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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-07 · 175 added, 110 removed, 245 unchanged (54% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three months ended March 31, 2020 and 2019 and should be read in conjunction with the information included under Item 1.

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three and six months ended June 30, 2020 and 2019 and should be read in conjunction with the information included under Item 1.

Financial Statements and Supplementary Data (Unaudited) included elsewhere in this report.

31 unchanged sentences

The following table reconciles Contribution Margin and Contribution Margin per Metric Ton to gross profit:

Three Months Ended March 31,

(in millions, unless otherwise indicated)

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(In millions, unless otherwise indicated) (In millions, unless otherwise indicated)

$ 202.6 $ 399.0 $ 538.7 $ 783.7

Variable costs (2)

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The following table presents a reconciliation of Adjusted EBITDA to consolidated net income for each of the periods indicated:

Three Months Ended March 31,

(in $ millions)

Net income $ 18.0 $ 19.0

Add back income tax expense 7.6 9.4

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(In millions) (In millions)

Net income/(loss) $ (17.8) $ 24.7 $ 0.3 $ 43.7

Add back income tax expense/(benefit) (5.9) 9.3 1.8 18.7

Add back equity in earnings of affiliated companies, net of tax (0.2) (0.2) (0.3) (0.3)

Income from operations before income taxes and equity in earnings of affiliated companies 25.5 28.3

Income/(loss) from operations before income taxes and equity in earnings of affiliated companies (23.8) 33.9 1.7 62.2

Add back interest and other financial expense, net 8.3 7.6 17.9 14.0

Reclassification of actuarial losses from AOCI 2.7 — 5.1 —

Earnings before income taxes and finance income/costs 37.5 34.7

Earnings/(loss) before income taxes and finance income/costs (12.9) 41.5 24.7 76.2

Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment 21.9 25.4 45.7 49.5

1 unchanged sentence

Equity in earnings of affiliated companies, net of tax 0.2 0.2 0.3 0.3

Restructuring expenses/(income) (1)

Restructuring expenses (1)

Consulting fees related to Company strategy (2)

Extraordinary expense items related to COVID-19 (3)

Long term incentive plan 1.2 1.6 0.1 5.1

1 unchanged sentence

Other adjustments (4)

1.2 0.6 2.1 1.0

Adjusted EBITDA $ 15.2 $ 71.5 $ 79.1 $ 136.1

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$ (1.2) $ 40.5 $ 34.5 $ 75.7

(1) Restructuring expenses for the three months ended March 31, 2019 are related to our strategic realignment of our worldwide Rubber footprint.

(1) Restructuring expenses for the six months ended June 30, 2019 are related to our strategic realignment of our worldwide Rubber footprint.

(2) Consulting fees related to the Orion strategy include external consulting for establishing and executing Company strategies relating to Rubber footprint realignment, conversion to U.S.

1 unchanged sentence

GAAP, as well as costs relating to our assessment of feasibility for inclusion in certain U.S.

(3) Other adjustments in the three months ended March 31, 2020 mainly relate to a non-income tax expense incurred during the construction phase of an asset in an amount of $0.3 million.

(3) Extraordinary expense items related to COVID-19 are costs incurred to address impacts associated with the global corona virus pandemic.

These items include select production costs, expenses related to providing personal protection equipment and costs related to protective measures carried out at our facilities to ensure the safety of our employees, among other expenditures.

(4) Other adjustments in the three and six months ended June 30, 2020 mainly relate to legal fees associated with a dispute concerning intellectual property of $0.6 million and $0.8 million, respectively, and a non-income tax expense incurred during the construction phase of an asset in an amount of $0.5 million and $0.8 million, respectively.

The asset under construction is expected to qualify for certain non-income tax credits once operational, since such credits were applied to the predecessor machine.

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Operating Results

2020 Compared to 2019

Quarter and six months ended June 30, 2020 compared to quarter and six months ended June 30, 2019

The table below presents our historical results derived from our consolidated financial statements for the periods indicated.

Statement of operations data Three Months Ended March 31,

(In millions)

Statement of operations data Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(In millions) (In millions)

Net sales $ 202.6 $ 399.0 $ 538.7 $ 783.7

5 unchanged sentences

Restructuring expenses 0.0 1.0 0.0 1.1

Income from operations 37.5 34.7

Income/(loss) from operations (12.9) 41.5 24.7 76.2

Interest and other financial expense, net 8.3 7.6 17.9 14.0

Reclassification of actuarial losses from AOCI 2.7 — 5.1 —

Income from operations before income tax expense and equity in earnings of affiliated companies 25.5 28.3

Income tax expense 7.6 9.4

Income/(loss) from continuing operations before income tax expense and equity in earnings of affiliated companies (23.8) 33.9 1.7 62.2

Income tax expense/(benefit) (5.9) 9.3 1.8 18.7

Equity in earnings of affiliated companies, net of tax 0.2 0.2 0.3 0.3

Net income $ 18.0 $ 19.0

Net sales decreased overall by $48.7 million, or 12.7%, from $384.7 million in the three months ended March 31, 2019 to $336.0 million in the three months ended March 31, 2020 driven by lower volumes, passing on lower feedstock costs to customers and negative foreign exchange rate translation effects, partially offset by favorable product mix and positive base price increases.

Volume decreased by 27.7 kmt, or 10.5%, from 262.8 kmt in the three months ended March 31, 2019 to 235.1 kmt in the three months ended March 31, 2020, principally reflecting the impact on the Rubber and Specialties segments of a sharp reduction in sales volume beginning in mid-March as tire manufacturing plants began idling or closing outright in anticipation of the negative implications of the COVID-19 pandemic on miles driven and light vehicle sales.

