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NEU > SEC Filings for NEU > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Quarterly Report

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Forward-Looking Statements
The following discussion contains forward-looking statements about future events and expectations within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document such as "anticipates," "intends," "plans," "believes," "estimates," "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, availability of raw materials and transportation systems; supply disruptions at single-sourced facilities; ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; hazards common to chemical businesses; occurrence or threat of extraordinary events, including natural disasters and terrorist attacks; competition from other manufacturers; sudden or sharp raw materials price increases; gain or loss of significant customers; risks related to operating outside of the United States; the impact of fluctuations in foreign exchange rates; political, economic, and regulatory factors concerning our products; future governmental regulation; resolution of environmental liabilities or legal proceedings; inability to complete future acquisitions or successfully integrate future acquisitions into our business; and other factors detailed from time to time in the reports that NewMarket files with the Securities and Exchange Commission, including the risk factors in Item 1A. "Risk Factors" of our 2012 Annual Report, which is available to shareholders upon request.
You should keep in mind that any forward-looking statement made by us in this discussion or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, any forward-looking statement made in this discussion or elsewhere might not occur.

Our business performed extremely well during the first three months 2013, as the only three month period with better operating profit results was the first three months 2012. The petroleum additives business posted the second highest three month performance ever, excluding the third quarter 2011 when a legal settlement was recognized. In many respects, the three months 2013 was very similar to three months 2012. Revenue and product shipments were essentially the same, as was the gross profit margin. During three months 2013, we had higher spending in research, development, and testing, as well as selling, general, and administrative expenses in support of our business. Our net income and income taxes benefited from the retroactive reinstatement of the research and development credit. In addition, our cash flow generation was sufficient to fund operations, including increased working capital needs. We continue to run our business for the long-run with the goal of helping our customers succeed in their marketplace.
Also of note during the first three months 2013 was our repurchase of $23.0 million of our common stock, and the payment of a 90 cent per share dividend, which was a 20% increase from our prior regular dividend.
During March 2013, we registered, under the Securities Act of 1933, our previously unregistered 4.10% senior notes, which we issued in December 2012, and commenced an offer to exchange the outstanding unregistered notes for an equal aggregate principal amount of the registered 4.10% senior notes.

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Results of Operation
Our consolidated revenue for the three months 2013 totaled $562.6 million, which
was consistent with the three months 2012 level of $562.7 million. The following
table shows revenue by segment and product line.

                              Three Months Ended
                                   March 31,
 (in millions)                  2013           2012
Petroleum additives
Lubricant additives       $    452.7         $ 444.6
Fuel additives                 105.7           113.1
Total                          558.4           557.7
Real estate development          2.9             2.9
All other                        1.3             2.1
Consolidated revenue      $    562.6         $ 562.7

Petroleum Additives Segment
The primary regions in which we operate include North America, Latin America, Asia Pacific, and the Europe/Middle East/Africa/India (EMEAI) regions. The percentage of revenue generated in the regions remains fairly consistent when comparing the first three months 2013 with the first three months 2012, as well as with prior year periods, although there is some fluctuation between regions on a period to period basis. In addition, the percentage of lubricant additives sales and fuel additives sales is also substantially consistent between periods. Petroleum additives net sales for the first three months 2013 of $558.4 million increased $0.7 million, or approximately 0.1%, from $557.7 million for the first three months 2012. From a regional perspective, both EMEAI and Asia Pacific reflected increased revenue when comparing the two three month periods, while both North America and Latin America were lower for three months 2013 as compared to three months 2012. Each of these changes was minor. The small increase in revenue when comparing the two three months periods resulted from favorable product shipments of lubricant additives, substantially offset by unfavorable shipments of fuel additives, as well as lower selling prices and an unfavorable foreign currency impact. While our overall petroleum additives product shipments were substantially even between the two years, product shipments in all regions, except North America, were slightly higher. When comparing the two periods, the U.S. Dollar weakened against the European Union Euro and the British Pound Sterling resulting in a favorable foreign currency impact on revenue, but that impact was more than offset by the strengthening of the U.S. Dollar against the Japanese Yen resulting in an unfavorable foreign currency impact on revenue.
The table below details the approximate components of the increase between the first three months of 2013 and 2012 periods.

(in millions)                                        Three Months
Period ended March 31, 2012                         $      557.7
Lubricant additives shipments                               15.9
Fuel additive shipments                                     (5.3 )
Selling prices, including changes in customer mix           (8.5 )
Foreign currency impact, net                                (1.4 )
Period ended March 31, 2013                         $      558.4

Real Estate Development Segment
The revenue reflected in the table above for both three months 2013 and three months 2012 for the real estate development segment represents the rental of an office building, which was constructed by Foundry Park I.

