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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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, and our future capital expenditure levels.
We believe our forward-looking statements are based on reasonable expectations and assumptions, within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control.
Factors that could cause actual results to differ materially from expectations include, but are not limited to, the availability of raw materials and distribution systems; disruptions at production facilities, including single-sourced facilities; hazards common to chemical businesses; the ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; sudden or sharp raw material price increases; competition from other manufacturers; the gain or loss of significant customers; current and future governmental regulations; failure to attract and retain a highly-qualified workforce; the occurrence or threat of extraordinary events, including natural disasters and terrorist attacks; risks related to operating outside of the United States; the impact of substantial indebtedness on our operational and financial flexibility; the impact of fluctuations in foreign exchange rates; an information technology system failure or security breach; resolution of environmental liabilities or legal proceedings; political, economic, and regulatory factors concerning our products; limitation of our insurance coverage; our inability to realize expected benefits from investment in our infrastructure or from recent or future acquisitions, or our inability to successfully integrate recent or future 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 2018 with 2017, net sales increased 4.3% primarily due to higher selling prices and a favorable foreign currency impact, partially offset by lower shipment volumes. Petroleum additives operating profit for 2018 was 9.9% lower than 2017 primarily reflecting unfavorable impacts from higher raw material costs and higher conversion costs.
Our operations generate cash that is in excess of the needs of the business. We continue to invest and manage our business for the long-run 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, consisting of technical centers, production capability, and geographic expansion.
During 2018, we repurchased 603,449 shares of our common stock at a total cost of $232 million.
RESULTS OF OPERATIONS
Certain prior year amounts have been reclassified to reflect the adoption of Accounting Standards Update No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". There was no impact to net income for any period presented.
Net Sales
Our consolidated net sales for
2018
amounted to
$2.3 billion
, an increase of $91 million, or
4.2%
from
2017
. The increase between
2017
and
2016
was
$149 million
, or
7.3%
.
No single customer accounted for 10% or more of our total net sales in 2018, 2017, or 2016.
The following table shows net sales by segment and product line for each of the last three years.
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Years Ended December 31,
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(in millions)
|
|
2018
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|
2017
|
|
2016
|
Petroleum additives
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Lubricant additives
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$
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1,871
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$
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1,790
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$
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1,673
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Fuel additives
|
|
410
|
|
|
397
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|
362
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Total
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2,281
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|
|
2,187
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|
|
2,035
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All other
|
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9
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|
|
11
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|
|
14
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|
Net sales
|
|
$
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2,290
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|
|
$
|
2,198
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|
|
$
|
2,049
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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. North America and EMEAI both represent around 35% of our petroleum additives net sales, while Asia Pacific contributes about 25% and Latin America represents 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 has remained substantially consistent over the past three years. The discussion below provides further detail on net sales in our petroleum additives segment for
2018
,
2017
, and
2016
.
The approximate components of the petroleum additives increases in net sales of
$94 million
when comparing
2018
to
2017
and
$152 million
when comparing
2017
to
2016
are shown below in millions.
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Net sales for year ended December 31, 2016
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$
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2,035
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Lubricant additives shipments
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137
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Fuel additives shipments
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30
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|
Selling prices
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(17
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)
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Foreign currency impact, net
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2
|
|
Net sales for year ended December 31, 2017
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2,187
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Lubricant additives shipments
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(9
|
)
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Fuel additives shipments
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0
|
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Selling prices
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82
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Foreign currency impact, net
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21
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Net sales for year ended December 31, 2018
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$
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2,281
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Petroleum additives net sales for
2018
of
$2.3 billion
were approximately 4.3% higher than
2017
levels. The increase was across all regions, but predominantly in the Asia Pacific region with a nearly 11% increase. The primary driver in the higher net sales between 2018 and 2017 was improved selling prices, which, along with a favorable foreign currency impact, contributed $103 million. Offsetting the impact from selling prices, petroleum additives shipments accounted for a $9 million reduction in net sales due to a 2.8% decrease in volume of product shipments. Shipments of lubricant additives increased in the Asia Pacific region, but were more than offset by lower lubricant additives shipments in the other regions. Fuel additives shipments decreased in the North America, Asia Pacific, and EMEAI regions, which were partially offset by a small increase in the Latin America region. Foreign currency contributed a favorable impact, mostly from the Euro. The U.S. Dollar weakened against the Euro, Japanese Yen, Pound Sterling, and Chinese Reminbi resulting in a favorable impact to net sales.
Petroleum additives net sales for
2017
of
$2.2 billion
were approximately 7.5% higher than
2016
levels. The increase was predominantly in the EMEAI region with a nearly 14% increase, as well as in the Asia Pacific region with an almost 10% increase. The Latin America region contributed a smaller increase of almost 7%, while the North America region was substantially unchanged between the two years. The primary driver in the higher net sales between 2017 and 2016 was an 8.2% increase in shipments which was partially offset by lower selling prices. Shipments increased in both lubricant and fuel additives. EMEAI, Asia Pacific and Latin America experienced shipment increases in lubricant additives, while EMEAI was the primary driver in the increase in shipments for fuel additives. The North America region was substantially unchanged between the two years for both lubricant and fuel additives shipments. Foreign currency contributed a small favorable impact, mostly from the Euro. The U.S. Dollar weakened against the Euro, resulting in a favorable impact to net sales. Partially offsetting the impact from the Euro, the U.S. Dollar strengthened against the Japanese Yen and Chinese Renminbi resulting in an unfavorable foreign currency impact.
All Other
- The “All other” category includes the operations of the antiknock compounds business, and certain contracted manufacturing and services performed by Ethyl.
Segment Operating Profit
NewMarket evaluates the performance of the petroleum additives business based on segment operating profit. NewMarket Services expenses are charged to each subsidiary pursuant to services agreements between the companies. Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets, is included in segment operating profit.
The table below reports segment operating profit for the last three years. A reconciliation of segment operating profit to income before income tax expense is in Note 21.
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Years Ended December 31,
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(in millions)
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2018
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2017
|
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2016
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Petroleum additives
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$
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311
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|
|
$
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345
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$
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375
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All other
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$
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(3
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)
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$
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4
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$
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0
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Petroleum Additives
- Petroleum additives segment operating profit decreased
$34 million
when comparing
2018
to
2017
and decreased
$30 million
when comparing
2017
to
2016
. Both 2017 and 2016 reflect the retroactive restatement of petroleum additives operating profit due to the adoption of Accounting Standards Update 2017-07. Further information is in Note 23. Both comparative periods included the impact of the same factors that affected gross profit (see discussion below).
The operating profit margin was
13.6%
in
2018
,
15.8%
in
2017
, and
18.4%
in
2016
. Increases in raw material costs over the past two years have continued to put downward pressure on margins. While our efforts have been focused on recovering these increased costs, we continue to experience the lag between when the price increases go into effect and when margins improve. While operating profit margins will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry are unchanged.
Petroleum additives gross profit decreased $39 million when comparing 2018 and 2017 and $47 million when comparing 2017 and 2016. Cost of goods sold as a percentage of net sales has increased in 2018 over the prior two years reflecting percentages of 74.5% in 2018, 71.6% in 2017, and 67.1% in 2016.
When comparing 2018 and 2017, the decrease in gross profit resulted predominantly from unfavorable raw material and conversion costs, including unfavorable foreign currency translation, as well as a smaller unfavorable impact from product shipments, which together contributed over 100% of the change. A favorable impact from selling prices partially offset the unfavorable factors.
When comparing 2017 and 2016, the decrease in gross profit resulted predominantly from the unfavorable raw material costs and selling prices (including product mix), as well as unfavorable conversion costs, which together contributed over 100% of the change. These unfavorable factors were partially offset by increases in products shipments as discussed in the Net Sales section above.
The sales price variance for both comparative periods included the impact from foreign currency rates as discussed in the Net Sales section above.
Petroleum additives selling, general, and administrative expenses (SG&A) were $9 million, or 6.1% lower in 2018 than 2017 and essentially flat in 2017 compared to 2016. SG&A as a percentage of net sales was 5.7% in 2018, 6.4% in 2017, and 6.8% in 2016. Our SG&A costs are mainly personnel-related and include salaries, benefits and other costs associated with our workforce. There were no significant changes in the individual components of SG&A costs when comparing the years.
When comparing
2018
with
2017
, R&D expenses decreased approximately $6 million, and when comparing
2017
with
2016
, R&D decreased approximately $15 million. In both comparison periods, the decrease was primarily in the lubricant additives product lines. As a percentage of net sales, R&D was 6.2% in 2018, 6.7% in 2017, and 7.9% in 2016.
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 investment, as it is with SG&A, is one of purposeful spending on programs to support our current product base and to ensure that we develop products to support our customers' programs in the future. R&D investments include personnel-related costs, as well as internal and external testing of our products. Most R&D is incurred in the United States and in the United Kingdom, with over 70% of total R&D being attributable to the North America and EMEAI regions. Substantially all investments in new product development are incurred in the United States and the United Kingdom. The remaining R&D is attributable to the Asia Pacific and Latin America regions and represents customer technology support services in those regions. All of our R&D is related to the petroleum additives segment.
The following discussion references certain captions on the Consolidated Statements of Income.
Interest and Financing Expenses
Interest and financing expenses were
$27 million
in
2018
,
$22 million
in
2017
, and
$17 million
in
2016
. The increase in interest and financing expense between 2018 and 2017 resulted primarily from higher average debt, which was partially offset from a lower average interest rate. The increase between 2017 and 2016 resulted primarily from higher average interest rates, as well as higher average debt.
Other Income (Expense), Net
Other income (expense), net was income of
$24 million
in
2018
, $15 million in 2017 and $5 million in 2016. Both 2017 and 2016 reflect the retroactive restatement due to the adoption of Accounting Standards Update 2017-07. Further information is in Note 23. The amounts for all periods primarily reflect the components of net periodic benefit cost (income), except for service costs. See Note 18 for further information on total periodic benefit cost (income). The 2016 period also includes the impact from an interest rate swap derivative instrument recorded at fair value through earnings, which we terminated in 2016.
Income Tax Expense
Income tax expense was
$56 million
in
2018
, $125 million in
2017
, and $100 million in
2016
. The effective tax rate was
19.1%
in
2018
,
39.6%
in
2017
, and
29.1%
in
2016
. When comparing 2018 and 2017, income tax decreased $59 million due to the lower effective tax rate and $10 million due to lower income before income tax expense. When comparing 2017 and 2016, income tax increased $33 million due to the higher effective tax rate, but decreased $8 million due to lower income before income tax. See Note 19 for further details on income taxes.
The primary reason for the decrease in the effective tax rate for 2018 is the December 22, 2017 enactment of tax legislation commonly known as the Tax Cuts and Jobs Act (Tax Reform Act), which reduced the U.S. federal tax rate from 35% to 21% effective January 1, 2018. In addition, the effective tax rates for 2018 included the benefit from the research and development tax credit, as well as the impact of the decrease in deferred tax liabilities due to the reduction of the U.S. corporate tax rate.
The 2017 tax rate included a one-time tax on the deemed repatriation of previously deferred foreign earnings. We recorded a net tax expense of $31 million as a result of the Tax Reform Act. Included in this expense amount was $32 million related to the deemed repatriation of foreign earnings, which was partially offset by reductions to deferred tax liabilities. The 2017 period also included the benefit of income in foreign jurisdictions with lower tax rates than the United States.
CASH FLOWS DISCUSSION
We generated cash from operating activities of
$198 million
in
2018
,
$243 million
in
2017
, and
$353 million
in
2016
.
During 2018, we used the $198 million cash generated from operations, $168 million of borrowings on our revolving credit facility and $11 million cash on hand to repurchase $232 million of our common stock, pay dividends of $80 million on our common stock, and fund capital expenditures of $75 million. Cash flows from operating activities included a decrease of $54 million from higher working capital requirements, as well as cash contributions of $65 million to our pension and postretirement plans.
During 2017, we used the $243 million cash generated from operations, $250 million from the issuance of the 3.78% senior notes, and $108 million cash on hand to fund the acquisition of AMSA for $184 million, repay the outstanding balance of $156 million on our revolving credit facility, and fund $149 million in capital expenditures. We also paid dividends of $83 million and repurchased $26 million of our common stock. Cash flows from operating activities included a decrease of $36 million from higher working capital requirements, $31 million from the impact of the Tax Reform Act, and cash contributions of $26 million for our pension and postretirement plans.
During 2016, we used the $353 million cash generated from operations and $11 million of borrowings on our revolving credit facility to fund $143 million of capital expenditures, fund $76 million in dividend payments, and repurchase $36 million of our common stock. These transactions, along with an unfavorable foreign currency impact of $8 million resulted in an increase of $99 million in cash and cash equivalents. Cash flows from operating activities included an increase of $21 million from lower working capital requirements, as well as cash contributions of $26 million for our pension and postretirement plans.
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 at least the next twelve months.
FINANCIAL POSITION AND LIQUIDITY
Cash
At
December 31, 2018
, we had cash and cash equivalents of
$73 million
as compared to
$84 million
at the end of
2017
.
Our cash and cash equivalents held by our foreign subsidiaries amounted to approximately
$71 million
at
December 31, 2018
and
$77 million
at
December 31, 2017
. Periodically, we repatriate cash from our foreign subsidiaries to the United States through intercompany dividends. Under the Tax Reform Act enacted in 2017, previously deferred foreign earnings were subjected to U.S. tax in 2017. The Tax Reform Act also includes a 100% dividends received deduction for most future distributions from our foreign subsidiaries. As a result of these two provisions, 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
4.10% Senior Notes
-
At both
December 31, 2018
and
December 31, 2017
, we had $350 million of
4.10%
senior notes due 2022 which are senior unsecured obligations. The senior notes are registered under the Securities Act of 1933. We incurred financing costs totaling approximately
$5 million
related to the
4.10%
senior notes, which are being amortized over the term of the agreement.
The
4.10%
senior notes rank:
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•
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equal in right of payment with all of our existing and future senior unsecured indebtedness; and
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•
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senior in right of payment to any of our future subordinated indebtedness.
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The indenture governing the
4.10%
senior notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to:
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•
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create or permit to exist liens;
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•
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enter into sale-leaseback transactions;
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•
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incur additional guarantees; and
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•
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sell all or substantially all of our assets or consolidate or merge with or into other companies.
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We were in compliance with all covenants under the indenture governing the
4.10%
senior notes as of
December 31, 2018
and
December 31, 2017
.
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%
and mature on
January 4, 2029
. Interest is payable semiannually. Principal payments of
$50 million
are payable annually beginning on January 4, 2025. We have the right to make optional prepayments on the notes at any time, subject to certain limitations. The note purchase agreement contains representations, warranties, terms and conditions customary for transactions of this type. These 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.
We were in compliance with all covenants under the
3.78%
senior notes as of
December 31, 2018
and
December 31, 2017
.
Revolving Credit Facility
– On September 22, 2017, we entered into a Credit Agreement (Credit Agreement) with a term of
five
years. The Credit Agreement provides for an
$850 million
, multicurrency revolving credit facility, with a
$150 million
sublimit for multicurrency borrowings, a
$75 million
sublimit for letters of credit, and a
$20 million
sublimit for swingline loans. The Credit Agreement includes an expansion feature which allows 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
$425 million
. In addition, the Credit Agreement includes provisions that allow certain of our foreign subsidiaries to borrow under the agreement. The obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by NewMarket. The revolving credit facility matures on
September 22, 2022
. We incurred financing costs totaling
$2.8 million
related to the Credit Agreement, which are being amortized over the term of the agreement.
At December 31, 2018, the outstanding borrowings under the Credit Agreement amounted to $168 million. There were no outstanding borrowings under the Credit Agreement at December 31, 2017. Outstanding letters of credit amounted to $3 million at both December 31, 2018 and December 31, 2017 resulting in the unused portion of the credit facility amounting to $679 million at December 31, 2018 and $847 million at December 31 2017.
