What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-16 · 108 added, 123 removed, 267 unchanged (46% of the section changed)

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failure to protect our intellectual property rights;

sudden or sharp raw material price increases;

sudden, sharp, or prolonged raw material price increases;

competition from other manufacturers;

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limitation of our insurance coverage;

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;

our inability to realize expected benefits from investment in our infrastructure or from future acquisitions, or our inability to successfully integrate recent or future acquisitions into our business;

and the underperformance of our pension assets resulting in additional cash contributions to our pension plans.

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In light of these risks and uncertainties, any forward-looking statement made in this discussion or elsewhere, might not occur.

When comparing the results of the petroleum additives segment for 2020 with 2019, both net sales and operating profit decreased primarily as a result of the economic disruption from the COVID-19 pandemic.

Net sales for 2020 decreased 8.0% primarily due to lower lubricant additives and fuel additives product shipments, as well as decreased selling prices.

Petroleum additives operating profit for 2020 was 7.2% lower reflecting lower product shipments and changes in selling prices, as well as higher conversion costs, partially offset by improved raw material costs.

When comparing the results of the petroleum additives segment for 2021 with 2020, net sales increased 17.1% primarily due to higher lubricant additives product shipments, higher selling prices, and a favorable foreign currency impact.

Petroleum additives operating profit was 15.7% lower when comparing 2021 with 2020 reflecting significantly higher raw material costs partially offset by improved product shipments and higher selling prices.

In addition to rising raw material costs, we have experienced rising energy costs, transportation network issues, and other costs associated with the continuing global supply chain disruptions affecting supply and distribution.

While we have made some progress in adjusting our selling prices to address these higher costs, our costs have continued to rise throughout the year outpacing our ability to adjust selling prices sufficiently to offset the cost increases.

During the year, we repurchased 566,671 shares of our common stock for a total of $196 million.

Our operations generate cash that is in excess of the needs of the business.

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Our investments continue to be in organizational talent, technology development and processes, and global infrastructure, consisting of technical centers, production capability, and geographic expansion.

IMPACT OF THE COVID-19 PANDEMIC AND CURRENT ECONOMIC ENVIRONMENT

Petroleum additives operating results for 2020 have been marked by economic uncertainty resulting from the ongoing effects of the COVID-19 pandemic and the related restrictions on the movement of people, goods and services.

we have continued to operate throughout the year in each of our regions, we have at various times experienced significant changes in some of the key drivers that affect the performance of our business.

During the second quarter of 2020, government and business shutdowns in North America and Europe led to a precipitous drop in vehicle miles driven and auto production, with gasoline consumption in the United States dropping to its lowest point in over 50 years.

With less travel and fewer miles driven, combined with automobile plant closures, global demand for our products declined substantially, except in our Asia Pacific region where demand remained relatively stable throughout the year.

As restrictions eased and economies reopened in the second half of 2020, global production of automobiles began to rebound and gasoline consumption and miles driven showed steady improvement in most countries, including the United States.

Late in the fourth quarter, renewed restrictions on travel and work in certain countries had a negative effect on our business.

The pace and stability of improvement in demand for our products will continue to depend heavily on economic recovery and the rate at which government restrictions are lifted and remain lifted.

With only a very few government-ordered, short-term exceptions, all of our locations around the world, including our manufacturing and research and development facilities, have continued to operate safely and without interruption during the pandemic, and we expect them to continue to do so.

Raw material sourcing has not been significantly impacted and we do not expect that to change over the coming months.

The transportation industry continues to operate and our products are currently being delivered to our customers.

IMPACT OF THE CURRENT ECONOMIC ENVIRONMENT AND THE COVID-19 PANDEMIC

The current economic environment in which we operate is characterized by steadily rising costs, including raw material costs, limitations on certain supply availability, and a challenging supply chain network and transportation system.

Because of our active business continuity process and global network, we have substantially managed through these factors during 2021 and have delivered product to our customers.

We do not currently expect the supply chain network disruptions to be long-term in nature, but we cannot predict how the current economic environment may evolve over the coming months or how long the supply chain network disruptions may last.

We will continue working with our customers to deliver product, but at the same time, we also expect to be challenged by these ongoing economic factors as we manage our business in 2022.

