10-K 1 neu-2017123110k.htm FORM 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-32190
 
NEWMARKET CORPORATION
Incorporated pursuant to the Laws of the Commonwealth of Virginia
Internal Revenue Service Employer Identification No. 20-0812170
330 South Fourth Street
Richmond, Virginia 23219-4350
804-788-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
COMMON STOCK, without par value
 
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
(Do not check if a smaller reporting company)
 
 
 
 
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter): $3,969,585,799*
Number of shares of Common Stock outstanding as of January 31, 2018: 11,779,143
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of NewMarket Corporation’s definitive Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
*
In determining this figure, an aggregate of 3,231,973 shares of Common Stock as beneficially owned by Bruce C. Gottwald and members of his immediate family have been excluded and treated as shares held by affiliates. See Item 12. The aggregate market value has been computed on the basis of the closing price on the New York Stock Exchange on June 30, 2017.






Form 10-K
Table of Contents
 
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.



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PART I

ITEM 1.
BUSINESS
NewMarket Corporation (NewMarket) (NYSE: NEU) is a holding company and is the parent company of Afton Chemical Corporation (Afton), Ethyl Corporation (Ethyl), NewMarket Services Corporation (NewMarket Services), and NewMarket Development Corporation (NewMarket Development).
Each of our subsidiaries manages its own assets and liabilities. Afton manufactures and sells petroleum additives, while Ethyl represents the sale of tetraethyl lead (TEL) in North America and certain contracted manufacturing and services. NewMarket Development manages the property that we own in Virginia. NewMarket Services provides various administrative services to NewMarket, Afton, Ethyl, and NewMarket Development. NewMarket Services departmental expenses and other expenses are billed to each subsidiary pursuant to services agreements between the companies.
References in this Annual Report on Form 10-K to “we,” “us,” “our,” and “NewMarket” are to NewMarket Corporation and its consolidated subsidiaries, unless the context indicates otherwise.
As a specialty chemicals company, Afton develops and manufactures highly formulated lubricant and fuel additive packages and markets and sells these products worldwide. Afton is one of the largest lubricant and fuel additives companies in the world. Lubricant and fuel additives are necessary products for efficient and reliable operation of vehicles and machinery. From custom-formulated additive packages to market-general additives, we believe Afton provides customers with products and solutions that make engines run smoother, machines last longer, and fuels burn cleaner.
Through an open, flexible, and collaborative style, Afton works closely with its customers to understand their business and help them meet their goals. This style has allowed Afton to develop long-term relationships with its customers in every major region of the world, which Afton serves through twelve manufacturing facilities across the globe.
With almost 550 employees in research and development, Afton is dedicated to developing additive formulations that are tailored to our customers’ and the end-users’ specific needs. Afton’s portfolio of technologically-advanced, value-added products allows it to provide a full range of products, services, and solutions to its customers.
Ethyl provides contracted manufacturing and services to Afton and to third parties, and is a marketer of TEL in North America.
NewMarket Development manages the property that we own in Richmond, Virginia consisting of approximately 57 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, as we have no specific timeline for any future developments.
We were incorporated in the Commonwealth of Virginia in 2004. Our principal executive offices are located at 330 South Fourth Street, Richmond, Virginia, and our telephone number is (804) 788-5000. We employed 2,223 people at the end of 2017.
Business Segments
Our business is composed of one segment, petroleum additives, which is primarily represented by Afton. The TEL business of Ethyl is reflected in the “All other” category. Each of these is discussed below.
Petroleum Additives—Petroleum additives are used in lubricating oils and fuels to enhance their performance in machinery, vehicles, and other equipment. We manufacture chemical components that are selected to perform one or more specific functions and combine those chemicals with other chemicals or components to form additive packages for use in specified end-user applications. The petroleum additives market is a global marketplace, with customers ranging from large, integrated oil companies to national, regional, and independent companies.


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We believe our success in the petroleum additives market is largely due to our ability to deliver value to our customers through our products and our open, flexible, and collaborative working style. We accomplish this by understanding what our customers value and by applying our technical capabilities, formulation expertise, broadly differentiated product solutions, and global supply capabilities to satisfy the customers' needs. We invest significantly in research and development in order to meet our customers’ needs and to adapt to the rapidly changing environment for new and improved products and services.
We view the petroleum additives marketplace as being comprised of two broad product applications: lubricant additives and fuel additives. Lubricant additives are highly formulated chemical solutions that, when blended with base fluids, improve the efficiency, durability, performance, and functionality of mineral oils, synthetic oils, and biodegradable fluids, thereby enhancing the performance of machinery and engines. Fuel additives are chemical components that help oil refiners meet fuel specifications or formulated packages that improve the performance of gasoline, diesel, biofuels, and other fuels, resulting in lower operating costs, improved vehicle performance, and reduced tailpipe or smokestack emissions.
Lubricant Additives
Lubricant additives are essential ingredients for making lubricating oils. Lubricant additives are used in a wide variety of vehicle and industrial applications, including engine oils, transmission fluids, off-road powertrain and hydraulic systems, gear oils, hydraulic oils, turbine oils, metalworking fluids and virtually any other application where metal-to-metal moving parts are utilized. Lubricant additives are organic and synthetic chemical components that enhance wear protection, prevent deposits, and protect against the hostile operating environment of an engine, transmission, axle, hydraulic pump, or industrial machine.
Lubricants are widely used in operating machinery from transportation vehicles to heavy industrial equipment. Lubricants provide a layer of protection between moving mechanical parts. Without this layer of protection, the normal functioning of machinery would not occur. Effective lubricants reduce downtime and increase efficiency. Specifically, lubricants serve the following main functions:
friction reduction—Friction is reduced by maintaining a thin film of lubricant between moving surfaces, preventing them from coming into direct contact with one another and reducing wear on moving machinery, thereby providing longer life and operational efficiency.
heat removalLubricants act as coolants by removing heat resulting either from friction or through contact with other, higher temperature materials.
containment of contaminantsLubricants function by carrying contaminants away from the machinery and neutralizing the harmful impact of the by-products created by combustion.
The functionality of lubricants is created through an exact balance between a base fluid and performance enhancing additives. This balance is the goal of effective formulations achieved by experienced research and development professionals. We offer a full line of lubricant additive packages, each of which is composed of component chemicals specially selected to perform desired functions. We manufacture most of the chemical components and blend these components to create formulated additives packages designed to meet industry and customer specifications. Lubricant additive components are generally classified based upon their intended functionality, including:
detergents, which clean moving parts of engines and machines, suspend oil contaminants and combustion by-products, and absorb acidic combustion products;
dispersants, which serve to inhibit the formation of sludge and particulates;
extreme pressure/antiwear agents, which reduce wear on moving engine and machinery parts;
viscosity index modifiers, which improve the viscosity and temperature characteristics of lubricants and help the lubricant flow evenly to all parts of an engine or machine; and
antioxidants, which prevent oil from degrading over time.


