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Item 7. Management’s Discussion and Analysis

2021-02-18 compared with 2020-02-20 · 133 added, 241 removed, 215 unchanged (63% 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 years ended December 31, 2019, 2018 and 2017 and should be read in conjunction with the information included under Item 1.

The following discussion and analysis summarize the significant factors affecting our results of operations and financial condition during the years ended December 31, 2020, 2019 and 2018 and should be read in conjunction with the information included under Item 1.

Business and Item 8.

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We prepare our financial statements in accordance with accounting principles generally accepted in the United States and in US Dollars.

In 2019, we generated revenue of $1,476.4 million on a volume of 1,023.2 kmt, a net income of $86.9 million, and Adjusted EBITDA of $267.3 million.

In 2020, we generated revenue of $1,136.4 million on volumes of 866.8 kmt, resulting in net income of $18.2 million, and Adjusted EBITDA of $200.0 million.

Adjusted EBITDA for our Specialty Carbon Black segment was $109.9 million, and the Segment Adjusted EBITDA Margin was 24.7%.

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In addition, important factors that could cause our actual results of operations or financial conditions to differ materially from those expressed or implied below, include, but are not limited to, factors indicated under “ Item 1A.

Risk Factors ”, “ Note Regarding Forward-Looking Statements ” of this report.

Risk Factors ”, and “ Note Regarding Forward-Looking Statements ” of this report.

Recent Developments and Certain Known Trends

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide.

COVID-19 has spread through Asia, Europe, and North and South America, all regions in which we have operations.

In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction.

These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions.

In some areas around the world, government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy relative to early in the second quarter.

Meanwhile, some regions have experienced increasing numbers of COVID-19 cases, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted and economic conditions could weaken.

We continue to monitor the impact of the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain and distribution network and to take action, as appropriate, to address these circumstances.

Our manufacturing facilities generally have continued to operate since the pandemic was declared in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity.

While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, it had a more pronounced effect on our business during the second quarter, primarily as a result of reduced demand in our end markets, The third and fourth quarters of 2020 saw the favorable business momentum initially experienced in the latter part of the second quarter continue, with broad-based improvement in demand.

Nevertheless, we may be required to take further actions to comply with mandates of national, state or local authorities and may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites.

The extent to which our operations may be impacted by COVID-19 during the remainder of the pandemic depends on a variety of factors, including the duration, severity, and scope of the pandemic, which remain highly uncertain.

General Economic Conditions, Cyclicality and Seasonality

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The nature of our business and our large fixed asset base make it difficult to rapidly adjust our fixed costs downward when demand for our products declines, which materially affects our results of operations.

Our business is generally not seasonal in nature, although we may experience some regional seasonal declines during holiday periods and our results of operations are generally weaker in the last three months of the year.

Drivers of Demand

Besides general global economic conditions, certain specific drivers of demand for carbon black differ among our operating segments.

Specialty carbon black has a wide variety of end-uses and demand is largely driven by the development of the coatings, polymers and printing industries.

Demand for specialty carbon black in the coatings and polymers industries is mainly influenced by the levels of industrialization, automobile OEM demand, infrastructure, consumer goods and construction.

Demand for specialty carbon black in the printing industry is mainly influenced by developments in print media and packaging materials.

Demand for rubber carbon black is largely driven by the development of the tire and mechanical rubber goods industries.

Demand for rubber carbon black in tires is mainly influenced by the number of replacement and original equipment tires produced, which in turn is driven by (i) vehicle trends, including the number of vehicles produced and registered, and the number of miles driven, (ii) demand for high-performance tires, (iii) demand for larger vehicles, such as trucks and buses and (iv) changes in regulatory requirements.

Demand for rubber carbon black in mechanical rubber goods is mainly influenced by vehicle trends, construction activity and general industrial production.

Demand in the developed West European and North American regions is mainly driven by demographic changes, customers’ high-quality requirements, stringent tire regulation standards and relatively stable tire replacement demand.

Demand in emerging markets, such as China, Southeastern Asia, South America and Eastern Europe, is mainly driven by the growing middle class, rapid industrialization, new infrastructure spending and increasing car ownership trends.

