What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-30 compared with 2024-04-25 · 87 added, 67 removed, 143 unchanged (52% of the section changed)

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

and other factors detailed from time to time in the reports that NewMarket files with the SEC, including the risk factors in Item 1A.

“Risk Factors” of our 2023 Annual Report on Form 10-K, which is available to shareholders at www.newmarket.com, as well as Item 1A.

and other factors detailed from time to time in the reports that NewMarket files with the SEC, including the risk factors in Part I, Item 1A.

“Risk Factors” of our 2023 Annual Report, which is available to shareholders at www.newmarket.com, as well as Part II, Item 1A.

"Risk Factors" of this Quarterly Report on Form 10-Q.

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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 2024 with the first three months of 2023, net sales were 3.2% lower resulting primarily from lower selling prices, which were partially offset by an increase in product shipments of 4.7%.

Petroleum additives operating profit was 14.3% higher when comparing the 2024 and 2023 three months periods, primarily reflecting the favorable impact of lower raw material and operating costs, partially offset by the lower selling prices and product mix.

When comparing the results of the petroleum additives segment for the first six months of 2024 with the first six months of 2023, net sales were 2.7% lower, resulting primarily from lower selling prices, which were partially offset by an increase in product shipments of 2.7%.

Petroleum additives operating profit was 13.1% higher when comparing the 2024 and 2023 six months periods, primarily reflecting the favorable impact of lower raw material and operating costs, as well as higher shipments, which were partially offset by the lower selling prices.

We completed the acquisition of AMPAC for approximately $697 million on January 16, 2024.

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Results of Operations

Consolidated net sales for the first three months of 2024 totaled $696.7 million, representing a slight decrease of $6.1 million, or 0.9%, from the first three months of 2023.

Consolidated net sales for the second quarter of 2024 totaled $710.2 million, representing an increase of $25.1 million, or 3.7% from the second quarter of 2023.

Consolidated net sales for the first six months of 2024 totaled $1.4 billion, representing an increase of $19.0 million, or 1.4%, from the first six months of 2023.

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

The net sales in the table below for the specialty materials segment only include those since the acquisition of AMPAC on January 16, 2024.

Three Months Ended March 31,

The net sales in the table below for the specialty materials segment include sales since the acquisition of AMPAC on January 16, 2024.

Second Quarter Ended June 30, Six Months Ended June 30,

(in millions) 2024 2023 2024 2023

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

While there is some fluctuation, the percentage of net sales generated by region remained fairly consistent when comparing the three months of 2024 with the same period in 2023, as well as with the full year of 2023.

Petroleum additives net sales for the first three months of 2024 were $677.3 million, while the first three months of 2023 were $700.0 million, representing a decrease of 3.2%.

The North America and Latin America regions reported decreases for the first three months of 2024 compared to the same 2023 period, which was partially offset by smaller increases in the Asia Pacific and EMEAI regions.

The following table details the approximate components of the changes in petroleum additives net sales between the first three months of 2024 and 2023.

(in millions) Three Months

Period ended March 31, 2023 $ 700.0

While there is some fluctuation, the percentage of net sales generated by region remained fairly consistent when comparing the six months of 2024 with the same period in 2023, as well as with the full year of 2023.

Petroleum additives net sales for the second quarter of 2024 were $669.8 million compared to $684.0 million for the second quarter of 2023, a decrease of 2.1%.

The decrease for the second quarter comparison was across all regions with North America representing about 55%, Asia Pacific about 23%, EMEAI about 17%, and Latin America about 5%.

Petroleum additives net sales for the first six months of 2024 were $1.3 billion, while the first six months of 2023 were $1.4 billion, representing a decrease of 2.7%.

Almost all of the decrease for the six months comparison was in the North America region with the Latin America region reporting a smaller decrease, both of which were partially offset by small increases in the EMEAI and Asia Pacific regions.

The following table details the approximate components of the changes in petroleum additives net sales between the second quarter and first six months of 2024 and 2023.

(in millions) Second Quarter Six Months

Period ended June 30, 2023 $ 684.0 $ 1,384.0

Lubricant additives shipments 8.8 13.5

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Foreign currency impact, net (2.8) (3.4)

Period ended March 31, 2024 $ 677.3

When comparing the first three months of 2024 and 2023, the decrease in petroleum additives net sales was primarily due to lower selling prices, partially offset by increases in both lubricant additives and fuel additives shipments.

