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NEWMARKET CORP - Quarter Report: 2011 June (Form 10-Q)

FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 1-32190

 

 

NEWMARKET CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   20-0812170

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

330 SOUTH FOURTH STREET

RICHMOND, VIRGINIA

  23218-2189
(Address of principal executive offices)   (Zip Code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

Number of shares of common stock, without par value, outstanding as of July 27, 2011: 13,834,513.

 

 

 


Table of Contents

NEWMARKET CORPORATION

I N D E X

 

     Page
Number
 
PART I. FINANCIAL INFORMATION   

ITEM 1. Financial Statements (unaudited)

  

Consolidated Statements of Income – Second Quarter and Six Months Ended June 30, 2011 and June 30, 2010

     3   

Consolidated Balance Sheets – June 30, 2011 and December 31, 2010

     4   

Consolidated Statements of Shareholders’ Equity – Six Months Ended June 30, 2011 and Year Ended December 31, 2010

     5   

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and June 30, 2010

     6   

Notes to Consolidated Financial Statements

     7 – 33   

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34 – 42   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     43   

ITEM 4. Controls and Procedures

     43   
PART II. OTHER INFORMATION   

ITEM 1. Legal Proceedings

     44   

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     44   

ITEM 6. Exhibits

     45   

SIGNATURES

     46   

 

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

NEWMARKET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per-share amounts)

(Unaudited)

 

     Second Quarter Ended
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  

Revenue:

           

Net sales - product

   $ 575,665       $ 466,986       $ 1,080,890       $ 859,251   

Rental revenue

     2,858         2,855         5,716         5,716   
                                   
     578,523         469,841         1,086,606         864,967   
                                   

Costs:

           

Cost of goods sold - product

     429,659         336,574         795,710         610,202   

Cost of rental

     1,068         1,066         2,136         2,156   
                                   
     430,727         337,640         797,846         612,358   
                                   

Gross profit

     147,796         132,201         288,760         252,609   

Selling, general, and administrative expenses

     37,319         36,193         75,743         66,767   

Research, development, and testing expenses

     25,379         22,064         49,840         43,147   
                                   

Operating profit

     85,098         73,944         163,177         142,695   

Interest and financing expenses

     4,693         4,314         9,338         8,263   

Other expense, net

     3,987         9,210         4,054         11,521   
                                   

Income before income tax expense

     76,418         60,420         149,785         122,911   

Income tax expense

     24,159         20,564         47,937         40,917   
                                   

Net income

   $ 52,259       $ 39,856       $ 101,848       $ 81,994   
                                   

Basic earnings per share

   $ 3.77       $ 2.69       $ 7.34       $ 5.48   
                                   

Diluted earnings per share

   $ 3.77       $ 2.69       $ 7.34       $ 5.47   
                                   

Shares used to compute basic earnings per share

     13,852         14,796         13,871         14,957   
                                   

Shares used to compute diluted earnings per share

     13,856         14,828         13,881         14,991   
                                   

Cash dividends declared per common share

   $ 0.600       $ 0.375       $ 1.040       $ 0.750   
                                   

See accompanying Notes to the Consolidated Financial Statements.

 

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NEWMARKET CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

     June 30
2011
    December 31
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 60,888      $ 49,192   

Short-term investments

     0        300   

Trade and other accounts receivable, less allowance for doubtful accounts ($824 in 2011 and $733 in 2010)

     313,818        257,748   

Inventories:

    

Finished goods

     260,352        215,764   

Raw materials

     61,102        50,853   

Stores, supplies and other

     6,390        6,598   
                
     327,844        273,215   
                

Deferred income taxes

     5,679        6,876   

Prepaid expenses and other current assets

     21,069        15,444   
                

Total current assets

     729,298        602,775   
                

Property, plant and equipment, at cost

     1,031,536        988,180   

Less accumulated depreciation and amortization

     676,834        654,204   
                

Net property, plant and equipment

     354,702        333,976   
                

Prepaid pension cost

     12,578        8,597   

Deferred income taxes

     17,188        21,974   

Other assets and deferred charges

     52,237        48,893   

Intangibles (net of amortization) and goodwill

     42,623        46,526   
                

Total assets

   $ 1,208,626      $ 1,062,741   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 127,163      $ 109,250   

Accrued expenses

     64,675        71,558   

Dividends payable

     7,108        5,304   

Book overdraft

     9,821        1,063   

Long-term debt, current portion

     5,109        4,369   

Income taxes payable

     29,446        14,843   
                

Total current liabilities

     243,322        206,387   
                

Long-term debt

     260,100        217,544   

Other noncurrent liabilities

     142,516        147,170   

Commitments and contingencies (Note 8)

    

Shareholders’ equity:

    

Common stock (without par value) and paid-in capital; authorized shares - 80,000,000; Outstanding shares - 13,833,811 in 2011 and 14,034,884 in 2010

     0        0   

Accumulated other comprehensive loss

     (63,144     (73,820

Retained earnings

     625,832        565,460   
                
     562,688        491,640   
                

Total liabilities and shareholders’ equity

   $ 1,208,626      $ 1,062,741   
                

See accompanying Notes to the Consolidated Financial Statements.

 

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NewMarket Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands, except share amounts)

(unaudited)

 

                 Accumulated              
   Common Stock and     Other           Total  
   Paid in Capital     Comprehensive     Retained     Shareholders’  
     Shares     Amount     (Loss) Income     Earnings     Equity  

Balance at December 31, 2009

     15,209,989      $ 275      $ (74,784   $ 532,694      $ 458,185   

Comprehensive income:

          

Net income

           177,125        177,125   

Changes in (net of tax):

          

Foreign currency translation adjustments

         (6,042       (6,042

Pension plans and other postretirement benefit adjustments:

          

Prior service cost

         (523       (523

Unrecognized gain

         9,006          9,006   

Transition obligation

         10          10   

Derivative net loss

         (1,487       (1,487
                

Total comprehensive income

             178,089   
                

Cash dividends ($1.565 per share)

           (22,608     (22,608

Repurchases of common stock

     (1,213,158     (3,104       (121,751     (124,855

Stock options exercised

     21,000        91            91   

Stock options tax benefit

       711            711   

Issuance of stock

     17,053        2,027            2,027   
                                        

Balance at December 31, 2010

     14,034,884        0        (73,820     565,460        491,640   

Comprehensive income:

          

Net income

           101,848        101,848   

Changes in (net of tax):

          

Foreign currency translation adjustments

         9,428          9,428   

Pension plans and other postretirement benefit adjustments:

          

Prior service cost

         130          130   

Unrecognized gain

         1,304          1,304   

Transition obligation

         20          20   

Derivative net loss

         (206       (206
                

Total comprehensive income

             112,524   
                

Cash dividends ($1.04 per share)

           (14,408     (14,408

Repurchases of common stock

     (217,073     (1,106       (27,068     (28,174

Stock options exercised

     16,000        70            70   

Stock options tax benefit

       1,036            1,036   
                                        

Balance at June 30, 2011

     13,833,811      $ 0      $ (63,144   $ 625,832      $ 562,688   
                                        

See accompanying Notes to the Consolidated Financial Statements.

 

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NEWMARKET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30
 
     2011     2010  

Cash and cash equivalents at beginning of year

   $ 49,192      $ 151,831   
                

Cash flows from operating activities:

    

Net income

     101,848        81,994   

Adjustments to reconcile net income to cash flows from operating activities:

    

Depreciation and amortization

     20,771        17,718   

Amortization of deferred financing costs

     788        741   

Noncash environmental remediation and dismantling

     687        2,162   

Noncash pension benefits expense

     6,383        6,696   

Noncash postretirement benefits expense

     1,600        1,538   

Noncash foreign exchange (gain) loss

     (123     2,003   

Deferred income taxes

     3,628        (4,177

Unrealized loss on derivative instruments, net

     747        12,062   

Working capital changes

     (84,660     (38,863

Cash pension benefits contributions

     (14,623     (9,242

Cash postretirement benefits contributions

     (990     (860

Excess tax benefits from stock-based payment arrangements

     (1,036     0   

Other, net

     3,395        1,391   
                

Cash provided from operating activities

     38,415        73,163   
                

Cash flows from investing activities:

    

Capital expenditures

     (34,790     (18,036

Deposits for interest rate swap

     (20,274     (18,890

Return of deposits for interest rate swap

     17,890        7,420   

Payments on settlement of interest rate swap

     (2,574     0   

Receipts from settlement of interest rate swap

     145        0   

Proceeds from sale of short-term investment

     300        0   

Acquisition of business (net of cash acquired of $1.8 million in 2010)

     0        (41,970
                

Cash used in investing activities

     (39,303     (71,476
                

Cash flows from financing activities:

    

Net borrowings under revolving credit agreement

     44,000        18,000   

Repayment on Foundry Park I mortgage loan

     (1,340     (834

Borrowing under (repayment of) line of credit

     780        0   

Repayment of Foundry Park I construction loan

     0        (99,102

Borrowing under Foundry Park I mortgage loan

     0        68,400   

Repurchases of common stock

     (31,512     (79,220

Dividends paid

     (7,301     (11,037

Change in book overdraft, net

     8,758        1,565   

Debt issuance costs

     (3,233     (1,524

Payment for financed intangible asset

     0        (500

Proceeds from exercise of stock options

     70        21   

Excess tax benefits from stock-based payment arrangements

     1,036        0   

Payments on capital lease

     (144     (411
                

Cash provided from (used in) financing activities

     11,114        (104,642
                

Effect of foreign exchange on cash and cash equivalents

     1,470        (2,270
                

Increase (decrease) in cash and cash equivalents

     11,696        (105,225
                

Cash and cash equivalents at end of period

   $ 60,888      $ 46,606   
                

See accompanying Notes to the Consolidated Financial Statements.

