Orion S.A. 10-Q

Item 2. 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 and nine months ended September 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. We prepare our financial statements in accordance with accounting principles generally accepted in the United States. PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION Non-GAAP Financial Measures In this report, we present certain financial measures that are not recognized by GAAP and that may not be permitted to appear on the face of GAAP-compliant financial statements or notes thereto. The non-GAAP financial measures contained in this report are unaudited and have not been prepared in accordance with GAAP or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, see below. The non-GAAP financial measures used in this report are Contribution Margin, Contribution Margin per Metric Ton (collectively, “Contribution Margins”), Adjusted EBITDA, Net Working Capital and Capital Expenditures. We define Contribution Margin as revenue less variable costs (such as raw materials, packaging, utilities and distribution costs). We define Contribution Margin per Metric Ton as Contribution Margin divided by volume measured in metric tons. We define Adjusted EBITDA as operating result (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Company strategy, share of profit or loss of joint venture and certain other items. Adjusted EBITDA is defined similarly in the Credit Agreement. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of items that have less bearing on the performance of our underlying core business. We define Net Working Capital as inventories plus current trade receivables minus trade payables. 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. We also use Segment Adjusted EBITDA Margin, which we define as Adjusted EBITDA for the relevant segment divided by the revenue for that segment. We use Adjusted EBITDA, Contribution Margins and Net Working Capital, as well as Adjusted EBITDA by segment and Segment Adjusted EBITDA Margin, as internal measures of performance to benchmark and compare performance among our own operations. We use these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of our business. We believe these measures are useful measures of financial performance in addition to consolidated net income for the period, income from operations (EBIT) and other profitability measures under GAAP because they facilitate operating performance comparisons from period to period and company to company and, with respect to Contribution Margin, eliminate volatility in feedstock prices. By eliminating potential differences in results of operations between periods or companies caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures and taxation positions or regimes, we believe that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated. For these reasons, we believe EBITDA-based measures are often used by the investment community as a means of comparison of companies in our industry. By deducting variable costs (such as raw materials, packaging, utilities and distribution costs) from revenue, we believe that Contribution Margins can provide a useful basis for comparing the current performance of the underlying operations being evaluated by indicating the portion of revenue that is not consumed by these variable costs and therefore contributes to the coverage of all costs and profits. Different companies and analysts may calculate measures based on EBITDA, contribution margins and working capital differently, so making comparisons among companies on this basis should be done carefully. Adjusted EBITDA, Contribution Margins and Net Working Capital are not measures of performance under GAAP and should not be considered in isolation or construed as substitutes for revenue, consolidated net income for the period, income from operations (EBIT), gross profit and other GAAP measures as an indicator of our operations in accordance with GAAP. Reconciliation of Non-GAAP Financial Measures We use Contribution Margin and Adjusted EBITDA as supplemental measures of our operating performance. Contribution Margin and Adjusted EBITDA presented in this Management Discussion and Analysis have not been prepared in accordance with GAAP or the accounting standards of any other jurisdiction. Other companies may use similar non-GAAP financial measures that are calculated differently from the way we calculate these measures. Accordingly, our Contribution Margin and Adjusted EBITDA may not be comparable to similar measures used by other companies and should not be considered in isolation, or construed as substitutes for, revenue, consolidated net income for the period, income from operations (EBIT), gross profit and other GAAP measures as indicators of our results of operations in accordance with GAAP. 25 Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures) We calculate Contribution Margin by subtracting variable costs (such as raw materials, packaging, utilities and distribution costs) from our revenue. We believe that Contribution Margin is useful because we see this measure as indicating the portion of revenue that is not consumed by such variable costs and therefore contributes to the coverage of all other costs and profits. The following table reconciles Contribution Margin and Contribution Margin per Metric Ton to gross