•Our failure to protect our intellectual property rights could harm our competitive position and could adversely affect our future performance and growth.
Protection of our proprietary processes, methods, compounds, and other technologies is important to our business. We depend upon our ability to develop and protect our intellectual property rights to distinguish our products from those of our competitors. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. The inability to continue using certain of our trademarks or service marks could result in the loss of brand recognition, and could require us to devote additional resources to advertise, rebrand our products, and market our brands. See Item 1, “Business-Intellectual Property.”
We rely on a combination of patent, trade secret, trademark, and copyright laws, as well as judicial enforcement, to protect our intellectual property and technologies. We cannot assure that the measures taken by us to protect these assets and rights will provide meaningful protection or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise. We cannot assure that any of our intellectual property rights will not be challenged, invalidated, circumvented, or rendered unenforceable. In addition, we have manufacturing operations in countries where we may not have the same strength of intellectual property protection and enforcement as in North America or Europe, resulting in a greater risk of a third party appropriating our intellectual property.
Furthermore, we cannot assure that any pending patent application filed by us will result in an issued patent, or if patents are issued to us, that those patents will provide meaningful protection against competitors or against competitive technologies. We could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we were found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, redesign our products partially or completely, pay to use the technology of others, or stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.
We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, we cannot assure that our confidentiality agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise, or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
In addition, our trade secrets and know-how may be improperly obtained by other means, such as a breach of our information technology security systems or direct theft. Any unauthorized disclosure of our material know-how or trade secrets could adversely affect our business and results of operations.
•In order to be successful, we must attract and retain a highly qualified workforce, including key employees in leadership positions.
The success of our business is highly dependent on our ability to attract and retain highly qualified technical personnel to support our research and development efforts and our agility in effectively responding to technological changes in our industry. To the extent that the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting, or training costs in order to attract and retain such a work force. We compete with other companies, both within and outside of our industry, for qualified technical and scientific personnel such as chemical, mechanical, and industrial engineers. To the extent that we lose experienced personnel through wage competition, normal attrition (including retirement), or other means, we must be able to attract qualified candidates to fill those positions and successfully manage the transfer of critical knowledge from those individuals leaving our company. Our inability to maintain a highly qualified technical workforce could adversely affect our competitive position and result in a loss of market share.
We also must manage leadership development and succession planning throughout our business. To the extent that we are unable to attract, develop, and retain leadership talent successfully, we could experience business disruptions andthat adversely affect our ability to grow our business.
Competitive pressures could adversely affect our margins and profitability.
We face significant competition in all of the product lines and markets in which we compete. We expect that our competitors will develop and introduce new and enhanced products, which could cause a decline in the market acceptance of certain products we manufacture. In addition, as a result of price competition, we may be compelled to reduce the prices for some of our products, which could adversely affect our margins and profitability. Some of our competitors may also have greater financial, technological, and other resources than we have and may be able to maintain greater operating and financial flexibility than we are able to maintain. As a result, these competitors may be able to better withstand changes in conditions within our industry, changes in the prices for raw materials, and changes in general economic conditions.
Sudden or sharp changes in the prices of and/or demand for raw materials•An information technology system failure may adversely affect our profit margins.
We utilize a variety of raw materials in the manufacture of our products, including base oil, polyisobutylene, antioxidants, alcohols, solvents, sulfonates, friction modifiers, olefins, and copolymers. We may also enter into contracts which commit us to purchase some of our more critical raw materials based on anticipated demand. Our profitability is sensitive to changes in the quantities of raw materials we may need and the costs of those materials which may be caused by changes in supply, demand or other market conditions, over which we have little or no control. Political and economic conditions globally have caused, and may continue to cause, our demand for and the cost of our raw materials to fluctuate. War, armed hostilities, terrorist acts, civil unrest, or other incidents may also cause a sudden or sharp change in our demand for and the cost of our raw materials. We cannot assure that we will be able to pass on to our customers any future increases in raw material costs in the form of price increases for our products. If our demand for raw materials were to decline such that we would not have need for the quantities required to be purchased under commitment agreements, we could incur additional charges that would affect our profitability.business.
We rely on a small numberinformation technology systems, some of significant customers concentrated in the lubricant and fuel industries. Thewhich are managed by third parties, to transact our business. An information technology system failure due to computer viruses, internal or external security breaches, cybersecurity attacks, power interruptions, hardware failures, fire, natural disasters, human error or other causes could disrupt our operations, lead to loss of salesconfidential information (such as the personally identifiable information of individuals, including our employees) or intellectual property, and/or prevent us from being able to any ofprocess transactions with our customers, operate our manufacturing facilities, and properly report transactions in a timely manner. Cybersecurity threats, in particular, continue to increase in sophistication. We have security processes and disaster recovery plans in place to mitigate these customers could significantly reducethreats. Nonetheless, these may not be sufficient to identify a threat in a timely manner or protect our revenues and negativelyoperations from such a threat, potentially resulting in financial, legal, business, or reputational damage to our company.
A significant, protracted information technology system failure may adversely affect our profitability.results of operations, financial condition, or cash flows.
Our principal customersFurthermore, we are multinational oil companies primarilysubject both to changing cybersecurity rules and evolving data privacy rules and regulations, such as the European Union's General Data Protection Regulation, in the lubricantcountries, states, and fuel industries. These industries are characterized by the concentrationjurisdictions where we conduct business. The failure to comply with these rules and regulations could result in significant financial penalties or increase our cost of a few large participants. This concentration of customers affects our overall risk profile, since our customers will be similarly affected by changes in economic, geopolitical, and industry conditions. Many factors affect the level of our customers’ spending on our products, including, among others, general business conditions, changes in technology, interest rates, gasoline prices, and consumer confidence in future economic conditions. A sudden or protracted downturn in these industries could adversely affect the buying power of, and purchases by, our customers. The loss of a significant customer or a material reduction in purchases by a significant customer could reduce our revenues and negatively affect our profitability.doing business.
•The occurrence or threat of extraordinary events, including domestic andor international terrorist attacks, hostilities, or health-related epidemics, may disrupt our operations, decrease demand for our products, and increase our expenses.
Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the United States and throughout the world. Federal legislation has imposed significant site security requirements, specifically on chemical manufacturing facilities. Federal regulations have also been enacted to increase the security of the transportation of hazardous chemicals in the United States. The enactment of further federal regulations to increase the security of the transportation of hazardous chemicals in the United States could result in additional costs.
The occurrence of extraordinary events, including future terrorist attacks, and the outbreak or escalation of hostilities, or a health-related epidemic cannot be predicted, but their occurrence can be expected to negatively affect the economy in general, and specificallyas well as the markets for our products. Theproducts, and can result in production downtime. In addition, the damage from a direct attack on our assets or assets used by us could include loss of life or property damage, and production downtime. In addition, available insurance coverage may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive.
•The COVID-19 pandemic has had an impact on our financial results and could have a material adverse effect on our results of operations, financial position, and cash flows in the future.
The COVID-19 pandemic has created significant uncertainty and economic disruption. The extent to which it will continue to impact our business, results of operations, financial position, and cash flows is difficult to predict and dependent upon many factors over which we have no control. These factors include, but are not limited to, the duration and severity of the pandemic; the effectiveness, acceptance, and speed of application of the recently developed vaccines; government restrictions on businesses and individuals; the impact of the pandemic on our customers’ businesses and the resulting demand for our products; the impact on our suppliers and supply chain network; the impact on U.S. and global economies and the timing and rate of economic recovery; and potential adverse effects on the financial markets.
•We face risks related to our foreign operations that may negatively affect our business.
In 2017,2020, sales to customers outside of the United States accounted for over 65% of consolidated net sales. We do business in all major regions of the world, some of which do not have stable economies or governments. In particular, we sell and market products in countries experiencing political and/or economic instability in the Middle East, Asia Pacific, Latin America, and Europe. Our international operations are subject to international business risks, including unsettled political conditions, expropriation, import and export restrictions, trade policies, increases in royalties, exchange controls, national and regional labor strikes, taxes, government royalties, inflationary or unstable economies, currency exchange rate fluctuations, and changes in laws and policies governing operations of foreign-based companies (such as restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries). The occurrence of any one or a combination of these factors may increase our costs or have other adverse effects on our business.
In addition, theThe United Kingdom'sKingdom’s June 2016 votereferendum decision to withdraw from the European Union (EU) effective January 31, 2020, commonly known as Brexit, has resulted in uncertaintiesuncertainty for our European operations regarding the extent to which our operations and financial performance will be affected immediately and in the longer term. On December 24, 2020, in advance of the transition period ending on December 31, 2020, the United Kingdom (U.K.) and the EU reached an agreement on the future relationship. The agreement is complex, addressing a wide-range of matters, but notably trade on goods between the U.K. and EU will continue tariff-free. Our key manufacturing facilities in the EU are not in the U.K. Therefore, goods movements continue to be predominantly within the EU post-Brexit which means that existing key trade agreements will continue to apply. However, Brexit has brought new ways of working and uncertainty for U.K. business, logistics providers, and customs brokers for international business when the U.K. is involved in the supply chain. While this has resulted in some disruption to our operations in the U.K., no material additional risks have become apparent. We are continuing to monitor and evaluate changes in legislation and trading practices in order to mitigate any potential risks to our operations.
•The insurance we maintain may not fully cover all potential exposures.
We maintain property, business interruption, and casualty insurance, but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental remediation. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
Legislative and Regulatory Risks
•Our business could be adversely affected by current and future governmental regulation.
We are subject to regulation by local, state, federal, and foreign governmental authorities. In some circumstances, before we may sell certain products, these authorities must approve these products, our manufacturing processes, and our facilities. We are also subject to ongoing reviews of our products, manufacturing processes, and facilities by governmental authorities. Any delay in obtaining or failure to obtain or maintain these approvals would adversely affect our ability to introduce new products and generate sales from those products.
New laws and regulations, including climate change regulations, may be introduced in the future and could result in additional compliance costs, which could prevent or inhibit the development, distribution, and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls, or seizures.
We are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions which generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. We are also subject to export and import laws and regulations which restrict trading with embargoed or sanctioned countries and certain individuals. Although we have policies and procedures designed to facilitate compliance with these laws and regulations, our employees, contractors and agents may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could adversely affect our business and/or our reputation.
•Legal proceedings and other claims could impose substantial costs on us.
We are involved in numerous administrative and legal proceedings that result from, and are incidental to, the conduct of our business. From time to time, these proceedings involve environmental, product liability, tetraethyl lead, premises asbestos liability, and other matters. See Item 3, “Legal Proceedings.” There is no assurance that our available insurance will cover these claims, that our insurers will not challenge coverage for certain claims, or that final damage awards will not exceed our available insurance coverage.
At any given time, we are involved in claims, litigation, administrative proceedings, and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with waste disposal sites, natural resource damages, property damage, and personal injury. We cannot assure that the resolution of these environmental matters will not have an adverse effect on our results of operations, financial condition, or cash flows.
•Environmental matters could have a substantial negative impact on our business.
As a manufacturer and distributor of chemical products, we are generally subject to extensive local, state, federal, and foreign environmental, safety, and health laws and regulations concerning, among other things, emissions to the air; discharges to land and water; the generation, handling, treatment, and disposal of hazardous waste and other materials; and remediation of contaminated soil, as well as surface and ground water. Our operations entail the risk of violations of those laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. We believe that we comply in all material respects with laws, regulations, statutes, and ordinances protecting the environment, including those related to the discharge of materials. However, we cannot assure that we have been or will be at all times in compliance with all of these requirements.
In addition, these requirements, and the enforcement or interpretation of these requirements, may become more stringent in the future. Although we cannot predict the ultimate cost of compliance with any such requirements, the costs could be material. Noncompliance could subject us to material liabilities, such as government fines, damages arising from third-party lawsuits, or the suspension and potential cessation of non-compliant operations. We may also be required to make significant site or operational modifications at substantial cost. Future developments could also restrict or eliminate the use of or require us to make modifications to our products.
There may be environmental problems associated with our properties of which we are unaware. The discovery of environmental liabilities attached to our properties could have an adverse effect on our business even if we did not create or cause the problem.
We may also face liability arising from current or future claims alleging personal injury, product liability, or property damage due to exposure to chemicals or other hazardous substances, such as premises asbestos, at or from our facilities. We may also face liability for personal injury, product liability, property damage, natural resource damage, or clean-up costs for the alleged migration of contaminants or hazardous substances from our facilities or for future accidents or spills.
In some cases, we have been identified, and in the future may be identified, as a potentially responsible party (PRP) in connection with state and federal laws regarding environmental clean-up projects. As a PRP, we may be liable for a share of the United Kingdom's relationshipcosts associated with cleaning up hazardous waste sites, such as a landfill to which we may have sent waste.
The ultimate costs and timing of environmental liabilities are difficult to predict. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. A liable party could be held responsible for all costs at a site, whether currently or formerly owned or operated, regardless of fault, knowledge, timing of the European Unioncontamination, cause of the contamination, percentage of contribution to the contamination, or the legality of the original disposal. We could incur significant costs, including clean-up costs, natural resource damages, civil or criminal fines and how it will withdraw from the European Union. Further, there are uncertaintiessanctions, and third-party claims, as to what impact the United Kingdom's withdrawal from the European Union will have on our operations in both the United Kingdoma result of past or future violations of, or liabilities under, environmental laws.
Financial and Europe and the resulting impact on our profitability.Economic Risks
•A substantial amount of indebtedness could adversely impact our business and limit our operational and financial flexibility.
We have incurred, and may in the future incur, significant amounts of indebtedness to support our operations. Our indebtedness could, among other things, require us to dedicate a substantial portion of our cash flow to repaying our indebtedness, thus reducing the amount of funds available for other general corporate purposes; limit our ability to borrow additional funds necessary for working capital, capital expenditures or other general corporate purposes; and limit our flexibility in planning for, or reacting to, changes in our business.
Our ability to make payments on or refinance our indebtedness will depend on our ability to generate cash from operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.
We cannot guarantee that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to repay our debt, service our indebtedness, or to fund other liquidity needs. Furthermore, substantially all of our business is conducted through our subsidiaries, and we cannot guarantee that our subsidiaries will be able to distribute funds to us for these purposes.
We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot guarantee that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
Additionally, our debt instruments contain restrictive covenants. These covenants may constrain our activities and limit our operational and financial flexibility. The failure to comply with these covenants could result in an event of default.
Our revolving credit facility utilizes the London Interbank Offered Rates (LIBOR) in establishing interest rates on the facility. LIBOR is the subject of recent proposals for reform, which may cause LIBOR to disappear entirely or perform differently than in the past. The consequences of these developments cannot be entirely predicted at this time, but could result in an increase in the cost of borrowings under the revolving credit facility.
•We are exposed to fluctuations in foreign exchange rates, which may adversely affect our results of operations.
We conduct our business in the local currency of many of the countries in which we operate. The financial condition and results of operations of our foreign operating subsidiaries are reported in the relevant local currency and then translated to U.S. Dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded amounts of our assets and liabilities, as well as our revenues, costs, and operating margins. The primary foreign currencies in which we have exchange rate fluctuation exposure are the European Union Euro, British Pound Sterling, Japanese Yen, Chinese Renminbi, Indian Rupee, Singapore Dollar, Mexican Peso, Australian Dollar, and Canadian Dollar. Exchange rates between these currencies and the U.S. Dollar have fluctuated significantly in recent years and may do so in the future.
An information technology system failure may adversely affect our business.
•We rely on information technology systems to transact our business. An information technology system failure due to computer viruses, internal or external security breaches, cybersecurity attacks, power interruptions, hardware failures, fire, natural disasters, human error, or other causes could disrupt our operations and prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report transactions in a timely manner. A significant, protracted information technology system failure may adversely affect our results of operations, financial condition, or cash flows.
Our business could be adversely affected by current and future governmental regulation.
We are subject to regulation by local, state, federal, and foreign governmental authorities. In some circumstances, before we may sell certain products, these authorities must approve these products, our manufacturing processes, and our facilities. We are also subject to ongoing reviews of our products, manufacturing processes, and facilities by governmental authorities. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate sales from those products.
New laws and regulations, including climate change regulations, may be introduced in the future that could result in additional compliance costs, seizures, confiscation, recall, or monetary fines, any of which could prevent or inhibit the development, distribution, and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, and recalls or seizures.
We are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions which generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. We are also subject to export and import laws and regulations which restrict trading with embargoed or sanctioned countries and certain individuals. Although we have policies and procedures designed to facilitate compliance with these laws and regulations, our employees, contractors and agents may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could adversely affect our business and/or our reputation.
Legal proceedings and other claims could impose substantial costs on us.
We are involved in numerous administrative and legal proceedings that result from, and are incidental to, the conduct of our business. From time to time, these proceedings involve environmental, product liability, TEL, premises asbestos liability, and other matters. See Item 3, “Legal Proceedings.” There is no assurance that our available insurance will cover these claims, that our insurers will not challenge coverage for certain claims, or that final damage awards will not exceed our available insurance coverage.
At any given time, we are involved in claims, litigation, administrative proceedings, and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with waste disposal sites, natural resource damages, property damage, and personal injury. We cannot assure that the resolution of these environmental matters will not have an adverse effect on our results of operations, financial condition, or cash flows.
Environmental matters could have a substantial negative impact on our business.
As a manufacturer and distributor of chemical products, we are generally subject to extensive local, state, federal, and foreign environmental, safety, and health laws and regulations concerning, among other things, emissions to the air; discharges to land and water; the generation, handling, treatment, and disposal of hazardous waste and other materials; and remediation of contaminated soil, as well as surface and ground water. Our operations entail the risk of violations of those laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. We believe that we comply in all material respects with laws, regulations, statutes, and ordinances protecting the environment, including those related to the discharge of materials. However, we cannot assure that we have been or will be at all times in compliance with all of these requirements.
In addition, these requirements, and the enforcement or interpretation of these requirements, may become more stringent in the future. Although we cannot predict the ultimate cost of compliance with any such requirements, the costs could be material. Noncompliance could subject us to material liabilities, such as government fines, damages arising from third-party lawsuits, or the suspension and potential cessation of noncompliant operations. We may also be required to make significant site or operational modifications at substantial cost. Future developmentsadditional contributions to our pension plans, which may be underfunded due to any underperformance of equity markets.
Our pension plan asset allocation is predominantly weighted towards equities. Cash contribution requirements to our pension plans are sensitive to changes in our plans’ actual return on assets. Reductions in our plans’ return on assets due to poor performance of equity markets could also restrict or eliminate the use of orcause our pension plans to be underfunded and require us to make modifications to our products.additional cash contributions.
There may be environmental problems associated with our properties
We may also face liability arising from current or future claims alleging personal injury, product liability, or property damage due to exposure to chemicals or other hazardous substances, such as premises asbestos, at or from our facilities. We may also face liability for personal injury, product liability, property damage, natural resource damage, or clean-up costs for the alleged migration of contaminants or hazardous substances from our facilities or for future accidents or spills.Acquisition and Investment Risks
In some cases, we have been identified, and in the future may be identified, as a PRP in connection with state and federal laws regarding environmental clean-up projects. As a PRP, we may be liable for a share of the costs associated with cleaning up hazardous waste sites, such as a landfill to which we may have sent waste.
The ultimate costs and timing of environmental liabilities are difficult to predict. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. A liable party could be held responsible for all costs at a site, whether currently or formerly owned or operated, regardless of fault, knowledge, timing of the contamination, cause of the contamination, percentage of contribution to the contamination, or the legality of the original disposal. We could incur significant costs, including clean-up costs, natural resource damages, civil or criminal fines and sanctions, and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws.
The insurance we maintain may not fully cover all potential exposures.
We maintain property, business interruption, and casualty insurance, but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental remediation. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
•We may be unable to consummate a proposed acquisition transaction due to a lack of regulatory approval or the failure of one or more parties to satisfy conditions to close. In addition, we may not be able to realize the expected benefits from recent or future acquisitions or from investments in our infrastructure, or it may take longer to realize those benefits than originally planned. The inability to achieve our objectives related to these activities could result in unanticipated expenses and losses.
As part of our business growth strategy, we intend to continue pursuing acquisitions and investing in our infrastructure. Our ability to implement these components of our growth strategy will be limited by our ability to identify appropriate acquisition or joint venture candidates; our ability to consummate proposed transactions due to a lack of regulatory approval or the failure of one of the parties to a transaction to satisfy conditions required for closing; and the availability of financial resources, including cash and borrowing capacity. When we acquire new businesses or invest in infrastructure improvements (for example, building new plant facilities), we consider the benefits we expect to realize and time frames over which we will realize those benefits. The expenses incurred in completing these types of activities, the time it takes to integrate the activities into our ongoing business, or our failure to realize the expected benefits from the activities in the planned time frames could result in unanticipated expenses and losses. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations.
We could be required to make additional contributions to our pension plans, which may be underfunded due to any underperformance of equity markets.
Our pension plan asset allocation is predominantly weighted towards equities. Cash contribution requirements to our pension plans are sensitive to changes in our plans’ actual return on assets. Reductions in our plans’ return on assets due to poor performance of equity markets could cause our pension plans to be underfunded and require us to make additional cash contributions.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal operating properties are shown below. Unless indicated, we own the research, development, and testing facilities, as well as the manufacturing and distribution properties, which primarily support the petroleum additives business segment.
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Research, Development, and Testing | | Richmond, Virginia Bracknell, England
Manchester, England
Tsukuba, Japan
Ashland, Virginia
Suzhou, China
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Manufacturing and Distribution | | Bedford Park, Illinois Feluy, Belgium (lubricant additives)
Feluy, Belgium (lubricant additives)
Houston, Texas (lubricant and fuel additives; also TEL storage and distribution) Hyderabad, India (lubricant additives)
Jurong Island, Singapore (lubricant additives; leased land) Manchester, England (lubricant additives)
Orangeburg, South Carolina (fuel additives; manufacturing equipment only) Port Arthur, Texas (lubricant additives) Rio de Janeiro, Brazil (petroleum additives storage and distribution; manufacturing equipment only) San Juan del Rio, Mexico (lubricant additives) Sauget, Illinois (lubricant and fuel additives) Suzhou, China (lubricant additives) |
We own our corporate headquarters located in Richmond, Virginia, and generally lease our regional and sales offices located in a number of areas worldwide.
NewMarket Development manages the real property we own in Richmond, Virginia consisting of approximately 5754 acres. Our corporate offices are included in this acreage, as well as a research and testing facility and several acres dedicated to other uses. We are currently exploring various development opportunities for portions of the property as the demand warrants. This effort is ongoing in nature, and we have no specific timeline for any future developments.
Production Capacity
We believe our plants and supply agreements are sufficient to meet expected sales levels. Operating rates of the plants vary with product mix and normal sales swings. We believe that our facilities are well maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings that are incidental to our business and may include administrative or judicial actions. Some of these legal proceedings involve governmental authorities and relate to environmental matters. For further information, see “Environmental”the Environmental section in Part I, Item 1.Note 20.
While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
In late 2013, Afton initiated a voluntary self-audit of its compliance with certain sections of the Toxic Substances Control Act (TSCA) under the EPA’s audit policy (Audit Policy). If any potential TSCA violations are discovered during the audit, we would voluntarily disclose them to the EPA under the Audit Policy. In August 2014, the EPA staff began its own TSCA inspection of both Afton and Ethyl. While it is not possible to predict or determine with certainty the outcome, we do not believe that any findings identified as a result of our audit or the EPA’s TSCA inspection will have a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, with no par value, has traded on the New York Stock Exchange (NYSE) under the symbol “NEU” since June 21, 2004 when we became the parent holding company of Ethyl, Afton, NewMarket Services, NewMarket Development, and their subsidiaries. We had 2,1471,891 shareholders of record at January 31. 2018.31, 2021.
On October 21, 2015,December 13, 2018, our Board of Directors approved a share repurchase program authorizing management to repurchase up to $500 million of NewMarket's outstanding common stock effective January 1, 2019 until December 31, 2018,2021, as market conditions warrant and covenants under our existing debt agreements permit. We may conduct the share repurchasesrepurchase in the open market, and in privately negotiated transactions.transactions, through block trades or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The repurchase program does not require NewMarket to acquire any specific number of shares and may be terminated or suspended at any time. Approximately $419At December 31, 2020, approximately $399 million remained available under the 2015 authorization at December 31, 2017. The following table outlines the2018 authorization. There were no purchases during the fourth quarter of 20172020 under this authorization.
Issuer Purchases of Equity Securities
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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 |
October 1 to October 31 | | 0 | | $ | 0.00 |
| | 0 | | $ | 446,944,207 |
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November 1 to November 30 | | 36,409 | | 393.39 |
| | 36,409 | | 432,621,340 |
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December 1 to December 31 | | 34,280 | | 391.89 |
| | 34,280 | | 419,187,485 |
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Total | | 70,689 | | $ | 392.66 |
| | 70,689 | | $ | 419,187,485 |
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As shown in the table below, cashCash dividends declared and paid totaled $7.00$7.60 per share for the year ended December 31, 20172020 and $6.40$7.30 per share for the year ended December 31, 2016.
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Year | Date Declared | | Date Paid | | Per Share Amount |
2017 | February 23, 2017 | | April 3, 2017 | | $ | 1.75 |
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| April 27, 2017 | | July 3, 2017 | | 1.75 |
|
| August 3, 2017 | | October 2, 2017 | | 1.75 |
|
| October 26, 2017 | | January 2, 2018 | | 1.75 |
|
2016 | February 25, 2016 | | April 1, 2016 | | 1.60 |
|
| April 28, 2016 | | July 1, 2016 | | 1.60 |
|
| August 11, 2016 | | October 1, 2016 | | 1.60 |
|
| October 27, 2016 | | January 2, 2017 | | 1.60 |
|
2019. The declaration and payment of dividends is subject to the discretion of our Board of Directors. Future dividends will depend on various factors, including our financial condition, earnings, cash requirements, legal requirements, restrictions in agreements governing our outstanding indebtedness, and other factors deemed relevant by our Board of Directors.
The following table shows the high and low prices of our common stock on the NYSE for each of the last eight quarters.
|
| | | | | | | | | | | | | | | |
| 2017 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
High | $ | 455.72 |
| | $ | 483.86 |
| | $ | 470.43 |
| | $ | 434.49 |
|
Low | 416.02 |
| | 442.65 |
| | 409.37 |
| | 377.27 |
|
|
| | | | | | | | | | | | | | | |
| 2016 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
High | $ | 402.82 |
| | $ | 415.74 |
| | $ | 447.97 |
| | $ | 435.03 |
|
Low | 322.54 |
| | 385.66 |
| | 399.91 |
| | 386.90 |
|
The performance graph showing the five-year cumulative total return on our common stock as compared to chemical companies in the S&P 1500 Specialty Chemicals Index and the S&P 500 is shown below. The graph assumes $100 invested on the last day of December 2012,2015, and the reinvestment of all dividends. The graph is based on historical data, and is not intended to be a forecast or indication of future performance of our common stock.
Performance Graph
Comparison of Five-Year Cumulative Total Return
Performance Through December 31, 20172020
| | | December 31, | | December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
NewMarket Corporation | $ | 100.00 |
| | $ | 129.15 |
| | $ | 157.86 |
| | $ | 151.02 |
| | $ | 170.79 |
| | $ | 162.78 |
| NewMarket Corporation | $ | 100.00 | | | $ | 113.09 | | | $ | 107.79 | | | $ | 113.74 | | | $ | 136.51 | | | $ | 114.02 | |
S&P 1500 Specialty Chemicals Index | 100.00 |
| | 135.18 |
| | 156.71 |
| | 151.81 |
| | 168.76 |
| | 213.39 |
| S&P 1500 Specialty Chemicals Index | 100.00 | | | 112.78 | | | 143.83 | | | 123.18 | | | 141.89 | | | 166.21 | |
S&P 500 | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
| S&P 500 | 100.00 | | | 111.96 | | | 136.40 | | | 130.42 | | | 171.49 | | | 203.04 | |
The graph and table above are not deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor are they incorporated by reference into other filings made by us with the SEC.