Foreign currency exchange rates had a small unfavorable impact on net sales.

The United States Dollar strengthened against the Indian Rupee, Chinese Renminbi, and Japanese Yen resulting in an unfavorable impact to petroleum additives net sales for the comparative periods but weakened against both the Euro and the Pound Sterling for the same comparison, which substantially offset the unfavorable impact on net sales from the change in the exchange rates of the Rupee, Renminbi, and Yen.

On a worldwide basis, the volume of product shipments for petroleum additives increased 4.7% when comparing the first three months of 2024 and 2023.

The increase was in both lubricant additives and fuels additives across all regions except Latin America, which reported a decrease in lubricant additives product shipments, and North America, which reported a decrease in fuel additives product shipments.

Period ended June 30, 2024 $ 669.8 $ 1,347.1

When comparing the second quarter of 2024 and 2023, the decrease in petroleum additives net sales was primarily due to lower selling prices, along with smaller impacts from lower fuel additives shipments and an unfavorable foreign currency impact.

These factors were partially offset by an increase in lubricant additives shipments.

When comparing the first six months of 2024 and 2023, the decrease in petroleum additives net sales was primarily due to lower selling prices, as well as an unfavorable foreign currency impact, which were partially offset by increases in both lubricant additives and fuel additives shipments.

The primary currencies in which we transact include the Euro, Pound Sterling, Japanese Yen, Chinese Renminbi, and Indian Rupee.

Comparing the second quarter of 2024 and 2023, the United States Dollar strengthened against all of the major

currencies in which we transact, except for the Pound Sterling, resulting in the unfavorable impact to net sales for the second quarter comparison reflected in the above table.

For the six months comparison, the United States Dollar strengthened against all of the major currencies in which we transact, except for the Pound Sterling and Euro, resulting in the unfavorable impact to net sales shown above.

The unfavorable impact for the second quarter comparison was primarily from the Japanese Yen, Chinese Renminbi, and Euro.

The unfavorable impact for the six months comparison was primarily from the Japanese Yen and Chinese Renminbi, which was partially offset by a favorable impact from the Euro.

On a worldwide basis, the volume of product shipments for petroleum additives increased approximately 1% when comparing the two second quarter periods and 2.7% when comparing the first six months of 2024 and 2023.

For the second quarter comparison, a slight increase in lubricant additives shipments was partially offset by a very small decrease in fuel additives shipments.

Both the North America and Asia Pacific regions experienced increases in lubricant additives shipments and decreases in fuel additives shipments for the second quarter comparison, while both the EMEAI and Latin America regions experienced decreases in lubricant additives shipments and increases in fuel additives shipments.

For the six months comparison, the increase was in both lubricant additives and fuels additives.

Both the North America and Asia Pacific regions reported increases in lubricant additives shipments, which were partially offset by decreases in the EMEAI and Latin America regions.

The EMEAI and Latin America regions reported increases in fuel additives shipments, which were partially offset by decreases in the North America and Asia Pacific regions.

Specialty Materials Segment

The specialty materials segment includes the operations of AMPAC, which operates predominantly in the North America region.

Total net sales were $17.0 million for the period that we owned AMPAC during the first three months of 2024.

Total net sales were $38.0 million for the second quarter 2024 and $55.1 million for the period that we owned AMPAC during the first six months of 2024.

The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and related services associated with Ethyl.

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NewMarket Services Corporation expenses are charged to NewMarket and each subsidiary pursuant to services agreements between the companies.

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, 2024 and March 31, 2023.

The amount reported for specialty materials is for the period from January 16, 2024 to March 31, 2024.

Three Months Ended March 31,

Depreciation of 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, 2024 and June 30, 2023.

The amount reported for specialty materials is for the period from January 16, 2024 to June 30, 2024.

Second Quarter Ended June 30, Six Months Ended June 30,

(in millions) 2024 2023 2024 2023

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Petroleum Additives Segment

Petroleum additives segment gross profit increased $16.4 million and operating profit increased $18.8 million when comparing the first three months of 2024 to the first three months of 2023.

Petroleum additives segment gross profit increased $12.1 million and operating profit increased $15.7 million when comparing the second quarter of 2024 to the second quarter of 2023.