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We are one of the leading global suppliers of specially formulated lubricant additives that combine some or all of the components described above to develop our products. Our products are highly formulated, complex chemical compositions derived from extensive research and testing to ensure all additive components work together to provide the intended results. Our products are engineered to meet specifications prescribed by either the industry or a specific customer. Purchasers of lubricant additives tend to be integrated oil companies or independent compounders/blenders. We make no sales directly to end-users or to original equipment manufacturers (OEMs).
We view our participation in the lubricant marketplace in three primary areas: engine oil additives, driveline additives, and industrial additives. Our view is not necessarily the same way others view the market.
Engine Oil Additives—The largest submarket within the lubricant additives marketplace is engine oil additives which consists of additives designed for passenger cars, motorcycles, on and off-road heavy duty commercial equipment, locomotives, and large engines in ocean-going vessels. We estimate engine oil additives represent approximately 70% of the overall lubricant additives market volume.
The engine oil market’s primary customers include consumers, fleet owners, mining and construction companies, farmers, railroads, shipping companies, service dealers, and OEMs. The primary functions of engine oil additives are to reduce friction, prevent wear, control formation of sludge and oxidation, and prevent rust. Engine oil additives are typically sold to lubricant manufacturers who combine them with a base oil fluid to meet internal, industry, and OEM specifications.
Key drivers of engine oil additives demand are the total vehicle miles driven, fuel economy, number of vehicles on the road, the average age of vehicles on the road, drain intervals, engine and crankcase size, changes in engine design, and temperature and specification changes driven by the OEMs. The extension of drain intervals has generally offset increased demand due to higher vehicle population, new hardware, and more miles driven. Other key drivers include industrial production rates, agricultural output, mining and construction output, environmental regulations, and infrastructure investments of commercial companies. Afton offers products that enhance the performance of mineral, part-synthetic, and fully-synthetic engine oils.
Driveline Additives—The driveline additives submarket is comprised of additives designed for products such as transmission fluids, axle fluids, and off-road powertrain fluids. This submarket shares in the 30% of the market not covered by engine oil additives. Transmission fluids primarily serve as the power transmission and heat transfer medium in the area of the transmission where the torque of the drive shaft is transferred to the gears of the vehicle. Axle fluids lubricate gears and bearings in axles, and powertrain fluids are used in off-highway powertrain and hydraulic systems. Other products in this area include power steering fluids, shock absorber fluids, gear oils, and lubricants for heavy machinery. These products must conform to highly prescribed specifications developed by vehicle OEMs for specific models or designs. These additives are generally sold to oil companies for ultimate sale to vehicle OEMs for new vehicles (factory-fill), service dealers for aftermarket servicing (service-fill), retailers, and distributors.
Key drivers of the driveline additives marketplace are the number of vehicles manufactured, total number of vehicles in operation, drain intervals for transmission fluids and axle fluids, changes in engine and transmission design and temperatures, and specification changes driven by the OEMs.
Industrial Additives—The industrial additives submarket is comprised of additives designed for products for industrial applications such as hydraulic fluids, grease, industrial gear fluids, industrial specialty applications, such as turbine oils, and metalworking fluids. This submarket also shares in the 30% of the market not covered by engine oil additives. These products must conform to industry specifications, OEM requirements, and/or application and operating environment demands. Industrial additives are generally sold to oil companies, service dealers for after-market servicing, and distributors.
Key drivers of the industrial additives marketplace are gross domestic product levels and industrial production.


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Fuel Additives
Fuel additives are chemical compounds that are used to improve both the oil refining process and the performance of gasoline, diesel, biofuels, and other fuels. Benefits of fuel additives in the oil refining process include reduced use of crude oil, lower processing costs, and improved fuel storage properties. Fuel performance additives enhance fuel economy, improve ignition and combustion efficiency, reduce emission particulates, maintain engine cleanliness, and protect against deposits in fuel injectors, intake valves, and the combustion chamber. Our fuel additives are extensively tested and designed to meet stringent industry, government, OEM, and individual customer requirements.
Many different types of additives are used in fuels. Their use is generally determined by customer, industry, OEM, and government specifications, and often differs from country to country. The types of fuel additives we offer include:
gasoline performance additives, which clean and maintain key elements of the fuel delivery systems, including fuel injectors and intake valves, in gasoline engines;
diesel fuel performance additives, which perform similar cleaning functions in diesel engines;
cetane improvers, which increase the cetane number (ignition quality) in diesel fuel by reducing the delay between injection and ignition;
stabilizers, which reduce or eliminate oxidation in fuel;
corrosion inhibitors, which minimize the corrosive effects of combustion by-products and prevent rust;
lubricity additives, which restore lubricating properties lost in the refining process;
cold flow improvers, which improve the pumping and flow of distillate and diesel fuels in cold temperatures; and
octane enhancers, which increase octane ratings and decrease emissions.
We offer a broad line of fuel additives worldwide and sell our products to major fuel marketers and refiners, as well as independent terminals and other fuel blenders.
Key drivers in the fuel additive marketplace include total vehicle miles driven, fuel economy, the introduction of new engine designs, regulations on emissions (both gasoline and diesel), quality of the crude oil slate and performance standards, and marketing programs of major oil companies.
Competition
We believe we are one of the four largest manufacturers and suppliers in the petroleum additives marketplace.
In the lubricant additives submarket of petroleum additives, our major competitors are The Lubrizol Corporation (a wholly-owned subsidiary of Berkshire Hathaway Inc.), Infineum (a joint venture between ExxonMobil Chemical and Royal Dutch Shell plc), and Chevron Oronite Company LLC. There are several other suppliers in the worldwide market who are competitors in their particular product areas.
The fuel additives submarket is characterized by more competitors. While we participate in many facets of the fuel additives market, our competitors tend to be more narrowly focused. In the gasoline detergent market, we compete mainly against BASF, Chevron Oronite Company LLC, and The Lubrizol Corporation. In the diesel and refinery markets, we compete mainly against The Lubrizol Corporation, Infineum, BASF, Clariant Ltd., and Innospec Inc. We also compete against other regional competitors in the fuel additives marketplace.
The competition among the participants in these industries is characterized by the need to provide customers with cost effective, technologically-capable products that meet or exceed industry specifications. The need to continually increase technology performance and lower cost through formulation technology and cost improvement programs is vital for success in this environment.


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All Other—The “All other” category includes the operations of the TEL business (primarily sales of TEL in North America), as well as certain contracted manufacturing and services performed by Ethyl. The Ethyl facility is located in Houston, Texas and is substantially dedicated to terminal operations related to TEL and other fuel additives. The financial results of the petroleum additives activities by Ethyl are reflected in the petroleum additives segment results. The “All other” category financial results include a service fee charged by Ethyl for its production services to Afton.
Raw Materials and Product Supply
We use a variety of raw materials and chemicals in our manufacturing and blending processes and believe the sources of these are adequate for our current operations. The primary raw materials for Afton are base oil, polyisobutylene, antioxidants, alcohols, solvents, sulfonates, friction modifiers, olefins, and copolymers.
As the performance requirements of our products become more complex, we often work with highly specialized suppliers. In some cases, we source from a single supplier. In cases where we decide to source from a single supplier, we manage our risk by maintaining safety stock of the raw material or qualifying alternate suppliers. The backup position could take additional time to implement, but we are confident we can ensure continued supply for our customers. We continue to monitor the raw material supply situation and continually adjust our procurement strategies as conditions require.
Research, Development, and Testing
Research, development, and testing (R&D) provides Afton with new performance-based solutions for our customers in the petroleum additives market. We develop products through a combination of chemical synthesis, formulation development, engineering design, and performance testing. In addition to developing new products, R&D provides our customers and OEMs with data to substantiate product differentiation and technical support to assure total customer satisfaction.
We are committed to providing the most advanced products, comprehensive testing programs, and superior technical solutions tailored to the needs of our customers and OEMs worldwide. R&D expenditures, which totaled $140 million in 2017, $157 million in 2016, and $158 million in 2015, are expected to increase slightly in 2018 over 2017 levels. Afton continues to successfully implement techniques to drive efficiency in technology discovery and development, while expanding our internal testing, research, and customer support capabilities around the world in support of our goals of providing market-driven technical leadership and performance-based differentiation.  In 2017, we invested in additional capability at our facility in Ashland, Virginia, completed the expansion of our facility in Suzhou, China and approved a project to upgrade and expand our capabilities in Tsukuba, Japan.
Afton continues to develop new products and technology to meet evolving OEM requirements, industry specifications and environmental regulations, and to keep our customers well-positioned for the future. A significant portion of our R&D investment is dedicated to the development of products that are differentiated by their ability to deliver improved fuel efficiency in addition to robust performance in a wide range of new vehicle and industrial equipment designs.  Afton’s state-of-the art testing capabilities enable customized research in all areas of performance needed by both OEMs and tier one suppliers. Our leading-edge capabilities and fundamental understanding in the areas of combustion, friction control, energy efficiency, and wear prevention are used to set the stage for next-generation products in all areas.
In 2017, we successfully launched new technologies across all of our lubricant additive and fuel additive product areas. We developed new engine oil products for passenger cars and commercial trucks in support of our customers in all the major regions of the world in which we operate. Research in the engine oil area remained high as we continue to prepare for the new engine oil specification in North America for passenger car motor oil, ILSACGF-6.  This new specification is expected to go into effect in 2019.
We continued to develop new products in multiple application areas in the industrial additive sector, including hydraulic, industrial gear, turbine, grease, and metalworking fluid additives. Research is focused on the development of technologies that will provide differentiation to our customers in multiple performance areas including equipment life, reliability, and energy efficiency.