ITEM 6. SELECTED FINANCIAL DATA
NewMarket Corporation and Subsidiaries
Five Year Summary
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts and percentages) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Results of operations | | | | | | | | | | |
Net sales | | $ | 2,198,404 |
| | $ | 2,049,451 |
| | $ | 2,140,830 |
| | $ | 2,335,405 |
| | $ | 2,280,355 |
|
Costs and expenses | | 1,861,635 |
| | 1,686,761 |
| | 1,784,110 |
| | 1,972,685 |
| | 1,928,510 |
|
Operating profit | | 336,769 |
| | 362,690 |
| | 356,720 |
| | 362,720 |
| | 351,845 |
|
Interest and financing expenses, net | | 21,856 |
| | 16,785 |
| | 14,652 |
| | 16,567 |
| | 17,796 |
|
Other income (expense), net (1) | | 529 |
| | (2,697 | ) | | (3,097 | ) | | (7,054 | ) | | 7,262 |
|
Income from continuing operations before income tax expense | | 315,442 |
| | 343,208 |
| | 338,971 |
| | 339,099 |
| | 341,311 |
|
Income tax expense (2) | | 124,933 |
| | 99,767 |
| | 100,368 |
| | 105,844 |
| | 98,964 |
|
Income from continuing operations | | 190,509 |
| | 243,441 |
| | 238,603 |
| | 233,255 |
| | 242,347 |
|
Income from discontinued operations, net of tax (3) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 22,395 |
|
Net income | | $ | 190,509 |
| | $ | 243,441 |
| | $ | 238,603 |
| | $ | 233,255 |
| | $ | 264,742 |
|
Financial position and other data (3) | | | | | | | | | | |
Total assets | | $ | 1,712,154 |
| | $ | 1,416,436 |
| | $ | 1,286,249 |
| | $ | 1,227,733 |
| | $ | 1,322,556 |
|
Operations: | | | | | | | | | | |
Working capital | | $ | 516,861 |
| | $ | 542,293 |
| | $ | 504,712 |
| | $ | 529,680 |
| | $ | 641,438 |
|
Current ratio | | 2.63 to 1 |
| | 2.84 to 1 |
| | 2.91 to 1 |
| | 3.04 to 1 |
| | 3.59 to 1 |
|
Depreciation and amortization | | $ | 55,340 |
| | $ | 44,893 |
| | $ | 42,265 |
| | $ | 41,538 |
| | $ | 46,144 |
|
Capital expenditures | | $ | 148,713 |
| | $ | 142,874 |
| | $ | 126,499 |
| | $ | 59,716 |
| | $ | 58,476 |
|
Gross profit as a % of net sales | | 29.2 | % | | 33.2 | % | | 31.7 | % | | 28.5 | % | | 28.6 | % |
Research, development, and testing expenses | | $ | 140,193 |
| | $ | 156,959 |
| | $ | 158,254 |
| | $ | 139,183 |
| | $ | 136,573 |
|
Total long-term debt | | $ | 602,900 |
| | $ | 507,275 |
| | $ | 490,920 |
| | $ | 359,334 |
| | $ | 344,749 |
|
Common stock and other shareholders’ equity | | $ | 601,649 |
| | $ | 483,251 |
| | $ | 387,564 |
| | $ | 421,041 |
| | $ | 572,448 |
|
Total long-term debt as a % of total capitalization (debt plus equity) | | 50.1 | % | | 51.2 | % | | 55.9 | % | | 46.0 | % | | 37.6 | % |
Common stock | | | | | | | | | | |
Basic and diluted earnings per share: | | | | | | | | | | |
Income from continuing operations | | $ | 16.08 |
| | $ | 20.54 |
| | $ | 19.45 |
| | $ | 18.38 |
| | $ | 18.21 |
|
Income from discontinued operations (3) | | 0.00 |
| | 0.00 |
| | 0.00 |
| | 0.00 |
| | 1.69 |
|
Net income | | $ | 16.08 |
| | $ | 20.54 |
| | $ | 19.45 |
| | $ | 18.38 |
| | $ | 19.90 |
|
Equity per share | | $ | 51.07 |
| | $ | 40.79 |
| | $ | 32.44 |
| | $ | 33.83 |
| | $ | 43.70 |
|
Cash dividends declared per share | | $ | 7.00 |
| | $ | 6.40 |
| | $ | 5.80 |
| | $ | 4.70 |
| | $ | 3.80 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts and percentages) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Results of operations | | | | | | | | | | |
Net sales | | $ | 2,010,931 | | | $ | 2,190,295 | | | $ | 2,289,675 | | | $ | 2,198,404 | | | $ | 2,049,451 | |
Costs and expenses | | 1,699,129 | | | 1,852,974 | | | 1,997,001 | | | 1,875,670 | | | 1,694,692 | |
Operating profit | | 311,802 | | | 337,321 | | | 292,674 | | | 322,734 | | | 354,759 | |
Interest and financing expenses, net | | 26,328 | | | 29,241 | | | 26,723 | | | 21,856 | | | 16,785 | |
Other income (expense), net (1) | | 45,813 | | | 23,510 | | | 24,334 | | | 14,564 | | | 5,234 | |
Income before income tax expense | | 331,287 | | | 331,590 | | | 290,285 | | | 315,442 | | | 343,208 | |
Income tax expense (2) | | 60,719 | | | 77,304 | | | 55,551 | | | 124,933 | | | 99,767 | |
Net income | | $ | 270,568 | | | $ | 254,286 | | | $ | 234,734 | | | $ | 190,509 | | | $ | 243,441 | |
Financial position and other data | | | | | | | | | | |
Total assets | | $ | 1,933,875 | | | $ | 1,885,132 | | | $ | 1,697,274 | | | $ | 1,712,154 | | | $ | 1,416,436 | |
Operations: | | | | | | | | | | |
Working capital | | $ | 585,623 | | | $ | 570,503 | | | $ | 542,119 | | | $ | 516,861 | | | $ | 542,293 | |
Current ratio | | 2.87 to 1 | | 2.85 to 1 | | 3.00 to 1 | | 2.63 to 1 | | 2.84 to 1 |
Depreciation and amortization | | $ | 84,002 | | | $ | 87,560 | | | $ | 71,759 | | | $ | 55,340 | | | $ | 44,893 | |
Capital expenditures | | $ | 93,316 | | | $ | 59,434 | | | $ | 74,638 | | | $ | 148,713 | | | $ | 142,874 | |
Gross profit as a % of net sales | | 29.6 | % | | 28.8 | % | | 25.6 | % | | 28.9 | % | | 33.0 | % |
Research, development, and testing expenses | | $ | 140,367 | | | $ | 144,465 | | | $ | 140,289 | | | $ | 146,002 | | | $ | 160,788 | |
Total long-term debt | | $ | 598,848 | | | $ | 642,941 | | | $ | 770,999 | | | $ | 602,900 | | | $ | 507,275 | |
Common stock and other shareholders’ equity | | $ | 759,824 | | | $ | 683,098 | | | $ | 489,907 | | | $ | 601,649 | | | $ | 483,251 | |
Total long-term debt as a % of total capitalization (debt plus equity) | | 44.1 | % | | 48.5 | % | | 61.1 | % | | 50.1 | % | | 51.2 | % |
Common stock | | | | | | | | | | |
Basic and diluted earnings per share | | $ | 24.64 | | | $ | 22.73 | | | $ | 20.34 | | | $ | 16.08 | | | $ | 20.54 | |
Equity per share | | $ | 69.57 | | | $ | 61.05 | | | $ | 43.80 | | | $ | 51.07 | | | $ | 40.79 | |
Cash dividends declared per share | | $ | 7.60 | | | $ | 7.30 | | | $ | 7.00 | | | $ | 7.00 | | | $ | 6.40 | |
Notes to the Five Year Summary
| |
(1) | Other income (expense), net for 2013 through 2016 included a gain or loss on the Goldman Sachs interest rate swap, as well as several other small items. The loss on the interest rate swap was $5 million for the year ended December 31, 2016, $3 million for the year ended December 31, 2015 and $7 million for the year ended December 31, 2014. The gain on the interest rate swap was $7 million for the year ended December 31, 2013. We terminated the interest rate swap on September 7, 2016. We did not use hedge accounting to record the interest rate swap, and accordingly, any change in the fair value was immediately recognized in earnings.
|
| |
(2) | On December 22, 2017, the United States enacted tax legislation commonly known as the Tax Cuts and Jobs Act, which required a one-time tax in 2017 on the deemed repatriation of previously deferred foreign earnings and reduced the U.S. corporate tax rate to 21% beginning in 2018. We recorded a net tax expense of $31 million as a result. |
| |
(3) | On July 2, 2013, Foundry Park I completed the sale of its real estate assets which comprised the entire real estate development segment. The operations of the real estate development segment are reported as discontinued operations. The 2013 amount includes the gain on sale of discontinued business, net of tax, of $22 million. Financial position and cash flow data reflect discontinued operations and continuing operations together. |
(1)Other income (expense), net for each year included the components of net periodic benefit cost (income), except for service costs, amounting to income of $26 million in 2020, $23 million in 2019, $19 million in 2018, $14 million in 2017 and $8 million in 2016. The amount for 2020 also included a gain of $16 million related to the sale of a non-operating parcel of real estate. In addition, 2016 included a loss on the Goldman Sachs interest rate swap, as well as several other small items. The loss on the interest rate swap was $5 million for 2016. We terminated the interest rate swap on September 7, 2016. We did not use hedge accounting to record the interest rate swap, and accordingly, any change in the fair value was immediately recognized in earnings.
(2)On December 22, 2017, the United States enacted tax legislation commonly known as the Tax Cuts and Jobs Act, which required a one-time tax in 2017 on the deemed repatriation of previously deferred foreign earnings and reduced the U.S. corporate tax rate from 35% to 21% beginning in 2018. We recorded a net tax expense of $31 million in 2017 as a result.
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion, as well as other discussions in this Annual Report on Form 10-K, contains forward-looking statements about future events and expectations within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” “expects,” “should,” “could,” “may,” “will,” and similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding future prospects of growth in the petroleum additives market, other trends in the petroleum additives market, our ability to maintain or increase our market share, and our future capital expenditure levels.
We believe our forward-looking statements are based on reasonable expectations and assumptions, within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control.
Factors that could cause actual results to differ materially from expectations include, but are not limited to, the availability of raw materials and distribution systems; disruptions at manufacturingproduction facilities, including single-sourced facilities; hazards common to chemical businesses; the ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; sudden or sharp raw material price increases; competition from other manufacturers; current and future governmental regulations; the gain or loss of significant customers; failure to attract and retain a highly-qualified workforce; hazards common to chemical businesses; competition from other manufacturers; suddenan information technology system failure or sharp raw material price increases; the gain or loss of significant customers;security breach; the occurrence or threat of extraordinary events, including natural disasters, terrorist attacks, and terrorist attacks;health-related epidemics such as the COVID-19 pandemic; risks related to operating outside of the United States; political, economic, and regulatory factors concerning our products; the impact of substantial indebtedness on our operational and financial flexibility; the impact of fluctuations in foreign exchange rates; an information technology system failure or security breach; political, economic, and regulatory factors concerning our products; current and future governmental regulations; resolution of environmental liabilities or legal proceedings; andlimitation of our insurance coverage; our inability to realize expected benefits from investment in our infrastructure or from recent or future acquisitions, or our inability to successfully integrate recent or future acquisitions into our business.business; and the underperformance of our pension assets resulting in additional cash contributions to our pension plans. Risk factors are discussed in Item 1A. “Risk Factors.”
You should keep in mind that any forward-looking statement made by us in this discussion or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, any forward-looking statement made in this discussion or elsewhere, might not occur.
OVERVIEW
When comparing the results of the petroleum additives segment for 20172020 with 2016,2019, both net sales increased 7.5%and operating profit decreased primarily as a result of the economic disruption from the COVID-19 pandemic. Net sales for 2020 decreased 8.0% primarily due to increased shipment volumes,lower lubricant additives and fuel additives product shipments, as well as decreased selling prices. Petroleum additives operating profit for 2020 was 7.2% lower reflecting lower product shipments and changes in selling prices, as well as higher conversion costs, partially offset by lower selling prices. The lower selling prices, along with increasedimproved raw material costs, resulted in petroleum additives operating profit being 6.5% lower when comparing 2017 with 2016.costs.
Our operations generate cash that is in excess of the needs of the business. We continue to invest in and manage our business for the long-runlong-term with the goal of helping our customers succeed in their marketplaces. Our investments continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability, and geographic expansion.
On July 3, 2017, we completed our acquisitionIMPACT OF THE COVID-19 PANDEMIC AND CURRENT ECONOMIC ENVIRONMENT
Petroleum additives operating results for 2020 have been marked by economic uncertainty resulting from the ongoing effects of Aditivos Mexicanos S.A. de C.V. (AMSA), a petroleum additives manufacturing, salesthe COVID-19 pandemic and distribution company based in Mexico City, Mexico. The acquisition complements and expands our existing presence in the Latin America region, and also improves our supply capabilities to better serve our customers. See Note 2 for further informationrelated restrictions on the acquisition.
In December 2017, the Tax Cutsmovement of people, goods and Jobs Act was signed into law. This resulted in increased income tax expense in 2017 of $31 million. Further information on the impact of the U.S. tax reform is in Note 18.
services. While
During 2017, we repurchased 70,689 shareshave continued to operate throughout the year in each of our common stockregions, we have at various times experienced significant changes in some of the key drivers that affect the performance of our business. During the second quarter of 2020, government and business shutdowns in North America and Europe led to a total costprecipitous drop in vehicle miles driven and auto production, with gasoline consumption in the United States dropping to its lowest point in over 50 years. With less travel and fewer miles driven, combined with automobile plant closures, global demand for our products declined substantially, except in our Asia Pacific region where demand remained relatively stable throughout the year. As restrictions eased and economies reopened in the second half of $28 million.2020, global production of automobiles began to rebound and gasoline consumption and miles driven showed steady improvement in most countries, including the United States. Late in the fourth quarter, renewed restrictions on travel and work in certain countries had a negative effect on our business. The pace and stability of improvement in demand for our products will continue to depend heavily on economic recovery and the rate at which government restrictions are lifted and remain lifted.
With only a very few government-ordered, short-term exceptions, all of our locations around the world, including our manufacturing and research and development facilities, have continued to operate safely and without interruption during the pandemic, and we expect them to continue to do so. Raw material sourcing has not been significantly impacted and we do not expect that to change over the coming months. The transportation industry continues to operate and our products are currently being delivered to our customers.
Our financial position remains strong. We have sufficient access to additional capital if needed, including our new $900 million revolving credit facility we entered into in March 2020, and we do not anticipate any issues with meeting the covenants in our debt agreements. Our major capital projects are continuing to progress substantially as planned. The chemical industry and our products are recognized as essential for the transportation of goods and services. Our business continuity planning process focuses our efforts on managing through this challenging time and helping our customers do the same. As we are a global company and can leverage the knowledge and experience of our personnel in facilities across the world, we do not expect to experience negative impacts related to short-term travel and border restrictions. As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.
RESULTS OF OPERATIONS
Management's discussion and analysis of our results of operations is presented below for the comparative periods of 2020 versus 2019. The discussion and analysis of our results of operations for 2019 compared to 2018 is available in Item 7 of our 2019 Annual Report on Form 10-K.
Net Sales
Our consolidated net sales for 20172020 amounted to $2.2$2.0 billion, an increasea decrease of $149$179 million, or 7.3%8.2% from 2016. The decrease between 2016 and 2015 was $91 million, or 4.3%.2019.
No single customer accounted for 10% or more of our total net sales in 2017, 2016,2020, 2019, or 2015.2018.
The following table shows net sales by segment and product line for each of the last three years.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in millions) | | 2020 | | 2019 | | 2018 |
Petroleum additives | | | | | | |
Lubricant additives | | $ | 1,687 | | | $ | 1,779 | | | $ | 1,871 | |
Fuel additives | | 315 | | | 397 | | | 410 | |
Total | | 2,002 | | | 2,176 | | | 2,281 | |
All other | | 9 | | | 14 | | | 9 | |
Net sales | | $ | 2,011 | | | $ | 2,190 | | | $ | 2,290 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
Petroleum additives | | | | | | |
Lubricant additives | | $ | 1,790 |
| | $ | 1,673 |
| | $ | 1,741 |
|
Fuel additives | | 397 |
| | 362 |
| | 384 |
|
Total | | 2,187 |
| | 2,035 |
| | 2,125 |
|
All other | | 11 |
| | 14 |
| | 16 |
|
Net sales | | $ | 2,198 |
| | $ | 2,049 |
| | $ | 2,141 |
|
Petroleum Additives - The regions in which we operate include North America (the United States and Canada), Latin America (Mexico, Central America, and South America), Asia Pacific, and the Europe/Middle East/Africa/India (EMEAI) region. The percentage of net sales being generated in the regions has remained fairly consistent over the past
three years, with some limited fluctuation due to various factors, including the impact of regional economic trends. North America and EMEAI both represent around 35% of our petroleum additives net sales, while Asia Pacific contributes over 20%about 25% and Latin America represents almost 10%.the remaining amount. As shown in the table above, lubricant additives net sales and fuel additives net sales compared to total petroleum additives net sales has remained substantially consistent over the past three years. The discussion below provides further detail on
Petroleum additives net sales in ourfor 2020 of $2.0 billion were approximately 8.0% lower than 2019 levels. The decrease was across all regions except the Latin America region, which was substantially even with 2019 levels. The North America region represented nearly 50% of the petroleum additives segmentdecrease in net sales, while the Asia Pacific and EMEAI regions represented about 25% each. The decrease in petroleum additives net sales was predominantly the result of the economic disruption due to the COVID-19 pandemic, including lower demand for 2017, 2016,petroleum additives products reflecting the restrictions across the world on the movement of people, goods, and 2015.services.
The approximate components of the petroleum additives increasedecrease in net sales of $152$174 million when comparing 20172020 to 2016 and decrease of $90 million when comparing 2016 to 20152019 are shown below in millions.
|
| | | |
Net sales for year ended December 31, 2015 | $ | 2,125 |
|
Lubricant additives shipments | 9 |
|
Fuel additives shipments | 3 |
|
Selling prices | (97 | ) |
Foreign currency impact, net | (5 | ) |
Net sales for year ended December 31, 2016 | 2,035 |
|
Lubricant additives shipments | 137 |
|
Fuel additives shipments | 30 |
|
Selling prices | (17 | ) |
Foreign currency impact, net | 2 |
|
Net sales for year ended December 31, 2017 | $ | 2,187 |
|
| | | | | |
Net sales for year ended December 31, 2019 | $ | 2,176 | |
Lubricant additives shipments | (46) | |
Fuel additives shipments | (46) | |
Selling prices | (86) | |
Foreign currency impact, net | 4 | |
Net sales for year ended December 31, 2020 | $ | 2,002 | |
Petroleum additives net salesshipments accounted for 2017 of $2.2 billion were approximately 7.5% higher than 2016 levels. The increase was predominantlya $92 million decrease in the EMEAI region with a nearly 14% increase, as well as in the Asia Pacific region with an almost 10% increase. The Latin America region contributed a smaller increase of almost 7%, while the North America region was substantially unchanged between the two years. The primary driver in the higher net sales between 20172019 and 2016 was an 8.2% increase in shipments which was2020. Lower selling prices, partially offset by lower selling prices. Shipments increased in both lubricant and fuel additives. EMEAI, Asia Pacific and Latin America experienced shipment increases in lubricant additives, while EMEAI was the primary driver in the increase in shipments for fuel additives. The North America region was substantially unchanged between the two years for both lubricant and fuel additives shipments. Foreigna favorable foreign currency contributed a small favorable impact, mostly from the European Euro. The U.S. Dollar weakened against the Euro, resultingresulted in a favorable impact to net sales. Partially offsetting the impact from the Euro, the U.S. Dollar strengthened against the Japanese Yen and Chinese Renminbi resultingdecrease in an unfavorable foreign currency impact.
Petroleum additives net sales for 2016 of $2.0 billion were approximately 4.3% lower than 2015 levels. All regions, except for Asia Pacific, reflected decreased net sales ranging from approximately 2% in EMEAI to about 16% in Latin America. North America experienced an approximate 9% decrease, while Asia Pacific reported an approximate 8% increase in net sales. Lower selling prices were the primary factor of the decrease in petroleum additives net sales when comparing 2016 and 2015, with foreign currency exchange also having an unfavorable impact. The U.S. Dollar strengthened against most of the major currencies in which we transact, including the European Euro and the British Pound Sterling, resulting in an unfavorable impact on net sales$82 million when comparing the two years. The Japanese Yen strengthenedUnited States Dollar weakened against the U.S. Dollar duringEuro when comparing 2020 and 2019, which resulted in most of the same time period partially offsetting the unfavorable impact from the other currencies in which we transact. Increases in the volume of product shipments, mostly from fuel additives, along with a favorable impact from product mix, mostly in lubricant additives, partially offset the negative effects of selling prices and foreign currency exchange. Theimpact to net sales in 2020.
On a worldwide basis, the volume of product shipments for petroleum additives increased approximately 1.1% on a worldwide basisdecreased 5.2% when comparing 2016 and 2015. Lubricant additives product2020 with 2019. The decreases in shipments increasedwere in both lubricant additives and fuel additives. Most of the decrease in lubricant additives was in the Asia Pacific and EMEAI, but were substantially offset byregion, with small decreases in the North America and EMEAI regions offset by a small increase in the Latin America. Fuel additivesAmerica region. The North America and EMEAI regions represented most of the decrease in fuel additive product shipments. We believe the decrease in product shipments increased in all regions, except for EMEAI.during 2020 substantially resulted from the impact of the COVID-19 pandemic.
All Other - The “All other” category includes the operations of the TELantiknock compounds business, and certain contracted manufacturing and services performed by Ethyl.
Segment Operating Profit
NewMarket evaluates the performance of the petroleum additives business based on segment operating profit. NewMarket Services expenses are charged to each subsidiary pursuant to services agreements between the companies. Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets and lease right-of-use assets, is included in segment operating profit.
The table below reports segment operating profit for the last three years. A reconciliation of segment operating profit to income before income tax expense is in Note 20.4.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in millions) | | 2020 | | 2019 | | 2018 |
Petroleum additives | | $ | 333 | | | $ | 359 | | | $ | 311 | |
All other | | $ | 0 | | | $ | (2) | | | $ | (3) | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
Petroleum additives | | $ | 360 |
| | $ | 385 |
| | $ | 375 |
|
All other | | $ | 4 |
| | $ | 0 |
| | $ | 4 |
|
Petroleum Additives - Petroleum additives segment operating profit decreased $25$26 million when comparing 20172020 to 2016 and increased $10 million when comparing 2016 to 2015.2019. Both comparative periods included the impact of the same factors that affected gross profit (see discussion below). In addition to the impact of foreign currency exchange on net sales discussed above, petroleum additives operating profit also included including an unfavorable foreign currency impact when comparing 2017 and 2016, but a favorable impact when comparing 2016 and 2015 arising from other transactions.
translation impact.
The operating profit margin was 16.7% in 2020 and 16.5% in 2017, 18.9%2019. Despite the economic disruption from the COVID-19 pandemic during 2020 resulting in 2016,lower product shipment volumes and 17.6% in 2015. Increases in raw material costs have continuedreduced net sales compared to put downward pressure on margins, and our actions with regard to pricing have not kept pace. Given this environment, our ongoing focus will be to recover our margins so that they continue to be in line with our expectations for2019, the performance of our business over the long-term. While operating profit margin is slightly improved from 2019 levels. Operating profit margins remain a priority, and while they will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry are unchanged.
GrossPetroleum additives gross profit decreased $34$37 million when comparing 20172020 and 2016 and increased $11 million when comparing 2016 and 2015, consistent with the change in operating profit margins.2019. Cost of salesgoods sold as a percentage of net sales has increased slightlywas 70.4% in 2017 over the prior two years reflecting percentages of 71%2020 and 71.1% in 2017, 67% in 2016, and 68% in 2015.2019.
When comparing 20172020 and 2016,2019, the decrease in gross profit resulted predominantly from the unfavorable raw material costsimpacts from product shipments and lower selling prices (including product mix)(both as discussed in the Net Sales section above), as well as unfavorable conversion costs, which together contributed over 100% of the changes.change between 2020 and 2019. These unfavorable factors were partially offset by increases in products shipments as discussed in the Net Sales section above.
When comparing 2016 and 2015, the primary factor in the improvement in gross profit resulted from a favorablelower raw material cost variance due to lower costs, which contributed over 100% of the change, along with favorable impacts from the volume variance in product shipments (as discussed in the Net Sales section above), conversion costs, and miscellaneous costs. An unfavorable selling price variance mostly offset the favorable impacts.
The sales price variance for both comparative periods included the impact from foreign currency rates as discussed in the Net Sales section above.
Selling,Petroleum additives selling, general, and administrative expenses (SG&A) were essentially flat$7 million, or 5.7% lower in 20172020 compared to 2016, while expenses in 2016 were $2 million, or 1.3%, lower than 2015 levels.2019. SG&A as a percentage of net sales was 6.2%5.9% in 2017, 6.7%2020 and 5.8% in 2016, and 6.5% in 2015.2019. Our SG&A costs are mainlyprimarily personnel-related and include salaries, benefits and other costs associated with our workforce. Thereworkforce, including travel-related expenses. While personnel-related costs fluctuate from year to year, there were no significant changes in the drivers of these costs when comparing 2020 and 2019 other than reduced travel-related expenses due to the years.impact of the COVID-19 pandemic.
When comparing 2017 with 2016, R&D expensesOur investment in petroleum additives research, development, and testing (R&D) decreased approximately $17$4 million and when comparing 20162020 with 2015, R&D decreased approximately $1 million. When comparing 2017 with 2016, the decrease was primarily in the lubricant additives product lines. For the 2016 to 2015 comparison, investments in R&D in the lubricant additives product lines increased, but were more than offset by reductions in the fuel additives product lines.2019. As a percentage of net sales, R&D was 6.4%7.0% in 2017, 7.7%2020 and 6.6% in 2016, and 7.4% in 2015.
2019. Our R&D investments reflect our efforts to support the development of solutions that meet our customers' needs, meet new and evolving standards, and support our expansion into new product areas. Our approach to R&D investment, as it is with SG&A, is one of purposeful spending on programs to support our current product base and to ensure that we develop products to support our customers' programs in the future. R&D investments include personnel-related costs, as well as costs for internal and external testing of our products. Most R&D is incurred in the United States and in the United Kingdom, with over 70% of total R&D being attributable to the North America and EMEAI regions. Substantially all investments in new product development are incurred in the United States and the United Kingdom.U.K., with approximately 70% of total R&D being attributable to the North America and EMEAI regions. The remaining 30% of R&D is attributable to the Asia Pacific and Latin America regions and represents customer technology support services in those regions. All of our R&D is related to the petroleum additives segment.
The following discussion references certain captions on the Consolidated Statements of Income.
Interest and Financing Expenses
Interest and financing expenses were $22$26 million in 2017, $172020 and $29 million in 2016, and $15 million in 2015.2019. The increasedecrease in interest and financing expense between 20172020 and 20162019 resulted primarily from highera lower average interest rates, as well as higher average debt. The increase in interest and financing expenses between 2016 and 2015 resulted primarily from higher average debt.
rate during 2020.
Other Income (Expense), Net
Other income (expense), net was income of $1 million in 2017 and expense of $3$46 million in both 20162020 and 2015.$24 million in 2019. The amount for 2017 was comprised2020 included a gain of immaterial items.$16 million related to the sale of a non-operating parcel of real estate. The amounts for 2016 and 2015 primarily reflectedboth periods also included the impact from an interest rate swap derivative instrument recorded at fair value through earnings, which we terminated in 2016.components of net periodic benefit cost (income), except for service costs. See Note 17 for further information on total periodic benefit cost (income).
Income Tax Expense
Income tax expense was $125$61 million in 2017,2020 and $100$77 million in both 2016 and 2015.2019. The effective tax rate was 39.6%18.3% in 2017, 29.1%2020 and 23.3% in 2016,2019. When comparing 2020 and 29.6% in 2015. The effective2019, income tax rates for each year includeddecreased $16 million due to the benefit of income in foreign jurisdictions with lower tax rates than the United States, as well as a benefit from the domestic manufacturing tax deduction. The effective tax rates for all years included the domestic R&D tax credit for that year. See Note 18 for further details on income taxes.
On December 22, 2017, the United States enacted tax legislation commonly known as the Tax Cuts and Jobs Act (Tax Reform Act), which required a one-time tax in 2017 on the deemed repatriation of previously deferred foreign earnings and reduced the U.S. corporate tax rate to 21% beginning in 2018. We recorded a net tax expense of $31 million as a result of the Tax Reform Act. Included in this expense amount was $32 million related to the deemed repatriation of foreign earnings, which was partially offset by reductions to deferred tax liabilities. We believe that this is a reasonable estimate of the impact of the effects of the Tax Reform Act, and any adjustments to this provisional amount will impact tax expense or benefit in the period in which the adjustments are determined, which will be no later than the fourth quarter of 2018. Although our analysis is not fully completed, we expect that the reduction in the U.S. corporate tax rate will result in a favorable impact to our net income and cash flows in future years.
rate. The changesdecrease in the effective tax rate which arewas primarily due to the Tax Reform Act, resulted in higher incomeresult of finalizing prior year tax expense of $33 million when compared to 2016, which was partially offset by lower income before incomefilings and releasing certain tax expense. reserves.
When comparing 2016 and 2015, the decrease in the effective income tax rate resulted in lower income tax expense of $2 million, which was substantially offset by higher income before income tax expense.
CASH FLOWS DISCUSSION
We generated cash from operating activities of $243$284 million in 2017, $3532020 and $337 million in 2016, and $268 million in 2015.2019.