Lower volumes also reflected the impact of a deliberate Rubber commercial strategy as part of 2019 contract negotiations to emphasize raising price closer to reinvestment levels over volume.

Net income/(loss) $ (17.8) $ 24.7 $ 0.3 $ 43.7

Net sales decreased by $196.4 million, or 49.2%, from $399.0 million ($139.3 million in our Specialty Carbon Black segment and $259.7 million in our Rubber Carbon Black segment) in the second quarter of 2019 to $202.6 million ($94.4 million in our Specialty Carbon Black segment and $108.3 million in our Rubber Carbon Black segment) in the second quarter of 2020.

Net sales decreased, driven primarily by lower volumes and, to a lesser extent, the effects of passing on lower feedstock costs to customers.

Net sales decreased overall by $245.1 million, or 31.3%, from $783.7 million in the six months ended June 30, 2019 to $538.7 million in the six months ended June 30, 2020, driven primarily by the decrease of net sales in the second quarter of 2020.

Volume decreased by 113.5 kmt or 42.0% from 270.5 kmt (69.9 kmt in our Specialty Carbon Black segment and 200.6 kmt in our Rubber Carbon Black segment) in the second quarter of 2019 to 156.9 kmt (49.5 kmt in our Specialty carbon Black segment and 107.5 kmt in our Rubber Carbon Black segment) in the second quarter of 2020, with lower demand in both segments and in all regions, due to the effects of COVID-19 on the overall global economy.

Volume decreased by 141.2 kmt, or 26.5%, from 533.3 kmt in the six months ended June 30, 2019 to 392.0 kmt in the six months ended June 30, 2020, with lower demand in both segments and in all regions, due to the effects of COVID-19 on the overall global economy.

Cost of sales and Gross profit

Cost of sales decreased by $40.9 million, or 14.3%, from $286.7 million in the three months ended March 31, 2019 to $245.8 million in the three months ended March 31, 2020.

The 10.5% decrease in volume in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 resulted in a decrease of cost of sales of 10.6%, or $26.0 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 while the remaining decrease is primarily related to changes in oil prices.

As a result, gross profit decreased by $7.8 million, or 7.9%, from $98.0 million in the three months ended March 31, 2019 to $90.2 million in the three months ended March 31, 2020 for reasons described above.

Cost of sales decreased by $126.3 million, or 42.8%, from $295.0 million in the second quarter of 2019 to $168.7 million in the second quarter of 2020, mainly as a result of lower volumes.

Cost of sales decreased by $167.2 million, or 28.7%, from $581.7 million in the six months ended June 30, 2019 to $414.5 million in the six months ended June 30, 2020.

The 26.5% decrease in volume in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 resulted in a decrease of cost of sales of 25.9%, or $150.4 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 while the remaining decrease is primarily related to changes in oil prices.

Gross profit decreased for reasons described above by $70.1 million, or 67.4% from $104.0 million ($44.4 million in our Specialty Carbon Black segment and $59.6 million in our Rubber Carbon Black segment) in the second quarter of 2019 to $33.9 million ($24.2 million in our Specialty Carbon Black segment and $9.7 million in our Rubber Carbon Black segment) in the second quarter of 2020.

Primarily as a result of the decrease in the second quarter of 2020, gross profit decreased by $77.9 million, or 38.5%, from $202.0 million in the six months ended June 30, 2019 to $124.1 million in the six months ended June 30, 2020 for reasons described above.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $11.1 million, or 19.9%, from $55.6 million in the three months ended March 31, 2019 to $44.5 million in the three months ended March 31, 2020 primarily due to lower personnel related expenses related to bonuses including long term incentive expenses, lower distribution expenses as a result of lower volumes and favorable impacts from foreign currency translation impacts.

Selling, general and administrative expenses decreased by $13.6 million, or 26.0%, from $52.1 million in the second quarter of 2019 to $38.5 million in the second quarter of 2020, driven primarily by lower freight costs due reductions in volumes as a result of the effects of COVID-19 on the overall global economy and countermeasures implemented to reduce our costs.

Selling, general and administrative expenses decreased by $24.6 million, or 22.9%, from $107.7 million in the six months ended June 30, 2019 to $83.1 million in the six months ended June 30, 2020, driven primarily by lower freight costs due to lower volumes as a result of the effects of COVID-19 on the overall global economy and countermeasures implemented to reduce our costs.

Research and development costs

R&D expenses decreased by $0.2 million, from $5.1 million in the three months ended March 31, 2019 to $5.0 million in the three months ended March 31, 2020.

This decrease is primarily related to the timing of expenditures for individual development of programs.

R&D expenses decreased by $0.5 million from $4.9 million in the second quarter of 2019 to $4.4 million in the second quarter of 2020 driven by the timing of expenditures for individual development of programs.

R&D expenses decreased by $0.6 million, from $10.0 million in the six months ended June 30, 2019 to $9.4 million in the six months ended June 30, 2020 driven by the timing of expenditures for individual development of programs.

Other expenses, net

Other expenses, net which comprises other operating income and other operating expenses, amounted to $3.2 million in the three months ended March 31, 2020 and $2.5 million in the three months ended March 31, 2019.

In the three months ended March 31, 2020, other operating income amounted to $2.0 million and included, among other items, a gain related to the release of bonus accruals.

Other operating expenses in the three months ended March 31, 2020 amounted to $5.2 million, comprised primarily of $2.6 million EPA-related expenses and impairment and write-off charges of $0.9 million.