Borrowings made under the revolving credit facility bear interest, at our option, at an annual rate equal to either (1) the Alternate Base Rate (ABR) plus the Applicable Rate (as defined in the Credit Agreement) (solely in the case of loans denominated in U.S. dollars to NewMarket) or (2) the Adjusted LIBO Rate plus the Applicable Rate. ABR is the greater of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate, (ii) the NYFRB Rate (as defined in the Credit Agreement) from time to time plus
0.5%
, and (iii) the Adjusted LIBO Rate for a
one
month interest period plus
1%
. The Adjusted LIBO Rate means the rate at which Eurocurrency deposits in the London interbank market for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other applicable mandatory costs. The Applicable Rate ranges from
0.0%
to
0.625%
(depending on our consolidated Leverage Ratio or Credit Ratings) for loans bearing interest based on the ABR. The Applicable Rate ranges from
1.00%
to
1.625%
(depending on our Leverage Ratio or Credit Ratings) for loans bearing interest based on the Adjusted LIBO Rate. At December 31, 2018, the Applicable Rate was 0.25% for loans bearing interest based on the ABR and 1.25% for loans bearing interest based on the Adjusted LIBO Rate.
The average interest rate for borrowings under our revolving credit facilities was
3.0%
during
2018
and
2.5%
during
2017
.
The Credit Agreement contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Credit Agreement) of no more than
3.50
to
1.00
except during an Increased Leverage Period (as defined in the Credit Agreement) at the end of each quarter, and a consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of no less than
3.00
to
1.00
, calculated on a rolling four quarter basis, as of the end of each fiscal quarter.
At
December 31, 2018
, the Leverage Ratio was
2.00
and the Interest Coverage Ratio was
11.89
.
We were in compliance with all covenants under the current revolving credit facility at
December 31, 2018
and
December 31, 2017
.
Other Borrowings
-
One of our subsidiaries in China has access to a short-term line of credit totaling $10 million. There was no activity on this line of credit during 2018. The average interest rate was 4.1% during 2017. One of our subsidiaries in the United Kingdom entered into a 10 million Euro facility in 2018. There was no outstanding balance under this line at December 31, 2018. The average interest rate of this Euro facility during 2018 was 1%. There was no outstanding balance on any subsidiary lines of credit at December 31, 2017.
***
We had long-term debt of
$771 million
at
December 31, 2018
and
$603 million
at
December 31, 2017
. The increase in debt resulted from borrowings under the outstanding revolving credit facility during 2018.
As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt
increased
from
50.1%
at the end of
2017
to
61.1%
at the end of
2018
. The change in the percentage was primarily the result of the increase in long-term debt, as well as the decrease in shareholders' equity. The change in shareholders’ equity reflects our earnings offset by the impact of the foreign currency translation adjustment, a decrease in the funded position of our defined benefit plans, the impact of stock repurchases and dividend payments. Normally, 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, 2018
, we had working capital of
$542 million
, resulting in a current ratio of
3.00
to 1. Our working capital at
December 31, 2017
on the same basis was
$517 million
, resulting in a current ratio of
2.63
to 1.
Other than the decrease in cash and cash equivalents, the most significant changes in working capital since December 31, 2017 resulted from a decrease in accounts receivable and accrued expenses, which were partially offset by an increase in inventories. The lower accounts receivable balance primarily reflected lower trade receivables due to decreased sales levels substantially in the EMEAI region when comparing the fourth quarter of 2018 with the fourth quarter of 2017, as well as some foreign currency impact. The decrease in trade receivables was partially offset by an increase in income and value added tax receivables since December 31, 2017. The decrease in accrued expenses primarily was due to lower capital project and retainage accruals as compared to December 31 2017. The increase in inventory was in the North America and Asia Pacific regions with some offset in the EMEAI region. The changes in inventory reflected timing of shipments, increases due to maintenance, production start-up at our Singapore facility, and planned safety stock of certain raw materials.
Capital Expenditures
Capital expenditures were
$75 million
for
2018
,
$149 million
for
2017
, and
$143 million
for
2016
. We currently estimate capital expenditures in 2019 will be in the range of $75 million to $85 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 on hand and cash provided from operations, together with borrowing available under our
$850 million
revolving credit facility.
Environmental Expenses
We spent approximately
$30 million
in
2018
,
$26 million
in
2017
, and
$24 million
in
2016
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.
Contractual Obligations
The table below shows our year-end contractual obligations by year due.
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Payments Due by Period
|
(in millions)
|
|
Total
|
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Less than
1 Year
|
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1 - 3
Years
|
|
3 - 5
Years
|
|
More than
5 Years
|
Debt obligations (a)
|
|
$
|
768
|
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|
$
|
0
|
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|
$
|
0
|
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|
$
|
518
|
|
|
$
|
250
|
|
Interest payable on long-term debt and capital lease obligations
|
|
154
|
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|
29
|
|
|
59
|
|
|
37
|
|
|
29
|
|
Letters of credit (b)
|
|
3
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3
|
|
Capital lease obligations (c)
|
|
6
|
|
|
1
|
|
|
1
|
|
|
1
|
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3
|
|
Other lease obligations
|
|
82
|
|
|
17
|
|
|
26
|
|
|
15
|
|
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24
|
|
Property, plant, and equipment purchase obligations
|
|
12
|
|
|
12
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Purchase obligations (d)
|
|
693
|
|
|
169
|
|
|
294
|
|
|
213
|
|
|
17
|
|
Other long-term liabilities (e)
|
|
27
|
|
|
11
|
|
|
2
|
|
|
2
|
|
|
12
|
|
Reserves for uncertain tax positions
|
|
11
|
|
|
1
|
|
|
6
|
|
|
1
|
|
|
3
|
|
Total
|
|
$
|
1,756
|
|
|
$
|
240
|
|
|
$
|
388
|
|
|
$
|
787
|
|
|
$
|
341
|
|
|
|
(a)
|
Amounts represent contractual payments due on the 4.10% senior notes, revolving credit facility, and the Prudential senior unsecured notes as of
December 31, 2018
. See
Note 13
for more information on long-term debt obligations.
|
|
|
(b)
|
We intend to renew letters of credit when necessary as they mature; therefore, the obligations do not have a definitive maturity date.
|
|
|
(c)
|
Amounts represent the debt obligation under the capital leases related to the Singapore manufacturing facility, as well as future minimum lease payments in excess of the capital lease debt obligation.
|
|
|
(d)
|
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Purchase orders made in the ordinary course of business are excluded from the above table. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheets as accounts payable or accrued expenses.
|
|
|
(e)
|
These represent other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. Amounts include environmental liabilities, contributions associated with pension and postretirement benefit plans, and tax payments related to the deemed repatriation of foreign earnings resulting from the Tax Reform Act. Amounts accrued for potential exposure with respect to litigation, claims, and assessments are not included in the table above.
|
Pension and Postretirement Benefit Plans
Our U.S. and foreign benefit plans are discussed separately below. The information applies to all of our U.S. benefit plans. 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. The discussion surrounding our foreign retirement benefits focuses only on our pension plan in the United Kingdom (U.K.), which represents the majority of the amounts recorded in our financial statements for foreign pension plans. We use a December 31 measurement date to determine our pension and postretirement expenses 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 12.8 years, while the average remaining life expectancy of inactive participants is 22.9 years. We utilize the sex distinct RP-2014 tables with separate rates for annuitants and non-annuitants, adjusted to remove MP-2014 improvements, with separate rates for annuitants and non-annuitants, projected generationally with Scale MP-2018 in determining the impact of the U.S. benefit plans on 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, 2019 and January 1, 2018. This analysis reflects our expected long-term rates of return for each significant asset class or economic indicator. As of January 1, 2019, the expected rates were
8.5%
for U.S. large cap stocks,
4.5%
for fixed income, and
3.4%
for inflation. 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
8.5%
at
December 31, 2018
.
An actuarial loss on the assets occurred during both 2018 and 2016 as the actual investment return for all of our U.S. pension plans was less than the expected return by approximately $56 million in 2018 and $3 million in 2016. An actuarial gain on the assets occurred during 2017 as the actual investment return for all of our U.S. pension plans exceeded the expected return by approximately $39 million in 2017. Investment gains and losses are recognized in earnings on an amortized basis over a period of years, resulting in increased expense of approximately $2 million in 2019. We expect that there will be continued volatility in pension expense 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, 2018
, our expected long-term rate of return on our postretirement plans was
4.5%
. This rate varies from the pension rate of
8.5%
primarily because of the difference in investment of assets. The assets of the postretirement plan are held in an insurance contract, which results in a lower assumed rate of investment return.
Pension expense and the life insurance portion of postretirement expense are sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to
7.5%
for pension assets and
3.5%
for postretirement benefit assets (while holding other assumptions constant) would increase the forecasted 2019 expense for our U.S. pension and postretirement plans by approximately $4 million. Similarly, a 100 basis point increase in the expected rate of return to
9.5%
for pension assets and
5.5%
for postretirement benefit assets (while holding other assumptions constant) would reduce forecasted 2019 pension and postretirement expense by $4 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, 2018
was
4.25%
for all plans.
Pension and postretirement benefit expense is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to
3.25%
(while holding other assumptions constant) would increase the forecasted 2019 expense for our U.S. pension and postretirement benefit plans by approximately $7 million. A 100 basis point increase in the discount rate to
5.25%
would reduce forecasted 2019 pension and postretirement benefit expense by $4 million.
Rate of Projected Compensation Increase
—We have maintained our rate of projected compensation increase at
December 31, 2018
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. We expect our aggregate cash contributions, before income taxes, to the U.S. pension plans will be approximately $2 million to $4 million in 2019. We expect our contributions to the postretirement benefit plans will be approximately
$1 million
in 2019.
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 13 years, while the average remaining life expectancy of inactive participants is 24 years. We utilize the S2P (Light) mortality tables and allow for future projected improvements in life expectancy in line with the CMI 2017 model (with the default smoothing factor), with a long-term rate of improvement of 1% per year based on the membership of the plan, in determining the impact of the U.K. pension plans on our financial statements.
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, as well as yields available in the U.K. markets.
The target asset allocation in the U.K. is to be invested 40% in pooled equities funds, 40% in pooled government bonds, and 20% in pooled diversified growth funds. The actual allocation at the end of
2018
was 39% in pooled equities funds, 41% in pooled government bonds, and 20% in pooled diversified growth funds. 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
5.7%
at
December 31, 2018
.
An actuarial loss on the assets occurred during 2018 as the actual investment return was less than the expected investment return by approximately $16 million. An actuarial gain on the assets occurred during both 2017 and 2016 as the actual investment return exceeded the expected investment return by approximately $5 million in 2017 and $22 million in 2016. Investment gains and losses are recognized in earnings on an amortized basis over a period of years. The amortization of the actuarial net loss is expected to be approximately $0.5 million in 2019 resulting primarily from investment losses on the plan assets. We expect that there will be continued volatility in pension expense as actual investment returns vary from the expected return, but we continue to believe the potential benefits justify the risk premium for the target asset allocation.
Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to
4.7%
(while holding other assumptions constant) would increase the forecasted 2019 expense for our U.K. pension plan by approximately $2 million. Similarly, a 100 basis point increase in the expected rate of return to
6.7%
(while holding other assumptions constant) would reduce forecasted 2019 pension expense 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,
2018
was
2.9%
.
Pension expense is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to
1.9%
(while holding other assumptions constant) would increase the forecasted 2019 expense for our U.K. pension plans by approximately $1 million. A 100 basis point increase in the discount rate to
3.9%
would reduce forecasted 2019 pension expense by approximately $1 million.
Rate of Projected Compensation Increase
—Our rate of projected compensation increase at
December 31, 2018
is 4.3%. 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, before income taxes, will be approximately $4 million in 2019.
OUTLOOK
We are pleased with the overall solid performance of our business in 2018. Our stated goal is to provide a 10% compounded return per year for our shareholders over any five-year period (defined by earnings per share growth plus dividends), although we may not necessarily achieve a 10% return each year. We continue to have confidence in our customer-focused strategy and approach to the market. We believe the fundamentals of how we run our business - a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, and world-class supply chain capability - will continue to be beneficial for all of our stakeholders over the long term.
We expect our petroleum additives segment to deliver another year of solid performance in 2019. We expect that the petroleum additives industry shipment demand will grow in the 1% to 2% range over the long-term, and we plan to exceed the industry growth rate.
In the past several years we have made significant investments in our business as the industry fundamentals remain positive. These investments have been and will continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability and geographic expansion. Our investments in support of our customers include significant research and development efforts, completing construction of a new manufacturing facility in Singapore and our recently acquired facility in Mexico. We intend to utilize these new investments to improve our ability to deliver the solutions that our customers value, expand our global reach, and enhance our operating results. We will continue to invest in our capabilities to provide even better value, service, technology, and customer solutions.
Our business generates significant amounts of cash beyond what is necessary for the expansion and growth of our current offerings. We regularly review our many internal opportunities to utilize excess cash from a technological, geographic, capability and product line perspective. We believe our capital spending is creating the capability we need to grow and support our customers worldwide, and our research and development investments are positioning us well to provide added value to our customers. Our focus in the acquisition area remains on the petroleum additives industry. It is our view that this industry segment will provide the greatest opportunity for solid returns on our investments while minimizing risk. We remain focused on this strategy and will evaluate any future opportunities. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends.
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 $13 million and goodwill amounting to $123 million at
December 31, 2018
that are discussed in
Note 10
. These intangibles and goodwill relate to our petroleum additives business. The intangibles are being amortized over periods with up to approximately 11 years of remaining life. We continue to assess the market related to the intangibles and goodwill, as well as their specific values, and have concluded the values are appropriate, as are the amortization periods for the intangibles. We also evaluate the intangibles and goodwill for any potential impairment when significant events or circumstances occur that might impair the value of these assets. As part of the impairment assessment, we estimate the fair value of the reporting unit using a discounted cash flow model. The determination of fair value of the reporting unit using this technique requires the use of estimates and assumptions related to cash flow projections. In particular, our cash flow projections include significant judgments and assumptions relating to revenue growth rates. These evaluations continue to support the values at which the identifiable intangibles and goodwill are carried on our financial statements. However, if conditions were to substantially deteriorate in the petroleum additives market, 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 the market conditions in the near term.
Pension Plans and Other Postretirement Benefits
We use assumptions to record the impact of the pension and postretirement benefit plans in the financial statements. These assumptions include the discount rate, expected long-term rate of return on plan assets, and rate of compensation increase. A change in any one 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 17
. 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 pronouncements which may impact our financial statements, see
Note 23
.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of NewMarket Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NewMarket Corporation and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 19, 2019
We have served as the Company's or its predecessor's auditor since 1947.