In addition, but to a lesser extent than during 2020, petroleum additives operating results for 2021 include an unfavorable impact from the economic uncertainty resulting from the ongoing effects of the COVID-19 pandemic and the related restrictions on the movement of people, goods, and services.

The pace and stability of improvement in demand for our products will continue to depend heavily on economic recovery.

All of our locations around the world, including our manufacturing and research and development facilities, have continued to operate safely and without interruption during the pandemic, with only a very few government-ordered, short-term exceptions, and we expect them to continue to do so.

Our financial position remains strong.

We have sufficient access to additional capital if needed, including our new $900 million revolving credit facility we entered into in March 2020, and we do not anticipate any issues with meeting the covenants in our debt agreements.

We have sufficient access to capital, if needed, and do not anticipate any issues with meeting the covenants for all our debt agreements.

Our major capital projects are continuing to progress substantially as planned.

The chemical industry and our products are recognized as essential for the transportation of goods and services.

As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.

The chemical industry and our products are recognized as essential for transportation of goods and services.

Our business continuity planning process focuses our efforts on managing through this challenging time and helping our customers do the same.

As we are a global company and can leverage the knowledge and experience of our personnel in facilities across the world, we do not expect to experience negative impacts related to short-term travel and border restrictions.

RESULTS OF OPERATIONS

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The discussion and analysis of our results of operations for 2020 compared to 2019 is available in Item 7 of our 2020 Annual Report on Form 10-K.

Our consolidated net sales for 2020 amounted to $2.0 billion, a decrease of $179 million, or 8.2% from 2019.

Our consolidated net sales for 2021 amounted to $2.4 billion, an increase of $345 million, or 17.2% from 2020.

No single customer accounted for 10% or more of our total net sales in 2021, 2020, or 2019.

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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 about 25% and Latin America represents the remaining amount.

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 represents around 35% of our petroleum additives net sales, while EMEAI contributes about 30%, Asia Pacific about 25% and Latin America the remaining amount.

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.

Petroleum additives net sales for 2020 of $2.0 billion were approximately 8.0% lower than 2019 levels.

The decrease was across all regions except the Latin America region, which was substantially even with 2019 levels.

The North America region represented nearly 50% of the petroleum additives decrease in net sales, while the Asia Pacific and EMEAI regions represented about 25% each.

The decrease in petroleum additives net sales was predominantly the result of the economic disruption due to the COVID-19 pandemic, including lower demand for petroleum additives products reflecting the restrictions across the world on the movement of people, goods, and services.

The approximate components of the petroleum additives decrease in net sales of $174 million when comparing 2020 to 2019 are shown below in millions.

Petroleum additives net sales for 2021 of $2.3 billion were approximately 17.1% higher than 2020 levels.

The increase was across all regions.

The North America region represented approximately 40% of the petroleum additives increase in net sales, the Asia Pacific region represented about 26%, EMEAI represented approximately 16%, and the Latin America region nearly 18% of the increase.

While 2021 results continue to include some economic impact of the COVID-19 pandemic, 2020 includes a more significant impact, reflecting lower demand for petroleum additives products due to more restrictions across the world on the movement of people, goods, and services.

The approximate components of the petroleum additives increase in net sales of $342 million when comparing 2021 to 2020 are shown below in millions.

Net sales for year ended December 31, 2020 $ 2,002

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Net sales for year ended December 31, 2021 $ 2,344

Petroleum additives shipments accounted for a $92 million decrease in net sales between 2019 and 2020.

Lower selling prices, partially offset by a favorable foreign currency impact, resulted in a decrease in net sales of $82 million when comparing the two years.

The United States Dollar weakened against the Euro when comparing 2020 and 2019, which resulted in most of the favorable foreign currency impact to net sales in 2020.

On a worldwide basis, the volume of product shipments for petroleum additives decreased 5.2% when comparing 2020 with 2019.

The decreases in shipments were in both lubricant additives and fuel additives.

Most of the decrease in lubricant additives was in the Asia Pacific region, with small decreases in the North America and EMEAI regions offset by a small increase in the Latin America region.

The North America and EMEAI regions represented most of the decrease in fuel additive product shipments.