During 2017,2020, we used the $243$284 million of cash generated from operations $250along with $19 million from the issuance of the 3.78% senior notes, and $108 million cash on hand to fund the acquisitionrepurchase $101 million of AMSA for $184our common stock, pay $83 million of dividends on our common stock, repay the outstanding balance of $156$45 million on our revolving credit facility, and fund $149$93 million infor capital expenditures. We also paid dividends of $83 million and repurchased $26 million of our common stock. Cash flows from operating activities included a decrease of $36$54 million from higher working capital requirements, $31 million from the impact of the Tax Reform Act, and cash contributions of $26$11 million forto our pension and postretirement plans.plans, and a gain of $16 million related to the sale of a parcel of non-operating real estate.
During 2016,2019, we used the $353$337 million cash generated from operations and $11to repay $123 million of borrowings on our revolving credit facility, to fund $143pay $82 million of dividends on our common stock, and fund capital expenditures fund $76 million in dividend payments, and repurchase $36 million of our common stock. These transactions, along with an unfavorable foreign currency impact of $8 million resulted in an increase of $99 million in cash and cash equivalents.$59 million. Cash flows from operating activities included an increase of $21$5 million from lower working capital requirements, as well as cash contributions of $26$10 million forto our pension and postretirement plans.
During 2015, we used the $268 million cash generated from operations, as well as $131 million of borrowings on our revolving credit facility and $10 million cash-on-hand, to repurchase $195 million of our common stock, fund $126 million of capital expenditures, and fund $71 million in dividend payments. The change in cash also included an unfavorable foreign currency impact of $12 million. Cash flows from operating activities included a decrease of $23 million from higher working capital requirements, as well as cash contributions of $27 million for our pension and postretirement plans.
We expect that cash from operations, together with borrowing available under our credit facilities, will continue to be sufficient to cover our operating needs and planned capital expenditures for at least the next twelve months.
FINANCIAL POSITION AND LIQUIDITY
Cash
At December 31, 2017,2020, we had cash and cash equivalents of $84$125 million as compared to $192$144 million at the end of 2016.2019.
Our cashCash and cash equivalents held by our foreign subsidiaries amounted to approximately $77$97 million at December 31, 20172020 and $189$99 million at December 31, 2016. 2019. Periodically, we repatriate cash from our foreign subsidiaries to the United States through intercompany dividends and loans. We do not anticipate significant tax consequences of future distributions of foreign earnings.
A significant amountportion of theseour foreign cash balances areis associated with earnings that we have asserted are indefinitely reinvested. We plan to use these indefinitely reinvested earnings to support growth outside of the United States through funding of operating expenses, research and development expenses, capital expenditures, and other cash needs of our foreign subsidiaries. Periodically, we repatriate cash from our foreign subsidiaries to the United States through intercompany dividends. These intercompany dividends are paid only by subsidiaries whose earnings we have not asserted are indefinitely reinvested or whose earnings qualify as previously taxed income, as defined by the United States Internal Revenue Code. Under the Tax Reform Act enacted in 2017, previously deferred foreign earnings were subjected to U.S. tax in 2017. Future earnings will not be subject to U.S. federal tax. As a result of this new legislation, we are continuing to evaluate our permanent investment assertions, but we do not anticipate significant U.S. or foreign tax consequences of future distributions of foreign earnings. As final determinations are made, any required adjustment will be recorded to income tax expense or benefit in the period that the determination is made. As part
Debt
A summary of our foreign subsidiary repatriation activities, we received cash dividends from our foreign subsidiaries of $0.2 million for 2017, $6 million for 2016, and $28 million for 2015. The amount of cash that we repatriate from foreign subsidiariesdebt instruments follows. A full discussion is in any given year is dependent upon many factors, including utilization of available cash in the foreign locations for working capital, capital investments, and other needs.Note 13.
Debt
4.10% Senior Notes -At both December 31, 20172020 and December 31, 2016,2019, we had $350 million of 4.10% senior notes due 2022 with interest payable semiannually and which are senior unsecured obligations. The senior notes are registered under the Securities Act of 1933. We incurred financing costs totaling approximately $5 million related to the 4.10% senior notes, which are being amortized over the term of the agreement.
The 4.10% senior notes rank:
equal in right of payment with all of our existing and future senior unsecured indebtedness; and
senior in right of payment to any of our future subordinated indebtedness.
The indenture governing the 4.10% senior notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to:
create or permit to exist liens;
enter into sale-leaseback transactions;
incur additional guarantees; and
sell all or substantially all of our assets or consolidate or merge with or into other companies.
We were in compliance with all covenants under the indenture governing the 4.10% senior notes as of December 31, 20172020 and December 31, 2016.2019.
3.78% Senior Notes -On January 4, 2017, we issued $250 million in senior unsecured notes in a private placement with The Prudential Insurance Company of America and certain other purchasers. These notes bear interest at 3.78% and mature on January 4, 2029. Interest is payable semiannually and principalsemiannually. Principal payments of $50 million are payable annually beginning on January 4, 2025. We have the right to make optional prepayments on the notes at any time, subject to certain limitations. The note purchase agreement contains representations, warranties, terms and conditions customary for transactions of this type. These include negative covenants, certain financial covenants, and events of default which are substantially similar to the covenants and events of default in our revolving credit facility.
We were in compliance with all covenants under the 3.78% senior notes as of December 31, 2017.
2020 and December 31, 2019.
Revolving Credit Facility – On September 22, 2017, weMarch 5, 2020, NewMarket and certain foreign subsidiary borrowers entered into a Credit Agreement (Credit(the Credit Agreement) with a term of five years. The Credit Agreement provides for an $850a $900 million, multicurrency revolving credit facility with a $150$500 million sublimit for multicurrencyforeign currency borrowings, a $75$50 million sublimit for letters of credit, and a $20 million sublimit for swingline loans. The Credit Agreement includes an expansion feature which allows us, subject to certain conditions, to request an increase in the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $425 million. In addition, the Credit Agreement includes provisions that allow certain of our foreign subsidiaries to borrow under the agreement. Concurrent with entering into the Credit Agreement, we terminated our former revolving credit facility that we had entered into in 2014.
There were no outstanding borrowings under the Credit Agreement at December 31, 2017. At December 31, 2016, the outstanding borrowings under our former revolving credit facility amounted to $156 million.
We paid financing costs in 2017 of approximately $1.9 million related to this revolving credit facility and carried over deferred financing costs from our previous revolving credit facility of approximately $0.9 million, resulting in total deferred financing costs of $2.8 million as of December 31, 2017, which we are amortizing over the term of the Credit Agreement. Deferred financing costs from our former revolving credit facility of approximately $0.2 million were written off when we entered into our current revolving credit facility.
TheNewMarket's obligations under the Credit Agreement are unsecured and the obligations of foreign subsidiary borrowers are fully and unconditionally guaranteed by NewMarket. The revolving credit facility maturesis available on September 22, 2022.a revolving basis until March 5, 2025.
Borrowings madeThere were no outstanding borrowings under the revolving credit facility bear interest, at December 31, 2020 compared to $45 million in outstanding borrowings at December 31, 2019 under our option,former facility. Outstanding letters of credit amounted to $2 million at an annual rate equal to either (1) the Alternate Base Rate (ABR) plus the Applicable Rate (as definedDecember 31, 2020 and $3 million at December 31, 2019 resulting in the Credit Agreement) (solely inunused portion of the case of loans denominated in U.S. dollarsapplicable credit facility amounting to NewMarket) or (2) the Adjusted LIBO Rate plus the Applicable Rate. ABR is the greater of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate, (ii) the NYFRB Rate (as defined in the Credit Agreement) from time to time plus 0.5%, and (iii) the Adjusted LIBO Rate for a one month interest period plus 1%. The Adjusted LIBO Rate means the rate$898 million at which Eurocurrency deposits in the London interbank market for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other applicable mandatory costs. The Applicable Rate ranges from 0.0% to 0.625%(depending on our consolidated Leverage Ratio or Credit Ratings) for loans bearing interest based on the ABR. The Applicable Rate ranges from 1.00% to 1.625% (depending on our Leverage Ratio or Credit Ratings) for loans bearing interest based on the Adjusted LIBO Rate. At December 31, 2017,2020 and $803 million at December 31, 2019.
The average interest rate for borrowings under the Applicable Ratecredit facilities was 0.125% for loans bearing interest based on the ABR1.4% during 2020 and 1.125% for loans bearing interest based on the Adjusted LIBO Rate.3.0% during 2019.
The Credit Agreement contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Credit Agreement) of no more than 3.503.75 to 1.00 except during an Increased Leverage Period (as defined in the Credit Agreement) at the end of each quarter, and a consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of no less than 3.00 to 1.00, calculated on a rolling four quarter basis, as of the end of each fiscal quarter.
. At December 31, 2017,2020, the Leverage Ratio was 1.52 and the Interest Coverage Ratio was 15.49.
1.45. We were in compliance with all covenants under the current revolving credit facility at December 31, 2017 and the former revolving credit facility at December 31, 2016.
The following table provides information related to the unused portion of our revolving credit facility in effect at December 31, 20172020 and at December 31, 2016.2019.
|
| | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
Maximum borrowing capacity under the revolving credit facility | | $ | 850 |
| | $ | 650 |
|
Outstanding borrowings under the revolving credit facility | | 0 |
| | 156 |
|
Outstanding letters of credit | | 3 |
| | 3 |
|
Unused portion of revolving credit facility | | $ | 847 |
| | $ | 491 |
|
The average interest rate for borrowings under our revolving credit facilities was 2.5% during 2017 and 1.9% during 2016.
Other Borrowings -OurTwo of our subsidiaries in Singapore and China each have access to separate short-term lines of credit totaling $18of $10 million. One of our subsidiaries in the U.K. has access to a short-term line of credit of 10 million Euro. There was no activity on these lines of credit in 2020, nor was there an outstanding balance on any of these lines of credit at December 31, 2017. The outstanding balance under these lines at December 31, 2016 was $1 million. The average interest rate was approximately 4.1% during 2017 and 3.9% during 2016.2019.
***
We had long-term debt of $603$599 million at December 31, 20172020 and $507$643 million at December 31, 2016.2019. The increasedecrease in debt resulted from repaying borrowings outstanding under the new 3.78% senior notes, as well as a new capital lease, partially offset by the pay-off of the outstanding revolving credit facility during 2017.2020.
As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt decreased from 51.2%48.5% at the end of 20162019 to 50.1%44.1% at the end of 2017.2020. The change in the percentage was primarily the result of the decrease in long-term debt, as well as the increase in shareholders' equity, partially offset by an increase in debt.equity. The change in shareholders’ equity primarily reflects our earnings and the impact of the foreign currency translation adjustment offset by stock repurchases, dividend payments, and a small increasedecrease in the funded position of our defined benefit plans, offset by the impact of stock repurchases and dividend payments.plans. Normally, we repay any outstanding long-term debt with cash from operations or refinancing activities.
Working Capital
Including cash and cash equivalents and the impact of foreign currency on the balance sheet, at December 31, 2017,2020, we had working capital of $517$586 million,, resulting in a current ratio of 2.632.87 to 1. Our working capital at December 31, 20162019 on the same basis was $542$571 million,, resulting in a current ratio of 2.842.85 to 1.
Other than the decrease in cash and cash equivalents, the most significant changes in working capital since December 31, 20162019 resulted from an increase in accounts receivable and inventories,inventory, which werewas partially offset by an increase in accounts payable. The higher accounts receivable balanceincrease in inventories was primarily reflecting increased trade receivables due to higher sales levels in all regions when comparing the fourth quarter of 2017 with the fourth quarter of 2016, as well as some foreign currency impact. The increase in trade receivables was partially offset by a reduction in an income tax receivable since December 31, 2016. The increase in inventory was across all regions with most of the increase in the EMEAI region. The increase resulted from higher demand, timing of shipments, higher raw material costs, and the additional inventory from our acquisition of AMSA.reserve, as well as planning for first quarter 2021 sales forecasts. The increase in accounts payable wasreflected normal fluctuations across our major subsidiaries due to higher raw material costs, timing of payments, and foreign currency impacts.the regions.
Capital Expenditures
Capital expenditures were $149$93 million for 2017, $1432020 and $59 million for 2016, and $126 million for 2015.2019. We currently estimate capital expenditures in 20182021 will be in the range of $75 million to $85 million as we anticipate spending on several improvements to our manufacturing and R&D infrastructure around $125 million.the world. We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our $850$900 million revolving credit facility.
The estimated 2018 capital expenditure amount includes anticipated spending on several improvements to our manufacturing and R&D infrastructure around the world.
Environmental Expenses
We spent approximately $26$29 million in 2017, $24 millionboth 2020 and in 2016, and $22 million in 20152019 for ongoing environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures. These environmental operating and clean-up expenses are included in cost of goods sold. We expect to continue to fund these costs through cash provided by operations.
Liquidity and Contractual Obligations
We have both current and long-term obligations that have known payment streams and are discussed throughout this Report on Form 10-K. The more material of these include debt-related obligations, lease obligations, purchase commitments, including those for property, plant, and equipment, contributions to pension and postretirement benefit plans, and environmental dismantling and decontamination.
The debt-related contractual obligations include both principle payments on outstanding long-term debt and the related interest payments. The maturity dates and interest rates, as well as information on the repayment of the principle on our long-term debt is detailed above in the Debt section, as well as in Note 13. At December 31, 2020, all of our long-term debt was at fixed rates. Interest is paid semi-annually on both of our fixed rate long-term debt agreements.
Note 16 provides information by year on our lease obligations which have commenced. We also have obligations for leases that have not yet commenced of $5 million in 2021, $3 million in 2022, $3 million in 2023, $2 million in 2024, $2 million in 2025, and $10 million thereafter. Note 17 includes information on contributions to pension and postretirement benefit plans. Benefit payments under these plans are included in Note 17 are predominantly paid from assets held in trust. Further information on purchase commitments, including those for purchases of property, plant, and equipment are in Note 20.
The annual operating expenses and capital expenditures associated with compliance with environmental, health, and safety regulations are included in Item 1, Governmental and Environmental Regulations. In addition to these costs, there are expected cash flows for dismantling and decontamination of environmental sites. At December 31, 2020, these costs were estimated at $1 million in each of 2021 through 2025, and $8 million thereafter.
We expect that cash from operations, together with borrowing available under our credit facilities, will continue to be sufficient for our operating needs and planned capital expenditures for both a current and long-term horizon.
The table below shows our year-end contractual obligations at December 31, 2020 by year due.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
(in millions) | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Debt obligations (a) | | $ | 600 | | | $ | 0 | | | $ | 350 | | | $ | 50 | | | $ | 200 | |
Interest payable on long-term debt | | 85 | | | 24 | | | 33 | | | 17 | | | 11 | |
Letters of credit (b) | | 2 | | | 0 | | | 0 | | | 2 | | | 0 | |
Finance lease obligations (c) | | 14 | | | 2 | | | 3 | | | 2 | | | 7 | |
Operating lease obligations (c) | | 81 | | | 15 | | | 22 | | | 11 | | | 33 | |
Leases not yet commenced | | 25 | | | 5 | | | 6 | | | 4 | | | 10 | |
Property, plant, and equipment purchase obligations | | 38 | | | 38 | | | 0 | | | 0 | | | 0 | |
Purchase obligations (d) | | 361 | | | 151 | | | 193 | | | 5 | | | 12 | |
Other long-term liabilities (e) | | 28 | | | 13 | | | 2 | | | 5 | | | 8 | |
Reserves for uncertain tax positions | | 7 | | | 1 | | | 2 | | | 4 | | | 0 | |
Total | | $ | 1,241 | | | $ | 249 | | | $ | 611 | | | $ | 100 | | | $ | 281 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
(in millions) | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Debt obligations (a) | | $ | 600 |
| | $ | 0 |
| | $ | 0 |
| | $ | 350 |
| | $ | 250 |
|
Interest payable on long-term debt and capital lease obligations | | 158 |
| | 24 |
| | 48 |
| | 48 |
| | 38 |
|
Letters of credit (b) | | 3 |
| | 0 |
| | 0 |
| | 0 |
| | 3 |
|
Capital lease obligations (c) | | 6 |
| | 0 |
| | 1 |
| | 1 |
| | 4 |
|
Operating lease obligations | | 62 |
| | 15 |
| | 19 |
| | 9 |
| | 19 |
|
Property, plant, and equipment purchase obligations | | 26 |
| | 26 |
| | 0 |
| | 0 |
| | 0 |
|
Purchase obligations (d) | | 1,087 |
| | 194 |
| | 397 |
| | 383 |
| | 113 |
|
Other long-term liabilities (e) | | 69 |
| | 28 |
| | 7 |
| | 10 |
| | 24 |
|
Reserves for uncertain tax positions | | 9 |
| | 2 |
| | 6 |
| | 1 |
| | 0 |
|
Total | | $ | 2,020 |
| | $ | 289 |
| | $ | 478 |
| | $ | 802 |
| | $ | 451 |
|
(a)Amounts represent contractual payments due on the 4.10% senior notes and the Prudential senior unsecured notes as of December 31, 2020. See Note 13 for more information on long-term debt obligations. | |
(a) | Amounts represent contractual payments due on the 4.10% senior notes and the Prudential senior unsecured notes as of December 31, 2017. See Note 12 for more information on long-term debt obligations.
|
| |
(b) | We intend to renew letters of credit when necessary as they mature; therefore, the obligations do not have a definitive maturity date. |
| |
(c) | Amounts represent the debt obligation under the capital leases related to the Singapore manufacturing facility, as well as future minimum lease payments in excess of the capital lease debt obligation. |
| |
(d) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Purchase orders made in the ordinary course of business are excluded from the above table. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheets as accounts payable or accrued expenses. |
| |
(e) | These represent other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. Amounts include environmental liabilities, contributions associated with pension and postretirement benefit plans, and tax payments related to the deemed repatriation of foreign earnings resulting from the Tax Reform Act. Amounts accrued for potential exposure with respect to litigation, claims, and assessments are not included in the table above.
|
(b)We intend to renew letters of credit when necessary as they mature; therefore, the maturity date is the same as the revolving credit facility under which the letters of credit are issued.
(c)Amounts represent the undiscounted obligation for lease payments for leases having an initial lease term of at least one year.
(d)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Purchase orders made in the ordinary course of business are excluded from the above table. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheets as accounts payable or accrued expenses.
(e)These represent other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. Amounts include environmental liabilities, contributions associated with pension and postretirement benefit plans, and tax payments related to the deemed repatriation of foreign earnings resulting from the Tax Reform Act. Amounts accrued for potential exposure with respect to litigation, claims, and assessments are not included in the table above.
Pension and Postretirement Benefit Plans
Our U.S. and foreign benefit plans are discussed separately below. The information applies to all of our U.S. benefit plans. Our foreign plans are quite diverse, and the actuarial assumptions used by the various foreign plans are based upon the circumstances of each particular country and retirement plan. The discussion surrounding our foreign retirement benefits focuses only on our pension plan in the United Kingdom (U.K.), which represents the majority of the amounts recorded in our financial statements for foreign pension plans. We use a December 31 measurement date to determine our pension and postretirement expenses and related financial disclosure information. Additional information on our pension and postretirement plans is in Note 17.17.
U.S. Pension and Postretirement Benefit Plans—The average remaining service period of active participants for our U.S. plans is 13.513 years, while the average remaining life expectancy of inactive participants is 23.223 years. We utilize the sex distinct RP-2014 tablesPri-2012 table with separate rates for annuitants, non-annuitants, and non-annuitants, adjusted to remove MP-2014 improvements, with separate rates forcontingent annuitants, and non-annuitants, projected generationally withusing Scale MP-2017MP-2020 in determining the impact of the U.S. benefit plans on our financial statements.
Investment Return Assumptions and Asset Allocation—We periodically review our assumptions for the long-term expected return on pension plan assets. As part of the review and to develop expected rates of return, we considered an analysis of expected returns based on the U.S. plans’ asset allocation as of both January 1, 20182021 and January 1, 2017.2020. This analysis reflects our expected long-term rates of return for each significant asset class or economic indicator. As of January 1, 2018, the expected rates were 8.5% for U.S. large cap stocks, 4.1% for fixed income, and 3.1% for inflation. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.
The While the asset allocation for our U.S. pension plans is predominantly weighted toward equities. Throughequities, through the ongoing monitoring of our investments and review of market data, we have determined that we should maintainreduce the expected long-term rate of return for our U.S. pension plans atfrom 8.5% to 8.0% at December 31, 2017.2020.
An actuarial gain on the assets occurred during 2017both 2020 and 2019 as the actual investment return for all of our U.S. pension plans exceeded the expected return by approximately $39$43 million in 2017. An actuarial loss occurred during both 20162020 and 2015 as the actual investment return for all of our U.S. pension plans was less than the expected return by approximately $3$75 million in 2016 and $26 million in 2015.2019. Investment gains and losses are recognized in earnings on an amortized basis over a period of years, resulting in decreased expenseyears. The amortization of the actuarial net loss is expected to be approximately $1.3$6 million in 2018.2021 resulting primarily from the actuarial loss on the plan liabilities which has only partially been offset by the investment gains on plan assets. We expect that there will be continued volatility in pension expense as actual investment returns vary from the expected return, but we continue to believe the potential long-term benefits justify the risk premium for equity investments.
At December 31, 2017,2020, our expected long-term rate of return on our postretirement plans was 4.5%. This rate varies from the pension rate of 8.5%8.0% primarily because of the difference in investment of assets. The assets of the postretirement plan are held in an insurance contract, which results in a lower assumed rate of investment return.
Pension expense and the life insurance portion of postretirement expense are sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 7.5%7.0% for pension assets and 3.5% for postretirement benefit assets (while holding other assumptions constant) would increase the forecasted 20182021 expense for our U.S. pension and postretirement plans by approximately $4$5 million. Similarly, a 100 basis point increase in the expected rate of return to 9.5%9.0% for pension assets and 5.5% for postretirement benefit assets (while holding other assumptions constant) would reduce forecasted 20182021 pension and postretirement expense by $4$5 million.
Discount Rate Assumption—We develop the discount rate assumption by determining the single effective discount rate for a unique hypothetical portfolio constructed from investment-grade bonds that, in the aggregate, match the projected cash flows of each of our retirement plans. The discount rate is developed based on the hypothetical portfolio on the last day of December. The discount rate at December 31, 20172020 was 3.75%2.875% for all plans.
Pension and postretirement benefit expense is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to 2.75%1.875% (while holding other assumptions constant) would increase the forecasted 20182021 expense for our U.S. pension and postretirement benefit plans by approximately $7$9 million. A 100 basis point increase in the discount rate to 4.75%3.875% would reduce forecasted 20182021 pension and postretirement benefit expense by $6$7 million.
Rate of Projected Compensation Increase—We have maintained our rate of projected compensation increase at December 31, 20172020 at 3.5%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future.
Liquidity—Cash contribution requirements to the pension plan are sensitive to changes in assumed interest rates and investment gains or losses in the same manner as pension expense. We expect our aggregate cash contributions before income taxes, to the U.S. pension plans will be approximately $19$3 million in 2018.2021. We expect our contributions to the postretirement benefit plans will be approximately $1$2 million in 2018.2021.
Foreign Pension Benefit Plans—Our foreign pension plans are quite diverse. The following information applies only to our U.K. pension plan, which represents the majority of the amounts recorded in our financial statements for our foreign pension plans. The average remaining service period of active participants for our U.K. plan is 1316 years, while the average remaining life expectancy of inactive participants is 2426 years. WeIn determining the impact of the U.K. pension plans on our financial statements, we utilize the S2PS3P (Light) mortality tables and allow for future projected improvements in life expectancy in line with the CMI 20162019 model (with the defaultcore smoothing factor),parameter and an initial addition to mortality improvements of 0.4% per year) with a long-term rate of improvement of 1% per year based on the membership of the plan, in determining the impact of the U.K. pension plans on our financial statements.plan.
Investment Return Assumptions and Asset Allocation—We periodically review our assumptions for the long-term expected return on the U.K. pension plan assets. The expected long-term rate of return is based on both the asset allocation, as well as yields available in the U.K. markets.
The target asset allocation in the U.K. is to be invested 40% in pooled equities funds, 40% in pooled government bonds, and 20% in pooled diversified growth funds. The actual allocation at the end of 20172020 was 41%40% in pooled equities funds, 40% in pooled government bonds, and 19%20% in pooled diversified growth funds. Based on the actual asset allocation and the expected yields available in the U.K. markets, the expected long-term rate of return for the U.K. pension plan was 5.7%5.0% at December 31, 2017.2020.
An actuarial gainActuarial gains on the assets occurred during both 20172020 and 20162019 as the actual investment return exceeded the expected investment return by approximately $5$4 million in 20172020 and $22$10 million in 2016. An actuarial loss occurred during 2015 as the actual investment return was less than the expected investment return by approximately $5 million.2019. Investment gains and losses are recognized in pension expenseearnings on an amortized basis.basis over a period of years. The amortization of the actuarial net loss is not expected to be materialapproximately $3 million in 2018.2021 resulting primarily from the actuarial loss on the plan liabilities, which has only partially been offset by investment gains on the plan assets. We expect that there will be continued volatility in pension expense as actual investment returns vary from the expected return, but we continue to believe the potential benefits justify the risk premium for the target asset allocation.
Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 4.7%4% (while holding other assumptions constant) would increase the forecasted 20182021 expense for our U.K. pension plan by approximately $2 million. Similarly, a 100 basis point increase in the expected rate of return to 6.7%6% (while holding other assumptions constant) would reduce forecasted 20182021 pension expense by approximately $2 million.
Discount Rate Assumption—We utilize a yield curve based on AA-rated corporate bond yields in developing a discount rate assumption. The yield appropriate to the duration of the U.K. plan liabilities is then used. The discount rate at December 31, 20172020 was 2.6%1.3%.
Pension expense is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to 1.6%0.3% (while holding other assumptions constant) would increase the forecasted 20182021 expense for our U.K. pension plans by approximately $1$2 million. A 100 basis point increase in the discount rate to 3.6%2.3% would reduce forecasted 20172021 pension expense by approximately $1 million.
Rate of Projected Compensation Increase—Our rate of projected compensation increase at December 31, 20172020 is 4.3%4.1%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future.
Liquidity—Cash contribution requirements to the U.K. pension plan are sensitive to changes in assumed interest rates utilized in the pension valuation.and investment gains or losses. We expect our aggregate U.K. cash contributions before income taxes, will be approximately $4$5 million in 2018.2021.
OUTLOOK
We are pleased with the overall performance of our business in 2017. Our stated goal is to provide a 10% compounded return per year for our shareholders over any five-year period (defined by earnings per share growth plus dividends)dividend yield), although we may not necessarily achieve a 10% return each year. We continue to have confidence in our customer-focused strategy and approach to the market. We believe the fundamentals of how we run our business - a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, and world-class supply chain capability - will continue to be beneficial for all of our stakeholders over the long term.
We expect our petroleum additives segment will continue to deliver solidexperience impacts to its operating performance in 2018, after having posted strong operating results overdue to the past several years.current economic environment. Our global business will see varying effects on demand that will differ by region based on our product portfolio and geographic coverage. The global market should stabilize when government restrictions on the movement of people, goods, and services implemented as a result of the COVID-19 pandemic are lifted, as modern transportation and machinery cannot function without our products. We expect that the petroleum additives industry shipment demandmarket will grow at an average annual rate ofin the 1% to 2% overrange annually for the long-term, as there have been no significant changes in the positive fundamentals of the industry. Over the long-term, weforeseeable future. We plan to exceed that growth rate over the industry growth rate.long-term.
WeIn the past several years we have made significant investments to expandin our capabilities aroundbusiness as the world over the last few years, which have continued in 2017.industry fundamentals remain positive. These investments have been and will continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability and geographic expansion. Our investments in support of our customers include completing construction of a new manufacturing facility in Singapore and the acquisition of the AMSA business. We intend to utilize these new investments to improve our ability to deliver the solutions that our customers value, expand our global reach, and enhance our operating results. We will continue to invest in our capabilities to provide even better value, service, technology, and customer solutions.
OurTypically, our business generates significant amounts of cash beyond what is necessary for the expansion and growth of our current offerings. We are making investments like the ones mentioned above to position ourselves for the future. We regularly review our many internal opportunities to utilize excess cash from a technological, geographic, production capability, and product line perspective.perspectives. We believe our capital spending is creating the capability we need to grow and support our customers worldwide, and our research and development investments are positioning us well to provide added value to our customers. Our primary focus in the acquisition area remains on the petroleum additives industry. It is our view that this industry segment will provide the greatest opportunity for solid returns on our investments while minimizing risk. We remain focused on this strategy and will evaluate any future opportunities. We will continue to evaluate all alternative uses of cash to enhance shareholder value, including stock repurchases and dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion highlights some of the more critical areas where a significant change in facts and circumstances in our operating and financial environment could cause a change in future reported financial results.
