NEWMARKET CORP - Quarter Report: 2005 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission File Number 1-32190

NEWMARKET CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code - (804) 788-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Number of shares of common stock, without par value, outstanding as of April 30, 2005: 17,014,059.

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NEWMARKET CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

NEWMARKET CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEWMARKET CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to the condensed consolidated financial statements.

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NEWMARKET CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

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NEWMARKET CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In the opinion of management, the accompanying condensed consolidated financial statements of NewMarket Corporation and Subsidiaries contain all necessary adjustments for the fair presentation of, in all material respects, our consolidated financial position as of March 31, 2005, as well as our consolidated results of operations for the three months ended March 31, 2005 and 2004 and our consolidated cash flows for the three months ended March 31, 2005 and 2004. The financial statements are subject to normal year-end adjustments and do not include the comprehensive footnotes. All adjustments are of a normal, recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the NewMarket Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission (SEC) (2004 Annual Report). The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

Unless the context otherwise requires, all references to “we,” “us,” “our,” the “Company” and “NewMarket” are to NewMarket Corporation and its subsidiaries.

At both March 31, 2005 and December 31, 2004, we had a book overdraft for some of our disbursement cash accounts. A book overdraft represents transactions that have not cleared the bank accounts at the end of the reporting period. We transfer cash on an as-needed basis to fund these items as they clear the bank in subsequent periods.

First quarter 2004 segment operating profit was adjusted from previously reported information to reflect the current allocation of certain costs in alignment with the 2004 transition to a holding company structure, which was effective June 18, 2004. The reclassification had no effect on net income.

Our asset retirement obligations are related primarily to tetraethyl lead (TEL) operations. These obligations had been previously fully accrued. Upon the January 1, 2003 adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), these accruals were discounted to their net present value, which resulted in the recognition of a gain. Current accretion of the asset retirement obligations is expensed in operations. The following table illustrates the activity associated with SFAS No. 143 for the three months ended March 31, 2005 and the year ended December 31, 2004.

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We account for the stock-based compensation plan using the intrinsic-value method. Under this method, we do not record compensation cost for stock options unless the quoted market price of the stock at grant date or other measurement date exceeds the amount the employee must pay to exercise the stock option. Compensation cost for restricted stock grants, if issued, is recognized over the vesting period. See Note 12 of the Notes to Condensed Consolidated Financial Statements for information on an accounting standard which we will adopt in 2006 related to the accounting for stock-based compensation. See Note 16 of the Notes to Consolidated Financial Statements in our 2004 Annual Report for further information on our stock-based compensation plan.

The following table illustrates the effect on net income and earnings per share as if we had applied the fair-value method of accounting for the stock-based compensation plan.

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The tables below show our consolidated net sales by segment, operating profit by segment, reconciliation to income before income taxes, and depreciation and amortization by segment.

Net Sales by Segment

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Segment Operating Profit

The prior period has been reclassified to conform to the current presentation. The reclassifications consist of an allocation of certain costs in alignment with the 2004 transition to a holding company structure. There was no impact on net income in any period.

Depreciation and Amortization

During the first three months of 2005, we made contributions of approximately $15 thousand for domestic pension plans and approximately $600 thousand for domestic postretirement plans. We expect to make total contributions in 2005 of approximately $4 million to $6 million for our domestic pension plans and approximately $2 million to $3 million for our domestic postretirement plans.

We made contributions of approximately $1.3 million for our foreign pension plans during the first three months of 2005 and expect to make total contributions to our foreign pension plans of approximately $6 million to $7 million during 2005.

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The table below presents information on periodic benefit cost for our domestic retirement plans. The second table presents the same information for the foreign plans.

Basic and diluted earnings per share are calculated as shown in the table below. Amounts, except share and per share, are in thousands of dollars. Options are not included in the computation of diluted earnings per share when the option exercise price exceeds the average market price of the common stock. At both March 31, 2005 and March 31, 2004, we had outstanding options to purchase 50,000 shares of NewMarket common stock at $44.375 per share. These options were not included in the computation of diluted earnings per share for any period due to their antidilutive impact.

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The following table provides certain information related to our intangible assets.

Estimated amortization expense in thousands for the next five years is expected to be:

We amortize the cost of intangible assets by the straight-line method, over their economic lives of 5 to 20 years.

During 2003, we were notified by DSM Copolymer, Inc., our supplier of olefin copolymer viscosity index improvers, of its intent to terminate a supply contract with us in mid-2005. The contract was initially scheduled to terminate in 2012. We have adjusted the amortization period of the intangible asset associated with this contract to coincide with the 2005 termination date.

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Long-term debt consisted of the following:

Senior Notes - On April 30, 2003, Ethyl Corporation (Ethyl) sold senior notes in the aggregate principal amount of $150 million that bear interest at a fixed rate of 8.875% and are due in 2010.

The senior notes are our senior unsecured obligations and are jointly and severally guaranteed on an unsecured basis by all of our existing and future wholly owned domestic restricted subsidiaries and certain of our existing wholly owned foreign subsidiaries. We incurred financing costs of approximately $5 million related to the senior notes, which are being amortized over seven years.

In connection with the holding company formation, NewMarket assumed all of Ethyl’s rights, liabilities and obligations under the senior notes, effective June 18, 2004.

The senior notes and the subsidiary guarantees rank:

The indenture governing the senior notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:

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We were in compliance with these covenants as of both March 31, 2005 and December 31, 2004.

Senior Credit Facility - On April 30, 2003, we entered into a long-term debt structure for Ethyl. The debt structure included the senior notes discussed above and a senior credit facility with a bank term loan and a revolving credit facility.

