What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-04-28 · 83 added, 70 removed, 132 unchanged (54% of the section changed)

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

When comparing the results of the petroleum additives segment for the first three months of 2022 with the first three months of 2021, net sales increased 16.9% primarily due to higher selling prices, as well as higher product shipments, which were partially offset by an unfavorable foreign currency impact.

Petroleum additives operating profit was 7.6% lower when comparing the first three months of 2022 with the first three months of 2021, reflecting significantly higher raw material costs, as well as higher operating costs, partially offset by higher selling prices and improved product shipments.

During the first three months of 2022, we repurchased 115,796 shares of our common stock for a total of $37.3 million.

When comparing the results of the petroleum additives segment for the first six months of 2022 with the first six months of 2021, net sales increased 20.0% primarily due to higher selling prices, as well as a small increase in product shipments, which were partially offset by an unfavorable foreign currency impact.

Petroleum additives operating profit was 5.8% higher when comparing the first six months of 2022 with the first six months of 2021, reflecting the same drivers of higher selling prices and increased product shipments that favorably impacted net sales, partially offset by significantly higher raw material costs and higher operating and conversion costs.

During the first six months of 2022, we repurchased 289,737 shares of our common stock for a total of $92.8 million.

We also redeemed our 4.10% senior notes and sold all of our marketable securities.

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Impact of the Current Economic Environment

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 continued to substantially manage through these factors during the first three months of the year 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.

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

Because of our active business continuity process and global network, we have continued to substantially manage through these factors during the first six months of the year.

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 throughout the rest of the year.

In addition to the general inflationary environment in which we operate, the Russia-Ukraine war has introduced additional challenges to our business.

While this conflict did not have a material impact on our financial results for the first three months of 2022, numerous countries have imposed sanctions against Russia.

While this conflict has not had a material impact on our financial results for the first six months of 2022, numerous countries have imposed sanctions against Russia.

We are complying with these sanctions and are evaluating this evolving situation to assess its impact on our business.

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Results of Operations

Consolidated net sales for the first three months of 2022 totaled $662.6 million, representing an increase of $95.9 million, or 16.9%, from the first three months of 2021.

Consolidated net sales for the second quarter of 2022 totaled $723.6 million, representing an increase of $132.9 million, or 22.5% from the second quarter of 2021.

Consolidated net sales for the first six months of 2022 totaled $1.4 billion, representing an increase of $228.9 million, or 19.8%, from the first six months of 2021.

The following table shows net sales by segment and product line.

Three Months Ended

Second Quarter Ended

June 30, Six Months Ended

(in millions) 2022 2021 2022 2021

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Petroleum Additives Segment

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 EMEAI region.

While there is some fluctuation, the percentage of net sales generated in the regions remained fairly consistent when comparing the first three months of 2022 with the same period in 2021, as well as with the full year in 2021.

Petroleum additives net sales for the first three months of 2022 were $660.3 million compared to $564.9 million for the first three months of 2021, an increase of 16.9%.

The increase was across all regions with North America representing around 60% of the increase, both the EMEAI and Latin America regions representing about 20%, and net sales for the Asia Pacific region nearly unchanged when comparing the three months periods of 2022 and 2021.

The following table details the approximate components of the increase in petroleum additives net sales between the first three months of 2022 and 2021.

(in millions) Three Months

Period ended March 31, 2021 $ 564.9

The regions in which we operate include North America, Latin America, Asia Pacific, and the EMEAI region.

While there is some fluctuation, the percentage of net sales generated in the regions remained fairly consistent when comparing the six months of 2022 with the same period in 2021, as well as with the full year in 2021.

Petroleum additives net sales for the second quarter of 2022 were $721.0 million compared to $586.6 for the second quarter of 2021, an increase of 22.9%.

Petroleum additives net sales for the first six months of 2022 were $1.4 billion compared to $1.2 billion for the first six months of 2021, an increase of 20.0%.

For both the second quarter and six months comparative periods, the increases were across all regions.

For both comparative periods, North America represented around 50% of the increase and EMEAI represented about 25%.

For the second quarter comparison, Asia Pacific represented about 15% of the increase and Latin America contributed around 10%.

For the six months comparative periods, Latin America represented approximately 15% of the increase and Asia Pacific contributed around 10%.