Income Taxes
We file United States, foreign, state, and local income tax returns. Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. Any significant impact as a result of changes in underlying facts, law, tax rates, or tax audits could lead to adjustments to our income tax expense, effective tax rate, financial position, or cash flow.
Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities, as well as for net operating losses and tax credit carryforwards. When recording these deferred tax assets and liabilities, we must estimate the tax rates we expect will apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. In addition, we may record valuation allowances to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Judgment is required as we consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. If our estimates and assumptions change from those used when we recorded deferred tax assets and liabilities, the effect on our results of operations and financial position could be material.
The income tax returns for our entities in the United States and in foreign jurisdictions are open for examination by tax authorities. We assess our income tax positions and record a liability for all years open for examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. The economic benefit associated with a tax position will be recognized only if we determine it is more likely than not to be upheld on audit. Although we believe our estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our results of operations and financial position.
At each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Our provision for income taxes is impacted by the income tax rates of the countries where we operate. A change in the geographical source of our income can affect the effective tax rate. Significant judgment is involved regarding the application of global income tax laws and regulations when projecting the jurisdictional mix of income. Additionally, interpretations of tax laws, court decisions, or other guidance provided by taxing authorities influence our estimate of the effective income tax rate. As a result, our actual effective income tax rate and related income tax liabilities may differ materially from our estimated effective tax rate and related income tax liabilities.
Intangibles (net of amortization) and Goodwill
We have certain identifiable intangibles amounting to $6 million and goodwill amounting to $124 million at December 31, 2020 that are discussed in Note 10. These intangibles and goodwill relate to our petroleum additives business. The intangibles are being amortized over periods with up to approximately 8 years of remaining life. We continue to assess the market related to the intangibles and goodwill, as well as their specific values and evaluate the intangibles and goodwill for any potential impairment when significant events or circumstances occur that might impair the value of these assets. We have concluded the values are appropriate, as are the amortization periods for the intangibles. However, if conditions were to substantially deteriorate in the petroleum additives market, it could possibly cause a decrease in the estimated useful lives of the intangible assets or result in a noncash write-off of all or a portion of the intangibles and goodwill carrying amounts. A reduction in the amortization period of the intangibles would have no effect on cash flows. We do not anticipate such a change in the market conditions in the near term.
Pension Plans and Other Postretirement Benefits
We use assumptions to record the impact of the pension and postretirement benefit plans in the financial statements. These assumptions include the discount rate and the expected long-term rate of return on plan assets, and rate of compensation increase.assets. A change in any one of these assumptions could cause different results for the plans and therefore, impact our results of operations, cash flows, and financial condition. We develop these assumptions after considering available information that we deem relevant. Information is provided on the pension and postretirement plans in Note 17. In addition, further disclosure of the effect of changes in these assumptions is provided in the “Financial Position and Liquidity” section of Item 7.
Environmental and Legal Proceedings
We have disclosed our environmental matters in Item 1 of this Annual Report on Form 10-K, as well as in Note 16.20. Our estimates for costs that will be incurred to satisfy our obligations related to environmental matters are affected by many variables, including our judgment regarding the extent of remediation that will be required, future changes in and enforcement and interpretation of laws and regulations, current and future technology available, and timing of remediation activities. While we currently do not anticipate significant changes to the many factors that could impact our environmental requirements, we continue to keep our accruals consistent with these requirements as they change.
Also, as noted in the discussion of “Legal Proceedings” in Item 3 of this Annual Report on Form 10-K, while it is not possible to predict or determine with certainty the outcome of any legal proceeding, it is our opinion, based on our current knowledge, that we will not experience any material adverse effects on our results of operations, cash flows, or financial condition as a result of any pending or threatened proceeding.
Intangibles (net of amortization) and Goodwill
We have certain identifiable intangibles amounting to $22 million and goodwill amounting to $123 million at December 31, 2017 that are discussed in Note 9. These intangibles and goodwill relate to our petroleum additives business. The intangibles are being amortized over periods with up to approximately twelve years of remaining life. We continue to assess the market related to the intangibles and goodwill, as well as their specific values, and have concluded the values are appropriate, as are the amortization periods for the intangibles. We also evaluate the intangibles and goodwill for any potential impairment when significant events or circumstances occur that might impair the value of these assets. These evaluations continue to support the values at which the identifiable intangibles and goodwill are carried on our financial statements. However, if conditions were to substantially deteriorate in the petroleum additives market, it could possibly cause a decrease in the estimated useful lives of the intangible assets or result in a noncash write-off of all or a portion of the intangibles and goodwill carrying amounts. A reduction in the amortization period of the intangibles would have no effect on cash flows. We do not anticipate such a change in the market conditions in the near term.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a full discussion of the more significant pronouncements which may impact our financial statements,recently issued accounting standards, see Note 22.23.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to many market risk factors, including fluctuations in interest and foreign currency rates, as well as changes in the cost of raw materials. These risk factors may affect our results of operations, cash flows, and financial position.
We manage these risks through regular operating and financing methods, including the use of derivative financial instruments. When we have derivative instruments, they are with major financial institutions and are not for speculative or trading purposes. Also, as part of our financial risk management, we regularly review significant contracts for embedded derivatives and, if identified, would record them in accordance with accounting principles generally accepted in the United States.
The following analysis presents the effect on our results of operations, cash flows, and financial position as if the hypothetical changes in market risk factors occurred at December 31, 2017.2020. We analyzed only the potential impacts of our hypothetical assumptions. This analysis does not consider other possible effects that could impact our business.
Interest Rate Risk
At December 31, 2017,2020, we had total long-term debt of $603 million.$599 million. All of ourthe long-term debt is at fixed rates. There was no interest rate risk at the end of the year associated with the fixed rate debt.
At December 31, 2017,2020, we had no outstanding borrowings of variable rate debt under our revolving credit facility, so there wasfacility. Therefore, we had no interest rate risk at the end of the year associated with the revolving credit facility.variable rate debt.
A hypothetical 100 basis point decrease in interest rates, holding all other variables constant, would have resulted in a change of $37$22 million in fair value of our debt at December 31, 2017.2020.
Foreign Currency Risk
We sell to customers in foreign markets through our foreign subsidiaries, as well as through export sales from the United States. These transactions are often denominated in currencies other than the U.S. Dollar. Our primary currency exposures are the European Union Euro, British Pound Sterling, Japanese Yen, Chinese Renminbi, Indian Rupee, Singapore Dollar, Mexican Peso, Australian Dollar, and Canadian Dollar. We may enter into forward contracts as hedges to minimize the fluctuation of intercompany accounts receivable denominated in foreign currencies. At December 31, 2017,2020, we had no outstanding forward contracts.
Raw Material Price Risk
We utilize a variety of raw materials in the manufacture of our products, including base oil, polyisobutylene, antioxidants, alcohols, solvents, sulfonates, friction modifiers, olefins, and copolymers. We may also enter into contracts which commit us to purchase some of our more critical raw materials based on anticipated demand. Our profitability is sensitive to changes in the quantities of raw materials we may need and the costs of those materials which may be caused by changes in supply, demand or other market conditions, over which we have little or no control. In addition, political and economic conditions in certain regions of the world in which we operate have caused, and may continue to cause, our demand for and the cost of our raw materials to fluctuate. War, armed hostilities, terrorist acts, civil unrest, or other incidents may also cause a sudden or sharp change in our demand for and the cost of our raw materials. If we experience such increases in the cost of our raw materials, we may not be able to pass them along to our customers in the form of price increases for our products. The inability to do so would have a negative impact on our operating profit. In
addition, if our demand for raw materials were to decline such that we would not have need for the quantities required to be purchased under commitment agreements, we could incur additional charges that would affect our profitability.
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ITEM 8. | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of NewMarket Corporation:Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NewMarket Corporation and its subsidiaries (the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of income, of comprehensive income, shareholders’of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
/s/The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Pension Benefit Obligation
As described in Note 17 to the consolidated financial statements, the Company’s consolidated pension benefit obligation, excluding other postretirement benefits, was $720 million as of December 31, 2020. Management develops the actuarial assumptions used by the various US and foreign plans based upon the circumstances of each particular country and pension plan. As disclosed by management, the determination of the pension benefit obligation requires the use of estimates and assumptions. Management’s assumption in the determination of the pension benefit obligation is the discount rate.
The principal considerations for our determination that performing procedures relating to the valuation of the pension benefit obligation is a critical audit matter are the significant judgment by management to determine the pension benefit obligation. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s significant assumption used in the valuation of the pension benefit obligation, specifically the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of the pension benefit obligation, including controls over the Company’s methods, significant assumption, and data. These procedures also included, among others, testing the completeness, accuracy, and relevance
of underlying data used in the valuation of the pension benefit obligation. With the involvement of professionals with specialized skill and knowledge to assist, these procedures also included testing management’s process for determining the pension benefit obligation, evaluating the appropriateness of the methods, and evaluating the reasonableness of the significant assumption, specifically the discount rate.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 15, 2018
16, 2021
We have served as the Company'sCompany’s or its predecessor'spredecessor’s auditor since 1947.
NewMarket Corporation and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts) | | 2020 | | 2019 | | 2018 |
Net sales | | $ | 2,010,931 | | | $ | 2,190,295 | | | $ | 2,289,675 | |
Cost of goods sold | | 1,415,899 | | | 1,560,426 | | | 1,704,312 | |
Gross profit | | 595,032 | | | 629,869 | | | 585,363 | |
Selling, general, and administrative expenses | | 142,863 | | | 148,083 | | | 152,400 | |
Research, development, and testing expenses | | 140,367 | | | 144,465 | | | 140,289 | |
| | | | | | |
Operating profit | | 311,802 | | | 337,321 | | | 292,674 | |
Interest and financing expenses, net | | 26,328 | | | 29,241 | | | 26,723 | |
| | | | | | |
Other income (expense), net | | 45,813 | | | 23,510 | | | 24,334 | |
Income before income tax expense | | 331,287 | | | 331,590 | | | 290,285 | |
Income tax expense | | 60,719 | | | 77,304 | | | 55,551 | |
Net income | | $ | 270,568 | | | $ | 254,286 | | | $ | 234,734 | |
Earnings per share - basic and diluted | | $ | 24.64 | | | $ | 22.73 | | | $ | 20.34 | |
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See accompanying Notes to Consolidated Financial Statements
39
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| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts) | | 2017 | | 2016 | | 2015 |
Net sales | | $ | 2,198,404 |
| | $ | 2,049,451 |
| | $ | 2,140,830 |
|
Cost of goods sold | | 1,556,386 |
| | 1,368,690 |
| | 1,461,774 |
|
Gross profit | | 642,018 |
| | 680,761 |
| | 679,056 |
|
Selling, general, and administrative expenses | | 165,056 |
| | 161,112 |
| | 164,082 |
|
Research, development, and testing expenses | | 140,193 |
| | 156,959 |
| | 158,254 |
|
Operating profit | | 336,769 |
| | 362,690 |
| | 356,720 |
|
Interest and financing expenses, net | | 21,856 |
| | 16,785 |
| | 14,652 |
|
Other income (expense), net | | 529 |
| | (2,697 | ) | | (3,097 | ) |
Income before income tax expense | | 315,442 |
| | 343,208 |
| | 338,971 |
|
Income tax expense | | 124,933 |
| | 99,767 |
| | 100,368 |
|
Net income | | $ | 190,509 |
| | $ | 243,441 |
| | $ | 238,603 |
|
Earnings per share - basic and diluted | | $ | 16.08 |
| | $ | 20.54 |
| | $ | 19.45 |
|
NewMarket Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Net income | | $ | 270,568 | | | $ | 254,286 | | | $ | 234,734 | |
Other comprehensive income (loss): | | | | | | |
Pension plans and other postretirement benefits: | | | | | | |
Prior service credit (cost) arising during the period, net of income tax expense (benefit) of $(16) in 2020, $(257) in 2019 and $(91) in 2018 | | (49) | | | (756) | | | (446) | |
Amortization of prior service cost (credit) included in net periodic benefit cost (income), net of income tax expense (benefit) of $(680) in 2020, $(681) in 2019 and $(720) in 2018 | | (2,120) | | | (2,211) | | | (2,363) | |
Actuarial net gain (loss) arising during the period, net of income tax expense (benefit) of $(5,852) in 2020, $5,952 in 2019 and $(6,976) in 2018 | | (25,441) | | | 16,739 | | | (24,581) | |
Amortization of actuarial net loss (gain) included in net periodic benefit cost (income), net of income tax expense (benefit) of $1,460 in 2020, $901 in 2019 and $1,381 in 2018 | | 4,634 | | | 2,988 | | | 4,355 | |
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Total pension plans and other postretirement benefits | | (22,976) | | | 16,760 | | | (23,035) | |
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| | | | | | |
| | | | | | |
| | | | | | |
Foreign currency translation adjustments, net of income tax expense (benefit) of $(636) in 2020, $(181) in 2019 and $(535) in 2018 | | 12,560 | | | 1,808 | | | (12,287) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other comprehensive income (loss) | | (10,416) | | | 18,568 | | | (35,322) | |
Comprehensive income | | $ | 260,152 | | | $ | 272,854 | | | $ | 199,412 | |
See accompanying Notes to Consolidated Financial Statements
40
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Net income | | $ | 190,509 |
| | $ | 243,441 |
| | $ | 238,603 |
|
Other comprehensive income (loss): | | | | | | |
Pension plans and other postretirement benefits: | | | | | | |
Prior service credit (cost) arising during the period, net of income tax expense (benefit) of $(286) in 2016 and $13,913 in 2015 | | 0 |
| | (463 | ) | | 21,855 |
|
Amortization of prior service cost (credit) included in net periodic benefit cost (income), net of income tax expense (benefit) of $(1,127) in 2017, $(1,123) in 2016 and $(375) in 2015 | | (1,955 | ) | | (1,801 | ) | | (629 | ) |
Actuarial net gain (loss) arising during the period, net of income tax expense (benefit) of $2,814 in 2017, $(4,409) in 2016 and $(2,477) in 2015 | | 10,966 |
| | (8,102 | ) | | (1,331 | ) |
Amortization of actuarial net loss (gain) included in net periodic benefit cost (income), net of income tax expense (benefit) of $2,028 in 2017, $2,287 in 2016 and $3,052 in 2015 | | 3,656 |
| | 3,977 |
| | 5,426 |
|
Total pension plans and other postretirement benefits | | 12,667 |
| | (6,389 | ) | | 25,321 |
|
Foreign currency translation adjustments, net of income tax expense (benefit) of $703 in 2017, $(895) in 2016 and $(71) in 2015 | | 23,849 |
| | (31,595 | ) | | (30,687 | ) |
Other comprehensive income (loss) | | 36,516 |
| | (37,984 | ) | | (5,366 | ) |
Comprehensive income | | $ | 227,025 |
| | $ | 205,457 |
| | $ | 233,237 |
|
NewMarket Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands, except share amounts) | | 2020 | | 2019 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 125,172 | | | $ | 144,397 | |
Trade and other accounts receivable, net | | 336,395 | | | 335,826 | |
Inventories | | 401,031 | | | 365,938 | |
Prepaid expenses and other current assets | | 35,480 | | | 33,237 | |
Total current assets | | 898,078 | | | 879,398 | |
Property, plant, and equipment, net | | 665,147 | | | 635,439 | |
Intangibles (net of amortization) and goodwill | | 129,944 | | | 131,880 | |
Prepaid pension cost | | 137,069 | | | 133,848 | |
Operating lease right-of-use assets | | 61,329 | | | 60,505 | |
| | | | |
Deferred charges and other assets | | 42,308 | | | 44,062 | |
Total assets | | $ | 1,933,875 | | | $ | 1,885,132 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 189,937 | | | $ | 178,773 | |
Accrued expenses | | 78,422 | | | 77,350 | |
Dividends payable | | 15,184 | | | 19,217 | |
Income taxes payable | | 3,760 | | | 10,632 | |
Operating lease liabilities | | 13,410 | | | 14,036 | |
Other current liabilities | | 11,742 | | | 8,887 | |
Total current liabilities | | 312,455 | | | 308,895 | |
Long-term debt | | 598,848 | | | 642,941 | |
Operating lease liabilities - noncurrent | | 48,324 | | | 46,792 | |
Other noncurrent liabilities | | 214,424 | | | 203,406 | |
Total liabilities | | 1,174,051 | | | 1,202,034 | |
Commitments and contingencies (Note 20) | | 0 | | 0 |
Shareholders’ equity: | | | | |
Common stock and paid-in capital (with 0 par value; authorized shares - 80,000,000; issued and outstanding - 10,921,377 at December 31, 2020 and 11,188,549 at December 31, 2019) | | 717 | | | 1,965 | |
Accumulated other comprehensive loss | | (173,164) | | | (162,748) | |
Retained earnings | | 932,271 | | | 843,881 | |
Total shareholders' equity | | 759,824 | | | 683,098 | |
Total liabilities and shareholders' equity | | $ | 1,933,875 | | | $ | 1,885,132 | |
See accompanying Notes to Consolidated Financial Statements
41
|
| | | | | | | | |
| | December 31, |
(in thousands, except share amounts) | | 2017 | | 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 84,166 |
| | $ | 192,154 |
|
Trade and other accounts receivable, net | | 335,317 |
| | 306,916 |
|
Inventories | | 383,097 |
| | 311,512 |
|
Prepaid expenses and other current assets | | 31,074 |
| | 26,301 |
|
Total current assets | | 833,654 |
| | 836,883 |
|
Property, plant, and equipment, at cost | | 1,474,962 |
| | 1,264,957 |
|
Less accumulated depreciation and amortization | | 822,681 |
| | 761,212 |
|
Net property, plant, and equipment | | 652,281 |
| | 503,745 |
|
Intangibles (net of amortization) and goodwill | | 144,337 |
| | 10,436 |
|
Prepaid pension cost | | 66,495 |
| | 25,800 |
|
Deferred income taxes | | 4,349 |
| | 29,063 |
|
Deferred charges and other assets | | 11,038 |
| | 10,509 |
|
Total assets | | $ | 1,712,154 |
| | $ | 1,416,436 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 159,408 |
| | $ | 141,869 |
|
Accrued expenses | | 107,999 |
| | 104,082 |
|
Dividends payable | | 19,055 |
| | 17,478 |
|
Income taxes payable | | 16,340 |
| | 17,573 |
|
Other current liabilities | | 13,991 |
| | 13,588 |
|
Total current liabilities | | 316,793 |
| | 294,590 |
|
Long-term debt | | 602,900 |
| | 507,275 |
|
Other noncurrent liabilities | | 190,812 |
| | 131,320 |
|
Total liabilities | | 1,110,505 |
| | 933,185 |
|
Commitments and contingencies (Note 16) | |
| |
|
Shareholders’ equity: | | | | |
Common stock and paid-in capital (without par value; authorized shares - 80,000,000; issued and outstanding - 11,779,978 at December 31, 2017 and 11,845,972 at December 31, 2016) | | 0 |
| | 1,603 |
|
Accumulated other comprehensive loss | | (145,994 | ) | | (182,510 | ) |
Retained earnings | | 747,643 |
| | 664,158 |
|
Total shareholders' equity | | 601,649 |
| | 483,251 |
|
Total liabilities and shareholders' equity | | $ | 1,712,154 |
| | $ | 1,416,436 |
|
NewMarket Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Shareholders’ Equity | | |
(in thousands, except share and per-share amounts) | | Shares | | Amount | | | | | |
Balance at December 31, 2017 | | 11,779,978 | | | $ | 0 | | | $ | (145,994) | | | $ | 747,643 | | | $ | 601,649 | | | |
Net income | | | | | | | | 234,734 | | | 234,734 | | | |
Other comprehensive income (loss) | | | | | | (35,322) | | | | | (35,322) | | | |
Cash dividends ($7.00 per share) | | | | | | | | (80,448) | | | (80,448) | | | |
Repurchases of common stock | | (603,449) | | | (2,038) | | | | | (229,978) | | | (232,016) | | | |
| | | | | | | | | | | | |
Tax withholdings related to stock-based compensation | | (2,055) | | | 0 | | | | (740) | | | (740) | | | |
Stock-based compensation | | 10,008 | | | 2,038 | | | | | 12 | | | 2,050 | | | |
Balance at December 31, 2018 | | 11,184,482 | | | 0 | | | (181,316) | | | 671,223 | | | 489,907 | | | |
Net income | | | | | | | | 254,286 | | | 254,286 | | | |
Other comprehensive income (loss) | | | | | | 18,568 | | | | | 18,568 | | | |
Cash dividends ($7.30 per share) | | | | | | | | (81,676) | | | (81,676) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Tax withholdings related to stock-based compensation | | (603) | | | (304) | | | | | 0 | | (304) | | | |
Stock-based compensation | | 4,670 | | | 2,269 | | | | | 48 | | | 2,317 | | | |
Balance at December 31, 2019 | | 11,188,549 | | | 1,965 | | | (162,748) | | | 843,881 | | | 683,098 | | | |
Net income | | | | | | | | 270,568 | | | 270,568 | | | |
Other comprehensive income (loss) | | | | | | (10,416) | | | | | (10,416) | | | |
Cash dividends ($7.60 per share) | | | | | | | | (83,417) | | | (83,417) | | | |
Repurchases of common stock | | (270,963) | | | (2,630) | | | | | (98,804) | | | (101,434) | | | |
Tax withholdings related to stock-based compensation | | (1,547) | | | (641) | | | | | 0 | | (641) | | | |
Stock-based compensation | | 5,338 | | | 2,023 | | | | | 43 | | | 2,066 | | | |
Balance at December 31, 2020 | | 10,921,377 | | | $ | 717 | | | $ | (173,164) | | | $ | 932,271 | | | $ | 759,824 | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Shareholders’ Equity |
(in thousands, except share and per-share amounts) | | Shares | | Amount | | | |
Balance at December 31, 2014 | | 12,446,365 |
| | $ | 0 |
| | $ | (139,160 | ) | | $ | 560,201 |
| | $ | 421,041 |
|
Net income | | | | | | | | 238,603 |
| | 238,603 |
|
Other comprehensive income (loss) | | | | | | (5,366 | ) | | | | (5,366 | ) |
Cash dividends ($5.80 per share) | | | | | | | | (70,763 | ) | | (70,763 | ) |
Repurchases of common stock | | (501,261 | ) | | (3,070 | ) | | | | (194,781 | ) | | (197,851 | ) |
Tax benefit from stock-based compensation | | | | 374 |
| | | | | | 374 |
|
Tax withholdings related to stock-based compensation | | (3,135 | ) | | (3 | ) | | | | (1,196 | ) | | (1,199 | ) |
Stock-based compensation | | 6,477 |
| | 2,699 |
| | | | 26 |
| | 2,725 |
|
Balance at December 31, 2015 | | 11,948,446 |
| | 0 |
| | (144,526 | ) | | 532,090 |
| | 387,564 |
|
Net income | | | | | | | | 243,441 |
| | 243,441 |
|
Other comprehensive income (loss) | | | | | | (37,984 | ) | | | | (37,984 | ) |
Cash dividends ($6.40 per share) | | | | | | | | (75,829 | ) | | (75,829 | ) |
Repurchases of common stock | | (98,867 | ) | | (252 | ) | | | | (35,563 | ) | | (35,815 | ) |
Tax withholdings related to stock-based compensation | | (2,582 | ) | | (1,076 | ) | | | | 0 |
| | (1,076 | ) |
Stock-based compensation | | (1,025 | ) | | 2,931 |
| | | | 19 |
| | 2,950 |
|
Balance at December 31, 2016 | | 11,845,972 |
| | 1,603 |
| | (182,510 | ) | | 664,158 |
| | 483,251 |
|
Net income | | | | | | | | 190,509 |
| | 190,509 |
|
Other comprehensive income (loss) | | | | | | 36,516 |
| | | | 36,516 |
|
Cash dividends ($7.00 per share) | | | | | | | | (82,885 | ) | | (82,885 | ) |
Repurchases of common stock | | (70,689 | ) | | (3,607 | ) | | | | (24,150 | ) | | (27,757 | ) |
Tax withholdings related to stock-based compensation | | (2,328 | ) | | (915 | ) | |
| | 0 |
| | (915 | ) |
Stock-based compensation | | 7,023 |
| | 2,919 |
| | | | 11 |
| | 2,930 |
|
Balance at December 31, 2017 | | 11,779,978 |
| | $ | 0 |
| | $ | (145,994 | ) | | $ | 747,643 |
| | $ | 601,649 |
|
NewMarket Corporation and Subsidiaries
Consolidated Statements of Cash Flows |
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Cash and cash equivalents at beginning of year | | $ | 192,154 |
| | $ | 93,424 |
| | $ | 103,003 |
|
Cash flows from operating activities: | | | | | | |
Net income | | 190,509 |
| | 243,441 |
| | 238,603 |
|
Adjustments to reconcile net income to cash flows from operating activities: | | | | | | |
Depreciation and amortization | | 55,340 |
| | 44,893 |
| | 42,265 |
|
Noncash pension and postretirement expense | | 7,959 |
| | 12,829 |
| | 22,037 |
|
Deferred income tax expense | | 27,375 |
| | 19,185 |
| | 150 |
|
Tax Reform Act expense | | 31,375 |
| | 0 |
| | 0 |
|
Unrealized gain on derivative instruments, net | | 0 |
| | 0 |
| | (1,656 | ) |
Change in assets and liabilities: | | | | | | |
Trade and other accounts receivable, net | | 250 |
| | (38,231 | ) | | 7,215 |
|
Inventories | | (44,936 | ) | | 14,480 |
| | (21,747 | ) |
Prepaid expenses | | (2,715 | ) | | 8,790 |
| | 1,464 |
|
Accounts payable and accrued expenses | | 17,955 |
| | 18,455 |
| | (8,809 | ) |
Book overdrafts | | 1,595 |
| | 10,149 |
| | (8,241 | ) |
Income taxes payable | | (8,475 | ) | | 7,172 |
| | 6,856 |
|
Cash pension and postretirement contributions | | (26,264 | ) | | (25,898 | ) | | (26,813 | ) |
Realized loss on derivative instruments, net | | 0 |
| | 4,825 |
| | 4,877 |
|
Other, net | | (7,173 | ) | | 33,344 |
| | 11,826 |
|
Cash provided from (used in) operating activities | | 242,795 |
| | 353,434 |
| | 268,027 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (148,713 | ) | | (142,874 | ) | | (126,499 | ) |
Acquisition of business (net of $1,131 cash acquired) | | (183,930 | ) | | 0 |
| | 0 |
|
Deposits for interest rate swap | | 0 |
| | (7,570 | ) | | (16,487 | ) |
Return of deposits for interest rate swap | | 0 |
| | 11,832 |
| | 18,140 |
|
Other, net | | (2,000 | ) | | (4,749 | ) | | (4,877 | ) |
Cash provided from (used in) investing activities | | (334,643 | ) | | (143,361 | ) | | (129,723 | ) |
Cash flows from financing activities: | | | | | | |
Net (repayments) borrowings under revolving credit facility | | (156,000 | ) | | 11,000 |
| | 131,000 |
|
Issuance of 3.78% senior notes | | 250,000 |
| | 0 |
| | 0 |
|
Dividends paid | | (82,885 | ) | | (75,829 | ) | | (70,763 | ) |
Repurchases of common stock | | (25,998 | ) | | (35,815 | ) | | (194,924 | ) |
Other, net | | (4,093 | ) | | (2,733 | ) | | (791 | ) |
Cash provided from (used in) financing activities | | (18,976 | ) | | (103,377 | ) | | (135,478 | ) |
Effect of foreign exchange on cash and cash equivalents | | 2,836 |
| | (7,966 | ) | | (12,405 | ) |
(Decrease) increase in cash and cash equivalents | | (107,988 | ) | | 98,730 |
| | (9,579 | ) |
Cash and cash equivalents at end of year | | $ | 84,166 |
| | $ | 192,154 |
| | $ | 93,424 |
|
See accompanying Notes to Consolidated Financial Statements
4542
NewMarket Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Cash and cash equivalents at beginning of year | | $ | 144,397 | | | $ | 73,040 | | | $ | 84,166 | |
Cash flows from operating activities: | | | | | | |
Net income | | 270,568 | | | 254,286 | | | 234,734 | |
Adjustments to reconcile net income to cash flows from operating activities: | | | | | | |
Depreciation and amortization | | 84,002 | | | 87,560 | | | 71,759 | |
Deferred income tax expense | | 7,554 | | | 7,384 | | | 14,527 | |
Gain on sale of land | | (16,483) | | | 0 | | | 0 | |
Change in assets and liabilities: | | | | | | |
Trade and other accounts receivable, net | | 2,591 | | | (22,587) | | | 14,096 | |
Inventories | | (33,111) | | | 31,884 | | | (29,672) | |
Prepaid expenses and other current assets | | (6,138) | | | (2,742) | | | 702 | |
Accounts payable and accrued expenses | | 7,077 | | | 8,859 | | | (19,638) | |
Operating lease liabilities | | (17,801) | | | (16,496) | | | 0 | |
Other current liabilities | | 228 | | | 1,866 | | | (10,169) | |
Income taxes payable | | (6,935) | | | 3,979 | | | (9,731) | |
Cash pension and postretirement contributions | | (10,655) | | | (9,932) | | | (64,756) | |
Other, net | | 3,257 | | | (6,849) | | | (3,941) | |
Cash provided from (used in) operating activities | | 284,154 | | | 337,212 | | | 197,911 | |
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (93,316) | | | (59,434) | | | (74,638) | |
Proceeds from sale of land | | 20,000 | | | 0 | | | 0 | |
| | | | | | |
| | | | | | |
Other, net | | (927) | | | 0 | | | 14,607 | |
Cash provided from (used in) investing activities | | (74,243) | | | (59,434) | | | (60,031) | |
Cash flows from financing activities: | | | | | | |
Net (repayments) borrowings under revolving credit facility | | (44,678) | | | (123,451) | | | 168,129 | |
| | | | | | |
| | | | | | |
Dividends paid | | (83,417) | | | (81,676) | | | (80,448) | |
| | | | | | |
Repurchases of common stock | | (101,434) | | | 0 | | | (232,016) | |
Other, net | | (1,934) | | | (2,952) | | | (1,092) | |
Cash provided from (used in) financing activities | | (231,463) | | | (208,079) | | | (145,427) | |
Effect of foreign exchange on cash and cash equivalents | | 2,327 | | | 1,658 | | | (3,579) | |
(Decrease) increase in cash and cash equivalents | | (19,225) | | | 71,357 | | | (11,126) | |
Cash and cash equivalents at end of year | | $ | 125,172 | | | $ | 144,397 | | | $ | 73,040 | |
See accompanying Notes to Consolidated Financial Statements
43
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies | |
1. | Summary of Significant Accounting Policies |
Consolidation—Our consolidated financial statements include the accounts of NewMarket Corporation and its subsidiaries. All intercompany transactions are eliminated upon consolidation. References to "we," "us," "our," the "company," and "NewMarket" are to NewMarket Corporation and its consolidated subsidiaries, unless the context indicates otherwise.