For the first six months of 2024 compared to the first six months of 2023, petroleum additives segment gross profit increased $28.5 million and operating profit increased $34.5 million.

The following table presents petroleum additives cost of goods sold as a percentage of net sales and the operating profit margin.

Three Months Ended March 31,

Second Quarter Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Cost of goods sold as a percentage of net sales 68.9 % 71.3 % 68.6 % 71.5 %

Operating profit margin 22.1 % 19.3 % 22.2 % 19.1 %

For the rolling four quarters ended March 31, 2024, the operating profit margin for petroleum additives was 20.0%, which is within our historical range of operating profit margin.

For the rolling four quarters ended June 30, 2024, the operating profit margin for petroleum additives was 20.7%, which is within our historical range of operating profit margin.

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.

When comparing the first three months of 2024 and 2023, the increase in both gross profit and operating profit primarily included the favorable impact of lower raw material and operating costs, partially offset by lower selling prices and product mix.

When comparing both the second quarter and first six months of 2024 and 2023, the increase in both gross profit and operating profit primarily included the favorable impacts of lower raw material and operating costs, as well as a favorable impact from higher shipments, which were partially offset by lower selling prices.

We remain challenged by the ongoing inflationary environment impacting us.

Cost control and margin management remain high priorities for us.

Petroleum additives selling, general, and administrative expenses (SG&A) for the first three months of 2024 were $0.4 million lower than the first three months of 2023.

SG&A as a percentage of net sales was 4.8% for the first three months of 2024, and 4.7% for the first three months of 2023.

Petroleum additives selling, general, and administrative (SG&A) expenses for the second quarter of 2024 were $1.7 million higher than the second quarter of 2023.

SG&A expenses for the first six months of 2024 were $1.3 million higher than the first six months of 2023.

SG&A expenses as a percentage of net sales were 4.7% for the second quarter of 2024, 4.4% for the second quarter of 2023, 4.7% for the first six months of 2024, and 4.5% for the first six months of 2023.

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) decreased approximately $2.0 million when comparing the first three months periods of 2024 and 2023.

As a percentage of net sales, R&D was 4.6% for the first three months of 2024 and 4.7% for the first three months of 2023.

Our investment in petroleum additives research, development, and testing (R&D) decreased $5.3 million when comparing the second quarter periods of 2024 and 2023 and $7.3 million when comparing the first six months periods of 2024 and 2023.

As a percentage of net sales, our R&D investment was 4.3% for the second quarter of 2024, 5.0% for the second quarter of 2023, 4.4% for the first six months of 2024 and 4.9% for the first six months of 2023.

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 costs, 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.

Specialty Materials Segment

The specialty materials segment reported an operating loss of $5.0 million for the period from the AMPAC acquisition date of January 16, 2024 to March 31, 2024.

The loss is primarily due to the sale of AMPAC finished goods inventory that we

acquired, which was recorded at fair market value on the acquisition date and sold to customers from the date of acquisition through March 31, 2024.

The specialty materials segment reported operating profit of $5.0 million for second quarter of 2024, resulting in operating profit of $5 thousand for the period from the AMPAC acquisition date of January 16, 2024 to June 30, 2024.

The specialty materials results for the second quarter and first six months of 2024 include the sale of AMPAC finished goods inventory that we acquired at closing.

This inventory was recorded at fair value on the acquisition date and, when sold during the first half of 2024, generated no margin.

While we may experience substantial variation in quarterly results for AMPAC on an ongoing basis due to the nature of its business, we anticipate full year 2024 results to be consistent with our pre-acquisition expectations.

The following discussion references certain captions on the Consolidated Statements of Income.

Interest and Financing Expenses, Net

Interest and financing expenses were $15.7 million for the first three months of 2024 and $10.8 million for the first three months of 2023.

The increase for the three months comparison resulted from both higher average debt outstanding and a higher average interest rate.

Capitalized interest, as well as amortization and fees were also unfavorable.

Interest and financing expenses were $15.9 million for the second quarter of 2024, $10.3 million for the second quarter of 2023, $31.6 million for the first six months of 2024, and $21.0 million for the first six months of 2023.

The increase for both the second quarter and six months comparisons resulted primarily from both higher average debt outstanding, as well as a higher average interest rate.