profit: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions, unless otherwise indicated) (In millions, unless otherwise indicated) Revenue (1) $ 282.0 $ 370.2 $ 820.7 $ 1,153.9 Variable costs (2) (163.9) (234.8) (496.3) (738.9) Contribution margin 118.2 135.4 324.3 415.1 Freight 17.9 19.6 48.7 61.0 Fixed Costs (3) (56.9) (56.3) (169.8) (175.4) Gross profit (1) $ 79.2 $ 98.7 $ 203.3 $ 300.7 Volume (in kmt) 237.0 256.4 629.1 789.7 Contribution margin per metric ton $ 498.6 $ 527.9 $ 515.6 $ 525.6 Gross profit per metric ton $ 334.1 $ 385.0 $ 323.2 $ 380.8 (1) Separate line item in Condensed Consolidated Financial Statements. (2) Includes costs such as raw materials, packaging, utilities and distribution. (3) Includes costs such as depreciation, amortization and impairment of intangible assets and property, plant and equipment, personnel and other production related costs. Adjusted EBITDA (Non-GAAP Financial Measure) We define Adjusted EBITDA as income from operations (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Company strategy, share of profit or loss of joint venture and certain other items. Adjusted EBITDA is defined similarly in our Credit Agreements. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of items that have less bearing on the performance of our underlying core business. Our use of Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although Adjusted EBITDA excludes the impact of depreciation and amortization, the assets being depreciated and amortized may have to be replaced in the future and thus the cost of replacing assets or acquiring new assets, which will affect our operating results over time, is not reflected; (b) Adjusted EBITDA does not reflect interest or certain other costs that we will continue to incur over time and will adversely affect our profit or loss, which is the ultimate measure of our financial performance and (c) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently. Because of these and other limitations, Adjusted EBITDA should be considered alongside our other GAAP-based financial performance measures, such as revenue, consolidated net income for the period or income from operations (EBIT). 26 The following table presents a reconciliation of Adjusted EBITDA to consolidated net income for each of the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) (In millions) Net income $ 9.0 $ 24.3 $ 9.2 $ 68.0 Add back income tax expense 2.3 7.8 4.0 26.5 Add back equity in earnings of affiliated companies, net of tax (0.1) (0.1) (0.4) (0.4) Income from operations before income taxes and equity in earnings of affiliated companies 11.1 31.9 12.8 94.0 Add back interest and other financial expense, net 10.8 6.5 28.7 20.5 Reclassification of actuarial losses from AOCI 2.3 — 7.3 — Earnings before income taxes and finance income/costs 24.1 38.4 48.8 114.6 Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment 24.0 22.0 69.7 71.5 EBITDA 48.1 60.4 118.5 186.0 Equity in earnings of affiliated companies, net of tax 0.1 0.1 0.4 0.4 Restructuring expenses (1) — 2.7 — 3.8 Consulting fees related to Company strategy (2) — (0.7) — 0.8 Extraordinary expense items related to COVID-19 (3) 0.8 — 3.5 — Long term incentive plan 1.2 2.0 1.2 7.1 EPA-related expenses 1.5 1.5 5.1 3.0 Other adjustments (4) 3.2 1.9 5.3 2.9 Adjusted EBITDA $ 55.0 $ 68.1 $ 134.1 $ 204.1 Thereof Adjusted EBITDA Specialty Carbon Black $ 26.5 $ 30.0 $ 71.0 $ 90.4 Thereof Adjusted EBITDA Rubber Carbon Black $ 28.5 $ 38.1 $ 63.1 $ 113.8 (1) Restructuring expenses for the three and nine months ended September 30, 2019 are related to the strategic realignment of our global Rubber manufacturing footprint. (2) Consulting fees related to the Orion strategy include external consulting for establishing and executing Company strategies relating to realigning the manufacturing footprint of our Rubber business, the conversion of our financial statements to U.S. dollar and U.S. GAAP, and costs related to assessing feasibility for inclusion in certain U.S. indices. (3) Extraordinary expense items related to COVID-19 are costs incurred to address impacts associated with the global coronavirus 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 nine months ended September 30, 2020 mainly relate to legal fees associated with a dispute concerning intellectual property of $1.0 million and $1.9 million, respectively; severance costs of $1.8 million and $1.7 million, respectively; and hurricane related costs of $0.8 million and $0.8 million, respectively. These costs were offset by a non-income tax expense related settlement in the amount of $1.7 million. 27 Operating Results Quarter and nine months ended September 30, 2020 compared to quarter and nine months ended September 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) (In millions) Net sales $ 282.0 $ 370.2 $ 820.7 $ 1,153.9 Cost of sales 202.9 271.5 617.4 853.2 Gross profit 79.2 98.7 203.3 300.7 Selling, general and administrative expenses 43.2 49.6 126.2 157.3 Research and development costs 7.4 4.8 16.8 14.8 Other expenses, net 4.5 3.2 11.5 10.2 Restructuring expenses 0.0 2.7 0.0 3.8 Income from operations 24.1 38.4 48.8 114.6 Interest and other financial expense, net 10.8 6.5 28.7 20.5 Reclassification of actuarial losses from AOCI 2.3 — 7.3 — Income from operations before income tax expense and equity in earnings of affiliated companies 11.1 31.9 12.8 94.0 Income tax expense/(benefit) 2.3 