The growth in vehicle production in turn drives demand for both original equipment tire manufacturing and replacement tires in developing regions.

Asset Utilization

Margins in the carbon black industry, and the chemical industry generally, are strongly influenced by industry capacity utilization.

As demand for products approaches available supply, utilization rates rise, and prices and margins typically increase over time.

Historically, this relationship has been highly cyclical, due to fluctuations in supply resulting from the timing of new investments in capacity and general economic conditions affecting the relative strength or weakness of demand.

Generally, capacity is more likely to be added in periods when current or expected future demand is strong and margins are, or are expected to be, high.

Investments in new capacity can result, and in the past frequently have resulted, in over-capacity, which typically leads to a reduction of margins.

For example, some of our customers have shifted, and may continue to shift, manufacturing capacity from mature regions, such as North America and Europe, to emerging regions, such as Asia and South America.

Consequently, competitors in China have added capacity (particularly regarding production of standard tire grades), at far greater proportion than demand has risen, which resulted in pressured margins in the region.

In response, producers typically reduce capacity utilization or limit further capacity additions, eventually causing the industry to be relatively undersupplied.

In recent years,

a systematic reduction in capacity in North America and Europe, together with increased manufacturing efficiencies, has enabled us to largely preserve margins and maintain high utilization rates.

Although utilization levels can differ significantly by plant, these levels tend to be driven more by variations in demand from specific customers served by each plant rather than by general trends in the region where the plant is located.

We estimate our average plant utilization rate to have been at approximately 91% in 2019, approximately 91% in 2018 and approximately 90% in 2017.

We have made recent investments in strategic sites to increase the flexibility of our production platform and closed production facilities in Europe and South Korea in order to consolidate capacities in the European and Asian regions.

Both actions allow us to opportunistically upgrade and expand our capacity to produce higher margin products, as demand allows, and positions us better to shift additional production capacity to specialty carbon black products and rubber carbon black for higher-end mechanical rubber goods.

We intend to achieve further growth in production volume, as customer demand allows, by improving utilization rates, improving the availability of our assets by minimizing planned and unplanned facility downtime and improving the capacity of our assets through systematic supply chain planning and improved operating technologies.

In addition a new specialty carbon black line is under construction at our Ravenna (Italy) plant, which is expected to commence production in 2021.

Unplanned outages can impact our operating results.

Similarly, planned or unplanned outages of our competitors can positively affect our operating results by decreasing the product supply in the industry.

Raw Material and Energy Costs

Our results of operations are affected, directly and indirectly, by fluctuations in raw material and energy prices.

Our manufacturing processes consume significant amounts of raw materials and energy, the costs of which are subject to fluctuations in worldwide supply and demand, in addition to other factors beyond our control.

In 2019, raw materials accounted for approximately 75% of our cost of sales.

Approximately 79% of the cost of raw material used in the production of carbon black is related to petroleum-based or coal-based feedstock known as carbon black oil, with some limited use of other raw materials, such as acetylene, nitrogen tetroxide, hydrogen and natural gas.

The pricing of carbon black oil is typically indexed to the price of fuel oil.

In general, we benchmark against Platts indices in the sourcing regions e.g.

USGC, New York, Rotterdam and Singapore.

In some areas the Gasoil index is used.

While the majority of our purchases are based on underlying fuel oil indices, the ultimate carbon black oil price also depends on carbon black oil specific quality characteristics, differentials (premiums or discounts to Platts indices), freight costs and region-specific supply and demand as well as regulatory factors.

Carbon black oil procurement is an important factor in achieving best-in-class production costs.

Approximately 50% of our carbon black oil supply is covered by short- and long-term contracts with a wide variety of suppliers.

A significant portion of approximately 75% of our volume is sold based on formula-driven price adjustment mechanisms for changes in costs of raw materials, Sales prices under our non-indexed contracts are reviewed regularly with a view to reflecting raw material and energy price fluctuations as overall market conditions allow.

In addition, there can be no guarantee that we will be able to timely adjust prices under our non-indexed contracts in the future, see “ Item 1A.

Risk Factors—Risks Related to Our Business—We are subject to volatility in the costs, quality and availability of raw materials and energy, which could decrease our production volumes and margins and adversely affect our business, financial condition, results of operations and cash flows.