NewMarket Corporation and Subsidiaries
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands, except per-share amounts)
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
2,289,675
|
|
|
$
|
2,198,404
|
|
|
$
|
2,049,451
|
|
Cost of goods sold
|
|
1,704,312
|
|
|
1,562,017
|
|
|
1,372,269
|
|
Gross profit
|
|
585,363
|
|
|
636,387
|
|
|
677,182
|
|
Selling, general, and administrative expenses
|
|
152,400
|
|
|
167,651
|
|
|
161,635
|
|
Research, development, and testing expenses
|
|
140,289
|
|
|
146,002
|
|
|
160,788
|
|
Operating profit
|
|
292,674
|
|
|
322,734
|
|
|
354,759
|
|
Interest and financing expenses, net
|
|
26,723
|
|
|
21,856
|
|
|
16,785
|
|
Other income (expense), net
|
|
24,334
|
|
|
14,564
|
|
|
5,234
|
|
Income before income tax expense
|
|
290,285
|
|
|
315,442
|
|
|
343,208
|
|
Income tax expense
|
|
55,551
|
|
|
124,933
|
|
|
99,767
|
|
Net income
|
|
$
|
234,734
|
|
|
$
|
190,509
|
|
|
$
|
243,441
|
|
Earnings per share - basic and diluted
|
|
$
|
20.34
|
|
|
$
|
16.08
|
|
|
$
|
20.54
|
|
See accompanying Notes to Consolidated Financial Statements
40
NewMarket Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Net income
|
|
$
|
234,734
|
|
|
$
|
190,509
|
|
|
$
|
243,441
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Pension plans and other postretirement benefits:
|
|
|
|
|
|
|
Prior service credit (cost) arising during the period, net of income tax expense (benefit) of $(91) in 2018 and $(286) in 2016
|
|
(446
|
)
|
|
0
|
|
|
(463
|
)
|
Amortization of prior service cost (credit) included in net periodic benefit cost (income), net of income tax expense (benefit) of $(720) in 2018, $(1,127) in 2017 and $(1,123) in 2016
|
|
(2,363
|
)
|
|
(1,955
|
)
|
|
(1,801
|
)
|
Actuarial net gain (loss) arising during the period, net of income tax expense (benefit) of $(6,976) in 2018, $2,814 in 2017 and $(4,409) in 2016
|
|
(24,581
|
)
|
|
10,966
|
|
|
(8,102
|
)
|
Amortization of actuarial net loss (gain) included in net periodic benefit cost (income), net of income tax expense (benefit) of $1,381 in 2018, $2,028 in 2017 and $2,287 in 2016
|
|
4,355
|
|
|
3,656
|
|
|
3,977
|
|
Total pension plans and other postretirement benefits
|
|
(23,035
|
)
|
|
12,667
|
|
|
(6,389
|
)
|
Foreign currency translation adjustments, net of income tax expense (benefit) of $(535) in 2018, $703 in 2017 and $(895) in 2016
|
|
(12,287
|
)
|
|
23,849
|
|
|
(31,595
|
)
|
Other comprehensive income (loss)
|
|
(35,322
|
)
|
|
36,516
|
|
|
(37,984
|
)
|
Comprehensive income
|
|
$
|
199,412
|
|
|
$
|
227,025
|
|
|
$
|
205,457
|
|
See accompanying Notes to Consolidated Financial Statements
41
NewMarket Corporation and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands, except share amounts)
|
|
2018
|
|
2017
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
73,040
|
|
|
$
|
84,166
|
|
Trade and other accounts receivable, net
|
|
314,860
|
|
|
335,317
|
|
Inventories
|
|
396,341
|
|
|
383,097
|
|
Prepaid expenses and other current assets
|
|
29,179
|
|
|
31,074
|
|
Total current assets
|
|
813,420
|
|
|
833,654
|
|
Property, plant, and equipment, net
|
|
644,138
|
|
|
652,281
|
|
Intangibles (net of amortization) and goodwill
|
|
136,039
|
|
|
144,337
|
|
Prepaid pension cost
|
|
88,705
|
|
|
66,495
|
|
Deferred income taxes
|
|
5,094
|
|
|
4,349
|
|
Deferred charges and other assets
|
|
9,878
|
|
|
11,038
|
|
Total assets
|
|
$
|
1,697,274
|
|
|
$
|
1,712,154
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
151,631
|
|
|
$
|
159,408
|
|
Accrued expenses
|
|
91,202
|
|
|
107,999
|
|
Dividends payable
|
|
17,923
|
|
|
19,055
|
|
Income taxes payable
|
|
6,431
|
|
|
16,340
|
|
Other current liabilities
|
|
4,114
|
|
|
13,991
|
|
Total current liabilities
|
|
271,301
|
|
|
316,793
|
|
Long-term debt
|
|
770,999
|
|
|
602,900
|
|
Other noncurrent liabilities
|
|
165,067
|
|
|
190,812
|
|
Total liabilities
|
|
1,207,367
|
|
|
1,110,505
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
Common stock and paid-in capital (without par value; authorized shares - 80,000,000; issued and outstanding - 11,184,482 at December 31, 2018 and 11,779,978 at December 31, 2017)
|
|
0
|
|
|
0
|
|
Accumulated other comprehensive loss
|
|
(181,316
|
)
|
|
(145,994
|
)
|
Retained earnings
|
|
671,223
|
|
|
747,643
|
|
Total shareholders' equity
|
|
489,907
|
|
|
601,649
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,697,274
|
|
|
$
|
1,712,154
|
|
See accompanying Notes to Consolidated Financial Statements
42
NewMarket Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and
Paid-in Capital
|
|
Accumulated Other Comprehensive Loss
|
|
Retained Earnings
|
|
Total Shareholders’ Equity
|
(in thousands, except share and per-share amounts)
|
|
Shares
|
|
Amount
|
|
|
|
Balance at December 31, 2015
|
|
11,948,446
|
|
|
$
|
0
|
|
|
$
|
(144,526
|
)
|
|
$
|
532,090
|
|
|
$
|
387,564
|
|
Net income
|
|
|
|
|
|
|
|
243,441
|
|
|
243,441
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
(37,984
|
)
|
|
|
|
(37,984
|
)
|
Cash dividends ($6.40 per share)
|
|
|
|
|
|
|
|
(75,829
|
)
|
|
(75,829
|
)
|
Repurchases of common stock
|
|
(98,867
|
)
|
|
(252
|
)
|
|
|
|
(35,563
|
)
|
|
(35,815
|
)
|
Tax withholdings related to stock-based compensation
|
|
(2,582
|
)
|
|
(1,076
|
)
|
|
|
|
0
|
|
|
(1,076
|
)
|
Stock-based compensation
|
|
(1,025
|
)
|
|
2,931
|
|
|
|
|
19
|
|
|
2,950
|
|
Balance at December 31, 2016
|
|
11,845,972
|
|
|
1,603
|
|
|
(182,510
|
)
|
|
664,158
|
|
|
483,251
|
|
Net income
|
|
|
|
|
|
|
|
190,509
|
|
|
190,509
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
36,516
|
|
|
|
|
36,516
|
|
Cash dividends ($7.00 per share)
|
|
|
|
|
|
|
|
(82,885
|
)
|
|
(82,885
|
)
|
Repurchases of common stock
|
|
(70,689
|
)
|
|
(3,607
|
)
|
|
|
|
(24,150
|
)
|
|
(27,757
|
)
|
Tax withholdings related to stock-based compensation
|
|
(2,328
|
)
|
|
(915
|
)
|
|
|
|
0
|
|
|
(915
|
)
|
Stock-based compensation
|
|
7,023
|
|
|
2,919
|
|
|
|
|
11
|
|
|
2,930
|
|
Balance at December 31, 2017
|
|
11,779,978
|
|
|
0
|
|
|
(145,994
|
)
|
|
747,643
|
|
|
601,649
|
|
Net income
|
|
|
|
|
|
|
|
234,734
|
|
|
234,734
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
(35,322
|
)
|
|
|
|
(35,322
|
)
|
Cash dividends ($7.00 per share)
|
|
|
|
|
|
|
|
(80,448
|
)
|
|
(80,448
|
)
|
Repurchases of common stock
|
|
(603,449
|
)
|
|
(2,038
|
)
|
|
|
|
(229,978
|
)
|
|
(232,016
|
)
|
Tax withholdings related to stock-based compensation
|
|
(2,055
|
)
|
|
0
|
|
|
|
|
(740
|
)
|
|
(740
|
)
|
Stock-based compensation
|
|
10,008
|
|
|
2,038
|
|
|
|
|
12
|
|
|
2,050
|
|
Balance at December 31, 2018
|
|
11,184,482
|
|
|
$
|
0
|
|
|
$
|
(181,316
|
)
|
|
$
|
671,223
|
|
|
$
|
489,907
|
|
See accompanying Notes to Consolidated Financial Statements
43
NewMarket Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Cash and cash equivalents at beginning of year
|
|
$
|
84,166
|
|
|
$
|
192,154
|
|
|
$
|
93,424
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
234,734
|
|
|
190,509
|
|
|
243,441
|
|
Adjustments to reconcile net income to cash flows from operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
71,759
|
|
|
55,340
|
|
|
44,893
|
|
Noncash pension and postretirement expense
|
|
4,903
|
|
|
7,959
|
|
|
12,829
|
|
Deferred income tax expense
|
|
14,527
|
|
|
27,375
|
|
|
19,185
|
|
Tax Reform Act expense
|
|
0
|
|
|
31,375
|
|
|
0
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
Trade and other accounts receivable, net
|
|
14,096
|
|
|
250
|
|
|
(38,231
|
)
|
Inventories
|
|
(29,672
|
)
|
|
(44,936
|
)
|
|
14,480
|
|
Prepaid expenses and other current assets
|
|
702
|
|
|
(2,715
|
)
|
|
8,790
|
|
Accounts payable and accrued expenses
|
|
(19,638
|
)
|
|
17,955
|
|
|
18,455
|
|
Other current liabilities
|
|
(10,169
|
)
|
|
1,595
|
|
|
10,149
|
|
Income taxes payable
|
|
(9,731
|
)
|
|
(8,475
|
)
|
|
7,172
|
|
Cash pension and postretirement contributions
|
|
(64,756
|
)
|
|
(26,264
|
)
|
|
(25,898
|
)
|
Realized loss on derivative instruments, net
|
|
0
|
|
|
0
|
|
|
4,825
|
|
Other, net
|
|
(8,844
|
)
|
|
(7,173
|
)
|
|
33,344
|
|
Cash provided from (used in) operating activities
|
|
197,911
|
|
|
242,795
|
|
|
353,434
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Capital expenditures
|
|
(74,638
|
)
|
|
(148,713
|
)
|
|
(142,874
|
)
|
Acquisition of business (net of $1,131 cash acquired)
|
|
0
|
|
|
(183,930
|
)
|
|
0
|
|
Deposits for interest rate swap
|
|
0
|
|
|
0
|
|
|
(7,570
|
)
|
Return of deposits for interest rate swap
|
|
0
|
|
|
0
|
|
|
11,832
|
|
Other, net
|
|
14,607
|
|
|
(2,000
|
)
|
|
(4,749
|
)
|
Cash provided from (used in) investing activities
|
|
(60,031
|
)
|
|
(334,643
|
)
|
|
(143,361
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Net borrowings (repayments) under revolving credit facility
|
|
168,129
|
|
|
(156,000
|
)
|
|
11,000
|
|
Issuance of 3.78% senior notes
|
|
0
|
|
|
250,000
|
|
|
0
|
|
Dividends paid
|
|
(80,448
|
)
|
|
(82,885
|
)
|
|
(75,829
|
)
|
Repurchases of common stock
|
|
(232,016
|
)
|
|
(25,998
|
)
|
|
(35,815
|
)
|
Other, net
|
|
(1,092
|
)
|
|
(4,093
|
)
|
|
(2,733
|
)
|
Cash provided from (used in) financing activities
|
|
(145,427
|
)
|
|
(18,976
|
)
|
|
(103,377
|
)
|
Effect of foreign exchange on cash and cash equivalents
|
|
(3,579
|
)
|
|
2,836
|
|
|
(7,966
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
(11,126
|
)
|
|
(107,988
|
)
|
|
98,730
|
|
Cash and cash equivalents at end of year
|
|
$
|
73,040
|
|
|
$
|
84,166
|
|
|
$
|
192,154
|
|
See accompanying Notes to Consolidated Financial Statements
44
Notes to Consolidated Financial Statements
|
|
1.
|
Summary of Significant Accounting Policies
|
Consolidation
—Our consolidated financial statements include the accounts of NewMarket Corporation and its subsidiaries. All intercompany transactions are eliminated upon consolidation. References to "we," "us," "our," the "company," and "NewMarket" are to NewMarket Corporation and its consolidated subsidiaries, unless the context indicates otherwise.
NewMarket is the parent company of
three
operating companies, each managing its own assets and liabilities. Those companies are Afton, which focuses on petroleum additive products; Ethyl, representing certain contracted manufacturing and services, as well as the antiknock compounds business; and NewMarket Development, which manages the property and improvements that we own in Virginia. NewMarket is also the parent company of NewMarket Services, which provides various administrative services to NewMarket, Afton, Ethyl, and NewMarket Development.
Certain reclassifications have been made to the accompanying consolidated financial statements and the related notes to reflect the adoption of Accounting Standards Update No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." There was no impact to net income for any period presented.
Foreign Currency Translation
—We translate the balance sheets of our foreign subsidiaries into U.S. Dollars based on the current exchange rate at the end of each period. We translate the statements of income using the weighted-average exchange rates for the period. NewMarket includes translation adjustments in the Consolidated Balance Sheets as part of accumulated other comprehensive loss and transaction adjustments in the Consolidated Statements of Income as part of cost of goods sold. Foreign currency transaction adjustments resulted in a net loss of
$8 million
in
2018
and a net gain of
$5 million
in both
2017
and
2016
.
Revenue Recognition
—We recognize revenue when control of the product is transferred to our customer and for an amount that reflects the consideration that we expect to collect from the customer. Net sales (revenues) are reported at the gross amount billed, including amounts related to shipping that are charged to the customer. Provisions for rebates to customers are recorded in the same period that the related sales are recorded. Freight costs incurred on the delivery of products are included in the Consolidated Statements of Income in cost of goods sold. Our standard terms of delivery are included in our contracts, sales order confirmation documents, and invoices. Taxes assessed by a governmental authority concurrent with sales to our customers, including sales, use, value-added, and revenue-related excise taxes, are not included as net sales, but are reflected in accrued expenses until remitted to the appropriate governmental authority.
Cash and Cash Equivalents
—Our cash equivalents consist of government obligations and commercial paper with original maturities of
90
days or less. Throughout the year, we have cash balances in excess of federally insured amounts on deposit with various financial institutions. We state cash and cash equivalents at cost, which approximates fair value.
Accounts Receivable
—We record our accounts receivable at net realizable value. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers not making required payments. We determine the adequacy of the allowance by periodically evaluating each customer’s receivable balance, considering their financial condition and credit history, and considering current economic conditions. The allowance for doubtful accounts was not material at
December 31, 2018
or
December 31, 2017
.
Inventories
—NewMarket values its inventories at the lower of cost or net realizable value. In the United States, cost is determined on the last-in, first-out (LIFO) basis. In all other countries, we determine cost using the weighted-average method. Inventory cost includes raw materials, direct labor, and manufacturing overhead.
Property, Plant, and Equipment
—We state property, plant, and equipment at cost and compute depreciation by the straight-line method based on the estimated useful lives of the assets. We capitalize expenditures for significant improvements that extend the useful life of the related property. We expense repairs and maintenance, including plant turnaround costs, as incurred. When property is sold or retired, we remove the cost and accumulated depreciation from the accounts and any related gain or loss is included in earnings.
Notes to Consolidated Financial Statements
Intangibles (Net of Amortization) and Goodwill
—Identifiable intangibles include the cost of acquired contracts, formulas and technology, trademarks and trade names, and customer bases. We assign a value to identifiable intangibles based on independent third-party appraisals and management's assessment at the time of acquisition. NewMarket amortizes the cost of the customer bases by an accelerated method and the cost of the remaining identifiable intangibles by the straight-line method over the estimated economic life of the intangible.
Goodwill arises from the excess of cost over net assets of businesses acquired. Goodwill represents the residual purchase price after allocation to all identifiable net assets. We test goodwill for impairment each year, as well as whenever a significant event or circumstance occurs which could reduce the fair value of the reporting unit to which the goodwill applies below the carrying amount of the reporting unit.
Impairment of Long-Lived Assets
—When significant events or circumstances occur that might impair the value of long-lived assets, we evaluate recoverability of the recorded cost of these assets. Assets are considered to be impaired if their carrying amount is not recoverable from the estimated undiscounted future cash flows associated with the assets. If we determine an asset is impaired and its recorded cost is higher than estimated fair market value based on the estimated present value of future cash flows, we adjust the asset to estimated fair market value.
Environmental Costs
—NewMarket capitalizes environmental compliance costs if they extend the useful life of the related property or prevent future contamination. Environmental compliance costs also include maintenance and operation of pollution prevention and control facilities. We expense these compliance costs in cost of goods sold as incurred.
Accrued environmental remediation and monitoring costs relate to an existing condition caused by past operations. NewMarket accrues these costs in current operations within cost of goods sold in the Consolidated Statements of Income when it is probable that we have incurred a liability and the amount can be reasonably estimated. These estimates are based on an assessment of the site, available clean-up methods, and prior experience in handling remediation.
When we can reliably determine the amount and timing of future cash flows, we discount these liabilities, incorporating an inflation factor.
Legal Costs
—We expense legal costs in the period incurred.
