NEU

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, for NewMarket Corporation. On June 18, 2004, the company completed a transition to a holding company structure, with NewMarket becoming the parent of two operating subsidiaries: Afton Chemical Corporation (petroleum additives) and Ethyl Corporation (manufacturing and tetraethyl lead/TEL business). The company's common stock began trading on the NYSE under the symbol "NEU" on June 21, 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 23% in Q2 2004 and 24% for the six-month period compared to 2003, driven primarily by a 26% increase in petroleum additive shipments.
• Profitability: Operating profit rose 42% in Q2 and 78% for the six months ended June 30, 2004, compared to the same periods in 2003. This improvement was aided by favorable foreign currency impacts and higher volumes, partially offset by higher raw material costs.
• Segment Performance:
  • Petroleum Additives: Sales increased $39.3M in Q2. MMT (methylcyclopentadienyl manganese tricarbonyl) sales were negatively impacted by a suspension of use by Canadian customers pending a government review.
  • Tetraethyl Lead (TEL): Operating profit increased significantly due to higher volumes and improved pricing in marketing agreements, though the market is expected to decline long-term.
• Debt Reduction: Total debt decreased by $4.1 million since year-end 2003, reflecting a $53.8 million repayment on a term loan, partially offset by a $50 million draw on a new revolving credit facility.

Guidance, Outlook, and Risks

• Outlook: Management expects petroleum additive profits to face margin erosion in the second half of 2004 as raw material price escalation outpaces pricing improvements. TEL volumes are expected to continue declining globally, though margins may improve.
• Capital Expenditures: Estimated at approximately $15 million for 2004, funded by cash from operations.
• Debt Strategy: The company expects debt reduction of approximately $30 million for the year. A new $100 million revolving credit facility was established in June 2004, with $50 million outstanding and $26 million available (after letters of credit).
• Key Risks:
  • MMT Suspension: Substantial Canadian customers have suspended MMT use pending an independent third-party review sponsored by the Government of Canada.
  • Supply Chain: A key supplier (DSM Copolymer) plans to close a plant in mid-2005, requiring NewMarket to build $10–$15 million in inventory of viscosity index improvers.
  • Environmental/Legal: Accruals for environmental remediation stand at $22 million. The company is a defendant in a lead exposure lawsuit but believes it has strong defenses.
  • Accounting Changes: The company has deferred accounting for the Medicare Prescription Drug Act (FSP FAS 106-2) pending further analysis.

Investor Verification Checklist

• Verify the timeline and potential outcome of the Government of Canada's independent review of MMT and its impact on Canadian sales.
• Confirm the status of alternative supply contracts for viscosity index improvers following the DSM Copolymer plant closure in mid-2005.
• Monitor the company's ability to pass on raw material cost increases to customers to protect margins in the second half of 2004.
• Review the amortization schedule for the $25 million unamortized TEL marketing agreement costs and the $54.6 million in identifiable intangibles.
• Assess the impact of the new holding company structure on intercompany cash flows and dividend restrictions under the new credit facility covenants.