What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-15 compared with 2022-02-15 · 93 added, 89 removed, 286 unchanged (39% of the section changed)

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current and future governmental regulations;

the gain or loss of significant customers;

the loss of significant customers;

failure to attract and retain a highly-qualified workforce;

an information technology system failure or security breach;

the occurrence or threat of extraordinary events, including natural disasters, terrorist attacks, and health-related epidemics such as the COVID-19 pandemic;

the occurrence or threat of extraordinary events, including natural disasters, terrorist attacks, wars, and health-related epidemics such as the COVID-19 pandemic;

risks related to operating outside of the United States;

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limitation of our insurance coverage;

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;

our inability to realize expected benefits from investment in our infrastructure or from future acquisitions, or our inability to successfully integrate 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 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.

When comparing the results of the petroleum additives segment for 2022 with 2021, net sales increased 17.5% primarily due to higher selling prices, partially offset by decreases in product shipments and an unfavorable foreign currency impact.

Petroleum additives operating profit was 34.6% higher when comparing 2022 with 2021, reflecting the higher selling prices that favorably impacted net sales, partially offset by significantly higher raw material costs and higher operating costs during 2022, including costs for utilities, logistics, insurance, and third-party manufacturing services.

A full discussion and comparison of our 2022 and 2021 results follows this overview.

We also believe that it is useful to consider our 2022 results versus those of 2019, as the last three years have been characterized by unprecedented factors, including the impact of the COVID-19 pandemic, worldwide supply chain disruptions, inflation, and war.

The 2019 results were the last full year before these factors impacted our operating results.

Petroleum additives net sales in 2022 were $578 million higher than in 2019, an increase of 26%.

Petroleum additives operating profit in 2022 was $19 million higher, an increase of 5% over 2019, and shipments were 2.8% higher in 2022 than in 2019.

The petroleum additives operating margin for 2022 was 13.7% versus 16.5% for 2019.

During 2022, we also repurchased 668,553 shares of our common stock for a total of $207 million, redeemed our 4.10% senior notes, and sold all of our marketable securities.

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 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.

IMPACT OF THE CURRENT ECONOMIC ENVIRONMENT

As mentioned above, the economic environment in which we operated during 2022 was characterized by steadily rising costs, including raw material costs, limitations on certain supply availability, and a challenging global supply chain network.

Because of our active business continuity process and global network, we were able to substantially manage through these factors during the year.

We made good progress during the year towards resolving our supply chain issues in order to better meet our customers' growing needs, and we will continue working with our customers to deliver products.

At the same time, while we are beginning to see some stabilization in the marketplace, we also expect to be challenged by these economic factors as we manage our business in 2023.

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 2022, numerous countries have imposed sanctions against Russia.

We are complying with these sanctions.

Despite the challenging economic environment, our financial position remains strong.

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.

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.

The chemical industry and our products are essential for transportation of people, 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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All other 11 12 9

Net sales $ 2,356 $ 2,011 $ 2,190

Consolidated revenue $ 2,765 $ 2,356 $ 2,011

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.

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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 North America region represented approximately 54% of the petroleum additives increase in net sales, EMEAI represented approximately 23%, the Latin America region represented approximately 13%, and the Asia Pacific region represented approximately 10%.

The approximate components of the petroleum additives increase in net sales of $410 million when comparing 2022 to 2021 are shown below in millions.

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Net sales for year ended December 31, 2022 $ 2,754

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.

When comparing 2022 with 2021, higher selling prices were the predominant factor in the increase in petroleum additives net sales.

The 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.

The United States Dollar strengthened against all of the major currencies in which we transact with the majority of the unfavorable impact arising from net sales denominated in the Euro and the Japanese Yen.

On a worldwide basis, the volume of product shipments for petroleum additives decreased 2.9% when comparing 2022 with 2021.

The worldwide decrease in petroleum additives shipments primarily resulted from lower lubricant additives shipments, with a small decrease in fuel additives shipments.

The primary contributors to the decline in shipments were due to supply chain disruptions and new sanctions introduced during 2022 as a result of the Russia-Ukraine war.

The decrease in lubricant additives shipments when comparing 2022 with 2021 was across all regions except for EMEAI, which was substantially unchanged between the two years.

Most of the decrease in lubricant additives shipments was in the Asia Pacific region with smaller decreases in North America and Latin America.

The decrease in fuel additives shipments when comparing 2022 and 2021 was in the EMEAI and Asia Pacific regions, which was partially offset by shipment increases in North America and Latin America.

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

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

Petroleum Additives - Petroleum additives segment operating profit increased $97 million and gross profit increased $86 million when comparing 2022 to 2021.