Employee Savings Plan
—Most of our full-time salaried and hourly employees may participate in defined contribution savings plans. Employees who are covered by collective bargaining agreements may also participate in a savings plan according to the terms of their bargaining agreements. Employees, as well as NewMarket, contribute to the plans. We made contributions of
$6 million
in
2018
,
$6 million
in
2017
, and
$7 million
in
2016
related to these plans.
Research, Development, and Testing Expenses
—NewMarket expenses all research, development, and testing costs as incurred. R&D costs include personnel-related costs, as well as internal and external testing of our products.
Income Taxes
—We recognize deferred income taxes for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. We also adjust for changes in tax rates and laws at the time the changes are enacted. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. We recognize accrued interest and penalties associated with uncertain tax positions as part of income tax expense on our Consolidated Statements of Income.
Capital Lease Obligation
—We record our capital lease obligations at the lower of fair market value of the related asset at the inception of the lease or the present value of the total minimum lease payments.
Derivative Financial Instruments and Hedging Activities
—We are exposed to certain risks arising from both our business operations and economic conditions. We manage our exposures to a wide variety of business and operational risks through management of our core business activities.
We manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding, as well as through the use of derivative financial instruments. Specifically, we have entered, and in the future may enter, into interest rate swaps to manage our exposure to interest rate movements.
Notes to Consolidated Financial Statements
In addition, our foreign operations expose us to fluctuations of foreign exchange rates. These fluctuations may impact our results of operations, financial position, and cash flows. To manage this exposure, we sometimes enter into foreign currency forward contracts to minimize currency exposure due to cash flows from foreign operations.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting. We do not enter into derivative instruments for speculative purposes. We had no derivative financial instruments outstanding at
December 31, 2018
or
December 31, 2017
.
Stock-based Compensation
—We calculate the fair value of restricted stock and restricted stock units based on the closing price of our common stock on the date of grant. If award recipients are entitled to receive dividends during the vesting period, we make no adjustment to the fair value of the award for dividends. If the award does not entitle recipients to dividends during the vesting period, we reduce the grant-date price of our common stock by the present value of the dividends expected to be paid on the underlying shares during the vesting period, discounted at the risk-free interest rate.
We recognize stock-based compensation expense for the number of awards expected to vest on a straight-line basis over the requisite service period.
Estimates and Risks Due to Concentration of Business
—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In addition, our financial results can be influenced by certain risk factors. Some of our significant concentrations of risk include the following:
|
|
•
|
reliance on a small number of significant customers;
|
|
|
•
|
customers concentrated in the fuel and lubricant industries; and
|
|
|
•
|
production of several of our products solely at one facility.
|
Notes to Consolidated Financial Statements
2. Acquisition of Business
On July 3, 2017, Afton Chemical de Mexico, S.A. de C.V., an indirect, wholly-owned subsidiary of NewMarket Corporation, acquired approximately
99.5%
of the outstanding capital stock of Aditivos Mexicanos, S.A. de C.V. (AMSA) for
$185 million
in cash. AMSA is a petroleum additives manufacturing, sales and distribution company based in Mexico City, Mexico. The results of AMSA's operations have been included in our consolidated financial statements since the date of acquisition and are not material. The noncontrolling interest is also not material. The acquisition agreement included all physical assets of AMSA.
We performed a purchase price valuation to determine the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date.
The allocation of the purchase price is as follows (in millions):
|
|
|
|
|
|
Cash
|
|
$
|
1
|
|
Trade accounts receivable
|
|
16
|
|
Inventory
|
|
6
|
|
Property, plant, and equipment
|
|
53
|
|
Goodwill
|
|
118
|
|
Intangible assets
|
|
18
|
|
Other long-term assets
|
|
2
|
|
Other current liabilities
|
|
(7
|
)
|
Other long-term liabilities
|
|
(3
|
)
|
Deferred taxes
|
|
(19
|
)
|
Fair value of net assets acquired
|
|
$
|
185
|
|
Identified intangible assets acquired consisted of the following:
|
|
|
|
|
|
|
|
|
|
Fair Value (in millions)
|
|
Estimated Useful Lives (in years)
|
Formulas and technology
|
|
$
|
9
|
|
|
3-6
|
Customer base
|
|
9
|
|
|
4
|
Total identified intangible assets
|
|
$
|
18
|
|
|
|
As part of the acquisition, we recorded
$118 million
of goodwill. The goodwill recognized is attributable to expected synergies, including a secure supply source for certain raw materials, as well as the skilled assembled workforce of AMSA. All of the goodwill recognized is part of the petroleum additives segment, and none is deductible for Mexican tax purposes.
Pro forma results of operations are not presented as the acquisition was not considered material to our consolidated results.
3. Net Sales
On January 1, 2018, we adopted Accounting Standards Codification 606 (ASC 606), "Revenue from Contracts with Customers" using the modified retrospective method and applying the standard only to uncompleted contracts at the date of adoption. The impact of adopting ASC 606 did not result in a change to income, and therefore we are not reflecting a cumulative effect to the opening balance of retained earnings due to the adoption of ASC 606. The comparative periods have not been adjusted and continue to be reported under the accounting standards in effect for those periods.
Notes to Consolidated Financial Statements
Our revenues are primarily derived from the manufacture and sale of petroleum additives products. We sell petroleum additives products across the world including to customers located in the United States, Europe, Asia Pacific (including China), Latin America, Canada, India, and the Middle East. Our customers primarily consist of global, national, and independent oil companies. While some of our customers have payment terms beyond 30 days, we do not provide extended payment terms of a year or more, nor do our contracts include a financing component. Our allowance for doubtful accounts is immaterial, as are any bad debts we incur. In limited cases, we collect funds in advance of shipping product to our customers and recognizing the related revenue. These prepayments from customers are recorded as a contract liability to our customer until we recognize the revenue. Prepayments from our customers totaled
$0.6 million
at
December 31, 2018
. Revenue recognized from funds collected in advance from customers in an earlier period was
$3.2 million
in
2018
.
We recognize revenue when control of the product is transferred to our customer and for an amount that reflects the consideration that we expect to collect from the customer. Control is generally transferred to the customer when title transfers (which may include physical possession by the customer), we have a right to payment from the customer, the customer has accepted the product, and the customer has assumed the risks and rewards of ownership. We have supplier managed inventory arrangements with some of our customers to facilitate on-demand product availability. In some cases, the inventory resides at a customer site, although title has not transferred, we are not entitled to payment, and we have not invoiced for the product. We have evaluated the contract terms under these arrangements and have determined that control transfers when the customer uses the product, at which time revenue is recognized. Our contracts generally include one performance obligation, which is providing petroleum additives products. The performance obligation is satisfied at a point in time when products are shipped, delivered, or consumed by the customer, depending on the underlying contracts.
Taxes assessed by a governmental authority which are concurrent with sales to our customers, including sales, use, value-added, and revenue-related excise taxes, are collected by us from the customer and are not included in net sales, but are reflected in accrued expenses until remitted to the appropriate governmental authority. When we are responsible for shipping and handling costs after title has transferred, we account for those as fulfillment costs and include them in cost of goods sold.
Some of our contracts include variable consideration in the form of rebates or business development funds. We record rebates at the point of sale as contra-revenue when we can reasonably estimate the amount of the rebate. The estimates are based on our best judgment at the time of sale, which includes anticipated as well as historical performance. Depending upon the specific terms of a business development fund, amounts are accrued as contra-revenue at the point of sale or are expensed when costs are incurred by us. We regularly review both rebates and business development funds and make adjustments when necessary, recognizing the full amount of any adjustment in the period identified. We recognized an increase to net sales of
$3 million
for
2018
related to adjustments to rebates or business development funds which were recognized in revenue in a prior period. At
December 31, 2018
, accrued rebates were
$24.8 million
and accrued business development funds were
$1.7 million
.
The following table provides information on our net sales by geographic area. Information on net sales by segment is in Note 21.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
(in thousands)
|
|
2018
|
Net sales
|
|
|
United States
|
|
$
|
722,576
|
|
China
|
|
239,406
|
|
Europe, Middle East, Africa, India
|
|
756,258
|
|
Asia Pacific, except China
|
|
335,119
|
|
Other foreign
|
|
236,316
|
|
Net sales
|
|
$
|
2,289,675
|
|
4. Earnings Per Share
We had
18,892
shares in
2018
,
16,708
shares in
2017
, and
17,130
shares in
2016
of nonvested restricted stock that were excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive.
The nonvested restricted stock is considered a participating security since the restricted stock contains nonforfeitable rights to dividends. As such, we use the two-class method to compute basic and diluted earnings per share for all periods presented since this method yielded a more dilutive result than the treasury-stock method. The following table illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands, except per-share amounts)
|
|
2018
|
|
2017
|
|
2016
|
Earnings per share numerator:
|
|
|
|
|
|
|
Net income attributable to common shareholders before allocation of earnings to participating securities
|
|
$
|
234,734
|
|
|
$
|
190,509
|
|
|
$
|
243,441
|
|
Earnings allocated to participating securities
|
|
474
|
|
|
356
|
|
|
477
|
|
Net income attributable to common shareholders after allocation of earnings to participating securities
|
|
$
|
234,260
|
|
|
$
|
190,153
|
|
|
$
|
242,964
|
|
Earnings per share denominator:
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding - basic and diluted
|
|
11,515
|
|
|
11,824
|
|
|
11,828
|
|
Earnings per share - basic and diluted
|
|
$
|
20.34
|
|
|
$
|
16.08
|
|
|
$
|
20.54
|
|
|
|
5.
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Cash paid during the year for
|
|
|
|
|
|
|
Interest and financing expenses (net of capitalization)
|
|
$
|
28,915
|
|
|
$
|
20,376
|
|
|
$
|
18,775
|
|
Income taxes
|
|
76,859
|
|
|
59,010
|
|
|
60,998
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions:
|
|
|
|
|
|
|
Release of deposit account funds to terminate interest rate swap
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
21,868
|
|
Non-cash additions to property, plant, and equipment
|
|
3,076
|
|
|
11,209
|
|
|
8,762
|
|
Non-cash obligation under capital lease
|
|
0
|
|
|
1,341
|
|
|
4,810
|
|
Notes to Consolidated Financial Statements
|
|
6.
|
Trade and Other Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Trade receivables
|
|
$
|
276,667
|
|
|
$
|
310,941
|
|
Income tax receivables
|
|
12,210
|
|
|
7,455
|
|
Other
|
|
25,983
|
|
|
16,921
|
|
|
|
$
|
314,860
|
|
|
$
|
335,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Finished goods and work-in-process
|
|
$
|
319,120
|
|
|
$
|
319,036
|
|
Raw materials
|
|
63,403
|
|
|
51,485
|
|
Stores, supplies, and other
|
|
13,818
|
|
|
12,576
|
|
|
|
$
|
396,341
|
|
|
$
|
383,097
|
|
Our U.S. finished goods, work-in-process, and raw materials inventories, which are stated on the LIFO basis, amounted to
$137 million
at
December 31, 2018
, which was below replacement cost by approximately
$56 million
. At
December 31, 2017
, LIFO basis inventories were
$128 million
, which was approximately
$49 million
below replacement cost.
Our foreign inventories amounted to
$248 million
at
December 31, 2018
and
$244 million
at
December 31, 2017
.
Reserves for obsolete and slow-moving inventory included in the table above were not material at
December 31, 2018
or
December 31, 2017
.
|
|
8.
|
Prepaid Expenses and Other Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Dividend funding
|
|
$
|
17,923
|
|
|
$
|
19,055
|
|
Income taxes on intercompany profit
|
|
6,431
|
|
|
6,866
|
|
Other
|
|
4,825
|
|
|
5,153
|
|
|
|
$
|
29,179
|
|
|
$
|
31,074
|
|
Notes to Consolidated Financial Statements
9. Property, Plant, and Equipment, at Cost
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Land
|
|
$
|
39,396
|
|
|
$
|
42,067
|
|
Land improvements
|
|
54,937
|
|
|
45,144
|
|
Leasehold improvements
|
|
1,968
|
|
|
1,636
|
|
Buildings
|
|
166,566
|
|
|
170,624
|
|
Machinery and equipment
|
|
1,143,106
|
|
|
1,043,194
|
|
Construction in progress
|
|
20,140
|
|
|
172,297
|
|
|
|
1,426,113
|
|
|
1,474,962
|
|
Less accumulated depreciation and amortization
|
|
781,975
|
|
|
822,681
|
|
Net property, plant, and equipment
|
|
$
|
644,138
|
|
|
$
|
652,281
|
|
We depreciate the cost of property, plant, and equipment by the straight-line method over the following estimated useful lives:
|
|
|
Land improvements
|
5 - 25 years
|
Buildings
|
10 - 48 years
|
Machinery and equipment
|
3 - 25 years
|
Depreciation expense was
$63 million
in
2018
,
$51 million
in
2017
, and
$42 million
in
2016
.
During 2018, we identified fully depreciated property, plant, and equipment that is no longer in use and should have been written off in prior periods. During 2018, we reduced both the cost and the related accumulated depreciation and amortization of property, plant, and equipment by
$90 million
each. There was no impact to net property, plant, and equipment. Prior period amounts were not revised as the adjustments were not considered material.
|
|
10.
|
Intangibles (Net of Amortization) and Goodwill
|
The net carrying amount of intangibles and goodwill was
$136 million
at
December 31, 2018
and
$144 million
at
December 31, 2017
. The gross carrying amount and accumulated amortization of each type of intangible asset and goodwill are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
(in thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortizing intangible assets
|
|
|
|
|
|
|
|
|
Formulas and technology
|
|
$
|
9,600
|
|
|
$
|
3,250
|
|
|
$
|
12,339
|
|
|
$
|
3,280
|
|
Contract
|
|
2,000
|
|
|
400
|
|
|
2,000
|
|
|
200
|
|
Customer bases
|
|
14,240
|
|
|
9,091
|
|
|
15,759
|
|
|
5,140
|
|
Trademarks and trade names
|
|
0
|
|
|
0
|
|
|
1,531
|
|
|
1,213
|
|
Goodwill
|
|
122,940
|
|
|
|
|
122,541
|
|
|
|
|
|
$
|
148,780
|
|
|
$
|
12,741
|
|
|
$
|
154,170
|
|
|
$
|
9,833
|
|
Aggregate amortization expense
|
|
|
|
$
|
7,413
|
|
|
|
|
$
|
2,845
|
|
Aggregate amortization expense was
$2 million
in
2016
. All of the intangibles relate to the petroleum additives segment. The change in the gross carrying amount between
2017
and
2018
is primarily due to disposal of certain intangible assets, an immaterial adjustment to goodwill related to AMSA, and foreign currency fluctuations. See
Note 2
for further information on the AMSA acquisition.
There is no accumulated goodwill impairment.
Notes to Consolidated Financial Statements
Estimated annual amortization expense related to our intangible assets for the next five years is expected to be (in thousands):
|
|
|
|
|
2019
|
$
|
4,207
|
|
2020
|
2,907
|
|
2021
|
2,156
|
|
2022
|
1,423
|
|
2023
|
907
|
|
We amortize the contract over
10 years
; customer bases over
4 years
to
20 years
; and formulas and technology over
3 years
to
6 years
.
|
|
11.
|
Deferred Charges and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Asbestos insurance receivables
|
|
$
|
3,727
|
|
|
$
|
3,767
|
|
Deferred financing costs, net of amortization
|
|
2,060
|
|
|
2,614
|
|
Other
|
|
4,091
|
|
|
4,657
|
|
|
|
$
|
9,878
|
|
|
$
|
11,038
|
|
Deferred financing costs, net of amortization in the table above include only those costs associated with the revolving credit facility. The amount of deferred financing costs, net of amortization related to the
4.10%
senior notes is reported as a component of long-term debt. See
Note 13
for further information on our long-term debt.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Employee benefits, payroll, and related taxes
|
|
$
|
30,824
|
|
|
$
|
36,252
|
|
Customer rebates
|
|
24,822
|
|
|
20,703
|
|
Taxes other than income and payroll
|
|
5,778
|
|
|
5,398
|
|
Capital projects
|
|
2,779
|
|
|
6,316
|
|
Other
|
|
26,999
|
|
|
39,330
|
|
|
|
$
|
91,202
|
|
|
$
|
107,999
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Senior notes - 4.10% due 2022 (net of related deferred financing costs)
|
|
$
|
347,677
|
|
|
$
|
347,091
|
|
Senior notes - 3.78% due 2029
|
|
250,000
|
|
|
250,000
|
|
Revolving credit facility
|
|
168,129
|
|
|
0
|
|
Capital lease obligations
|
|
5,193
|
|
|
5,809
|
|
|
|
$
|
770,999
|
|
|
$
|
602,900
|
|
4.10% Senior Notes
– In 2012, we issued
$350 million
aggregate principal amount of
4.10%
senior notes due
2022
at an issue price of
99.83%
. The notes are senior unsecured obligations and are registered under the Securities Act of 1933. We incurred financing costs totaling approximately
$5 million
related to the
4.10%
senior notes, which are being amortized over the term of the agreement.