In the three months ended March 31, 2019, other operating income amounted to $0.2 million.

Other operating expenses in the three months ended March 31, 2019 amounted to $2.7 million, comprised primarily of $0.9 million consulting fees related to Company strategy and EPA-related expenses of $0.7 million.

Other expenses, net, which comprises other operating income and other operating expenses, decreased from $4.5 million in the second quarter of 2019 to $3.8 million in the second quarter of 2020 driven by the timing of expenditures in the second quarter of 2019.

Other expenses, net which comprises other operating income and other operating expenses, amounted to $7.0 million in the six months ended June 30, 2020 and 2019, respectively, unchanged year over year.

In the six months ended June 30, 2020, other operating income amounted to $3.9 million and included, among other items, a gain related to the release of bonus accruals.

Other operating expenses in the six months ended June 30, 2020 amounted to $10.9 million, comprised primarily of $3.6 million of EPA-related expenses and $2.7 million of COVID-19 related expenses.

In the six months ended June 30, 2019, other operating income amounted to $1.3 million.

Other operating expenses in the six months ended June 30, 2019 amounted to $8.3 million, comprised primarily of $1.5 million consulting fees related to Company strategy, EPA-related expenses of $1.4 million as well as allowances and asset disposal expenses.

Restructuring expenses/(income), net

In the three months ended March 31, 2019, restructuring expenses related to the strategic repositioning of the Rubber business footprint amounted to $0.1 million, Our Rubber footprint restructuring activities in the fiscal years 2016 to 2019 generated annualized savings of approximately $16 million per year on a consolidated basis since the end of fiscal year 2018 from the facility shutdown in Ambès, France, the facility consolidations in Seoul, South Korea, the related headcount reductions, as well as to a lesser extent, to operational efficiencies.

These anticipated savings were expected to come essentially in full from our reportable Rubber segment.

Besides the realized one-time gain recorded upon the sale of our land in Seoul, South Korea, a significant portion of the anticipated savings are expected to be reinvested in business development, research & development and capital improvements to help drive organic growth.

Income from operations

Income from operations increased by $2.8 million, or 8.2%, from $34.7 million in the three months ended March 31, 2019 to $37.5 million in the three months ended March 31, 2020.

Lower gross profit was more than offset by lower selling, general and administration expenses as described above.

The decrease in selling, general and administrative expenses was primarily attributable to lower bonus charges year over year including releases of long term incentive expenses.

In the six months ended June 30, 2019, restructuring expenses amounted to $1.1 million and related to follow-up expenses associated with the strategic repositioning of the Rubber business footprint.

Those activities in the fiscal years 2016 to 2019 generated annualized savings of approximately $16 million per year on a consolidated basis since the end of fiscal year 2018 from the facility shutdown in Ambès, France, the facility consolidations in Seoul, South Korea, the related headcount reductions, and to a lesser extent, to operational efficiencies.

These anticipated savings came essentially in full from our Rubber segment.

Income/(loss) from operations

Income from operations decreased by $54.3 million from $41.5 million in the second quarter of 2019 to a loss from operations of $12.9 million in the second quarter of 2020, due to the effects of COVID-19 on the overall global economy and carbon black demand.

Income from operations decreased by $51.5 million, or 67.6%, from $76.2 million in the six months ended June 30, 2019 to $24.7 million in the six months ended June 30, 2020.

The decrease year over year in the six months ended June 30, 2020 is primarily due to lower volumes related to the impact of COVID-19 during the second quarter of 2020.

Interest and other financial expense, net

Interest and other financial expense, net comprises interest and other financial income and interest and other financial expenses and increased by $0.7 million from $7.6 million in the second quarter of 2019 to $8.3 million in the second quarter of 2020, reflecting the impact of bolstering our cash position by drawing under our ancillary lines of credit and RCF.

Interest and other financial expense, net comprises interest and other financial income and interest and other financial expenses.

Interest and other financial expense, net amounted to $9.6 million in the three months ended March 31, 2020 compared to $6.4 million in the three months ended March 31, 2019.

Interest and other financial expense, net in the three months ended March 31, 2020 includes, among others, $3.6 million of regular interest expenses for our term loan facilities, $0.5 million of amortization of capitalized transaction costs and $5.2 million net expenses of foreign currency revaluation effects.

Interest and other financial expense, net in the three months ended March 31, 2019 includes regular interest expenses for our term loan facilities amortization of capitalized transaction costs and $1.4 million net gains of foreign currency revaluation effects.

Interest and other financial expense, net amounted to $17.9 million in the six months ended June 30, 2020 compared to $14.0 million in the six months ended June 30, 2019.

Interest and other financial expense, net in the six months ended June 30, 2020 included, among other items, $7.2 million of interest expenses, $1.0 million of amortization of capitalized transaction costs, $0.9 million of interest expenses on pension obligations and $7.3 million of net foreign currency revaluation related expenses.

Interest and other financial expense, net in the six months ended June 30, 2019 amounted to $14.0 million and included, among other items, $8.5 million of interest expenses, $1.1 million amortization of capitalized transaction costs, $0.9 million of interest expenses on pension obligations and $0.8 million of net foreign currency revaluation related expenses.

Reclassification of actuarial losses from AOCI

The actuarial losses associated with our pension obligations recorded in prior years in accumulated other comprehensive income exceeding 10% of the defined benefit obligation are recorded ratably over the current year through profit and loss separately from income from operations and amounted to $2.4 million in the three months ended March 31, 2020.