7.8 4.0 26.5 Equity in earnings of affiliated companies, net of tax 0.1 0.1 0.4 0.4 Net income $ 9.0 $ 24.3 $ 9.2 $ 68.0 Net sales Net sales decreased by $88.2 million, or 23.8%, from $370.2 million ($122.8 million in our Specialty Carbon Black segment and $247.4 million in our Rubber Carbon Black segment) in the third quarter of 2019 to $282.0 million ($103.6 million in our Specialty Carbon Black segment and $178.4 million in our Rubber Carbon Black segment) in the third quarter of 2020, driven primarily by the effects of passing on lower feedstock costs to customers and, to a lesser extent, lower volumes. Net sales decreased by $333.2 million, or 28.9%, from $1,153.9 million in the nine months ended September 30, 2019 to $820.7 million in the nine months ended September 30, 2020, driven primarily by lower volumes and the effects of passing on lower feedstock costs to customers. Volume decreased by 19.4 kmt or 7.6%, from 256.4 kmt (60.4 kmt in our Specialty Carbon Black segment and 196.0 kmt in our Rubber Carbon Black segment) in the third quarter of 2019 to 237.0 kmt (58.8 kmt in our Specialty carbon Black segment and 178.2 kmt in our Rubber Carbon Black segment) in the third quarter of 2020, with lower demand in both segments and in all regions, primarily driven by the global economic downturn, and rose 51.0% sequentially, as end markets partially recovered. Volume decreased by 160.6 kmt, or 20.3%, from 789.7 kmt in the nine months ended September 30, 2019 to 629.1 kmt in the nine months ended September 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 $68.6 million, or 25.3%, from $271.5 million in the third quarter of 2019 to $202.9 million in the third quarter of 2020, mainly as a result of lower volumes. Cost of sales decreased by $235.8 million, or 27.6%, from $853.2 million in the nine months ended September 30, 2019 to $617.4 million in the nine months ended September 30, 2020, of which the 20.3% year over year volume decline drove $150.4 million of the decline and the balance of the decline primarily related to lower oil prices. Gross profit decreased for reasons described above by $19.5 million, or 19.8% from $98.7 million ($41.4 million in our Specialty Carbon Black segment and $57.3 million in our Rubber Carbon Black segment) in the third quarter of 2019 to $79.2 million ($37.1 million in our Specialty Carbon Black segment and $42.1 million in our Rubber Carbon Black segment) in the third quarter of 2020. Primarily as a result of declining economic activity in the second and third quarters of 2020, gross profit decreased by $97.4 million, or 32.4%, from $300.7 million in the nine months ended September 30, 2019 to $203.3 million in the nine months ended 28 September 30, 2020 for reasons described above. Selling, general and administrative expenses Selling, general and administrative expenses decreased by $6.5 million, or 13.1%, from $49.6 million in the third quarter of 2019 to $43.2 million in the third quarter of 2020, driven primarily by lower freight costs due to 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 $31.1 million, or 19.8%, from $157.3 million in the nine months ended September 30, 2019 to $126.2 million in the nine months ended September 30, 2020, driven primarily by lower freight costs due to decreased volumes as a result of the effects of COVID-19 on the overall global economy and cost reduction initiatives. Research and development costs R&D expenses increased by $2.6 million from $4.8 million in the third quarter of 2019 to $7.4 million in the third quarter of 2020 driven by the timing of expenditures for individual development of programs. R&D expenses increased by $1.9 million, from $14.8 million in the nine months ended September 30, 2019 to $16.8 million in the nine months ended September 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, increased from $3.2 million in the third quarter of 2019 to $4.5 million in the third quarter of 2020 driven by the timing of expenditures in the third quarter of 2019. Other expenses, net which comprises other operating income and other operating expenses, were $11.5 million and $10.2 million for the nine months ended September 30, 2020 and 2019, respectively, and included in particular EPA-related expenses, COVID-19 related expenses and severance cost. In the nine months ended September 30, 2020, other operating income amounted to $6.8 million and included, among other items, a gain related to the release of bonus accruals as well as a sales tax reimbursement of $2.5 million following a successful ruling in our favor and an other non-income tax expense related indemnification in an amount of $1.7 million. Other operating expenses in the nine months ended September 30, 2020 amounted to $18.3 million, comprised primarily of $5.1 million of EPA-related expenses, $3.5 million of COVID-19 related expenses, litigation and severance cost of $1.9 million and $1.8, respectively, and charges for bad debt allowances of $1.4 million. In the nine months ended September 30, 2019, other operating income amounted to $1.6 million. Other operating expenses in the nine months ended September 30, 2019 amounted to $11.8 million, comprised primarily of $0.8 million consulting fees related to Company strategy, EPA-related expenses of $3.0 million as well as allowances and asset disposal expenses. Restructuring expenses/(income), net In the nine