The
4.10%
senior notes rank:
|
|
•
|
equal in right of payment with all of our existing and future senior unsecured indebtedness; and
|
|
|
•
|
senior in right of payment to any of our future subordinated indebtedness.
|
The indenture governing the
4.10%
senior notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to:
|
|
•
|
create or permit to exist liens;
|
|
|
•
|
enter into sale-leaseback transactions;
|
|
|
•
|
incur additional guarantees; and
|
|
|
•
|
sell all or substantially all of our assets or consolidate or merge with or into other companies.
|
We were in compliance with all covenants under the indenture governing the
4.10%
senior notes as of
December 31, 2018
and
December 31, 2017
.
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%
and mature on
January 4, 2029
. Interest is payable semiannually. Principal payments of
$50 million
are payable annually beginning on January 4, 2025. We have the right to make optional prepayments on the notes at any time, subject to certain limitations. The note purchase agreement contains representations, warranties, terms and conditions customary for transactions of this type. These 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.
We were in compliance with all covenants under the
3.78%
senior notes as of
December 31, 2018
and
December 31, 2017
.
Revolving Credit Facility
– On September 22, 2017, we entered into a Credit Agreement (Credit Agreement) with a term of
five years
. The Credit Agreement provides for an
$850 million
, multicurrency revolving credit facility, with a
$150 million
sublimit for multicurrency borrowings, a
$75 million
sublimit for letters of credit, and a
$20 million
sublimit for swingline loans. The Credit Agreement includes an expansion feature which allows us, subject to certain conditions, to request an increase to the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to
$425 million
. In addition, the Credit Agreement includes provisions that allow certain of our foreign subsidiaries to borrow under the agreement. The obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by NewMarket. The revolving credit facility matures on
September 22, 2022
. We incurred financing costs totaling
$2.8 million
related to the Credit Agreement, which are being amortized over the term of the agreement.
Notes to Consolidated Financial Statements
At
December 31, 2018
, the outstanding borrowings under the Credit Agreement amounted to
$168 million
. There were no outstanding borrowings under the Credit Agreement at
December 31, 2017
. Outstanding letters of credit amounted to
$3 million
at both
December 31, 2018
and
December 31, 2017
resulting in the unused portion of the credit facility amounting to
$679 million
at
December 31, 2018
and
$847 million
at
December 31, 2017
.
Borrowings made under the revolving credit facility bear interest, at our option, at an annual rate equal to either (1) the Alternate Base Rate (ABR) plus the Applicable Rate (as defined in the Credit Agreement) (solely in the case of loans denominated in U.S. dollars to NewMarket) or (2) the Adjusted LIBO Rate plus the Applicable Rate. The ABR is the greater of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate, (ii) the NYFRB Rate (as defined in the Credit Agreement) from time to time plus
0.5%
, and (iii) the Adjusted LIBO Rate for a
one
month interest period plus
1%
. The Adjusted LIBO Rate means the rate at which Eurocurrency deposits in the London interbank market for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other applicable mandatory costs. The Applicable Rate ranges from
0.0%
to
0.625%
(depending on our consolidated Leverage Ratio or Credit Ratings) for loans bearing interest based on the ABR. The Applicable Rate ranges from
1.00%
to
1.625%
(depending on our Leverage Ratio or Credit Ratings) for loans bearing interest based on the Adjusted LIBO Rate. At
December 31, 2018
, the Applicable Rate was
0.25%
for loans bearing interest based on the ABR and
1.25%
for loans bearing interest based on the Adjusted LIBO Rate.
The average interest rate for borrowings under our revolving credit facilities was
3.0%
during
2018
and
2.5%
during
2017
.
The Credit Agreement contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Credit Agreement) of no more than
3.50
to
1.00
except during an Increased Leverage Period (as defined in the Credit Agreement) at the end of each quarter, and a consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of no less than
3.00
to
1.00
, calculated on a rolling four quarter basis, as of the end of each fiscal quarter.
We were in compliance with all covenants under the revolving credit facility at
December 31, 2018
and at
December 31, 2017
.
Capital Lease Obligations
– The capital lease obligations are related to the Singapore manufacturing facility.
|
|
14.
|
Other Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Employee benefits
|
|
$
|
81,473
|
|
|
$
|
89,116
|
|
Deferred income taxes
|
|
43,071
|
|
|
35,303
|
|
Environmental remediation
|
|
9,854
|
|
|
11,753
|
|
Asbestos litigation reserve
|
|
8,296
|
|
|
8,251
|
|
Deemed repatriation of earnings
|
|
2,956
|
|
|
26,901
|
|
Other
|
|
19,417
|
|
|
19,488
|
|
|
|
$
|
165,067
|
|
|
$
|
190,812
|
|
Notes to Consolidated Financial Statements
|
|
15.
|
Stock-based Compensation
|
The 2014 Incentive Compensation and Stock Plan (the Plan) was approved on April 24, 2014. Any employee of our company or an affiliate or a person who is a member of our Board of Directors or the board of directors of an affiliate is eligible to participate in the Plan if the Compensation Committee of the Board of Directors (the Administrator), in its sole discretion, determines that such person has contributed or can be expected to contribute to the profits or growth of our company or its affiliates (each, a participant). Under the terms of the Plan, we may grant participants stock awards, incentive awards, stock units, or options (which may be either incentive stock options or nonqualified stock options), or stock appreciation rights (SARs), which may be granted with a related option. Stock options entitle the participant to purchase a specified number of shares of our common stock at a price that is fixed by the Administrator at the time the option is granted; provided, however, that the price cannot be less than the shares’ fair market value on the date of grant. The maximum period in which an option may be exercised is fixed by the Administrator at the time the option is granted but, in the case of an incentive stock option, cannot exceed
ten
years. No participant may be granted or awarded, in any calendar year, shares, options, SARs, or stock units covering more than
200,000
shares of our common stock in the aggregate. For purposes of this limitation and the individual limitation on the grant of options, an option and corresponding SAR are treated as a single award.
The maximum aggregate number of shares of our common stock that may be issued under the Plan is
1,000,000
. At
December 31, 2018
,
964,036
shares were available for grant. During
2018
, we granted
1,110
shares to
five
of our non-employee directors, which vested immediately.
A summary of activity during
2018
related to NewMarket’s restricted stock and restricted stock units (stock awards) is presented below in whole shares:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant-Date Fair Value
|
Unvested stock awards at January 1, 2018
|
|
17,637
|
|
|
$
|
397.18
|
|
Granted in 2018
|
|
9,357
|
|
|
415.98
|
|
Vested in 2018
|
|
6,714
|
|
|
375.65
|
|
Forfeited in 2018
|
|
952
|
|
|
381.68
|
|
Unvested stock awards at December 31, 2018
|
|
19,328
|
|
|
414.52
|
|
The weighted average grant-date fair value was
$428.61
for stock awards granted in
2017
.
No
awards were granted in
2016
. The fair value of shares vested was
$3 million
in
2018
,
$3 million
in
2017
, and
$3 million
in
2016
. We recognized compensation expense of
$2 million
in
2018
,
$3 million
in
2017
, and
$3 million
in
2016
related to stock awards. At
December 31, 2018
, total unrecognized compensation expense related to stock awards was
$4 million
, which is expected to be recognized over a period of
2.5 years
.
Notes to Consolidated Financial Statements
|
|
16.
|
Fair Value Measurements
|
The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets, as well as the fair value, was
$73 million
at
December 31, 2018
and
$84 million
at
December 31, 2017
. The fair value is categorized in Level 1 of the fair value hierarchy.
No material events occurred during
2018
requiring adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.
Long-term debt -
We record the carrying amount of our long-term debt at historical cost, less deferred financing costs related to the
4.10%
senior notes. The estimated fair value of our long-term debt is shown in the table below and is based primarily on estimated current rates available to us for debt of the same remaining duration and adjusted for nonperformance risk and credit risk. The estimated fair value of our publicly traded
4.10%
senior notes included in long-term debt in the table below is based on the last quoted price closest to
December 31, 2018
. The fair value of our debt instruments is categorized as Level 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
(in thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term debt (excluding capital lease obligations)
|
|
$
|
765,806
|
|
|
$
|
757,414
|
|
|
$
|
597,091
|
|
|
$
|
623,557
|
|
|
|
17.
|
Commitments and Contingencies
|
Contractual Commitments
—NewMarket has operating lease agreements primarily for office space, land, transportation equipment, and storage facilities. Rental expense was
$23 million
in
2018
,
$33 million
in
2017
, and
$33 million
in
2016
.
Future lease payments for all noncancelable operating leases as of
December 31, 2018
are (in thousands):
|
|
|
|
|
2019
|
$
|
17,223
|
|
2020
|
15,035
|
|
2021
|
10,502
|
|
2022
|
7,957
|
|
2023
|
6,810
|
|
After 2023
|
24,490
|
|
We have contractual obligations for the construction of assets, as well as purchases of property and equipment, of approximately
$12 million
at
December 31, 2018
, all of which are due within
five years
.
Purchase Obligations
—We have purchase obligations for goods or services that are enforceable, legally binding, and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Purchase orders made in the ordinary course of business are excluded from this amount. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheets as accounts payable or accrued expenses.
Notes to Consolidated Financial Statements
Future payments for purchase obligations as of
December 31, 2018
are (in thousands):
|
|
|
|
|
2019
|
$
|
168,932
|
|
2020
|
148,772
|
|
2021
|
145,230
|
|
2022
|
134,573
|
|
2023
|
78,211
|
|
After 2023
|
17,138
|
|
Litigation
—We are involved in legal proceedings that are incidental to our business and may include administrative or judicial actions. Some of these legal proceedings involve governmental authorities and relate to environmental matters. For further information, see Environmental below and Item 1 of this Form 10-K.
While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
In late 2013, Afton initiated a voluntary self-audit of its compliance with certain sections of the USEPA Audit Policy. Afton concluded its self-audit, sending its notice of this conclusion to the USEPA on August 1, 2018. Any known potential findings and/or violations were disclosed on or before the conclusion of the self-audit. In August 2014, the USEPA staff began its own TSCA inspection of both Afton and Ethyl. To date, however, the USEPA has not notified Afton or Ethyl of any findings, violations, or the conclusion of this inspection. While it is not possible to predict or determine with certainty the outcomes of Afton's self-audit or the USEPA's inspection, we do not believe that any disclosures or findings identified as a result of Afton's self-audit or the USEPA’s TSCA inspection will have a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
Asbestos
We are a defendant in personal injury lawsuits involving exposure to asbestos. These cases involve exposure to asbestos in premises owned or operated, or formerly owned or operated, by subsidiaries of NewMarket. We have never manufactured, sold, or distributed products that contain asbestos. Nearly all of these cases are pending in Texas, Louisiana, or Illinois and involve multiple defendants. We maintain an accrual for these proceedings, as well as a receivable for expected insurance recoveries.
The accrual for our premises asbestos liability related to currently asserted claims is based on the following assumptions and factors:
|
|
•
|
We are often one of many defendants. This factor influences both the number of claims settled against us and the indemnity cost associated with such resolutions.
|
|
|
•
|
The estimated percent of claimants in each case that, after discovery, will actually make a claim against us, out of the total number of claimants in a case, is based on a level consistent with past experience and current trends.
|
|
|
•
|
We utilize average comparable plaintiff cost history as the basis for estimating pending premises asbestos related claims. These claims are filed by both former contractors and former employees who worked at past and present company locations. We also include an estimated inflation factor in the calculation.
|
|
|
•
|
No estimate is made for unasserted claims.
|
|
|
•
|
The estimated recoveries from insurance and Albemarle Corporation (a former operation of our company) for these cases are based on, and are consistent with, the 2005 settlement agreements with Travelers Indemnity Company.
|
Notes to Consolidated Financial Statements
Based on the above assumptions, we have provided an undiscounted liability related to premises asbestos claims of
$10 million
at both
December 31, 2018
and
December 31, 2017
. The liabilities related to asbestos claims are included in accrued expenses (current portion) and other noncurrent liabilities on the Consolidated Balance Sheets. Certain of these costs are recoverable through the settlement agreement with The Travelers Indemnity Company, as well as an agreement with Albemarle Corporation. The receivable for these recoveries related to premises asbestos liabilities was
$5 million
at both
December 31, 2018
and
December 31, 2017
. These receivables are included in trade and other accounts receivable, net on the Consolidated Balance Sheets for the current portion. The noncurrent portion is included in deferred charges and other assets.
Environmental
—We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities, or at third-party sites where we have been designated as a potentially responsible party (PRP). While we believe we are currently adequately accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact on our financial position, results of operations, and cash flows. Our total accruals for environmental remediation, dismantling, and decontamination were approximately
$12 million
at
December 31, 2018
and
$14 million
at
December 31, 2017
. Of the total accrual, the current portion is included in accrued expenses and the noncurrent portion is included in other noncurrent liabilities on the Consolidated Balance Sheets.
Our more significant environmental sites include a former plant site in Louisiana (the Louisiana site) and a Houston, Texas plant site (the Texas site). Together, the amounts accrued on a discounted basis related to these sites represented approximately
$8 million
of the total accrual above at
December 31, 2018
, using discount rates ranging from
3%
to
9%
, and
$7 million
of the total accrual above at
December 31, 2017
, using discount rates ranging from
4%
to
9%
. The aggregate undiscounted amount for these sites was
$11 million
at
December 31, 2018
and
$10 million
at
December 31, 2017
. Of the total accrued for these two sites, the amount related to remediation of groundwater and soil was
$4 million
for the Louisiana site and
$4 million
for the Texas site at
December 31, 2018
and
$3 million
for the Louisiana site and
$4 million
for the Texas site at
December 31, 2017
.
In 2000, the EPA named us as a PRP under Superfund law for the clean-up of soil and groundwater contamination at the five grouped disposal sites known as "Sauget Area 2 Sites" in Sauget, Illinois. Without admitting any fact, responsibility, fault, or liability in connection with this site, in November 2018, we resolved our purported liabilities with the government and those PRP's performing the remedial activities addressed in the EPA's December 2013 Record of Decision.
|
|
18.
|
Pension Plans and Other Postretirement Benefits
|
NewMarket uses a
December 31
measurement date for all of our plans.
U.S. Retirement Plans
NewMarket sponsors
four
pension plans for all full-time U.S. employees that offer a benefit based primarily on years of service and compensation. Employees do not contribute to these pension plans. The plans are as follows:
|
|
•
|
Salaried employees pension plan;
|
|
|
•
|
Afton pension plan for union employees (the Sauget plan);
|
|
|
•
|
NewMarket retirement income plan for union employees in Houston, Texas (the Houston plan); and
|
|
|
•
|
Afton Chemical Additives pension plan for union employees in Port Arthur, Texas (the Port Arthur plan).
|
Notes to Consolidated Financial Statements
In addition, we offer an unfunded, nonqualified supplemental pension plan. This plan restores the pension benefits from our regular pension plans that would have been payable to designated participants if it were not for limitations imposed by U.S. federal income tax regulations.