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Research continued in our transmission fluid, axle oil, and tractor fluid product lines. This included the development of new OEM-specific additives used in factory fill fluids installed during automotive component and vehicle assembly in the United States, Germany, Japan, India, and China. In addition, we developed new products for the service-fill sector to provide our customers with the latest additive technology available to differentiate their offering to the retail market.
We continue to provide leading technology in the fuel additives area. In 2017, we developed and launched new products in all product lines including gasoline performance additives and diesel performance additives, as well as additives used in the distribution of fuels. Research is focused on the development of new technologies that perform well in new, modern engine designs and changing fuel properties, as well as addressing the growing need for increased fuel economy and emissions reduction. In addition, we continue to maintain close interactions with regulatory, industry, and OEM leaders to guide our development of future fuel additive technologies based on well-defined market needs.
Intellectual Property
Our intellectual property, including our patents, licenses, and trademarks, is an important component of our business. We actively protect our inventions, new technologies, and product developments by filing patent applications and maintaining trade secrets. We currently own approximately 1,300 issued or pending United States and foreign patents. In addition, we have acquired the rights under patents and inventions of others through licenses or otherwise. We take care to respect the intellectual property rights of others and we believe our products do not infringe upon those rights. We vigorously participate in patent opposition proceedings around the world, where necessary, to secure a technology base free of infringement. We believe our patent position is strong, aggressively managed, and sufficient for the conduct of our business.
We also have several hundred trademark registrations throughout the world for our marks, including NewMarket®, Afton Chemical®, Ethyl®, mmt®, HiTEC®, TecGARD®, GREENBURN®, Passion for Solutions®, CleanStart®, Polartech®, BioTEC®, Microbotz®, and Axcel®, as well as a pending trademark application for DriveMoreTM.
Commitment to Environmental and Safety Excellence
Our commitment to the environment and safety excellence applies to every employee, contractor, and visitor every day, at every site. Safety and environmental responsibility are a way of life at NewMarket - enhancing operations, the way we work, and the relationships we maintain with our employees, customers, supply chain partners, and the communities in which we operate. Our objective is to establish a culture where our employees understand that good environmental and safety performance is good business and understand that environmental compliance and safety are their personal responsibilities. Every employee at NewMarket is responsible for ensuring that our high standards in the area of health, safety (including process safety), environmental protection, and security are upheld at all times.
Our Global Responsible Care Policy Statement includes a commitment to conduct operations in a manner that protects our employees, communities, and the environment, to comply with all applicable laws and regulations, and to reduce our environmental impacts. Additionally, in pursuit of our vision of zero incidents, we work with our employees and other key stakeholders to establish appropriate goals, objectives and targets.
Both Afton and Ethyl have implemented Responsible Care® Management Systems (RC14001® and RCMS®) at U.S. facilities. Our Responsible Care® management systems are certified by an independent third-party auditing process. Additionally, Afton’s Feluy, Belgium; Suzhou, China; Hyderabad, India; Tsukuba, Japan; Rio de Janeiro, Brazil; Bracknell, England; Manchester, England; and Singapore facilities are all certified to the environmental standard ISO 14001. Suzhou is also certified to OHSAS 18001, a global occupational health and safety standard. Afton’s Sauget, Illinois plant continues to be an OSHA VPP (Voluntary Protection Program) “Star” worksite.
In 2017, we continued to enhance our “Actively Caring” safety program, where people look out for the safety and welfare of others with courage and compassion, enabling the achievement of an injury-free environment. Our worldwide injury/illness recordable rate (which is the number of injuries per 200,000 hours worked) in 2017 was .31. Our performance is a demonstration of our safety-first culture and represents a focused effort by all of our employees. We are extremely proud of our accomplishments in this area. Both Afton and Ethyl continue to be top performers among their industry peers. While our safety performance is very strong, we strive for continual improvement with a vision of having zero injuries.


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As members of the American Chemistry Council (ACC), Afton and Ethyl provide data on twelve metrics used to track environmental impact, safety, energy use, community outreach and emergency preparedness, greenhouse gas intensity, and product stewardship performance of the ACC member companies. These can be viewed at http://responsiblecare.americanchemistry.com/Performance-Results. The information on this website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated by reference in this Annual Report on Form 10-K or any other filings we make with the Securities and Exchange Commission (SEC).
Environmental
We believe that we comply, in all material respects, with laws, regulations, statutes, and ordinances protecting the environment, including those related to the management and stewardship of chemicals. We have policies and procedures in place establishing regular reviews of our compliance and stewardship, as well as monitoring any significant existing, potential or threatened environmental issues that could materially affect the company.
Our total accruals for environmental remediation, dismantling, and decontamination were approximately $14 million at December 31, 2017 and $16 million December 31, 2016.
As new technology becomes available, it may be possible to reduce accrued amounts. While we believe that we are currently fully accrued for known environmental issues, it is possible that unexpected future costs could have a significant financial impact on our financial position, results of operations, and cash flows.
We spent approximately $26 million in 2017, $24 million in 2016, and $22 million in 2015 for ongoing environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures. These environmental operating and clean-up expenses are primarily included in cost of goods sold.
For capital expenditures on pollution prevention and safety projects, we spent $10 million in 2017, $14 million in 2016, and $13 million in 2015. We expect expenditures in 2018 to be at a level similar to the previous three years.
The costs of complying with governmental pollution prevention and safety regulations are subject to:
potential changes in applicable statutes and regulations (or their enforcement and interpretation);
uncertainty as to the success of anticipated solutions to pollution problems;
uncertainty as to whether additional expense may prove necessary; and
potential for emerging technology to affect remediation methods and reduce associated costs.
We are subject to liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damage, or natural resource damages arising from the release of, or exposure to, such hazardous substances. Further, we may have environmental liabilities imposed in many situations without regard to violations of laws or regulations. These liabilities may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss) and may be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property and entities that arranged for the disposal of the hazardous substances at an affected property. We are subject to many environmental laws, including the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as CERCLA or Superfund, in the United States, and similar foreign and state laws.
Under CERCLA, we are currently considered a potentially responsible party (PRP), at several sites, ranging from a de minimis PRP or a minor PRP, to involvement considered greater than minor PRP involvement. At some of these sites, the remediation methodology, as well as the proportionate shares of each PRP, has been well established. Other sites are not as mature, which makes it more difficult to reasonably estimate our share of the future clean-up or remediation costs.


