lubricant additives shipments. All regions except Asia Pacific experienced decreases in fuel additives shipments for the first three months comparison. 20 Table of Contents Specialty Materials Segment Total net sales were $53.7 million for the first three months of 2025 and $17.0 million for the period that we owned AMPAC during the first three months of 2024. The increase in net sales was the result of significantly higher product volume, along with higher selling prices, including favorable product mix. 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 three months ended March 31, 2025 and March 31, 2024. The amount reported for specialty materials is for the period from January 16, 2024 to March 31, 2024. A reconciliation of segment operating profit to income before income tax expense is in Note 4. Three Months Ended March 31, (in millions) 2025 2024 Petroleum additives $ 142.1 $ 150.9 Specialty materials $ 23.2 $ (5.0) All other $ (0.5) $ (0.1) Petroleum Additives Segment Petroleum additives segment gross profit decreased $6.5 million and operating profit decreased $8.8 million when comparing the first three months of 2025 to the first three months of 2024. The decrease in both gross profit and operating profit included the unfavorable impacts of lower product shipments and higher operating costs, which were partially offset by favorable product mix and lower raw material costs. The following table presents petroleum additives cost of goods sold as a percentage of net sales and the operating profit margin. Three Months Ended March 31, 2025 2024 Cost of goods sold as a percentage of net sales 67.8 % 68.4 % Operating profit margin 22.0 % 22.3 % For the rolling four quarters ended March 31, 2025, the operating profit margin for petroleum additives was 22.4%, 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. Petroleum additives selling, general, and administrative (SG&A) expenses for the first three months of 2025 were $0.3 million higher than the first three months of 2024. SG&A expenses as a percentage of net sales were 5.0% for the first three months of 2025 and 4.8% for the first three months of 2024. 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) increased $2.0 million when comparing the first three months periods of 2025 and 2024. As a percentage of net sales, our R&D investment was 5.1% for the first three months of 2025 and 4.6% for the first three months of 2024. 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 21 Table of Contents 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 $23.2 million for the first three months of 2025 as compared to an operating loss of $5.0 million for the period from the AMPAC acquisition date of January 16, 2024 to March 31, 2024. The increase in specialty materials operating profit was primarily the result of the same factors discussed in the Net Sales section above. The specialty materials results for the 2024 period include the sale of AMPAC finished goods inventory that we acquired at closing. The acquired inventory was recorded at fair value on the acquisition date and sold during 2024, generating no margin. We may experience substantial variation in quarterly results for the specialty materials segment on an ongoing basis due to the nature of its business. The following discussion references certain captions on the Consolidated Statements of Income. Interest and Financing Expenses, Net Interest and financing expenses were $10.7 million for the first three months of 2025 and $15.7 million for the first three months of 2024. The decrease for the three months comparisons resulted primarily from both lower average debt outstanding and a lower average interest rate. Other Income (Expense), Net Other income (expense), net was income of $14.9 million for the first three months of 2025 and $12.5 million for the first three months of 2024. The amounts for both the 2025 and 2024 three 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 $38.2 million for the first three months of 2025 and $30.0 million for the first three months of 2024. The effective tax rate was 23.3% for the first three months of 2025 and 21.8% for the first three months of 2024. Income tax expense increased $5.7 million due to higher income before income tax expense and $2.5 million due to the higher effective tax rate. The increase in the effective tax rate for the first three months comparison was primarily caused by prior year tax items. Cash Flows, Financial Condition, and Liquidity Cash and cash equivalents at March 31, 2025 were $118.3 million, an increase of $40.8 million since December 31, 2024. Cash and cash equivalents held by our foreign subsidiaries amounted to $114.3 million at March 31, 2025 and $71.3 million at December 31, 2024. 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 three months of 2025 was $120.3 million, including $26.6 million of higher working capital requirements. The $26.6 million excluded an unfavorable foreign currency impact to the components of working capital on the balance sheet. When comparing the March 31, 2025 balances with those at December 31, 2024, the most significant changes in working capital included increases in trade and other accounts receivable, accounts payable, and income taxes payable, along with decreases in inventories and accrued expenses. The increase in trade and other accounts receivable primarily reflects higher 22 Table of Contents sales during the first quarter of 2025 compared to the fourth quarter of 2024. The increase in accounts payable is primarily the result of increased purchases during the first quarter of 2025 and normal invoice payment timing. The increase in income taxes payable is due to the timing of U.S. income tax payments. The decrease in inventory reflects lower production to allow for customer demand, as well as the planned use of inventory built up during the end of 2024 to provide for normal maintenance outages. The decrease in accrued expenses is primarily the result of normal payments related to customer rebates, interest payments on our long-term debt, and personnel-related 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 $727.5 million at March 31, 2025 and $655.1 million at December 31, 2024. The current ratio was 2.84 at March 31, 2025 and 2.75 at December 31, 2024. Cash Flows – Investing Activities Cash used in investing activities totaled $13.0 million during the first three months of 2025, comprised of capital expenditures. We expect that our total capital spending during 2025 will be in the $70 million to $100 million range and will include improvements to our manufacturing and R&D infrastructure around the world. Included in the expected capital expenditures for 2025 is a capital investment of up to $100 million to expand AMPAC's ammonium perchlorate production capabilities in support of growing solid rocket motor demand. This anticipated investment, which has been approved by the AMPAC board of directors, will include the construction of an additional production line, increasing capacity by more than 50%. The increased capacity will allow AMPAC to meet the demand of U.S. military and space launch programs, while also addressing the needs of U.S. allies in these critical areas. The project remains subject to approval by NewMarket’s board of directors and is currently scheduled to be completed during 2026. 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 three months of 2025 amounted to $68.5 million. These cash flows included repurchases of our common stock of $57.1 million, a principal payment of $50.0 million on the 3.78% senior notes, and cash dividends of $26.1 million, which were partially offset by net borrowings of $69 million on the revolving credit facility. Debt Our long-term debt was $990.6 million at March 31, 2025 compared to $971.3 million at December 31, 2024. 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. 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 March 31, 2025, the Leverage Ratio was 1.31 under the revolving credit facility. At March 31, 2025, 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 decreased from 39.9% at December 31, 2024 to 39.5% at March 31, 2025. The change resulted from the increase in shareholders' equity partially offset by a net increase in outstanding long-term debt. The increase in shareholders’ equity primarily reflects our earnings and favorable impact from foreign currency translation adjustments, partially offset by dividend payments and repurchases of shares 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 2024 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 2024 Annual Report. 23 Table of Contents There have been no significant changes in our critical accounting policies and estimates from those reported in our 2024 Annual Report. 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 as 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, and 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. We continue to focus on the ongoing integration of AMPAC into our business. While we may experience substantial variation in quarterly results for specialty materials 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 planned investment to expand capacity at AMPAC is aligned with anticipated future industry demand. 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 was outside of our core petroleum additives business, we believe it presented 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. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk At March 31, 2025, there were no material changes in our market risk from the information provided in the 2024 Annual Report.