On June 18, 2004, prior to the completion of the holding company formation, Ethyl entered into an Amended and Restated Credit Agreement, which consists of a $100 million revolving credit facility. This agreement amended and restated the credit agreement that Ethyl had entered into on April 30, 2003. Effective with the completion of the holding company formation, NewMarket assumed all of Ethyl’s rights and obligations under the Amended and Restated Credit Agreement pursuant to the First Amendment thereto. We incurred additional financing costs of approximately $1 million, which resulted in total deferred financing costs of approximately $6 million related to the amended and restated credit facility. These costs are being amortized over five years.

Borrowings under the $100 million revolving credit facility are used for working capital and other general corporate purposes for NewMarket and our subsidiaries. The revolving credit facility includes a sub-facility for letters of credit. Borrowings bear interest, at our election, at either a base rate plus a margin (50 basis points as of March 31, 2005) or LIBOR plus a margin (200 basis points as of March 31, 2005). The revolving credit facility matures on June 18, 2009. Borrowings outstanding at March 31, 2005 under the revolving credit facility were $32.5 million and bore interest at rates of 4.72% to 6.25%, depending upon the type of borrowing. At March 31, 2005, we had outstanding letters of credit of $23.7 million, resulting in the unused portion of the revolver amounting to $43.8 million.

The revolving credit facility is secured by liens on substantially all of our U.S. assets. In addition, the credit facility is guaranteed by our U.S. subsidiaries and certain foreign subsidiaries to the extent that such guarantees would not result in adverse tax consequences.

The credit agreement contains covenants, representations, and events of default that management considers typical of a credit agreement of this nature. The financial covenants include:

We were in compliance with these covenants as of both March 31, 2005 and December 31, 2004.

There have been no significant changes in our contractual commitments and contingencies from those reported in our 2004 Annual Report, except for changes related to the legal proceedings concerning the TEL case in Maryland. In that case, Ethyl was served as a defendant in the case filed in the Circuit Court for Baltimore City, Maryland, in September 1999. Smith, et al. v. Lead Industries Association, Inc., et al., alleged personal injuries for seven children from lead exposure

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arising from lead paint and dust from tailpipe emissions due to leaded gasoline. The court dismissed Ethyl and some other defendants from the case in February 2002 and granted summary judgment to other defendants in November 2002. The plaintiffs have appealed both decisions, but did not appeal the dismissal of Ethyl as a defendant. On April 4, 2005, the Court of Appeals of Maryland dismissed the appeal on the basis that the trial court’s decision was not a final decision that could be appealed, and the case is once again pending in the trial court. If such claims are further pursued against Ethyl, we believe Ethyl has strong defenses and will vigorously defend any such claims.

Our accruals for environmental remediation were approximately $22 million at both March 31, 2005 and December 31, 2004. In addition to the accruals for environmental remediation, we also have accruals for dismantling and decommissioning costs of approximately $7 million at both March 31, 2005 and December 31, 2004.

The components of comprehensive income consist of the following:

The components of accumulated other comprehensive loss consist of the following:

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In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004) “Share-Based Payment.” The statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In general, the statement provides guidance in accounting for transactions in which a company obtains employee services in exchange for share-based payments. The statement requires that the cost from share-based payment transactions be recognized in the financial statements and be determined using a fair-value-based measurement method. This standard was to be effective for interim periods beginning after June 15, 2005. In April 2005, the SEC delayed the effective date to the first fiscal year beginning after June 15, 2005. This standard applies to all share-based payment transactions initiated or modified after the effective date. We are evaluating this statement, but do not expect it to have a significant impact on our financial results.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47.) FIN 47 clarifies certain aspects of FASB No. 143, “Accounting for Asset Retirement Obligations” and is effective no later than December 31, 2005. We are currently evaluating the impact of FIN 47.

The senior notes are fully and unconditionally guaranteed by certain of our subsidiaries (Guarantor Subsidiaries) on a joint and several unsecured senior basis. The Guarantor Subsidiaries include all of our existing and future wholly owned domestic restricted subsidiaries and certain of our existing wholly owned foreign subsidiaries. The Guarantor Subsidiaries and the subsidiaries that do not guarantee the senior notes (the Non-Guarantor Subsidiaries) are wholly owned by NewMarket Corporation (the Parent). The Guarantor Subsidiaries consist of the following:

We conduct all of our business and derive all of our income from our subsidiaries. Therefore, our ability to make payments on the senior notes or other obligations is dependent on the earnings and the distribution of funds from our subsidiaries. There are no restrictions on the ability of any of our domestic subsidiaries to transfer funds to the Parent. We are currently able to transfer funds from our foreign subsidiaries, although certain conditions may arise occasionally that may restrict these transfers.

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The following sets forth the consolidating statements of income for the three months ended March 31, 2005 and 2004, consolidating balance sheets as of March 31, 2005 and December 31, 2004, and condensed consolidating statements of cash flows for the three months ended March 31, 2005 and 2004 for the Parent, the Guarantor Subsidiaries and Non-Guarantor Subsidiaries. Certain amounts in these financial statements have been reclassified for the transition to a holding company structure effective June 18, 2004. The financial information is based on our understanding of the SEC’s interpretation and application of Rule 3-10 of the Regulation S-X promulgated by the SEC.

The financial information may not necessarily be indicative of results of operations or financial position had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries operated as independent entities.

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NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Three Months Ended March 31, 2005

(in thousands)

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NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Three Months Ended March 31, 2004

(in thousands)