We believe the decrease in product shipments during 2020 substantially resulted from the impact of the COVID-19 pandemic.

Petroleum additives shipments accounted for a $220 million increase in net sales between 2020 and 2021.

Higher selling prices along with a favorable foreign currency impact contributed $122 million of the increase in net sales between 2020 and 2021.

The favorable foreign currency impact resulted from the United States Dollar weakening against most of the major currencies in which we transact with the majority of the favorable impact arising from net sales denominated in the Euro and the Chinese Renminbi when comparing 2021 and 2020.

On a worldwide basis, the volume of product shipments for petroleum additives increased 11.7% when comparing 2021 with 2020.

The increase in shipments was predominantly in lubricant additives which had increases across all regions.

Shipments of fuel additives products increased across all regions except for the EMEAI region resulting in total fuel additives shipments being substantially flat.

Product shipments during 2020 were negatively impacted due to the COVID-19 pandemic.

All Other - The “All other” category includes the operations of the antiknock compounds business, and certain contracted manufacturing and services performed by Ethyl.

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Depreciation on segment property, plant, and equipment, as well as amortization of segment intangible assets and lease right-of-use assets, is included in segment operating profit.

The table below reports segment operating profit for the last three years.

The following table reports segment operating profit for the last three years.

A reconciliation of segment operating profit to income before income tax expense is in Note 4.

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All other $ (1) $ 0 $ (2)

Petroleum Additives - Petroleum additives segment operating profit decreased $26 million when comparing 2020 to 2019.

Both periods included the impact of the same factors that affected gross profit (see discussion below) including an unfavorable foreign currency translation impact.

The operating profit margin was 16.7% in 2020 and 16.5% in 2019.

Despite the economic disruption from the COVID-19 pandemic during 2020 resulting in lower product shipment volumes and reduced net sales compared to 2019, the operating profit margin is slightly improved from 2019 levels.

Operating profit margins remain a priority, and while they will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry are unchanged.

Petroleum additives gross profit decreased $37 million when comparing 2020 and 2019.

Petroleum Additives - Petroleum additives segment operating profit decreased $52 million and gross profit decreased $45 million when comparing 2021 to 2020.

Cost of goods sold as a percentage of net sales was 76.7% in 2021 and 70.4% in 2020.

When comparing 2020 and 2019, the decrease in gross profit resulted from unfavorable impacts from product shipments and lower selling prices (both as discussed in the Net Sales section above), as well as unfavorable conversion costs, which together contributed over 100% of the change between 2020 and 2019.

These unfavorable factors were partially offset by lower raw material costs.

Petroleum additives selling, general, and administrative expenses (SG&A) were $7 million, or 5.7% lower in 2020 compared to 2019.

The operating profit margin was 12.0% in 2021 and 16.7% in 2020.

Both operating profit and gross profit for 2021 and 2020 included the impact of improved selling prices and product shipments as discussed above, as well as an unfavorable foreign currency translation impact.

Throughout 2021, our operating margins have continued to decline mainly due to the prolonged period of escalating raw material costs.

While we have made some progress in adjusting our selling prices to offset the effects of the higher costs, we have not been able to adjust selling prices sufficiently to offset the cost increases.

We continue to experience a lag between when price increases go into effect and when margin recovery begins.

This lag will continue until raw material prices stabilize.

There have also been significant increases in many elements of our operating costs including utilities, logistics, insurance, and third-party manufacturing services.

In addition, the worldwide supply chain disruptions continue to negatively impact our business.

In this uncertain economic environment of continuing increasing costs, operating profit margins remain a priority for us.

Margin recovery and cost control will be priorities throughout 2022 with the goal of returning to our historical profit margin range.

While operating margins will fluctuate from quarter to quarter due to multiple factors, we believe the fundamentals of our business and industry as a whole are unchanged.

Petroleum additives selling, general, and administrative expenses (SG&A) were $3 million, or 2.8% higher in 2021 compared to 2020.

SG&A as a percentage of net sales was 5.2% in 2021 and 5.9% in 2020.

Our SG&A costs are primarily personnel-related and include salaries, benefits and other costs associated with our workforce, including travel-related expenses.