months ended September 30, 2019, restructuring expenses amounted to $3.8 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 from operations Income from operations decreased by $14.2 million from $38.4 million in the third quarter of 2019 to a loss from operations of $24.1 million in the third quarter of 2020, primarily driven by lower end market demand due to the global economic downturn. Income from operations decreased by $65.7 million, or 57.4%, from $114.6 million in the nine months ended September 30, 2019 to $48.8 million in the nine months ended September 30, 2020. The decrease year over year in the nine months ended September 30, 2020 is primarily due to lower volumes related to the impact of COVID-19 during the third 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 $4.3 million from $6.5 million in the third quarter of 2019 to $10.8 million in the third 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 $28.7 million in the nine months ended September 30, 2020 compared to $20.5 million in the nine months ended September 30, 2019. 29 Interest and other financial expense, net in the nine months ended September 30, 2020 included, among other items, $11.0 million of interest expenses for our Term Loan Facilities, $1.5 million of amortization of capitalized transaction costs, $0.9 million of interest expenses on pension obligations and $12.4 million of net foreign currency revaluation related expenses. Interest and other financial expense, net in the nine months ended September 30, 2019 amounted to $20.5 million and included, among other items, $11 million of interest expenses for our Term Loan Facilities, $1.6 million amortization of capitalized transaction costs, $0.9 million of interest expenses on pension obligations and $1.2 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 $7.3 million in the nine months ended September 30, 2020. Income from 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 $20.8 million from $31.9 million in the third quarter of 2019 to a loss from operations before income taxes of $11.1 million in the third 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 $81.2 million, or 86.4%, from $94.0 million in the nine months ended September 30, 2019 to $12.8 million in the nine months ended September 30, 2020, due to the effects of COVID-19 on the overall global economy in the third quarter of 2020. Income tax expense/(benefit) Income taxes decreased by $5.5 million from $7.8 million in the third quarter of 2019 to tax income of $2.3 million in the third quarter of 2020, as a result of decreased income before taxes. Income tax expense amounted to $4.0 million in the nine months ended September 30, 2020 compared to $26.5 million in the nine months ended September 30, 2019, as a result of decreased income before taxes. In the nine months ended September 30, 2020, the impact of discrete tax items included discrete tax expense of $0.4 million, primarily due to tax return filings and other prior year adjustments and a deferred tax gain of $0.4 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 30.2% for the nine months ended September 30, 2020. The estimated annual tax rate is 30.2% for 2020. For details regarding this deviation see Note M. Income Taxes to the unaudited condensed consolidated financial statements. In the nine months ended September 30, 2019, the effective tax rate of 28.1% deviated from our estimated annual effective tax rate of 30.6% in particular due to a net discrete tax gain of $2.5 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 nine months ended September 30, 2020 and the nine months ended September 30, 2019. Net income Net income decreased by $15.3 million from $24.3 million in the third quarter of 2019 to $9.0 million in the third quarter of 2020, reflecting all the items described above. Our net income in the nine months ended September 30, 2020 amounted to $9.2 million, a decrease of $58.7 million, reflecting all the factors described above. Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures) Contribution Margin decreased by $17.2 million, or 12.7%, from $135.4 million in the third quarter of 2019 to $118.2 million in the third quarter of 2020, primarily due to less volume, unfavorable mix and the effects of passing through lower feedstock costs, partially offset by base price increases. Contribution Margin per Metric Ton decreased by 5.6%, from $527.9 per Metric Ton for the third quarter of 2019 to $498.6 per Metric Ton in the third quarter of 2020. Contribution Margin decreased by $90.7 million, or 21.9%, from $415.1 million in the nine months ended September 30, 2019 to $324.3 million in the nine months ended September 30, 2020, primarily due to less volume, unfavorable mix and the effects of passing through lower feedstock costs, partially offset by base price increases. Contribution Margin per Metric Ton decreased by 1.9%, from $525.6 per Metric Ton in the nine months ended September 30, 2019 to $515.6 per Metric Ton in the nine months ended September 30, 2020. 30 Adjusted EBITDA (Non-GAAP Financial Measure) Adjusted EBITDA decreased by $13.1 million, or 19.2%, from $68.1 million in the third quarter of 2019 to $55.0 million in the third quarter of 2020, primarily due to lower volume and less favorable mix, partially offset by base price increases primarily in the Rubber segment. Adjusted EBITDA decreased by $70.1 million, or 34.3%, from $204.1 million in the nine months ended September 30, 2019 to $134.1 million in the nine months ended September 30, 2020, mainly reflecting the COVID-19 impacts of the third quarter of 2020. 