Other Income (Expense), Net

Other income (expense), net was income of $12.5 million for the first three months of 2024 and $10.9 million for the first three months of 2023.

The amounts for both the 2024 and 2023 three 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 $12.0 million for the second quarter of 2024, $10.7 million for the second quarter of 2023, $24.5 million for the first six months of 2024 and $21.6 million for the first six months of 2023.

The amounts for both the 2024 and 2023 second quarter and 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 5 for further information on total periodic benefit cost (income).

Income Tax Expense

Income tax expense was $30.0 million for the first three months of 2024 and $27.6 million for the first three months of 2023.

The effective tax rate was 21.8% for the first three months of 2024 and 22.0% for the first three months of 2023.

Income tax expense increased $2.8 million due to higher income before income tax expense, which was partially offset by a $0.4 million decrease caused by the lower effective tax rate.

Income tax expense was $31.4 million for the second quarter of 2024 and $25.1 million for the second quarter of 2023.

The effective tax rate was 21.9% for the second quarter of 2024 and 20.1% for the second quarter of 2023.

Income tax expense increased $3.7 million due to higher income before income tax expense and $2.6 million due to the higher effective tax rate.

Income tax expense was $61.3 million for the first six months of 2024 and $52.7 million for the first six months of 2023.

The effective tax rate was 21.9% for the first six months of 2024 and 21.1% for the first six months of 2023.

Income tax expense increased $6.5 million due to higher income before income tax expense and $2.2 million due to the higher effective tax rate.

On October 8, 2021, almost all members of the Organisation for Economic Co-operation and Development (OECD) reached an agreement on a two-pillar approach to international tax reform, including the establishment of a 15% global minimum tax for large multinational entities.

Several jurisdictions in which we operate have adopted or are in the process of adopting this global minimum tax, with effective dates in 2024 or 2025.

We are continuing to monitor the legislation in these jurisdictions and have recognized an immaterial impact to our effective tax rate and income tax liabilities related to the enactment of these rules for the first three months of 2024.

Cash Flows, Financial Condition, and Liquidity

Cash and cash equivalents at March 31, 2024 were $117.1 million, an increase of $5.1 million since December 31, 2023.

Cash and cash equivalents held by our foreign subsidiaries amounted to $103.1 million at March 31, 2024 and $86.5 million at December 31, 2023.

Cash and cash equivalents at June 30, 2024 were $87.6 million, a decrease of $24.3 million since December 31, 2023.

Cash and cash equivalents held by our foreign subsidiaries amounted to $80.1 million at June 30, 2024 and $86.5 million at December 31, 2023.

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 provided from operating activities for the first three months of 2024 was $102.8 million, including $21.4 million of higher working capital requirements.

Cash provided from operating activities for the first six months of 2024 was $217.8 million, including $40.7 million of higher working capital requirements.

The $40.7 million excluded a favorable foreign currency impact to the components of working capital on the balance sheet.

The working capital of AMPAC is included in our consolidated balance sheet at March 31, 2024.

Excluding the impact of AMPAC working capital, when comparing the March 31, 2024 balances with those at December 31, 2023, the most significant changes in working capital included increases in trade and other accounts receivable and accounts payable, and a decrease in accrued expenses.

The increase in trade and other accounts receivable primarily reflects higher sales during the first three months of 2024 compared to the fourth quarter of 2023.

The increase in accounts payable is primarily the result of increased purchases during the first three months of 2024 and normal invoice payment timing.

The change in accrued expenses primarily reflects normal payments related to rebate payments to customers, interest payments on our long-term debt and personnel payments.

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 $728.5 million at March 31, 2024 and $675.4 million at December 31, 2023.

The current ratio was 2.86 at March 31, 2024 and 2.85 at December 31, 2023.

The working capital of AMPAC is included in our consolidated balance sheet at June 30, 2024.

Excluding the impact of AMPAC working capital, when comparing the June 30, 2024 balances with those at December 31, 2023, the most significant changes in working capital included increases in trade and other accounts receivable, inventory, and accounts payable.

The increase in trade and other accounts receivable primarily reflects higher sales during the second quarter of 2024 compared to the fourth quarter of 2023.

The increase in inventory reflects increased production during the second quarter of 2024 as compared to our planned inventory rationalization that took place in 2023.