The following table details the approximate components of the increase in petroleum additives net sales between the second quarter and first six months of 2022 and 2021.

(in millions) Second Quarter Six Months

Period ended June 30, 2021 $ 586.6 $ 1,151.5

Lubricant additives shipments 21.7 21.3

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Foreign currency impact, net (11.5) (20.6)

Period ended March 31, 2022 $ 660.3

When comparing the first three months periods of 2022 and 2021, petroleum additives shipments accounted for a $2.2 million increase in net sales.

Selling prices improved during the first three months of 2022 over the same period in 2021 contributing a favorable impact to net sales of $102.3 million.

The favorable impact from shipments and improved selling prices was partially offset by an unfavorable impact from foreign currency exchange rates.

The United States Dollar strengthened against most of the major currencies in which we transact when comparing the first three months of 2022 and 2021 resulting in an unfavorable impact to petroleum additives net sales for the three months comparative periods.

The unfavorable impact was predominantly due to changes in the Euro and Japanese Yen exchange rates.

On a worldwide basis, the volume of product shipments for petroleum additives increased 2.3% when comparing the first three months of 2022 and 2021.

The increases in product shipments for both lubricant additives and fuel additives was across all regions except for the Asia Pacific Region, which experienced decreases in both product lines.

North America contributed most of the increase in product shipments for both lubricant additives and fuel additives.

While there was an increase in lubricant additives product shipments on a global basis, due to the mix of products sold within the product line, lubricant additives had a small unfavorable impact on net sales as shown in the table above.

Period ended June 30, 2022 $ 721.0 $ 1,381.3

When comparing both the second quarter and the first six months periods of 2022 and 2021, higher selling prices was the predominant factor in the increase in petroleum additives net sales.

Higher lubricant additives shipments, partially offset by lower fuel additive shipments, also had a favorable impact on petroleum additives net sales, but to a much lesser extent than

selling prices.

The favorable impact from improved selling prices and the net higher shipments was partially offset by an unfavorable impact from foreign currency exchange rates for both the second quarter and six months comparative periods.

The United States Dollar strengthened against all of the major currencies in which we transact when comparing both the second quarter and first six months periods of 2022 and 2021, resulting in an unfavorable impact to petroleum additives net sales for the comparative periods.

The unfavorable impacts for both the second quarter and six months comparison was predominantly due to changes in the Euro and Japanese Yen exchange rates.

On a worldwide basis, the volume of product shipments for petroleum additives increased 2.6% when comparing the two second quarter periods and 2.5% when comparing the first six months of 2022 and 2021.

The worldwide increase in petroleum additives shipments for both the second quarter and six months comparative periods included higher lubricant additives shipments, partially offset by lower fuel additives shipments.

The increase in lubricant additives shipments when comparing the 2022 second quarter with the 2021 second quarter was across all regions except Latin America with most of the increase from the EMEAI region.

The lubricant additives increase in shipments for the first six months 2022 and first six months 2021 comparison was across all regions except Asia Pacific with most of the increase in the North America and EMEAI regions.

The decrease in fuel additives shipments for the second quarter comparison was across all regions except North America, which experienced an increase in fuel additives shipments.

The six months comparison for fuel additives shipments reflected decreases in the EMEAI and Asia Pacific regions which were partially offset by increases in the North America and Latin America regions.

The “All other” category includes the operations of the antiknock compounds business and certain contracted manufacturing and services.

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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 following table reports segment operating profit for the three months ended March 31, 2022 and March 31, 2021.

Three Months Ended

The following table reports segment operating profit for the second quarter and six months ended June 30, 2022 and June 30, 2021.

Second Quarter Ended

June 30, Six Months Ended

(in millions) 2022 2021 2022 2021

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Petroleum Additives Segment

Petroleum additives segment gross profit decreased $7.6 million and operating profit decreased $7.2 million when comparing the first three months of 2022 to the first three months of 2021.

Cost of goods sold as a percentage of net sales was 76.6% for the first three months of 2022 and 71.3% for the first three months of 2021.

The operating profit margin was 13.2% for the first three months of 2022 as compared to 16.7% for the first three months of 2021.

For the rolling four quarters ended March 31, 2022, the operating profit margin for petroleum additives was 11.2%.

When comparing the first three months of 2022 and 2021, both gross profit and operating profit included the impact of significantly higher raw material costs, as well as an unfavorable impact from conversion costs.