While personnel-related costs fluctuate from year to year, there were no significant changes in the drivers of these costs when comparing 2020 and 2019 other than reduced travel-related expenses due to the impact of the COVID-19 pandemic.

Our investment in petroleum additives research, development, and testing (R&D) decreased approximately $4 million when comparing 2020 with 2019.

While personnel-related costs fluctuate from year to year, there were no significant changes in the drivers of these costs when comparing 2021 and 2020.

Our investment in petroleum additives research, development, and testing (R&D) increased approximately $4 million when comparing 2021 with 2020.

As a percentage of net sales, R&D was 6.1% in 2021 and 7.0% in 2020.

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Interest and financing expenses were $34 million in 2021 and $26 million in 2020.

The decrease in interest and financing expense between 2020 and 2019 resulted primarily from a lower average interest rate during 2020.

The increase in interest and financing expense between 2021 and 2020 resulted primarily from higher average outstanding debt in 2021 than in 2020.

The average interest rate was slightly lower in 2021 than 2020, which was mostly offset by higher amortization and fees due to the issuance of our 2.70% senior notes.

Other Income (Expense), Net

Other income (expense), net was income of $24 million in 2021 and $46 million in 2020.

The amount for 2020 included a gain of $16 million related to the sale of a non-operating parcel of real estate.

The amounts for both periods also included the components of net periodic benefit cost (income), except for service costs.

The amounts for both periods included the components of net periodic benefit cost (income), except for service costs, from defined benefit pension and postretirement plans.

See Note 18 for further information on total periodic benefit cost (income).

The 2021 amount included a loss on marketable securities of $7 million, while 2020 included a gain of $16 million related to the sale of a non-operating parcel of real estate.

Income Tax Expense

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The effective tax rate was 22.9% in 2021 and 18.3% in 2020.

When comparing 2020 and 2019, income tax decreased $16 million due to the lower effective tax rate.

The decrease in the effective tax rate was primarily the result of finalizing prior year tax filings and releasing certain tax reserves.

When comparing 2021 and 2020, income tax decreased $15 million due to the lower income before income taxes offset by a higher effective tax rate, which resulted in an increase of $11 million in income tax expense.

The increase in the effective tax rate was primarily the result of the impact from our foreign operations, along with the non-recurring favorable adjustments in 2020 related to prior year tax filings and releasing certain tax reserves.

CASH FLOWS DISCUSSION

We generated cash from operating activities of $165 million in 2021 and $284 million in 2020.

During 2021, we used the $165 million cash generated from operations along with proceeds of $395 million from the issuance of 2.70% senior notes, $148 million of borrowings under the revolving credit facility, and cash on hand of $42 million to invest $382 million in marketable securities, repurchase $196 million of our common stock, pay $86 million of dividends on our common stock, and fund capital expenditures of $79 million.

Cash flows from operating activities included cash contributions of $10 million to our pension and postretirement plans, as well as a decrease of $116 million from higher working capital requirements, which is further discussed below in the Working Capital section.

During 2020, we used the $284 million of cash generated from operations along with $19 million of cash on hand to repurchase $101 million of our common stock, pay $83 million of dividends on our common stock, repay $45 million on our revolving credit facility, and fund $93 million for capital expenditures.

Cash flows from operating activities included a decrease of $54 million from higher working capital requirements, cash contributions of $11 million to our pension and postretirement plans, and a gain of $16 million related to the sale of a parcel of non-operating real estate.

During 2019, we used the $337 million cash generated from operations to repay $123 million on our revolving credit facility, pay $82 million of dividends on our common stock, and fund capital expenditures of $59 million.

Cash flows from operating activities included an increase of $5 million from lower working capital requirements, as well as cash contributions of $10 million to our pension and postretirement plans.

FINANCIAL POSITION AND LIQUIDITY

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A full discussion is in Note 14.

2.70% Senior Notes - On March 18, 2021, we issued $400 million aggregate principal amount of 2.70% senior notes due 2031 at an issue price of 98.763%.

We intend to use the net proceeds from the offering for the repayment or redemption of our 4.10% senior notes and for general corporate purposes.

We incurred financing costs in 2021 of approximately $4 million related to the 2.70% senior notes, which are being amortized over the term of the notes.