2019 Compared to 2018 The comparison of the three and nine months ended September 30, 2019 and the three and nine months ended September 30, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the nine months ended September 30, 2019 located within “ Part I, Item 2. Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein. Segment Discussion Our business operations are divided into two operating segments: the Specialty Carbon Black segment and the Rubber Carbon Black segment. We use segment revenue, segment gross profit, segment volume, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin as measures of segment performance and profitability. The table below presents our segment results derived from our audited consolidated financial statements for the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions, unless otherwise indicated) (In millions, unless otherwise indicated) Specialty Carbon Black Net sales $ 103.6 $ 122.8 $ 317.8 $ 393.7 Cost of sales (66.5) (81.5) (216.7) (266.5) Gross profit $ 37.1 $ 41.4 $ 101.1 $ 127.2 Volume (kmt) 58.8 60.4 166.6 194.2 Adjusted EBITDA $ 26.5 $ 30.0 $ 71.0 $ 90.4 Adjusted EBITDA Margin (%) (1) 25.5 24.4 22.3 23.0 Rubber Carbon Black Net sales $ 178.4 $ 247.4 $ 502.9 $ 760.2 Cost of sales (136.3) (190.0) (400.6) (586.7) Gross profit $ 42.1 $ 57.3 $ 102.3 $ 173.5 Volume (kmt) 178.2 196.0 462.5 595.4 Adjusted EBITDA $ 28.5 $ 38.1 $ 63.1 $ 113.8 Adjusted EBITDA Margin (%) (1) 16.0 15.4 12.5 15.0 (1) Defined as Adjusted EBITDA divided by net sales. Specialty Carbon Black 2020 Compared to 2019 Three months ended September 30, 2020 compared to three months ended September 30, 2019 Net sales of the Specialty Carbon Black segment decreased by $19.2 million, or 15.6%, from $122.8 million in the third quarter of 2019 to $103.6 million in the third quarter of 2020, primarily due to the pass through of lower feedstock costs and lower volumes. Specialty Carbon Black segment volumes decreased by 1.6 kmt, or 2.6%, from 60.4 kmt in the third quarter of 2019 to 58.8 kmt in the third quarter of 2020, primarily in North America and EMEA, and rose 18.8%, sequentially, as end markets partially recovered. Gross profit of the Specialty Carbon Black segment decreased by $4.2 million, or 10.3%, from $41.4 million in the third quarter of 2019 to $37.1 million in the third quarter of 2020, as well as a result of lower volumes. 31 Adjusted EBITDA of the Specialty Carbon Black segment decreased by $3.5 million, or 11.6%, from $30.0 million in the third quarter of 2019 to $26.5 million in the third quarter of 2020, primarily due to lower volumes and overhead absorption, partially offset by foreign currency translation. Adjusted EBITDA margin increased 110 basis points to 25.5% in the third quarter of 2020 compared to 24.4% in the third quarter of 2019. Nine months ended September 30, 2020 compared to nine months ended September 30, 2019 Net sales of the Specialty Carbon Black segment decreased by $75.9 million, or 19.3%, from $393.7 million in the nine months ended September 30, 2019 to $317.8 million in the nine months ended September 30, 2020, primarily due to lower volumes and the effects of passing on lower feedstock costs to customers, partially offset by favorable product mix. Specialty Carbon Black segment volumes decreased by 27.6 kmt, or 14.2%, from 194.2 kmt in the nine months ended September 30, 2019 to 166.6 kmt in the nine months ended September 30, 2020, primarily in North America and EMEA, and rose 14.4%, sequentially, as end markets partially recovered. Gross profit of the Specialty Carbon Black segment decreased by $26.1 million, or 20.5%, from $127.2 million in the nine months ended September 30, 2019 to $101.1 million in the nine months ended September 30, 2020, mainly due to lower volumes, partially offset by favorable product mix and base price increases. Adjusted EBITDA of the Specialty Carbon Black segment decreased by $19.4 million, or 21.4%, from $90.4 million in the nine months ended September 30, 2019 to $71.0 million in the nine months ended September 30, 2020, mainly driven by the decrease in gross profit. 2019 Compared to 2018 The comparison of the three and nine months ended September 30, 2019 and the three and nine months ended September 30, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the nine months ended September 30, 2019 located within “ Part I, Item 2. Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein. Rubber Carbon Black 2020 Compared to 2019 Three months ended September 30, 2020 compared to three months ended September 30, 2019 Net sales of the Rubber Carbon Black segment decreased by $69.0 million, or 27.9%, from $247.4 million in the third quarter of 2019 to $178.4 million in the third quarter of 2020, primarily driven by the pass through of lower feedstock costs to customers and, to a lesser extent, the broad-based volume slowdown across all regions and markets, partially offset by base price increases. Rubber Carbon Black segment volumes decreased by 17.8, or 9.1%, from 196.0 kmt in the third quarter of 2019 to 178.2 kmt in the third quarter of 2020 primarily driven by the COVID-19 induced global economic downturn which impacted demand from tire