These were partially offset by the impact of improved selling prices and product shipments as discussed above, as well as a favorable foreign currency transaction and translation impact.

Petroleum additives segment gross profit increased $17.1 million and operating profit increased $17.0 million when comparing the second quarter of 2022 to the second quarter of 2021.

For the first six months of 2022 compared to the first six months of 2021, gross profit increased $9.5 million and operating profit increased $9.8 million.

Cost of goods sold as a percentage of net sales was 78.2% for the second quarter of 2022, 76.1% for the second quarter of 2021, 77.4% for the first six months of 2022 and 73.8% for the first six months of 2021.

The operating profit margin was 12.7% for both the second quarter of 2022 and second quarter of 2021, 12.9% for the first six months of 2022, and 14.6% for the first six months of 2021.

For the rolling four quarters ended June 30, 2022, the operating profit margin for petroleum additives was 11.3%.

When comparing both the second quarter and first six months of 2022 and 2021, both gross profit and operating profit included the impact of significantly higher selling prices, along with a favorable impact from higher shipments.

These favorable components were partially offset by significantly higher raw material costs, as well as a smaller unfavorable impact from operating and conversion costs.

Throughout most of 2021, we experienced declining operating margins due mainly to the prolonged period of escalating raw material costs.

While raw material costs, along with other operating costs, have continued to increase in 2022, we have been able to make adjustments to selling prices to offset some of the raw material and operating cost increases.

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

Nonetheless, we continue to be challenged by the ongoing inflationary environment and continue to experience a lag between when price increases go into effect and when margin recovery is realized.

This lag will continue until raw material costs and other operating costs, including higher costs resulting from the worldwide supply chain disruptions, stabilize.

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 this year with the goal of returning to our historical profit margin range.

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

Margin recovery and cost control will remain priorities throughout this year 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) for the first three months of 2022 were $0.5 million lower as compared to the first three months of 2021.

SG&A as a percentage of net sales was 4.7% for the first three months of 2022 and 5.6% for the first three months of 2021.

Petroleum additives selling, general, and administrative expenses (SG&A) for the second quarter of 2022 were substantially unchanged from the second quarter of 2021 and were $0.4 million lower when comparing the first six months of 2022 and first six months of 2021.

SG&A as a percentage of net sales was 4.2% for the second quarter of 2022, 5.2% for the second quarter of 2021, 4.5% for the first six months of 2022 and 5.4% for the first six months of 2021.

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 period to period, there were no significant changes in the drivers of these costs when comparing the periods.

Our investment in petroleum additives research, development, and testing (R&D) was substantially unchanged when comparing the first three months periods of 2022 and 2021.

As a percentage of net sales, R&D was 5.5% for the first three months of 2022, and 6.4% for the first three months of 2021.

Our investment in petroleum additives research, development, and testing (R&D) was substantially unchanged when comparing the second quarter periods, as well as the first six months periods of 2022 and 2021.

As a percentage of net sales, R&D was 4.9% for the second quarter of 2022, 6.1% for the second quarter of 2021, 5.2% for the first six months of 2022, and 6.2% for the first six months of 2021.

Our R&D investments reflect our efforts to support the development of solutions that meet our customers' needs, meet new and evolving standards, and support our expansion into new product areas.

Our approach to R&D investments, as it is with SG&A, is one of purposeful spending on programs to support our current

product base and to ensure that we develop products to support our customers' programs in the future.

Our approach to R&D investments, as it is with SG&A, is one of purposeful spending on programs to support our current product base and to ensure that we develop products to support our customers' programs in the future.

R&D investments include personnel-related costs, as well as costs for internal and external testing of our products.

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Interest and Financing Expenses, Net

Interest and financing expenses were $9.4 million for the first three months of 2022 and $6.3 million for the first three months of 2021.

The increase resulted primarily from higher outstanding debt during the 2022 period, along with higher amortization and fees, as well as lower capitalized interest when comparing the first three months of 2022 and the first three months of 2021.

Interest and financing expenses were $7.1 million for the second quarter of 2022, $8.9 million for the second quarter of 2021, $16.5 million for the first six months of 2022, and $15.2 million for the first six months of 2021.

The decrease for the second quarter comparison resulted from a lower average interest rate, as well as lower average outstanding debt.

