What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-25 compared with 2022-08-03 · 86 added, 81 removed, 134 unchanged (55% 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 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.

When comparing the results of the petroleum additives segment for the first nine months of 2022 with the first nine months of 2021, net sales increased 17.1% primarily due to higher selling prices, partially offset by decreases in product shipments and an unfavorable foreign currency impact.

Petroleum additives operating profit was 8.6% higher when comparing the first nine months of 2022 with the first nine months of 2021, reflecting the higher selling prices that favorably impacted net sales, mostly offset by significantly higher raw material costs and higher operating and conversion costs.

During the first nine months of 2022, we repurchased 499,275 shares of our common stock for a total of $155.2 million.

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

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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.

Because of our active business continuity process and global network, we have continued to substantially manage through these factors during the first nine 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 has not had a material impact on our financial results for the first six 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 nine 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 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.

Consolidated net sales for the third quarter of 2022 totaled $696.0 million, representing an increase of $73.8 million, or 11.9% from the third quarter of 2021.

Consolidated net sales for the first nine months of 2022 totaled $2.1 billion, representing an increase of $302.7 million, or 17.0%, from the first nine months of 2021.

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

Second Quarter Ended

June 30, Six Months Ended

Third Quarter Ended

September 30, Nine Months Ended

September 30,

(in millions) 2022 2021 2022 2021

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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

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

Petroleum additives net sales for the third quarter of 2022 were $692.7 million compared to $619.1 for the third quarter of 2021, an increase of 11.9%.

Petroleum additives net sales for the first nine months of 2022 were $2.1 billion compared to $1.8 billion for the first nine months of 2021, an increase of 17.1%.

For both the third quarter and nine months comparative periods, the increases were across all regions.

North America represented around 35% of the increase for the third quarter comparison, while EMEAI represented about 30%.

For the nine months comparison, North America contributed about 50% of the increase and EMEAI contributed approximately 25%.

The Asia Pacific region contributed about 25% of the increase for the third quarter comparison and about 10% of the increase for the nine months comparison.

Latin America contributed the remaining increases for both comparative periods.

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

(in millions) Third Quarter Nine Months

Period ended September 30, 2021 $ 619.1 $ 1,770.6

Lubricant additives shipments (42.1) (18.8)

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Foreign currency impact, net (18.9) (39.5)

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.

Period ended September 30, 2022 $ 692.7 $ 2,074.0

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

Higher selling prices were partially offset by lower shipments for both lubricant additives and fuel additives products, as well as an unfavorable impact from foreign currency

exchange rates for both the third quarter and nine months comparative periods.

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

The unfavorable foreign currency impacts for both the third quarter and nine months comparison were predominantly due to changes in the Euro and Japanese Yen exchange rates.

On a worldwide basis, the volume of product shipments for petroleum additives decreased 8.5% when comparing the two third quarter periods and 1.3% when comparing the first nine months of 2022 and 2021.

The worldwide decrease in petroleum additives shipments for both the third quarter and nine months comparative periods included lower lubricant additives shipments, as well as lower fuel additives shipments.

The decrease in lubricant additives shipments when comparing the 2022 third quarter with the 2021 third quarter was across all regions with most of the decrease from the North America region.

The lubricant additives decrease in shipments for the first nine months 2022 and first nine months 2021 comparison was across all regions except EMEAI with the decrease almost comparable across the other regions.

The decrease in fuel additives shipments for the third quarter comparison was in the North America and EMEAI regions with a small increase in the Latin America region.

The Asia Pacific region, while down very slightly, was substantially unchanged for the third quarter comparison.

The nine 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 second quarter and six months ended June 30, 2022 and June 30, 2021.

Second Quarter Ended

June 30, Six Months Ended

The following table reports segment operating profit for the third quarter and nine months ended September 30, 2022 and September 30, 2021.

Third Quarter Ended

September 30, Nine Months Ended

September 30,

(in millions) 2022 2021 2022 2021

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Petroleum Additives Segment

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.

Petroleum additives segment gross profit increased $9.9 million and operating profit increased $10.9 million when comparing the third quarter of 2022 to the third quarter of 2021.

For the first nine months of 2022 compared to the first nine months of 2021, gross profit increased $19.4 million and operating profit increased $20.7 million.

Cost of goods sold as a percentage of net sales was 78.7% for the third quarter of 2022, 77.7% for the third quarter of 2021, 77.9% for the first nine months of 2022, and 75.2% for the first nine months of 2021.

The operating profit margin was 12.0% for the third quarter of 2022, 11.7% for the third quarter of 2021, 12.6% for the first nine months of 2022, and 13.6% for the first nine months of 2021.

For the rolling four quarters ended September 30, 2022, the operating profit margin for petroleum additives was 11.4%.

When comparing the third quarter and first nine months of 2022 and 2021, both gross profit and operating profit included the favorable impact of significantly higher selling prices, which were partially offset by significantly higher raw material costs for the third quarter and nine months comparison periods.

Operating and conversion costs for both the third quarter and nine months comparison periods were unfavorable, as was the impact from shipments for the third quarter comparison.