Income from operations before income tax expense and equity in earnings of affiliated companies

Income from operations before income tax expense and equity in earnings of affiliated companies decreased by $2.7 million, or 9.6%, from $28.3 million in the three months ended March 31, 2019 to $25.5 million in the three months ended March 31, 2020, as a result of the effects described above.

Income tax expense

Income tax expense amounted to $7.6 million in the three months ended March 31, 2020 compared to $9.4 million in the three months ended March 31, 2019, as a result of decreased income before taxes.

In the three months ended March 31, 2020, the effective tax rate of 29.7% included a net discrete tax gain of $0.7 million and deviated therefore from the estimated annual tax rate of 29.19%.

For details regarding this deviation see Note L.

Income/(loss) from continuing operations before income tax expense and equity in earnings of affiliated companies

Income from operations before income taxes and equity in earnings of affiliated companies decreased by $57.7 million from $33.9 million in the second quarter of 2019 to a loss from operations before income taxes of $23.8 million in the second quarter of 2020, due to the effects of COVID-19 on the overall global economy.

Income from operations before income tax expense and equity in earnings of affiliated companies decreased by $60.4 million, or 97.2%, from $62.2 million in the six months ended June 30, 2019 to $1.7 million in the six months ended June 30, 2020, due to the effects of COVID-19 on the overall global economy in the second quarter of 2020.

Income tax expense/(benefit)

Income taxes decreased by $15.2 million from $9.3 million in the second quarter of 2019 to tax income of $5.9 million in the second quarter of 2020, as a result of decreased income before taxes.

Income tax expense amounted to $1.8 million in the six months ended June 30, 2020 compared to $18.7 million in the six months ended June 30, 2019, as a result of decreased income before taxes.

In the six months ended June 30, 2020, the impact of discrete tax items included discrete tax expense of $0.5 million, primarily due to tax return filings and other prior year adjustments and an unfavorable deferred tax expense of $0.7 million due to revaluation of realizability of certain deferred tax assets.

The discrete tax items compared to the low income from operations before taxes resulted in an effective tax rate of more than 87% for the six months ended June 30, 2020.

The estimated annual tax rate is 28.91% for 2020.

For details regarding this deviation see Note M.

Income Taxes to the unaudited condensed consolidated financial statements.

In the three months ended March 31, 2019, the effective tax rate of 33.2% deviated from out estimated annual effective tax rate of 30.1% in particular due to a net discrete tax expense of $0.9 million.

For details regarding this deviation see Note L.

In the six months ended June 30, 2019, the effective tax rate of 30.0% deviated from our estimated annual effective tax rate of 30.1% in particular due to a net discrete tax expense of $0.3 million.

For details regarding this deviation see Note M.

Income Taxes to the unaudited condensed consolidated financial statements.

Equity in earnings of affiliated companies, net of tax

Equity in earnings of affiliated companies represents the equity income from our German JV, which was comparable in the three months ended March 31, 2020 and the three months ended March 31, 2019.

Our net income in the three months ended March 31, 2020 amounted to $18.0 million, a decrease of $0.9 million, reflecting all the factors described above.

Equity in earnings of affiliated companies represents the equity income from our German JV, which was comparable in the six months ended June 30, 2020 and the six months ended June 30, 2019.

Net income/(loss)

Net income decreased by $42.5 million from $24.7 million in the second quarter of 2019 to $17.8 million in the second quarter of 2020, reflecting all the items described above.

Our net income in the six months ended June 30, 2020 amounted to $0.3 million, a decrease of $43.4 million, reflecting all the factors described above.

Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures)

Contribution Margin decreased by $4.4 million, or 3.3%, from $136.3 million in the three months ended March 31, 2019 to $131.9 million in the three months ended March 31, 2020, primarily due to lower volumes and negative foreign exchange rate translation effects partially offset by favorable base price increases in the Rubber segment in particular and a favorable product mix in the Specialty segment in particular.

Contribution Margin per Metric Ton increased by 8.1%, from $518.7 per Metric Ton in the three months ended March 31, 2019 to $560.8 per Metric Ton in the three months ended March 31, 2020.

Contribution Margin decreased by $69.1 million, or 48.2%, from $143.4 million in the second quarter of 2019 to $74.3 million in the second quarter of 2020, primarily due to lower volumes, partially offset by favorable base price increases in the Rubber segment, in particular.

Contribution Margin per Metric Ton decreased by 10.7%, from $530.3 per Metric Ton for the second quarter of 2019 to $473.6 per Metric Ton in the second quarter of 2020.

Contribution Margin decreased by $73.5 million, or 26.3%, from $279.7 million in the six months ended June 30, 2019 to $206.2 million in the six months ended June 30, 2020.

The decrease of $73.5 million year over year is primarily attributable to the decrease in Contribution Margin in the second quarter of 2020 in an amount of $69.1 million.

Contribution Margin per Metric Ton increased by 0.3%, from $524.6 per Metric Ton in the six months ended June 30, 2019 to $525.9 per Metric Ton in the six months ended June 30, 2020.

Adjusted EBITDA (Non-GAAP Financial Measure)

Adjusted EBITDA decreased by $0.7 million, or 1.1%, from $64.6 million in the three months ended March 31, 2019 to $63.8 million in the three months ended March 31, 2020 mainly reflecting lower contribution margins and higher fixed costs of sales offset by lower selling and administrative expenses and positive foreign exchange translation effects on fixed costs.

Adjusted EBITDA decreased by $56.3 million, or 78.7%, from $71.5 million in the second quarter of 2019 to $15.2 million in the second quarter of 2020, primarily due to lower volume, partially offset by lower fixed costs and base price increases in the Rubber segment, in particular.

