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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-32190
 
NEWMARKET CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Virginia
 
20-0812170
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
330 South Fourth Street
 
23219-4350
Richmond,
Virginia
 
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code - (804) 788-5000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
NEU
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
¨
Non-accelerated filer
¨
 
Smaller reporting company
 
 
 
Emerging growth company



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 Exchange Act).
Yes   No  x
Number of shares of common stock, without par value, outstanding as of June 30, 2019: 11,188,126


NEWMARKET CORPORATION

INDEX


 
Page
Number
 
 
Inventories
 

3


PART I.        FINANCIAL INFORMATION
ITEM 1.     Financial Statements

NEWMARKET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
(in thousands, except per-share amounts)
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net sales
 
$
563,417

 
$
598,952

 
$
1,100,033

 
$
1,188,197

Cost of goods sold
 
392,584

 
453,093

 
776,331

 
885,555

Gross profit
 
170,833

 
145,859

 
323,702

 
302,642

Selling, general, and administrative expenses
 
35,021

 
41,999

 
71,794

 
82,912

Research, development, and testing expenses
 
37,137

 
36,729

 
70,361

 
71,024

Operating profit
 
98,675

 
67,131

 
181,547

 
148,706

Interest and financing expenses, net
 
7,741

 
5,565

 
15,753

 
10,729

Other income (expense), net
 
5,757

 
7,999

 
11,705

 
12,899

Income before income tax expense
 
96,691

 
69,565

 
177,499

 
150,876

Income tax expense
 
22,517

 
16,680

 
41,120

 
37,426

Net income
 
$
74,174

 
$
52,885

 
$
136,379

 
$
113,450

Earnings per share - basic and diluted
 
$
6.63

 
$
4.53

 
$
12.20

 
$
9.67

Cash dividends declared per share
 
$
1.75

 
$
1.75

 
$
3.50

 
$
3.50



See accompanying Notes to Condensed Consolidated Financial Statements

4


NEWMARKET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 (in thousands)
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
74,174

 
$
52,885

 
$
136,379

 
$
113,450

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Pension plans and other postretirement benefits:
 
 
 
 
 
 
 
 
Amortization of prior service cost (credit) included in net periodic benefit cost, net of income tax expense (benefit) of $(186) in second quarter 2019, $(181) in second quarter 2018, $(371) in six months 2019 and $(361) in six months 2018
 
(601
)
 
(591
)
 
(1,202
)
 
(1,182
)
Amortization of actuarial net loss (gain) included in net periodic benefit cost, net of income tax expense (benefit) of $251 in second quarter 2019, $359 in second quarter 2018, $505 in six months 2019 and $719 in six months 2018
 
834

 
1,131

 
1,675

 
2,267

Total pension plans and other postretirement benefits
 
233

 
540

 
473

 
1,085

Foreign currency translation adjustments, net of income tax expense (benefit) of $114 in second quarter 2019, $(504) in second quarter 2018, $7 in six months 2019 and $(544) in six months 2018
 
(4,366
)
 
(12,791
)
 
580

 
(33
)
Other comprehensive income (loss)
 
(4,133
)
 
(12,251
)
 
1,053

 
1,052

Comprehensive income
 
$
70,041

 
$
40,634

 
$
137,432

 
$
114,502



See accompanying Notes to Condensed Consolidated Financial Statements

5


NEWMARKET CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(in thousands, except share amounts)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
73,219

 
$
73,040

Trade and other accounts receivable, less allowance for doubtful accounts
 
349,210

 
314,860

Inventories
 
376,481

 
396,341

Prepaid expenses and other current assets
 
30,524

 
29,179

Total current assets
 
829,434

 
813,420

Property, plant, and equipment, net
 
629,724

 
644,138

Intangibles (net of amortization) and goodwill
 
133,945

 
136,039

Prepaid pension cost
 
94,853

 
88,705

Operating lease right-of-use assets
 
55,739

 
0

Deferred income taxes
 
5,039

 
5,094

Deferred charges and other assets
 
18,251

 
9,878

Total assets
 
$
1,766,985

 
$
1,697,274

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
164,956

 
$
151,631

Accrued expenses
 
70,016

 
91,202

Dividends payable
 
17,884

 
17,923

Income taxes payable
 
11,481

 
6,431

Operating lease liabilities
 
13,537

 
0

Other current liabilities
 
5,605

 
4,114

Total current liabilities
 
283,479

 
271,301

Long-term debt
 
678,803

 
770,999

Operating lease liabilities-noncurrent
 
42,157

 
0

Other noncurrent liabilities
 
173,370

 
165,067

Total liabilities
 
1,177,809

 
1,207,367

Commitments and contingencies (Note 10)
 