 

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NEWMARKET CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Financial Statement Presentation

In the opinion of management, the accompanying consolidated financial statements of NewMarket Corporation and its subsidiaries contain all necessary adjustments for the fair statement of, in all material respects, our consolidated financial position as of June 30, 2011 and December 31, 2010, and the change in our shareholders’ equity for the six months ended June 30, 2011 and the year ended December 31, 2010, as well as our consolidated results of operations for the second quarter and six months ended June 30, 2011 and June 30, 2010 and our cash flows for the six months ended June 30, 2011 and June 30, 2010. All adjustments are of a normal, recurring nature, unless otherwise disclosed. 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 year ended December 31, 2010 (2010 Annual Report), as filed with the Securities and Exchange Commission (SEC). The results of operations for the six month period ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. The December 31, 2010 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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

At both June 30, 2011 and December 31, 2010, 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. There are no agreements with the same banks to offset the presented balance. We transfer cash on an as-needed basis to fund these items as they clear the bank in subsequent periods.

Cash dividends for the six months ended June 30, 2011 and June 30, 2010 were declared and paid as shown in the table below.

 

Year

   Date Declared    Date Paid    Per Share
Amount

2011

   February 17, 2011    April 1, 2011    44.0 cents
   April 20, 2011    July 1, 2011    60.0 cents

2010

   February 18, 2010    April 1, 2010    37.5 cents
   April 22, 2010    July 1, 2010    37.5 cents

 

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2. Asset Retirement Obligations

Our asset retirement obligations are related primarily to our tetraethyl lead (TEL) operations. The following table illustrates the activity associated with our asset retirement obligations for the six months ended June 30, 2011 and June 30, 2010.

 

     2011      2010  
     (in thousands)  

Asset retirement obligations, January 1

   $ 2,975       $ 3,031   

Accretion expense

     74         72   

Changes in expected cash flows and timing

     0         (110
                 

Asset retirement obligations, June 30

   $ 3,049       $ 2,993   
                 

 

3. Segment Information

The tables below show our consolidated segment results. The “All other” category includes the operations of the TEL business, as well as certain contract manufacturing performed by Ethyl Corporation (Ethyl).

Consolidated Revenue by Segment

(in millions)

 

     Second Quarter Ended      Six Months Ended  
     June 30      June 30  
     2011      2010      2011      2010  

Petroleum additives

   $ 572.8       $ 464.9       $ 1,075.5       $ 854.3   

Real estate development

     2.8         2.9         5.7         5.7   

All other

     2.9         2.0         5.4         5.0   
                                   

Consolidated revenue

   $ 578.5       $ 469.8       $ 1,086.6       $ 865.0   
                                   

 

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Segment Operating Profit

(in millions)

 

     Second Quarter Ended     Six Months Ended  
     June 30     June 30  
     2011     2010     2011     2010  

Petroleum additives

   $ 85.6      $ 76.6      $ 166.2      $ 147.0   

Real estate development

     1.8        1.8        3.6        3.5   

All other

     1.0        1.0        1.3        2.0   
                                

Segment operating profit

     88.4        79.4        171.1        152.5   

Corporate, general, and administrative expenses

     (3.6     (4.7     (7.7     (8.9

Interest and financing expenses

     (4.7     (4.3     (9.3     (8.3

Gain (loss) on interest rate swap agreement (a)

     (4.1     (9.7     (3.2     (12.1

Other income (expense), net

     0.4        (0.3     (1.1     (0.3
                                

Income before income taxes

   $ 76.4      $ 60.4      $ 149.8      $ 122.9   
                                

 

(a) The loss on the interest rate swap agreement represents the change, since the beginning of the reporting period, in the fair value of an interest rate swap which we entered into on June 25, 2009. We are not using hedge accounting to record the interest rate swap, and accordingly, any change in the fair value is immediately recognized in earnings.

Segment Depreciation and Amortization

(in millions)

 

     Second Quarter Ended      Six Months Ended  
     June 30      June 30  
     2011      2010      2011      2010  

Petroleum additives

   $ 9.3       $ 7.6       $ 18.2       $ 15.1   

Real estate development

     0.9         1.0         1.9         1.9   

All other and corporate

     0.8         0.7         1.5         1.5   
                                   

Total depreciation and amortization

   $ 11.0       $ 9.3       $ 21.6       $ 18.5   
                                   

 

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4. Pension and Postretirement Benefit Plans

The table below shows cash contributions made during the six months ended June 30, 2011, as well as expected contributions for the year ended December 31, 2011, for both our domestic and foreign pension plans and postretirement benefit plans.

 

     Actual Cash      Expected Cash  
     Contributions for      Contributions for  
     Six Months Ended      Year Ending  
     June 30, 2011      December 31, 2011  
     (in millions)  

Domestic Plans

     

Pension benefits

   $ 11.3       $ 22.6   

Postretirement benefits

   $ 0.9       $ 1.8   

Foreign Plans

     

Pension benefits

   $ 3.3       $ 6.6   

Postretirement benefits

   $ 0.1       $ 0.2   

 

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The tables below present information on periodic benefit cost for our pension and postretirement benefit plans.

 

     Domestic  
     Pension Benefits     Postretirement Benefits  
     Second Quarter Ended June 30  
     2011     2010     2011     2010  
     (in thousands)  

Service cost

   $ 1,691      $ 1,644      $ 354      $ 317   

Interest cost

     2,246        2,117        842        848   

Expected return on plan assets

     (2,836     (2,372     (399     (408

Amortization of prior service cost

     77        32        3        3   

Amortization of net loss (gain)

     797        829        (75     (60
                                

Net periodic benefit cost

   $ 1,975      $ 2,250      $ 725      $ 700   
                                
     Domestic  
     Pension Benefits     Postretirement Benefits  
     Six Months Ended June 30  
     2011     2010     2011     2010  
     (in thousands)  

Service cost

   $ 3,382      $ 3,289      $ 707      $ 635   

Interest cost

     4,493        4,235        1,685        1,696   

Expected return on plan assets

     (5,673     (4,746     (798     (815

Amortization of prior service cost

     153        63        5        5   

Amortization of net loss (gain)

     1,595        1,659        (149     (121
                                

Net periodic benefit cost

   $ 3,950      $ 4,500      $ 1,450      $ 1,400   
                                

 

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     Foreign  
     Pension Benefits     Postretirement Benefits  
     Second Quarter Ended June 30  
     2011     2010     2011      2010  
     (in thousands)  

Service cost

   $ 1,071      $ 744      $ 7       $ 7   

Interest cost

     1,501        1,316        39         37   

Expected return on plan assets

     (1,629     (1,313     0         0   

Amortization of prior service cost

     22        22        0         0   

Amortization of transition (asset) obligation

     0        (10     14         12   

Amortization of net loss

     276        308        16         14   
                                 

Net periodic benefit cost

   $ 1,241      $ 1,067      $ 76       $ 70   
                                 
     Foreign  
     Pension Benefits     Postretirement Benefits  
     Six Months Ended June 30  
     2011     2010     2011      2010  
     (in thousands)  

Service cost

   $ 2,104      $ 1,526      $ 15       $ 13   

Interest cost

     2,950        2,703        77         73   

Expected return on plan assets

     (3,205     (2,690     0         0   

Amortization of prior service cost

     43        43        0         0   

Amortization of transition (asset) obligation

     0        (19     27         25   

Amortization of net loss

     541        633        31         27   
                                 

Net periodic benefit cost

   $ 2,433      $ 2,196      $ 150       $ 138   
                                 

 

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5. Earnings Per Share

Basic and diluted earnings per share are calculated as shown in the table below. Options are not included in the computation of diluted earnings per share when the option exercise price exceeds the average market price of the underlying common share, as the impact on earnings per share would be anti-dilutive. We had no anti-dilutive options that were excluded from the calculation of earnings per share for any period presented.

 

     Second Quarter Ended
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  
     (in thousands, except per-share amounts)  

Basic earnings per share

           

Numerator:

           

Net income

   $ 52,259       $ 39,856       $ 101,848       $ 81,994   
                                   

Denominator:

           

Weighted-average number of shares of common stock outstanding

     13,852         14,796         13,871         14,957   
                                   

Basic earnings per share

   $ 3.77       $ 2.69       $ 7.34       $ 5.48   
                                   

Diluted earnings per share

           

Numerator:

           

Net income

   $ 52,259       $ 39,856       $ 101,848       $ 81,994   
                                   

Denominator:

           

Weighted-average number of shares of common stock outstanding

     13,852         14,796         13,871         14,957   

Shares issuable upon exercise of stock options

     4         32         10         34   
                                   

Total shares

     13,856         14,828         13,881         14,991   
                                   

Diluted earnings per share

   $ 3.77       $ 2.69       $ 7.34       $ 5.47   
                                   

 

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6. Intangibles (net of amortization) and goodwill

The following table provides certain information related to our intangible assets. All of the intangibles relate to the petroleum additives segment.

 

     Identifiable Intangibles  
     June 30
2011
     December 31
2010
 
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 
     (in thousands)  

Amortizing intangible assets

           

Formulas and technology

   $ 91,648       $ 66,623       $ 91,487       $ 64,013   

Contracts

     16,380         10,930         16,380         9,650   

Customer base

     7,064         1,550         7,040         1,276   

Trademarks and trade name

     1,624         202         1,600         133   

Goodwill

     5,212            5,091      
                                   
   $ 121,928       $ 79,305       $ 121,598       $ 75,072   
                                   

Amortization expense was (in millions):

 

•      Second quarter ended June 30, 2011

   $ 2.1   

•      Six months ended June 30, 2011

   $ 4.2   

•      Second quarter ended June 30, 2010

   $ 2.2   

•      Six months ended June 30, 2010

   $ 4.4   

Currently, estimated amortization expense for the remainder of 2011, as well as annual amortization expense related to our intangible assets for the next five years is expected to be (in millions):

 

•      2011

   $ 4.4   

•      2012

   $ 7.4   

•      2013

   $ 7.1   

•      2014

   $ 6.2   

•      2015

   $ 5.8   

•      2016

   $ 1.9   

Generally, we amortize the cost of the customer base intangible by an accelerated method and the cost of the remaining intangible assets by the straight-line method over their estimated economic lives. We generally amortize contracts over 1.5 to 10 years and formulas and technology over 5 to 20 years. Trademarks and the trade name are amortized over 10 years.