NewMarket is the parent company of threeseparate operating companies, each managing its own assets and liabilities. Those companies are Afton, which focuses on petroleum additive products; Ethyl, representing certain contracted manufacturing and services, as well as the TELantiknock compounds business; and NewMarket Development, which manages the real property and improvements that we own in Virginia. NewMarket is also the parent company of NewMarket Services, which provides various administrative services to NewMarket, Afton, Ethyl, and NewMarket Development.
Certain reclassifications have been made to the accompanying consolidated financial statements and the related notes to conform to the current presentation.
Foreign Currency Translation—We translate the balance sheets of our foreign subsidiaries into U.S. Dollars based on the current exchange rate at the end of each period. We translate the statements of income using the weighted-average exchange rates for the period. NewMarket includes translation adjustments in the Consolidated Balance Sheets as part of accumulated other comprehensive loss and transaction adjustments in the Consolidated Statements of Income as part of cost of goods sold. Foreign currency transaction adjustments resulted in a net gainloss of $5$3 million in both 2017 and 2016, and a net loss of $112020, $4 million in 2015.2019, and $8 million 2018.
Revenue Recognition—Our policy is toWe recognize revenue when control of the product is transferred to our customer and for an amount that reflects the consideration we expect to collect from the sale of products when title and risk of loss have transferred to the buyer, the price is fixed and determinable, and collectability is reasonably assured.customer. Net sales (revenues) are reported at the gross amount billed, including amounts related to shipping that are charged to the customer. Provisions for rebates to customers are recorded in the same period that the related sales are recorded. Freight costs incurred on the delivery of products are included in the Consolidated Statements of Income in cost of goods sold. Our standard terms of delivery are included in our contracts, sales order confirmation documents, and invoices. Taxes assessed by a governmental authority concurrent with sales to our customers, including sales, use, value-added, and revenue-related excise taxes, are not included as net sales, but are reflected in accrued expenses until remitted to the appropriate governmental authority.
Cash and Cash Equivalents—Our cash equivalents consist of government obligations and commercial paper with original maturities of 90 days or less. Throughout the year, we have cash balances in excess of federally insured amounts on deposit with various financial institutions. We state cash and cash equivalents at cost, which approximates fair value.
Accounts Receivable—We record our accounts receivable at net realizable value. We maintain anoutstanding principal adjusted for allowances for credit losses. The allowance for doubtful accounts for estimatedcredit losses resulting fromrepresents probable losses to be incurred if our customers do not makingmake required payments. We determine the adequacy of the allowance by periodically evaluating each customer’s receivable balance, considering their financial condition and credit history, and considering current economic conditions. The allowance for doubtful accountscredit losses was not material at December 31, 20172020 or December 31, 2016.2019.
Inventories—NewMarket values its petroleum additives and TEL inventories at the lower of cost or net realizable value. In the United States, petroleum additives inventory cost is determined on the last-in, first-out (LIFO) basis. InFor all other countries,inventory, we determine cost using thea weighted-average method. Inventory cost includes raw materials, direct labor, and manufacturing overhead.
Property, Plant, and Equipment—We state property, plant, and equipment at cost less accumulated depreciation and compute depreciation by the straight-line method based on the estimated useful lives of the assets. We capitalize expenditures for significant improvements that extend the useful life of the related property. We expense repairs and maintenance, including plant turnaround costs, as incurred. When property is sold or retired, we remove the cost and accumulated depreciation from the accounts and any related gain or loss is included in earnings.
Notes to Consolidated Financial Statements
Intangibles (Net of Amortization) and Goodwill—Identifiable intangibles include the cost of acquired contracts, formulas and technology, trademarks and trade names, and customer bases. We assign a value to identifiable intangibles based on independent third-party appraisals and management's assessment at the time of acquisition. NewMarket amortizes the cost of the customer bases by an accelerated method and the cost of the remaining identifiable intangibles by the straight-line method over the estimated economic life of the intangible.
Goodwill arises from the excess of cost over the net assets of businesses acquired. Goodwill represents the residual purchase price after allocation to all identifiable net assets. We test goodwill for impairment each year, as well as whenever a significant event or circumstance occurs which could reduce the fair value of the reporting unit to which the goodwill applies below the carrying amount of the reporting unit.
We have historically tested goodwill for impairment as of December 31. This year, we voluntarily changed the annual impairment assessment date from December 31 to December 1. We determined this measurement date, which represents a change in the method of applying an accounting principle, to be preferable as it better aligns with our business planning and forecasting process, which is a key component of the annual impairment testing. The change in the measurement date did not delay, accelerate, or prevent an impairment charge.
Impairment of Long-Lived Assets—When significant events or circumstances occur that might impair the value of long-lived assets, we evaluate recoverability of the recorded cost of these assets. Assets are considered to be impaired if their carrying amount is not recoverable from the estimated undiscounted future cash flows associated with the assets. If we determine an asset is impaired and its recorded cost is higher than estimated fair market value based on the estimated present value of future cash flows, we adjust the asset to estimated fair market value.
Environmental Costs—NewMarket capitalizes environmental compliance costs if they extend the useful life of the related property or prevent future contamination. Environmental compliance costs also include maintenance and operation of pollution prevention and control facilities. We expense these compliance costs in cost of goods sold as incurred.
Accrued environmental remediation and monitoring costs relate to an existing condition caused by past operations. NewMarket accrues these costs in current operations within cost of goods sold in the Consolidated Statements of Income when it is probable that we have incurred a liability and the amount can be reasonably estimated. These estimates are based on an assessment of the site, available clean-up methods, and prior experience in handling remediation.
When we can reliably determine the amount and timing of future cash flows, we discount these liabilities, incorporating an inflation factor.
Legal Costs—We expense legal costs in the period incurred.
Employee Savings Plan—Most of our full-time salaried and hourly employees may participate in defined contribution savings plans. Employees who are covered by collective bargaining agreements may also participate in a savings plan according to the terms of their bargaining agreements. Employees, as well as NewMarket, contribute to the plans. We made contributions of $6$7 million in 2017, $7 million in 2016,2020, and $6 million in 2015both 2019 and 2018 related to these plans.
Research, Development, and Testing Expenses—NewMarket expenses all research, development, and testing costs as incurred. R&D costs include personnel-related costs, as well as internal and external testing of our products.
Income Taxes—We recognize deferred income taxes for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. We also adjust for changes in tax rates and laws at the time the changes are enacted. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. We typically remove a tax impact from accumulated other comprehensive loss when the underlying circumstance which gave rise to the tax impact no longer exists. We recognize accrued interest and penalties associated with uncertain tax positions as part of income tax expense on our Consolidated Statements of Income.
Leases—We generally provide for additional U.S. taxesdetermine if an arrangement includes a lease at the inception of the agreement. The right-of-use asset and lease liability are determined at the lease commencement date and are based on the present value of estimated lease payments.
Our lease agreements contain both fixed and variable lease payments. In some cases, variable lease payments are based on a rate or an index. Fixed lease payments, as well as variable lease payments which are based on a rate or index, are included in the determination of the right-of-use asset and lease liability. Variable lease payments that wouldare not based on a rate or index are expensed when incurred.
The present value of estimated lease payments is determined utilizing the rate implicit in the lease agreement, if that rate can be incurred if a foreign subsidiary returns its earnings in cash todetermined. If the United States. Undistributed earningsimplicit rate cannot be determined, the present value of certain foreign subsidiaries for which U.S. taxes have not been provided were zero at December 31, 2017, and totaled approximately at $537 million at December 31, 2016, and $436 million at December 31, 2015. The decrease from 2016 to 2017estimated lease payments is due to the deemed repatriation of foreign earnings resulting
determined
Notes to Consolidated Financial Statements
utilizing our incremental borrowing rate. The incremental borrowing rate is determined at the lease commencement date and is developed utilizing a readily available market interest rate curve adjusted for our credit quality.
fromSome of our leases include an option to renew that can extend the enactmentlease term. For those leases which are reasonably certain to be renewed, we include the renewal in the lease term.
We do not recognize leases with terms of the Tax Reform Act. Deferred income taxes were not provided12 months or less on the undistributed earnings in 2016 and 2015 since we expected them to be indefinitely reinvested abroad. Deferred income taxes werebalance sheet for any lease class, except the railcar lease class. For the short-term leases not recorded on the balance sheet, the lease payments are recognized in the consolidated statements of income on a straight-line basis over the lease term.
We account for undistributed earnings in 2017 because such earnings would either not be subject to U.S. tax when remittedthe lease and nonlease components as a result ofsingle lease component in determining the enactment the Tax Reform Act or they are considered permanently reinvested. As a result of this new legislation, we are continuing to evaluate the unrecognized deferred tax liability associated with our investment in foreign subsidiaries, but we do not anticipate the amount to be significant.right-of-use assets and lease liabilities for all lease classes.
Capital Lease Obligation—We record our capital lease obligations at the lower of fair market value of the related asset at the inception of the lease or the present value of the total minimum lease payments.
Derivative Financial Instruments and Hedging Activities—We are exposed to certain risks arising from both our business operations and economic conditions. We manage our exposures to a wide variety of business and operational risks through management of our core business activities.
We manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding, as well as through the use of derivative financial instruments. Specifically, we have entered, and in the future mayWe sometimes enter into interest rate swaps to manage our exposure to interest rate movements.
In addition, our foreign operations expose us to fluctuations of foreign exchange rates. These fluctuations may impact our results of operations, financial position, and cash flows. To manage this exposure, we sometimes enter into foreign currency forward contracts to minimize currency exposure due to cash flows from foreign operations.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting. We do not enter into derivative instruments for speculative purposes. We had no derivative financial instruments outstanding at December 31, 20172020 or December 31, 2016.2019.
In 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). While outstanding, this exposure was fully collateralized through cash deposits posted with Goldman Sachs. We terminated this swap on September 7, 2016 and settled the liability using approximately $22 million of the cash deposit with Goldman Sachs. Under the terms of this interest rate swap, NewMarket made fixed rate payments at 5.3075% and Goldman Sachs made variable rate payments based on three-month LIBOR.
Stock-based Compensation—We calculate the fair value of restricted stock and restricted stock units based on the closing price of our common stock on the date of grant. If award recipients are entitled to receive dividends during the vesting period, we make no adjustment to the fair value of the award for dividends. If the award does not entitle recipients to dividends during the vesting period, we reduce the grant-date price of our common stock by the present value of the dividends expected to be paid on the underlying shares during the vesting period, discounted at the risk-free interest rate.
We recognize stock-based compensation expense for the number of awards expected to vest on a straight-line basis over the requisite service period.
Estimates and Risks Due to Concentration of Business—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
In addition, our financial results can be influenced by certain risk factors. Some of our significant concentrations of risk include the following:
Notes to Consolidated Financial Statements
•reliance on a small number of significant customers;
•customers concentrated in the fuel and lubricant industries; and
•production of several of our products solely at one facility.
2. Acquisition of Business
On July 3, 2017, Afton Chemical de Mexico, S.A. de C.V., an indirect, wholly-owned subsidiary of NewMarket Corporation, acquired approximately 99.5% of the outstanding capital stock of Aditivos Mexicanos, S.A. de C.V. (AMSA) for $185 million in cash. AMSA is a petroleum additives manufacturing, sales and distribution company based in Mexico City, Mexico. The results of AMSA's operations have been included in our consolidated financial statements since the date of acquisition and are not material. The noncontrolling interest is also not material. The acquisition agreement included all physical assets of AMSA.
We have initiated a purchase price valuation to determine the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. The amounts recorded for certain assets and liabilities are preliminary and are subject to adjustment if additional information is obtained about facts that existed as of the acquisition date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date.
A preliminary allocation of the purchase price is as follows (in millions):
|
| | | | |
Cash | | $ | 1 |
|
Trade accounts receivable | | 16 |
|
Inventory | | 7 |
|
Property, plant, and equipment | | 53 |
|
Goodwill | | 118 |
|
Intangible assets | | 18 |
|
Other long-term assets | | 2 |
|
Other current liabilities | | (8 | ) |
Other long-term liabilities | | (3 | ) |
Deferred taxes | | (19 | ) |
Fair value of net assets acquired | | $ | 185 |
|
46
Identified intangible assets acquired consisted of the following:
|
| | | | | | |
| | Fair Value (in millions) | | Estimated Useful Lives (in years) |
Formulas and technology | | $ | 9 |
| | 3-6 |
Customer base | | 9 |
| | 4 |
Total identified intangible assets | | $ | 18 |
| | |
As part of the acquisition, we recorded $118 million of goodwill. The goodwill recognized is attributable to expected synergies, including a secure supply source for certain raw materials, as well as the skilled assembled workforce of AMSA. All of the goodwill recognized is part of the petroleum additives segment, and none is deductible for Mexican tax purposes.
Notes to Consolidated Financial Statements
2. Net Sales
Our revenues are primarily derived from the manufacture and sale of petroleum additives products. We sell petroleum additives products across the world including to customers located in our North America, Latin America, Asia Pacific, and EMEAI regions. Our customers primarily consist of global, national, and independent oil companies. While some of our customers have payment terms beyond 30 days, we do not provide extended payment terms of a year or more, nor do our contracts include a financing component. Our allowance for credit losses is immaterial, as are any bad debts we incur. In limited cases, we collect funds in advance of shipping product to our customers and recognizing the related revenue. These prepayments from customers are recorded as a contract liability to our customer until we recognize the revenue. Prepayments from our customers totaled $1 million in both December 31, 2020 and December 31, 2019. Revenue recognized from funds collected in advance from customers in an earlier period was $1 million in both 2020 and 2019 and $3 million in 2018.
Pro forma resultsWe recognize revenue when control of operationsthe product is transferred to our customer and for an amount that reflects the consideration we expect to collect from the customer. Control is generally transferred to the customer when title transfers (which may include physical possession by the customer), we have a right to payment from the customer, the customer has accepted the product, and the customer has assumed the risks and rewards of ownership. We have supplier managed inventory arrangements with some of our customers to facilitate on-demand product availability. In some cases, the inventory resides at a customer site, although title has not transferred, we are not presented asentitled to payment, and we have not invoiced for the acquisition was not considered materialproduct. We have evaluated the contract terms under these arrangements and have determined that control transfers when the customer uses the product, at which time revenue is recognized. Our contracts generally include one performance obligation, which is providing petroleum additives products. The performance obligation is satisfied at a point in time when products are shipped, delivered, or consumed by the customer, depending on the underlying contracts.
Taxes assessed by a governmental authority which are concurrent with sales to our consolidated results.customers, including sales, use, value-added, and revenue-related excise taxes, are collected by us from the customer and are not included in net sales, but are reflected in accrued expenses until remitted to the appropriate governmental authority. When we are responsible for shipping and handling costs after title has transferred, we account for those as fulfillment costs and include them in cost of goods sold.
Some of our contracts include variable consideration in the form of rebates or business development funds. We record rebates at the point of sale as contra-revenue when we can reasonably estimate the amount of the rebate. The estimates are based on our best judgment at the time of sale, which includes anticipated as well as historical performance. Depending upon the specific terms of a business development fund, amounts are accrued as contra-revenue at the point of sale or are expensed when costs are incurred by us. We regularly review both rebates and business development funds and make adjustments when necessary, recognizing the full amount of any adjustment in the period identified. We recognized an increase to net sales of $2 million for 2020, $1 million for 2019, and $3 millionfor 2018 related to adjustments to rebates or business development funds which were recognized in revenue in a prior period. At December 31, 2020, accrued rebates were $24 million and accrued business development funds were $1 million. At December 31, 2019, accrued rebates were $23 million and accrued business developments funds were $2 million.
Notes to Consolidated Financial Statements
The following table provides information on our net sales by geographic area. Information on net sales by segment is in Note 4.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
(in thousands) | | | | 2020 | | 2019 | | 2018 | | |
Net sales | | | | | | | | | | |
United States | | | | $ | 650,654 | | | $ | 728,125 | | | $ | 722,576 | | | |
China | | | | 213,788 | | | 225,498 | | | 239,406 | | | |
Europe, Middle East, Africa, India | | | | 651,645 | | | 700,081 | | | 756,258 | | | |
Asia Pacific, except China | | | | 279,847 | | | 311,469 | | | 335,119 | | | |
Other foreign | | | | 214,997 | | | 225,122 | | | 236,316 | | | |
Net sales | | | | $ | 2,010,931 | | | $ | 2,190,295 | | | $ | 2,289,675 | | | |
3. Earnings Per Share
We had 16,70819,951 shares in 2017, 17,1302020, 20,441 shares in 2016,2019, and 26,45018,892 shares in 20152018 of nonvested restricted stock that were excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive.
The nonvested restricted stock is considered a participating security since the restricted stock contains nonforfeitable rights to dividends. As such, we use the two-class method to compute basic and diluted earnings per share for all periods presented since this method yielded a moreyields the most dilutive result than the treasury-stock method.result. The following table illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts) | | 2020 | | 2019 | | 2018 |
Earnings per share numerator: | | | | | | |
Net income attributable to common shareholders before allocation of earnings to participating securities | | $ | 270,568 | | | $ | 254,286 | | | $ | 234,734 | |
Earnings allocated to participating securities | | 448 | | | 441 | | | 474 | |
Net income attributable to common shareholders after allocation of earnings to participating securities | | $ | 270,120 | | | $ | 253,845 | | | $ | 234,260 | |
Earnings per share denominator: | | | | | | |
Weighted-average number of shares of common stock outstanding - basic and diluted | | 10,961 | | | 11,166 | | | 11,515 | |
| | | | | | |
| | | | | | |
Earnings per share - basic and diluted | | $ | 24.64 | | | $ | 22.73 | | | $ | 20.34 | |
| | | | | | |
4. Segment and Geographic Area Information
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands, except per-share amounts) | | 2017 | | 2016 | | 2015 |
Earnings per share numerator: | | | | | | |
Net income attributable to common shareholders before allocation of earnings to participating securities | | $ | 190,509 |
| | $ | 243,441 |
| | $ | 238,603 |
|
Earnings allocated to participating securities | | 356 |
| | 477 |
| | 482 |
|
Net income attributable to common shareholders after allocation of earnings to participating securities | | $ | 190,153 |
| | $ | 242,964 |
| | $ | 238,121 |
|
Earnings per share denominator: | | | | | | |
Weighted-average number of shares of common stock outstanding - basic and diluted | | 11,824 |
| | 11,828 |
| | 12,241 |
|
Earnings per share - basic and diluted | | $ | 16.08 |
| | $ | 20.54 |
| | $ | 19.45 |
|
Segment Information—The tables below show our consolidated segment results. The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and services associated with Ethyl.
| |
4. | Supplemental Cash Flow Information |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Cash paid during the year for | | | | | | |
Interest and financing expenses (net of capitalization) | | $ | 20,376 |
| | $ | 18,775 |
| | $ | 16,193 |
|
Income taxes | | 59,010 |
| | 60,998 |
| | 99,006 |
|
| | | | | | |
Supplemental disclosure of non-cash transactions: | | | | | | |
Release of deposit account funds to terminate interest rate swap | | $ | 0 |
| | $ | 21,868 |
| | $ | 0 |
|
Non-cash additions to property, plant, and equipment | | 11,209 |
| | 8,762 |
| | 13,959 |
|
Non-cash obligation under capital lease | | 1,341 |
| | 4,810 |
| | 0 |
|
| |
5. | Trade and Other Accounts Receivable, Net |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Trade receivables | | $ | 310,941 |
| | $ | 265,991 |
|
Income tax receivables | | 7,455 |
| | 26,189 |
|
Other | | 16,921 |
| | 14,736 |
|
| | $ | 335,317 |
| | $ | 306,916 |
|
The segment accounting policies are the same as those described in Note 1. We evaluate the performance of the petroleum additives business based on segment operating profit. NewMarket Services departments and other expenses are billed to Afton and Ethyl based on the services provided under the holding company structure. Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets and lease right-of-use assets for 2020 and 2019 are included in segment operating profit. No transfers occurred between the petroleum additives segment and the “All other” category during the periods presented. The table below reports net sales and operating profit by segment, as well as a reconciliation to income before income tax expense, for the last three years.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Net sales | | | | | | |
Petroleum additives | | | | | | |
Lubricant additives | | $ | 1,686,649 | | | $ | 1,778,473 | | | $ | 1,870,803 | |
Fuel additives | | 314,918 | | | 397,431 | | | 410,000 | |
Total | | 2,001,567 | | | 2,175,904 | | | 2,280,803 | |
All other | | 9,364 | | | 14,391 | | | 8,872 | |
Net sales (a) | | $ | 2,010,931 | | | $ | 2,190,295 | | | $ | 2,289,675 | |
Segment operating profit | | | | | | |
Petroleum additives | | $ | 333,241 | | | $ | 359,228 | | | $ | 311,019 | |
All other | | (100) | | | (1,562) | | | (3,256) | |
Segment operating profit | | 333,141 | | | 357,666 | | | 307,763 | |
Corporate, general, and administrative expenses | | (21,744) | | | (20,345) | | | (19,651) | |
Interest and financing expenses, net | | (26,328) | | | (29,241) | | | (26,723) | |
Other income (expense), net | | 46,218 | | | 23,510 | | | 28,896 | |
Income before income tax expense | | $ | 331,287 | | | $ | 331,590 | | | $ | 290,285 | |
(a)NaN single customer accounted for 10% or more of our total net sales in 2020, 2019, or 2018.
The following tables show asset information by segment and the reconciliation to consolidated assets. Segment assets consist of accounts receivable, inventory, and long-lived assets. Long-lived assets included in the petroleum additives segment amounts in the table below include property, plant, and equipment (net of depreciation), intangibles (net of amortization) and goodwill, and lease right-of-use assets. The additions to long-lived assets include property, plant, and equipment for all years and lease right-of-use assets for 2020 and 2019. | | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Segment assets | | | | |
Petroleum additives | | $ | 1,557,834 | | | $ | 1,506,690 | |
| | | | |
All other | | 18,383 | | | 14,519 | |
| | 1,576,217 | | | 1,521,209 | |
Cash and cash equivalents | | 125,172 | | | 144,397 | |
Other accounts receivable | | 13,566 | | | 6,068 | |
Prepaid expenses and other current assets | | 35,480 | | | 33,237 | |
Non-segment property, plant, and equipment, net | | 31,839 | | | 34,648 | |
Prepaid pension cost | | 137,069 | | | 133,848 | |
Lease right-of-use assets | | 198 | | | 302 | |
Deferred charges and other assets | | 14,334 | | | 11,423 | |
Total assets | | $ | 1,933,875 | | | $ | 1,885,132 | |
Notes to Consolidated Financial Statements
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Finished goods and work-in-process | | $ | 319,036 |
| | $ | 254,068 |
|
Raw materials | | 51,485 |
| | 45,581 |
|
Stores, supplies, and other | | 12,576 |
| | 11,863 |
|
| | $ | 383,097 |
| | $ | 311,512 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Additions to long-lived assets | | | | | | |
Petroleum additives | | $ | 109,536 | | | $ | 85,711 | | | $ | 72,829 | |
All other | | 3 | | | 28 | | | 0 | |
Corporate | | 2,453 | | | 3,076 | | | 1,809 | |
Total additions to long-lived assets | | $ | 111,992 | | | $ | 88,815 | | | $ | 74,638 | |
Depreciation and amortization | | | | | | |
Petroleum additives | | $ | 80,811 | | | $ | 84,872 | | | $ | 69,029 | |
All other | | 52 | | | 52 | | | 11 | |
Corporate | | 3,139 | | | 2,636 | | | 2,719 | |
Total depreciation and amortization | | $ | 84,002 | | | $ | 87,560 | | | $ | 71,759 | |
Geographic Area Information - We have operations in the North America, Latin America, Asia Pacific, and EMEAI regions. Our foreign customers consist primarily of global, national, and independent oil companies.
The tables below report net sales, total assets, and long-lived assets by geographic area, as well as by country for those countries with significant net sales or long-lived assets. Since our foreign operations are significant to our overall business, we are also presenting net sales in the table below by the major regions in which we operate. NewMarket assigns net sales to geographic areas based on the location to which the product was shipped to a third party. Long-lived assets in the table below include property, plant, and equipment, net of depreciation, and lease right-of-use assets.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Net sales | | | | | | |
United States | | $ | 650,654 | | | $ | 728,125 | | | $ | 722,576 | |
China | | 213,788 | | | 225,498 | | | 239,406 | |
Europe, Middle East, Africa, India | | 651,645 | | | 700,081 | | | 756,258 | |
Asia Pacific, except China | | 279,847 | | | 311,469 | | | 335,119 | |
Other foreign | | 214,997 | | | 225,122 | | | 236,316 | |
Net sales | | $ | 2,010,931 | | | $ | 2,190,295 | | | $ | 2,289,675 | |
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Total assets | | | | |
United States | | $ | 763,642 | | | $ | 728,571 | |
Foreign | | 1,170,233 | | | 1,156,561 | |
Total assets | | $ | 1,933,875 | | | $ | 1,885,132 | |
Long-lived assets | | | | |
United States | | $ | 312,586 | | | $ | 275,646 | |
Singapore | | 271,135 | | | 287,276 | |
Other foreign | | 153,529 | | | 145,862 | |
Total long-lived assets | | $ | 737,250 | | | $ | 708,784 | |
Notes to Consolidated Financial Statements
5. Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Cash paid during the year for | | | | | | |
Interest and financing expenses (net of capitalization) | | $ | 26,148 | | | $ | 28,523 | | | $ | 28,915 | |
Income taxes | | 62,238 | | | 64,899 | | | 76,859 | |
| | | | | | |
Supplemental disclosure of non-cash transactions: | | | | | | |
| | | | | | |
Non-cash additions to property, plant, and equipment | | $ | 5,106 | | | $ | 6,025 | | | $ | 3,076 | |
6. Trade and Other Accounts Receivable, Net
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Trade receivables | | $ | 284,759 | | | $ | 289,737 | |
Income and other tax receivables | | 40,708 | | | 34,465 | |
Other | | 10,928 | | | 11,624 | |
| | $ | 336,395 | | | $ | 335,826 | |
7. Inventories
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Finished goods and work-in-process | | $ | 325,588 | | | $ | 295,997 | |
Raw materials | | 59,413 | | | 55,702 | |
Stores, supplies, and other | | 16,030 | | | 14,239 | |
| | $ | 401,031 | | | $ | 365,938 | |
Our U.S. petroleum additives finished goods, work-in-process, and raw materials inventories, which are stated on the LIFO basis, amounted to $128$124 million at December 31, 2017, which was2020 and were below replacement cost by approximately $49 million.$37 million. At December 31, 2016,2019, LIFO basis inventories were $130$116 million,, which was approximately $39$50 million below replacement cost.
Our foreign inventories amounted to $244$255 million at December 31, 20172020 and $176$238 million at December 31, 2016.2019.
Reserves for obsolete and slow-moving inventory included in the table above were not material at December 31, 20172020 or December 31, 2016.2019.