customers. The year over year volume decline also partially reflected the impact of our commercial strategy during 2019 contract negotiations which emphasized raising price over volume. Volume rose 65.9% sequentially, reflecting partial end market recovery. Gross profit of the Rubber Carbon Black segment decreased by $15.3 million, or 26.7%, from $57.3 million in the third quarter of 2019 to $42.1 million in the third quarter of 2020, driven by lower volumes and the impact of passing through lower feedstock costs, partially offset by base price increases. Adjusted EBITDA of the Rubber Carbon Black segment decreased by $9.6 million, or 25.1%, from $38.1 million in the third quarter of 2019 to $28.5 million in the third quarter of 2020, primarily driven by lower volume, the impact of passing through lower feedstock costs and unfavorable mix, partially offset by price increases. Nine months ended September 30, 2020 compared to nine months ended September 30, 2019 Net sales of the Rubber Carbon Black segment decreased by $257.3 million, or 33.8%, from $760.2 million in the nine months ended September 30, 2019 to $502.9 million in the nine months ended September 30, 2020, primarily due to lower volumes and, to a lesser extent, the pass through of lower feedstock costs to customers, somewhat offset by base price increases. Rubber Carbon Black segment volumes decreased by 133.0 kmt, or 22.3%, from 595.4 kmt in the nine months ended September 30, 2019 to 462.5 kmt in the nine months ended September 30, 2020, primarily reflecting the impact on demand of the COVID-19 induced global economic downturn. 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 $71.3 million, or 41.1%, from $173.5 million in the nine months ended September 30, 2019 to $102.3 million in the nine months ended September 30, 2020, primarily as a result of lower sales volumes. 32 Adjusted EBITDA of the Rubber Carbon Black segment decreased by $50.7 million, or 44.6%, from $113.8 million in the nine months ended September 30, 2019 to $63.1 million in the nine months ended September 30, 2020, reflecting the development of gross profit partially offset by lower freight costs. 2019 Compared to 2018 The comparison of the three and nine months ended September 30, 2019 and the three and nine months ended September 30, 2018 can be found in our quarterly report filed as Exhibit to Form 6-K for the nine months ended September 30, 2019 located within “ Part I, Item 2. Management’s Discussions and Analysis — Operating Results” , which is incorporated by reference herein. Liquidity and Capital Resources Historical Cash Flows The tables below present our historical cash flows derived from our unaudited consolidated financial statements for the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) (In millions) Net cash provided by operating activities $ 1.7 $ 68.5 $ 92.4 $ 142.7 Net cash used in investing activities $ (30.9) $ (34.5) $ (120.3) $ (95.3) Net cash provided by/(used in) financing activities $ (20.9) $ (29.5) $ 60.9 $ (46.3) Cash, cash equivalents and restricted cash at the end of the period $ 100.4 $ 60.3 $ 100.4 $ 60.3 Less restricted cash at the end of the period 2.9 4.4 2.9 4.4 Cash and cash equivalents at the end of the period $ 97.5 $ 56.0 $ 97.5 $ 56.0 2020 Net cash provided by operating activities for the third quarter 2020 amounted to $1.7 million and consisted primarily of a consolidated profit for the period of $9.0 million, adjustments primarily for depreciation of $24.0 million and cash outflows from changes in Net Working Capital of $27.7 million. Net cash used in investing activities for the third quarter 2020 amounted to $30.9 million. This line item includes capital expenditures mainly related to preservation and overhaul projects and expenditures associated with our efforts to meet the EPA requirements in the United States of $9.0 million. Net cash used in financing activities for the third quarter 2020 amounted to $20.9 million, of which $18.8 million, net, was used for repayments of current borrowings and $2.1 million was used for regular debt repayment. Net cash provided by operating activities in the nine months ended September 30, 2020 amounted to $92.4 million and consisted of a consolidated profit for the period of $9.2 million, adjustments primarily for depreciation of $69.7 million and cash inflows from changes in operating assets and liabilities of $16.2 million, primarily related to changes in Net Working Capital. Net cash used in investing activities in the nine months ended September 30, 2020 amounted to $120.3 million comprised o$75.8 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as $44.5 million environmental improvements of our U.S. based facilities to address the EPA requirements. Net cash provided by financing activities in the nine months ended September 30, 2020 amounted to $60.9 million. Cash inflows during the nine months of $80.2 million were related to a combination of net drawings under local bank loan facilities and the Company’s revolver 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 $6.1 million and a $12.0 million dividend payment in the first quarter of 2020 as well as $1.2 million tax payments for equity settled stock compensation plans . 