Adjusted EBITDA decreased by $57.0 million, or 41.9%, from $136.1 million in the six months ended June 30, 2019 to $79.1 million in the six months ended June 30, 2020, mainly reflecting the COVID-19 impacts of the second quarter of 2020.

2019 Compared to 2018

The comparison of the three months ended March 31, 2019and the three months ended March 31, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the three months ended March 31, 2019 located within “ Part I, Item 2.

The comparison of the three and six months ended June 30, 2019 and the three and six months ended June 30, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the six months ended June 30, 2019 located within “ Part I, Item 2.

Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein.

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The table below presents our segment results derived from our audited consolidated financial statements for the periods indicated.

Three Months Ended March 31,

(In millions, unless otherwise indicated)

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(In millions, unless otherwise indicated) (In millions, unless otherwise indicated)

Specialty Carbon Black

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Adjusted EBITDA Margin (%) (1)

17.5 22.3 20.8 22.3

Rubber Carbon Black

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Adjusted EBITDA Margin (%) (1)

(1.1) 15.6 10.6 14.8

(1) Defined as Adjusted EBITDA divided by net sales.

1 unchanged sentence

2020 Compared to 2019

Net sales of the Specialty Carbon Black segment decreased by $11.8 million, or 9.0%, from $131.6 million in the three months ended March 31, 2019 to $119.8 million in the three months ended March 31, 2020, primarily due to lower volumes and the pass through of lower feedstock costs to customers, partially offset by favorable product mix and base price increases.

Volume of the Specialty Carbon Black segment decreased by 5.6 kmt, or 8.8%, from 64.0 kmt in the three months ended March 31, 2019 to 58.3 kmt in the three months ended March 31, 2020, mainly due to weakening demand in the North America and Western Europe regions predominantly in the automotive and pipe markets.

Gross profit of the Specialty Carbon Black segment decreased by $1.7 million, or 4.0%, from $41.4 million in the three months ended March 31, 2019 to $39.7 million in the three months ended March 31, 2020, mainly due to lower volumes and negative foreign exchange rate translation effects partially offset by higher base price and favorable mix.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $1.3 million, or 4.5%, from $29.4 million in the three months ended March 31, 2019 to $28.1 million in the three months ended March 31, 2020, primarily driven by the factors driving lower Gross Profit.

Adjusted EBITDA margin increased 110 basis points to 23.4% compared to 22.3% in the first quarter of 2019.

Three months ended June 30, 2020 compared to three months ended June 30, 2019

Lower volumes drove a decline in net sales of the Specialty Carbon Black segment by $44.9 million, or 32.2%, from $139.3 million in the second quarter of 2019 to $94.4 million in the second quarter of 2020.

Volume of the Specialty Carbon Black segment decreased by 20.4 kmt, or 29.2%, from 69.9 kmt in the second quarter of 2019 to 49.5 kmt in the second quarter of 2020.

All regions were down.

Gross profit of the Specialty Carbon Black segment decreased by $20.2 million, or 45.5%, from $44.4 million in the second quarter of 2019 to $24.2 million in the second quarter of 2020, as well as a result of lower volumes.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $14.6 million, or 46.9%, from $31.0 million in the second quarter of 2019 to $16.5 million in the second quarter of 2020, primarily due to lower volumes, partially offset by mix.

Adjusted EBITDA margin decreased 480 basis points to 17.5% in the second quarter of 2020 compared to 22.3% in the second quarter of 2019.

Six months ended June 30, 2020 compared to six months ended June 30, 2019

Net sales of the Specialty Carbon Black segment decreased by $56.7 million, or 20.9%, from $270.9 million in the six months ended June 30, 2019 to $214.2 million in the six months ended June 30, 2020, primarily due to lower volumes.

Volume of the Specialty Carbon Black segment decreased by 26.0 kmt, or 19.5%, from 133.8 kmt in the six months ended June 30, 2019 to 107.8 kmt in the six months ended June 30, 2020.

All regions were down.

Gross profit of the Specialty Carbon Black segment decreased by $21.9 million, or 25.5%, from $85.8 million in the six months ended June 30, 2019 to $63.9 million in the six months ended June 30, 2020, mainly due to lower volumes and foreign exchange rate translation effects, partially offset by a positive product mix.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $15.9 million, or 26.3%, from $60.4 million in the six months ended June 30, 2019 to $44.5 million in the six months ended June 30, 2020, reflecting primarily the decrease in gross profit and slightly increased fixed costs year over year.

2019 Compared to 2018

The comparison of the three months ended March 31, 2019 and the three months ended March 31, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the three months ended March 31, 2019 located within “ Part I, Item 2.

Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein.

1 unchanged sentence

2020 Compared to 2019

Net sales of the Rubber Carbon Black segment decreased by $36.9 million, or 14.6%, from $253.1 million in the three months ended March 31, 2019 to $216.2 million in the three months ended March 31, 2020, primarily due to lower volumes and passing through lower feedstock costs to customers partially offset by base price increases.

Volume of the Rubber Carbon Black segment decreased by 22.0 kmt, or 11.1%, from 198.8 kmt in the three months ended March

31, 2019 to 176.8 kmt in the three months ended March 31, 2020 primarily attributable to a sharp decline in sales volumes beginning in mid-March as tire and auto manufacturing plants closed due to COVID-19.

Lower volumes also reflected the impact of a deliberate Rubber commercial strategy as part of 2019 contract negotiations to emphasize raising price closer to reinvestment levels over volume.