We also provide postretirement health care benefits and life insurance to eligible retired employees. A plan amendment, with an effective date of January 1, 2016, was made in 2015 to provide post-65 medical and prescription drug benefits to retirees through a private healthcare exchange with fixed subsidies to eligible retirees through a health reimbursement account. As a result, the postretirement plan liabilities were remeasured at September 1, 2015 resulting in a non-cash improvement in the funded position. The adjustment to accumulated other comprehensive loss is reflected in prior service cost (credit) and is being amortized into expense.
The service cost component of net periodic benefit cost (income) is reflected in cost of goods sold; selling, general, and administrative expenses; or research, development, and testing expenses, to reflect where other compensation costs arising from services rendered by the pertinent employee are recorded on the Consolidated Statements of Income. The remaining components of net periodic benefit cost (income) are recorded in other income (expense), net on the Consolidated Statements of Income.
The components of net periodic pension and postretirement benefit cost (income), as well as other amounts recognized in other comprehensive income (loss), are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Net periodic benefit cost (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
15,391
|
|
|
$
|
13,679
|
|
|
$
|
12,860
|
|
|
$
|
896
|
|
|
$
|
774
|
|
|
$
|
705
|
|
Interest cost
|
|
13,256
|
|
|
13,289
|
|
|
13,175
|
|
|
1,458
|
|
|
1,582
|
|
|
1,653
|
|
Expected return on plan assets
|
|
(29,883
|
)
|
|
(26,146
|
)
|
|
(23,137
|
)
|
|
(969
|
)
|
|
(1,197
|
)
|
|
(1,239
|
)
|
Amortization of prior service cost (credit)
|
|
25
|
|
|
26
|
|
|
187
|
|
|
(3,028
|
)
|
|
(3,029
|
)
|
|
(3,028
|
)
|
Amortization of actuarial net (gain) loss
|
|
5,139
|
|
|
4,725
|
|
|
5,243
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net periodic benefit cost (income)
|
|
3,928
|
|
|
5,573
|
|
|
8,328
|
|
|
(1,643
|
)
|
|
(1,870
|
)
|
|
(1,909
|
)
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial net (gain) loss
|
|
29,215
|
|
|
(13,386
|
)
|
|
9,140
|
|
|
(2,190
|
)
|
|
2,635
|
|
|
156
|
|
Prior service cost (credit)
|
|
0
|
|
|
0
|
|
|
749
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Amortization of actuarial net gain (loss)
|
|
(5,139
|
)
|
|
(4,725
|
)
|
|
(5,243
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Amortization of prior service (cost) credit
|
|
(25
|
)
|
|
(26
|
)
|
|
(187
|
)
|
|
3,028
|
|
|
3,029
|
|
|
3,028
|
|
Total recognized in other comprehensive income (loss)
|
|
24,051
|
|
|
(18,137
|
)
|
|
4,459
|
|
|
838
|
|
|
5,664
|
|
|
3,184
|
|
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss)
|
|
$
|
27,979
|
|
|
$
|
(12,564
|
)
|
|
$
|
12,787
|
|
|
$
|
(805
|
)
|
|
$
|
3,794
|
|
|
$
|
1,275
|
|
The estimated actuarial net loss to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during
2019
is expected to be
$3 million
for pension plans. The estimated prior service credit to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during
2019
is not expected to be material for pension plans. The estimated prior service credit to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during
2019
related to postretirement benefits is expected to be
$3 million
.
Notes to Consolidated Financial Statements
Changes in the plans’ benefit obligations and assets follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
358,812
|
|
|
$
|
316,366
|
|
|
$
|
40,438
|
|
|
$
|
38,110
|
|
Service cost
|
|
15,391
|
|
|
13,679
|
|
|
896
|
|
|
774
|
|
Interest cost
|
|
13,256
|
|
|
13,289
|
|
|
1,458
|
|
|
1,582
|
|
Actuarial net (gain) loss
|
|
(26,957
|
)
|
|
25,828
|
|
|
(2,355
|
)
|
|
2,506
|
|
Benefits paid
|
|
(11,290
|
)
|
|
(10,350
|
)
|
|
(2,925
|
)
|
|
(2,534
|
)
|
Benefit obligation at end of year
|
|
349,212
|
|
|
358,812
|
|
|
37,512
|
|
|
40,438
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
365,421
|
|
|
291,092
|
|
|
22,904
|
|
|
23,238
|
|
Actual return on plan assets
|
|
(26,289
|
)
|
|
65,360
|
|
|
803
|
|
|
1,067
|
|
Employer contributions
|
|
56,710
|
|
|
19,319
|
|
|
1,596
|
|
|
1,133
|
|
Benefits paid
|
|
(11,290
|
)
|
|
(10,350
|
)
|
|
(2,925
|
)
|
|
(2,534
|
)
|
Fair value of plan assets at end of year
|
|
384,552
|
|
|
365,421
|
|
|
22,378
|
|
|
22,904
|
|
Funded status
|
|
$
|
35,340
|
|
|
$
|
6,609
|
|
|
$
|
(15,134
|
)
|
|
$
|
(17,534
|
)
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
75,206
|
|
|
$
|
48,515
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Current liabilities
|
|
(2,788
|
)
|
|
(2,793
|
)
|
|
(1,215
|
)
|
|
(1,278
|
)
|
Noncurrent liabilities
|
|
(37,078
|
)
|
|
(39,113
|
)
|
|
(13,919
|
)
|
|
(16,256
|
)
|
|
|
$
|
35,340
|
|
|
$
|
6,609
|
|
|
$
|
(15,134
|
)
|
|
$
|
(17,534
|
)
|
Amounts recognized in accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
Actuarial net (gain) loss
|
|
$
|
113,026
|
|
|
$
|
88,950
|
|
|
$
|
(480
|
)
|
|
$
|
1,710
|
|
Prior service cost (credit)
|
|
7
|
|
|
32
|
|
|
(25,675
|
)
|
|
(28,703
|
)
|
|
|
$
|
113,033
|
|
|
$
|
88,982
|
|
|
$
|
(26,155
|
)
|
|
$
|
(26,993
|
)
|
The accumulated benefit obligation for all domestic defined benefit pension plans was
$303 million
at
December 31, 2018
and
$307 million
at
December 31, 2017
.
The fair market value of plan assets exceeded the accumulated benefit obligation for all domestic plans, except the nonqualified plan, at
December 31, 2018
and
December 31, 2017
. The fair market value of plan assets exceeded the projected benefit obligation for all domestic plans, except the nonqualified plan, at
December 31, 2018
and
December 31, 2017
.
The net asset position for plans in which assets exceeded the projected benefit obligation is included in prepaid pension cost on the Consolidated Balance Sheets. The net liability position of plans in which the projected benefit obligation exceeded assets is included in other noncurrent liabilities on the Consolidated Balance Sheets.
A portion of the accrued benefit cost for the nonqualified plan is included in current liabilities at both
December 31, 2018
and
December 31, 2017
. As the nonqualified plan is unfunded, the amount reflected in current liabilities represents the expected benefit payments related to the nonqualified plan during
2019
.
Notes to Consolidated Financial Statements
The first table below shows information on domestic pension plans with the accumulated benefit obligation in excess of plan assets. The second table presents information on domestic pension plans with the projected benefit obligation in excess of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Plans with the accumulated benefit obligation in excess of the fair market value of plan assets
|
|
|
|
|
Projected benefit obligation
|
|
$
|
39,866
|
|
|
$
|
41,906
|
|
Accumulated benefit obligation
|
|
36,586
|
|
|
38,105
|
|
Fair market value of plan assets
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Plans with the projected benefit obligation in excess of the fair market value of plan assets
|
|
|
|
|
Projected benefit obligation
|
|
$
|
39,866
|
|
|
$
|
41,906
|
|
Fair market value of plan assets
|
|
0
|
|
|
0
|
|
There are no assets held by the trustee for the retired beneficiaries of the nonqualified plan. Payments to retired beneficiaries of the nonqualified plan are made with cash from operations.
Assumptions
—We used the following assumptions to calculate the results of our retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average assumptions used to determine net periodic benefit cost (income) for years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.75
|
%
|
|
4.25
|
%
|
|
4.50
|
%
|
|
3.75
|
%
|
|
4.25
|
%
|
|
4.50
|
%
|
Expected long-term rate of return on plan assets
|
|
8.50
|
%
|
|
8.50
|
%
|
|
8.50
|
%
|
|
4.50
|
%
|
|
5.50
|
%
|
|
5.50
|
%
|
Rate of projected compensation increase
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.25
|
%
|
|
3.75
|
%
|
|
4.25
|
%
|
|
4.25
|
%
|
|
3.75
|
%
|
|
4.25
|
%
|
Rate of projected compensation increase
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
|
|
|
|
|
For pension plans, we base the assumed expected long-term rate of return for plan assets on an analysis of our actual investments, including our asset allocation, as well as an analysis of expected returns. This analysis reflects the expected long-term rates of return for each significant asset class and economic indicator. As of January 1,
2019
, the expected rates were
8.5%
for U.S. large cap stocks,
4.5%
for fixed income, and
3.4%
for inflation. The range of returns relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. Our asset allocation is predominantly weighted toward equities. Through our 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. plans at
8.5%
at
December 31, 2018
. For the postretirement plan, we based the assumed expected long-term rate of return for plan assets on an evaluation of projected interest rates, as well as the guaranteed interest rate for our insurance contract.
Notes to Consolidated Financial Statements
Plan Assets
—Pension plan assets are held and distributed by trusts and consist principally of equity securities and investment-grade fixed income securities. We invest directly in equity securities, as well as in funds which primarily hold equity and debt securities. Our target allocation is
90%
to
97%
in equities,
3%
to
10%
in debt securities and
1%
to
5%
in cash.
The pension obligation is long-term in nature and the investment philosophy followed by the Pension Investment Committee is likewise long-term in its approach. The majority of the pension funds are invested in equity securities as historically, equity securities have outperformed debt securities and cash investments, resulting in a higher investment return over the long-term. While in the short-term, equity securities may underperform other investment classes, we are less concerned with short-term results and more concerned with long-term improvement. The pension funds are managed by
five
different investment companies who predominantly invest in U.S. and international equities. Each investment company’s performance is reviewed quarterly. A small portion of the funds is in investments such as cash or short-term bonds, which historically has been less vulnerable to short-term market swings. These funds are used to provide the cash needed to meet our monthly obligations.
There are no significant concentrations of risk within plan assets, nor do the equity securities include any NewMarket common stock for any year presented.
The assets of the postretirement benefit plan are invested completely in an insurance contract held by Metropolitan Life. No NewMarket common stock is included in these assets.
The following table provides information on the fair value of our pension and postretirement benefit plans assets, as well as the related level within the fair value hierarchy. Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified by level in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Fair Value Measurements Using
|
(in thousands)
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. companies
|
|
$
|
274,972
|
|
|
$
|
274,972
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
286,103
|
|
|
$
|
286,103
|
|
|
$
|
0
|
|
|
$
|
0
|
|
International companies
|
|
4,223
|
|
|
4,223
|
|
|
0
|
|
|
0
|
|
|
2,074
|
|
|
2,074
|
|
|
0
|
|
|
0
|
|
Real estate investment trusts
|
|
5,745
|
|
|
5,745
|
|
|
0
|
|
|
0
|
|
|
3,487
|
|
|
3,487
|
|
|
0
|
|
|
0
|
|
Money market instruments
|
|
13,099
|
|
|
13,099
|
|
|
0
|
|
|
0
|
|
|
18,395
|
|
|
18,395
|
|
|
0
|
|
|
0
|
|
Pooled investment funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities—mutual funds
|
|
9,039
|
|
|
9,039
|
|
|
0
|
|
|
0
|
|
|
8,958
|
|
|
8,958
|
|
|
0
|
|
|
0
|
|
International equities—mutual fund
|
|
14,302
|
|
|
14,302
|
|
|
0
|
|
|
0
|
|
|
16,715
|
|
|
16,715
|
|
|
0
|
|
|
0
|
|
Common collective trusts measured at net asset value
|
|
61,254
|
|
|
|
|
|
|
|
|
26,084
|
|
|
|
|
|
|
|
Insurance contract
|
|
1,918
|
|
|
0
|
|
|
1,918
|
|
|
0
|
|
|
3,605
|
|
|
0
|
|
|
3,605
|
|
|
0
|
|
|
|
$
|
384,552
|
|
|
$
|
321,380
|
|
|
$
|
1,918
|
|
|
$
|
0
|
|
|
$
|
365,421
|
|
|
$
|
335,732
|
|
|
$
|
3,605
|
|
|
$
|
0
|
|
Postretirement Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contract
|
|
$
|
22,378
|
|
|
$
|
0
|
|
|
$
|
22,378
|
|
|
$
|
0
|
|
|
$
|
22,904
|
|
|
$
|
0
|
|
|
$
|
22,904
|
|
|
$
|
0
|
|
Notes to Consolidated Financial Statements
The valuation methodologies used to develop the fair value measurements for the investments in the table above is outlined below. There have been no changes in the valuation techniques used to value the investments.
|
|
•
|
Equity securities, including common stock and real estate investment trusts, are valued at the closing price reported on a national exchange.
|
|
|
•
|
Money market instruments are valued at cost, which approximates fair value.
|
|
|
•
|
Pooled investment funds—Mutual funds are valued at the closing price reported on a national exchange.
|
|
|
•
|
The common collective trusts (the trusts) are valued at the net asset value of units held based on the quoted market value of the underlying investments held by the funds. One of the trusts invests primarily in a diversified portfolio of equity securities of companies located outside of the United States and Canada, as determined by a company's jurisdiction of incorporation. We may make withdrawals from this trust on the first business day of each month with at least
ten
business days' notice. Another trust invests primarily in a diversified portfolio of equity securities included in the S&P 500 index and a third trust invests primarily in a diversified portfolio of equity securities included in the Russell 1000 Value index. There are no restrictions on redemption for the index trusts and there were no unfunded commitments.
|
|
|
•
|
Cash and cash equivalents are valued at cost.
|
|
|
•
|
The insurance contracts are unallocated funds deposited with an insurance company and are stated at an amount equal to the sum of all amounts deposited less the sum of all amounts withdrawn, adjusted for investment return.
|
Cash Flows
—For U.S. plans, NewMarket expects to contribute
$3 million
to our pension plans and
$1 million
to our postretirement benefit plan in
2019
. The expected benefit payments for the next ten years are as follows.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Expected Pension
Benefit Payments
|
|
Expected
Postretirement
Benefit Payments
|
2019
|
|
$
|
12,166
|
|
|
$
|
2,616
|
|
2020
|
|
13,254
|
|
|
2,477
|
|
2021
|
|
14,293
|
|
|
2,366
|
|
2022
|
|
15,327
|
|
|
2,262
|
|
2023
|
|
16,307
|
|
|
2,164
|
|
2024 through 2028
|
|
98,861
|
|
|
10,065
|
|
Foreign Retirement Plans
For most employees of our foreign subsidiaries, NewMarket has defined benefit pension plans that offer benefits based primarily on years of service and compensation. These defined benefit plans provide benefits for employees of our foreign subsidiaries located in Belgium, the United Kingdom, Germany, Canada, and Mexico. NewMarket generally contributes to investment trusts and insurance accounts to provide for these plans.
Notes to Consolidated Financial Statements
The components of net periodic pension cost (income), as well as other amounts recognized in other comprehensive income (loss), for these foreign defined benefit pension plans are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Net periodic benefit cost (income)
|
|
|
|
|
|
|
Service cost
|
|
$
|
7,271
|
|
|
$
|
7,437
|
|
|
$
|
6,926
|
|
Interest cost
|
|
4,514
|
|
|
4,314
|
|
|
4,915
|
|
Expected return on plan assets
|
|
(9,918
|
)
|
|
(8,479
|
)
|
|
(6,638
|
)
|
Amortization of prior service cost (credit)
|
|
(81
|
)
|
|
(79
|
)
|
|
(83
|
)
|
Amortization of actuarial net (gain) loss
|
|
597
|
|
|
959
|
|
|
1,021
|
|
Net periodic benefit cost (income)
|
|
2,383
|
|
|
4,152
|
|
|
6,141
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss)
|
|
|
|
|
|
|
Actuarial net (gain) loss
|
|
4,532
|
|
|
(3,029
|
)
|
|
3,215
|
|
Prior service cost (credit)
|
|
537
|
|
|
0
|
|
|
0
|
|
Amortization of actuarial net gain (loss)
|
|
(597
|
)
|
|
(959
|
)
|
|
(1,021
|
)
|
Amortization of prior service (cost) credit
|
|
81
|
|
|
79
|
|
|
83
|
|
Total recognized in other comprehensive income (loss)
|
|
4,553
|
|
|
(3,909
|
)
|
|
2,277
|
|
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss)
|
|
$
|
6,936
|
|
|
$
|
243
|
|
|
$
|
8,418
|
|
The estimated actuarial net loss to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during
2019
is expected to be
$1 million
. The estimated prior service credit to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during
2019
is not expected to be material.