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In 2000, the Environmental Protection Agency (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 Record of Decision (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. We also have several other sites where we are in the process of environmental remediation and monitoring. See Note 16 for further information.
Geographic Areas
We have operations in the United States, Europe, Asia Pacific, India, Latin America, Canada, and the Middle East. The economies are generally stable in the countries where we do most of our business, although many of those countries have experienced economic downturns in the past. In countries with more political or economic uncertainty, we generally minimize our risk of loss by utilizing U.S. Dollar-denominated transactions, letters of credit, and prepaid transactions. Our foreign customers consist of global, national, and independent oil companies.
The tables below report net sales 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. The change in net sales during the three-year period is discussed more fully in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
No single customer accounted for 10% or more of our total net sales in 2017, 2016, or 2015.
Geographic Areas
 
 
Years Ended December 31,
(in millions)
 
2017
 
2016
 
2015
Net sales
 
 
 
 
 
 
United States
 
$
696

 
$
701

 
$
776

China
 
225

 
203

 
184

Europe, Middle East, Africa, India
 
742

 
653

 
669

Asia Pacific, except China
 
293

 
268

 
252

Other foreign
 
242

 
224

 
260

Net sales
 
$
2,198

 
$
2,049

 
$
2,141

 
 
December 31,
(in millions)
 
2017
 
2016
Long-lived assets
 
 
 
 
United States
 
$
230

 
$
225

Singapore
 
271

 
190

Other foreign
 
151

 
89

Total long-lived assets
 
$
652

 
$
504



10


Availability of Reports Filed with the Securities and Exchange Commission and Corporate Governance Documents
Our internet website address is www.newmarket.com. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. In addition, our Corporate Governance Guidelines, Code of Conduct, and the charters of our Audit, Compensation, and Nominating and Corporate Governance Committees are available on our website and are available in print, without charge, to any shareholder upon request by contacting our Corporate Secretary at NewMarket Corporation, 330 South Fourth Street, Richmond, Virginia 23219. The information on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated by reference in this Annual Report on Form 10-K or any other filings we make with the SEC.
Executive Officers of the Registrant
The names and ages of all executive officers as of February 15, 2018 follow.
Name
Age
Positions
Thomas E. Gottwald
57
Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Brian D. Paliotti
41
Chief Financial Officer and Vice President (Principal Financial Officer)
Bruce R. Hazelgrove, III
57
Executive Vice President and Chief Administrative Officer
William J. Skrobacz
58
Controller (Principal Accounting Officer)
Cameron D. Warner, Jr.
59
Treasurer
M. Rudolph West
64
Vice President, General Counsel, and Secretary
Robert A. Shama
57
President, Afton Chemical Corporation
Our officers, at the discretion of the Board of Directors, hold office until the meeting of the Board of Directors following the next annual shareholders’ meeting. Mr. Gottwald, Mr. Hazelgrove, and Mr. Warner have served in their capacity for at least the last five years. Mr. Paliotti, Mr. West, Mr. Skrobacz, and Mr. Shama have served in their capacities for less than five years.
Mr. Paliotti has been employed by NewMarket or Afton since 2008. Prior to being named Chief Financial Officer and Vice President effective January 1, 2015, Mr. Paliotti was Vice President, Finance, of NewMarket Services since 2013, Senior Financial Officer of NewMarket Services since 2011, and Financial Officer of Afton since 2008. Mr. West was named Vice President, General Counsel, and Secretary effective January 1, 2016. Prior to that date, Mr. West served as Assistant General Counsel and Secretary for more than five years. Mr. Skrobacz joined NewMarket in May 2011 as Senior Manager, Business Assurance, and was appointed Controller Designate in September 2012. In May 2013, he was appointed Controller. Prior to joining NewMarket, Mr. Skrobacz served as Controller of UPS Freight, a wholly-owned subsidiary of United Parcel Service, Inc., since 2008. Mr. Shama has been employed by Afton for at least five years in various senior management capacities. Prior to being named President of Afton in 2013, he was Executive Vice President of Afton beginning in 2012 and Senior Vice President North America and Chief Marketing Officer in 2011. From 2008 to 2010, Mr. Shama was Vice President Sales and Marketing North America.


ITEM 1A.
RISK FACTORS
Our business is subject to many factors that could have a material adverse effect on our future performance, results of operations, financial condition, or cash flows and could cause our actual results to differ materially from those expressed or implied by forward-looking statements made in this Annual Report on Form 10-K. Those risk factors are outlined below.


11


Lack of availability of raw materials, including sourcing from some single suppliers, could negatively impact our ability to meet customer demand.
The chemical industry can experience limited supply of certain materials. In addition, in some cases, we choose to source from a single supplier. Any significant disruption in supply, for any reason, could adversely affect our ability to obtain raw materials, which in turn could adversely affect our ability to ensure continued supply for our customers and to meet customer demand.
A disruption in the availability or capacity of distribution systems could negatively impact our ability to meet our customers’ needs and affect our competitive position.
We rely on a variety of modes of transportation to deliver products to our customers, including rail cars, cargo ships, and trucks. We depend upon the availability of a distribution infrastructure to deliver our products in a safe and timely manner. Any disruptions in this infrastructure network, whether caused by human error, accidents, deliberate acts of violence, limitations on capacity, repairs and improvements to infrastructure components, earthquakes, storms, or other natural disasters, could adversely affect our ability to meet customer demand.
A significant disruption or disaster at one of our production facilities, including those facilities which are sole producers of certain of our products, could result in our inability to meet production requirements and projected customer demand. This could potentially result in us incurring significant liabilities.
We are dependent upon the continued safe operation of our production facilities. Several of the products we sell are produced only in one location. A prolonged disruption or disaster at one of our facilities could result in our inability to meet production requirements.
Our production facilities are subject to various hazards associated with the manufacturing, handling, storage, and transportation of chemical materials and products, including some that are reactive, explosive, and flammable. Such hazards could include leaks, ruptures, chemical spills, explosions, or fires which result in the discharge or release of toxic or hazardous substances or gases; mechanical failures; unscheduled downtime; and environmental hazards. These sites may also experience significant disruptions in operations due to inclement weather, natural disasters, flooding, and levee breaches. Many of these hazards could cause a disruption in the production of our products and may diminish our ability to meet output goals. We cannot assure that our facilities will not experience these types of hazards and disruptions in the future or that these incidents will not result in production delays and affect our ability to meet production requirements. Any such disruptions or disasters at our facilities could result in us losing revenue or not being able to maintain our relationships with our customers.
Additionally, some of the hazards mentioned above could result in significant liabilities related to personal injury and loss of life; severe damage to, or destruction of, property and equipment; and environmental contamination.
Our research and development efforts are costly and may not succeed, which could impair our ability to meet our customers’ needs, affect our competitive position, and result in a loss of market share.
The petroleum additives industry is subject to periodic technological change, changes in performance standards, and ongoing product improvements. Further, technological changes in some or all of our customers’ products or processes may make our products obsolete. As a result, the life cycle of our products is often hard to predict. In order to maintain our profits and remain competitive, we must effectively respond to technological changes in our industry and successfully develop, manufacture, and market new or improved products in a cost-effective and timely manner. As a result, we must commit substantial resources each year to research and development to maintain and enhance our technological capabilities and meet our customers’ changing needs. Ongoing investments in research and development for future products could result in higher costs without a proportional increase in profits. Additionally, for any new product program, there is a risk of technical or market failure in which case we may not be able to develop the new commercial products needed to maintain and enhance our competitive position, or we may need to commit additional resources to new product development programs. Moreover, new products may have lower margins than the products they replace.