The increase in accounts payable is primarily the result of increased purchases during 2024 and normal invoice payment 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 $695.7 million at June 30, 2024 and $675.4 million at December 31, 2023.

The current ratio was 2.66 at June 30, 2024 and 2.85 at December 31, 2023.

Cash Flows – Investing Activities

Cash used in investing activities totaled $697.5 million during the first three months of 2024, comprised of the acquisition of AMPAC for $683.9 million (net of cash acquired) and capital expenditures of $13.6 million.

Cash used in investing activities totaled $710.0 million during the first six months of 2024, comprised of the acquisition of AMPAC for $681.5 million (net of cash acquired) and capital expenditures of $28.5 million.

We expect that our total capital spending during 2024 will be in the $50 million to $70 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 provided from financing activities during the first three months of 2024 amounted to $601.4 million.

Cash provided from financing activities during the first six months of 2024 amounted to $470.5 million.

These cash flows primarily included net borrowings of $279.0 million on the revolving credit facility and proceeds of $250 million from the term loan, partially offset by cash dividends of $48.0 million.

Our long-term debt was $1.3 billion at March 31, 2024 compared to $643.6 million at December 31, 2023.

Our long-term debt was $1.2 billion at June 30, 2024 compared to $643.6 million at December 31, 2023.

On January 22, 2024, we entered into a new $900 million revolving credit facility, as well as a $250 million unsecured term loan.

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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, 2024, the Leverage Ratio was 1.92 under the revolving credit facility.

At March 31, 2024, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, term loan, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt increased from 37.4% at December 31, 2023 to 52.6% at March 31, 2024.

At June 30, 2024, the Leverage Ratio was 1.71 under the revolving credit facility.

At June 30, 2024, we were in compliance with all covenants under the 3.78% senior notes, 2.70% senior notes, term loan, and revolving credit facility.

As a percentage of total capitalization (total long-term debt and shareholders’ equity), our total long-term debt increased from 37.4% at December 31, 2023 to 48.7% at June 30, 2024.

The change resulted primarily from the increase in outstanding revolving credit facility and term loan borrowings, partially offset by the increase in shareholders' equity.

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Critical Accounting Policies and Estimates

This Form 10-Q and our 2023 Annual Report on Form 10-K include discussions of our accounting policies, as well as methods and estimates used in the preparation of our financial statements.

We also provided a discussion of Critical Accounting Policies and Estimates in our 2023 Annual Report on Form 10-K.

The following provides an update to the information related to intangibles, net of amortization, and goodwill provided in the Critical Accounting Policies and Estimates section of our 2023 Annual Report on Form 10-K.

We have certain identifiable intangibles amounting to $386.9 million and goodwill amounting to $382.0 million at March 31, 2024 that are discussed in Note 8.

This Form 10-Q and our 2023 Annual Report include discussions of our accounting policies, as well as methods and estimates used in the preparation of our financial statements.

We also provided a discussion of Critical Accounting Policies and Estimates in our 2023 Annual Report.

We have certain identifiable intangibles amounting to $383.5 million and goodwill amounting to $379.9 million at June 30, 2024 that are discussed in Note 8.

Of these identifiable intangibles and goodwill, $124.5 million relate to our petroleum additives business and $638.9 million relate to the specialty materials business.

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We believe the fundamentals of how we run our business - a long-term view, safety-first culture, customer-focused solutions, technology-driven product offerings, and world-class supply chain capability - will continue to be beneficial for all of our stakeholders over the long term.

We expect our petroleum additives segment to experience impacts to its operating performance during 2024 due to the uncertain global economic environment in which we operate, as we continue to see challenges with inflationary trends impacting our operating costs and raw material prices.

Our petroleum additives segment may experience impacts to its operating performance during 2024 due to the uncertain global economic environment in which we operate, as we continue to see challenges from inflationary trends.

As a result, we will continue to focus on cost control and operating profit margin recovery throughout the year.

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We anticipate continued strength in our petroleum additives segment in 2024 and also look forward to the ongoing integration of AMPAC into our business during the year.

While we may see substantial variation in quarterly results for AMPAC on an ongoing basis due to the nature of its business, we anticipate full year results to be consistent with our pre-acquisition expectations.

While we may experience substantial variation in quarterly results for AMPAC

on an ongoing basis due to the nature of its business, we anticipate full year results to be consistent with our pre-acquisition expectations.

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

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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