Changes in the benefit obligations and assets of the foreign defined benefit pension plans follow.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Change in benefit obligation
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
185,815
|
|
|
$
|
157,101
|
|
Service cost
|
|
7,271
|
|
|
7,437
|
|
Interest cost
|
|
4,514
|
|
|
4,314
|
|
Acquisition
|
|
0
|
|
|
1,888
|
|
Employee contributions
|
|
737
|
|
|
766
|
|
Actuarial net (gain) loss
|
|
(10,976
|
)
|
|
2,417
|
|
Benefits paid
|
|
(4,144
|
)
|
|
(5,157
|
)
|
Foreign currency translation
|
|
(9,597
|
)
|
|
17,049
|
|
Benefit obligation at end of year
|
|
173,620
|
|
|
185,815
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
176,968
|
|
|
144,877
|
|
Actual return on plan assets
|
|
(6,357
|
)
|
|
13,778
|
|
Employer contributions
|
|
5,968
|
|
|
5,646
|
|
Employee contributions
|
|
737
|
|
|
766
|
|
Benefits paid
|
|
(4,144
|
)
|
|
(5,157
|
)
|
Acquisition
|
|
0
|
|
|
1,910
|
|
Foreign currency translation
|
|
(9,426
|
)
|
|
15,148
|
|
Fair value of plan assets at end of year
|
|
163,746
|
|
|
176,968
|
|
Funded status
|
|
$
|
(9,874
|
)
|
|
$
|
(8,847
|
)
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
Noncurrent assets
|
|
$
|
13,499
|
|
|
$
|
17,980
|
|
Current liabilities
|
|
(301
|
)
|
|
(346
|
)
|
Noncurrent liabilities
|
|
(23,072
|
)
|
|
(26,481
|
)
|
|
|
$
|
(9,874
|
)
|
|
$
|
(8,847
|
)
|
Amounts recognized in accumulated other comprehensive loss
|
|
|
|
|
Actuarial net (gain) loss
|
|
$
|
42,766
|
|
|
$
|
38,831
|
|
Prior service cost (credit)
|
|
736
|
|
|
118
|
|
|
|
$
|
43,502
|
|
|
$
|
38,949
|
|
The accumulated benefit obligation for all foreign defined benefit pension plans was
$146 million
at
December 31, 2018
and
$155 million
at
December 31, 2017
.
The fair market value of plan assets exceeded both the accumulated benefit obligation and projected benefit obligation for the United Kingdom and the Canadian Salary plans at both year-end 2018 and 2017. The net asset position of the United Kingdom and Canadian Salary plans are included in prepaid pension cost on the Consolidated Balance Sheets at December 31, 2018 and December 31, 2017. The accumulated benefit obligation and projected benefit obligation exceeded the fair market value of plan assets for the German and Belgian plans at December 31, 2018 and December 31, 2017. For the two Mexican plans, the fair market value of plan assets exceeded the accumulated benefit obligation but not the projected benefit obligation at both December 31, 2018 and December 31, 2017. The accrued benefit cost of these plans is included in other noncurrent liabilities on the Consolidated Balance Sheets.
Notes to Consolidated Financial Statements
As the German plan is unfunded, a portion of the accrued benefit cost for the German plan is included in current liabilities at year-end 2018 and 2017, reflecting the expected benefit payments related to the plan for the following year.
The first table below shows information on foreign pension plans with the accumulated benefit obligation in excess of plan assets. The second table shows information on foreign pension plans with the projected benefit obligation in excess of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Plans with the accumulated benefit obligation in excess of the fair market value of plan assets
|
|
|
|
|
Projected benefit obligation
|
|
$
|
33,730
|
|
|
$
|
36,687
|
|
Accumulated benefit obligation
|
|
22,803
|
|
|
23,704
|
|
Fair market value of plan assets
|
|
10,618
|
|
|
10,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Plans with the projected benefit obligation in excess of the fair market value of plan assets
|
|
|
|
|
Projected benefit obligation
|
|
$
|
35,970
|
|
|
$
|
39,074
|
|
Fair market value of plan assets
|
|
12,597
|
|
|
12,247
|
|
Assumptions
—The information in the table below provides the weighted-average assumptions used to calculate the results of our foreign defined benefit pension plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average assumptions used to determine net periodic benefit cost (income) for the years ended December 31,
|
|
|
|
|
|
|
Discount rate
|
|
2.36
|
%
|
|
2.53
|
%
|
|
3.58
|
%
|
Expected long-term rate of return on plan assets
|
|
5.50
|
%
|
|
5.50
|
%
|
|
5.10
|
%
|
Rate of projected compensation increase
|
|
4.14
|
%
|
|
4.20
|
%
|
|
4.28
|
%
|
Weighted-average assumptions used to determine benefit obligations at December 31,
|
|
|
|
|
|
|
Discount rate
|
|
2.67
|
%
|
|
2.36
|
%
|
|
2.53
|
%
|
Rate of projected compensation increase
|
|
4.10
|
%
|
|
4.14
|
%
|
|
4.20
|
%
|
The actuarial assumptions used by the various foreign locations are based upon the circumstances of each particular country and pension plan. The factors impacting the determination of the long-term rate of return for a particular foreign pension plan include the market conditions within a particular country, as well as the investment strategy and asset allocation of the specific plan.
Plan Assets
—Pension plan assets vary by foreign location and plan. Assets are held and distributed by trusts and, depending upon the foreign location and plan, consist primarily of pooled equity funds, pooled debt securities funds, pooled diversified funds, equity securities, debt securities, cash, and insurance contracts. The combined weighted-average target allocation of our foreign pension plans is
38%
in equities (including pooled funds),
36%
in debt securities (including pooled funds),
7%
in insurance contracts, and
19%
in pooled diversified funds.
Notes to Consolidated Financial Statements
While the pension obligation is long-term in nature for each of our foreign plans, the investment strategies followed by each plan vary to some degree based upon the laws of a particular country, as well as the provisions of the specific pension trust. The United Kingdom and Canadian plans are invested predominantly in equity securities funds, diversified funds, and debt securities funds. The funds of these plans are managed by various trustees and investment companies whose performance is reviewed throughout the year. The Belgian plan is invested in an insurance contract. The Mexican plans are invested in various mutual funds, equities, and debt securities. The German plan has no assets.
There are no significant concentrations of risk within plan assets, nor do the equity securities include any NewMarket common stock for any year presented.
The following table provides information on the fair value of our foreign pension plans assets, as well as the related level within the fair value hierarchy. Investments that are measured at fair value using net asset value per share (or its equivalent) have not been classified by level in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Fair Value Measurements Using
|
(in thousands)
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Insurance contract
|
|
$
|
10,618
|
|
|
$
|
0
|
|
|
$
|
10,618
|
|
|
$
|
0
|
|
|
$
|
10,151
|
|
|
$
|
0
|
|
|
$
|
10,151
|
|
|
$
|
0
|
|
Equity securities—international companies
|
|
684
|
|
|
684
|
|
|
0
|
|
|
0
|
|
|
755
|
|
|
755
|
|
|
0
|
|
|
0
|
|
Debt securities
|
|
756
|
|
|
698
|
|
|
58
|
|
|
0
|
|
|
872
|
|
|
801
|
|
|
71
|
|
|
0
|
|
Pooled investment funds—mutual funds
|
|
538
|
|
|
538
|
|
|
0
|
|
|
0
|
|
|
469
|
|
|
469
|
|
|
0
|
|
|
0
|
|
Cash and cash equivalents
|
|
66
|
|
|
66
|
|
|
0
|
|
|
0
|
|
|
825
|
|
|
825
|
|
|
0
|
|
|
0
|
|
Pooled investment funds (measured at net asset value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities—U.S. companies
|
|
10,294
|
|
|
|
|
|
|
|
|
10,621
|
|
|
|
|
|
|
|
Equity securities—international companies
|
|
49,610
|
|
|
|
|
|
|
|
|
56,803
|
|
|
|
|
|
|
|
Debt securities
|
|
60,480
|
|
|
|
|
|
|
|
|
63,007
|
|
|
|
|
|
|
|
Diversified growth funds
|
|
30,700
|
|
|
|
|
|
|
|
|
33,465
|
|
|
|
|
|
|
|
|
|
$
|
163,746
|
|
|
$
|
1,986
|
|
|
$
|
10,676
|
|
|
$
|
0
|
|
|
$
|
176,968
|
|
|
$
|
2,850
|
|
|
$
|
10,222
|
|
|
$
|
0
|
|
The valuation methodologies used to develop the fair value measurements for the investments in the table above are outlined below. There have been no changes in the valuation techniques used to value the investments.
|
|
•
|
The insurance contract represents funds deposited with an insurance company and is stated at an amount equal to the sum of all amounts deposited less the sum of all amounts withdrawn, adjusted for investment return.
|
|
|
•
|
Equity securities are valued at the closing price reported on a national exchange.
|
|
|
•
|
Debt securities are valued by quoted market prices or valued based on yields currently available on comparable securities of issuers with similar credit ratings.
|
|
|
•
|
Pooled investment funds that are mutual funds are valued at the closing price reported on a national exchange.
|
|
|
•
|
Cash and cash equivalents are valued at cost.
|
Notes to Consolidated Financial Statements
|
|
•
|
The pooled investment funds are valued at the net asset value of units held by the plans based on the quoted market value of the underlying investments held by the fund. The United Kingdom pension plan is invested in units of life insurance policies that are linked to equity securities funds, government bond funds and diversified growth funds. The underlying assets of the equity funds, bond funds, and diversified growth funds are traded on a national exchange and are based on tracking various indices of the London Stock Exchange. There are no redemption restrictions on these funds. There were no unfunded commitments for the United Kingdom pension plan funds. The Canadian pension plan is invested in a pooled Canadian equity fund and a pooled diversified fund. The Canadian equity fund invests in a diversification (sector and industry) of equities listed on a recognized Canadian exchange. The diversified fund invests in a diversified mix of equities, fixed income securities, cash, and cash equivalent securities. There are no redemption restrictions on the pooled Canadian funds and there were no unfunded commitments.
|
Cash Flows
—For foreign pension plans, NewMarket expects to contribute
$6 million
to the plans in
2019
. The expected benefit payments for the next ten years for our foreign pension plans are shown in the table below.
|
|
|
|
|
|
(in thousands)
|
|
Expected Pension
Benefit Payments
|
2019
|
|
$
|
3,937
|
|
2020
|
|
4,209
|
|
2021
|
|
4,280
|
|
2022
|
|
3,499
|
|
2023
|
|
5,153
|
|
2024 through 2028
|
|
27,292
|
|
Notes to Consolidated Financial Statements
On December 22, 2017, the U.S. enacted tax legislation commonly known as the Tax Cuts and Jobs Act (Tax Reform Act), which required a one-time transition tax in
2017
on the deemed repatriation of previously deferred foreign earnings and reduced the U.S. corporate tax rate to
21%
beginning in
2018
. In addition, the Tax Reform Act included several provisions effective in
2018
which impact NewMarket, including the global intangible low-taxed income (GILTI) inclusion from foreign subsidiaries and the foreign-derived intangible income deduction. We have elected to account for the impact of the tax on GILTI in the period in which it is incurred.
We recognized
$31 million
of income tax expense in the fourth quarter of
2017
, as a result of the Tax Reform Act. This provisional expense included
$32 million
relating to the one-time tax on deferred foreign earnings, which we elected to pay over an eight-year period, partially offset by
$1 million
of reductions to deferred tax liabilities.
During the fourth quarter of
2018
, we completed the accounting for the impact of the Tax Reform Act. We recorded
$1 million
of additional tax on previously deferred foreign earnings, which was offset by
$8 million
of reductions to deferred tax liabilities, as a result of the decrease in the U.S. corporate tax rate. These changes are the result of additional analysis, changes in previous interpretations and assumptions, additional regulatory guidance issued during
2018
, and actions we took as a result of the Tax Reform Act. As of
December 31, 2018
, we have a remaining liability of
$3 million
associated with the one-time tax on the deemed repatriation of foreign earnings, which is recorded in other noncurrent liabilities.
Our income before income tax expense, as well as our provision for income taxes is shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Income before income tax expense
|
|
|
|
|
|
|
Domestic
|
|
$
|
157,459
|
|
|
$
|
140,779
|
|
|
$
|
161,687
|
|
Foreign
|
|
132,826
|
|
|
174,663
|
|
|
181,521
|
|
|
|
$
|
290,285
|
|
|
$
|
315,442
|
|
|
$
|
343,208
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
Current income taxes
|
|
|
|
|
|
|
Federal
|
|
$
|
9,153
|
|
|
$
|
61,188
|
|
|
$
|
34,213
|
|
State
|
|
4,679
|
|
|
3,942
|
|
|
9,020
|
|
Foreign
|
|
27,192
|
|
|
32,428
|
|
|
37,349
|
|
|
|
41,024
|
|
|
97,558
|
|
|
80,582
|
|
Deferred income taxes
|
|
|
|
|
|
|
Federal
|
|
16,545
|
|
|
15,901
|
|
|
13,876
|
|
State
|
|
2,888
|
|
|
3,633
|
|
|
3,095
|
|
Foreign
|
|
(4,906
|
)
|
|
7,841
|
|
|
2,214
|
|
|
|
14,527
|
|
|
27,375
|
|
|
19,185
|
|
Total income tax expense
|
|
$
|
55,551
|
|
|
$
|
124,933
|
|
|
$
|
99,767
|
|
Notes to Consolidated Financial Statements
The reconciliation of the U.S. federal statutory rate to the effective income tax rate follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Income Before Income Tax Expense
|
|
|
2018
|
|
2017
|
|
2016
|
Federal statutory rate
|
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal tax
|
|
2.1
|
|
|
1.6
|
|
|
2.3
|
|
Foreign operations
|
|
(0.9
|
)
|
|
(4.4
|
)
|
|
(5.8
|
)
|
Domestic research tax credit
|
|
(1.5
|
)
|
|
(1.1
|
)
|
|
(1.2
|
)
|
Foreign-derived intangible tax benefit
|
|
(2.4
|
)
|
|
0.0
|
|
|
0.0
|
|
U.S. minimum tax on foreign income
|
|
1.5
|
|
|
0.0
|
|
|
0.0
|
|
Domestic manufacturing tax benefit
|
|
0.0
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
Deemed repatriation of foreign earnings
|
|
0.5
|
|
|
10.1
|
|
|
0.0
|
|
Change in U.S. tax rate
|
|
(2.0
|
)
|
|
0.2
|
|
|
0.0
|
|
Other items and adjustments
|
|
0.8
|
|
|
(1.0
|
)
|
|
(0.4
|
)
|
Effective income tax rate
|
|
19.1
|
%
|
|
39.6
|
%
|
|
29.1
|
%
|
Our deferred income tax assets and liabilities follow.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Deferred income tax assets
|
|
|
|
|
Future employee benefits
|
|
$
|
4,550
|
|
|
$
|
8,039
|
|
Environmental and future shutdown reserves
|
|
2,854
|
|
|
3,327
|
|
Operating loss and credit carryforwards
|
|
16,578
|
|
|
6,312
|
|
Trademark expenses
|
|
3,833
|
|
|
3,852
|
|
Foreign currency translation adjustments
|
|
4,708
|
|
|
3,993
|
|
Other
|
|
3,071
|
|
|
3,248
|
|
Gross deferred income tax assets
|
|
35,594
|
|
|
28,771
|
|
Valuation allowance
|
|
(13,059
|
)
|
|
(5,768
|
)
|
Total deferred income tax assets
|
|
22,535
|
|
|
23,003
|
|
Deferred income tax liabilities
|
|
|
|
|
Depreciation and amortization
|
|
51,601
|
|
|
45,128
|
|
Inventory
|
|
3,973
|
|
|
3,562
|
|
Other
|
|
4,938
|
|
|
5,267
|
|
Total deferred income tax liabilities
|
|
60,512
|
|
|
53,957
|
|
Net deferred income tax (liabilities) assets
|
|
$
|
(37,977
|
)
|
|
$
|
(30,954
|
)
|
Reconciliation to financial statements
|
|
|
|
|
Deferred income tax assets
|
|
$
|
5,094
|
|
|
$
|
4,349
|
|
Deferred income tax liabilities
|
|
43,071
|
|
|
35,303
|
|
Net deferred income tax (liabilities) assets
|
|
$
|
(37,977
|
)
|
|
$
|
(30,954
|
)
|
Notes to Consolidated Financial Statements
Deferred income tax liabilities are included in other noncurrent liabilities in our Consolidated Balance Sheets. Our deferred taxes are in a net liability position at
December 31, 2018
. Our deferred tax assets include
$17 million
of foreign operating loss carryforwards, foreign capital loss carryforwards, and foreign and state tax credits. The operating loss carryforwards expire in 2019 through 2028 and certain tax credits expire in 2026 through 2027. Based on current forecasted operating plans and historical profitability, we believe that we will recover the full benefit of our deferred tax assets with the exception of
$13 million
of certain credits, operating loss and capital loss carryforwards. Therefore, as of
December 31, 2018
, we have recorded an offsetting valuation allowance against these items, as we do not believe we will be able to utilize these credits and operating loss carryforwards before expiration. The largest change during 2018 related to a
$6 million
increase in foreign tax credit carryforwards, and the offsetting valuation allowance, due to recording additional foreign tax credits when finalizing the deemed repatriation of foreign earnings under the Tax Reform Act.