 

Shareholders’ equity:
 
 
 
 
Common stock and paid-in capital (without par value; authorized shares - 80,000,000; issued and outstanding shares - 11,188,126 at June 30, 2019 and 11,184,482 at December 31, 2018)
 
949

 
0

Accumulated other comprehensive loss
 
(180,263
)
 
(181,316
)
Retained earnings
 
768,490

 
671,223

Total shareholders' equity
 
589,176

 
489,907

Total liabilities and shareholders’ equity
 
$
1,766,985

 
$
1,697,274


See accompanying Notes to Condensed Consolidated Financial Statements

6


NEWMARKET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

(in thousands, except share and per-share amounts)
 
Common Stock and
Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
Balance at March 31, 2018
 
11,787,054

 
$
36

 
$
(132,691
)
 
$
787,440

 
$
654,785

Net income
 
 
 
 
 
 
 
52,885

 
52,885

Other comprehensive income (loss)
 
 
 
 
 
(12,251
)
 
 
 
(12,251
)
Cash dividends ($1.75 per share)
 
 
 
 
 
 
 
(20,192
)
 
(20,192
)
Repurchases of common stock
 
(321,153
)
 
(736
)
 
 
 
(122,711
)
 
(123,447
)
Stock-based compensation
 
(87
)
 
700

 
 
 
1

 
701

Balance at June 30, 2018
 
11,465,814

 
$
0

 
$
(144,942
)
 
$
697,423

 
$
552,481

 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
11,188,126

 
$
431

 
$
(176,130
)
 
$
713,895

 
$
538,196

Net income
 
 
 
 
 
 
 
74,174

 
74,174

Other comprehensive income (loss)
 
 
 
 
 
(4,133
)
 
 
 
(4,133
)
Cash dividends ($1.75 per share)
 
 
 
 
 
 
 
(19,579
)
 
(19,579
)
Stock-based compensation
 
 
 
518

 
 
 
 
 
518

Balance at June 30, 2019
 
11,188,126

 
$
949

 
$
(180,263
)
 
$
768,490

 
$
589,176

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
11,779,978

 
$
0

 
$
(145,994
)
 
$
747,643

 
$
601,649

Net income
 

 

 

 
113,450

 
113,450

Other comprehensive income (loss)
 

 

 
1,052

 

 
1,052

Cash dividends ($3.50 per share)
 

 

 

 
(40,821
)
 
(40,821
)
Repurchases of common stock
 
(322,753
)
 
(1,225
)
 
 
 
(122,854
)
 
(124,079
)
Stock-based compensation
 
8,589

 
1,225

 


 
5

 
1,230

Balance at June 30, 2018
 
11,465,814

 
$
0

 
$
(144,942
)
 
$
697,423

 
$
552,481

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
11,184,482

 
$
0

 
$
(181,316
)
 
$
671,223

 
$
489,907

Net income
 

 

 

 
136,379

 
136,379

Other comprehensive income (loss)
 

 

 
1,053

 

 
1,053

Cash dividends ($3.50 per share)
 

 

 

 
(39,158
)
 
(39,158
)
Stock-based compensation
 
3,644

 
949

 

 
46

 
995

Balance at June 30, 2019
 
11,188,126

 
$
949

 
$
(180,263
)
 
$
768,490

 
$
589,176

 
 
 
 
 
 
 
 
 
 
 


See accompanying Notes to Condensed Consolidated Financial Statements

7


NEWMARKET CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 (in thousands)
 
Six Months Ended
June 30,
 
 
2019
 
2018
Cash and cash equivalents at beginning of year
 
$
73,040

 
$
84,166

Cash flows from operating activities:
 
 
 
 
Net income
 
136,379

 
113,450

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
43,716

 
35,220

Deferred income tax expense (benefit)
 
4,154

 
(813
)
Working capital changes
 
(27,079
)
 
(74,506
)
Cash pension and postretirement contributions
 
(4,869
)
 