 

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7. Long-term Debt

Long-term debt consisted of:

 

     June 30
2011
    December 31
2010
 
     (in thousands)  

Senior notes - 7.125% due 2016

   $ 150,000      $ 150,000   

Foundry Park I mortgage loan - due 2015

     64,935        66,275   

Revolving credit facility

     48,000        4,000   

Line of credit

     2,274        1,494   

Capital lease obligations

     0        144   
                
     265,209        221,913   

Current maturities of long-term debt

     (5,109     (4,369
                
   $ 260,100      $ 217,544   
                

We had outstanding borrowings under our revolving credit facility of $48.0 million at June 30, 2011 at an average interest rate of 3.04%. We had outstanding letters of credit of $6.4 million at June 30, 2011, resulting in the unused portion of the revolving credit facility amounting to $245.6 million. At December 31, 2010, we had outstanding letters of credit of $5.1 million and borrowings of $4.0 million, resulting in the unused portion of the revolving credit facility amounting to $290.9 million. The combined average interest rate for borrowings in 2010 under our existing revolving credit facilities during 2010 was 4.53%.

We were in compliance with all covenants under our debt agreements at June 30, 2011 and December 31, 2010.

 

8. Contractual Commitments and Contingencies

There have been no significant changes in our contractual commitments and contingencies from those reported in our 2010 Annual Report on Form 10-K in Note 18. The information below provides information on certain contractual commitments and contingencies.

Litigation

We are involved in legal proceedings that are incidental to our business and include administrative or judicial actions seeking remediation under environmental laws, such as Superfund. Some of these legal proceedings relate to environmental matters and involve governmental authorities. For further information, see “Environmental” below.

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 financial condition, results of operations, or cash flows.

Environmental

During 2000, the U.S. Environmental Protection Agency (EPA) named us as a potentially responsible party (PRP) under Superfund law for the clean-up of soil and groundwater contamination at the Sauget Area 2 Site in Sauget, Illinois. Without admitting any fact, responsibility, fault, or liability in connection with this site, we are participating with other PRPs in site investigations and feasibility studies. The Sauget Area 2 Site PRPs received notice of

 

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approval from the EPA of their October 2009 Human Health Risk Assessment. Additionally, the PRPs have submitted their Feasibility Study (FS) to the EPA Remedy Review Board. We have accrued our estimated proportional share of the expenses for the FS, as well as our best estimate of our proportional share of the remediation liability proposed in our ongoing discussions and submissions with the agencies involved. The amount currently accrued for this site is not material.

At a former TEL plant site located in Louisiana, we have completed significant environmental remediation, although we will be monitoring and treating the site for an extended period. The accrual for this site was $6.5 million at June 30, 2011 and $6.8 million at December 31, 2010. We based these amounts on the best estimate of future costs discounted at approximately 3% in both 2011 and 2010. An inflation factor is included in the estimate. The undiscounted liability was $8.3 million at June 30, 2011 and $8.7 million at December 31, 2010. The expected payments over the next five years amount to approximately $400 thousand in 2011, $700 thousand in 2012, and $600 thousand for each of the years 2013 through 2015. Expected payments thereafter amount to approximately $5.4 million.

At a plant site in Houston, Texas, we have accruals of $7.4 million at June 30, 2011 and $7.6 million at December 31, 2010 for environmental remediation, dismantling, and decontamination. Included in these amounts are $7.1 million at June 30, 2011 and $7.3 million at December 31, 2010 for remediation. Of the total remediation, $6.7 million at June 30, 2011 and $6.9 million at December 31, 2010 relates to remediation of groundwater and soil. The accruals for this site are discounted at approximately 3% at both June 30, 2011 and December 31, 2010 and include an inflation factor. The undiscounted accrual for this site was $10.7 million at June 30, 2011 and $10.8 million at December 31, 2010. The expected payments over the next five years are approximately $200 thousand in 2011, $500 thousand in 2012, $700 thousand in 2013, $1.6

million in 2014, and $200 thousand in 2015. Expected payments thereafter amount to approximately $7.5 million.

At a Superfund site in Louisiana, we have an accrual of $3.3 million at both June 30, 2011 and December 31, 2010 for environmental remediation. The accrual for this site was discounted at approximately 3% at both June 30, 2011 and December 31, 2010 and included an inflation factor. The undiscounted accrual for this site was $4.2 million at both June 30, 2011 and December 31, 2010. The expected payments over the next five years amount to approximately $300 thousand in 2012, $400 thousand in 2013, and $300 thousand each for years 2014 and 2015. Expected payments thereafter amount to approximately $2.9 million.

The remaining environmental liabilities are not discounted.

We accrue for environmental remediation and monitoring activities for which costs can be reasonably estimated and are probable. These estimates are based on an assessment of the site, available clean-up methods, and prior experience in handling remediation. While we believe we are currently fully 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 were approximately $22.2 million at June 30, 2011 and $22.5 million at December 31, 2010. In addition to the accruals for environmental remediation, we also have accruals for dismantling and decommissioning costs of $500 thousand at both June 30, 2011 and December 31, 2010.

 

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Letters of Credit and Guarantees

We have outstanding guarantees with several financial institutions in the amount of $46.8 million at June 30, 2011. The guarantees are secured by letters of credit, as well as cash collateral. A portion of the guarantees is unsecured. The outstanding letters of credit amounted to $6.4 million at June 30, 2011, all of which were issued under the letter of credit sub-facility of our revolving credit facility. The letters of credit primarily relate to insurance and performance guarantees. The remaining amounts represent additional performance, lease, custom and excise tax guarantees, as well as a cash deposit of $25.6 million related to the Goldman Sachs Bank USA (Goldman Sachs) interest rate swap. The cash deposit is recorded in “Other assets and deferred charges” on the Consolidated Balance Sheets. Expiration dates of the letters of credit and certain guarantees range from 2011 to 2014. Some of the guarantees have no expiration date. We renew letters of credit as necessary.

We cannot estimate the maximum amount of potential liability under the guarantees. However, we accrue for potential liabilities when a future payment is probable and the range of loss can be reasonably estimated.

 

9. Derivatives and Hedging Activities

Accounting Policy for Derivative Instruments and Hedging Activities

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. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. 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.

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We primarily 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 into interest rate swaps to manage our exposure to interest rate movements.

Our foreign operations expose us to fluctuations of foreign exchange rates. These fluctuations may impact the value of our cash receipts and payments as compared to our reporting currency, the U.S. Dollar. To manage this exposure, we sometimes enter into foreign currency forward contracts to minimize currency exposure due to cash flows from foreign operations.

 

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Cash Flow Hedge of Interest Rate Risk

In January 2010, we entered into an interest rate swap to manage our exposure to interest rate movements on the Foundry Park I mortgage loan and to reduce variability in interest expense. Further information on the mortgage loan is in Note 12 in our 2010 Annual Report. We also had an interest rate swap to manage our exposure to interest rate movements on the Foundry Park I construction loan and add stability to capitalized interest expense. The Foundry Park I construction loan interest rate swap matured on January 1, 2010. Both interest rate swaps are designated and qualify as a cash flow hedge. As such, the effective portion of changes in the fair value of the swaps is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of changes in the fair value of the swap is recognized immediately in earnings. We assess the effectiveness of the mortgage loan interest rate swap quarterly by comparing the changes in the fair value of the derivative hedging instrument with the change in present value of the expected future cash flows of the hedged transaction.

The mortgage loan interest rate swap involves the receipt of variable-rate amounts based on LIBOR in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying notional amount. The fixed-rate payments are at a rate of 2.642% for the mortgage loan interest rate swap. The notional amount of the mortgage loan interest rate swap was $68.4 million at origination and approximately $64.9 million at June 30, 2011. The notional amount of the mortgage loan interest rate swap amortizes to approximately $53.7 million over the term of the swap. The amortizing notional amount is necessary to maintain the swap notional at an amount that matches the declining mortgage loan principal balance over the loan term. The mortgage loan interest swap matures on January 29, 2015.

The unrealized loss, net of tax, related to the fair value of the mortgage loan interest rate swap is recorded in accumulated other comprehensive loss in shareholders’ equity on the Consolidated Balance Sheets, and amounted to approximately $1.8 million at June 30, 2011 and $1.5 million at December 31, 2010. Also recorded as a component of accumulated other comprehensive loss in shareholders’ equity on the Consolidated Balance Sheets is the accumulated losses related to the construction loan interest rate swap of approximately $2.6 million, net of tax, at both June 30, 2011 and December 31, 2010. The amount remaining in accumulated other comprehensive loss related to the construction loan interest rate swap is being recognized in the Consolidated Statements of Income over the depreciable life of the office building. Approximately $1 million, net of tax, currently recognized in accumulated other comprehensive loss related to both the construction loan interest rate swap and the mortgage loan interest rate swap is expected to be reclassified into earnings over the next twelve months.

Non-designated Hedges

On June 25, 2009, we entered into an interest rate swap with Goldman Sachs in the notional amount of $97 million and with a maturity date of January 19, 2022 (Goldman Sachs interest rate swap). NewMarket entered into the Goldman Sachs interest rate swap in connection with the termination of a loan application and related rate lock agreement between Foundry Park I and Principal Commercial Funding II, LLC (Principal). When the rate lock agreement was originally executed in 2007, Principal simultaneously entered into an interest rate swap with a third party to hedge Principal’s exposure to fluctuation in the ten-year Treasuries rate. Upon the termination on June 25, 2009 of the rate lock agreement, Goldman Sachs both assumed Principal’s position with the third party and entered into an offsetting interest rate swap with NewMarket. Under the terms of this interest rate swap, NewMarket will make fixed rate payments at 5.3075% and Goldman Sachs will make variable rate payments based on three-month LIBOR. We have collateralized this

 

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exposure through cash deposits posted with Goldman Sachs amounting to $25.6 million at June 30, 2011. This transaction effectively preserves the impact of the original rate lock agreement for the possible application to a future loan of a similar structure.