8. Prepaid Expenses and Other Current Assets | |
7. | Prepaid Expenses and Other Current Assets |
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Dividend funding | | $ | 15,184 | | | $ | 19,217 | |
Income taxes on intercompany profit | | 4,828 | | | 5,756 | |
Other | | 15,468 | | | 8,264 | |
| | $ | 35,480 | | | $ | 33,237 | |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Dividend funding | | $ | 19,055 |
| | $ | 17,478 |
|
Income taxes on intercompany profit | | 6,866 |
| | 3,954 |
|
Other | | 5,153 |
| | 4,869 |
|
| | $ | 31,074 |
| | $ | 26,301 |
|
Notes to Consolidated Financial Statements
| |
8. | Property, Plant, and Equipment, at Cost |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Land | | $ | 42,067 |
| | $ | 40,190 |
|
Land improvements | | 45,144 |
| | 44,048 |
|
Leasehold improvements | | 1,636 |
| | 1,510 |
|
Buildings | | 170,624 |
| | 161,512 |
|
Machinery and equipment | | 1,043,194 |
| | 915,423 |
|
Construction in progress | | 172,297 |
| | 102,274 |
|
| | $ | 1,474,962 |
| | $ | 1,264,957 |
|
9. Property, Plant, and Equipment, at Cost | | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Land | | $ | 37,796 | | | $ | 40,938 | |
Land improvements | | 58,646 | | | 57,635 | |
Leasehold improvements | | 2,146 | | | 2,122 | |
Buildings | | 183,234 | | | 174,600 | |
Machinery and equipment | | 1,188,396 | | | 1,161,409 | |
Construction in progress | | 73,234 | | | 29,228 | |
| | 1,543,452 | | | 1,465,932 | |
Less accumulated depreciation and amortization | | 878,305 | | | 830,493 | |
Net property, plant, and equipment | | $ | 665,147 | | | $ | 635,439 | |
We depreciate the cost of property, plant, and equipment by the straight-line method over the following estimated useful lives:
|
| | | | |
Land improvements | 59 - 40 years |
Buildings | 10 - 46 years |
Machinery and equipment | 3 - 30 years |
Buildings | 10 - 48 years |
Machinery and equipment | 3 - 20 years |
Notes to Consolidated Financial Statements
Depreciation expense was $51$61 million in 2017, $422020, $64 million in 2016,2019, and $35$63 million in 2015.2018.
10. Intangibles (Net of Amortization) and Goodwill | |
9. | Intangibles (Net of Amortization) and Goodwill |
The net carrying amount of intangibles and goodwill was $144$130 million at December 31, 20172020 and $10$132 million at December 31, 2016.2019. The gross carrying amount and accumulated amortization of each type of intangible asset and goodwill are presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
(in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortizing intangible assets | | | | | | | | |
Formulas and technology | | $ | 6,200 | | | $ | 3,617 | | | $ | 9,600 | | | $ | 5,416 | |
Contract | | 2,000 | | | 800 | | | 2,000 | | | 600 | |
Customer bases | | 14,240 | | | 12,037 | | | 14,240 | | | 10,931 | |
| | | | | | | | |
Goodwill | | 123,958 | | | | | 122,987 | | | |
| | $ | 146,398 | | | $ | 16,454 | | | $ | 148,827 | | | $ | 16,947 | |
Aggregate amortization expense | | | | $ | 2,907 | | | | | $ | 4,206 | |
|
| | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
(in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Amortizing intangible assets | | | | | | | | |
Formulas and technology | | $ | 12,339 |
| | $ | 3,280 |
| | $ | 2,678 |
| | $ | 1,958 |
|
Contract | | 2,000 |
| | 200 |
| | 2,000 |
| | 0 |
|
Customer bases | | 15,759 |
| | 5,140 |
| | 6,938 |
| | 3,961 |
|
Trademarks and trade names | | 1,531 |
| | 1,213 |
| | 1,513 |
| | 1,069 |
|
Goodwill | | 122,541 |
| | | | 4,295 |
| | |
| | $ | 154,170 |
| | $ | 9,833 |
| | $ | 17,424 |
| | $ | 6,988 |
|
Aggregate amortization expense | | | | $ | 2,845 |
| | | | $ | 1,860 |
|
Aggregate amortization expense was $6$7 million in 2015.2018. All of the intangibles relate to the petroleum additives segment. The change in the gross carrying amount between 20162019 and 2017 is primarily2020 was due to additional goodwill and identifiable intangibles from the acquisition of AMSA,foreign currency fluctuations, as well as foreign currency fluctuations.the following:
•A formulas and technology intangible asset became fully amortized in 2020, resulting in a decrease in the gross carrying amount and accumulated amortization.
•In May 2020, we completed the purchase of the remaining outstanding capital stock of Aditivos Mexicanos, S.A. de C.V. (AMSA), which we acquired in 2017. The additional goodwill and identifiable intangibles fromprior noncontrolling interest represented by the acquisitionoutstanding capital stock of AMSA are preliminary and are subject to adjustment if additional information is obtained about facts that existed as of the acquisition date. The final determination of the fair values will be completed within the measurement period of up to one year from the acquisition date. See Note 2 for further information.was not material.
There is no0 accumulated goodwill impairment.
Notes to Consolidated Financial Statements
Estimated annual amortization expense related to our intangible assets for the next five years is expected to be (in thousands):
| | | | | |
2021 | $ | 2,156 | |
2022 | 1,423 | |
2023 | 907 | |
2024 | 390 | |
2025 | 390 | |
|
| | | |
2018 | $ | 7,651 |
|
2019 | 4,660 |
|
2020 | 3,024 |
|
2021 | 2,206 |
|
2022 | 1,473 |
|
We amortize the contract over 10 years;years; customer bases over 4 years to 20 years; and formulas and technology over 3 years to 10 years;6 years.
11. Deferred Charges and trademarks and trade names over 10 years.Other Assets
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Deposit on future leased plant and equipment | | $ | 12,958 | | | $ | 12,958 | |
Finance lease right-of-use assets | | 10,774 | | | 12,840 | |
Deferred income tax assets | | 7,992 | | | 6,327 | |
Asbestos insurance receivables | | 2,931 | | | 5,528 | |
| | | | |
Deferred financing costs, net of amortization | | 2,106 | | | 1,507 | |
Other | | 5,547 | | | 4,902 | |
| | $ | 42,308 | | | $ | 44,062 | |
| |
10. | Deferred Charges and Other Assets |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Asbestos insurance receivables | | $ | 3,767 |
| | 4,147 |
|
Deferred financing costs, net of amortization | | 2,614 |
| | 1,414 |
|
Other | | 4,657 |
| | 4,948 |
|
| | $ | 11,038 |
| | $ | 10,509 |
|
Deferred financing costs, net of amortization, in the table above include only those costs associated with the revolving credit facility. The amount of deferred financing costs, net of amortization related to the 4.10% senior notes is reported as a component of long-term debt. See Note 1213 for further information on our long-term debt.
12. Accrued Expenses
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Employee benefits, payroll, and related taxes | | $ | 34,136 | | | $ | 33,806 | |
Customer rebates | | 23,641 | | | 22,682 | |
Taxes other than income and payroll | | 5,995 | | | 3,631 | |
Interest on long-term debt | | 5,284 | | | 5,290 | |
| | | | |
| | | | |
Other | | 9,366 | | | 11,941 | |
| | $ | 78,422 | | | $ | 77,350 | |
Notes to Consolidated Financial Statements
13. Long-term Debt
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Senior notes - 4.10% due 2022 (net of related deferred financing costs) | | $ | 348,848 | | | $ | 348,263 | |
Senior notes - 3.78% due 2029 | | 250,000 | | | 250,000 | |
Revolving credit facility | | 0 | | | 44,678 | |
| | | | |
| | $ | 598,848 | | | $ | 642,941 | |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Employee benefits, payroll, and related taxes | | $ | 36,252 |
| | $ | 33,019 |
|
Customer rebates | | 20,703 |
| | 20,944 |
|
Taxes other than income and payroll | | 5,398 |
| | 6,046 |
|
Capital projects | | 6,316 |
| | 18,779 |
|
Other | | 39,330 |
| | 25,294 |
|
| | $ | 107,999 |
| | $ | 104,082 |
|
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Senior notes - 4.10% due 2022 (net of related deferred financing costs) | | $ | 347,091 |
| | $ | 346,505 |
|
Senior notes - 3.78% due 2029 | | 250,000 |
| | 0 |
|
Revolving credit facility | | 0 |
| | 156,000 |
|
Capital lease obligations | | 5,809 |
| | 4,770 |
|
| | $ | 602,900 |
| | $ | 507,275 |
|
4.10% Senior Notes – In 2012, we issued$350 million aggregate principal amount of 4.10% senior notes due 2022 at an issue price of 99.83%. The notes are senior unsecured obligations and are registered under the Securities Act of 1933.obligations. We incurred financing costs totaling approximately $5 million related to the 4.10% senior notes, which are being amortized over the term of the agreement. Interest is payable semiannually.
The 4.10% senior notes rank:
•equal in right of payment with all of our existing and future senior unsecured indebtedness; and
•senior in right of payment to any of our future subordinated indebtedness.
The indenture governing the 4.10% senior notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to:
•create or permit to exist liens;
•enter into sale-leaseback transactions;
•incur additional guarantees; and
•sell all or substantially all of our assets or consolidate or merge with or into other companies.
We were in compliance with all covenants under the indenture governing the 4.10% senior notes as of December 31, 20172020 and December 31, 2016.2019.
Notes to Consolidated Financial Statements
3.78% Senior Notes – On January 4, 2017, we issued $250 million in senior unsecured notes in a private placement with The Prudential Insurance Company of America and certain other purchasers. These notes bear interest at 3.78% and mature on January 4, 2029. Interest is payable semiannually and principalsemiannually. Principal payments of $50 million are payable annually beginning on January 4, 2025. We have the right to make optional prepayments on the notes at any time, subject to certain limitations. The note purchase agreement contains representations, warranties, terms and conditions customary for transactions of this type. These include negative covenants, certain financial covenants and events of default which are substantially similar to the covenants and events of default in our revolving credit facility.
We were in compliance with all covenants under the 3.78% senior notes as of December 31, 2017.2020 and December 31, 2019.
Revolving Credit Facility – - On September 22, 2017, weMarch 5, 2020, NewMarket and certain foreign subsidiary borrowers entered into a Credit Agreement (Credit(the Credit Agreement) with a term of five years. The Credit Agreement provides for an $850a $900 million, multicurrency revolving credit facility with a $150$500 million sublimit for multicurrencyforeign currency borrowings, a $75$50 million sublimit for letters of credit, and a $20 million sublimit for swingline loans. The Credit Agreement includes an expansion feature which allows us, subject to certain conditions, to request an increase toin the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $425 million. In addition,NewMarket's obligations under the Credit Agreement includes provisions that allow certainare unsecured and the obligations of our foreign subsidiaries to borrow under the agreement. subsidiary borrowers are fully and unconditionally guaranteed by NewMarket. The revolving credit facility is available on a revolving basis until March 5, 2025.
Concurrent with entering into the Credit Agreement, we terminated our former revolving credit facility that we had entered into in 2014.
There were no outstanding borrowings under the Credit Agreement at December 31, 2017. At December 31, 2016, the outstanding borrowings under our former revolving credit facility amounted to $156 million.
We paid financing costs in 2017 of approximately $1.9 million related to this revolving credit facility and carried over deferred financing costs from our previous revolving credit facility of approximately $0.9 million, resulting in total deferred financing costs of $2.8 million as of December 31, 2017, which we are amortizing over the term of the Credit Agreement. Deferred financing costs from our former revolving credit facility of approximately $0.2 million were written off when we entered into our current revolving credit facility.
The obligations under the Credit Agreement are unsecured and fully guaranteed by NewMarket. The revolving credit facility matures on September 22, 2022.
Borrowings made under the revolving credit facility bear interest, at our option, at an annual rate equal to either (1) the Alternate Base Rate (ABR) plus the Applicable Rate (as defined in the Credit Agreement) (solelysolely in the case of loans
Notes to Consolidated Financial Statements
denominated in U.S. dollars to NewMarket) orNewMarket, (2) the Adjusted LIBO Rate plus the Applicable Rate, or (3) the Adjusted EURIBO Rate plus the Applicable Rate. ABR is the greatergreatest of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate, (ii) the NYFRB Rate (as defined in the creditCredit Agreement) from time to time plus 0.5%, and (iii) the Adjusted LIBO Rate for a one month interest period plus 1%. The Adjusted LIBO Rate means the rate at which Eurocurrency deposits in the London interbank market for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other applicable mandatory costs. The Adjusted EURIBO Rate means the rate at which Eurocurrency deposits denominated in euro in the euro interbank markets for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other mandatory costs. The Applicable Rate ranges from 0.0%0.000% to 0.625%0.375% (depending on our consolidated Leverage Ratio or Credit Ratings) for loans bearing interest based on the ABR. The Applicable Rate ranges from 1.00%0.875% to 1.625%1.375% (depending on our Leverage Ratio or Credit Ratings) for loans bearing interest based on the Adjusted LIBO Rate. AtRate or the Adjusted EURIBO rate. The Credit Agreement contains the Administrative Agent's customary LIBOR successor rate provisions, which apply in the event LIBOR ceases to be available or is generally replaced as a benchmark interest rate in the market.
We paid financing costs in 2020 of approximately $1.3 million related to this revolving credit facility and carried over deferred financing costs from our previous revolving credit facility of approximately $1.2 million, resulting in total deferred financing costs of $2.5 million, which we are amortizing over the term of the Credit Agreement.
There were 0 outstanding borrowings under the revolving credit facility at December 31, 2017,2020 compared to $45 million in outstanding borrowings at December 31, 2019 under our former facility. Outstanding letters of credit amounted to $2 million at December 31, 2020 and $3 million at December 31, 2019 resulting in the Applicable Rateunused portion of the applicable credit facility amounting to $898 million at December 31, 2020 and $803 million at December 31, 2019.
The average interest rate for borrowings under the credit facilities was 0.125% for loans bearing interest based on the ABR1.4% during 2020 and 1.125% for loans bearing interest based on the Adjusted LIBO Rate.3.0% during 2019.
The Credit Agreement contains certain customary covenants, including financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Credit Agreement) of no more than 3.503.75 to 1.00 except during an Increased Leverage Period (as defined in the Credit Agreement) at the end of each quarter, and a consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of no less than 3.00 to 1.00, calculated on a rolling four quarter basis, as of the end of each fiscal quarter.. We were in compliance with all covenants under the revolving credit facility in effect at December 31, 20172020 and the former revolving credit facility at December 31, 2016.2019.
14. Other Noncurrent Liabilities
54
Table of Contents | | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Employee benefits | | $ | 115,780 | | | $ | 92,711 | |
Deferred income tax liabilities | | 60,041 | | | 57,196 | |
Finance lease liabilities | | 10,077 | | | 11,119 | |
Environmental remediation | | 9,000 | | | 9,204 | |
Asbestos litigation reserve | | 7,218 | | | 10,534 | |
Deemed repatriation of earnings | | 2,956 | | | 2,956 | |
Other | | 9,352 | | | 19,686 | |
| | $ | 214,424 | | | $ | 203,406 | |
Notes to Consolidated Financial Statements
15. Stock-based Compensation
The following table provides information related to the unused portion of our revolving credit facility in effect at December 31, 2017 and December 31, 2016:
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Maximum borrowing capacity under the revolving credit facility | | $ | 850,000 |
| | $ | 650,000 |
|
Outstanding borrowings under the revolving credit facility | | 0 |
| | 156,000 |
|
Outstanding letters of credit | | 2,830 |
| | 3,483 |
|
Unused portion of revolving credit facility | | $ | 847,170 |
| | $ | 490,517 |
|
The average interest rate for borrowings under our revolving credit facilities was 2.5% during 2017 and 1.9% during 2016. The average interest rate on outstanding borrowings was 2.1% at December 31, 2016.
Capital Lease Obligations – The capital lease obligations are related to the Singapore manufacturing facility.
| |
13. | Other Noncurrent Liabilities |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Employee benefits | | $ | 89,116 |
| | $ | 81,377 |
|
Deferred income taxes | | 35,303 |
| | 9,234 |
|
Deemed repatriation of earnings | | 26,901 |
| | 0 |
Environmental remediation | | 11,753 |
| | 13,796 |
|
Asbestos litigation reserve | | 8,251 |
| | 9,710 |
|
Other | | 19,488 |
| | 17,203 |
|
| | $ | 190,812 |
| | $ | 131,320 |
|
| |
14. | Stock-based Compensation |
The 2014 Incentive Compensation and Stock Plan (the Plan) was approved on April 24, 2014. Any employee of our company or an affiliate or a person who is a member of our Board of Directors or the board of directors of an affiliate is eligible to participate in the Plan if the Compensation Committee of the Board of Directors (the Administrator), in its sole discretion, determines that such person has contributed or can be expected to contribute to the profits or growth of our company or its affiliates (each, a participant). Under the terms of the Plan, we may grant participants stock awards, incentive awards, stock units, or options (which may be either incentive stock options or nonqualified stock options), or stock appreciation rights (SARs), which may be granted with a related option. Stock options entitle the participant to
Notes to Consolidated Financial Statements
purchase a specified number of shares of our common stock at a price that is fixed by the Administrator at the time the option is granted; provided, however, that the price cannot be less than the shares’ fair market value on the date of grant. The maximum period in which an option may be exercised is fixed by the Administrator at the time the option is granted but, in the case of an incentive stock option, cannot exceed ten10 years. No participant may be granted or awarded, in any calendar year, shares, options, SARs, or stock units covering more than 200,000 shares of our common stock in the aggregate. For purposes of this limitation and the individual limitation on the grant of options, an option and corresponding SAR are treated as a single award.
The maximum aggregate number of shares of our common stock that may be issued under the Plan is 1,000,000.1,000,000. At December 31, 2017, 974,0442020, 954,028 shares were available for grant. During 2017,2020, we granted 6501,120 shares to five5 of our non-employee directors, which vested immediately.
Notes to Consolidated Financial Statements
A summary of activity during 20172020 related to NewMarket’s restricted stock and restricted stock units (stock awards) is presented below in whole shares:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant-Date Fair Value |
Unvested stock awards at January 1, 2020 | | 21,111 | | | $ | 427.14 | |
Granted in 2020 | | 6,779 | | | 414.33 | |
Vested in 2020 | | 4,708 | | | 428.54 | |
Forfeited in 2020 | | 2,268 | | | 428.07 | |
Unvested stock awards at December 31, 2020 | | 20,914 | | | 422.57 | |
|
| | | | | | | |
| | Number of Shares | | Weighted Average Grant-Date Fair Value |
Unvested stock awards at January 1, 2017 | | 18,114 |
| | $ | 379.22 |
|
Granted in 2017 | | 6,785 |
| | 428.61 |
|
Vested in 2017 | | 6,795 |
| | 381.99 |
|
Forfeited in 2017 | | 467 |
| | 378.09 |
|
Unvested stock awards at December 31, 2017 | | 17,637 |
| | 397.18 |
|
The weighted average grant-date fair value was $375.57$440.42 for stock awards granted in 2015. No2019 and $415.98 for stock awards were granted in 2016.2018. The fair value of shares vested was $2 million in 2020, $1 million in 2019, and $3 million in 2017, $3 million in 2016, and $4 million in 2015.2018. We recognized compensation expense of $3$2 million in 2017, $32020, $2 million in 2016,2019, and $2 million in 20152018 related to stock awards. At December 31, 2017,2020, total unrecognized compensation expense related to stock awards was $3$5 million,, which is expected to be recognized over a period of 1.5 years.3.1 years.
| |
15. | Fair Value Measurements |
The carrying amount of cashOur leases are for land, real estate, railcars, vehicles, pipelines, plant equipment, and cash equivalents in the Consolidated Balance Sheets, as well as the fair value, was $84 million at December 31, 2017office equipment. We have both operating and $192 million at December 31, 2016. The fair value is categorized in Level 1 of the fair value hierarchy.
Except for the acquisition of AMSA, no events occurred during 2017 requiring adjustmentfinance leases with remaining terms ranging from less than one year to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis. See Note 2 for information on the acquisition of AMSA.
Long-term debt - We record the carrying amount of our long-term debt at historical cost, less deferred financing costs related to the 4.10% senior notes. The estimated fair value of our long-term debt is shown in the table below and is based primarily on estimated current rates available to us for debt of the same remaining duration and adjusted for nonperformance risk and credit risk. The estimated fair value of our publicly traded 4.10% senior notes included in long-term debt in the table below is based on the last quoted price closest to December 31, 2017. The fair value of our debt instruments is categorized as Level 2.
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
(in thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt (excluding capital lease obligation) | | $ | 597,091 |
| | $ | 623,557 |
| | $ | 502,505 |
| | $ | 507,925 |
|
| |
16. | Commitments and Contingencies |
Contractual Commitments—NewMarket has operating50 years. Our lease agreements primarily for office space, land, transportation equipment, and storage facilities.do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
(in thousands) | | | | | | 2020 | | 2019 | | |
Operating lease cost | | | | | | $ | 17,371 | | | $ | 17,414 | | | |
Finance lease cost: | | | | | | | | | | |
Amortization of assets | | | | | | 3,047 | | | 2,723 | | | |
Interest on lease liabilities | | | | | | 417 | | | 426 | | | |
Short-term lease cost | | | | | | 4,665 | | | 3,459 | | | |
Variable lease cost | | | | | | 4,579 | | | 3,206 | | | |
Total lease cost | | | | | | 30,079 | | | $ | 27,228 | | | |
Variable lease costs also include leases that do not have a right-of-use asset or lease liability, but are capitalized as part of inventory. Rental expense was $33$23 million in 2017, $33 million2018 under the authoritative accounting guidance in 2016, and $34 million in 2015.effect during that year.
Future lease payments for all noncancelable operating leases as of December 31, 2017 are (in thousands):
Notes to Consolidated Financial Statements
|
| | | |
2018 | $ | 14,520 |
|
2019 | 11,328 |
|
2020 | 8,000 |
|
2021 | 5,169 |
|
2022 | 3,461 |
|
After 2022 | 19,206 |
|
We have contractual obligations for the construction of assets, as well as purchases of property and equipment, of approximately $26 million at December 31, 2017, all of which are due within five years.
Purchase Obligations—We have purchase obligations for goods or services that are enforceable, legally binding, and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Purchase orders made in the ordinary course of business are excluded from this amount. Any amounts for which we are liable under purchase orders are reflected in our Consolidated Balance Sheets as accounts payable or accrued expenses.
Future payments for purchase obligations as of December 31, 2017 are (in thousands):
|
| | | |
2018 | $ | 193,821 |
|
2019 | 197,235 |
|
2020 | 200,115 |
|
2021 | 196,849 |
|
2022 | 185,956 |
|
After 2022 | 113,310 |
|
Litigation—We are involved in legal proceedings that are incidental to our business and may include administrative or judicial actions. Some of these legal proceedings involve governmental authorities and relate to environmental matters. For furtherSupplemental balance sheet information see “Environmental” below and Item 1 of this Form 10-K.
While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
In late 2013, Afton initiated a voluntary self-audit of its compliance with certain sections of the TSCA under the EPA’s Audit Policy. If any potential TSCA violations are discovered during the audit, we would voluntarily disclose them to the EPA under the Audit Policy. In August 2014, the EPA staff began its own TSCA inspection of both Afton and Ethyl. While it is not possible to predict or determine with certainty the outcome, we do not believe that any findings identified as a result of our audit or the EPA’s TSCA inspection will have a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
Asbestos
We are a defendant in personal injury lawsuits involving exposure to asbestos. These cases involve exposure to asbestos in premises owned or operated, or formerly owned or operated, by subsidiaries of NewMarket. We have never manufactured, sold, or distributed products that contain asbestos. Nearly all of these cases are pending in Texas, Louisiana, or Illinois and involve multiple defendants. We maintain an accrual for these proceedings, as well as a receivable for expected insurance recoveries.
The accrual for our premises asbestos liability related to currently asserted claims is based on the following assumptions and factors:leases was as follows:
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | Balance Sheet Classification | | 2020 | | 2019 | | |
Operating leases: | | | | | | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | $ | 61,329 | | | $ | 60,505 | | | |
| | | | | | | |
Current liability | Operating lease liabilities | | $ | 13,410 | | | $ | 14,036 | | | |
Noncurrent liability | Operating lease liabilities-noncurrent | | 48,324 | | | 46,792 | | | |
| | | $ | 61,734 | | | $ | 60,828 | | | |
| | | | | | | |
Finance leases: | | | | | | | |
Finance lease right-of-use assets | Deferred charges and other assets | | $ | 10,774 | | | $ | 12,840 | | | |
| | | | | | | |
Current liability | Other current liabilities | | $ | 2,142 | | | $ | 3,019 | | | |
Noncurrent liability | Other noncurrent liabilities | | 10,077 | | | 11,119 | | | |
| | | $ | 12,219 | | | $ | 14,138 | | | |
| | | | | | | | | | | | | | | | |
| | December 31, | | |
| | 2020 | | 2019 | | |
Weighted average remaining lease term (in years): | | | | | | |
Operating leases | | 13 | | 14 | | |
Finance leases | | 10 | | 9 | | |
| | | | | | |
Weighted average incremental borrowing rate: | | | | | | |
Operating leases | | 3.33 | % | | 3.88 | % | | |
Finance leases | | 3.05 | % | | 3.41 | % | | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 17,563 | | | $ | 16,765 | | | |
Operating cash flows from finance leases | | 417 | | | 426 | | | |
Financing cash flows from finance leases | | 3,031 | | | 2,649 | | | |
| | | | | | |
Right-of-use assets obtained in exchange for new lease obligations: | | | | | | |
Operating leases | | $ | 17,694 | | | $ | 18,826 | | | |
Finance leases | | 982 | | | 10,555 | | | |
Notes to Consolidated Financial Statements
Maturities of lease liabilities as of December 31, 2020 were as follows:
We | | | | | | | | | | | | | | |
(in thousands) | | Operating Leases | | Finance Leases |
2021 | | $ | 15,093 | | | $ | 2,463 | |
2022 | | 12,103 | | | 1,428 | |
2023 | | 9,854 | | | 1,211 | |
2024 | | 6,091 | | | 1,164 | |
2025 | | 4,437 | | | 1,143 | |
Thereafter | | 33,426 | | | 6,628 | |
Total lease payments | | 81,004 | | | 14,037 | |
Less: imputed interest | | 19,270 | | | 1,818 | |
Total lease obligations | | $ | 61,734 | | | $ | 12,219 | |
Operating lease payments in the table above include approximately $16 million related to options to extend lease terms that are often onereasonably certain of many defendants. This factor influences bothbeing exercised. At December 31, 2020, we have entered into leases that have not yet commenced, but provide for right-of-use assets of approximately $38 million with remaining related lease obligations of $25 million, which are not included in the number of claims settled against us and the indemnity cost associated with such resolutions.
The estimated percent of claimants in each case that, after discovery, will actually make a claim against us, outabove table. Most of the total number of claimantscommitments relate to plant and equipment that is being constructed or procured by the future lessors. These leases are expected to commence in a case, is based on a level consistent with past experience2021.
17. Pension Plans and current trends.Other Postretirement Benefits
We utilize average comparable plaintiff cost history as the basis for estimating pending premises asbestos related claims. These claims are filed by both former contractors and former employees who worked at past and present company locations. We also include an estimated inflation factor in the calculation.
No estimate is made for unasserted claims.
The estimated recoveries from insurance and Albemarle Corporation (a former operation of our company) for these cases are based on, and are consistent with, the 2005 settlement agreements with Travelers Indemnity Company.
Based on the above assumptions, we have provided an undiscounted liability related to premises asbestos claims of $10 million at December 31, 2017 and $11 million December 31, 2016. The liabilities related to asbestos claims are included in accrued expenses (current portion) and other noncurrent liabilities on the Consolidated Balance Sheets. Certain of these costs are recoverable through the settlement agreement with The Travelers Indemnity Company, as well as an agreement with Albemarle Corporation. The receivable for these recoveries related to premises asbestos liabilities was $5 million at both December 31, 2017 and December 31, 2016. These receivables are included in trade and other accounts receivable, net on the Consolidated Balance Sheets for the current portion. The noncurrent portion is included in deferred charges and other assets.
Environmental—We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities, or at third-party sites where we have been designated as a potentially responsible party (PRP). While we believe we are currently adequately accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact on our financial position, results of operations, and cash flows. Our total accruals for environmental remediation, dismantling, and decontamination were approximately $14 million at December 31, 2017 and $16 million at December 31, 2016. Of the total accrual, the current portion is included in accrued expenses and the noncurrent portion is included in other noncurrent liabilities on the Consolidated Balance Sheets.