12


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.
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 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 and adversely affect our ability to grow our business.


13


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 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.
We rely on a small number of significant customers concentrated in the lubricant and fuel industries. The loss of sales to any of these customers could significantly reduce our revenues and negatively affect our profitability.
Our principal customers are multinational oil companies primarily in the lubricant and fuel industries. These industries are characterized by the concentration 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.
The occurrence or threat of extraordinary events, including domestic and international terrorist attacks, 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, cannot be predicted, but their occurrence can be expected to negatively affect the economy in general, and specifically the markets for our products. The damage from a direct attack on our assets or assets used by us could include loss of life, 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.


14


We face risks related to our foreign operations that may negatively affect our business.
In 2017, 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, the United Kingdom's June 2016 vote to withdraw from the European Union has resulted in uncertainties in connection with the United Kingdom's relationship with the European Union and how it will withdraw from the European Union. Further, there are uncertainties as to what impact the United Kingdom's withdrawal from the European Union will have on our operations in both the United Kingdom and Europe and the resulting impact on our profitability.
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.
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.


15


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.


16


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 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 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.


17


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.


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.
Research, Development, and Testing
 
Richmond, Virginia
Bracknell, England
Manchester, England
Tsukuba, Japan
Ashland, Virginia
Suzhou, China
 
 
Manufacturing and Distribution
 
Bedford Park, Illinois (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 property we own in Richmond, Virginia consisting of approximately 57 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.



18


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” in Part I, Item 1.
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.


ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.



19


PART II

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 2,147 shareholders of record at January 31. 2018.
On October 21, 2015, our Board of Directors approved a share repurchase program authorizing management to repurchase up to $500 million of NewMarket's outstanding common stock until December 31, 2018, as market conditions warrant and covenants under our existing agreements permit. We may conduct the share repurchases in the open market and in privately negotiated transactions. The repurchase program does not require NewMarket to acquire any specific number of shares and may be terminated or suspended at any time. Approximately $419 million remained available under the 2015 authorization at December 31, 2017. The following table outlines the purchases during the fourth quarter of 2017 under this authorization.
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 to October 31
 
0
 
$
0.00

 
0
 
$
446,944,207

November 1 to November 30
 
36,409
 
393.39

 
36,409
 
432,621,340

December 1 to December 31
 
34,280
 
391.89

 
34,280
 
419,187,485

Total
 
70,689
 
$
392.66

 
70,689
 
$
419,187,485


As shown in the table below, cash dividends declared and paid totaled $7.00 per share for the year ended December 31, 2017 and $6.40 per share for the year ended December 31, 2016.
Year
Date Declared
 
Date Paid
 
Per Share Amount
2017
February 23, 2017
 
April 3, 2017
 
$
1.75

 
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

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.


20


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




21


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, 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, 2017
neu-2017123_chartx50130a05.jpg
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
NewMarket Corporation
$
100.00

 
$
129.15

 
$
157.86

 
$
151.02

 
$
170.79

 
$
162.78

S&P 1500 Specialty Chemicals Index
100.00

 
135.18

 
156.71

 
151.81

 
168.76

 
213.39

S&P 500
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14


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.  



22


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



23


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.




24


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 manufacturing facilities, including single-sourced facilities; the ability to respond effectively to technological changes in our industry; failure to protect our intellectual property rights; failure to attract and retain a highly-qualified workforce; hazards common to chemical businesses; competition from other manufacturers; sudden or sharp raw material price increases; the gain or loss of significant customers; the occurrence or threat of extraordinary events, including natural disasters and terrorist attacks; risks related to operating outside of the United States; the impact of 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; and 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. 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 2017 with 2016, net sales increased 7.5% primarily due to increased shipment volumes, partially offset by lower selling prices. The lower selling prices, along with increased raw material costs, resulted in petroleum additives operating profit being 6.5% lower when comparing 2017 with 2016.
Our operations generate cash that is in excess of the needs of the business. We continue to invest and manage our business for the long-run with the goal of helping our customers succeed in their marketplaces. Our investments continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability, and geographic expansion.
On July 3, 2017, we completed our acquisition of Aditivos Mexicanos S.A. de C.V. (AMSA), a petroleum additives manufacturing, sales 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 information on the acquisition.
In December 2017, the Tax Cuts 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.


25


During 2017, we repurchased 70,689 shares of our common stock at a total cost of $28 million.

RESULTS OF OPERATIONS
Net Sales
Our consolidated net sales for 2017 amounted to $2.2 billion, an increase of $149 million, or 7.3% from 2016. The decrease between 2016 and 2015 was $91 million, or 4.3%.
No single customer accounted for 10% or more of our total net sales in 2017, 2016, or 2015.
The following table shows net sales by segment and product line for each of the last three years.
 
 
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% and Latin America represents almost 10%. As shown in the table above, lubricant additives net sales and fuel additives net sales compared to total petroleum additives net sales has remained substantially consistent over the past three years. The discussion below provides further detail on net sales in our petroleum additives segment for 2017, 2016, and 2015.
The approximate components of the petroleum additives increase in net sales of $152 million when comparing 2017 to 2016 and decrease of $90 million when comparing 2016 to 2015 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




26


Petroleum additives net sales for 2017 of $2.2 billion were approximately 7.5% higher than 2016 levels. The increase was predominantly in the EMEAI region with a nearly 14% increase, as well as in the Asia Pacific region with an almost 10% increase. The Latin America region contributed a smaller increase of almost 7%, while the North America region was substantially unchanged between the two years. The primary driver in the higher net sales between 2017 and 2016 was an 8.2% increase in shipments which was partially offset by lower selling prices. Shipments increased in both lubricant and fuel additives. EMEAI, Asia Pacific and Latin America experienced shipment increases in lubricant additives, while EMEAI was the primary driver in the increase in shipments for fuel additives. The North America region was substantially unchanged between the two years for both lubricant and fuel additives shipments. Foreign currency contributed a small favorable impact, mostly from the European Euro. The U.S. Dollar weakened against the Euro, resulting in a favorable impact to net sales. Partially offsetting the impact from the Euro, the U.S. Dollar strengthened against the Japanese Yen and Chinese Renminbi resulting in an unfavorable foreign currency impact.
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 when comparing the two years. The Japanese Yen strengthened against the U.S. Dollar during 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. The volume of product shipments for petroleum additives increased approximately 1.1% on a worldwide basis when comparing 2016 and 2015. Lubricant additives product shipments increased in both Asia Pacific and EMEAI, but were substantially offset by decreases in North America and Latin America. Fuel additives product shipments increased in all regions, except for EMEAI.
All Other - The “All other” category includes the operations of the TEL business, and certain contracted manufacturing and services performed by Ethyl.
Segment Operating Profit
NewMarket evaluates the performance of the petroleum additives business based on segment operating profit. NewMarket Services expenses are charged to each subsidiary pursuant to services agreements between the companies. Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets, is included in segment operating profit.
The table below reports segment operating profit for the last three years. A reconciliation of segment operating profit to income before income tax expense is in Note 20.
 