We do not use hedge accounting for the Goldman Sachs interest rate swap, and therefore, immediately recognize any change in the fair value of this derivative financial instrument in earnings.

*****

The table below presents the fair value of our derivative financial instruments, as well as their classification on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010.

Fair Value of Derivative Instruments

(in thousands)

 

     Asset Derivatives      Liability Derivatives  
     June 30, 2011      December 31, 2010      June 30, 2011      December 31, 2010  
     Balance
Sheet
Location
   Fair Value      Balance
Sheet
Location
   Fair Value      Balance
Sheet
Location
   Fair Value      Balance
Sheet
Location
   Fair Value  

Derivatives Designated as Hedging Instruments

                       

Mortgage loan interest rate swap

      $ 0          $ 0       Accrued
expenses
and Other
noncurrent
liabilities
   $ 3,032       Accrued
expenses
and Other
noncurrent
liabilities
   $ 2,656   
                                               

Derivatives Not Designated as Hedging Instruments

                       

Goldman Sachs interest rate swap

      $ 0          $ 0       Accrued
expenses
and Other
noncurrent
liabilities
   $ 20,202       Accrued
expenses
and Other
noncurrent
liabilities
   $ 19,456   
                                               

The total fair value reflected in the table above includes amounts recorded in accrued expenses of approximately $133 thousand at June 30, 2011 and $136 thousand at December 31, 2010 for the mortgage loan interest rate swap and approximately $2.3 million at June 30, 2011 and $2.2 million at December 31, 2010 for the Goldman Sachs interest rate swap.

 

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The tables below present the effect of our derivative financial instruments on the Consolidated Statements of Income.

Effect of Derivative Instruments on the Consolidated Statements of Income

Designated Cash Flow Hedges

(in thousands)

 

Derivatives in Cash Flow
Hedging Relationship

   Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
   

Location of

Gain (Loss)

Reclassified

from

Accumulated

OCI into

Income

(Effective

Portion)

   Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
   

Location of

Gain (Loss)
Recognized in

Income on

Derivative

(Ineffective

Portion and

Amount
Excluded from
Effectiveness

Testing)

   Amount of Gain (Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
     Second Quarter Ended
June 30
         Second Quarter Ended
June 30
         Second Quarter Ended
June 30
 
     2011     2010          2011     2010          2011      2010  

Mortgage loan interest rate swap

   $ (1,350   $ (2,324   Interest and financing expenses    $ (400   $ (402      $ 0       $ 0   
                                                       

Construction loan interest rate swap

   $ 0      $ 0      Cost of rental    $ (21   $ (21      $ 0       $ 0   
                                                       
     Six Months Ended
June 30
         Six Months Ended
June 30
         Six Months Ended
June 30
 
     2011     2010          2011     2010          2011      2010  

Mortgage loan interest rate swap

   $ (1,172   $ (3,237   Interest and financing expenses    $ (792   $ (686      $ 0       $ 0   
                                                       

Construction loan interest rate swap

   $ 0      $ 0      Cost of rental    $ (42   $ (42      $ 0       $ 0   
                                                       

Effect of Derivative Instruments on the Consolidated Statements of Income

Not Designated Derivatives

(in thousands)

 

Derivatives Not Designated as Hedging Instruments

  

Location of Gain (Loss)

Recognized in Income on

Derivative

   Amount of Gain (Loss) Recognized in Income  on
Derivative
 
          Second Quarter Ended
June  30
    Six Months Ended
June 30
 
          2011     2010     2011     2010  

Goldman Sachs interest rate swap

  

Other expense, net

   $ (4,042   $ (9,705   $ (3,176   $ (12,062
                                   

 

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Credit-risk-related Contingent Features

We have agreements with both of our current derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of indebtedness is accelerated by our lender(s) due to our default on the indebtedness.

As of June 30, 2011, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $22.7 million. We have minimum collateral posting thresholds with one of our derivative counterparties and have posted cash collateral of $25.6 million as of June 30, 2011. If required, we could have settled our obligations under the agreements at their termination value of $22.7 million at June 30, 2011.

 

10. Comprehensive Income and Accumulated Other Comprehensive Loss

The components of comprehensive income consist of the following:

 

     Second Quarter Ended     Six Months Ended  
     June 30     June 30  
     2011     2010     2011     2010  
           (in thousands)        

Net income

   $ 52,259      $ 39,856      $ 101,848      $ 81,994   
                                

Other comprehensive income, net of tax

        

Pension plans and other postretirement benefits adjustments

     1,128        1,138        2,250        2,295   

Tax (expense)

     (399     (394     (796     (793
                                
     729        744        1,454        1,502   
                                

Unrealized gain (loss) on derivative instruments

     (929     (1,900     (337     (2,508

Tax benefit

     361        739        131        976   
                                
     (568     (1,161     (206     (1,532
                                

Foreign currency translation adjustments

     1,337        (6,402     11,096        (14,320

Tax (expense) benefit

     (571     1,577        (1,668     2,415   
                                
     766        (4,825     9,428        (11,905
                                

Other comprehensive income (loss)

     927        (5,242     10,676        (11,935
                                

Comprehensive income

   $ 53,186      $ 34,614      $ 112,524      $ 70,059   
                                

 

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

 

     June 30     December 31  
     2011     2010  
     (in thousands)  

Pension plans and other postretirement benefit adjustments

   $ (50,108   $ (51,562

Accumulated loss on derivative instruments

     (4,357     (4,151

Foreign currency translation adjustments

     (8,679     (18,107
                

Accumulated other comprehensive loss

   $ (63,144   $ (73,820
                

 

11. Fair Value Measurements

The following table provides information on assets and liabilities measured at fair value on a recurring basis. No events occurred during the six months ended June 30, 2011, requiring adjustment to the recognized balances of assets or liabilities, which are recorded at fair value on a nonrecurring basis.

 

     Carrying                              
     Amount in                              
     Consolidated             Fair Value Measurements Using  
     Balance Sheets      Fair Value      Level 1      Level 2      Level 3  
     June 30, 2011  
     (in thousands)  

Cash and cash equivalents

   $ 60,888       $ 60,888       $ 60,888       $ 0       $ 0   

Interest rate swaps liability

   $ 23,234       $ 23,234       $ 0       $ 23,234       $ 0   
     December 31, 2010  
     (in thousands)  

Cash and cash equivalents

   $ 49,192       $ 49,192       $ 49,192       $ 0       $ 0   

Short-term investments

   $ 300       $ 300       $ 300       $ 0       $ 0   

Interest rate swaps liability

   $ 22,112       $ 22,112       $ 0       $ 22,112       $ 0   

We determine the fair value of the derivative instruments shown in the table above by using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.

The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observable market interest rate curves. In determining the fair value measurements, we incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and the counterparties’ nonperformance risk.

 

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Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustment associated with the derivatives utilizes Level 3 inputs. These Level 3 inputs include estimates of current credit spreads to evaluate the likelihood of default by both us and the counterparties to the derivatives. As of June 30, 2011, we have assessed the significance of the impact of the credit valuation adjustment on the overall valuation of our derivatives and have determined that the credit valuation adjustment is not significant to the overall valuation of the derivatives. Accordingly, we have determined that our derivative valuations should be classified in Level 2 of the fair value hierarchy.

We record the value of our long-term debt at historical cost. 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 fair value is categorized as Level 2.

 

     June 30, 2011     December 31, 2010  
     Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Long-term debt, including current maturities

   $ (265,209   $ (276,121   $ (221,913   $ (230,393

 

12. Consolidating Financial Information

The 7.125% senior notes due 2016 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 100% owned domestic restricted subsidiaries. The Guarantor Subsidiaries and the subsidiaries that do not guarantee the senior notes (the Non-Guarantor Subsidiaries) are 100% owned by NewMarket Corporation (the Parent Company). The Guarantor Subsidiaries consist of the following:

 

Ethyl Corporation   Afton Chemical Corporation
Ethyl Asia Pacific LLC   Afton Chemical Asia Pacific LLC
Ethyl Canada Holdings, Inc.   Afton Chemical Canada Holdings, Inc.
Ethyl Export Corporation   Afton Chemical Japan Holdings, Inc.
Ethyl Interamerica Corporation   Afton Chemical Additives Corporation
Ethyl Ventures, Inc.   Afton Chemical Intangibles LLC
Interamerica Terminals Corporation   The Edwin Cooper Corporation
NewMarket Development Corporation   NewMarket Investment Company
NewMarket Services Corporation   Old Town LLC
Foundry Park I, LLC   Foundry Park II, LLC
Gamble’s Hill, LLC   Gamble’s Hill Lab, LLC
Gamble’s Hill Landing, LLC   Gamble’s Hill Third Street, LLC
Gamble’s Hill Tredegar, LLC  

We conduct all of our business and derive essentially 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 Company.

 

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The following sets forth the Consolidating Statements of Income for the second quarter and six months ended June 30, 2011 and June 30, 2010; Consolidating Balance Sheets as of June 30, 2011 and December 31, 2010; and Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010 for the Parent Company, the Guarantor Subsidiaries, and Non-Guarantor Subsidiaries. The financial information is based on our understanding of the SEC’s interpretation and application of Rule 3-10 of the SEC Regulation S-X.

The financial information may not necessarily be indicative of their results of operations or financial positions had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries operated as independent entities. The Parent Company accounts for investments in these subsidiaries using the equity method.