Cost of goods sold as a percentage of net sales was 76.8% in 2022 and 76.7% in 2021.

The operating profit margin was 13.7% in 2022 and 12.0% in 2021.

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.

When comparing 2022 and 2021, both operating profit and gross profit included the favorable impact of significantly higher selling prices, which were partially offset by significantly higher raw material costs.

Operating and conversion costs were also unfavorable.

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, increased in 2022, we were able to make adjustments to selling prices resulting in some improvement in margins.

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, as well as other operating costs, stabilize.

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 2023.

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.

Petroleum additives selling, general, and administrative expenses (SG&A) were $0.4 million, or 0.3% lower in 2022 compared to 2021.

SG&A as a percentage of net sales was 4.4% in 2022 and 5.2% in 2021.

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While personnel-related costs fluctuate from year to year, there were no significant changes in the drivers of these costs when comparing 2022 and 2021.

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

Our investment in petroleum additives research, development, and testing (R&D) decreased approximately $4 million when comparing 2022 with 2021.

As a percentage of net sales, R&D was 5.1% in 2022 and 6.1% in 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 investment, 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 were $35 million in 2022 and $34 million in 2021.

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.

The increase in interest and financing expense between 2022 and 2021 resulted primarily from lower capitalized interest.

The average interest rate was lower in 2022 resulting in a favorable impact to interest and financing expenses but was substantially offset by an unfavorable impact from higher outstanding debt in 2022 than in 2021.

Other Income (Expense), Net

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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.

The 2022 amount included a loss on marketable securities of $3 million compared to a loss of $7 million on marketable securities in 2021.

Income Tax Expense

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The effective tax rate was 19.6% in 2022 and 22.9% in 2021.

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.

When comparing 2022 and 2021, income tax expense increased $23 million due to the higher income before income taxes, partially offset by a lower effective tax rate, which resulted in a decrease of $12 million in income tax expense.

The decrease in the effective tax rate was primarily the result of the impact from our foreign operations.

CASH FLOWS DISCUSSION

We generated cash from operating activities of $109 million in 2022 and $165 million in 2021.

During 2022, we used the $109 million of cash generated from operations along with the proceeds of $373 million from the sale of marketable securities, $213 million of borrowings under the revolving credit facility, and $15 million of cash on hand to redeem $350 million of our 4.10% senior notes, repurchase $207 million of our common stock, pay $84 million of dividends on our common stock, and fund $56 million of capital expenditures.

Cash flows from operating activities included a decrease of $205 million from higher working capital requirements, which is further discussed in the Working Capital section below, and cash contributions of $10 million to our pension and postretirement plans.

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.

FINANCIAL POSITION AND LIQUIDITY

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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 used 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 2.70% senior notes as of December 31, 2022 and December 31, 2021.

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.

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

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.

The 4.10% senior notes were due December 2022.

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.

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

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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We were in compliance with all covenants under the 3.78% senior notes as of December 31, 2022 and December 31, 2021.

Revolving Credit Facility – On March 5, 2020, NewMarket and certain foreign subsidiary borrowers entered into a Credit Agreement (the Credit Agreement) with a term of five years.

Revolving Credit Facilit y - On March 5, 2020, NewMarket and certain foreign subsidiary borrowers entered into a Credit Agreement (the Credit Agreement) with a term of five years.

The Credit Agreement provides for a $900 million, multicurrency revolving credit facility with a $500 million sublimit for foreign currency borrowings, a $50 million sublimit for letters of credit, and a $20 million sublimit for swingline loans.

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

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

Effective January 11, 2023, the revolving credit facility was amended to eliminate the use of LIBOR on borrowings, replacing it with SOFR.

There was $361 million outstanding borrowings under the revolving credit facility at December 31, 2022 compared to $148 million outstanding borrowings at December 31, 2021.

Outstanding letters of credit amounted to $2 million at both December 31, 2022 and December 31, 2021 resulting in the unused portion of the applicable credit facility amounting to $537 million at December 31, 2022 and $750 million at December 31, 2021.

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At December 31, 2022, the Leverage Ratio was 2.23.

We were in compliance with all covenants under the revolving credit facility in effect at December 31, 2021 and at December 31, 2020.

We were in compliance with all covenants under the revolving credit facility at December 31, 2022 and at December 31, 2021.

Other Borrowings - Two of our subsidiaries in Singapore and China each have access to separate short-term lines of credit of $10 million.

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There was no activity on these lines of credit in 2022 or 2021.

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.

We had long-term debt of $1.0 billion at December 31, 2022 and $1.1 billion at December 31, 2021.

The small decrease in debt resulted from the redemption of the 4.10% senior notes which was mostly offset by additional borrowings on the revolving credit facility during 2022.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt percentage decreased from 59.9% at the end of 2021 to 56.8% at the end of 2022.