Costs for raw materials and energy have fluctuated significantly and may continue to fluctuate in the future.

We believe that our contracts enable us generally to maintain our Segment Adjusted EBITDA Margins, however, rapid and significant oil or energy price fluctuations have had and are likely to continue to have significant and varying effects on our earnings and results of operations, partly because oil price changes affect our sales prices and our cost of raw materials and energy at different times and amounts, and partly due to other factors, such as differentials affecting the ultimate carbon black oil price paid by us (versus a particular reference price index), actual carbon black oil usage amounts and our ongoing efficiency initiatives.

As a result of the significant decline in oil prices in particular in 2014, we have seen one or more of these factors come into play at different times and adversely affect our profitability, and this is likely to be seen again in future periods of a declining oil pricing environment.

It is also possible that in this environment, other factors come into play and interact adversely with our longer-term formula-based customer pricing arrangements.

It is difficult to predict the impact of these factors going forward.

In general, our customer pricing arrangements, and in particular the price adjustment formulas, are designed to protect us against rising or higher oil prices, and while we may seek to adjust them to accommodate the current environment, they may be difficult to change quickly, and if changed, may not be as protective if and when oil prices begin to rise.

Foreign Currency Exchange Rate Fluctuations

Our results of operations and Net Working Capital are affected by foreign currency exchange rate fluctuations.

Our exposure to foreign currencies comes from three main sources:

(i) currency translation, when we translate results of our subsidiaries denominated in local functional currencies into U.S.

Dollar, (ii) commercial transactions, such as when we contract purchases of our feedstock, which are mostly in U.S.

Dollars, at non-U.S.-Dollar entities and (iii) financing transactions, as a large portion of our financial obligations are denominated in U.S.

Dollars, some of which are hedged.

In 2019, 40%, 27% and 16% of our net sales were generated by our subsidiaries whose functional currency is the Euro, the U.S.

Dollar and the Korean Won, respectively, with the remainder in other currencies.

Fluctuations in currency exchange rates could require us to reduce our prices to remain competitive in foreign regions.

In each case, the relevant income or expense is reported in the respective local currency and translated into U.S.

Dollar at the applicable currency exchange rate for inclusion in our consolidated financial information.

Therefore, our financial results in any given period are materially affected by fluctuations in the value of the U.S.

Dollar relative to other currencies, in particular the Euro and the Korean Won.

Our foreign currency transaction exposure is partially offset by costs and expenses incurred by our subsidiaries in their local functional currencies.

The pricing of carbon black oil, our main raw material, is linked to the price of heavy fuel oil and is generally benchmarked against Platts indices of three regions:

Gulf Coast, Rotterdam and Singapore.

Most of our carbon black oil purchase contracts are

denominated in U.S.

Generally, an appreciation of the U.S.

Dollar has a negative impact on our results of operations and Net Working Capital, because our raw material purchases in U.S.

Dollars may not be fully offset by our ability to pass-through changes in raw material costs to customers and by the translation effect of our results of operations outside the United States.

We manage our foreign currency exchange exposure through the use of derivative instruments to economically hedge on balance sheet foreign currency denominated receivables and payables.

In May 2018, we entered into a $235 million cross-currency swap to hedge interest rate risk and foreign currency exposure related to the U.S.

Dollar-denominated Term Loan entered into by our German entity.

In conjunction therewith we discontinued the use of the U.S.

Dollar-denominated portion of our Term loan to hedge our U.S.

See “ Item 8.—Financial Statements— Note K .

Derivatives ” .

We use customary products to manage other foreign exchange risk, including forward exchange contracts and currency options.

We do not generally use foreign exchange hedging for expected exposure, as our expected exposure from sales is largely offset by our expected exposure from purchases.

Current and Future Environmental Regulations

Our operations are subject to extensive environmental laws and regulations, which require us to invest significant financial and technical resources to maintain compliance with applicable requirements.

If environmental harm is found to have occurred as a result of our current or historical operations, we may incur significant remediation costs at current or former production facilities or third-party sites and may have to pay fines and damages.