 

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Table of Contents

NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Second Quarter Ended June 30, 2011

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Total
Consolidating
Adjustments
    Consolidated  

Revenue:

           

Net sales - product

   $ 0      $ 224,969      $ 350,696       $ 0      $ 575,665   

Rental revenue

     0        2,858        0         0        2,858   
                                         
     0        227,827        350,696         0        578,523   
                                         

Costs:

           

Cost of goods sold - product

     0        120,299        309,360         0        429,659   

Cost of rental

     0        1,068        0         0        1,068   
                                         
     0        121,367        309,360         0        430,727   
                                         

Gross profit

     0        106,460        41,336         0        147,796   

Selling, general, and administrative expenses

     1,145        27,946        8,228         0        37,319   

Research, development, and testing expenses

     0        18,939        6,440         0        25,379   
                                         

Operating (loss) profit

     (1,145     59,575        26,668         0        85,098   
                                         

Interest and financing expenses

     3,640        308        745         0        4,693   

Other (expense) income, net

     (4,031     (2     46         0        (3,987
                                         

(Loss) income before income tax (benefit) expense and equity income of subsidiaries

     (8,816     59,265        25,969         0        76,418   

Income tax (benefit) expense

     (3,573     22,459        5,273         0        24,159   

Equity income of subsidiaries

     57,502        0        0         (57,502     0   
                                         

Net income

   $ 52,259      $ 36,806      $ 20,696       $ (57,502   $ 52,259   
                                         

 

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Table of Contents

NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Second Quarter Ended June 30, 2010

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Total
Consolidating
Adjustments
    Consolidated  

Revenue:

           

Net sales - product

   $ 0      $ 184,866      $ 282,120       $ 0      $ 466,986   

Rental revenue

     0        2,855        0         0        2,855   
                                         
     0        187,721        282,120         0        469,841   
                                         

Costs:

           

Cost of goods sold - product

     0        83,756        252,818         0        336,574   

Cost of rental

     0        1,066        0         0        1,066   
                                         
     0        84,822        252,818         0        337,640   
                                         

Gross profit

     0        102,899        29,302         0        132,201   

Selling, general, and administrative expenses

     1,827        25,085        9,281         0        36,193   

Research, development, and testing expenses

     0        16,972        5,092         0        22,064   
                                         

Operating (loss) profit

     (1,827     60,842        14,929         0        73,944   
                                         

Interest and financing expenses

     3,183        1,022        109         0        4,314   

Other (expense) income, net

     (9,687     (152     629         0        (9,210
                                         

(Loss) income before income tax (benefit) expense and equity income of subsidiaries

     (14,697     59,668        15,449         0        60,420   

Income tax (benefit) expense

     (3,671     19,679        4,556         0        20,564   

Equity income of subsidiaries

     50,882        0        0         (50,882     0   
                                         

Net income

   $ 39,856      $ 39,989      $ 10,893       $ (50,882   $ 39,856   
                                         

 

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Table of Contents

NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Six Months Ended June 30, 2011

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Total
Consolidating
Adjustments
    Consolidated  

Revenue:

           

Net sales - product

   $ 0      $ 417,920      $ 662,970       $ 0      $ 1,080,890   

Rental revenue

     0        5,716        0         0        5,716   
                                         
     0        423,636        662,970         0        1,086,606   
                                         

Costs:

           

Cost of goods sold - product

     0        249,472        546,238         0        795,710   

Cost of rental

     0        2,136        0         0        2,136   
                                         
     0        251,608        546,238         0        797,846   
                                         

Gross profit

     0        172,028        116,732         0        288,760   

Selling, general, and administrative expenses

     2,316        54,768        18,659         0        75,743   

Research, development, and testing expenses

     0        37,867        11,973         0        49,840   
                                         

Operating (loss) profit

     (2,316     79,393        86,100         0        163,177   

Interest and financing expenses

     7,187        594        1,557         0        9,338   

Other (expense) income, net

     (4,140     (29     115         0        (4,054
                                         

(Loss) income before income tax (benefit) expense and equity income of subsidiaries

     (13,643     78,770        84,658         0        149,785   

Income tax (benefit) expense

     (5,685     32,616        21,006         0        47,937   

Equity income of subsidiaries

     109,806        0        0         (109,806     0   
                                         

Net income

   $ 101,848      $ 46,154      $ 63,652       $ (109,806   $ 101,848   
                                         

 

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Table of Contents

NewMarket Corporation and Subsidiaries

Consolidating Statements of Income

Six Months Ended June 30, 2010

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Total
Consolidating
Adjustments
    Consolidated  

Revenue:

           

Net sales - product

   $ 0      $ 364,951      $ 494,300       $ 0      $ 859,251   

Rental revenue

     0        5,716        0         0        5,716   
                                         
     0        370,667        494,300         0        864,967   
                                         

Costs:

           

Cost of goods sold - product

     0        163,046        447,156         0        610,202   

Cost of rental

     0        2,156        0         0        2,156   
                                         
     0        165,202        447,156         0        612,358   
                                         

Gross profit

     0        205,465        47,144         0        252,609   

Selling, general, and administrative expenses

     2,798        49,395        14,574         0        66,767   

Research, development, and testing expenses

     0        32,695        10,452         0        43,147   
                                         

Operating (loss) profit

     (2,798     123,375        22,118         0        142,695   

Interest and financing expenses

     6,262        1,747        254         0        8,263   

Other (expense) income, net

     (12,024     (152     655         0        (11,521
                                         

(Loss) income before income tax (benefit) expense and equity income of subsidiaries

     (21,084     121,476        22,519         0        122,911   

Income tax (benefit) expense

     (8,799     41,290        8,426         0        40,917   

Equity income of subsidiaries

     94,279        0        0         (94,279     0   
                                         

Net income

   $ 81,994      $ 80,186      $ 14,093       $ (94,279   $ 81,994   
                                         

 

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Table of Contents

NewMarket Corporation and Subsidiaries

Consolidating Balance Sheets

June 30, 2011

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Total
Consolidating
Adjustments
    Consolidated  

ASSETS

          

Cash and cash equivalents

   $ 17      $ 12,288      $ 48,583      $ 0      $ 60,888   

Trade and other accounts receivable, net

     0        109,657        211,790        (7,629     313,818   

Amounts due from affiliated companies

     391,070        601,158        16,819        (1,009,047     0   

Inventories

     0        114,036        213,808        0        327,844   

Deferred income taxes

     2,806        2,100        773        0        5,679   

Prepaid expenses and other current assets

     327        4,208        16,534        0        21,069   
                                        

Total current assets

     394,220        843,447        508,307        (1,016,676     729,298   
                                        

Amounts due from affiliated companies

     0        64,492        0        (64,492     0   

Property, plant and equipment, at cost

     0        798,734        232,802        0        1,031,536   

Less accumulated depreciation and amortization

     0        546,191        130,643        0        676,834   
                                        

Net property, plant and equipment

     0        252,543        102,159        0        354,702   
                                        

Investment in consolidated subsidiaries

     884,217        0        0        (884,217     0   

Prepaid pension cost

     0        2,694        9,884        0        12,578   

Deferred income taxes

     31,009        0        0        (13,821     17,188   

Other assets and deferred charges

     32,096        17,490        2,651        0        52,237   

Intangibles (net of amortization) and goodwill

     0        32,758        9,865        0        42,623   
                                        

Total assets

   $ 1,341,542      $ 1,213,424      $ 632,866      $ (1,979,206   $ 1,208,626   
                                        

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Accounts payable

   $ 5,774      $ 78,380      $ 48,777      $ (5,768   $ 127,163   

Accrued expenses

     8,497        35,489        20,689        0        64,675   

Dividends payable

     7,108        0        0        0        7,108   

Book overdraft

     0        9,821        0        0        9,821   

Amounts due to affiliated companies

     476,303        436,742        96,002        (1,009,047     0   

Long-term debt, current portion

     0        2,835        2,274        0        5,109   

Income taxes payable

     0        0        31,307        (1,861     29,446   
                                        

Total current liabilities

     497,682        563,267        199,049        (1,016,676     243,322   
                                        

Long-term debt

     198,000        62,100        0        0        260,100   

Amounts due to affiliated companies

     0        0        64,492        (64,492     0   

Other noncurrent liabilities

     83,172        39,062        20,282        0        142,516   

Deferred income taxes payable

     0        9,563        4,258        (13,821     0   
                                        

Total liabilities

     778,854        673,992        288,081        (1,094,989     645,938   
                                        

Shareholders’ equity:

          

Common stock and paid-in capital

     0        385,870        73,734        (459,604     0   

Accumulated other comprehensive loss

     (63,144     (12,549     (27,417     39,966        (63,144

Retained earnings

     625,832        166,111        298,468        (464,579     625,832   
                                        

Total shareholders’ equity

     562,688        539,432        344,785        (884,217     562,688   
                                        

Total liabilities and shareholders’ equity

   $ 1,341,542      $ 1,213,424      $ 632,866      $ (1,979,206   $ 1,208,626   
                                        

 

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NewMarket Corporation and Subsidiaries

Consolidating Balance Sheets

December 31, 2010

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Total
Consolidating
Adjustments
    Consolidated  

ASSETS

          

Cash and cash equivalents

   $ 17      $ 7,717      $ 41,458      $ 0      $ 49,192   

Short-term investments

     300        0        0        0        300   

Trade and other accounts receivable, net

     4,264        102,158        152,269        (943     257,748   

Amounts due from affiliated companies

     0        135,736        35,974        (171,710     0   

Inventories

     0        95,383        177,832        0        273,215   

Deferred income taxes

     2,805        3,332        739        0        6,876   

Prepaid expenses and other current assets

     5,455        7,746        2,243        0        15,444   
                                        

Total current assets

     12,841        352,072        410,515        (172,653     602,775   
                                        

Amounts due from affiliated companies

     0        57,470        0        (57,470     0   

Property, plant and equipment, at cost

     0        787,721        200,459        0        988,180   

Less accumulated depreciation and amortization

     0        535,241        118,963        0        654,204   
                                        

Net property, plant and equipment

     0        252,480        81,496        0        333,976   
                                        

Investment in consolidated subsidiaries

     765,787        0        0        (765,787     0   

Prepaid pension cost

     0        660        7,937        0        8,597   

Deferred income taxes

     33,142        0        0        (11,168     21,974   

Other assets and deferred charges

     28,157        19,052        1,684        0        48,893   

Intangibles (net of amortization) and goodwill

     0        36,795        9,731        0        46,526   
                                        

Total assets

   $ 839,927      $ 718,529      $ 511,363      $ (1,007,078   $ 1,062,741   
                                        

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Accounts payable

   $ 219      $ 68,042      $ 40,989      $ 0      $ 109,250   

Accrued expenses

     11,253        41,535        18,770        0        71,558   

Dividends payable

     5,304        0        0        0        5,304   

Book overdraft

     0        1,063        0        0        1,063   

Amounts due to affiliated companies

     88,850        0        82,860        (171,710     0   

Long-term debt, current portion

     0        2,875        1,494        0        4,369   

Income taxes payable

     0        0        15,786        (943     14,843   
                                        

Total current liabilities

     105,626        113,515        159,899        (172,653     206,387   
                                        

Long-term debt

     154,000        63,544        0        0        217,544   

Amounts due to affiliated companies

     0        0        57,470        (57,470     0   

Other noncurrent liabilities

     88,661        48,331        21,346        (11,168     147,170   
                                        

Total liabilities

     348,287        225,390        238,715        (241,291     571,101   
                                        

Shareholders’ equity:

          

Common stock and paid-in capital

     0        385,870        73,734        (459,604     0   

Accumulated other comprehensive loss

     (73,820     (14,159     (35,900     50,059        (73,820

Retained earnings

     565,460        121,428        234,814        (356,242     565,460   
                                        

Total shareholders’ equity

     491,640        493,139        272,648        (765,787     491,640   
                                        

Total liabilities and shareholders’ equity

   $ 839,927      $ 718,529      $ 511,363      $ (1,007,078   $ 1,062,741   
                                        

 

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NewMarket Corporation and Subsidiaries

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2011

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Total
Consolidating
Adjustments
    Consolidated  

Cash provided from (used in) operating activities

   $ 5,069      $ (19,009   $ 52,355      $ 0      $ 38,415   
                                        

Cash flows from investing activities:

          

Capital expenditures

     0        (11,916     (22,874     0        (34,790

Deposits for interest rate swap

     (20,274     0        0        0        (20,274

Return of deposits for interest rate swap

     17,890        0        0        0        17,890   

Payments on settlement of interest rate swap

     (2,574     0        0        0        (2,574

Receipts from settlement of interest rate swap

     145        0        0        0        145   

Proceeds from sale of short-term investment

     300        0        0        0        300   

Increase in intercompany loans

     (3,616     (5,005     0        8,621        0   

Cash dividends from subsidiaries

     0        28,277        0        (28,277     0   
                                        

Cash provided from (used in) investing activities

     (8,129     11,356        (22,874     (19,656     (39,303
                                        

Cash flows from financing activities:

          

Net borrowings under revolving credit agreement

     44,000        0        0        0        44,000   

Repayment of Foundry Park I mortgage loan

     0        (1,340     0        0        (1,340

Borrowing under (repayment of) line of credit

     0        0        780        0        780   

Repurchases of common stock

     (31,512     0        0        0        (31,512

Dividends paid

     (7,301     0        (28,277     28,277        (7,301

Change in book overdraft, net

     0        8,758        0        0        8,758   

Debt issuance costs

     (3,233     0        0        0        (3,233

Proceeds from exercise of stock options

     70        0        0        0        70   

Excess tax benefits from stock-based payment arrangements

     1,036        0        0        0        1,036   

Payments on capital lease

     0        (144     0        0        (144

Financing from affiliated companies

     0        3,616        5,005        (8,621     0   
                                        

Cash provided from (used in) financing activities

     3,060        10,890        (22,492     19,656        11,114   
                                        

Effect of foreign exchange on cash and cash equivalents

     0        1,334        136        0        1,470   
                                        

Increase (decrease) in cash and cash equivalents

     0        4,571        7,125        0        11,696   

Cash and cash equivalents at beginning of year

     17        7,717        41,458        0        49,192   
                                        

Cash and cash equivalents at end of period

   $ 17      $ 12,288      $ 48,583      $ 0      $ 60,888   
                                        

 

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NewMarket Corporation and Subsidiaries

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2010

(in thousands)

 

           Guarantor     Non-Guarantor     Total
Consolidating
       
     Parent     Subsidiaries     Subsidiaries     Adjustments     Consolidated  

Cash (used in) provided from operating activities

   $ (90,718   $ 170,444      $ (6,563   $ 0      $ 73,163   
                                        

Cash flows from investing activities:

          

Capital expenditures

     0        (10,972     (7,064     0        (18,036

Deposits for interest rate swap

     (18,890     0        0        0        (18,890

Return of deposits for interest rate swap

     7,420        0        0        0        7,420   

Acquisition of business (net of cash acquired of $1.8 million in 2010)

     0        0        (41,970     0        (41,970

Increase in intercompany loans

     0        (45,454     0        45,454        0   

Cash dividends from subsidiaries

     134,433        0        0        (134,433     0   
                                        

Cash provided from (used in) investing activities

     122,963        (56,426     (49,034     (88,979     (71,476
                                        

Cash flows from financing activities:

          

Net borrowings under revolving credit agreement

     18,000        0        0        0        18,000   

Repayment of Foundry Park I mortgage loan

     0        (834     0        0        (834

Repayment of Foundry Park I construction loan

     0        (99,102     0        0        (99,102

Borrowing under Foundry Park mortgage loan

     0        68,400        0        0        68,400   

Repurchase of common stock

     (79,220     0        0        0        (79,220

Dividends paid

     (11,037     (134,433     0        134,433        (11,037

Change in book overdraft, net

     0        1,565        0        0        1,565   

Debt issuance costs

     0        (1,524     0        0        (1,524

Payment for financed intangible asset

     0        (500     0        0        (500

Proceeds from exercise of stock options

     21        0        0        0        21   

Payments on capital lease

     0        (411     0        0        (411

Financing from affiliated companies

     0        0        43,800        (43,800     0   

Repayment of intercompany note payable

     0        0        1,654        (1,654     0   
                                        

Cash (used in) provided from financing activities

     (72,236     (166,839     45,454        88,979        (104,642
                                        

Effect of foreign exchange on cash and cash equivalents

     0        (1,396     (874     0        (2,270
                                        

Increase (decrease) in cash and cash equivalents

     (39,991     (54,217     (11,017     0        (105,225

Cash and cash equivalents at beginning of year

     40,008        62,203        49,620        0        151,831   
                                        

Cash and cash equivalents at end of period

   $ 17      $ 7,986      $ 38,603      $ 0      $ 46,606   
                                        

 

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13. Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). ASU 2011-04 results in common fair value measurement, as well as disclosure requirements, in U.S. GAAP and IFRS. The amendments clarify guidance on measuring fair value, but do not require any additional fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. We do not expect ASU 2011-04 will have a significant impact on our financial statements.

In June 2011, FASB issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous consolidated statement of comprehensive income or in two separate but consecutive consolidated statement of income and consolidated statement of comprehensive income. The option to present comprehensive income as part of the consolidated statement of stockholders’ equity has been eliminated. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. We are currently evaluating ASU 2011-05 and will modify our financial statements beginning with our March 31, 2012 Quarterly Report on Form 10-Q to adopt the requirements.

 

14. Subsequent Events

On July 18, 2011, our Board of Directors declared a quarterly dividend in the amount of 60 cents per share on our common stock. The dividend is payable October 1, 2011 to shareholders of record at the close of business on September 15, 2011.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion 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,” “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: availability of raw materials and transportation systems; supply disruptions at single-sourced facilities; ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; hazards common to chemical businesses; occurrence or threat of extraordinary events, including natural disasters and terrorist attacks; competition from other manufacturers; sudden or sharp raw materials price increases; gain or loss of significant customers; risks related to operating outside of the United States; the impact of fluctuations in foreign exchange rates; political, economic, and regulatory factors concerning our products; future governmental regulation; resolution of environmental liabilities or legal proceedings; inability to complete recent or future acquisitions or successfully integrate recent or future acquisitions into our business and other factors detailed from time to time in the reports that NewMarket files with the Securities and Exchange Commission, including the risk factors in Item 1A, “Risk Factors” of our 2010 Annual Report, which is available to shareholders upon request.

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, you should keep in mind that the events described in any forward-looking statement, made in this discussion or elsewhere, might not occur.

Overview

Operations during the first six months 2011 continued to generate strong results with increased net sales, operating profit, and product shipments in our petroleum additives segment over six months 2010. During six months 2011, we repurchased 217,073 shares of our common stock for $28.2 million. Also, our working capital position improved during six months 2011 and we ended June 2011 with $48 million drawn on the $300 million revolving credit facility.

 

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Results of Operations

Revenue

Our consolidated revenue for the second quarter 2011 amounted to $578.5 million, representing an increase of approximately 23% from the 2010 second quarter level of $469.8 million. Similarly, six months consolidated revenue increased 26% from $865.0 million for 2010 to $1.1 billion for 2011. The table below shows our revenue by segment.

Consolidated Revenue by Segment

(in millions)

 

     Second Quarter Ended
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  

Petroleum additives

   $ 572.8       $ 464.9       $ 1,075.5       $ 854.3   

Real estate development

     2.8         2.9         5.7         5.7   

All other

     2.9         2.0         5.4         5.0   
                                   

Consolidated revenue

   $ 578.5       $ 469.8       $ 1,086.6       $ 865.0   
                                   

Petroleum Additives Segment

Petroleum additives net sales for the second quarter 2011 of $572.8 million increased $107.9 million, or approximately 23%, from $464.9 million for the second quarter 2010. The increase in sales reflects higher total product shipments of 11%. The increase in shipments was across all product lines, but primarily in the lubricant additives product line. Selling prices, as well as the impact from foreign currency, were also favorable when comparing the two second quarter periods. When comparing the two periods, the U.S. Dollar weakened against the major currencies in which we conduct business, including the Euro and Pound Sterling, resulting in a favorable foreign currency impact on revenue from sales.