A decrease in capitalized interest during the 2022 period partially offset the impact of the lower average rate and lower outstanding debt.

The increase for the six months comparison resulted primarily from higher outstanding debt during the 2022 period, along with higher amortization and fees, as well as lower capitalized interest.

A lower average interest rate partially offset these unfavorable impacts.

Other Income (Expense), Net

Other income (expense), net was income of $7.2 million for both the first three months of 2022 and 2021.

The amounts for both the 2022 and 2021 periods primarily reflect the components of net periodic benefit cost (income), except for service cost, from defined benefit pension and postretirement plans.

Other income (expense), net was income of $9.1 million for the second quarter of 2022, $5.2 million for the second quarter of 2021, $16.3 million for the first six months of 2022, and 12.4 million for the first six months of 2021.

The amounts for both the 2022 and 2021 second quarter and first six months periods primarily reflect the components of net periodic benefit cost (income), except for service cost, from defined benefit pension and postretirement plans.

See Note 4 for further information on total periodic benefit cost (income).

The 2022 period also included investment income of $1.1 million, as well as a loss on marketable securities of $3.0 million.

The first six months of 2022 period also included investment income of $1.4 million, as well as a loss on marketable securities of $3.0 million.

Income Tax Expense

Income tax expense was $14.2 million for the first three months of 2022 and $19.7 million for the first three months of 2021.

The effective tax rate was 19.3% for the first three months of 2022 and 22.0% for the first three months of 2021.

Income tax expense decreased $3.5 million due to lower income before income tax expense with the remaining $2.0 million of the difference caused by the lower effective tax rate.

The decrease in the effective tax rate for the first three months comparison was primarily driven by the impact of research and development expense capitalization in 2022 on the foreign derived intangible income deduction and the impact of having less projected United States interest expense in 2022 as compared to 2021 on the calculation of the allowable global intangible low-taxed income foreign tax credits.

Income tax expense was $19.1 million for the second quarter of 2022 and $15.1 million for the second quarter of 2021.

The effective tax rate was 22.4% for the second quarter of 2022 and 22.5% for the second quarter of 2021.

Income tax expense increased $4.2 million due to higher income before income tax expense with the remaining $0.2 million of the difference caused by the slightly lower effective tax rate.

Income tax expense was $33.3 million for the first six months of 2022 and $34.8 million for the first six months of 2021.

The effective tax rate was 20.9% for the first six months of 2022 and 22.2% for the first six months of 2021.

Income tax expense increased $0.6 million due to higher income before income tax expense with the remaining $2.1 million of the difference caused by the lower effective tax rate.

While there were a number of factors impacting the change in the effective tax rate between the second quarter of 2022 and the second quarter of 2021, the overall change was small.

The decrease in the effective tax rate for the six months comparison was primarily driven by the impact of research and development expense capitalization in 2022 on the foreign derived intangible income deduction.

Cash Flows, Financial Condition, and Liquidity

Cash and cash equivalents at March 31, 2022 were $84.6 million, which was an increase of $1.2 million since December 31, 2021.

Cash and cash equivalents held by our foreign subsidiaries amounted to $81.5 million at March 31, 2022 and $81.1 million at December 31, 2021.

Cash and cash equivalents at June 30, 2022 were $79.5 million, which was a decrease of $3.8 million since December 31, 2021.

Cash and cash equivalents held by our foreign subsidiaries amounted to $77.1 million at June 30, 2022 and $81.1 million at December 31, 2021.

Periodically, we repatriate cash from our foreign subsidiaries to the United States through intercompany dividends and loans.

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Cash Flows – Operating Activities

Cash flows provided from operating activities for the first three months of 2022 were $6.8 million, adjusted for the use of $67.0 million to fund higher working capital requirements.

The $67.0 million used for working capital excluded a small unfavorable foreign currency impact to the components of working capital on the balance sheet.

Cash flows provided from operating activities for the first six months of 2022 were $24.4 million, adjusted for the use of $114.7 million to fund higher working capital requirements.

The $114.7 million used for working capital excluded an unfavorable foreign currency impact to the components of working capital on the balance sheet.

The most significant changes in working capital included a decrease in marketable securities, as well as increases in accounts receivable, inventory, and accounts payable.

During the first three months of 2022, we sold all of our marketable securities.