2019 Net cash provided by operating activities for the third quarter 2019 amounted to $68.5 million and consisted primarily of a consolidated profit for the period of $24.3 million, adjustments primarily for depreciation of $22.0 million million and cash inflows from changes in operating assets and liabilities of $12.8 million. 33 Net cash used in investing activities for the third quarter 2019 amounted to $34.5 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. Net cash used in financing activities for the third quarter 2019 amounted to $29.5 million. $25.2 million was used for repayments of current borrowing as well as $2.0 million regular debt repayment. In addition, $12.0 million was used for dividend payments. Cash inflow of $9.7 million are related to local short term financing facilities. Net cash provided by operating activities for the nine months ended September 30, 2019 amounted to $142.7 million and consisted primarily of a consolidated profit for the period of $68.0 million, adjustments primarily for depreciation of $71.5 million and cash outflows from changes in operating assets and liabilities of 15.0 million. Net cash used in investing activities for the nine months ended September 30, 2019 amounted to 95.3 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 nine months ended September 30, 2019 amounted to $46.3 million. $36.0 million was used for dividend payments and as well as $6.0 million regular debt repayment. In addition, Our local short term financing activities for nine months ended September 30, 2019 are shown gross as cash inflow of $88.4 million and cash outflow of $84.5 million. 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 RCF, and related ancillary facilities, 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 September 30, 2020, the Company had converted 68% of its RCF into ancillary capacity, resulting in an ability to borrow the full amount of commitments under the RCF at any net leverage level. We expect 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 capital expenditures for the foreseeable future. Net Working Capital (Non-GAAP Financial Measure) We define Net Working Capital as the total of inventories and current trade receivables, less trade payables. Net Working Capital is a non-GAAP financial measure, and other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Net Working Capital. The following tables set forth the principal components of our Net Working Capital as of the dates indicated. September 30, 2020 December 31, 2019 (In millions) Inventories $ 125.3 $ 164.8 Trade receivables 215.4 212.6 Trade payables (105.6) (156.3) Net working capital $ 235.1 $ 221.1 Our Net Working Capital position can vary significantly from month to month, mainly due to fluctuations in oil prices and receipts of carbon black oil shipments. In general, increases in the cost of raw materials lead to an increase in our Net Working Capital requirements, as our inventories and trade receivables increase as a result of higher carbon black oil prices and related sales levels. These increases are partially offset by related increases in trade payables. Due to the quantity of carbon black oil that we typically keep in stock, such increases in Net Working Capital occur gradually over a period of two to three months. Conversely, decreases in the cost of raw materials lead to a decrease in our Net Working Capital requirements over the same period of time. 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. Our Net Working Capital increased from $221.1 million as of December 31, 2019 to $235.1 million as of September 30, 2020, primarily due to lower volumes and oil prices. 34 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 $95.3 million in the nine months ended September 30, 2019 and $120.3 million in the nine months ended September 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 nine months ended September 30, 2020 amounted to $120.3 million and were mainly comprised of maintenance and overhaul projects including $44.5 million expenditures associated with our efforts to commence environmental investments required to address the EPA requirements in the United States. Capital Expenditures in the nine months ended September 30, 2019 amounted to $95.3 million and were mainly comprised of preservation and overhaul projects and $28.2 million in expenditures related to investments required to address the EPA requirements in the United States. Contractual Obligations The following table sets forth our contractual obligations as of September 30, 2020: Less than 1 year 1-3 years 4-5 years More than 5 years Total In million Long-term debt obligations (1) $ 143.5 $ 51.5 $ 641.1 $ — $ 836.1 Revolving credit facility (2) 74.6 — — — 74.6 Local credit lines (3) 42.1 — — — 42.1 Term loan (4) 8.1 16.1 613.7 — 637.9 Interest expense on long-term debt (5) 18.8 35.3 27.4 — 81.6 Purchase commitments (6) 108.8 77.5 — — 186.4 Lease obligations (7) 11.5 21.3 18.5 40.9 92.3 Total contractual obligations (8) $ 263.9 $ 150.3 $ 659.7 $ 40.9 $ 1,114.8 (1) Sets forth obligations to repay principal and interest under our long-term debt obligations. (2) Represents the obligation under the RCF. As of September 30, 2020, total drawing was $74.6 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: $292.7 million). (3) Currently in Korea and Brazil. (4) Represents the Term Loans and includes the outstanding principal amounts of $278.6 million (U.S. Dollar term loan) and $373.6 million (EUR term loan) which has been translated at an exchange rate at the reporting date of $1.1708 per €1.00. The borrowing costs on the principal of the Euro-denominated Term Loan have been translated applying the same exchange rate. (5) Represents interest expenses related to indebtedness from our Term Loans, assuming future interest based on a forward rate assumption. (6) Represents purchase commitments under long-term supply agreements for the supply of raw materials, mainly oil and gas. (7) Represents current leases, for forward-starting leases see “ Note C. Leases.” (8) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of September 30, 2020 amounted to $74.6 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 . As of September 30, 2020, the Company had guarantees totaling $15.6 million issued by various financial institutions. 