(13,756
)
Other, net
 
(1,685
)
 
6,185

Cash provided from (used in) operating activities
 
150,616

 
65,780

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(23,219
)
 
(42,601
)
Other, net
 
0

 
12,150

Cash provided from (used in) investing activities
 
(23,219
)
 
(30,451
)
Cash flows from financing activities:
 
 
 
 
Net (repayments) borrowings under revolving credit facility
 
(87,296
)
 
157,000

Dividends paid
 
(39,158
)
 
(40,821
)
Repurchases of common stock
 
0

 
(123,316
)
Other, net
 
(1,233
)
 
(170
)
Cash provided from (used in) financing activities
 
(127,687
)
 
(7,307
)
Effect of foreign exchange on cash and cash equivalents
 
469

 
(2,399
)
Increase in cash and cash equivalents
 
179

 
25,623

Cash and cash equivalents at end of period
 
$
73,219

 
$
109,789

 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements

8

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1.    Financial Statement Presentation
In the opinion of management, the accompanying consolidated financial statements of NewMarket Corporation and its subsidiaries contain all necessary adjustments for the fair statement of, in all material respects, our consolidated financial position as of June 30, 2019 and December 31, 2018, our consolidated results of operations, comprehensive income, and changes in shareholders' equity for the second quarter and six months ended June 30, 2019 and June 30, 2018, and our cash flows for the six months ended June 30, 2019 and June 30, 2018. All adjustments are of a normal, recurring nature, unless otherwise disclosed. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the NewMarket Corporation Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report), as filed with the Securities and Exchange Commission (SEC). The results of operations for the six month period ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Unless the context otherwise indicates, all references to “we,” “us,” “our,” the “company,” and “NewMarket” are to NewMarket Corporation and its consolidated subsidiaries.
We adopted Accounting Standard Update No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02) on January 1, 2019. ASU 2018-02 allows, but does not require, reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects that resulted from the enactment of U.S. tax legislation commonly known as the Tax Cuts and Jobs Acts (Tax Reform Act) at the end of 2017. We elected not to reclassify those tax effects from accumulated other comprehensive income upon adoption of ASU 2018-02. We typically remove the tax impact in accumulated other comprehensive income when the underlying circumstance which gave rise to the tax impact no longer exists.

2.    Net Sales

Our revenues are primarily derived from the manufacture and sale of petroleum additives products. We sell petroleum additives products across the world to customers located in the United States, Europe, Asia Pacific (including China), Latin America, Canada, India, and the Middle East. Our customers primarily consist of global, national, and independent oil companies. Our contracts generally include one performance obligation, which is providing petroleum additives products. The performance obligation is satisfied at a point in time when products are shipped, delivered, or consumed by the customer, depending on the underlying contracts.

In limited cases, we collect funds in advance of shipping product to our customers and recognizing the related revenue. These prepayments from customers are recorded as a contract liability to our customer until we recognize the revenue. Some of our contracts include variable consideration in the form of rebates or business development funds. We regularly review both rebates and business development funds and make adjustments when necessary, recognizing the full amount of any adjustment in the period identified.


9

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table provides information on our net sales by geographic area. Information on net sales by segment is in Note 3.
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
United States
$
188,031

 
$
185,225

 
$
360,045

 
$
366,863

China
62,115

 
61,878

 
121,408

 
126,089

Europe, Middle East, Africa, India
178,593

 
208,738

 
346,912

 
407,398

Asia Pacific, except China
80,301

 
84,183

 
162,830

 
166,689

Other foreign
54,377

 
58,928

 
108,838

 
121,158

Net sales
$
563,417

 
$
598,952

 
$
1,100,033

 
$
1,188,197



3. Segment Information
The tables below show our consolidated segment results. The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and services associated with Ethyl Corporation (Ethyl).
Net Sales by Segment
 
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Petroleum additives
 
 
 
 
 
 
 
 
     Lubricant additives
 
$
462,659

 
$
492,313

 
$
899,879

 
$
977,362

     Fuel additives
 
98,165

 
103,889

 
193,624

 
205,748

          Total
 
560,824

 
596,202

 
1,093,503

 
1,183,110

All other
 
2,593

 
2,750

 
6,530

 
5,087

Net sales
 
$
563,417

 
$
598,952

 
$
1,100,033

 
$
1,188,197


Segment Operating Profit
 
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Petroleum additives
 
$
102,992

 
$
71,530

 
$
190,855

 
$
155,670

All other
 
(342
)
 
406

 
169

 
329

Segment operating profit
 
102,650

 
71,936

 
191,024

 
155,999

Corporate, general, and administrative expenses
 
(4,275
)
 
(4,967
)
 
(9,369
)
 
(10,631
)
Interest and financing expenses, net
 
(7,741
)
 
(5,565
)
 
(15,753
)
 
(10,729
)
Other income (expense), net
 
6,057

 
8,161

 
11,597

 
16,237

Income before income tax expense
 
$
96,691

 
$
69,565

 
$
177,499

 
$
150,876


 

10

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


4.    Pension Plans and Other Postretirement Benefits
The table below shows cash contributions made during the six months ended June 30, 2019, as well as the remaining cash contributions we expect to make during the year ending December 31, 2019, for our domestic and foreign pension plans and domestic postretirement benefit plan.
(in thousands)
 
Actual Cash Contributions for Six Months Ended June 30, 2019
 
Expected Remaining Cash Contributions for Year Ending December 31, 2019
Domestic plans
 
 
 
 
Pension benefits
 
$
1,495

 
$
1,495

Postretirement benefits
 
571

 
571

Foreign plans
 
 
 
 
Pension benefits
 
2,803

 
2,564



The tables below present information on net periodic benefit cost (income) for our domestic and foreign pension plans and domestic postretirement benefit plan. The service cost component of net periodic benefit cost (income) is reflected in cost of goods sold; selling, general, and administrative expenses; or research, development, and testing expenses, to reflect where other compensation costs arising from services rendered by the pertinent employee are recorded on the Consolidated Statements of Income. The remaining components of net periodic benefit cost (income) are recorded in other income (expense), net on the Consolidated Statements of Income.
 
 
Domestic
 
 
Pension Benefits
 
Postretirement Benefits
 
 
Second Quarter Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
3,624

 
$
3,972

 
$
194

 
$
217

Interest cost
 
3,686

 
3,342

 
389

 
369

Expected return on plan assets
 
(8,657
)
 
(7,445
)
 
(244
)
 
(249
)
Amortization of prior service cost (credit)
 
(19
)
 
6

 
(757
)
 
(757
)
Amortization of actuarial net (gain) loss
 
854

 
1,341

 
0

 
0

Net periodic benefit cost (income)
 
$
(512
)
 
$
1,216

 
$
(418
)
 
$
(420
)
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
Pension Benefits
 
Postretirement Benefits
 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
7,247

 
$
7,944

 
$
388

 
$
433

Interest cost
 
7,371

 
6,685

 
778

 
739

Expected return on plan assets
 
(17,314
)
 
(14,890
)
 
(488
)
 
(498
)
Amortization of prior service cost (credit)
 
(38
)
 
13

 
(1,514
)
 
(1,514
)
Amortization of actuarial net (gain) loss
 
1,707

 
2,682

 
0

 
0

Net periodic benefit cost (income)
 
$
(1,027
)
 
$
2,434

 
$
(836
)
 
$
(840
)



11

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Foreign
 
 
Pension Benefits
 
 
Second Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
1,618

 
$
2,060

 
$
3,258

 
$
4,139

Interest cost
 
1,206

 
1,156

 
2,427

 
2,320

Expected return on plan assets
 
(2,327
)
 
(2,539
)
 
(4,680
)
 
(5,096
)
Amortization of prior service cost (credit)
 
(10
)
 
(21
)
 
(21
)
 
(42
)
Amortization of actuarial net (gain) loss
 
235

 
153

 
474

 
308

Net periodic benefit cost (income)
 
$
722

 
$
809

 
$
1,458

 
$
1,629



5.    Earnings Per Share
We had 22,536 shares of nonvested restricted stock at June 30, 2019 and 25,297 shares of nonvested restricted stock at June 30, 2018 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 yields 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.
 
 
Second Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands, except per-share amounts)
 
2019
 
2018
 
2019
 
2018
Earnings per share numerator:
 
 
 
 
 
 
 
 
Net income attributable to common shareholders before allocation of earnings to participating securities
 
$
74,174

 
$
52,885

 
$
136,379

 
$
113,450

Earnings allocated to participating securities
 
147

 
116

 
211

 
219

Net income attributable to common shareholders after allocation of earnings to participating securities
 
$
74,027

 
$
52,769

 
$
136,168

 
$
113,231

Earnings per share denominator:
 
 
 
 
 
 
 
 
Weighted-average number of shares of common stock outstanding - basic and diluted
 
11,166

 
11,647

 
11,166

 
11,705

Earnings per share - basic and diluted
 
$
6.63

 
$
4.53

 
$
12.20

 
$
9.67



6.
Inventories
 
 
June 30,
 
December 31,
(in thousands)
 
2019
 
2018
Finished goods and work-in-process
 
$
305,749

 
$
319,120

Raw materials
 
56,339

 
63,403

Stores, supplies, and other
 
14,393

 
13,818

 
 
$
376,481

 
$
396,341




12

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7.    Intangibles (Net of Amortization) and Goodwill

The net carrying amount of intangibles and goodwill was $134 million at June 30, 2019 and $136 million at December 31, 2018. The gross carrying amount and accumulated amortization of each type of intangible asset and goodwill are presented in the table below.
 
 
June 30, 2019
 
December 31, 2018
(in thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizing intangible assets
 
 
 
 
 
 
 
 
Formulas and technology
 
$
9,600

 
$
4,334

 
$
9,600

 
$
3,250

Contract
 
2,000

 
500

 
2,000

 
400

Customer bases
 
14,240

 
10,010

 
14,240

 
9,091

Goodwill
 
122,949

 
 
 
122,940

 
 
 
 
$
148,789

 
$
14,844

 
$
148,780

 
$
12,741


All of the intangibles relate to the petroleum additives segment. The change in the gross carrying amount between December 31, 2018 and June 30, 2019 is due to foreign currency fluctuation. There is no accumulated goodwill impairment.
Amortization expense was (in thousands):
Second quarter ended June 30, 2019
$
1,052

Six months ended June 30, 2019
2,103

Second quarter ended June 30, 2018
1,568

Six months ended June 30, 2018
4,474



Estimated amortization expense for the remainder of 2019, as well as estimated annual amortization expense related to our intangible assets for the next five years, is expected to be (in thousands):
2019
$
2,103

2020
2,907

2021
2,156

2022
1,423

2023
907

2024
390



We amortize the contract over 10 years; customer bases over 4 to 20 years; and formulas and technology over 3 to 6 years.

8.    Leases

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, "Leases (Topic 842)" (ASU 2016-02) using the modified retrospective transition method allowing us to apply the new standard at the adoption date and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transition method, the prior comparative period continues to be reported under the accounting standards in effect for that period.

We elected the package of practical expedients permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification of existing leases. In addition, we elected the hindsight practical expedient to determine the lease term for existing leases and also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. Except for the railcar lease class, we made an accounting policy election to adopt the short-term lease exception, which allows us to not recognize on the balance sheet those leases with terms of 12 months or less resulting in short-term lease payments being recognized in the consolidate

13

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


d statements of income on a straight-line basis over the lease term. We also elected a practical expedient to not separate lease and nonlease components in determining the right-of-use assets and lease liabilities for all lease classes.

Adoption of the new standard resulted in recognition of both right-of-use assets and lease liabilities of approximately $70 million as of January 1, 2019. As the right-of-use assets and lease liabilities were substantially the same at adoption, we did not record a cumulative effect adjustment to the opening balance of retained earnings.

We have both operating and finance leases with remaining terms ranging from less than one year to 52 years. Our leases are for land, real estate, railcars, vehicles, pipelines, plant equipment, and office equipment. We determine if an arrangement includes a lease at the inception of the agreement. The right-of-use asset and lease liability is determined at the lease commencement date and is based on the present value of estimated lease payments. Our lease agreements contain both fixed and variable lease payments. In some cases, variable lease payments are based on a rate or an index. Fixed lease payments, as well as variable lease payments which are based on a rate or index, are included in the determination of the right-of-use asset and lease liability. Variable lease payments that are not based on a rate or index are expensed when incurred. The present value of estimated lease payments is determined utilizing the rate implicit in the lease agreement, if that rate can be determined. If the implicit rate cannot be determined, the present value of estimated lease payments is determined utilizing our incremental borrowing rate. The incremental borrowing rate is determined at the lease commencement date and is developed utilizing a readily available market interest rate curve adjusted for our credit quality. Some of our leases include an option to renew that can extend the lease term. For those leases which are reasonably certain to be renewed, we included the renewal term in the lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The components of lease expense were as follows:
 
 
Second Quarter Ended June 30,
Six Months Ended June 30,
(in thousands)
 
2019
 
2019
Operating lease cost
 
$
4,299

 
$
8,528

Finance lease cost:
 
 
 
 
  Amortization of assets
 
636

 
1,269

  Interest on lease liabilities
 
94

 
192

Short-term lease cost
 
789

 
1,964

Variable lease cost
 
650

 
1,042

Total lease cost
 
$
6,468

 
$
12,995



Variable lease costs also include leases that do not have a right-of-use asset or lease liability, but are capitalized as part of inventory.


14

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Supplemental balance sheet information related to leases was as follows:
(in thousands)
Balance Sheet Classification
 
June 30,
2019
Operating leases:
 
 
 
Operating lease right-of-use assets
Operating lease right-of-use assets
 
$
55,739

 
 
 
 
Current liability
Operating lease liabilities
 
$
13,537

Noncurrent liability
Operating lease liabilities-noncurrent
 
42,157

  Total operating lease liabilities
 
 
$
55,694

 
 
 
 
Finance leases:
 
 
 
Finance lease right-of-use assets
Deferred charges and other assets
 
$
8,873

 
 
 
 
Current liability
Other current liabilities
 
$
2,537

Noncurrent liability
Other noncurrent liabilities
 
7,483

  Total finance lease liabilities
 
 
$
10,020


 
 
June 30,
2019
Weighted average remaining lease term (in years):
 
 
  Operating leases
 
14

  Finance leases
 
7

 
 
 
Weighted average incremental borrowing rate:
 
 
  Operating leases
 
4.07
%
  Finance leases
 
3.67
%


Supplemental cash flow information related to leases was as follows:
 
 
Six Months Ended June 30,
(in thousands)
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
  Operating cash flows from operating leases
 
$
8,321

  Operating cash flows from finance leases
 
192

  Financing cash flows from finance leases
 
1,233

 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
  Operating leases
 
$
5,884

  Finance leases
 
5,134




15

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Maturities of lease liabilities as of June 30, 2019 were as follows:
(in thousands)
 
Operating Leases
 
Finance Leases
2019 (remainder)
 
$
7,742

 
$
1,428

2020
 
13,993

 
2,855

2021
 
9,661

 
1,835

2022
 
7,122

 
804

2023
 
5,678

 
599

Thereafter
 
32,388

 
3,784

Total lease payments
 
76,584

 
11,305

Less: imputed interest
 
20,890

 
1,285

  Total lease obligations
 
$
55,694

 
$
10,020



Operating lease payments in the table above include approximately $17 million related to options to extend lease terms that are reasonably certain of being exercised. At June 30, 2019, we have commitments of approximately $17 million related to leases that have not yet commenced and are not included in the above table.

Future lease payments for all noncancelable operating leases as of December 31, 2018 were (in thousands):
2019
$
17,223

2020
15,035

2021
10,502

2022
7,957

2023
6,810

After 2023
24,490



9.    Long-term Debt
(in thousands)
 
June 30,
2019
 
December 31,
2018
Senior notes - 4.10% due 2022 (net of related deferred financing costs)
 
$
347,970

 
$
347,677

Senior notes - 3.78% due 2029
 
250,000

 
250,000

Revolving credit facility
 
80,833

 
168,129

Capital lease obligations
 
0

 
5,193

 
 
$
678,803

 
$
770,999


The outstanding 4.10% senior notes are unsecured, with an aggregate principal amount of $350 million and are registered under the Securities Act of 1933, as amended (Securities Act). The outstanding 3.78% senior notes are unsecured and were issued in a 2017 private placement with The Prudential Insurance Company of America and certain other purchasers. We were in compliance with all covenants under both issuances of the senior notes as of June 30, 2019 and December 31, 2018.
The revolving credit facility (the Credit Agreement) has a borrowing capacity of $850 million, a term of five years, and matures on September 22, 2022. The obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by NewMarket. The average interest rate for borrowings under the Credit Agreement was 3.3% during the first six months of 2019 and 3.0% during the full year of 2018. We were in compliance with all covenants under the Credit Agreement as of June 30, 2019 and December 31, 2018.

16

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The outstanding borrowings under the Credit Agreement amounted to $81 million at June 30, 2019 and $168 million at December 31, 2018. Outstanding letters of credit approximate to $3 million at both June 30, 2019 and December 31, 2018 resulting in the unused portion of the credit facility amounting to $766 million at June 30, 2019 and $679 million at December 31, 2018.
The capital lease obligations were related to the Singapore manufacturing facility and were reclassified to finance lease liabilities on the Consolidated Balance Sheets with the adoption of ASU 2016-02 on January 1, 2019. See Note 8.


10.    Commitments and Contingencies
Legal Matters
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 below.
While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows.
Environmental
We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities, or at third-party sites where we have been designated as a potentially responsible party (PRP). While we believe we are currently adequately accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact on our consolidated financial position, results of operations, and cash flows. Our total accruals for environmental remediation, dismantling, and decontamination were approximately $11 million at June 30, 2019 and $12 million at December 31, 2018. Of the total accrual, the current portion is included in accrued expenses and the noncurrent portion is included in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
Our more significant environmental sites include a former plant site in Louisiana (the Louisiana site) and a Houston, Texas plant site (the Texas site). Together, the amounts accrued on a discounted basis related to these sites represented approximately $8 million of the total accrual above at both June 30, 2019 and December 31, 2018, using discount rates ranging from 3% to 9% for both periods. The aggregate undiscounted amount for these sites was $10 million at June 30, 2019 and $11 million at December 31, 2018. Of the total accrued for these two sites, the amount related to remediation of groundwater and soil for the Louisiana site was $4 million at both June 30, 2019 and December 31, 2018. The amount related to remediation of groundwater and soil for the Texas site was $4 million at both June 30, 2019 and December 31, 2018.


17

NEWMARKET CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


11.    Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The balances of, and changes in, the components of accumulated other comprehensive loss, net of tax, consist of the following:
(in thousands)
 
Pension Plans
and Other Postretirement Benefits
 
Foreign Currency Translation Adjustments
 
Accumulated Other
Comprehensive (Loss) Income
Balance at December 31, 2017
 
$
(63,520
)
 
$
(82,474
)
 
$
(145,994
)
Other comprehensive income (loss) before reclassifications
 
0

 
(33
)
 
(33
)
Amounts reclassified from accumulated other comprehensive loss (a)
 
1,085

 
0

 
1,085

Other comprehensive income (loss)
 
1,085

 
(33
)
 
1,052

Balance at June 30, 2018
 
$
(62,435
)
 
$
(82,507
)
 
$
(144,942
)
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
(86,555
)
 
$
(94,761
)
 
$
(181,316
)
Other comprehensive income (loss) before reclassifications
 
0

 
580

 
580

Amounts reclassified from accumulated other comprehensive loss (a)
 
473

 
0

 
473

Other comprehensive income (loss)
 
473

 
580

 
1,053

Balance at June 30, 2019
 
$
(86,082
)
 
$
(94,181
)
 
$
(180,263
)


(a) The pension plan and other postretirement benefit components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income). See Note 4 in this Quarterly Report on Form 10-Q and Note 18 in our 2018 Annual Report for further information.

12.    Fair Value Measurements
The carrying amount of cash and cash equivalents in the Condensed Consolidated Balance Sheets, as well as the fair value, was $73 million at June 30, 2019 and $73 million at December 31, 2018. The fair value is categorized in Level 1 of the fair value hierarchy.
No material events occurred during the six months ended June 30, 2019 requiring adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.
Long-term debtWe record the carrying amount of our long-term debt at historical cost, less deferred financing costs related to the 4.10% senior notes. The estimated fair value of our long-term debt is shown in the table below and is based primarily on estimated current rates available to us for debt of the same remaining duration and adjusted for nonperformance risk and credit risk. The estimated fair value of our publicly-traded 4.10% senior notes included in long-term debt in the table below is based on the last quoted price closest to June 30, 2019. The fair value of our debt instruments is categorized as Level 2.
 
 
June 30, 2019
 
December 31, 2018
(in thousands)
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt (excluding capital lease obligations)