Many of our facilities have a long history of operation and have never been the subject of comprehensive environmental investigations.

As a result, our environmental compliance and remediation costs could increase.

Future closure and decommissioning at any one of these facilities, or of process units at these facilities, could result in significant remediation costs.

For instance, many of our facilities have onsite landfills, storage tanks, wastewater treatment systems, ponds and other units that have been in use for a number of years, and we may incur significant costs when closing these units in accordance with applicable laws and regulations and when addressing related contamination of soil and groundwater.

For more information about information requests made by the EPA to, and alleged violations of the U.S.

Clean Air Act by, certain of our facilities located in the United States, see “ Item 1.—Business—Environmental, Health and Safety Matters—Environmental—Environmental Proceedings .”

Changes to environmental regulations or laws that may affect previously unregulated aspects of our business may also require us to incur significant compliance costs.

New regulations requiring further reductions of GHG and other emissions are being considered in Europe, the United States, China, Brazil and South Korea.

Our carbon black operations may generate more CO 2 than is permitted under current or future allocation schemes for GHG emissions, requiring us either to purchase emission credits or to modify our production processes to reduce emissions.

Additionally, nano-scale materials, including carbon black, are under increased and ongoing scrutiny in multiple jurisdictions, including the European Union, and are likely to be subject to stricter regulation in the future, which may require us to incur significant costs in order to comply with new laws and requirements.

Further, carbon black has been classified by certain national and international health organizations as a possible or suspected human carcinogen.

A negative reclassification of carbon black by these organizations, or similar classifications of carbon black or other finished products, raw materials or intermediates by other organizations or governmental authorities could adversely affect our compliance costs, operations, sales and reputation.

Environmental considerations can also affect the industries in which we operate, including our position with respect to our competitors.

For example, new tire labeling regulatory requirements globally (particularly in Europe) are expected to reduce the threat of low-cost tire imports significantly and to favorably affect demand in developed regions.

In connection with the Acquisition, Evonik agreed, subject to certain deductibles, caps, exclusions and procedural requirements, to indemnify us for certain historical environmental liabilities.

See “ Item 1A.—Risk Factors—Risks Related to Indebtedness, Currency Exposure and Other Financial Matters—Our Agreements with Evonik in connection with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities.

We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect .”

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities.

We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements.

We evaluate our estimates and application of our policies on an ongoing basis.

We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

The policies that we believe are critical to the preparation of the consolidated financial statements are the following:

• Revenue and expense recognition;

• Valuation of intangibles acquired in a business combination

• Inventories;

• Pension provisions;

• Deferred taxes, current income taxes;

• Derivative financial instruments;

• Hedge accounting;

• Contingent liabilities and other financial obligations.

These critical accounting policies and other significant accounting policies are discussed in Note A.

Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this report.

See also Note H.

Business Combination, Goodwill and Intangible Assets to our audited consolidated financial statements with respect to goodwill.

In particular, with regard to the assessment of the fair value of the reporting unit to which goodwill is allocated, management believes that no reasonably possible change in any of the key assumptions would cause the carrying value of the reporting units to materially exceed their recoverable amounts.

Effective from January 1, 2018 ASC 606 with respect to revenue recognition became effective.

The adoption of this standard did not result in a material difference in our revenue recognition.

Effective from January 1, 2019 ASC 842 with respect to treatment and recognition of lease agreements became effective.

We have adopted this standard and based on the lease portfolio as of January 1, 2019, the Company recorded additional operating lease ROU assets of approximately $30 million and operating lease liabilities of $31 million on its consolidated balance sheet, with no other adoption impacts to its consolidated statements of operations.

One asset recorded under build-to-suit accounting as of December 31, 2018 and its associated liability of $29 million was derecognized upon adoption of the new standard.

For our current lease obligation see also Note R.

Commitments and Contingencies .

Certain of the significant accounting policies include the use of estimates, but do not meet the definition of critical because they generally do not require estimates or judgments that are as difficult or subjective to measure.

However, these policies are important to an understanding of the consolidated financial statements.

Reconciliation of Non-GAAP Financial Measures

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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.

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.

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

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(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.