Gross profit of the Rubber Carbon Black segment decreased by $6.1 million, or 10.8%, from $56.6 million in the three months ended March 31, 2019 to $50.5 million in the three months ended March 31, 2020 as a result of lower volumes and negative foreign exchange translation offset in part by base price increases and favorable absorption due to inventory build.

Adjusted EBITDA of the Rubber Carbon Black segment increased by $0.6 million, or 1.7%, from $35.2 million in the three months ended March 31, 2019 to $35.8 million in the three months ended March 31, 2020, reflecting higher base prices and favorable absorption partially offset by lower volumes.

Adjusted EBITDA margin was 16.5% in the first quarter of 2020 compared to 13.9% in the first quarter of 2019.

Three months ended June 30, 2020 compared to three months ended June 30, 2019

Net sales of the Rubber Carbon Black segment decreased by $151.5 million, or 58.3%, from $259.7 million in the second quarter of 2019 to $108.3 million in the second quarter of 2020, primarily due to lower volumes and, to a much lesser extent, the pass through of lower feedstock costs to customers, partially offset by base price increases.

Volume of the Rubber Carbon Black segment decreased by 93.1, or 46.4%, from 200.6 kmt in the second quarter of 2019 to 107.5 kmt in the second quarter of 2020.

All regions were down.

Volumes were down primarily due to COVID-19, but also reflect our commercial strategy as part of 2019 contract negotiations to emphasize raising price over volume.

Gross profit of the Rubber Carbon Black segment decreased by $49.9 million, or 83.7%, from $59.6 million in the second quarter of 2019 to $9.7 million in the second quarter of 2020, driven by lower volumes, partially offset by base price increases.

Adjusted EBITDA of the Rubber Carbon Black segment decreased by $41.7 million, or 103.0%, from $40.5 million in the second quarter of 2019 to $(1.2) million in the second quarter of 2020, primarily driven by lower volume and the unfavorable impact on margins of lower feedstock costs, partially offset by lower freight costs and fixed costs.

Six months ended June 30, 2020 compared to six months ended June 30, 2019

Net sales of the Rubber Carbon Black segment decreased by $188.4 million, or 36.7%, from $512.9 million in the six months ended June 30, 2019 to $324.5 million in the six months ended June 30, 2020, primarily due to lower volumes and, to a much lesser extent, the pass through of lower feedstock costs to customers, somewhat offset by base price increases.

Volume of the Rubber Carbon Black segment decreased by 115.2 kmt, or 28.8%, from 399.4 kmt in the six months ended June 30, 2019 to 284.2 kmt in the six months ended June 30, 2020, continuing the sharp decline in sales volumes that emerged in mid-March as tire and auto manufacturing plants closed due to COVID-19.

Lower volumes also reflected the impact of a deliberate Rubber commercial strategy as part of 2019 contract negotiations to emphasize raising price over volume.

Gross profit of the Rubber Carbon Black segment decreased by $56.0 million, or 48.2%, from $116.2 million in the six months ended June 30, 2019 to $60.2 million in the six months ended June 30, 2020, primarily as a result of the decrease in gross profit of $49.9 million in the second quarter of 2020.

Adjusted EBITDA of the Rubber Carbon Black segment decreased by $41.1 million, or 54.4%, from $75.7 million in the six months ended June 30, 2019 to $34.5 million in the six months ended June 30, 2020, reflecting the development of gross profit partially offset by lower freight cost.

2019 Compared to 2018

The comparison of the three months ended March 31, 2019 and the three months ended March 31, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the three months ended March 31, 2019 located within “ Part I, Item 2.

Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein.

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The tables below present our historical cash flows derived from our unaudited consolidated financial statements for the periods indicated.

Three Months Ended March 31,

(In millions)

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(In millions) (In millions)

Net cash provided by operating activities $ 85.7 $ 48.0 $ 90.6 $ 74.1

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Cash and cash equivalents at the end of the period $ 143.4 $ 53.2 $ 143.4 $ 53.2

Net cash provided by operating activities in the three months ended March 31, 2020 amounted to $4.9 million and consisted of a consolidated profit for the period of $18.0 million, adjustments primarily for depreciation of $23.8 million and cash outflows from changes in operating assets and liabilities of $38.4 million basically related to changes in Net Working Capital.

Net cash used in investing activities in the three months ended March 31, 2020 amounted to $50.9 million comprised of $28.2 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as $22.7 million environmental improvements of our U.S.

Net cash provided by operating activities for the second quarter 2020 amounted to $85.7 million and consisted primarily of a consolidated loss for the period of $17.8 million offset by adjustments primarily for depreciation of $21.9 million and cash inflows from changes in operating assets and liabilities, including changes in net working capital, of $82.3 million, primarily related to changes in Net Working Capital.

Net cash used in investing activities for the second quarter 2020 amounted to $38.5 million.

It comprises capital expenditure projects mainly related to preservation and overhaul projects as well as expenditures associated with our efforts to meet the EPA requirements in the U.S.

in an amount of $12.9 million.

Net cash used in financing activities for the second quarter 2020 amounted to $12.8 million.

$10.8 million, net, were used for repayments of current borrowing and $2.0 million were used for regular debt repayment.

Net cash provided by operating activities in the six months ended June 30, 2020 amounted to $90.6 million and consisted of a consolidated profit for the period of $0.3 million, adjustments primarily for depreciation of $45.7 million and cash inflows from changes in operating assets and liabilities of $43.9 million, primarily related to changes in Net Working Capital.

Net cash used in investing activities in the six months ended June 30, 2020 amounted to $89.4 million comprised of $53.8 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as $35.6 million environmental improvements of our U.S.

based facilities to address the EPA requirements.