 
Years Ended December 31,
(in millions)
 
2017
 
2016
 
2015
Petroleum additives
 
$
360

 
$
385

 
$
375

All other
 
$
4

 
$
0

 
$
4

Petroleum Additives - Petroleum additives operating profit decreased $25 million when comparing 2017 to 2016 and increased $10 million when comparing 2016 to 2015. 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 an unfavorable foreign currency impact when comparing 2017 and 2016, but a favorable impact when comparing 2016 and 2015 arising from other transactions.


27


The operating profit margin was 16.5% in 2017, 18.9% in 2016, and 17.6% in 2015. Increases in raw material costs have continued 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 for the performance of our business over the long-term. While operating profit margins will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry are unchanged.
Gross profit decreased $34 million when comparing 2017 and 2016 and increased $11 million when comparing 2016 and 2015, consistent with the change in operating profit margins. Cost of sales as a percentage of net sales has increased slightly in 2017 over the prior two years reflecting percentages of 71% in 2017, 67% in 2016, and 68% in 2015.
When comparing 2017 and 2016, the decrease in gross profit resulted predominantly from the unfavorable raw material costs and selling prices (including product mix), as well as unfavorable conversion costs, which together contributed over 100% of the changes. 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 favorable 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, general, and administrative expenses (SG&A) were essentially flat in 2017 compared to 2016, while expenses in 2016 were $2 million, or 1.3%, lower than 2015 levels. SG&A as a percentage of net sales was 6.2% in 2017, 6.7% in 2016, and 6.5% in 2015. Our SG&A costs are mainly personnel-related and include salaries, benefits and other costs associated with our workforce. There were no significant changes in these costs when comparing the years.
When comparing 2017 with 2016, R&D expenses decreased approximately $17 million, and when comparing 2016 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. As a percentage of net sales, R&D was 6.4% in 2017, 7.7% in 2016, and 7.4% in 2015.
Our R&D investments reflect our efforts to support the development of solutions that meet our customers' needs, meet new and evolving standards, and support our expansion into new product areas. Our approach to R&D investment, as it is with SG&A, is one of purposeful spending on programs to support our current product base and to ensure that we develop products to support our customers' programs in the future. R&D investments include personnel-related costs, as well as internal and external testing of our products. Most R&D is incurred in the United States and in the United Kingdom, with over 70% of total R&D being attributable to the North America and EMEAI regions. Substantially all investments in new product development are incurred in the United States and the United Kingdom. The remaining 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 million in 2017, $17 million in 2016, and $15 million in 2015. The increase in interest and financing expense between 2017 and 2016 resulted primarily from higher 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.


28


Other Income (Expense), Net
Other income (expense), net was income of $1 million in 2017 and expense of $3 million in both 2016 and 2015. The amount for 2017 was comprised of immaterial items. The amounts for 2016 and 2015 primarily reflected the impact from an interest rate swap derivative instrument recorded at fair value through earnings, which we terminated in 2016.
Income Tax Expense
Income tax expense was $125 million in 2017, and $100 million in both 2016 and 2015. The effective tax rate was 39.6% in 2017, 29.1% in 2016, and 29.6% in 2015. The effective income tax rates for each year included 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.
The changes in the effective tax rate, which are primarily due to the Tax Reform Act, resulted in higher income tax expense of $33 million when compared to 2016, which was partially offset by lower income before income tax expense.
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 million in 2017, $353 million in 2016, and $268 million in 2015.
During 2017, we used the $243 million cash generated from operations, $250 million from the issuance of the 3.78% senior notes, and $108 million cash on hand to fund the acquisition of AMSA for $184 million, repay the outstanding balance of $156 million on our revolving credit facility, and fund $149 million in capital expenditures. We also paid dividends of $83 million and repurchased $26 million of our common stock. Cash flows from operating activities included a decrease of $36 million from higher working capital requirements, $31 million from the impact of the Tax Reform Act, and cash contributions of $26 million for our pension and postretirement plans.
During 2016, we used the $353 million cash generated from operations and $11 million of borrowings on our revolving credit facility to fund $143 million of capital expenditures, fund $76 million in dividend payments, and repurchase $36 million of our common stock. These transactions, along with an unfavorable foreign currency impact of $8 million resulted in an increase of $99 million in cash and cash equivalents. Cash flows from operating activities included an increase of $21 million from lower working capital requirements, as well as cash contributions of $26 million for our pension and postretirement plans.
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.


29



FINANCIAL POSITION AND LIQUIDITY
Cash
At December 31, 2017, we had cash and cash equivalents of $84 million as compared to $192 million at the end of 2016.
Our cash and cash equivalents held by our foreign subsidiaries amounted to approximately $77 million at December 31, 2017 and $189 million at December 31, 2016. A significant amount 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 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 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 subsidiaries 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.
Debt
4.10% Senior Notes - At both December 31, 2017 and December 31, 2016, we had $350 million of 4.10% senior notes due 2022 which are senior unsecured obligations. The senior notes are registered under the Securities Act of 1933. We incurred financing costs totaling approximately $5 million related to the 4.10% senior notes, which are being amortized over the term of the agreement.
The 4.10% senior notes rank:
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, 2017 and December 31, 2016.
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 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.


30


Revolving Credit Facility – On September 22, 2017, we entered into a Credit Agreement (Credit Agreement) with a term of five years. The Credit Agreement provides for an $850 million, multicurrency revolving credit facility, with a $150 million sublimit for multicurrency borrowings, a $75 million sublimit for letters of credit, and a $20 million sublimit for swingline loans. The Credit Agreement includes an expansion feature which allows us, subject to certain conditions, to request an increase in the aggregate amount of the revolving credit facility or obtain incremental term loans in an amount up to $425 million. In addition, the Credit Agreement includes provisions that allow certain of our foreign subsidiaries to borrow under the agreement. 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 are fully and unconditionally 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) (solely in the case of loans denominated in U.S. dollars to NewMarket) or (2) the Adjusted LIBO Rate plus the Applicable Rate. ABR is the greater of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate, (ii) the NYFRB Rate (as defined in the Credit Agreement) from time to time plus 0.5%, and (iii) the Adjusted LIBO Rate for a one month interest period plus 1%. The Adjusted LIBO Rate means the rate at which Eurocurrency deposits in the London interbank market for certain periods (as selected by NewMarket) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities and other applicable mandatory costs. The Applicable Rate ranges from 0.0% to 0.625%(depending on our consolidated Leverage Ratio or Credit Ratings) for loans bearing interest based on the ABR. The Applicable Rate ranges from 1.00% to 1.625% (depending on our Leverage Ratio or Credit Ratings) for loans bearing interest based on the Adjusted LIBO Rate. At December 31, 2017, the Applicable Rate was 0.125% for loans bearing interest based on the ABR and 1.125% for loans bearing interest based on the Adjusted LIBO Rate.
The Credit Agreement contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the Credit Agreement) of no more than 3.50 to 1.00 except during an Increased Leverage Period (as defined in the Credit Agreement) at the end of each quarter, and a consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of no less than 3.00 to 1.00, calculated on a rolling four quarter basis, as of the end of each fiscal quarter.
At December 31, 2017, the Leverage Ratio was 1.52 and the Interest Coverage Ratio was 15.49.
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.