Six months 2011 petroleum additive net sales of $1.1 billion were approximately 26% higher than six months 2010. The increase between the two six months periods reflects a 14% increase in product shipments. The increase in shipments included the benefit of Polartech shipments for the full six months 2011 and was predominantly in the lubricant additives product line. Increased selling prices and a favorable foreign currency impact also contributed to the higher petroleum additives net sales when comparing the six months periods between the two years.

 

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The table below details the approximate components, in millions, of the increase between the second quarter and six months of the 2011 and 2010 periods.

 

     Second
Quarter
     Six
Months
 
     (in millions)  

Period ended June 30, 2010

   $ 464.9       $ 854.3   

Increase in shipments, including changes in product mix

     47.3         132.8   

Increase in selling prices, including changes in customer mix

     47.5         75.2   

Increase due to foreign currency

     13.1         13.2   
                 

Period ended June 30, 2011

   $ 572.8       $ 1,075.5   
                 

Real Estate Development Segment

The revenue reflected in the table above for both second quarter and six months 2011 and 2010 for the real estate development segment represents the rental of an office building, which was constructed by Foundry Park I.

All Other

The “All other” category includes the operations of the TEL business and certain contract manufacturing performed by Ethyl.

Segment Operating Profit

NewMarket evaluates the performance of the petroleum additives business and the real estate development business based on segment operating profit. NewMarket Services Corporation (NewMarket Services) departments and other expenses are charged to NewMarket and each subsidiary pursuant to service 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 second quarter and six months ended June 30, 2011 and June 30, 2010.

Segment Operating Profit

(in millions)

 

     Second Quarter Ended
June 30
     Six Months Ended
June 30
 
     2011      2010      2011      2010  

Petroleum additives

   $ 85.6       $ 76.6       $ 166.2       $ 147.0   
                                   

Real estate development

   $ 1.8       $ 1.8       $ 3.6       $ 3.5   
                                   

All other

   $ 1.0       $ 1.0       $ 1.3       $ 2.0   
                                   

 

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Petroleum Additives Segment

The petroleum additives operating profit increased $9.0 million when comparing second quarter 2011 to second quarter 2010 and $19.2 million when comparing six months 2011 to six months 2010. When compared to 2010 operating profit levels, both the second quarter 2011 and the six months 2011 results are higher across the lubricant additives product line, but lower across the fuel additives product line.

Substantially increased product shipments, as well as higher selling prices and the benefit of a favorable foreign currency impact, as discussed in the Revenue section above, were significant favorable factors in operating profit for both the second quarter and six months 2011 as compared to the same 2010 periods. The inclusion of the Polartech acquisition for the full six months in 2011 also contributed to the improved operating results. Partially offsetting these favorable factors on operating profit, were unfavorable effects from increased raw material costs, as well as planned additional spending in selling, general, and administrative expenses (SG&A) and research, development, and testing expenses (R&D). In response to the rising raw material costs, we have been implementing selling price increases.

Our SG&A, together with R&D, were approximately $6.5 million, or 12.5%, higher for the second quarter 2011 as compared to second quarter 2010 and approximately $17.3 million, or 17.6%, higher for six months 2011 as compared to six months 2010. In 2011, SG&A increased approximately $3.2 million, or 10.6%, for the second quarter and $10.6 million, or 19.2%, for six months over 2010 levels. The increase for both the second quarter and six months 2011 over the same 2010 periods primarily reflects higher personnel-related costs and professional fees. The increase for six months 2011 over six months 2010 also included the result of certain growth-related costs, largely reflecting the inclusion of the Polartech operations for the full six months in 2011. R&D increased approximately $3.3 million, or 15.0%, for second quarter 2011 and $6.7 million, or 15.5%, for six months 2011 when compared to the same 2010 periods. We continue to invest in SG&A and R&D to support our customers’ programs and to develop the technology required to remain a leader in this industry.

The following discussion references the Consolidated Financial Statements beginning on page 3 of this Quarterly Report on Form 10-Q.

Interest and Financing Expenses

Interest and financing expenses were $4.7 million for second quarter 2011 and $4.3 million for second quarter 2010. Six months 2011 amounted to $9.3 million, while six months 2010 was $8.3 million.

The increase in interest and financing expenses between both the second quarter 2011 and six months 2011 as compared to the same periods for 2010 was primarily related to higher average outstanding debt on the revolving credit facility during 2011, partially offset by a lower average interest rate as compared to the 2010 periods.

Other Expense, Net

Other expense, net for second quarter 2011 was $4.0 million, while second quarter 2010 was $9.2 million. The amount for six months 2011 was $4.1 million, while six months 2010 was $11.5 million. The six months 2011 includes $1.0 million expense related to the consent we obtained in January 2011 from the holders of the senior notes to modify the formula for calculating the capacity under the senior notes to make certain restricted payments. The remaining amounts for all periods in both 2011 and 2010 primarily reflect the loss on a derivative instrument representing an interest rate swap recorded at fair value through profit and loss. See Note 9 for additional information on the interest rate swap.

 

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Income Tax Expense

Income tax expense was $24.2 million for second quarter 2011 and $20.6 million for second quarter 2010. The effective tax rate was 31.6% for second quarter 2011, while second quarter 2010 was 34.0%. The increase in income before income tax expense resulted in an increase of $5.4 million in income taxes, while the lower effective tax rate in 2011 as compared to 2010 resulted in a decrease of $1.8 million in income tax expense when comparing the two second quarter periods.

Income tax expense was $47.9 million for six months 2011 and $40.9 million for six months 2010. The effective tax rate was 32.0% for six months 2011 and 33.3% for six months 2010. The increase in income before income tax expense resulted in an increase of $8.9 million in income taxes, while the lower effective tax rate in 2011 as compared to 2010 resulted in a decrease of approximately $1.9 million in income taxes when comparing the six months 2011 and 2010 periods.

The primary reason for the lower effective tax rate in the second quarter and six months 2011 periods is due to the inclusion of the R&D credit in the current year, which was not available for the 2010 periods. Also, both current year periods include tax benefits due to foreign exchange fluctuations on previously taxed income, while both periods in 2010 included non-deductible expenses related to the Polartech acquisition.

Cash Flows, Financial Condition, and Liquidity

Cash and cash equivalents at June 30, 2011 were $60.9 million, which was an increase of $11.7 million since December 31, 2010 and included a $1.5 million favorable impact from foreign currency translation.

We expect that cash from operations, together with borrowings available under our revolving credit facility, will continue to be sufficient to cover our operating expenses for the foreseeable future.

Cash Flows – Operating Activities

Cash flows provided from operating activities for the six months 2011 were $38.4 million and included a decrease of $84.7 million due to higher working capital levels, including higher accounts receivable and inventories, as well as lower accrued expenses partially offset by higher accounts payable and income taxes payable. The increase in accounts receivable is primarily due to higher sales levels when comparing the 2011 period with the fourth quarter 2010. The increase in inventories reflects increased quantities at certain locations to respond to demand for our products, as well as higher priced inventory at certain locations. The reduction in accrued expenses primarily reflects payments made during 2011 related to stock repurchased at the end of 2010 and customer rebates. The fluctuation in accounts payable is from normal differences in timing of payments and higher raw material costs, while the increase in income taxes payable reflects taxes due on earnings, which will be paid during 2011.

Including cash and the current portion of long-term debt, we had working capital of $486.0 million at June 30, 2011 and $396.4 million at December 31, 2010. The current ratio was 3.00 to 1 at June 30, 2011 and 2.92 to 1 at December 31, 2010.

 

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Cash Flows – Investing Activities

Cash used in investing activities was $39.3 million during six months 2011 and included $34.8 million for capital expenditures. Also included in investing activities was a net deposit of $2.4 million and a net settlement payment of $2.4 million related to the Goldman Sachs interest rate swap. Further information on the interest rate swap is discussed in Note 9. We estimate our total capital spending during 2011 will be approximately $55 million to $60 million. We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our $300 million revolving credit facility.

Cash Flows – Financing Activities

Cash provided from financing activities during six months 2011 amounted to $11.1 million. We borrowed an additional $44.0 million under our revolving credit facility during the six months 2011 and incurred $3.2 million of debt issuance costs related to the consents we obtained from the senior note holders related to the change in the formula for calculating the capacity to make restricted payments under the senior notes. In addition, we paid $31.5 million for the repurchase of common stock. We also paid $7.3 million to fund dividends during six months 2011, with the remaining amount for the July 1 dividend being funded on July 1, 2011.

We had total long-term debt, including the current portion, of $265.2 million at June 30, 2011, representing an increase of approximately $43.3 million in our total debt since December 31, 2010. The increase resulted from borrowing an additional $44.0 million under the revolving credit facility, as well as $800 thousand under a foreign short-term line of credit. These borrowings were partially offset by principal payments of approximately $1.4 million on the mortgage loan, as well as $100 thousand on capital leases.

At June 30, 2011, in addition to the revolving credit facility and the Foundry Park I mortgage loan, which are discussed below, we had outstanding senior notes in the aggregate principal amount of $150 million that bear interest at a fixed rate of 7.125% and are due in 2016. One of our subsidiaries in India also has a short-term line of credit of 110 million Rupees for working capital purposes with an outstanding balance of $2.3 million at June 30, 2011.

At June 30, 2011, we also had a $300 million multicurrency revolving credit facility, with a $100 million sublimit for multicurrency borrowings and a $100 million sublimit for letters of credit. The agreement includes an expansion feature, which allows us, subject to certain conditions, to request to increase the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $150 million. Borrowings bear interest at variable rates. The facility matures on November 12, 2015. At June 30, 2011, we had $48.0 million of outstanding borrowings under the revolving credit facility. We had outstanding letters of credit of $6.4 million at June 30, 2011, resulting in the unused portion of the revolver amounting to $245.6 million.

Both the senior notes and the revolving credit facility contain covenants, representations, and events of default that management considers typical of credit agreements of this nature. We were in compliance with all covenants under both the senior notes and the revolving credit facility as of both June 30, 2011 and December 31, 2010.