Our more significant environmental sites include a former TEL plant site in Louisiana (the Louisiana site) and a Houston, Texas plant site (the Texas site). Together, the amounts accrued on a discounted basis related to these sites represented approximately $7 million of the total accrual above at December 31, 2017, using discount rates ranging from 4% to 9%, and $10 million of the total accrual above at December 31, 2016, using discount rates ranging from 4% to 9%. The aggregate undiscounted amount for these sites was $10 million at December 31, 2017 and $13 million at December 31, 2016. Of the total accrued for these two sites, the amount related to remediation of groundwater and soil was $3 million for the Louisiana site and $4 million for the Texas site at December 31, 2017 and $4 million for the Louisiana site and $5 million for the Texas site at December 31, 2016.
In 2000, the EPA named us as a PRP under Superfund law for the clean-up of soil and groundwater contamination at the five grouped disposal sites known as "Sauget Area 2 Sites" in Sauget, Illinois. Without admitting any fact, responsibility, fault, or liability in connection with this site, we are participating with other PRPs in site investigations and feasibility studies. In December 2013, the EPA issued its ROD confirming its remedies for the selected Sauget Area 2 sites. In August 2017, the EPA issued a Special Notice Letter to over 75 PRPs notifying them of potential liability and encouraging the PRPs to voluntarily perform or finance the response actions detailed in the ROD. We have accrued our estimated proportional share of the remedial costs and expenses addressed in the ROD. We do not believe there is any additional information available as a basis for revision of the liability that we have established at December 31, 2017. The amount accrued for this site is not material.
| |
17. | Pension Plans and Other Postretirement Benefits |
NewMarket uses a December 31 measurement date for all of our plans.
Notes to Consolidated Financial Statements
U.S. Retirement Plans
NewMarket sponsors four4 pension plans for all full-time U.S. employees that offer a benefit based primarily on years of service and compensation. Employees do not contribute to these pension plans. The plans are as follows:
•Salaried employees pension plan;
•Afton pension plan for union employees (the Sauget plan);
•NewMarket retirement income plan for union employees in Houston, Texas (the Houston plan); and
•Afton Chemical Additives pension plan for union employees in Port Arthur, Texas (the Port Arthur plan).
In addition, we offer an unfunded, nonqualified supplemental pension plan. This plan restores the pension benefits from our regular pension plans that would have been payable to designated participants if it were not for limitations imposed by U.S. federal income tax regulations.
We also provide postretirement health care benefits and life insurance to eligible retired employees. A plan amendment, with an effective date of January 1, 2016, was made in 2015 to provide post-65 medical and prescription drug benefits to retirees through a private healthcare exchange with fixed subsidies to eligible retirees through a health reimbursement account. As a result, the postretirement plan liabilities were remeasured at September 1, 2015 resulting in a non-cash improvement in the funded position.
The adjustment to accumulated other comprehensive loss is reflected in prior service cost (credit)component of net periodic benefit cost (income) is included in cost of goods sold; selling, general, and is being amortized into expense.administrative expenses; or research, development, and testing expenses, to reflect where other compensation costs arising from services rendered by the pertinent employee are recorded on the Consolidated Statements of Income. The remaining components of net periodic benefit cost (income) are recorded in other income (expense), net on the Consolidated Statements of Income.
Notes to Consolidated Financial Statements
The components of net periodic pension and postretirement benefit cost (income), as well as other amounts recognized in other comprehensive income (loss), are shown below.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | Pension Benefits | | Postretirement Benefits |
(in thousands) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Net periodic benefit cost (income) | | | | | | | | | | | | |
Service cost | | $ | 13,679 |
| | $ | 12,860 |
| | $ | 13,034 |
| | $ | 774 |
| | $ | 705 |
| | $ | 2,244 |
|
Interest cost | | 13,289 |
| | 13,175 |
| | 11,938 |
| | 1,582 |
| | 1,653 |
| | 2,548 |
|
Expected return on plan assets | | (26,146 | ) | | (23,137 | ) | | (20,467 | ) | | (1,197 | ) | | (1,239 | ) | | (1,288 | ) |
Amortization of prior service cost (credit) | | 26 |
| | 187 |
| | 99 |
| | (3,029 | ) | | (3,028 | ) | | (1,008 | ) |
Amortization of actuarial net (gain) loss | | 4,725 |
| | 5,243 |
| | 6,891 |
| | 0 |
| | 0 |
| | 0 |
|
Net periodic benefit cost (income) | | 5,573 |
| | 8,328 |
| | 11,495 |
| | (1,870 | ) | | (1,909 | ) | | 2,496 |
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) | | | | | | | | | | | | |
Actuarial net (gain) loss | | (13,386 | ) | | 9,140 |
| | 11,095 |
| | 2,635 |
| | 156 |
| | (1,826 | ) |
Prior service cost (credit) | | 0 |
| | 749 |
| | 0 |
| | 0 |
| | 0 |
| | (35,768 | ) |
Amortization of actuarial net gain (loss) | | (4,725 | ) | | (5,243 | ) | | (6,891 | ) | | 0 |
| | 0 |
| | 0 |
|
Amortization of prior service (cost) credit | | (26 | ) | | (187 | ) | | (99 | ) | | 3,029 |
| | 3,028 |
| | 1,008 |
|
Total recognized in other comprehensive income (loss) | | (18,137 | ) | | 4,459 |
| | 4,105 |
| | 5,664 |
| | 3,184 |
| | (36,586 | ) |
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss) | | $ | (12,564 | ) | | $ | 12,787 |
| | $ | 15,600 |
| | $ | 3,794 |
| | $ | 1,275 |
| | $ | (34,090 | ) |
The estimated actuarial net loss to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during 2018 is expected to be $5 million for pension plans. The estimated prior service cost to be
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | Pension Benefits | | Postretirement Benefits |
(in thousands) | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
Net periodic benefit cost (income) | | | | | | | | | | | | |
Service cost | | $ | 16,544 | | | $ | 13,471 | | | $ | 15,391 | | | $ | 912 | | | $ | 718 | | | $ | 896 | |
Interest cost | | 13,771 | | | 14,509 | | | 13,256 | | | 1,340 | | | 1,514 | | | 1,458 | |
Expected return on plan assets | | (37,226) | | | (34,632) | | | (29,883) | | | (938) | | | (947) | | | (969) | |
Amortization of prior service cost (credit) | | 271 | | | 178 | | | 25 | | | (3,028) | | | (3,028) | | | (3,028) | |
Amortization of actuarial net (gain) loss | | 4,674 | | | 2,951 | | | 5,139 | | | 0 | | | 0 | | | 0 | |
Net periodic benefit cost (income) | | (1,966) | | | (3,523) | | | 3,928 | | | (1,714) | | | (1,743) | | | (1,643) | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) | | | | | | | | | | | | |
Actuarial net (gain) loss | | (4,933) | | | (36,814) | | | 29,215 | | | 2,410 | | | 3,049 | | | (2,190) | |
Prior service cost (credit) | | 65 | | | 1,013 | | | 0 | | | 0 | | | 0 | | | 0 | |
Amortization of actuarial net gain (loss) | | (4,674) | | | (2,951) | | | (5,139) | | | 0 | | | 0 | | | 0 | |
Amortization of prior service (cost) credit | | (271) | | | (178) | | | (25) | | | 3,028 | | | 3,028 | | | 3,028 | |
Total recognized in other comprehensive income (loss) | | (9,813) | | | (38,930) | | | 24,051 | | | 5,438 | | | 6,077 | | | 838 | |
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss) | | $ | (11,779) | | | $ | (42,453) | | | $ | 27,979 | | | $ | 3,724 | | | $ | 4,334 | | | $ | (805) | |
Notes to Consolidated Financial Statements
amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during 2018 is not expected to be material for pension plans. The estimated prior service credit to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during 2018 related to postretirement benefits is expected to be $3 million.
Changes in the plans’ benefit obligations and assets follow.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | Pension Benefits | | Postretirement Benefits |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Change in benefit obligation | | | | | | | | |
Benefit obligation at beginning of year | | $ | 403,056 | | | $ | 349,212 | | | $ | 40,320 | | | $ | 37,512 | |
Service cost | | 16,544 | | | 13,471 | | | 912 | | | 718 | |
Interest cost | | 13,771 | | | 14,509 | | | 1,340 | | | 1,514 | |
Actuarial net (gain) loss | | 37,978 | | | 38,045 | | | 2,221 | | | 3,165 | |
Plan amendment | | 65 | | | 1,014 | | | 0 | | | 0 | |
Benefits paid | | (13,693) | | | (13,195) | | | (3,086) | | | (2,589) | |
Benefit obligation at end of year | | 457,721 | | | 403,056 | | | 41,707 | | | 40,320 | |
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | 483,823 | | | 384,552 | | | 22,092 | | | 22,378 | |
Actual return on plan assets | | 80,137 | | | 109,493 | | | 750 | | | 1,063 | |
Employer contributions | | 2,904 | | | 2,973 | | | 1,616 | | | 1,240 | |
Benefits paid | | (13,693) | | | (13,195) | | | (3,086) | | | (2,589) | |
Fair value of plan assets at end of year | | 553,171 | | | 483,823 | | | 21,372 | | | 22,092 | |
Funded status | | $ | 95,450 | | | $ | 80,767 | | | $ | (20,335) | | | $ | (18,228) | |
Amounts recognized in the Consolidated Balance Sheets | | | | | | | | |
Noncurrent assets | | $ | 136,530 | | | $ | 121,968 | | | $ | 0 | | | $ | 0 | |
Current liabilities | | (2,849) | | | (2,920) | | | (1,074) | | | (1,164) | |
Noncurrent liabilities | | (38,231) | | | (38,281) | | | (19,261) | | | (17,064) | |
| | $ | 95,450 | | | $ | 80,767 | | | $ | (20,335) | | | $ | (18,228) | |
Amounts recognized in accumulated other comprehensive loss | | | | | | | | |
Actuarial net (gain) loss | | $ | 63,654 | | | $ | 73,261 | | | $ | 4,979 | | | $ | 2,569 | |
Prior service cost (credit) | | 636 | | | 842 | | | (19,619) | | | (22,647) | |
| | $ | 64,290 | | | $ | 74,103 | | | $ | (14,640) | | | $ | (20,078) | |
|
| | | | | | | | | | | | | | | | |
| | December 31, |
| | Pension Benefits | | Postretirement Benefits |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Change in benefit obligation | | | | | | | | |
Benefit obligation at beginning of year | | $ | 316,366 |
| | $ | 292,728 |
| | $ | 38,110 |
| | $ | 38,517 |
|
Service cost | | 13,679 |
| | 12,860 |
| | 774 |
| | 705 |
|
Interest cost | | 13,289 |
| | 13,175 |
| | 1,582 |
| | 1,653 |
|
Actuarial net (gain) loss | | 25,828 |
| | 6,087 |
| | 2,506 |
| | (322 | ) |
Plan amendment | | 0 |
| | 748 |
| | 0 |
| | 0 |
|
Benefits paid | | (10,350 | ) | | (9,232 | ) | | (2,534 | ) | | (2,443 | ) |
Benefit obligation at end of year | | 358,812 |
| | 316,366 |
| | 40,438 |
| | 38,110 |
|
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | 291,092 |
| | 260,911 |
| | 23,238 |
| | 23,972 |
|
Actual return on plan assets | | 65,360 |
| | 20,083 |
| | 1,067 |
| | 761 |
|
Employer contributions | | 19,319 |
| | 19,330 |
| | 1,133 |
| | 948 |
|
Benefits paid | | (10,350 | ) | | (9,232 | ) | | (2,534 | ) | | (2,443 | ) |
Fair value of plan assets at end of year | | 365,421 |
| | 291,092 |
| | 22,904 |
| | 23,238 |
|
Funded status | | $ | 6,609 |
| | $ | (25,274 | ) | | $ | (17,534 | ) | | $ | (14,872 | ) |
Amounts recognized in the Consolidated Balance Sheets | | | | | | | | |
Noncurrent assets | | $ | 48,515 |
| | $ | 15,188 |
| | $ | 0 |
| | $ | 0 |
|
Current liabilities | | (2,793 | ) | | (2,781 | ) | | (1,278 | ) | | (1,313 | ) |
Noncurrent liabilities | | (39,113 | ) | | (37,681 | ) | | (16,256 | ) | | (13,559 | ) |
| | $ | 6,609 |
| | $ | (25,274 | ) | | $ | (17,534 | ) | | $ | (14,872 | ) |
Amounts recognized in accumulated other comprehensive loss | | | | | | | | |
Actuarial net (gain) loss | | $ | 88,950 |
| | $ | 107,061 |
| | $ | 1,710 |
| | $ | (925 | ) |
Prior service cost (credit) | | 32 |
| | 58 |
| | (28,703 | ) | | (31,732 | ) |
| | $ | 88,982 |
| | $ | 107,119 |
| | $ | (26,993 | ) | | $ | (32,657 | ) |
The accumulated benefit obligation for all domestic defined benefit pension plans was $307$392 million at December 31, 20172020 and $272$346 million at December 31, 2016.2019.
The fair market value of plan assets exceeded both the accumulated benefit obligation for all domestic plans, except the nonqualified plan, at December 31, 2017and December 31, 2016. The fair market value of plan assets exceeded the projected benefit obligation for all domestic plans, except the nonqualified plan, at December 31, 20172020 and December 31, 2016.2019.
The net asset position for plans in which assets exceedexceeded the projected benefit obligation is included in prepaid pension cost on the Consolidated Balance Sheets.
Notes to Consolidated Financial Statements
The net liability position of plans in which the projected benefit obligation exceedsexceeded assets is included in other noncurrent liabilities on the Consolidated Balance Sheets.
A portion of the accrued benefit cost for the nonqualified plan is included in current liabilities at both December 31, 20172020 and December 31, 2016.2019. As the nonqualified plan is unfunded, the amount reflected in current liabilities represents the expected benefit payments related to the nonqualified plan during 2018.2021.
Notes to Consolidated Financial Statements
The first table below shows selected information on domestic pension plans with the accumulatedand postretirement benefit obligation in excess of plan assets. The second table presents information on domestic pension plans with the projected benefit obligation in excess of plan assets.plans.
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Plans with the accumulated benefit obligation in excess of the fair market value of plan assets | | | | |
Projected benefit obligation | | $ | 41,906 |
| | $ | 40,462 |
|
Accumulated benefit obligation | | 38,105 |
| | 35,939 |
|
Fair market value of plan assets | | 0 |
| | 0 |
|
| | | | December 31, | | December 31, |
(in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
Plans with the projected benefit obligation in excess of the fair market value of plan assets | | | | | |
Pension plans with the accumulated benefit obligation in excess of the fair market value of plan assets | | Pension plans with the accumulated benefit obligation in excess of the fair market value of plan assets | | | | |
Accumulated benefit obligation | | Accumulated benefit obligation | | $ | 39,016 | | | $ | 38,167 | |
Fair market value of plan assets | | Fair market value of plan assets | | 0 | | | 0 | |
| Pension plans with the projected benefit obligation in excess of the fair market value of plan assets | | Pension plans with the projected benefit obligation in excess of the fair market value of plan assets | |
Projected benefit obligation | | $ | 41,906 |
| | $ | 40,462 |
| Projected benefit obligation | | 41,081 | | | 41,201 | |
Fair market value of plan assets | | 0 |
| | 0 |
| Fair market value of plan assets | | 0 | | | 0 | |
| Postretirement benefit plans with the accumulated postretirement benefit obligation in excess of the fair market value of plan assets | | Postretirement benefit plans with the accumulated postretirement benefit obligation in excess of the fair market value of plan assets | |
Accumulated postretirement benefit obligation | | Accumulated postretirement benefit obligation | | 25,584 | | | 24,651 | |
Fair market value of plan assets | | Fair market value of plan assets | | 0 | | | 0 | |
There are no assets held by the trustee for the retired beneficiaries of the nonqualified plan. Payments to retired beneficiaries of the nonqualified plan are made with cash from operations. The postretirement healthcare benefits are also unfunded and paid with cash from operations. The benefits from the postretirement life insurance are funded through an insurance contract.
Assumptions—We used the following assumptions to calculate the results of our retirement plans:
|
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Weighted-average assumptions used to determine net periodic benefit cost (income) for years ended December 31, | | | | | | | | | | | | |
Discount rate | | 4.250 | % | | 4.500 | % | | 4.125 | % | | 4.250 | % | | 4.500 | % | | 4.125 | % |
Expected long-term rate of return on plan assets | | 8.50 | % | | 8.50 | % | | 8.50 | % | | 5.50 | % | | 5.50 | % | | 5.50 | % |
Rate of projected compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % | | | | | | |
Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | | | | | | | | |
Discount rate | | 3.750 | % | | 4.250 | % | | 4.500 | % | | 3.750 | % | | 4.250 | % | | 4.500 | % |
Rate of projected compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % | | | | | | |
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
Weighted-average assumptions used to determine net periodic benefit cost (income) for years ended December 31, | | | | | | | | | | | | |
Discount rate | | 3.50 | % | | 4.25 | % | | 3.75 | % | | 3.50 | % | | 4.25 | % | | 3.75 | % |
Expected long-term rate of return on plan assets | | 8.50 | % | | 8.50 | % | | 8.50 | % | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Rate of projected compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % | | | | | | |
Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | | | | | | | | |
Discount rate | | 2.875 | % | | 3.50 | % | | 4.25 | % | | 2.875 | % | | 3.50 | % | | 4.25 | % |
Rate of projected compensation increase | | 3.50 | % | | 3.50 | % | | 3.50 | % | | | | | | |
For pension plans, we base the assumed expected long-term rate of return for plan assets on an analysis of our actual investments, including our asset allocation, as well as an analysis of expected returns. This analysis reflects the expected long-term rates of return for each significant asset class and economic indicator. As of January 1, 2018, the expected rates were 8.5% for U.S. large cap stocks, 4.1% for fixed income, and 3.1% for inflation. The range of returns relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. Our asset allocation is predominantly weighted toward equities. Through our ongoing monitoring of our investments and review of market data, we have determined that we should maintainreduce the expected long-term rate of return for our U.S. plans at 8.5% at December 31, 2017.to 8.0% for the year beginning January 1, 2021. For the postretirement plan, we based the assumed expected long-term rate of return for plan assets on an evaluation of projected interest rates, as well as the guaranteed interest rate for our insurance contract.
Plan Assets—Pension plan assets are held and distributed by trusts and consist principally of equity securities and investment-grade fixed income securities. We invest directly in equity securities, as well as in funds which primarily
Notes to Consolidated Financial Statements
hold equity and debt securities. Our target allocation is 90% to 97% in equities, 3% to 10% in debt securities and 1% to 5% in cash.
The pension obligation is long-term in nature and the investment philosophy followed by the Pension Investment Committee is likewise long-term in its approach. The majority of the pension funds are invested in equity securities as historically, equity securities have outperformed debt securities and cash investments, resulting in a higher investment return over the long-term. While in the short-term, equity securities may underperform other investment classes, we are less concerned with short-term results and more concerned with long-term improvement. The pension funds are managed by fiveseveral different investment companies who predominantly invest in U.S. and international equities. Each investment company’s performance is reviewed quarterly. A small portion of the funds is in investments such as cash or short-term bonds, which historically has been less vulnerable to short-term market swings. These funds are used to provide the cash needed to meet our monthly obligations.
There are no significant concentrations of risk within plan assets, nor do the equity securities include any NewMarket common stock for any year presented.
The assets of the postretirement benefit plan are invested completely in an insurance contract held by Metropolitan Life.contract. No NewMarket common stock is included in these assets.
Notes to Consolidated Financial Statements
The following table provides information on the fair value of our pension and postretirement benefit plans assets, as well as the related level within the fair value hierarchy. Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified by level in the fair value hierarchy.
| | | | December 31, 2017 | | December 31, 2016 | | | December 31, 2020 | | December 31, 2019 |
| | | | Fair Value Measurements Using | | | | Fair Value Measurements Using | | | | | Fair Value Measurements Using | | | | Fair Value Measurements Using |
(in thousands) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Pension Plans | | | | | | | | | | | | | | | | | Pension Plans | | | | | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | | | | | | Equity securities: | |
U. S. companies | | $ | 286,103 |
| | $ | 286,103 |
| | $ | 0 |
| | $ | 0 |
| | $ | 232,895 |
| | $ | 232,895 |
| | $ | 0 |
| | $ | 0 |
| U. S. companies | | $ | 397,981 | | | $ | 397,981 | | | $ | 0 | | | $ | 0 | | | $ | 338,564 | | | $ | 338,564 | | | $ | 0 | | | $ | 0 | |
International companies | | 2,074 |
| | 2,074 |
| | 0 |
| | 0 |
| | 1,757 |
| | 1,757 |
| | 0 |
| | 0 |
| International companies | | 21,313 | | | 21,313 | | | 0 | | | 0 | | | 20,751 | | | 20,751 | | | 0 | | | 0 | |
Real estate investment trusts | | 3,487 |
| | 3,487 |
| | 0 |
| | 0 |
| | 2,653 |
| | 2,653 |
| | 0 |
| | 0 |
| |
Money market instruments | | 18,395 |
| | 18,395 |
| | 0 |
| | 0 |
| | 11,120 |
| | 11,120 |
| | 0 |
| | 0 |
| Money market instruments | | 6,771 | | | 6,771 | | | 0 | | | 0 | | | 17,618 | | | 17,618 | | | 0 | | | 0 | |
Pooled investment funds: | | | | | | | | | | | | | | | | | Pooled investment funds: | |
Fixed income securities—mutual funds | | 8,958 |
| | 8,958 |
| | 0 |
| | 0 |
| | 8,799 |
| | 8,799 |
| | 0 |
| | 0 |
| Fixed income securities—mutual funds | | 18,420 | | | 18,420 | | | 0 | | | 0 | | | 9,576 | | | 9,576 | | | 0 | | | 0 | |
International equities—mutual fund | | 16,715 |
| | 16,715 |
| | 0 |
| | 0 |
| | 13,104 |
| | 13,104 |
| | 0 |
| | 0 |
| International equities—mutual fund | | 19,341 | | | 19,341 | | | 0 | | | 0 | | | 17,378 | | | 17,378 | | | 0 | | | 0 | |
Common collective trusts measured at net asset value | | 26,084 |
| | | | | | | | 19,780 |
| | | | | | | Common collective trusts measured at net asset value | | 89,275 | | | 78,256 | | |
Cash | | Cash | | 70 | | | 70 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Insurance contract | | 3,605 |
| | 0 |
| | 3,605 |
| | 0 |
| | 984 |
| | 0 |
| | 984 |
| | 0 |
| Insurance contract | | 0 | | | 0 | | | 0 | | | 0 | | | 1,680 | | | 0 | | | 1,680 | | | 0 | |
| | $ | 365,421 |
| | $ | 335,732 |
| | $ | 3,605 |
| | $ | 0 |
| | $ | 291,092 |
| | $ | 270,328 |
| | $ | 984 |
| | $ | 0 |
|
| | $ | 553,171 | | | $ | 463,896 | | | $ | 0 | | | $ | 0 | | | $ | 483,823 | | | $ | 403,887 | | | $ | 1,680 | | | $ | 0 | |
Postretirement Plans | | | | | | | | | | | | | | | | | Postretirement Plans | | | | | | | | | | | | | | | | |
Insurance contract | | $ | 22,904 |
| | $ | 0 |
| | $ | 22,904 |
| | $ | 0 |
| | $ | 23,238 |
| | $ | 0 |
| | $ | 23,238 |
| | $ | 0 |
| Insurance contract | | $ | 21,372 | | | $ | 0 | | | $ | 21,372 | | | $ | 0 | | | $ | 22,092 | | | $ | 0 | | | $ | 22,092 | | | $ | 0 | |
The valuation methodologies used to develop the fair value measurements for the investments in the table above isare outlined below. There have been no changes in the valuation techniques used to value the investments.
•Equity securities, including common stock and real estate investment trusts, are valued at the closing price reported on a national exchange.
Notes to Consolidated Financial Statements
•Money market instruments are valued at cost, which approximates fair value.
•Pooled investment funds—Mutual funds are valued at the closing price reported on a national exchange.
•The common collective trusts (the trusts) are valued at the net asset value of units held based on the quoted market value of the underlying investments held by the funds. One of the trusts invests primarily in a diversified portfolio of equity securities of companies located outside of the United States and Canada, as determined by a company's jurisdiction of incorporation. We may make withdrawals from this trust on the first business day of each month with at least ten business days'10 days notice. The otherAnother trust invests primarily in a diversified portfolio of equity securities included in the S&P 500 index and a third trust invests primarily in a diversified portfolio of equity securities included in the Russell 1000 Value index. There are no restrictions on redemption for the index trusts and there were no0 unfunded commitments.
•Cash and cash equivalents are valued at cost.
Notes to Consolidated Financial Statements
•The insurance contracts are unallocated funds deposited with an insurance company and are stated at an amount equal to the sum of all amounts deposited less the sum of all amounts withdrawn, adjusted for investment return.
Cash Flows—For U.S. plans, NewMarket expects to contribute $19$3 million to our pension plans in 2018. Contributionsand $2 million to our postretirement benefit plans are not expected to be material.plan in 2021. The expected benefit payments for the next ten years are as follows.
|
| | | | | | | | |
(in thousands) | | Expected Pension Benefit Payments | | Expected Postretirement Benefit Payments |
2018 | | $ | 11,404 |
| | $ | 2,815 |
|
2019 | | 12,426 |
| | 2,659 |
|
2020 | | 13,227 |
| | 2,511 |
|
2021 | | 14,256 |
| | 2,391 |
|
2022 | | 15,154 |
| | 2,278 |
|
2023 through 2027 | | 92,183 |
| | 10,277 |
|
| | | | | | | | | | | | | | |
(in thousands) | | Expected Pension Benefit Payments | | Expected Postretirement Benefit Payments |
2021 | | $ | 13,671 | | | $ | 2,338 | |
2022 | | 14,523 | | | 2,203 | |
2023 | | 15,475 | | | 2,096 | |
2024 | | 16,527 | | | 1,994 | |
2025 | | 17,588 | | | 1,940 | |
2026 through 2030 | | 103,131 | | | 9,235 | |
Foreign Retirement Plans
For most employees of our foreign subsidiaries, NewMarket has defined benefit pension plans that offer benefits based primarily on years of service and compensation. These defined benefit plans provide benefits for employees of our foreign subsidiaries located in Belgium, the United Kingdom,U.K., Germany, Canada, and Mexico. NewMarket generally contributes to investment trusts and insurance accounts to provide for these plans.
Notes to Consolidated Financial Statements
The components of net periodic pension cost (income), as well as other amounts recognized in other comprehensive income (loss), for these foreign defined benefit pension plans are shown below.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Net periodic benefit cost (income) | | | | | | |
Service cost | | $ | 8,544 | | | $ | 6,430 | | | $ | 7,271 | |
Interest cost | | 3,866 | | | 4,768 | | | 4,514 | |
Expected return on plan assets | | (9,729) | | | (9,084) | | | (9,918) | |
Amortization of prior service cost (credit) | | (43) | | | (42) | | | (81) | |
| | | | | | |
Amortization of actuarial net (gain) loss | | 1,420 | | | 938 | | | 597 | |
| | | | | | |
Net periodic benefit cost (income) | | 4,058 | | | 3,010 | | | 2,383 | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) | | | | | | |
Actuarial net (gain) loss | | 33,816 | | | 11,074 | | | 4,532 | |
Prior service cost (credit) | | 0 | | | 0 | | | 537 | |
| | | | | | |
| | | | | | |
Amortization of actuarial net gain (loss) | | (1,420) | | | (938) | | | (597) | |
Amortization of prior service (cost) credit | | 43 | | | 42 | | | 81 | |
Total recognized in other comprehensive income (loss) | | 32,439 | | | 10,178 | | | 4,553 | |
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss) | | $ | 36,497 | | | $ | 13,188 | | | $ | 6,936 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Net periodic benefit cost (income) | | | | | | |
Service cost | | $ | 7,437 |
| | $ | 6,926 |
| | $ | 8,150 |
|
Interest cost | | 4,314 |
| | 4,915 |
| | 4,932 |
|
Expected return on plan assets | | (8,479 | ) | | (6,638 | ) | | (7,077 | ) |
Amortization of prior service cost (credit) | | (79 | ) | | (83 | ) | | (95 | ) |
Amortization of actuarial net (gain) loss | | 959 |
| | 1,021 |
| | 1,587 |
|
Net periodic benefit cost (income) | | 4,152 |
| | 6,141 |
| | 7,497 |
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) | | | | | | |
Actuarial net (gain) loss | | (3,029 | ) | | 3,215 |
| | (5,461 | ) |
Amortization of actuarial net gain (loss) | | (959 | ) | | (1,021 | ) | | (1,587 | ) |
Amortization of prior service (cost) credit | | 79 |
| | 83 |
| | 95 |
|
Total recognized in other comprehensive income (loss) | | (3,909 | ) | | 2,277 |
| | (6,953 | ) |
Total recognized in net periodic benefit cost (income) and other comprehensive income (loss) | | $ | 243 |
| | $ | 8,418 |
| | $ | 544 |
|
Notes to Consolidated Financial Statements
The estimated actuarial net loss to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during 2018 is expected to be $1 million. The estimated prior service credit to be amortized from accumulated other comprehensive loss into net periodic benefit cost (income) during 2018 is not expected to be material.