31


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 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 - Our subsidiaries in China have access to short-term lines of credit totaling $18 million. There was no outstanding balance on these lines 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.
***
We had long-term debt of $603 million at December 31, 2017 and $507 million at December 31, 2016. The increase in debt resulted from 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.
As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt decreased from 51.2% at the end of 2016 to 50.1% at the end of 2017. The change in the percentage was primarily the result of the increase in shareholders' equity, partially offset by an increase in debt. The change in shareholders’ equity reflects our earnings, the impact of the foreign currency translation adjustment, and a small increase in the funded position of our defined benefit plans, offset by the impact of stock repurchases and dividend payments. Normally, we repay any outstanding long-term debt with cash from operations or refinancing activities.
Working Capital
Including cash and cash equivalents and the impact of foreign currency on the balance sheet, at December 31, 2017, we had working capital of $517 million, resulting in a current ratio of 2.63 to 1. Our working capital at December 31, 2016 on the same basis was $542 million, resulting in a current ratio of 2.84 to 1.
Other than the decrease in cash and cash equivalents, the most significant changes in working capital since December 31, 2016 resulted from an increase in accounts receivable and inventories, which were partially offset by an increase in accounts payable. The higher accounts receivable balance 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. The increase in accounts payable was across our major subsidiaries due to higher raw material costs, timing of payments, and foreign currency impacts.
Capital Expenditures
Capital expenditures were $149 million for 2017, $143 million for 2016, and $126 million for 2015. We currently estimate capital expenditures in 2018 will be around $125 million. We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our $850 million revolving credit facility.


32


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 million in 2017, $24 million in 2016, and $22 million in 2015 for ongoing environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures. These environmental operating and clean-up expenses are included in cost of goods sold. We expect to continue to fund these costs through cash provided by operations.
Contractual Obligations
The table below shows our year-end contractual obligations by year due.
 
 
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, 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.


33


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.
U.S. Pension and Postretirement Benefit Plans—The average remaining service period of active participants for our U.S. plans is 13.5 years, while the average remaining life expectancy of inactive participants is 23.2 years. We utilize the sex distinct RP-2014 tables with separate rates for annuitants and non-annuitants, adjusted to remove MP-2014 improvements, with separate rates for annuitants and non-annuitants, projected generationally with Scale MP-2017 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, 2018 and January 1, 2017. 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 asset allocation for our U.S. pension plans is predominantly weighted toward equities. Through the ongoing monitoring of our investments and review of market data, we have determined that we should maintain the expected long-term rate of return for our U.S. pension plans at 8.5% at December 31, 2017.
An actuarial gain occurred during 2017 as the actual investment return for all of our U.S. pension plans exceeded the expected return by approximately $39 million in 2017. An actuarial loss occurred during both 2016 and 2015 as the actual investment return for all of our U.S. pension plans was less than the expected return by approximately $3 million in 2016 and $26 million in 2015. Investment gains and losses are recognized in earnings on an amortized basis over a period of years, resulting in decreased expense of approximately $1.3 million in 2018. 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, our expected long-term rate of return on our postretirement plans was 4.5%. This rate varies from the pension rate of 8.5% primarily because of the difference in investment of assets. The assets of the postretirement plan are held in an insurance contract, which results in a lower assumed rate of investment return.
Pension expense and the life insurance portion of postretirement expense are sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 7.5% for pension assets and 3.5% for postretirement benefit assets (while holding other assumptions constant) would increase the forecasted 2018 expense for our U.S. pension and postretirement plans by approximately $4 million. Similarly, a 100 basis point increase in the expected rate of return to 9.5% for pension assets and 5.5% for postretirement benefit assets (while holding other assumptions constant) would reduce forecasted 2018 pension and postretirement expense by $4 million.
Discount Rate Assumption—We develop the discount rate assumption by determining the single effective discount rate for a unique hypothetical portfolio constructed from investment-grade bonds that, in the aggregate, match the projected cash flows of each of our retirement plans. The discount rate is developed based on the hypothetical portfolio on the last day of December. The discount rate at December 31, 2017 was 3.75% 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% (while holding other assumptions constant) would increase the forecasted 2018 expense for our U.S. pension and postretirement benefit plans by approximately $7 million. A 100 basis point increase in the discount rate to 4.75% would reduce forecasted 2018 pension and postretirement benefit expense by $6 million.


34


Rate of Projected Compensation Increase—We have maintained our rate of projected compensation increase at December 31, 2017 at 3.5%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future.
LiquidityCash 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 million in 2018. We expect our contributions to the postretirement benefit plans will be approximately $1 million in 2018.
Foreign Pension Benefit Plans—Our foreign pension plans are quite diverse. The following information applies only to our U.K. pension plan, which represents the majority of the amounts recorded in our financial statements for our foreign pension plans. The average remaining service period of active participants for our U.K. plan is 13 years, while the average remaining life expectancy of inactive participants is 24 years. We utilize the S2P (Light) mortality tables and allow for future projected improvements in life expectancy in line with the CMI 2016 model (with the default smoothing factor), with a long-term rate of improvement of 1% per year based on the membership of the plan, in determining the impact of the U.K. pension plans on our financial statements.
Investment Return Assumptions and Asset AllocationWe 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 2017 was 41% in pooled equities funds, 40% in pooled government bonds, and 19% in pooled diversified growth funds. Based on the actual asset allocation and the expected yields available in the U.K. markets, the expected long-term rate of return for the U.K. pension plan was 5.7% at December 31, 2017.
An actuarial gain on the assets occurred during both 2017 and 2016 as the actual investment return exceeded the expected investment return by approximately $5 million in 2017 and $22 million in 2016. An actuarial loss occurred during 2015 as the actual investment return was less than the expected investment return by approximately $5 million. Investment gains and losses are recognized in pension expense on an amortized basis. The amortization of the actuarial net loss is not expected to be material in 2018. We expect that there will be continued volatility in pension expense as actual investment returns vary from the expected return, but we continue to believe the potential benefits justify the risk premium for the target asset allocation.
Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 100 basis points to 4.7% (while holding other assumptions constant) would increase the forecasted 2018 expense for our U.K. pension plan by approximately $2 million. Similarly, a 100 basis point increase in the expected rate of return to 6.7% (while holding other assumptions constant) would reduce forecasted 2018 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, 2017 was 2.6%.
Pension expense is also sensitive to changes in the discount rate. For example, decreasing the discount rate by 100 basis points to 1.6% (while holding other assumptions constant) would increase the forecasted 2018 expense for our U.K. pension plans by approximately $1 million. A 100 basis point increase in the discount rate to 3.6% would reduce forecasted 2017 pension expense by approximately $1 million.
Rate of Projected Compensation Increase—Our rate of projected compensation increase at December 31, 2017 is 4.3%. The rate assumption was based on an analysis of our projected compensation increases for the foreseeable future.
LiquidityCash contribution requirements to the U.K. pension plan are sensitive to changes in assumed interest rates utilized in the pension valuation. We expect our aggregate U.K. cash contributions, before income taxes, will be approximately $4 million in 2018.



35


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), although we may not necessarily achieve a 10% return each year. We continue to have confidence in our customer-focused strategy and approach to the market. We believe the fundamentals of how we run our business - a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, and world-class supply chain capability - will continue to be beneficial for all of our stakeholders over the long term.
We expect our petroleum additives segment to deliver solid performance in 2018, after having posted strong operating results over the past several years. We expect that the petroleum additives industry shipment demand will grow at an average annual rate of 1% to 2% over the long-term, as there have been no significant changes in the positive fundamentals of the industry. Over the long-term, we plan to exceed the industry growth rate.
We have made significant investments to expand our capabilities around the world over the last few years, which have continued in 2017. 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.
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, and product line perspective. We believe our capital spending is creating the capability we need to grow and support our customers worldwide, and our research and development investments are positioning us well to provide added value to our customers. Our 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.