(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)

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Consulting fees related to Company strategy (2)

Extraordinary expense items related to COVID-19 (3)

Long term incentive plan 4.4 9.4 13.9

EPA-related expenses 5.2 4.0 2.7

Other adjustments (4)

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$ 90.1 $ 145.2 $ 144.9

(1) Restructuring expenses for the periods ended December 31, 2019 and December 31, 2017 are related to our strategic realignment of our worldwide Rubber footprint, and resulted in restructuring income in the period ended December 31, 2018 in particular as a result of the gain recognized in connection with the land sale in South Korea exceeding the associated cessation costs related to our worldwide Rubber footprint initiative.

(1) Restructuring expenses for the periods ended December 31, 2020 and 2019 were related to the strategic restructuring of our worldwide Rubber footprint, Restructuring income in the period ended December 31, 2018 is primarily due to a gain recognized from the land sale in the restructuring of our South Korea footprint.

Financial Statements and Supplementary Data—Note O.—Restructuring Expenses for additional information.

(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.

dollar and U.S.

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

(3) Other adjustments (from items with less bearing on the underlying performance of the Company’s core business) in the period ended December 31, 2019 relate to an amount of $2.9 million in non-income tax expense incurred during the construction phase of an asset.

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.

This tax disadvantage cannot be capitalized as part of the project’s capital expenditure.

The remainder of other adjustments include in particular costs to meet the EPA requirements of $2.3 million.

Other adjustments in the period December 31, 2018 related to license fees required for certain innovative technologies to meet the EPA requirements of $1.2 million and other EPA related costs of $1.4 million.

Other adjustments in the period ended December 31, 2017 primarily relate to costs associated with our EPA enforcement action of $2.4 million, costs to remediate damages incurred by hurricane Harvey of $1.4 million and costs associate with the secondary offering of our shares, offset by $1.4 million of reimbursements of reassessed real estate transfer taxes.

Operating Results

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

(3) Extraordinary expense items related to COVID-19 reflect 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 (from items with less bearing on the underlying performance of the Company’s core business) in the period ended December 31, 2020 mainly relate to legal fees associated with a dispute concerning intellectual property of $2.7 million, severance costs of $1.5 million, and hurricane related costs of $2.5 million.

Other adjustments in the period ended December 31, 2019 mainly relate to an amount of $2.9 million in non-income tax expense incurred during the construction phase of an asset.

Other adjustments in the period December 31, 2018 were primarily related to personnel costs.

Operating Result s

2020 Compared to 2019

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Other expenses, net 14.1 12.2

Restructuring income — 40.3

Restructuring expenses 7.6 3.6

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Interest and other financial expense, net 38.7 27.6

Reclassification of actuarial losses from AOCI 9.9 —

Income from operations before income tax expense and equity in earnings of affiliated companies 25.8 119.6

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Net sales decreased overall by $340.0 million, or 23.0%, from $1,476.4 million in 2019 to $1,136.4 million in 2020.

This net sales decrease was primarily due to lower volumes, foreign exchange translation effects and contractually indexed sales price decreases in our Rubber Carbon Black segment resulting from the pass through of lower feedstock costs to customers with agreements that link price to the cost of feedstock offset by certain base price increases.

Volume decreased by 61.5 kmt, or 5.7%, from 1,084.7 kmt in 2018 to 1,023.2 kmt in 2019.

This decrease largely reflected reduced Rubber volumes in South Korea due to the closure of the plant in Seoul and slowing demand Europe and China.

The decrease in volume contributed a decrease of net sales of $86.8 million.

In addition to the volume related decrease of net sales, unfavorable impacts from foreign exchange translation effects of $33.5 million were incurred.

Oil price changes contributed a further reduction of net sales in 2019 compared to 2018 of $18.4 million.

These unfavorable impacts were in part offset by increases of certain base prices of $40.8 million.

Volumes declined by 15.3%, or 156.3 kmt to 866.8 kmt, primarily by weakness in the North America and Europe regions of our Rubber Carbon Black business as a result of the global economic impact of COVID-19.

The volume and oil price declines impacted net sales by approximately $214.4 and $148.4 million, respectively, partially offset by certain base price increases.