Changes in the benefit obligations and assets of the foreign defined benefit pension plans follow.
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Change in benefit obligation | | | | |
Benefit obligation at beginning of year | | $ | 206,058 | | | $ | 173,620 | |
Service cost | | 8,544 | | | 6,430 | |
Interest cost | | 3,866 | | | 4,768 | |
| | | | |
Employee contributions | | 714 | | | 680 | |
Actuarial net (gain) loss | | 36,463 | | | 21,558 | |
Benefits paid | | (5,059) | | | (5,977) | |
| | | | |
Foreign currency translation | | 12,003 | | | 4,979 | |
Benefit obligation at end of year | | 262,589 | | | 206,058 | |
Change in plan assets | | | | |
Fair value of plan assets at beginning of year | | 189,455 | | | 163,746 | |
Actual return on plan assets | | 13,590 | | | 19,591 | |
Employer contributions | | 5,913 | | | 5,586 | |
Employee contributions | | 714 | | | 680 | |
Benefits paid | | (5,059) | | | (5,977) | |
| | | | |
Foreign currency translation | | 8,004 | | | 5,829 | |
Fair value of plan assets at end of year | | 212,617 | | | 189,455 | |
Funded status | | $ | (49,972) | | | $ | (16,603) | |
Amounts recognized in the Consolidated Balance Sheets | | | | |
Noncurrent assets | | $ | 539 | | | $ | 11,880 | |
Current liabilities | | (407) | | | (297) | |
Noncurrent liabilities | | (50,104) | | | (28,186) | |
| | $ | (49,972) | | | $ | (16,603) | |
Amounts recognized in accumulated other comprehensive loss | | | | |
Actuarial net (gain) loss | | $ | 85,298 | | | $ | 52,902 | |
Prior service cost (credit) | | 821 | | | 778 | |
| | | | |
| | $ | 86,119 | | | $ | 53,680 | |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Change in benefit obligation | | | | |
Benefit obligation at beginning of year | | $ | 157,101 |
| | $ | 146,748 |
|
Service cost | | 7,437 |
| | 6,926 |
|
Interest cost | | 4,314 |
| | 4,915 |
|
Acquisition | | 1,888 |
| | 0 |
|
Employee contributions | | 766 |
| | 832 |
|
Actuarial net (gain) loss | | 2,417 |
| | 25,794 |
|
Benefits paid | | (5,157 | ) | | (3,501 | ) |
Foreign currency translation | | 17,049 |
| | (24,613 | ) |
Benefit obligation at end of year | | 185,815 |
| | 157,101 |
|
Change in plan assets | | | | |
Fair value of plan assets at beginning of year | | 144,877 |
| | 138,646 |
|
Actual return on plan assets | | 13,778 |
| | 29,026 |
|
Employer contributions | | 5,646 |
| | 5,441 |
|
Employee contributions | | 766 |
| | 832 |
|
Benefits paid | | (5,157 | ) | | (3,501 | ) |
Acquisition | | 1,910 |
| | 0 |
|
Foreign currency translation | | 15,148 |
| | (25,567 | ) |
Fair value of plan assets at end of year | | 176,968 |
| | 144,877 |
|
Funded status | | $ | (8,847 | ) | | $ | (12,224 | ) |
Amounts recognized in the Consolidated Balance Sheets | | | | |
Noncurrent assets | | $ | 17,980 |
| | $ | 10,612 |
|
Current liabilities | | (346 | ) | | (295 | ) |
Noncurrent liabilities | | (26,481 | ) | | (22,541 | ) |
| | $ | (8,847 | ) | | $ | (12,224 | ) |
Amounts recognized in accumulated other comprehensive loss | | | | |
Actuarial net (gain) loss | | $ | 38,831 |
| | $ | 42,809 |
|
Prior service cost (credit) | | 118 |
| | 39 |
|
Transition obligation | | 0 |
| | 10 |
|
| | $ | 38,949 |
| | $ | 42,858 |
|
The accumulated benefit obligation for all foreign defined benefit pension plans was $155$224 million at December 31, 20172020 and $132$171 million at December 31, 2016.
Notes to Consolidated Financial Statements
2019.
The fair market value of plan assets exceeded both the accumulated benefit obligation and projected benefit obligation for the United Kingdom and the Canadian Salary plansCanada plan at both year-end 20172020 and 2016.2019. The net asset position of the United Kingdom and Canadian Salary plans areCanada plan is included in prepaid pension cost on the Consolidated Balance Sheets at December 31, 20172020 and December 31, 2016.2019. The fair market value of plan assets for the U.K. plan exceeded the accumulated benefit obligation but not the projected benefit obligation at yearend 2020. For yearend 2019, the fair market value of plan assets of the U.K. plan exceeded both the accumulated benefit obligation and projected benefit obligation. The accrued benefit cost of the U.K. plan is included in other noncurrent liabilities on the Consolidated Balance Sheets at December 31, 2020 and the net asset position is included in prepaid pension cost on the Consolidated Balance Sheets at December 31, 2019. The accumulated benefit obligation and projected benefit obligation exceeded the fair market value of plan assets for the GermanGermany, Belgium, and Belgianthe two Mexico plans at December 31, 20172020 and for the German, Belgian, and Mexican plans at December 31, 2016. For the two Mexican plans, the fair market value of plan assets exceeded the accumulated benefit obligation but not the projected benefit obligation at December 31, 2017.2019. The accrued benefit cost of these plans is included in other noncurrent liabilities on the Consolidated Balance Sheets.Sheets for both years.
Notes to Consolidated Financial Statements
As the GermanGermany plan is unfunded, a portion of the accrued benefit cost for the German plan is included in current liabilities at year-end 20172020 and 2016,2019, reflecting the expected benefit payments related to the plan for the following year.
The first table below shows selected information on foreign pension plans with the accumulated benefit obligation in excess of plan assets. The second table shows information on foreign pension plans with the projected benefit obligation in excess of plan assets.plans.
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Pension plans with the accumulated benefit obligation in excess of the fair market value of plan assets | | | | |
Accumulated benefit obligation | | $ | 32,176 | | | $ | 27,879 | |
Fair market value of plan assets | | 14,527 | | | 12,642 | |
| | | | |
Pension plans with the projected benefit obligation in excess of the fair market value of plan assets | | | | |
Projected benefit obligation | | 257,642 | | | 41,126 | |
Fair market value of plan assets | | 207,131 | | | 12,642 | |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Plans with the accumulated benefit obligation in excess of the fair market value of plan assets | | | | |
Projected benefit obligation | | $ | 36,687 |
| | $ | 32,407 |
|
Accumulated benefit obligation | | 23,704 |
| | 21,310 |
|
Fair market value of plan assets | | 10,151 |
| | 9,568 |
|
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Plans with the projected benefit obligation in excess of the fair market value of plan assets | | | | |
Projected benefit obligation | | $ | 39,074 |
| | $ | 32,407 |
|
Fair market value of plan assets | | 12,247 |
| | 9,568 |
|
Assumptions—The information in the table below provides the weighted-average assumptions used to calculate the results of our foreign defined benefit pension plans.
| | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
Weighted-average assumptions used to determine net periodic benefit cost (income) for the years ended December 31, | | | | | | | Weighted-average assumptions used to determine net periodic benefit cost (income) for the years ended December 31, | | | | | | |
Discount rate | | 2.53 | % | | 3.58 | % | | 3.11 | % | Discount rate | | 1.81 | % | | 2.67 | % | | 2.36 | % |
Expected long-term rate of return on plan assets | | 5.50 | % | | 5.10 | % | | 5.03 | % | Expected long-term rate of return on plan assets | | 5.23 | % | | 5.58 | % | | 5.50 | % |
Rate of projected compensation increase | | 4.20 | % | | 4.28 | % | | 4.27 | % | Rate of projected compensation increase | | 3.96 | % | | 4.10 | % | | 4.14 | % |
Weighted-average assumptions used to determine benefit obligations at December 31, | | | | | | | Weighted-average assumptions used to determine benefit obligations at December 31, | |
Discount rate | | 2.36 | % | | 2.53 | % | | 3.58 | % | Discount rate | | 1.14 | % | | 1.81 | % | | 2.67 | % |
Rate of projected compensation increase | | 4.14 | % | | 4.20 | % | | 4.28 | % | Rate of projected compensation increase | | 3.94 | % | | 3.96 | % | | 4.10 | % |
The actuarial assumptions used by the various foreign locations are based upon the circumstances of each particular country and pension plan. The factors impacting the determination of the long-term rate of return for a particular foreign pension plan include the market conditions within a particular country, as well as the investment strategy and asset allocation of the specific plan.
Notes to Consolidated Financial Statements
Plan Assets—Pension plan assets vary by foreign location and plan. Assets are held and distributed by trusts and, depending upon the foreign location and plan, consist primarily of pooled equity funds, pooled debt securities funds, pooled diversified funds, equity securities, debt securities, cash, and insurance contracts. The combined weighted-average target allocation of our foreign pension plans is 38% in equities (including pooled funds), 37% in debt securities (including pooled funds), 6% in insurance contracts, and 19% in pooled diversified funds.
While the pension obligation is long-term in nature for each of our foreign plans, the investment strategies followed by each plan vary to some degree based upon the laws of a particular country, as well as the provisions of the specific pension trust. The United KingdomU.K. and CanadianCanada plans are invested predominantly in equity securities funds, diversified funds, and debt securities funds. The funds of these plans are managed by various trustees and investment companies whose performance is reviewed throughout the year. The BelgianBelgium plan is invested in an insurance contract. The MexicanMexico plans are invested in various mutual funds, equities, and debt securities. The GermanGermany plan has no assets.
There are no significant concentrations of risk within plan assets, nor do the equity securities include any NewMarket common stock for any year presented.
Notes to Consolidated Financial Statements
The following table provides information on the fair value of our foreign pension plans assets, as well as the related level within the fair value hierarchy. Investments that are measured at fair value using net asset value per share (or its equivalent) have not been classified by level in the fair value hierarchy.
| | | | December 31, 2017 | | December 31, 2016 | | | December 31, 2020 | | December 31, 2019 |
| | | | Fair Value Measurements Using | | | | Fair Value Measurements Using | | | | | Fair Value Measurements Using | | | | Fair Value Measurements Using |
(in thousands) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 | (in thousands) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Insurance contract | | $ | 10,151 |
| | $ | 0 |
| | $ | 10,151 |
| | $ | 0 |
| | $ | 9,399 |
| | $ | 0 |
| | $ | 9,399 |
| | $ | 0 |
| Insurance contract | | $ | 12,579 | | | $ | 0 | | | $ | 12,579 | | | $ | 0 | | | $ | 10,706 | | | $ | 0 | | | $ | 10,706 | | | $ | 0 | |
Equity securities—international companies | | 755 |
| | 755 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| Equity securities—international companies | | 714 | | | 714 | | | 0 | | | 0 | | | 691 | | | 691 | | | 0 | | | 0 | |
Debt securities | | 872 |
| | 801 |
| | 71 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| Debt securities | | 575 | | | 470 | | | 105 | | | 0 | | | 663 | | | 646 | | | 17 | | | 0 | |
Pooled investment funds—mutual funds | | 469 |
| | 469 |
| | 0 |
| | 0 |
| | 169 |
| | 169 |
| | 0 |
| | 0 |
| Pooled investment funds—mutual funds | | 639 | | | 639 | | | 0 | | | 0 | | | 582 | | | 582 | | | 0 | | | 0 | |
Cash and cash equivalents | | 825 |
| | 825 |
| | 0 |
| | 0 |
| | 427 |
| | 427 |
| | 0 |
| | 0 |
| Cash and cash equivalents | | 659 | | | 659 | | | 0 | | | 0 | | | 131 | | | 131 | | | 0 | | | 0 | |
Pooled investment funds (measured at net asset value): | | | | | | | | | | | | | | | | | Pooled investment funds (measured at net asset value): | |
Equity securities—U.S. companies | | 10,621 |
| | | | | | | | 9,341 |
| | | | | | | Equity securities—U.S. companies | | 13,062 | | | 13,074 | | |
Equity securities—international companies | | 56,803 |
| | | | | | | | 64,903 |
| | | | | | | Equity securities—international companies | | 67,593 | | | 60,945 | | |
Debt securities | | 63,007 |
| | | | | | | | 55,557 |
| | | | | | | Debt securities | | 77,766 | | | 67,094 | | |
Diversified growth funds | | 33,465 |
| | | | | | | | 0 |
| | | | | | | Diversified growth funds | | 39,030 | | | 35,569 | | |
Cash and cash equivalents | | 0 |
| | | | | | | | 349 |
| | | | | | | |
Property | | 0 |
| | | | | | | | 4,732 |
| | | | | | | |
| | $ | 176,968 |
| | $ | 2,850 |
| | $ | 10,222 |
| | $ | 0 |
| | $ | 144,877 |
| | $ | 596 |
| | $ | 9,399 |
| | $ | 0 |
| | $ | 212,617 | | | $ | 2,482 | | | $ | 12,684 | | | $ | 0 | | | $ | 189,455 | | | $ | 2,050 | | | $ | 10,723 | | | $ | 0 | |
The valuation methodologies used to develop the fair value measurements for the investments in the table above are outlined below. There have been no changes in the valuation techniques used to value the investments.
Notes to Consolidated Financial Statements
•The insurance contract represents funds deposited with an insurance company and is stated at an amount equal to the sum of all amounts deposited less the sum of all amounts withdrawn, adjusted for investment return.
•Equity securities are valued at the closing price reported on a national exchange.
•Debt securities are valued by quoted market prices or valued based on yields currently available on comparable securities of issuers with similar credit ratings.
•Pooled investment funds that are mutual funds are valued at the closing price reported on a national exchange.
•Cash and cash equivalents are valued at cost.
•The pooled investment funds are valued at the net asset value of units held by the plans based on the quoted market value of the underlying investments held by the fund. The United KingdomU.K. pension plan is invested in units of life insurance policies that are linked to equity securities funds, government bond funds and diversified growth funds. The underlying assets of the equity funds, bond funds, and diversified growth funds are traded on a national exchange and are based on tracking various indices of the London Stock Exchange. There are no redemption restrictions on these funds. There were no0 unfunded commitments for the United KingdomU.K. pension plan funds. The CanadianCanada pension plan is invested in a pooled Canadian equity fund and a pooled diversified fund. The Canadian equity fund invests in a diversification (sector and industry) of equities listed on a recognized Canadian exchange. The diversified fund invests in a balanced portfoliodiversified mix of marketableequities, fixed income securities, cash, and controls short-term risk by diversification in equities, bonds and cash.cash equivalent securities. There are no redemption restrictions on the pooled Canadian funds and there were no0 unfunded commitments.
Cash Flows—For foreign pension plans, NewMarket expects to contribute $6$7 million to the plans in 2018.2021. The expected benefit payments for the next ten years for our foreign pension plans are shown in the table below.
|
| | | | |
(in thousands) | | Expected Pension Benefit Payments |
2018 | | $ | 4,061 |
|
2019 | | 4,087 |
|
2020 | | 4,540 |
|
2021 | | 4,637 |
|
2022 | | 3,773 |
|
2023 through 2027 | | 28,938 |
|
67
Notes to Consolidated Financial Statements
| | | | | | | | |
(in thousands) | | Expected Pension Benefit Payments |
2021 | | $ | 6,461 | |
2022 | | 4,726 | |
2023 | | 6,566 | |
2024 | | 8,517 | |
2025 | | 6,941 | |
2026 through 2030 | | 38,075 | |
On December 22, 2017, the U.S. enacted tax legislation commonly known as the Tax Cuts and Jobs Act (Tax Reform Act), which required a one-time transition tax in 2017 on the deemed repatriation of previously deferred foreign earnings and reduces the U.S. corporate tax rate to 21% beginning in 2018. As of December 31, 2017, we have not fully completed our analysis of the impacts of the Tax Reform Act. However, we have recorded the effects of the reduced tax rate on our existing deferred tax balances and have estimated the one-time tax on deferred foreign earnings. We recognized $31 million of income tax expense in the year ended December 31, 2017, as a result of the Tax Reform Act. This expense includes $32 million relating to the one-time tax on deferred foreign earnings, which we will elect to pay over an eight-year period, partially offset by $1 million of reductions to deferred tax liabilities. The amount recorded for the transition tax on foreign earnings that is due within the next 12 months has been recorded as an offset to trade and other accounts receivable, net in our Consolidated Balance Sheet at December 31, 2017. The remainder has been recorded in other noncurrent liabilities.
Our estimate of the transition tax expense is based on currently available information and interpretations regarding the application of the new tax provisions. The U.S. Treasury, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance regarding the provisions of the Tax Reform Act that differ from our interpretation, which could impact our provisional expense. Additional work is necessary to further analyze our historical foreign earnings and other items that affect the calculations. Adjustments to the provisional amounts recorded as of December 31, 2017, will affect our tax expense or benefit from continuing operations in the period that adjustments are determined, which will be no later than the fourth quarter of 2018.
Our income before income tax expense, as well as our provision for income taxes is shown in the table below.
| | | | Years Ended December 31, | | | Years Ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
Income before income tax expense | | | | | | | Income before income tax expense | | | | | | |
Domestic | | $ | 140,779 |
| | $ | 161,687 |
| | $ | 229,561 |
| Domestic | | $ | 203,327 | | | $ | 183,907 | | | $ | 157,459 | |
Foreign | | 174,663 |
| | 181,521 |
| | 109,410 |
| Foreign | | 127,960 | | | 147,683 | | | 132,826 | |
| | $ | 315,442 |
| | $ | 343,208 |
| | $ | 338,971 |
| | $ | 331,287 | | | $ | 331,590 | | | $ | 290,285 | |
| | | | | | | | | | | | |
Income tax expense | | | | | | | Income tax expense | |
Current income taxes | | | | | | | Current income taxes | |
Federal | | $ | 61,188 |
| | $ | 34,213 |
| | $ | 62,491 |
| Federal | | $ | 14,861 | | | $ | 29,955 | | | $ | 9,153 | |
State | | 3,942 |
| | 9,020 |
| | 11,216 |
| State | | 6,106 | | | 9,551 | | | 4,679 | |
Foreign | | 32,428 |
| | 37,349 |
| | 26,511 |
| Foreign | | 32,198 | | | 30,414 | | | 27,192 | |
| | 97,558 |
| | 80,582 |
| | 100,218 |
| | 53,165 | | | 69,920 | | | 41,024 | |
Deferred income taxes | | | | | | | Deferred income taxes | | | | | | |
Federal | | 15,901 |
| | 13,876 |
| | 1,287 |
| Federal | | 4,498 | | | 1,671 | | | 16,545 | |
State | | 3,633 |
| | 3,095 |
| | (936 | ) | State | | 1,090 | | | 630 | | | 2,888 | |
Foreign | | 7,841 |
| | 2,214 |
| | (201 | ) | Foreign | | 1,966 | | | 5,083 | | | (4,906) | |
| | 27,375 |
| | 19,185 |
| | 150 |
| | 7,554 | | | 7,384 | | | 14,527 | |
Total income tax expense | | $ | 124,933 |
| | $ | 99,767 |
| | $ | 100,368 |
| Total income tax expense | | $ | 60,719 | | | $ | 77,304 | | | $ | 55,551 | |
Notes to Consolidated Financial Statements
The reconciliation of the U.S. federal statutory rate to the effective income tax rate follows:follows.
| | | | % of Income Before Income Tax Expense | | | % of Income Before Income Tax Expense |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
Federal statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % | Federal statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal tax | | 1.6 |
| | 2.3 |
| | 2.0 |
| State taxes, net of federal tax | | 1.7 | | | 2.4 | | | 2.1 | |
Foreign operations | | (4.4 | ) | | (5.8 | ) | | (4.3 | ) | Foreign operations | | 0.7 | | | 1.7 | | | (0.9) | |
Domestic research tax credit | | (1.1 | ) | | (1.2 | ) | | (1.2 | ) | |
Domestic manufacturing tax benefit | | (0.8 | ) | | (0.8 | ) | | (1.9 | ) | |
Deemed repatriation of foreign earnings | | 10.1 |
| | 0.0 |
| | 0.0 |
| |
Research tax credit | | Research tax credit | | (1.7) | | | (1.7) | | | (1.5) | |
Foreign-derived intangible tax benefit | | Foreign-derived intangible tax benefit | | (0.4) | | | (2.1) | | | (2.4) | |
U.S. minimum tax on foreign income | | U.S. minimum tax on foreign income | | 0.5 | | | 1.0 | | | 1.5 | |
Uncertain tax positions | | Uncertain tax positions | | (1.7) | | | 0.8 | | | 0.7 | |
Taxes applicable to prior years | | Taxes applicable to prior years | | (1.4) | | | (0.3) | | | (0.7) | |
| Change in U.S. tax rate | | Change in U.S. tax rate | | 0.0 | | | 0.0 | | | (2.0) | |
Other items and adjustments | | (0.8 | ) | | (0.4 | ) | | 0.0 |
| Other items and adjustments | | (0.4) | | | 0.5 | | | 1.3 | |
Effective income tax rate | | 39.6 | % | | 29.1 | % | | 29.6 | % | Effective income tax rate | | 18.3 | % | | 23.3 | % | | 19.1 | % |
Our deferred income tax assets and liabilities follow.
| | | | | | | | | | | | | | |
| | December 31, |
(in thousands) | | 2020 | | 2019 |
Deferred income tax assets | | | | |
| | | | |
| | | | |
Operating loss and credit carryforwards | | $ | 14,965 | | | $ | 13,375 | |
Trademark expenses | | 3,678 | | | 3,892 | |
Foreign currency translation adjustments | | 3,728 | | | 4,772 | |
Other | | 6,238 | | | 7,015 | |
Gross deferred income tax assets | | 28,609 | | | 29,054 | |
Valuation allowance | | (12,548) | | | (13,152) | |
Total deferred income tax assets | | 16,061 | | | 15,902 | |
Deferred income tax liabilities | | | | |
Depreciation and amortization | | 59,847 | | | 56,618 | |
Future employee benefits | | 1,670 | | | 4,064 | |
| | | | |
Other | | 6,593 | | | 6,089 | |
Total deferred income tax liabilities | | 68,110 | | | 66,771 | |
Net deferred income tax (liabilities) assets | | $ | (52,049) | | | $ | (50,869) | |
|
| | | | | | | | |
| | December 31, |
(in thousands) | | 2017 | | 2016 |
Deferred income tax assets | | | | |
Future employee benefits | | $ | 8,039 |
| | $ | 30,178 |
|
Environmental and future shutdown reserves | | 3,327 |
| | 5,737 |
|
Operating loss and credit carryforwards | | 6,312 |
| | 2,935 |
|
Trademark expenses | | 3,852 |
| | 5,810 |
|
Foreign currency translation adjustments | | 3,993 |
| | 6,687 |
|
Other | | 3,248 |
| | 7,458 |
|
Gross deferred income tax assets | | 28,771 |
| | 58,805 |
|
Valuation allowance | | (5,768 | ) | | (2,935 | ) |
Total deferred income tax assets | | 23,003 |
| | 55,870 |
|
Deferred income tax liabilities | | | | |
Depreciation and amortization | | 45,128 |
| | 29,736 |
|
Other | | 8,829 |
| | 6,305 |
|
Total deferred tax liabilities | | 53,957 |
| | 36,041 |
|
Net deferred income tax (liabilities) assets | | $ | (30,954 | ) | | $ | 19,829 |
|
Reconciliation to financial statements | | | | |
Deferred income tax assets | | $ | 4,349 |
| | $ | 29,063 |
|
Deferred income tax liabilities | | 35,303 |
| | 9,234 |
|
Net deferred income tax (liabilities) assets | | $ | (30,954 | ) | | $ | 19,829 |
|
Notes toNet deferred income tax (liabilities) assets in the table above are reflected in the Consolidated Financial Statements
Balance Sheets on a net jurisdictional basis. Deferred income tax assets are included in deferred charges and other assets. See Note 11. Deferred income tax liabilities are included in other noncurrent liabilities in our Consolidated Balance Sheets. liabilities. See Note 14.
Our deferred taxes are in a net liability position at December 31, 2017.2020. Our deferred tax assets include $6$15 million of foreign operating loss carryforwards, foreign capital loss carryforwards, and foreign and state tax credits. The operating loss carryforwards expire in 20192023 through 20222037 and certain tax credits expire in 2026.2026 through 2030. The largest change during 2020 on the carryforward items related to an increase in foreign tax credit carryforwards generated in 2019. Based on current forecasted operating plans and historical profitability, we believe that we will recover the full benefit of our deferred tax assets with the exception of $6$13 million of certain creditsthe aforementioned operating loss, capital loss, and operating losstax credit carryforwards. Therefore, as of December 31, 2017,2020, we have recorded an offsetting valuation allowance against these items, asitems. During 2020, we do not believe we will be able to utilize these credits and operating loss carryforwards before expiration. The $3 million increase in operating loss and credit carryforwards, andreleased the offsetting valuation allowance on $1 million of net operating losses that we utilized during 2017 is primarily duethe year.
Notes to recording foreign tax credits asConsolidated Financial Statements
As a result of the deemed repatriation of foreign earnings under the Tax Reform Act.Act, we do not expect to distribute earnings from our foreign subsidiaries in a manner that would result in significant U.S. tax, as these earnings have been previously taxed in the U.S. or meet the requirements for a dividends received deduction. However, we have recorded a $2 million deferred tax liability for the currency impact and for the withholding taxes that will not be creditable upon distribution.
We have not provided a deferred tax liability on approximately $163 million of temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration, as these earnings are considered to be indefinitely reinvested. If we were to repatriate these earnings, we could be subject to income taxes and withholding taxes in various countries. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the complexity associated with the hypothetical calculation.
A reconciliation of the beginning and ending balances of the unrecognized tax benefits from uncertain positions is as follows:
| | | | December 31, | | | December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
Balance at beginning of year | | $ | 8,810 |
| | $ | 2,322 |
| | $ | 1,465 |
| Balance at beginning of year | | $ | 13,543 | | | $ | 10,660 | | | $ | 9,102 | |
Increases for tax positions of prior years | | 865 |
| | 773 |
| | 1,035 |
| Increases for tax positions of prior years | | 363 | | | 3,176 | | | 2,123 | |
Decreases for tax positions of prior years | | 0 |
| | 0 |
| | 0 |
| |
| Increases for tax positions of the current year | | 453 |
| | 5,826 |
| | 533 |
| Increases for tax positions of the current year | | 824 | | | 703 | | | 614 | |
Settlements | | (260 | ) | | (111 | ) | | (497 | ) | Settlements | | 0 | | | (440) | | | (252) | |
Lapses of statutes | | (766 | ) | | 0 |
| | (214 | ) | Lapses of statutes | | (7,825) | | | (556) | | | (927) | |
Balance at end of year | | $ | 9,102 |
| | $ | 8,810 |
| | $ | 2,322 |
| Balance at end of year | | $ | 6,905 | | | $ | 13,543 | | | $ | 10,660 | |
We expect the amount of unrecognized tax benefits to change in the next twelve months; however, we do not expect the change to have a material impact on our financial statements.
Our U.S. subsidiaries file a U.S. federal consolidated income tax return. We are currently under examination by various U.S. state and foreign jurisdictions and remain subject to examination until the statute of limitations expires for the respective tax jurisdiction. We are no longer subject to U.S. federal income examination for years before 2014.2017. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three3 years to five5 years. Years still open to examination by foreign tax authorities in major jurisdictions include: the United Kingdom (2015U.K. (2019 and forward); Singapore (2013(2016 and forward); Belgium (2016(2018 and forward); and Brazil (2013Mexico (2015 and forward).
The balances of, and changes in, the components of accumulated other comprehensive loss, net of tax, consist of the following:
None.
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 third-party firms, separate from our independent registered public accounting firm, to assist with internal audit services.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f), under of the Securities Exchange Act of 1934.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
None.
The information required by this item is incorporated by reference to our definitive Proxy Statement for our 20182021 annual meeting of shareholders (Proxy Statement) under the headings entitled “Election of Directors,” “Committees of Our Board,” “Certain Relationships and Related Transactions,” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and is included in Part I of this Form 10-K under the heading entitled “Executive Officers of the Registrant.“Information about our Executive Officers.”
We have filed, as exhibits to this Annual Report on Form 10-K, the certifications of our principal executive officer and principal financial officer required under Sections 906 and 302 of the Sarbanes Oxley Act of 2002 to be filed with the SEC regarding the quality of our public disclosure.
The information required by this item is incorporated by reference to our Proxy Statement under the headings (including the narrative disclosures following a referenced table) entitled “Compensation Discussion and Analysis,” “The Compensation Committee Report,” “Compensation of Executive Officers,” and “Compensation of Directors.”
Except as noted below, the information required by this item is incorporated by reference to our Proxy Statement under the heading “Stock Ownership.”