36


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.
Pension Plans and Other Postretirement Benefits
We use assumptions to record the impact of the pension and postretirement benefit plans in the financial statements. These assumptions include the discount rate, expected long-term rate of return on plan assets, and rate of compensation increase. A change in any one of these assumptions could cause different results for the plans and therefore, impact our results of operations, cash flows, and financial condition. We develop these assumptions after considering available information that we deem relevant. Information is provided on the pension and postretirement plans in Note 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. 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.



37


RECENTLY ISSUED ACCOUNTING STANDARDS
For a full discussion of the more significant pronouncements which may impact our financial statements, see Note 22.

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. 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, we had total long-term debt of $603 million. All of our 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, we had no outstanding borrowings of variable rate debt under our revolving credit facility, so there was no interest rate risk at the end of the year associated with the revolving credit facility.
A hypothetical 100 basis point decrease in interest rates, holding all other variables constant, would have resulted in a change of $37 million in fair value of our debt at December 31, 2017.
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, 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.




38


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of NewMarket Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NewMarket Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, 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, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 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, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


39


Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Richmond, Virginia
February 15, 2018

We have served as the Company's or its predecessor's auditor since 1947.
 


40


NewMarket Corporation and Subsidiaries
Consolidated Statements of Income
 
 
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



See accompanying Notes to Consolidated Financial Statements
41


NewMarket Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
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

             

See accompanying Notes to Consolidated Financial Statements
42


NewMarket Corporation and Subsidiaries
Consolidated Balance Sheets
 
 
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



See accompanying Notes to Consolidated Financial Statements
43


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, 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



See accompanying Notes to Consolidated Financial Statements
44


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
45

Notes to Consolidated Financial Statements



1.
Summary of Significant Accounting Policies
Consolidation—Our consolidated financial statements include the accounts of NewMarket Corporation and its subsidiaries. All intercompany transactions are eliminated upon consolidation. References to "we," "us," "our," the "company," and "NewMarket" are to NewMarket Corporation and its consolidated subsidiaries, unless the context indicates otherwise.
NewMarket is the parent company of three operating companies, each managing its own assets and liabilities. Those companies are Afton, which focuses on petroleum additive products; Ethyl, representing certain contracted manufacturing and services, as well as the TEL business; and NewMarket Development, which manages the property and improvements that we own in Virginia. NewMarket is also the parent company of NewMarket Services, which provides various administrative services to NewMarket, Afton, Ethyl, and NewMarket Development.
Certain reclassifications have been made to the accompanying consolidated financial statements and the related notes to 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 gain of $5 million in both 2017 and 2016, and a net loss of $11 million in 2015.
Revenue Recognition—Our policy is to recognize revenue 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. Net sales (revenues) are reported at the gross amount billed, including amounts related to shipping that are charged to the customer. Provisions for rebates to customers are recorded in the same period that the related sales are recorded. Freight costs incurred on the delivery of products are included in the Consolidated Statements of Income in cost of goods sold. Our standard terms of delivery are included in our contracts, sales order confirmation documents, and invoices. Taxes assessed by a governmental authority concurrent with sales to our customers, including sales, use, value-added, and revenue-related excise taxes, are not included as net sales, but are reflected in accrued expenses until remitted to the appropriate governmental authority.
Cash and Cash Equivalents—Our cash equivalents consist of government obligations and commercial paper with original maturities of 90 days or less. Throughout the year, we have cash balances in excess of federally insured amounts on deposit with various financial institutions. We state cash and cash equivalents at cost, which approximates fair value.
Accounts Receivable—We record our accounts receivable at net realizable value. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers not making required payments. We determine the adequacy of the allowance by periodically evaluating each customer’s receivable balance, considering their financial condition and credit history, and considering current economic conditions. The allowance for doubtful accounts was not material at December 31, 2017 or December 31, 2016.
Inventories—NewMarket values its petroleum additives and TEL inventories at the lower of cost or net realizable value. In the United States, cost is determined on the last-in, first-out (LIFO) basis. In all other countries, we determine cost using the weighted-average method. Inventory cost includes raw materials, direct labor, and manufacturing overhead.
Property, Plant, and Equipment—We state property, plant, and equipment at cost and compute depreciation by the straight-line method based on the estimated useful lives of the assets. We capitalize expenditures for significant improvements that extend the useful life of the related property. We expense repairs and maintenance, including plant turnaround costs, as incurred. When property is sold or retired, we remove the cost and accumulated depreciation from the accounts and any related gain or loss is included in earnings.


46

Notes to Consolidated Financial Statements


Intangibles (Net of Amortization) and Goodwill—Identifiable intangibles include the cost of acquired contracts, formulas and technology, trademarks and trade names, and customer bases. We assign a value to identifiable intangibles based on independent third-party appraisals and management's assessment at the time of acquisition. NewMarket amortizes the cost of the customer bases by an accelerated method and the cost of the remaining identifiable intangibles by the straight-line method over the estimated economic life of the intangible.
Goodwill arises from the excess of cost over net assets of businesses acquired. Goodwill represents the residual purchase price after allocation to all identifiable net assets. We test goodwill for impairment each year, as well as whenever a significant event or circumstance occurs which could reduce the fair value of the reporting unit to which the goodwill applies below the carrying amount of the reporting unit.
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 million in 2017, $7 million in 2016, and $6 million in 2015 related to these plans.
Research, Development, and Testing Expenses—NewMarket expenses all research, development, and testing costs as incurred. R&D costs include personnel-related costs, as well as internal and external testing of our products.
Income Taxes—We recognize deferred income taxes for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. We also adjust for changes in tax rates and laws at the time the changes are enacted. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. We recognize accrued interest and penalties associated with uncertain tax positions as part of income tax expense on our Consolidated Statements of Income.
We generally provide for additional U.S. taxes that would be incurred if a foreign subsidiary returns its earnings in cash to the United States. Undistributed earnings 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 2017 is due to the deemed repatriation of foreign earnings resulting


47

Notes to Consolidated Financial Statements


from the enactment of the Tax Reform Act. Deferred income taxes were not provided on the undistributed earnings in 2016 and 2015 since we expected them to be indefinitely reinvested abroad.  Deferred income taxes were not recorded for undistributed earnings in 2017 because such earnings would either not be subject to U.S. tax when remitted as a result of 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.
Capital Lease Obligation—We record our capital lease obligations at the lower of fair market value of the related asset at the inception of the lease or the present value of the total minimum lease payments.
Derivative Financial Instruments and Hedging Activities—We are exposed to certain risks arising from both our business operations and economic conditions. We manage our exposures to a wide variety of business and operational risks through management of our core business activities.
We manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding, as well as through the use of derivative financial instruments. Specifically, we have entered, and in the future may enter, into interest rate swaps to manage our exposure to interest rate movements.
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, 2017 or December 31, 2016.
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:


48

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


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.


49

Notes to Consolidated Financial Statements



Pro forma results of operations are not presented as the acquisition was not considered material to our consolidated results.

3.    Earnings Per Share
We had 16,708 shares in 2017, 17,130 shares in 2016, and 26,450 shares in 2015 of nonvested restricted stock that were excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive.
The nonvested restricted stock is considered a participating security since the restricted stock contains nonforfeitable rights to dividends. As such, we use the two-class method to compute basic and diluted earnings per share for all periods presented since this method yielded a more dilutive result than the treasury-stock method. The following table illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share.
 
 
Years Ended December 31,
(in thousands, except per-share amounts)
 
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


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



50

Notes to Consolidated Financial Statements

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