Cost of sales and Gross profit

Cost of sales decreased by $242.6 million, or 22.3%, from $1,086.6 million in 2019 to $844.0 million in 2020.

The 5.7% decrease in volume in 2019 compared to 2018 resulted in a decrease of cost of sales of 4.9%, or $56.4 million in 2019 compared to 2018.

Lower overall net sales as a result of the above mentioned impacts were not fully offset by lower cost of sales.

As a result gross profit decreased by $40.3 million, or 9.4%, from $430.0 million in 2018 to $389.7 million in 2019 for reasons described above.

Volume declines of 15.3% and lower oil prices were the primary drivers and contributed $70.1 million and $216.0 million, respectively, to the decrease.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $25.0 million, or 10.8%, from $231.9 million in 2018 to $206.9 million in 2019 mainly as a result of lower volume in 2019 compared to 2018 and lower personnel related expenses in fiscal year 2019 related to bonuses and long term incentive expenses as well as favorable impacts from foreign currency translation impacts.

Selling, general and administrative expenses decreased by $30.7 million, or 14.9%, from $206.9 million in 2019 to $176.1 million in 2020 driven primarily by lower freight costs due to decreased volumes as a result of the effects of COVID-19, lower selling expenses and the implementation of cost reduction initiatives.

Research and development costs

R&D expenses decreased by $0.4 million, from $20.3 million in 2018 to $19.9 million in 2019.

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

R&D expenses were essentially flat with $20.2 million in 2020 compared to $19.9 million in 2019.

Other expenses, net

Other expenses, net which comprises other operating income and other operating expenses, amounted to $12.2 million in 2019 and

$6.1 million in 2018.

In 2019, other operating income amounted to $5.9 million and included, among other items, a gain related to an operating derivative of $1.3 million, a non-income tax related tax reimbursement $1.1 million and insurance claims of $0.8 million.

Other operating expenses in 2019 amounted to $18.1 million, comprised primarily of $9.9 million treated as other adjustment items and consulting fees related to Company strategy, miscellaneous other third-party expenses of $4.3 million and an impairment charge of $1.3 million.

In 2018, other operating income amounted to $5.0 million and included, among other items, $1.7 million income from the reversal of provisions.

Other operating expenses in 2018 amounted to $11.1 million, comprised primarily of $4.8 million consulting fees related to Company strategy and license fees required for certain innovative technologies to meet the EPA requirements of $1.2 million and other EPA related costs of $1.9 million.

Other expenses, net which comprises other operating income and other operating expenses, increased to $14.1 million in 2020 from $12.2 million in 2019.

The primary driver for the increase of $1.9 million were additional expenses incurred due to COVID-19.

Restructuring expenses/(income), net

In 2019 restructuring expenses amounted to $3.6 million associated with our Rubber footprint restructuring costs.

In 2018, restructuring expenses/(income), net, comprise restructuring income of $40.3 million and restructuring expenses of $15.6 million.

As part of the strategic repositioning of the Rubber business footprint, we consolidated our two production network in South Korea, ceased production at our Seoul plant and sold the land.

Proceeds from the land sale exceeded the associated closing and remediation costs and we recorded a restructuring gain of $24.6 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 decreased by $49.2 million, or 25.0%, from $196.3 million in 2018 to $147.2 million in 2019 mainly as a result of decreased gross profit and the absence of positive one-time proceeds from our land sale in South Korea in 2018.

In 2020 restructuring expenses increased to $7.6 million compared to 2019 primarily due to increased ground remediation costs related to the plant closing in Ambes, France.

Financial Statements and Supplementary Data—Note O.—Restructuring Expenses for additional information.

Interest and other financial expense, net

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Interest and other financial expense, net amounted to $38.7 million in 2020 compared to $27.6 million in 2019.

Interest and other financial expense, net in 2019 includes, among others, $15.2 million of regular interest expenses for our term loan facilities, $2.1 million of amortization of capitalized transaction costs and $3.6 million net expenses of foreign currency revaluation effects.

Interest and other financial expense, net in 2018 includes, $20.6 million of regular interest expenses for our term loan facilities, $2.2 million of amortization of capitalized transaction costs and $1.3 million net expenses of foreign currency revaluation effects.