See Note 6 for further information.

The increase in accounts receivable balances when comparing March 31, 2022 with the end of 2021 was primarily the result of increased shipment volumes along with higher sales prices.

During 2022, we sold all of our marketable securities.

The increase in accounts receivable balances when comparing June 30, 2022 with the end of 2021 was primarily the result of higher sales prices along with a smaller impact from increased shipment volumes.

The increase in inventory was primarily caused by higher raw material costs, as well as an increase in quantities to meet customer demand.

The increase in accounts payable reflected higher raw material and operating costs and normal fluctuations across the regions due to timing.

Including cash and cash equivalents, as well as the impact of changes in foreign currency exchange rates on the balance sheet, we had total working capital of $702.6 million at March 31, 2022 and $663.1 million at December 31, 2021.

The current ratio was 2.71 to 1 at March 31, 2022 and 1.91 to 1 at December 31, 2021.

Including cash and cash equivalents, as well as the impact of changes in foreign currency exchange rates on the balance sheet, we had total working capital of $714.3 million at June 30, 2022 and $663.1 million at December 31, 2021.

The current ratio was 2.60 to 1 at June 30, 2022 and 1.91 to 1 at December 31, 2021.

Cash Flows – Investing Activities

Cash provided from investing activities totaled $359.4 million during the first three months of 2022 primarily representing the proceeds from the sale of marketable securities of $372.8 million.

See Note 6 for further information.

Capital expenditures for the first three months of 2022 were $12.6 million.

Cash provided from investing activities totaled $344.3 million during the first six months of 2022 primarily representing the proceeds from the sale of marketable securities of $372.8 million.

Capital expenditures for the first six months of 2022 were $27.8 million.

We currently expect that our total capital spending during 2022 will be in the $55 million to $65 million range and will include several improvements to our manufacturing and R&D infrastructure around the world.

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Cash Flows – Financing Activities

Cash used in financing activities during the first three months of 2022 amounted to $365.8 million.

Cash used in financing activities during the first six months of 2022 amounted to $371.7 million.

These cash flows included $350.0 million for the redemption of the 4.10% senior notes along with $7.1 million of costs related to the redemption (see Debt discussion below), $90.8 million for repurchases of our common stock, and cash dividends of $42.9 million.

We also borrowed an additional $121.0 million on the revolving credit facility.

Our long-term debt was $841.1 million at March 31, 2022 compared to $1.1 billion at December 31, 2021.

Our long-term debt was $911.3 million at June 30, 2022 compared to $1.1 billion at December 31, 2021.

On March 15, 2022, we redeemed the 4.10% senior notes at a redemption price of 100% of the principal amount of $350 million plus the accrued and unpaid interest on the notes and the applicable premium as outlined in the Indenture dated December 20, 2012.

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We recognized a loss of $7.5 million on the early extinguishment including cash paid of $7.1 million for the premium on the early redemption and a write-off of $0.4 million of unamortized deferred financing costs.

See Note 9 for additional information on the 2.70% senior notes, 3.78% senior notes, 4.10% senior notes, and revolving credit facility, including the unused portion of our revolving credit facility.

See Note 8 for additional information on the 2.70% senior notes, 3.78% senior notes, and revolving credit facility, including the unused portion of our revolving credit facility.

All of our senior notes and the revolving credit facility contain covenants, representations, and events of default that management considers typical of credit arrangements of this nature.

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The revolving credit facility contains financial covenants that require NewMarket to maintain a consolidated Leverage Ratio (as defined in the agreement) of no more than 3.75 to 1.00, except during an Increased Leverage Period (as defined in the agreement) at the end of each quarter.

At March 31, 2022, the Leverage Ratio was 2.57 under the revolving credit facility.

At March 31, 2022, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt percentage decreased from 59.9% at December 31, 2021 to 52.5% at March 31, 2022.

At June 30, 2022, the Leverage Ratio was 2.61 under the revolving credit facility.

At June 30, 2022, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt percentage decreased from 59.9% at December 31, 2021 to 55.8% at June 30, 2022.

The change in the percentage resulted primarily from the repayment of the 4.10% senior notes, partially offset by the increase in outstanding revolving credit facility borrowings and the decrease in shareholders' equity.

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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-Q

Item 2. Management’s Discussion and Analysis