The more restrictive and significant of the covenants under the senior notes include a minimum fixed charge ratio of 2.00, as well as a limitation on restricted payments, as defined in the agreement. Our fixed charge coverage ratio was 20.06 at June 30, 2011 and 19.46 at December 31, 2010 under the senior notes. In addition, we would have been permitted to make additional restricted payments in the amount of approximately $159 million at June 30, 2011 and $50 million at December 31, 2010 under the senior notes. The increase in the capacity for restricted payments

 

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between December 31, 2010 and June 30, 2011 resulted from the January 2011 consents obtained from the holders of the senior notes allowing for a modification in the formula for calculating permitted restricted payments.

The more restrictive and significant financial covenants under the revolving credit facility include:

 

   

An interest coverage ratio of no less than 3.00; and

 

   

A leverage ratio of no more than 3.00.

At June 30, 2011, the interest coverage ratio was 16.55 and the leverage ratio was 0.83, while at December 31, 2010 the interest coverage ratio was 16.50 and the leverage ratio was 0.74.

As a percentage of total capitalization (total debt and shareholders’ equity), our total debt percentage increased from 31.1% at the end of 2010 to 32.0% at June 30, 2011. The change in the percentage was primarily the result of the increase in debt, partially offset by an increase in shareholders’ equity. The increase in shareholders’ equity reflects our earnings, partially offset by the impact of dividend payments and the repurchase of our common stock. Normally, we repay any outstanding long-term debt with cash from operations or refinancing activities.

Foundry Park I Mortgage Loan Agreement and Interest Rate Swap

On January 28, 2010, Foundry Park I entered into a mortgage loan agreement in the amount of $68.4 million. The loan, which is collateralized by the Foundry Park I office building, is for a period of five years, with two thirteen-month extension options. NewMarket Corporation is fully guaranteeing the loan. The mortgage loan bears interest at a variable rate of LIBOR plus a margin of 400 basis points, with a minimum LIBOR of 200 basis points. Concurrently with the closing of the mortgage loan, Foundry Park I obtained an interest rate swap to effectively convert the variable interest rate of the loan to a fixed interest rate by setting LIBOR at 2.642% for five years. The interest rate swap is discussed in Note 9. Principal payments on the loan are being made monthly based on a 15-year amortization schedule, with all remaining amounts due in January 2015, unless we exercise the extension option.

Critical Accounting Policies and Estimates

This report, as well as the 2010 Annual Report, includes a discussion of our accounting principles, as well as methods and estimates used in the preparation of our financial statements. We believe these discussions and financial statements fairly represent the financial position and operating results of our company in all material respects. The purpose of this portion of our discussion is to further emphasize some of the more critical areas where a significant change in facts and circumstances in our operating and financial environment might cause a change in reported financial results.

Intangibles (Net of Amortization) and Goodwill

We have certain identifiable intangibles, as well as goodwill, amounting to $42.6 million at June 30, 2011. These intangibles relate to our petroleum additives business and, except for the goodwill, are being amortized over periods with up to approximately twenty years of remaining life. We continue to assess the market related to these intangibles, as well as their specific values, and have concluded the values and amortization periods are appropriate. We also evaluate these intangibles for any potential impairment when significant events or circumstances occur that might impair the value of these assets. These evaluations continue to support the value at which these identifiable intangibles are carried on our financial statements. However, if conditions were to substantially deteriorate in this market, it could possibly cause a reduction in the periods of the amortization charge or result in a noncash write-off of a portion of the intangibles’ carrying value. A reduction in the amortization period would have no effect on cash flows. We do not anticipate such a change in the market conditions.

 

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Environmental and Legal Proceedings

We believe our environmental accruals are appropriate for the exposures and regulatory guidelines under which we currently operate. 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.

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 materially adverse effects on our results of operations, financial condition, or cash flows as a result of any pending or threatened proceeding.

Pension Plans and Other Postretirement Benefits

We use assumptions to record the impact of the pension and postretirement plans in the financial statements. These assumptions include the discount rate, expected long-term rate of return on plan assets, rate of compensation increase, and health care cost trend rate. A change in any one of these assumptions could result in different results for the plans. We develop these assumptions after considering available information that we deem relevant. Information is provided on the pension and postretirement plans in Note 19 of the 2010 Annual Report. In addition, further disclosure on the effect of changes in these assumptions is provided in the “Financial Position and Liquidity” section of Part II, Item 7 of the 2010 Annual Report.

Income Taxes

We file consolidated U.S. federal income and both consolidated and individual state income tax returns, as well as individual foreign income tax returns, under which assumptions may be made to determine the deductibility of certain costs. We make estimates related to the impact of tax positions taken on our financial statements when we believe the tax position is more likely than not to be upheld on audit. In addition, we make certain assumptions in the determination of the estimated future recovery of deferred tax assets.

Recently Issued Accounting Pronouncements

For a full discussion of the more significant pronouncements which may impact our financial statements, see Note 13.

Outlook

We are very pleased with the performance of our business during the first half of 2011. Our businesses are running well, demand was strong and our employees continue to focus on providing the goods and services our customers expect from NewMarket. The normal business challenges continue to keep our teams busy, but we are confident those challenges will be met and handled successfully. The industry dynamics remained unchanged during the first half of the year, and we see no change in the near term. We have begun to see some signs of a softening of demand. It is too early to know the cause of this, but it is not unusual given such a strong first half of the year and rising costs. We look forward to a successful and profitable 2011.

Our business continues to generate significant amounts of cash beyond what is necessary for the expansion and growth of our current product lines. We regularly review the many internal opportunities which we have to utilize this cash, both from a geographical and product line point of view. We have increased our efforts in investigating potential acquisitions as both a use for this cash and to generate shareholder value. Our primary focus in the acquisition area remains on the

 

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petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return on our investment while minimizing risk. We remain focused on this strategy and will evaluate any future opportunities. Nonetheless, we are patient in this pursuit and intend to make the right acquisition when the opportunity arises. Until an acquisition materializes, we will build cash on our balance sheet and will continue to evaluate all alternative uses of that cash to enhance shareholder value, including stock repurchases and dividends.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our market risk from the information provided in the 2010 Annual Report.

 

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a system of internal control over financial reporting to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. Our controls and procedures include written policies and procedures, careful selection and training of qualified personnel, and an internal audit program. We use a third-party firm, separate from our independent registered public accounting firm, to assist with internal audit services.

We work closely with the business groups, operations personnel, and information technology to ensure transactions are recorded properly. Environmental and legal staff are consulted to determine the appropriateness of our environmental and legal liabilities for each reporting period. We regularly review the regulations and rule changes that affect our financial disclosures.

Our disclosure control procedures include signed representation letters from our regional officers, as well as senior management.

We have formed a Financial Disclosure Committee (the committee), which is made up of the president of Afton Chemical Corporation, the general counsel of NewMarket, and the controller of NewMarket. The committee, as well as regional management, makes representations with regard to the financial statements that, to the best of their knowledge, the report does not contain any misstatement of a material fact or omit a material fact that is necessary to make the statements not misleading with respect to the periods covered by the report.

The committee and the regional management also represent, to the best of their knowledge, that the financial statements and other financial information included in the report fairly present, in all material respects, the financial condition, results of operations and cash flows of the company as of and for the periods presented in the report.

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act), we carried out an evaluation, with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e)) under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, during the quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. Legal Proceedings

We are involved in legal proceedings that are incidental to our business and include administrative or judicial actions seeking remediation under environmental laws, such as Superfund. Some of these legal proceedings relate to environmental matters and involve governmental authorities. For further information, see “Environmental” in Part I, Item 1 of our 2010 Annual Report and Note 8 in this Form 10-Q.

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 financial condition, results of operations, or cash flows.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 21, 2010, our Board of Directors approved a share repurchase program authorizing management to repurchase up to $200 million of NewMarket Corporation’s outstanding common stock until December 31, 2012, as market conditions warrant and covenants under our existing agreements permit. We may conduct the share repurchases in the open market and in privately negotiated transactions. The repurchase program does not require NewMarket to acquire any specific number of shares and may be terminated or suspended at any time. Approximately $126 million remained available under the 2010 authorization at June 30, 2011. The following table outlines the purchases during the second quarter 2011 under this authorization.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid per
Share
     Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
     Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the Plans
or Programs
 

April 1 to April 30

     0       $ 0         0       $ 130,275,036   

May 1 to May 31

     0       $ 0         0       $ 130,275,036   

June 1 to June 30

     26,500       $ 154.13         26,500       $ 126,190,549   
                                   

Total

     26,500       $ 154.13         26,500       $ 126,190,549   
                                   

 

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ITEM 6. Exhibits

 

Exhibit 3.1   Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10-K (File No. 1-32190) filed March 14, 2005)
Exhibit 3.2   NewMarket Corporation Bylaws Amended and Restated effective April 23, 2009 (incorporated by reference to Exhibit 3.1 to Form 8-K (File No. 1-32190) filed February 23, 2009)
Exhibit 10.1   Summary of Directors’ Compensation
Exhibit 31(a)   Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Thomas E. Gottwald
Exhibit 31(b)   Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by David A. Fiorenza
Exhibit 32(a)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Thomas E. Gottwald
Exhibit 32(b)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David A. Fiorenza
Exhibit 101   XBRL Instance Document and Related Items

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NEWMARKET CORPORATION
        (Registrant)
Date: August 4, 2011     By:  

/s/ D. A. Fiorenza

    David A. Fiorenza
   

Vice President and

Treasurer

    (Principal Financial Officer)
Date: August 4, 2011     By:  

/s/ Wayne C. Drinkwater

    Wayne C. Drinkwater
    Controller
    (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit 10.1   Summary of Directors’ Compensation
Exhibit 31(a)   Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Thomas E. Gottwald
Exhibit 31(b)   Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by David A. Fiorenza
Exhibit 32(a)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Thomas E. Gottwald
Exhibit 32(b)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David A. Fiorenza
Exhibit 101   XBRL Instance Document and Related Items

 

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