The impact from shipments for the nine months comparison had a small favorable impact on both gross profit and operating profit.

While shipments volumes were slightly lower when comparing the first nine months of 2022 to the first nine months of 2021, the mix of products sold during the 2022 period resulted in the small favorable impact.

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.

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.

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.

Nonetheless, we remain 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 are a priority for us.

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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 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.

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

SG&A as a percentage of net sales was 4.4% for the third quarter of 2022, 4.9% for the third quarter of 2021, 4.4% for the first nine months of 2022, and 5.2% for the first nine 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 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 investment in petroleum additives research, development, and testing (R&D) decreased approximately $1 million when comparing the third quarter periods, as well as the first nine months periods of 2022 and 2021.

As a percentage of net sales, R&D was 5.0% for the third quarter of 2022, 5.7% for the third quarter of 2021, 5.1% for the first nine months of 2022, and 6.1% for the first nine 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.

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Interest and Financing Expenses, Net

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.

Interest and financing expenses were $8.4 million for the third quarter of 2022, $9.3 million for the third quarter of 2021, $24.9 million for the first nine months of 2022, and $24.6 million for the first nine months of 2021.

The decrease for the third quarter comparison resulted from a lower average interest rate, as well as lower average outstanding debt, along with lower amortization and fees.

A decrease in capitalized interest during the 2022 period partially offset these favorable impacts.

The increase for the nine months comparison resulted primarily from higher outstanding debt during the 2022 period, 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 $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.

Other income (expense), net was income of $10.0 million for the third quarter of 2022, $7.4 million for the third quarter of 2021, $26.2 million for the first nine months of 2022, and $19.8 million for the first nine months of 2021.

The amounts for both the 2022 and 2021 third quarter and first nine 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 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.

The first nine months of 2022 also included a loss on marketable securities of $3.0 million.

Income Tax Expense

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.

Income tax expense was $17.1 million for the third quarter of 2022 and $9.1 million for the third quarter of 2021.

The effective tax rate was 21.3% for the third quarter of 2022 and 14.9% for the third quarter of 2021.

Income tax expense increased $5.1 million due to a higher effective tax rate and $2.9 million due to higher income before income tax expense.

Income tax expense was $50.4 million for the first nine months of 2022 and $43.9 million for the first nine months of 2021.

The effective tax rate was 21.1% for the first nine months of 2022 and 20.2% for the first nine months of 2021.

Income tax expense increased $4.4 million due to higher income before income tax expense with the remaining $2.1 million of the difference caused by the higher effective tax rate.

The increase in the effective tax rate for both the third quarter and nine months comparisons was primarily driven by the impact from our foreign operations.

Cash Flows, Financial Condition, and Liquidity

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.

Cash and cash equivalents at September 30, 2022 were $72.0 million, a decrease of $11.3 million since December 31, 2021.

Cash and cash equivalents held by our foreign subsidiaries amounted to $69.3 million at September 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 six months of 2022 were $24.4 million, adjusted for the use of $114.7 million to fund higher working capital requirements.

Cash flows provided from operating activities for the first nine months of 2022 were $16.0 million, adjusted for the use of $198.6 million to fund higher working capital requirements.

The $198.6 million used for working capital excluded an unfavorable foreign currency impact to the components of working capital on the balance sheet.

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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 receivable balances when comparing September 30, 2022 with the end of 2021 was primarily the result of higher sales prices during 2022.

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

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 $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.

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 $748.0 million at September 30, 2022 and $663.1 million at December 31, 2021.

The current ratio was 2.76 at September 30, 2022 and 1.91 at December 31, 2021.

Cash Flows – Investing Activities

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.

Cash provided from investing activities totaled $331.7 million during the first nine months of 2022 primarily representing the proceeds from the sale of marketable securities of $372.8 million.

Capital expenditures for the first nine months of 2022 were $40.4 million.

We 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.

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

Cash Flows – Financing Activities

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

Cash used in financing activities during the first nine months of 2022 amounted to $356.1 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), $150.8 million for repurchases of our common stock, and cash dividends of $63.8 million.

We also borrowed an additional $218.0 million on the revolving credit facility.

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

Our long-term debt was $1.0 billion at September 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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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 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.

At September 30, 2022, the Leverage Ratio was 2.71 under the revolving credit facility.

At September 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 increased from 59.9% at December 31, 2021 to 60.2% at September 30, 2022.

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

The change in shareholders’ equity primarily reflects our earnings offset by dividend payments, the repurchases of our common stock, and the impact of foreign currency translation adjustments along with the changes in the funded position of our defined benefit plans.

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Recent Accounting Pronouncements

There are no new significant recent accounting pronouncements which may materially impact our financial statements.

See Note 12, Recent Accounting Pronouncements for a discussion of recent accounting pronouncements which may impact our financial statements.

Our stated goal is to provide a 10% compounded return per year for our shareholders over any five-year period (defined by earnings per share growth plus dividend yield), although we may not necessarily achieve a 10% return each year.

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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