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

Segment Operating Profit
NewMarket evaluates the performance of the petroleum additives business and the
real estate development business based on segment operating profit. NewMarket
Services Corporation (NewMarket Services) expenses are charged to NewMarket and
each subsidiary pursuant to services agreements between the companies.
Depreciation on segment property, plant, and equipment, as well as amortization
of segment intangible assets is included in segment operating profit.
The table below reports segment operating profit for three months ended
March 31, 2013 and March 31, 2012.

                             Three Months Ended
                                 March 31,
(in millions)                 2013          2012
Petroleum additives       $    102.0      $ 107.2
Real estate development   $      1.8      $   1.8
All other                 $     (0.4 )    $   0.5

Petroleum Additives Segment
The petroleum additives operating profit decreased $5.2 million when comparing three months 2013 to three months 2012. The decrease in profitability was across both of our major product lines, lubricant additives and fuel additives. The operating profit margin was 18.3% for three months 2013 and 19.2% for three months 2012. For the rolling four quarters ended March 31, 2013, the operating profit margin was 16.7%, which is in line with our expectations of the performance of our business over the long-term. While operating profit margins will fluctuate from quarter to quarter due to multiple factors, we do not operate our business differently from quarter to quarter. We believe the fundamentals of our business and industry are unchanged. We continue to focus on developing and delivering innovative, technology-driven solutions to our customers.
Gross profit results were substantially the same when comparing three months 2013 to three months 2012 with a small increase of $1.2 million for the 2013 period. Cost of sales as a percentage of revenue remains fairly consistent between the two three month periods at 70.0% for three months 2013 and 70.2% for three months 2012.
When comparing three months 2013 and three months 2012, total product shipments were about even, with higher shipments of lubricant additives products offset by lower shipments of fuel additive products. Nonetheless, increased volumes of higher-valued products resulted in a favorable variance in our gross profit. In addition, raw material costs were favorable. These favorable components of gross profit were substantially offset by unfavorable variances in selling prices, as discussed in the Revenue section above, as well as manufacturing conversion costs.
Selling, general, and administrative expenses (SG&A) for three months 2013 was $3.2 million, or 10.3% higher, as compared to three months 2012. SG&A as a percentage of revenue was 6.2% for three months 2013 and 5.6% for three months 2012. Our SG&A costs are mainly personnel-related and include salaries, benefits, and other costs associated with our workforce. As our workforce has increased in number to support our growing worldwide operations, these costs have also risen, which occurred when comparing the two three month periods. In addition to the personnel-related impacts, professional fees, as well as health, safety, and environmental fees have also increased in 2013 over 2012 three months levels.
Research, development, and testing expenses (R&D) for three months 2013 increased $3.1 million, or 11.0%, from three months 2012 levels. As a percentage of revenue, R&D was 5.5% for three months 2013 and 5.0% for three months 2012. Our approach to R&D spending, 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 spending includes personnel-related costs, as well as internal and external testing of our products. The increase between the two periods was substantially in the lubricant additives product line and includes efforts to support the development of additives that meet our customers' needs, as well as new standards, and to expand into new solution areas. We expect R&D costs for the full year in 2013 will increase over the 2012 level.

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

Interest and Financing Expenses
Interest and financing expenses were $5.1 million for three months 2013 and $4.5 million for three months 2012. The increase in interest and financing expenses between the two periods of 2013 and 2012 primarily resulted from higher outstanding average debt, substantially offset by a lower average interest rate.

Loss on Early Extinguishment of Debt
We recorded a $3.2 million loss on the early extinguishment of debt in three months 2012 related to the recognition of $0.5 million of unamortized deferred financing costs on our previous revolving credit facility, as well as $2.7 million from a portion of the early redemption premium on the 7.125% senior notes. These amounts were a non-cash charge during three months 2012.

Other Income, Net
Other income, net for three months 2013 was $0.7 million, while three months 2012 was $1.8 million. The amounts for both 2013 and 2012 primarily reflect the gain on a derivative instrument representing an interest rate swap recorded at fair value through earnings. See Note 9 for additional information on the interest rate swap.