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 $48.1 million, or 28.7%, from $167.7 million in 2018 to $119.6 million in 2019, as a result of the effects described above.

The increase of $11.1 million was primarily due to losses on foreign currency translation and the exit of cross currency swaps.

Income tax expense

Income tax expense amounted to $8.1 million in 2020 compared to $33.2 million in 2019, as a result of decreased income before taxes.

In 2019, the effective tax rate of 27.6% deviated from the expected Company rate of 32.0% in particular due to favorable impacts from tax rate differentials of $3.5 million and prior year taxes of $3.2 primarily associated with a conclusion of a tax audit.

The amounts previously accrued for this purpose were released accordingly.

For details regarding this deviation see Note Q.

Income Taxes to the audited consolidated financial statements.

In 2018, the effective tax rate of 27.9% deviated from the expected Company rate of 32.0% in particular due tax rate differentials of $6.7 million.

For details regarding this deviation see Note Q.

Income Taxes to the audited consolidated financial statements.

In 2020, the effective tax rate was in line with the expected Company rate.

Unfavorable impacts from non-deductible business expenses, pre-tax earnings mix by jurisdiction and valuation adjustments of deferred tax assets primarily associated with the economic downturn related to COVID-19 were offset by the benefit from the reduction in the valuation allowance related to U.S.

tax credits of $3.6 million.

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data—Note R.—Income Taxes to the audited consolidated financial statements.

In 2019, the effective tax rate deviated from the expected Company rate primarily due to the favorable effects from tax rate differentials and income taxes for prior years.

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data—Note R.—Income Taxes to the audited 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 2020 and 2019.

Our net income in 2019 amounted to $86.9 million, a decrease of $34.4 million, reflecting all the factors described above.

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

Contribution Margin decreased by $37.0 million, or 6.4%, from $577.6 million in 2018 to $540.7 million in 2019, primarily due to lower volumes, foreign exchange rate translation effects and unfavorable oil price differentials, partially offset by base price increases.

Contribution Margin per Metric Ton decreased slightly by 0.8%, from $532.6 per Metric Ton in 2018 to $528.5 per Metric Ton in 2019.

Contribution Margin decreased by $76.8 million, or 14.2%, from $540.7 million in 2019 to $463.9 million in 2020, primarily due to lower volumes with an impact of approximately $70.1 million.

Contribution Margin per Metric Ton increased slightly by 1.3%, from $528.5 per Metric Ton in 2019 to $535.1 per Metric Ton in 2020.

Adjusted EBITDA (Non-GAAP Financial Measure)

Adjusted EBITDA decreased by $26.8 million, or 9.1%, from $294.1 million in 2018 to $267.3 million in 2019 mainly as a result of the decrease in Contribution Margin, somewhat offset by lower bonus expenses.

Adjusted EBITDA decreased by $67.3 million, or 25.2%, from $267.3 million in 2019 to $200.0 million in 2020 primarily as a result of lower net income year over year.

2019 Compared to 2018

The comparison of the fiscal years ended December 31, 2018 and 2017 can be found in our annual report on Form 20-F for the fiscal year ended December 31, 2018 located within Part I, Item 5.

Operating and Financial Review and Prospects, which is incorporated by reference herein.

We refer to our annual report 2019 filed with the SEC on Form 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“ Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Segment Discussion

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2020 Compared to 2019

Net sales of the Specialty Carbon Black segment decreased by $36.9 million, or 6.8%, from $545.4 million in 2018 to $508.5 million in 2019, primarily due to lower volumes and foreign exchange rate translation effects, partially offset by base price increases.

Volume of the Specialty Carbon Black segment decreased by 11.3 kmt, or 4.3%, from 262.4 kmt in 2018 to 251.0 kmt in 2019, as a result of lower demand in particular in North America, partially offset by increased volumes from our Chinese and European plants.

Gross profit of the Specialty Carbon Black segment decreased by $28.9 million, or 14.5%, from $199.4 million in 2018 to $170.4 million in 2019, mainly as a result of unfavorable foreign exchange rate translation effects and lower volumes.