As a result of the Tax Reform Act, we do not expect to distribute earnings from our foreign subsidiaries in a manner that would result in significant U.S. tax, as these earnings have been previously taxed in the U.S. or meet the requirements for a dividends received deduction. Therefore, we have only recorded an immaterial deferred tax liability for the withholding taxes that will not be creditable upon distribution.
We have not provided a deferred tax liability on approximately
$101 million
of temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration, as these earnings are considered to be indefinitely reinvested. If we were to repatriate these earnings, we could be subject to income taxes and withholding taxes in various countries. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the complexity associated with the hypothetical calculation.
A reconciliation of the beginning and ending balances of the unrecognized tax benefits from uncertain positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
9,102
|
|
|
$
|
8,810
|
|
|
$
|
2,322
|
|
Increases for tax positions of prior years
|
|
2,123
|
|
|
865
|
|
|
773
|
|
Increases for tax positions of the current year
|
|
614
|
|
|
453
|
|
|
5,826
|
|
Settlements
|
|
(252
|
)
|
|
(260
|
)
|
|
(111
|
)
|
Lapses of statutes
|
|
(927
|
)
|
|
(766
|
)
|
|
0
|
|
Balance at end of year
|
|
$
|
10,660
|
|
|
$
|
9,102
|
|
|
$
|
8,810
|
|
At
December 31, 2018
,
$10 million
of the amount of unrecognized tax benefits, if recognized, would affect our effective tax rate.
We expect the amount of unrecognized tax benefits to change in the next twelve months; however, we do not expect the change to have a material impact on our financial statements.
Our U.S. subsidiaries file a U.S. federal consolidated income tax return. We are currently under examination by various U.S. state and foreign jurisdictions and remain subject to examination until the statute of limitations expires for the respective tax jurisdiction. We are no longer subject to U.S. federal income examination for years before 2015. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from
three
to
five
years. Years still open to examination by foreign tax authorities in major jurisdictions include: the United Kingdom (2015 and forward); Singapore (2014 and forward); Belgium (2016 and forward); and Mexico (2013 and forward).
Notes to Consolidated Financial Statements
|
|
20.
|
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
|
The balances of, and changes in, the components of accumulated other comprehensive loss, net of tax, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension Plans
and Other Postretirement Benefits
|
|
Foreign Currency Translation Adjustments
|
|
Accumulated Other
Comprehensive (Loss) Income
|
Balance at December 31, 2015
|
|
$
|
(69,798
|
)
|
|
$
|
(74,728
|
)
|
|
$
|
(144,526
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(8,565
|
)
|
|
(31,595
|
)
|
|
(40,160
|
)
|
Amounts reclassified from accumulated other comprehensive loss (a)
|
|
2,176
|
|
|
0
|
|
|
2,176
|
|
Other comprehensive income (loss)
|
|
(6,389
|
)
|
|
(31,595
|
)
|
|
(37,984
|
)
|
Balance at December 31, 2016
|
|
(76,187
|
)
|
|
(106,323
|
)
|
|
(182,510
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
10,966
|
|
|
23,849
|
|
|
34,815
|
|
Amounts reclassified from accumulated other comprehensive loss (a)
|
|
1,701
|
|
|
0
|
|
|
1,701
|
|
Other comprehensive income (loss)
|
|
12,667
|
|
|
23,849
|
|
|
36,516
|
|
Balance at December 31, 2017
|
|
(63,520
|
)
|
|
(82,474
|
)
|
|
(145,994
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(25,027
|
)
|
|
(12,287
|
)
|
|
(37,314
|
)
|
Amounts reclassified from accumulated other comprehensive loss (a)
|
|
1,992
|
|
|
0
|
|
|
1,992
|
|
Other comprehensive income (loss)
|
|
(23,035
|
)
|
|
(12,287
|
)
|
|
(35,322
|
)
|
Balance at December 31, 2018
|
|
$
|
(86,555
|
)
|
|
$
|
(94,761
|
)
|
|
$
|
(181,316
|
)
|
(a) The pension plan and other postretirement benefit components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income). See
Note 18
for further information.
Notes to Consolidated Financial Statements
|
|
21.
|
Segment and Geographic Area Information
|
Segment Information
—The tables below show our consolidated segment results. The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and services associated with Ethyl.
The segment accounting policies are the same as those described in Note 1. We evaluate the performance of the petroleum additives business based on segment operating profit. NewMarket Services departments and other expenses are billed to Afton and Ethyl based on the services provided under the holding company structure. Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets, are included in segment operating profit. No transfers occurred between the petroleum additives segment and the “All other” category during the periods presented. The table below reports net sales and operating profit by segment, as well as a reconciliation to income before income tax expense, for the last three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
|
|
|
|
|
|
Petroleum additives
|
|
|
|
|
|
|
Lubricant additives
|
|
$
|
1,870,803
|
|
|
$
|
1,790,254
|
|
|
$
|
1,672,523
|
|
Fuel additives
|
|
410,000
|
|
|
397,029
|
|
|
362,122
|
|
Total
|
|
2,280,803
|
|
|
2,187,283
|
|
|
2,034,645
|
|
All other
|
|
8,872
|
|
|
11,121
|
|
|
14,806
|
|
Net sales (a)
|
|
$
|
2,289,675
|
|
|
$
|
2,198,404
|
|
|
$
|
2,049,451
|
|
Segment operating profit
|
|
|
|
|
|
|
Petroleum additives
|
|
$
|
311,019
|
|
|
$
|
345,017
|
|
|
$
|
375,360
|
|
All other
|
|
(3,256
|
)
|
|
4,135
|
|
|
388
|
|
Segment operating profit
|
|
307,763
|
|
|
349,152
|
|
|
375,748
|
|
Corporate, general, and administrative expenses
|
|
(19,651
|
)
|
|
(26,641
|
)
|
|
(20,026
|
)
|
Interest and financing expenses, net
|
|
(26,723
|
)
|
|
(21,856
|
)
|
|
(16,785
|
)
|
Other income (expense), net
|
|
28,896
|
|
|
14,787
|
|
|
4,271
|
|
Income before income tax expense
|
|
$
|
290,285
|
|
|
$
|
315,442
|
|
|
$
|
343,208
|
|
|
|
(a)
|
No single customer accounted for 10% or more of our total net sales in 2018, 2017, or 2016.
|
Notes to Consolidated Financial Statements
The following tables show asset information by segment and the reconciliation to consolidated assets. Segment assets consist of accounts receivable, inventory, and long-lived assets. Long-lived assets included in the petroleum additives segment amounts in the table below include property, plant, and equipment, net of depreciation, as well as intangibles (net of amortization) and goodwill. The additions to long-lived assets include only property, plant, and equipment for each year presented.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Segment assets
|
|
|
|
|
Petroleum additives
|
|
$
|
1,448,737
|
|
|
$
|
1,461,013
|
|
All other
|
|
12,200
|
|
|
14,089
|
|
|
|
1,460,937
|
|
|
1,475,102
|
|
Cash and cash equivalents
|
|
73,040
|
|
|
84,166
|
|
Other accounts receivable
|
|
1,310
|
|
|
11,026
|
|
Deferred income taxes
|
|
5,094
|
|
|
4,349
|
|
Prepaid expenses and other current assets
|
|
29,179
|
|
|
31,074
|
|
Non-segment property, plant, and equipment, net
|
|
33,134
|
|
|
32,939
|
|
Prepaid pension cost
|
|
88,705
|
|
|
66,495
|
|
Deferred charges and other assets
|
|
5,875
|
|
|
7,003
|
|
Total assets
|
|
$
|
1,697,274
|
|
|
$
|
1,712,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Additions to long-lived assets
|
|
|
|
|
|
|
Petroleum additives
|
|
$
|
72,829
|
|
|
$
|
196,951
|
|
|
$
|
145,768
|
|
All other
|
|
0
|
|
|
0
|
|
|
21
|
|
Corporate
|
|
1,809
|
|
|
6,266
|
|
|
1,895
|
|
Total additions to long-lived assets
|
|
$
|
74,638
|
|
|
$
|
203,217
|
|
|
$
|
147,684
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Petroleum additives
|
|
$
|
69,029
|
|
|
$
|
52,266
|
|
|
$
|
42,128
|
|
All other
|
|
11
|
|
|
13
|
|
|
15
|
|
Corporate
|
|
2,719
|
|
|
3,061
|
|
|
2,750
|
|
Total depreciation and amortization
|
|
$
|
71,759
|
|
|
$
|
55,340
|
|
|
$
|
44,893
|
|
Notes to Consolidated Financial Statements
Geographic Area Information
- We have operations in the United States, Europe, Asia Pacific, India, Latin America, Canada, and the Middle East. Our foreign customers consist primarily of global, national, and independent oil companies.
The tables below report net sales, total assets, and long-lived assets by geographic area, as well as by country for those countries with significant net sales or long-lived assets. Since our foreign operations are significant to our overall business, we are also presenting net sales in the table below by the major regions in which we operate. NewMarket assigns net sales to geographic areas based on the location to which the product was shipped to a third party. Long-lived assets in the table below include property, plant, and equipment, net of depreciation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
|
|
|
|
|
|
United States
|
|
$
|
722,576
|
|
|
$
|
696,138
|
|
|
$
|
701,209
|
|
China
|
|
239,406
|
|
|
224,409
|
|
|
203,031
|
|
Europe, Middle East, Africa, India
|
|
756,258
|
|
|
742,337
|
|
|
653,341
|
|
Asia Pacific, except China
|
|
335,119
|
|
|
293,137
|
|
|
267,585
|
|
Other foreign
|
|
236,316
|
|
|
242,383
|
|
|
224,285
|
|
Net sales
|
|
$
|
2,289,675
|
|
|
$
|
2,198,404
|
|
|
$
|
2,049,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Total assets
|
|
|
|
|
United States
|
|
$
|
586,339
|
|
|
$
|
557,488
|
|
Foreign
|
|
1,110,935
|
|
|
1,154,666
|
|
Total assets
|
|
$
|
1,697,274
|
|
|
$
|
1,712,154
|
|
Long-lived assets
|
|
|
|
|
United States
|
|
$
|
226,191
|
|
|
$
|
230,049
|
|
Singapore
|
|
280,340
|
|
|
271,516
|
|
Other foreign
|
|
137,607
|
|
|
150,716
|
|
Total long-lived assets
|
|
$
|
644,138
|
|
|
$
|
652,281
|
|
Notes to Consolidated Financial Statements
|
|
22.
|
Selected Quarterly Consolidated Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per-share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
589,245
|
|
|
$
|
598,952
|
|
|
$
|
563,166
|
|
|
$
|
538,312
|
|
Gross profit
|
|
156,783
|
|
|
145,859
|
|
|
140,883
|
|
|
141,838
|
|
Net income
|
|
60,565
|
|
|
52,885
|
|
|
58,481
|
|
|
62,803
|
|
Earnings per share - basic and diluted
|
|
5.14
|
|
|
4.53
|
|
|
5.12
|
|
|
5.58
|
|
2017
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net sales
|
|
$
|
542,818
|
|
|
$
|
547,188
|
|
|
$
|
548,416
|
|
|
$
|
559,982
|
|
Gross profit
|
|
168,842
|
|
|
163,471
|
|
|
158,877
|
|
|
145,197
|
|
Net income
|
|
63,937
|
|
|
62,728
|
|
|
59,772
|
|
|
4,072
|
|
Earnings per share - basic and diluted
|
|
5.39
|
|
|
5.29
|
|
|
5.04
|
|
|
0.35
|
|
|
|
23.
|
Recent Accounting Pronouncements
|
Recently Adopted Accounting Pronouncements
On January 1, 2018, we adopted Accounting Standards Codification 606 (ASC 606), "Revenue from Contracts with Customers." Further information on the adoption is in Note 3.
Also on January 1, 2018, we adopted Accounting Standards Update No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07) on a retrospective basis for the consolidated statements of income and on a prospective basis for capitalization of the service cost component in assets. ASU 2017-07 requires that an employer report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the consolidated statements of income outside of operating profit. There was no change to net income for any period presented as a result of adopting ASU 2017-07 on a retrospective basis for the consolidated statements of income, but there is a change within operating profit with a corresponding change in other income (expense), net to reflect the impact of presenting all components of net benefit cost, except for service cost, outside of operating profit. As a result of the retrospective application, operating profit decreased by
$14 million
and other income (expense), net increased by
$14 million
in income for the
twelve months ended
December 31, 2017
. For the
twelve months ended
December 31, 2016
, operating profit decreased by
$8 million
and other income (expense), net increased by
$8 million
in income. As allowed under ASU 2017-07, we utilized the amounts disclosed in the prior year for the various components of net benefit costs as the basis for the retrospective application. See
Note 18
for the components of our net benefit costs.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" (ASU 2016-02) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosures related to certain information about leasing arrangements. Under the new guidance, leases are classified as either operating or financing, with lease classification impacting the location of expense recognition in the consolidated statement of income.
Notes to Consolidated Financial Statements
We plan to adopt ASU 2016-02 electing the transition approach allowing for retrospective adoption on January 1, 2019. We plan to elect the package of practical expedients permitted under the guidance, which, among other things, allows us to not reassess the historical lease classification of existing leases. In addition, we plan to elect the hindsight practical expedient and the land easement practical expedient, as well as the short-term lease exception, which allows us to not recognize on the balance sheet those leases with terms of 12 months or less. We also expect to make the accounting policy election to not separate lease and nonlease components in determining the right of use assets and lease liabilities. We are continuing to finalize the accounting for the adoption of ASU 2016-02, but currently expect the right of use assets and lease liabilities to be approximately
$70 million
. We do not expect the adoption of ASU 2016-02 to materially impact our consolidated net income, liquidity, or covenant compliance under our existing debt agreements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02). ASU 2018-02 allows, but does not require, reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects that resulted from the Tax Reform Act at the end of 2017. ASU 2018-02, which is effective for our reporting period beginning January 1, 2019, also requires additional disclosures surrounding stranded tax effects.