Net cash provided by financing activities in the three months ended March 31, 2020 amounted to $94.6 million.

Cash inflows during the quarter of $109.8 million are related to local bank loan facilities to bolster the liquidity of the Company in light of the current COVID-19 uncertainties while cash outflows were used for regular debt repayment of $2.0 million and $12.0 million dividend payments.

Net cash provided by operating activities in the three months ended March 31, 2019 amounted to $26.2 million and consisted of a consolidated profit for the period of $19.0 million, adjustments primarily for depreciation of $24.1 million and from changes in operating assets and liabilities of $20.0 million of which outflows from Net Working Capital amounted to $0.8 million.

Net cash used in investing activities in the three months ended March 31, 2019 amounted to $22.5 million.

Net cash provided by financing activities in the six months ended June 30, 2020 amounted to $81.7 million.

Cash inflows during the six months of $99.0 million are related to local bank loan facilities to bolster the liquidity of the Company in light of the current COVID-19 uncertainties while cash outflows were used for regular debt repayment of $4.0 million and a $12.0 million dividend payment in the first quarter of 2020.

Net cash provided by operating activities for the second quarter 2019 amounted to $48.0 million and consisted primarily of a consolidated profit for the period of $24.7 million, adjustments primarily for depreciation of $25.4 million and cash outflows from changes in operating assets and liabilities of $7.8 million.

Net cash used in investing activities for the second quarter 2019 amounted to $38.4 million.

It comprises capital expenditure projects mainly related to preservation and overhaul projects as well as expenditures associated with our efforts to meet the EPA requirements in the U.S.

Net cash provided by financing activities in the three months ended March 31, 2019 amounted to $0.3 million.

$22.8 million was used for repayments of current borrowing, $2.0 million for regular debt repayments and $11.9 million for dividend payments.

Cash inflows of $37.1 million are related to local short term financing facilities.

Net cash used in financing activities for the second quarter 2019 amounted to $17.2 million.

$2.0 million were used for regular debt repayment, $12.0 million were used for dividend payments and $6.5 million were used for taxes paid for shares issued under net settlement feature.

Cash inflow, net, of $5.1 million are related to local short-term financing facilities.

Net cash provided by operating activities for the six months ended June 30, 2019 amounted to $74.1 million and consisted primarily of a consolidated profit for the period of $43.7 million, adjustments primarily for depreciation of $49.5 million and cash outflows from changes in operating assets and liabilities of $27.8 million.

Net cash used in investing activities for the six months ended June 30, 2019 amounted to $60.9 million.

It comprises capital expenditure projects mainly related to preservation and overhaul projects as well as expenditures associated with our efforts to meet the EPA requirements in the U.S.

Net cash used in financing activities for the six months ended June 30, 2019 amounted to $16.8 million.

$4.0 million were used for regular debt repayment, $23.9 million were used for dividend payments and $6.5 million were used for taxes paid for shares issued under net settlement feature.

Cash inflow, net, of $19.4 million are related to local short-term financing facilities.

Sources of Liquidity

Our principal sources of liquidity are the net cash generated (i) from operating activities, primarily driven by our operating results and changes in working capital requirements, and (ii) from financing activities, primarily driven by, borrowing amounts available under our committed multicurrency, senior secured Revolving Credit Facility, and related ancillary facilities as well as various uncommitted local credit lines and, from time to time, term loan borrowings.

Our principal sources of liquidity are the net cash generated (i) from operating activities, primarily driven by our operating results and changes in working capital requirements, and (ii) from financing activities, primarily driven by, borrowing amounts available under our committed multicurrency, senior secured RCF, and related ancillary facilities as well as various uncommitted local credit lines and, from time to time, term loan borrowings.

Our RCF allows the conversion of revolver capacity to ancillary line capacity.

Because ancillary lines are bilateral agreements directly with individual bank group participants, borrowings under such lines reduce overall RCF availability but do not count towards the 35% RCF utilization test governing our financial covenant.

As of June 30, 2020, we had converted 68% of our RCF into ancillary capacity, resulting in our ability to borrow the full amount of commitments under the RCF at any net leverage level.

While we continue to closely monitor our working capital management and capital spending in light of continuing uncertainties in the global economy, we anticipate that cash on hand and cash provided by operating activities and borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations and fund any capital expenditures for the foreseeable future.

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The following tables set forth the principal components of our Net Working Capital as of the dates indicated.

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

(In millions)

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Based on 2020 Net Working Capital requirements and normalized business activities, we estimate that a $10 per barrel movement in the Brent crude oil price correlates to a movement in our Net Working Capital of approximately $27 million to $30 million within about a two to three month period.

In times of relatively stable oil prices, the effects on our Net Working Capital levels are less significant and Net Working Capital swings increase in an environment of high price volatility.

Our Net Working Capital increased from $221.1 million as of December 31, 2019 to $257.7 million as of March 31, 2020, primarily due to the timing of the impact from oil-price related pass-through effects on our accounts receivables during the quarter.

Our Net Working Capital decreased from $221.1 million as of December 31, 2019 to $190.5 million as of June 30, 2020, primarily due to lower volumes and oil prices.

Capital Expenditures (Non-GAAP Financial Measure)

We define Capital Expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the consolidated financial statements.

Our Capital Expenditures amounted to $22.5 million in the three months ended March 31, 2019 and $50.9 million in the three months ended March 31, 2020 .

We plan to finance our Capital Expenditures, including the EPA related expenditure, with cash generated by our operating activities.