We were in compliance with all covenants under the indenture governing the 2.70% senior notes as of December 31, 2021.

4.10% Senior Notes - At both December 31, 2021 and December 31, 2020, we had $350 million of 4.10% senior notes due 2022 with interest payable semiannually and which are senior unsecured obligations.

We were in compliance with all covenants under the indenture governing the 4.10% senior notes as of December 31, 2021 and December 31, 2020.

In February 2022, we announced the redemption of the entire outstanding principal amount of the 4.10% senior notes.

See Note 24 for further information on the redemption.

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.

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The revolving credit facility is available on a revolving basis until March 5, 2025.

There were no outstanding borrowings under the revolving credit facility at December 31, 2020 compared to $45 million in outstanding borrowings at December 31, 2019 under our former facility.

Outstanding letters of credit amounted to $2 million at December 31, 2020 and $3 million at December 31, 2019 resulting in the unused portion of the applicable credit facility amounting to $898 million at December 31, 2020 and $803 million at December 31, 2019.

There was $148 million outstanding borrowings under the revolving credit facility at December 31, 2021 compared to no outstanding borrowings at December 31, 2020.

Outstanding letters of credit amounted to $2 million at both December 31, 2021 and December 31, 2020 resulting in the unused portion of the applicable credit facility amounting to $750 million at December 31, 2021 and $898 million at December 31, 2020.

The average interest rate for borrowings under the credit facilities was 1.6% during 2021 and 1.4% during 2020.

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has access to a short-term line of credit of 10 million Euro.

There was no activity on these lines of credit in 2020, nor was there an outstanding balance on any of these lines of credit at December 31, 2019.

We had long-term debt of $599 million at December 31, 2020 and $643 million at December 31, 2019.

The decrease in debt resulted from repaying borrowings outstanding under the revolving credit facility during 2020.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt decreased from 48.5% at the end of 2019 to 44.1% at the end of 2020.

The change in the percentage was primarily the result of the decrease in long-term debt, as well as the increase in shareholders' equity.

The change in shareholders’ equity primarily reflects our earnings and the impact of the foreign currency translation adjustment offset by stock repurchases, dividend payments, and a decrease in the funded position of our defined benefit plans.

There was no activity on these lines of credit in 2021 or 2020.

We had long-term debt of $1.1 billion at December 31, 2021 and $599 million at December 31, 2020.

The increase in debt resulted from the issuance of the $400 million 2.70% senior notes, as well as additional borrowings outstanding under the revolving credit facility during 2021.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt increased from 44.1% at the end of 2020 to 59.9% at the end of 2021.

The change in the percentage was primarily the result of the increase in long-term debt, partially offset by a small increase in shareholders' equity.

The change in shareholders’ equity primarily reflects our earnings and an increase in the funded position of our defined benefit plans mostly offset by stock repurchases, dividend payments, and the impact of the foreign currency translation adjustment.

Normally, we repay any outstanding long-term debt with cash from operations or refinancing activities.

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Our working capital at December 31, 2020 on the same basis was $586 million, resulting in a current ratio of 2.87 to 1.

Other than the decrease in cash and cash equivalents, the most significant changes in working capital since December 31, 2019 resulted from an increase in inventory, which was partially offset by an increase in accounts payable.

The increase in inventories was primarily due to a reduction in an inventory reserve, as well as planning for first quarter 2021 sales forecasts.

The increase in accounts payable reflected normal fluctuations across the regions.

The most significant change in working capital since December 31, 2020 resulted from the investment of the proceeds from the issuance of the 2.70% senior notes in marketable securities, the impact of which was mostly offset by our 4.10% senior notes becoming payable within 12 months.

In addition to these items, cash and cash equivalents decreased as outlined in the cash flows discussion above, while accounts receivable, inventories, and accounts payable all increased.

Trade accounts receivable balances increased when compared to December 31, 2020 resulting primarily from higher shipment volumes in 2021 along with higher selling prices this year.

Income and other tax receivables also increased reflecting overpayment of estimated income taxes in the fourth quarter of 2021, as well as higher balances of value added taxes for which we expect to be reimbursed.

The increase in inventories was primarily related to higher production of products in certain regions, along with increased costs across all regions.