Income Tax Expense
Income tax expense was $26.0 million for three months 2013 and $32.3 million for three months 2012. The effective tax rate was 27.7% for three months 2013, while three months 2012 was 32.6%. The decrease in income before income tax expense resulted in a decrease of $1.6 million in income taxes, while the lower effective tax rate in 2013 as compared to 2012 resulted in a decrease of $4.7 million in income tax expense when comparing the two three months periods. The effective tax rate for each year includes the benefit of higher income in foreign jurisdictions with lower tax rates, as well as a substantial benefit from the domestic manufacturing tax deduction. The 2013 period reflects the entire 2012 research and development credit which was signed into law in January 2013, as well as the first three months 2013 research and development credit, neither of which is included in the three months 2012 period.

Cash Flows, Financial Condition, and Liquidity Cash and cash equivalents at March 31, 2013 were $64.0 million, which was a decrease of $25.1 million since December 31, 2012 and included a $3.7 million unfavorable impact from foreign currency translation.
Our cash and cash equivalents held by our foreign subsidiaries amounted to approximately $63 million at March 31, 2013 and $80 million at December 31, 2012. A significant amount, but not all, of these foreign cash balances are 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 Internal Revenue Code. If circumstances were to change that would cause these indefinitely reinvested earnings to be repatriated, an incremental U.S. tax liability would be incurred. As part of our foreign subsidiary repatriation activities, we received cash dividends of $9.7 million for the three months ended March 31, 2013 and $5.9 million for the three months ended March 31, 2012.
We expect that cash from operations, together with borrowing available under our revolving credit facility, will continue to be sufficient to cover our operating expenses for the foreseeable future.
Cash Flows - Operating Activities
Cash flows provided from operating activities for the three months 2013 were $27.1 million and included a decrease of $55.7 million due to higher working capital levels, including higher accounts receivable and prepaid expenses, as well as lower accrued expenses, which were partially offset by higher dividends payable and income taxes payable. The increase in accounts receivable is primarily due to higher sales levels when comparing the first quarter 2013 with the fourth quarter 2012, while higher prepaid expenses as well as the increase in dividends payable represent the funding of the dividends in March 2013, but the payment by the transfer agent in April 2013. The decrease in accrued expenses primarily reflects payments related to customer rebates made during three months 2013. The increase in income taxes payable reflects taxes due on earnings, which will be paid during the second quarter 2013.

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We had working capital of $531.1 million at March 31, 2013 and $518.8 million at December 31, 2012. The current ratio was 3.34 to 1 at March 31, 2013 and 3.39 to 1 at December 31, 2012.
Cash Flows - Investing Activities
Cash used in investing activities was $14.8 million during three months 2013 and included $16.1 million for capital expenditures. Also included in investing activities was a net return of deposit of $3.9 million and a net settlement payment of $2.5 million related to the Goldman Sachs interest rate swap. Further information on the interest rate swap is discussed in Note 9. We estimate our total capital spending during 2013 will be approximately $80 million to $100 million. We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our $650 million revolving credit facility.
Cash Flows - Financing Activities
Cash used in financing activities during three months 2013 amounted to $33.8 million. Borrowings under our revolving credit facility increased by $1.0 million, while amounts outstanding under lines of credit increased $0.8 million. We incurred $1.1 million in debt issuance costs related to the 4.10% senior notes. We also paid $12.0 million to fund dividends and $22.5 million for the repurchase of common stock during three months 2013.
We had total long-term debt, including the current portion, of $430.6 million at March 31, 2013, representing an increase of approximately $1.8 million in our total debt since December 31, 2012.
At March 31, 2013, in addition to the revolving credit facility, which is discussed below, we had outstanding senior notes in the aggregate principal amount of $350 million that bear interest at a fixed rate of 4.10% and are due in 2022. During March 2013, we registered these 4.10% senior notes under the Securities Act of 1933 and commenced an offer to exchange the previously unregistered 4.10% senior notes that were outstanding at December 31, 2012 for an equal aggregate principal amount.
Two of our subsidiaries also have short-term lines of credit for working capital purposes. The line of credit for one of our subsidiaries in India is for 110 million rupees and has an outstanding balance of $1.6 million (90 million rupees) at March 31, 2013. The line of credit for one of our subsidiaries in China is for $10 million with an outstanding balance of $3.6 million at March 31, 2013.
Revolving Credit Facility - At March 31, 2013, we had a $650 million multicurrency revolving credit facility, with a $100 million sublimit for multicurrency borrowings, a $100 million sublimit for letters of credit, and a $20 million sublimit for swingline loans. The agreement includes an expansion feature, which allows us, subject to certain conditions, to request an increase to the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $150 million. Borrowings bear interest at variable rates. The revolving credit facility matures on March 14, 2017.
The following table provides information related to the unused portion of our revolving credit facility:

                                                          March 31,         December 31,
(in millions)                                                2013               2012
Maximum borrowing capacity under the revolving
credit facility                                        $        650.0     $        650.0
Outstanding borrowings under the revolving credit
facility                                                         76.0               75.0
Outstanding letters of credit                                     3.1                3.1
Unused portion of revolving credit facility            $        570.9     $        571.9

Both the 4.10% senior notes and the revolving credit facility contain covenants, representations, and events of default that management considers typical of credit agreements of this nature. The more restrictive and significant financial covenants under the revolving credit facility include:
A consolidated Leverage Ratio (as defined in the credit agreement) of no more than 3.00 to 1.00; 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. At March 31, 2013, the Leverage Ratio was 1.13 and the Interest Coverage Ratio was 30.40, while at December 31, 2012 the Leverage Ratio was 1.11 and the Interest Coverage Ratio was 32.44. We were in compliance with all covenants under both the revolving credit facility and the 4.10% senior notes at March 31, 2013 and December 31, 2012. As a percentage of total capitalization (total debt and shareholders' equity), our total debt percentage decreased from 51.6% at December 31, 2012 to 50.7% at March 31, 2013. The change in the percentage was primarily the result of an increase in shareholders' equity. The increase in shareholders' equity reflects our earnings, partially offset by the impact

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of dividend payments and stock repurchases. Normally, we repay any outstanding long-term debt with cash from operations or refinancing activities.

Other Matters

During April 2013, we made the decision to discontinue the production of a fuel additive at our Ethyl Canada facility. While the facility will remain in operation, the workforce will be reduced to support the remaining operations. As a result of this action, we recorded a reserve of $1.5 million during three months 2013 reflecting the impairment of the affected assets, as well as contractual severance. During the second quarter 2013, we will determine and recognize other costs associated with this action. We do not expect the total reserve or charge to operations to be material to our financial statements.

Critical Accounting Policies and Estimates This report, as well as the 2012 Annual Report on Form 10-K, includes a discussion of our accounting principles, as well as methods and estimates used in the preparation of our financial statements. We believe these discussions and financial statements fairly represent the financial position and results of operation of our company in all material respects. The purpose of this portion of our discussion is to further emphasize some of the more critical areas where a significant change in facts and circumstances in our operating and financial environment might cause a change in reported financial results. Intangibles (Net of Amortization) and Goodwill We have certain identifiable intangibles, as well as goodwill, amounting to $28.4 million at March 31, 2013. These intangibles relate to our petroleum additives business and, except for the goodwill, are being amortized over periods with up to approximately seventeen years of remaining life. We continue to assess the market related to these intangibles, as well as their specific values, and have concluded the values and amortization periods are appropriate. We also evaluate these intangibles for any potential impairment when significant events or circumstances occur that might impair the value of these assets. These evaluations continue to support the values at which these identifiable intangibles are carried on our financial statements. In addition, our reporting unit with goodwill is not at risk of failing the goodwill impairment test. 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' carrying amount. A reduction in the amortization period would have no effect on cash flows. We do not anticipate such a change in the market conditions in the near term.
Environmental and Legal Proceedings
We believe our environmental accruals are appropriate for the exposures and regulatory guidelines under which we currently operate. While we currently do not anticipate significant changes to the many factors that could impact our environmental requirements, we continue to keep our accruals consistent with these requirements as they change.
While it is not possible to predict or determine with certainty the outcome of any legal proceeding, it is our opinion, based on our current knowledge, that we will not experience any material adverse effects on our results of operation, cash flows, or financial condition as a result of any pending or threatened proceeding.
Pension Plans and Other Postretirement Benefits We use assumptions to record the impact of the pension and postretirement benefit plans in the financial statements. These assumptions include the discount rate, expected long-term rate of return on plan assets, rate of compensation increase, and health-care cost trend rate. A change in any one of these assumptions could cause different results for the plans, and therefore impact our results of operation, 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 19 of the 2012 Annual Report. In addition, further disclosure on the effect of changes in these assumptions is provided in the "Financial Position and Liquidity" section of Part II, Item 7 of the 2012 Annual Report. Income Taxes
We file United States, foreign, and local income tax returns, under which assumptions may be made to determine the deductibility of certain costs. We make estimates related to the impact of tax positions taken on our financial statements when we believe the tax position is more likely than not to be upheld on audit. We do not provide for income taxes on earnings considered to be indefinitely reinvested abroad. In addition, we make certain assumptions in the determination of the estimated future recovery of deferred tax assets.

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We are very pleased with our first quarter results, which was one of the best quarters for petroleum additives in our history. That performance reinforces our confidence that our customer-focused approach to the market is the path on . . .

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