With the exception of required expenditures in association with our settlement with the EPA we currently do not have any material commitments to make Capital Expenditures, and do not plan to make Capital Expenditures, outside the ordinary course of our business.

See “ Note M.

Our Capital Expenditures amounted to $60.9 million in the six months ended June 30, 2019 and $89.4 million in the six months ended June 30, 2020.

We plan to finance our Capital Expenditures with cash generated by our operating activities.

With the exception of required expenditures in association with our settlement with the EPA we currently do not have any material obligatory commitments to make Capital Expenditures outside the ordinary course of our business.

See “ Note N.

Commitments and Contingencies ” for further details regarding the EPA settlement.

Capital Expenditures in the three months ended March 31, 2020 amounted to $50.9 million and were mainly composed of maintenance and overhaul projects including $22.7 million expenditures associated with our efforts to commencing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in the three months ended March 31, 2019 amounted to $22.5 million and were mainly composed of preservation and overhaul projects as well as expenditures associated with our efforts for investments required to address the EPA requirements in the United States.

Capital Expenditures in the six months ended June 30, 2020 amounted to $89.4 million and were mainly comprised of maintenance and overhaul projects including $35.6 million expenditures associated with our efforts to commence environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in the six months ended June 30, 2019 amounted to $60.9 million and were mainly composed of preservation and overhaul projects and in an amount of $12.9 million for expenditures associated with our efforts for investments required to address the EPA requirements in the United States.

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2020:

The following table sets forth our contractual obligations as of June 30, 2020:

Less than 1 year 1-3 years 4-5 years More than 5 years Total

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89.7 — — — 89.7

Local credit lines (3)

40.6 — — — 40.6

Term loan (4)

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Operating leases (7)

7.2 13.2 10.7 3.8 34.9

Total contractual obligations (8)

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(1) Sets forth obligations to repay principal and interest under our long-term debt obligations.

(2) Represents the obligation under the Revolving Credit Facility.

As of March 31, 2020, total drawing amounting to $138.3 million either through our Revolving Credit Facility or related ancillary facilities.

The Revolving Credit Facility can be drawn up to a total amount of €250.0 million (USD equivalent:

(2) Represents the obligation under the RCF.

As of June 30, 2020, total drawing was $89.7 million either through our RCF or related ancillary facilities.

The RCF can be drawn up to a total amount of €250.0 million (USD equivalent:

$280.0 million).

(3) Currently in Korea and Brazil.

(4) Represents the Term Loans and includes the outstanding principal amounts of $279.5 million (U.S.

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(6) Represents purchase commitments under long-term supply agreements for the supply of raw materials, mainly oil and gas.

(6) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of March 31, 2020 amounted to $69.5 million (see “ Note G.

(7) Represents current leases, for forward-starting leases see “ Note C.

(8) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of June 30, 2020 amounted to $71.2 million (non-current) and $0.9 million (current) (see “ Note H.

Employee Benefit Plans ” with regard to pension provisions and post-retirement benefits included in the unaudited financial statements).

The level of performance bonds, guarantees and letters of credit required for carbon black oil purchasing could increase as a result of increasing oil prices or other factors (such as our ownership structure).

As at March 31, 2020 Orion Engineered Carbons GmbH has five guarantees issued by Euler Hermes S.A.

with a total volume of $9.4 million (in prior year three guarantees by Euler Hermes S.A.

of $9.2 million);

one guarantee insurance issued by Deutsche Bank AG with a volume of $2.2 million (in prior year one guarantee issued by Deutsche Bank AG with a volume of $2.2 million).

None of these guarantees reduce the possible utilization limit of the current RCF.

The level of performance bonds, guarantees and letters of credit required for carbon black oil purchasing could increase as a result of increasing oil prices or other factors .

As of June 30, 2020 Orion Engineered Carbons GmbH had entered into eight guarantees from various financial institutions amounting to $14.9 million compared with five guarantees amounting to $11.4 million as of December 31, 2019.

Neither of these guarantees reduce the utilization limit of the current RCF.

Orion also had entered during the second quarter of 2020 into four guarantees issued by UniCredit AG amounting to $0.3 million that reduce financing headroom under the RCF.

Borrowings under our Credit Agreement are at variable rates of interest based on USD-LIBOR or EURIBOR rates.

In July 2017, the U.K.

Financial Conduct Authority announced that it intends to stop collecting LIBOR rates from banks after 2021.

The announcement indicates that LIBOR will not continue to exist on the current basis.

We are unable to predict the effect of any changes to LIBOR, the establishment and success of any alternative reference rates, or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United Kingdom or elsewhere.

Such changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives or other financial instruments or extensions of credit held by us.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet arrangements.

As of June 30, 2020, we did not have any off-balance sheet arrangements.

Note Regarding Forward-Looking Statements

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• our ability to realize benefits from planned plant capacity expansions and site development projects and the potential delays to such expansions and projects;

• information technology systems failures, network disruptions and breaches of data security;

• information technology system failures, network disruptions and breaches of data security;

• our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages;

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• our exposure to political or country risks inherent in doing business in some countries;

• geopolitical events in the European Union, and in particular the ultimate future relations between the European Union and the United Kingdom resulting from the “Brexit” which may impact the Euro;

• geopolitical events in the European Union, and in particular the ultimate future relations between the European Union and the United Kingdom resulting from “Brexit” which may impact the Euro;

• environmental, health and safety regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities;

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Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the period ended March 31, 2020 does not differ materially from that discussed under Item 7A of our 2019 Form 10-K.

Information about market risks for the period ended June 30, 2020 does not differ materially from that discussed under Item 7A of our 2019 Form 10-K.

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