The increase in accounts payable reflected higher costs, including raw material costs, as well as higher inventory levels in some regions.

Capital Expenditures

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We currently estimate capital expenditures in 2022 will be in the range of $75 million to $85 million as we anticipate spending on several improvements to our manufacturing and R&D infrastructure around the world.

We expect to continue to finance capital spending through cash on hand and cash provided from operations, together with borrowing available under our $900 million revolving credit facility.

We expect to continue to finance capital spending through cash provided from operations, as well as with borrowing available under our $900 million revolving credit facility.

Environmental Expenses

We spent approximately $29 million in both 2020 and in 2019 for ongoing environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures.

We spent approximately $35 million in 2021 and $29 million in 2020 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.

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The more material of these include debt-related obligations, lease obligations, purchase commitments, including those for property, plant, and equipment, contributions to pension and postretirement benefit plans, and environmental dismantling and decontamination.

The debt-related contractual obligations include both principle payments on outstanding long-term debt and the related interest payments.

The maturity dates and interest rates, as well as information on the repayment of the principle on our long-term debt is detailed above in the Debt section, as well as in Note 13.

At December 31, 2020, all of our long-term debt was at fixed rates.

Interest is paid semi-annually on both of our fixed rate long-term debt agreements.

Note 16 provides information by year on our lease obligations which have commenced.

We also have obligations for leases that have not yet commenced of $5 million in 2021, $3 million in 2022, $3 million in 2023, $2 million in 2024, $2 million in 2025, and $10 million thereafter.

Note 17 includes information on contributions to pension and postretirement benefit plans.

Benefit payments under these plans are included in Note 17 are predominantly paid from assets held in trust.

Further information on purchase commitments, including those for purchases of property, plant, and equipment are in Note 20.

The debt-related contractual obligations include both principal payments on outstanding long-term debt and the related interest payments.

The maturity dates and interest rates, as well as information on the repayment of the principal on our long-term debt is detailed above in the Debt section, as well as in Note 14.

At December 31, 2021, all of our long-term debt was at fixed rates, except for the revolving credit facility.

Interest is paid semi-annually on our fixed rate long-term debt agreements.

As detailed in Note 14, our revolving credit facility currently utilizes LIBOR in establishing certain interest rates on the facility.

Interest rates determined based on LIBOR are being discontinued by June 2023 and replaced with a yet to be determined rate.

While we do expect some impact to interest expense, we do not expect a significant impact to our financial results because of the elimination of LIBOR.

Note 17 provides information by year on our lease obligations which have commenced, as well as lease commitments which have not yet commenced.

Note 18 includes information on contributions to pension and postretirement benefit plans, as well as benefit payments to participants.

Benefit payments under these plans are predominantly paid from assets held in trust.

Further information on purchase commitments, including those for purchases of property, plant, and equipment is in Note 21.

The annual operating expenses and capital expenditures associated with compliance with environmental, health, and safety regulations are included in Item 1, Governmental and Environmental Regulations.

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At December 31, 2021, these costs were estimated at $1 million in each of 2022 through 2026, and $9 million thereafter.

We expect that cash from operations, together with borrowing available under our credit facilities, will continue to be sufficient for our operating needs and planned capital expenditures for both a current and long-term horizon.

The table below shows our contractual obligations at December 31, 2020 by year due.

Payments Due by Period

(in millions) Total Less than

Years More than

Debt obligations (a) $ 600 $ 0 $ 350 $ 50 $ 200

Interest payable on long-term debt 85 24 33 17 11

Letters of credit (b) 2 0 0 2 0

Finance lease obligations (c) 14 2 3 2 7

Operating lease obligations (c) 81 15 22 11 33

Leases not yet commenced 25 5 6 4 10

Property, plant, and equipment purchase obligations 38 38 0 0 0

Purchase obligations (d) 361 151 193 5 12

Other long-term liabilities (e) 28 13 2 5 8

Reserves for uncertain tax positions 7 1 2 4 0

Total $ 1,241 $ 249 $ 611 $ 100 $ 281

(a) Amounts represent contractual payments due on the 4.10% senior notes and the Prudential senior unsecured notes as of December 31, 2020.

See Note 13 for more information on long-term debt obligations.