The change in the percentage was primarily the result of the decrease in long-term debt, along with 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.

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Our working capital at December 31, 2021 on the same basis was $663 million, resulting in a current ratio of 1.91 to 1.

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.

The most significant change in working capital since December 31, 2021 included a decrease in marketable securities, which was mostly offset by the decrease in the current portion of long-term debt due to the redemption of the 4.10% senior notes in March 2022.

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.

Trade accounts receivable balances increased when compared to December 31, 2021 resulting primarily from higher selling prices this year.

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

The increase in accounts payable reflected higher costs, including raw material costs, as well as normal fluctuations across the regions.

Capital Expenditures

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We currently estimate capital expenditures in 2023 will be in the range of $70 million to $80 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 provided from operations, as well as 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 revolving credit facility.

Environmental Expenses

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Liquidity and Contractual Obligations

We have both current and long-term obligations that have known payment streams and are discussed throughout this Report on Form 10-K.

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.

We have both current and long-term obligations that have known payment streams and are discussed throughout this Annual Report on Form 10-K.

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 principal payments on outstanding long-term debt and the related interest payments.

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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.

LIBOR will be completely eliminated in the market by June 2023.

Until January 11, 2023 when we amended our revolving credit facility, LIBOR was utilized in establishing interest rates on the revolving credit facility.

With new borrowings after January 11, 2023, our revolving credit facility uses SOFR in place of LIBOR to establish interest rates on borrowings under the revolving credit facility.

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

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pension plans at 8.0% at December 31, 2022.

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

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

An actuarial loss on the assets occurred during 2022 as the actual investment return for all of our U.S.

qualified pension plans was less than the expected return by $149 million.

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

qualified pension plans exceeded the expected return by approximately $83 million.

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 $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.

The amortization of the actuarial net gain is expected to be approximately $2 million in 2023 resulting primarily from the actuarial gain related to the increase in discount rate, which was only partially offset by actuarial losses 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 2023 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.

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.

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

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pension and postretirement benefit plans by approximately $4 million.

A 100 basis point increase in the discount rate to 3.875% would reduce forecasted 2022 pension and postretirement benefit expense by $4 million.

A 100 basis point increase in the discount rate to 6.625% (while holding other assumptions constant) would reduce forecasted 2023 pension and postretirement benefit expense by approximately $4 million.

Rate of Projected Compensation Increase - We have maintained our rate of projected compensation increase at December 31, 2022 at 3.5%.

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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 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.

pension plans on our financial statements, we utilize the S3P (Light) mortality tables weighted by 103% for males and 106% for females and allow for future projected improvements in life expectancy in line with the CMI 2021 model with the core smoothing parameter, an initial addition to mortality improvements of 0.3% per year, and an experience weighting of 7.5% on 2020 and 2021 data, 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.

pension plan assets.

The expected long-term rate of return is based on both the asset allocation, as well as yields available in the U.K.

The expected long-term rate of return is based on both the asset allocation and yields available in the U.K.

The target asset allocation in the U.K.

is to be invested 40% in pooled equities funds, 40% in pooled government bonds, and 20% in pooled diversified growth funds.

is 40% in pooled equities funds, 40% in pooled government bonds, and 20% in pooled diversified growth funds.

The actual allocation at the end of 2022 was 47% in pooled equities funds, 32% in pooled government bonds, and 21% in pooled diversified growth funds.

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pension plan was 6.7% at December 31, 2022.

Actuarial gains on the assets occurred during both 2021 and 2020 as the actual investment return exceeded the expected investment return by approximately $8 million in 2021 and $4 million in 2020.

An actuarial loss on the assets occurred during 2022 as the actual investment return was less than the expected investment return by approximately $44 million.

An actuarial gain on the assets occurred during 2021 as the actual investment return exceeded the expected investment return by approximately $8 million.

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

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.

The combined investment loss and actuarial gain on plan liabilities results in no expected amortization in 2023.

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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pension plans by approximately $0.5 million.

A 100 basis point increase in the discount rate to 2.9% would reduce forecasted 2022 pension expense by approximately $1 million.

A 100 basis point increase in the discount rate to 5.8% (while holding other assumptions constant) would reduce forecasted 2023 pension expense by approximately $0.4 million.

Rate of Projected Compensation Increase - Our rate of projected compensation increase at December 31, 2022 is 3.5%.

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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.

2 unchanged sentences

The economic benefit associated with a tax position will be recognized only if we determine it is more likely than not to be upheld on audit.

Although we believe our estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our results of operations and financial position.

believe our estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our results of operations and financial position.

At each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year.

28 unchanged sentences

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