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 35 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 September 30, 2020, we did not have any off-balance sheet arrangements. Note Regarding Forward-Looking Statements This report contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target,” “to be,” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters: • our strategies for (i) mitigating the impacts of the global outbreak of the coronavirus, (ii) strengthening our position in specialty carbon blacks and rubber carbon blacks, (ii) strengthening our position in specialty carbon blacks and rubber carbon blacks, (iii) increasing our rubber carbon black margins and (iv) strengthening the competitiveness of our operations; • the ability to pay dividends at historical dividend levels or at all; • cash flow projections; • the installation of pollution control technology in our U.S. manufacturing facilities pursuant to the EPA consent decree described herein; • the outcome of any in-progress, pending or possible litigation or regulatory proceedings; and • our expectation that the markets we serve will continue to grow. All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others: • the effects of the COVID-19 pandemic on our business and results of operations; • negative or uncertain worldwide economic conditions; • volatility and cyclicality in the industries in which we operate; • operational risks inherent in chemicals manufacturing, including disruptions as a result of severe weather conditions and natural disasters; • our dependence on major customers and suppliers; • our ability to compete in the industries and markets in which we operate; • our ability to address changes in the nature of future transportation and mobility concepts which may impact our customers and our business; • our ability to develop new products and technologies successfully and the availability of substitutes for our products; • our ability to implement our business strategies; • volatility in the costs and availability of raw materials (including but not limited to any and all effects from restrictions imposed by the MARPOL convention and respective International Maritime Organization (IMO) regulations in particular to reduce sulfur oxides (SOx) emissions from ships) and energy; 36 • our ability to respond to changes in feedstock prices and quality; • our ability to realize benefits from investments, joint ventures, acquisitions or alliances; • 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 system failures, network disruptions and breaches of data security; • our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages; • our ability to recruit or retain key management and personnel; • 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 “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; • possible future investigations and enforcement actions by governmental or supranational agencies; • our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases; • market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy; • litigation or legal proceedings, including product liability and environmental claims; • our ability to protect our intellectual property rights and know-how; • our ability to generate the funds required to service our debt and finance our operations; • fluctuations in foreign currency exchange and interest rates; • the availability and efficiency of hedging; • changes in international and local economic conditions, including with regard to the Euro, dislocations in credit and capital markets and inflation or deflation; • potential impairments or write-offs of certain assets; • required increases in our pension fund contributions; • the adequacy of our insurance coverage; • changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions; • our indemnities to and from Evonik (as defined below); • challenges to our decisions and assumptions in assessing and complying with our tax obligations; and • potential difficulty in obtaining or enforcing judgments or bringing actions against us in the United States. In light of these risks, our results could differ materially from the forward-looking statements contained in this report and no undue reliance should be placed on those forward-looking statements. For further information regarding factors that could affect our business and financial results and the related forward-looking statements, see “ Item 1A. Risk Factors .” Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the period ended September 30, 2020 does not differ materially from that discussed under Item 7A of our 2019 Form 10-K. 37