(b) We intend to renew letters of credit when necessary as they mature;

therefore, the maturity date is the same as the revolving credit facility under which the letters of credit are issued.

(c) Amounts represent the undiscounted obligation for lease payments for leases having an initial lease term of at least one year.

(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.

Pension and Postretirement Benefit Plans

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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.

While 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 reduce the expected long-term rate of return for our U.S.

pension plans from 8.5% to 8.0% at December 31, 2020.

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 8.0% at December 31, 2021.

An actuarial gain on the assets occurred during both 2021 and 2020 as the actual investment return for all of our U.S.

pension plans exceeded the expected return by approximately $43 million in 2020 and $75 million in 2019.

qualified pension plans exceeded the expected return by approximately $83 million in 2021 and $43 million in 2020.

Investment gains and losses are recognized in earnings on an amortized basis over a period of 5 years.

The amortization of the actuarial net loss is expected to be approximately $6 million in 2021 resulting primarily from the actuarial loss on the plan liabilities which has only partially been offset by the investment gains on plan assets.

The amortization of the actuarial net loss is expected to be approximately $2 million in 2022 resulting primarily from the actuarial loss on plan liabilities which has only partially been offset by the investment gains on plan assets.

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.

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Similarly, a 100 basis point increase in the expected rate of return to 9.0% for pension assets and 5.0% for postretirement benefit assets (while holding other assumptions constant) would reduce forecasted 2022 pension and postretirement expense by $6 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.

cash flows of each of our retirement plans.

The discount rate is developed based on the hypothetical portfolio on the last day of December.

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Liquidity — Cash 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 to the U.S.

While we do not expect to make a cash contribution to our U.S.

qualified pension plans, we expect our aggregate cash contributions to the U.S.

pension plans will be approximately $3 million in 2022.

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In determining the impact of the U.K.

pension plans on our financial statements, we utilize the S3P (Light) mortality tables and allow for future projected improvements in life expectancy in line with the CMI 2019 model (with the core smoothing parameter and an initial addition to mortality improvements of 0.4% per year) with a long-term rate of improvement of 1% per year based on the membership of the plan.

pension plans on our financial statements, we utilize the S3P (Light) mortality tables and allow for future projected improvements in life expectancy in line with the CMI 2020 model with the core smoothing parameter, an initial addition to mortality improvements of 0.3% per year, and a 2020 experience weighting of 20% with a long-term rate of improvement of 1% per year based on the membership of the plan.

Investment Return Assumptions and Asset Allocation — We periodically review our assumptions for the long-term expected return on the U.K.

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Investment gains and losses are recognized in earnings on an amortized basis over a period of years.

The amortization of the actuarial net loss is expected to be approximately $3 million in 2021 resulting primarily from the actuarial loss on the plan liabilities, which has only partially been offset by investment gains on the plan assets.

The amortization of the actuarial net gain is expected to be expense of approximately $0.5 million in 2022 resulting primarily from the actuarial loss on the plan liabilities, which has only partially been offset by investment gains on the plan assets.

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.

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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 will continue to experience impacts to its operating performance due to the current economic environment.

Our global business will see varying effects on demand that will differ by region based on our product portfolio and geographic coverage.

The global market should stabilize when government restrictions on the movement of people, goods, and services implemented as a result of the COVID-19 pandemic are lifted, as modern transportation and machinery cannot function without our products.

We expect our petroleum additives segment to experience impacts to its operating performance due to the current economic environment, as we continue to see challenges with the global supply network, inflationary trends, and raw material price escalation and volatility.

We expect that the petroleum additives market will grow in the 1% to 2% range annually for the foreseeable future.

We plan to exceed that growth rate over the long-term.

In the past several years we have made significant investments in our business as the industry fundamentals remain positive.

Over the past several years we have made significant investments in our business as the industry fundamentals remain positive.

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.

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We will continue to invest in our capabilities to provide even better value, service, technology, and customer solutions.

Typically, our business generates significant amounts of cash beyond what is necessary for the expansion and growth of our current offerings.

Our business generates significant amounts of cash beyond its operational needs.

We regularly review our many internal opportunities to utilize excess cash from technological, geographic, production capability, and product line perspectives.

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis