| NEWMARKET CORP ITEM 1A RISK FACTORS Our business is subject to many factors that could materially adversely affect our future performance and 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 |
| • Competition could adversely affect our operating results |
| We face intense competition in certain 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 produce |
| 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 |
| Competitive pressures can also result in the loss of major customers |
| Our inability to compete successfully could have a material adverse effect on our results of operations, financial condition, and cash flows in any given period |
| In addition, some of our competitors may have greater financial, technological, and other resources than we have |
| Some of our competitors may also 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 raw materials price increases may adversely affect our profit margins |
| We utilize a variety of raw materials in the manufacture of our products, including base oil, polyisobutylene, maleic anhydride, olefin copolymers, antioxidants, alcohols, and methacrylates |
| Our 12 ______________________________________________________________________ [34]Table of Contents profitability is sensitive to changes in the costs of these materials caused by changes in supply, demand or other market conditions, over which we have little or no control |
| Political and economic conditions in the Middle East and Latin America have caused and may continue to cause 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 increase in the cost of our raw materials |
| We cannot assure you 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 |
| • Availability of raw materials and transportation systems could have a material adverse effect on our operations |
| The chemical industry and transportation industry are in a situation where supply and demand is in balance |
| Any significant disruption in supply could affect our ability to obtain raw materials or transportation systems |
| This could have a material adverse effect on our operations |
| • Our reliance on a small number of significant customers may have a material adverse effect on our results of operations |
| Our principal customers are major multinational oil companies |
| The oil industry is characterized by concentration of a few large participants as a result of recent consolidation |
| Net sales for that period to BP plc and its affiliates amounted to dlra112 million (10prca of total net sales), and net sales to Royal Dutch Shell plc and its affiliates amounted to dlra143 million (13prca of total net sales) |
| The loss of either of these customers, or a material reduction in purchases from either of them, or from any other large or significant customer, could have a material adverse effect on our results of operations, financial condition, and cash flow |
| • Our customers are concentrated in the lubricant and fuel industries and, as a result, our reliance on that industry is significant |
| Most of our customers are primarily engaged in the fuel and lubricant industries |
| 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 and purchases by our customers |
| • We may be unable to respond effectively to technological changes in our industry |
| Our future business success will depend upon our ability to maintain and enhance our technological capabilities, develop and market products and applications that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis |
| Our industry is characterized by frequent changes in industry performance standards, which affect the amount and timing of our research and development costs and other technology-related costs |
| Further, technological changes in some or all of our customers’ products or processes may make our products obsolete |
| Any inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our results of operations, financial condition, and cash flow in any given period |
| • Our TEL business has declined and will continue to decline |
| Historically, TEL, an octane enhancer in leaded gasoline used to improve ignition qualities and operating performance of fuel, has been a material component of our product line |
| However, during the 1970s, the 13 ______________________________________________________________________ [35]Table of Contents implementation of the Federal Clean Air Act led to the use of catalytic converters that are deemed no longer compatible with leaded gasoline, and unleaded gasoline became the fuel standard in the United States with other countries following |
| We expect that the market for TEL will continue to decline going forward, and may decline with unpredictable volatility and severity |
| • Our TEL results would be adversely affected if Octel did not comply with the terms of the marketing agreements |
| Results of our TEL segment include the operating profit contribution from our marketing agreements with Octel, which is now the only manufacturer of TEL worldwide |
| Under our marketing agreement with Octel, we receive 32prca of the net proceeds from the sale of TEL by Octel in all regions of the world, except North America, as well as certain TEL operations not included in the marketing agreements |
| As a result, our TEL results would be adversely affected if Octel did not comply with the terms of the marketing agreements |
| • Several of our products are produced solely at one facility, and a significant disruption or disaster at such a facility could have a material adverse effect on our results of operations |
| Several of the products we produce or sell are produced only in one location |
| We are dependent upon the continued safe operation of those production facilities |
| Those production facilities are subject to various hazards associated with the manufacture, handling, storage, and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled downtime, and environmental hazards |
| Some of our products involve the manufacture and handling of a variety of reactive, explosive and flammable materials |
| Many of these hazards could cause a disruption in the production of our products |
| We cannot assure you that these facilities will not experience these types of hazards and disruptions in the future or that these incidents will not result in production delays or otherwise have an adverse effect on our results of operations, financial condition or cash flows in any given period |
| • We face risks related to our foreign operations that may negatively affect our business |
| In 2005, net sales to customers outside North America accounted for approximately 54prca of total 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 economic instability in the Middle East, Asia Pacific, and Latin America |
| Our international operations are subject to international business risks, including unsettled political conditions, expropriation, import and export restrictions, increases in royalties, exchange controls, national and regional labor strikes, taxes, government royalties, inflationary economies and 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 |
| • We face risks related to our foreign operations which may adversely affect our results of operations |
| We conduct our business in the local currency of most of the countries in which we operate |
| The financial condition and results of operations of each of our foreign operating subsidiaries are reported in the relevant local currency and then translated to US dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements |
| Changes in exchange rates between these foreign 14 ______________________________________________________________________ [36]Table of Contents currencies and the US dollar will affect the recorded levels of our assets and liabilities as foreign assets and liabilities that are translated into US dollars for presentation in our financial statements as well as our net sales, cost of goods sold, 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, and Canadian dollars |
| Exchange rates between these currencies and US dollars have fluctuated significantly in recent years and may do so in the future |
| • Our failure to protect our intellectual property rights 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 |
| We rely on a combination of patent, trade secret, trademark and copyright law as well as judicial enforcement to protect such technologies |
| We currently own approximately 1cmam000 issued US and foreign patents, with a significant number of additional patents pending |
| In addition, we have acquired the rights under patents and inventions of others through licenses |
| We also have several hundred trademark registrations throughout the world for our marks, including Ethyl^®, MMT^®, HiTEC^®, and GREENBURN^®, as well as pending trademark applications, including NewMarket^™ and Afton Chemical^™ |
| We cannot assure you that the measures taken by us to protect these assets and rights will provide meaningful protection for our trade secrets or 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 |
| We cannot assure you that any of our intellectual property rights will not be challenged, invalidated, circumvented, or rendered unenforceable |
| Furthermore, we cannot assure you 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 |
| The failure of our patents or other measures to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods, and compounds could have an adverse effect on our results of operations, financial condition, and cash flow |
| We could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies |
| If we are 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, to redesign our products partially or completely, to pay to use the technology of others or to 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 |
| • Our business is subject to government regulation, and could be adversely affected by 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 facilities |
| We are also subject to ongoing reviews of our products, manufacturing processes, and facilities by governmental authorities |
| 15 ______________________________________________________________________ [37]Table of Contents In order to obtain regulatory approval of certain new products, we must, among other things, demonstrate to the relevant authority that the product is safe and effective for its intended uses and that we are capable of manufacturing the product in accordance with current regulations |
| The process of seeking approvals can be costly, time consuming, and subject to unanticipated and significant delays |
| There can be no assurance that approvals will be granted to us on a timely basis, or at all |
| 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 net sales from those products |
| New laws and 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, any of which could have an adverse effect on our results of operations, financial condition, and cash flow |
| • Political, economic and regulatory factors concerning one of our primary products, MMT, could adversely affect our sales of MMT The EPA studied MMT and determined that it does not cause or contribute to the failure of vehicle emission systems |
| The Canadian government has made similar findings |
| However, the EPA is requiring additional testing to fill some data gaps, including potential risks to public health, and a change in current determinations could have a material adverse effect on our results of operations |
| In addition, certain industry groups are urging greater regulation of all metal-based gasoline additives, including MMT In 2002, AAM issued a fleet test report on MMT based on tests conducted by the AAM, the Association of International Automobile Manufacturers, and the Canadian Vehicle Manufacturers’ Association |
| The report alleges that MMT significantly raises vehicle emissions, increases fuel emissions, increases fuel consumption, and impairs the proper operation of vehicle emission control systems |
| In December 2003, the government of Canada released its “Proposed Framework for an Independent Third-Party Review of New Information on the Effects of MMT on Vehicle Emissions |
| ” In its proposal, the Canadian government provided no timetable for the commencement or completion of the review |
| Substantially all of our customers in Canada have suspended the use of MMT, pending the results of the government of Canada-sponsored independent third-party review |
| To date, the government of Canada has not initiated the review |
| We expect that the European Union will also review all metal-based petroleum additives, including MMT, for their impact on pollution abatement technology |
| Increased government regulation of MMT if it occurs or additional studies evaluating MMT, even if government regulation does not occur, could have a material adverse effect on our sales of that product |
| • 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 |