Net sales of the Specialty Carbon Black segment decreased by $63.2 million, or 12.4%, from $508.5 million in 2019 to $445.2 million in 2020, primarily due to lower volumes and the effects of lower feedstock costs passed through to customers, partially offset by base price increases.

Volume of the Specialty Carbon Black segment decreased by 19.1 kmt, or 7.6%, from 251.0 kmt in 2019 to 232.0 kmt in 2020, driven primarily by lower demand in the North America and European markets.

Gross profit of the Specialty Carbon Black segment decreased by $21.7 million, or 12.7%, from $170.4 million in 2019 to $148.7 million in 2020, primarily as a result of lower volumes.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $12.3 million, or 10.0%, from $122.2 million in 2019 to $109.9 million in 2020, primarily reflecting the decrease in gross profit.

2019 Compared to 2018

The comparison of the fiscal years ended December 31, 2018 and 2017 can be found in our annual report on Form 20-F for the fiscal year ended December 31, 2018 located within Part I, Item 5.

Operating and Financial Review and Prospects, which is incorporated by reference herein.

We refer to our annual report 2019 filed with the SEC on From 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Rubber Carbon Black

2020 Compared to 2019

Net sales of the Rubber Carbon Black segment decreased by $64.9 million, or 6.3%, from $1,032.8 million in 2018 to $967.9 million in 2019, primarily due to lower volumes.

Unfavorable impacts from contractually indexed sales prices resulting from the pass through changes in feedstock costs as well as unfavorable foreign exchange rate translation effects were almost in full offset by base price increases.

Volume of the Rubber Carbon Black segment decreased by 50.2 kmt, or 6.1%, from 822.3 kmt in 2018 to 772.1 kmt in 2019 mainly due to lower demand in all our major regions except for North America.

Gross profit of the Rubber Carbon Black segment decreased by $11.3 million, or 4.9%, from $230.6 million in 2018 to $219.3 million in 2019, mainly as a result of lower volumes, negative feedstock differentials and negative foreign exchange rate translation effects, in part offset by base price increases.

Adjusted EBITDA of the Rubber Carbon Black segment increased by $0.3 million, or 0.2%, from $144.9 million in 2018 to $145.2 million in 2019, while the decrease in gross profit was offset in part by lower selling and general administrative charges, bonus expenses as well as compensating impacts for foreign exchange rates translation effects.

Net sales of the Rubber Carbon Black segment decreased by $276.7 million, or 28.6%, from $967.9 million in 2019 to $691.2 million in 2020, primarily due to lower volumes and the effects of lower feedstock costs passed through to customers.

Volume of the Rubber Carbon Black segment decreased by 137.2 kmt, or 17.8%, from 772.1 kmt in 2019 to 634.9 kmt in 2020 mainly due to lower demand in all our major regions due to the global economic impact of COVID-19.

Gross profit of the Rubber Carbon Black segment decreased by $75.7 million, or 34.5%, from $219.3 million in 2019 to $143.6 million in 2020, mainly as a result of lower volumes, lower feedstock prices and unfavorable product mix.

Adjusted EBITDA of the Rubber Carbon Black segment decreased by $55.0 million, or 37.9%, from $145.2 million in 2019 to $90.1 million in 2020 reflecting the decline of gross profit partially offset by lower freight costs due to lower volumes.

2019 Compared to 2018

We refer to our annual report 2018 filed with the SEC on From 20-F.The comparison of the fiscal years ended December 31, 2018 and 2017 can be found in our annual report on Form 20-F for the fiscal year ended December 31, 2018 located within Part I, Item 5.

Operating and Financial Review and Prospects, which is incorporated by reference herein.

We refer to our annual report 2019 filed with the SEC on Form 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Liquidity and Capital Resources

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Net cash used in investing activities (144.9) (155.8) (88.1)

Net cash used in financing activities (68.6) (43.8) (68.5)

Net cash provided by (used in) financing activities 13.5 (68.6) (43.8)

Cash, cash equivalents and restricted cash at the end of the period $ 67.9 $ 68.2 $ 61.6

1 unchanged sentence

Cash and cash equivalents at the end of the period $ 64.9 $ 63.7 $ 57.0

Net cash provided by operating activities in 2019 amounted to $231.5 million and consisted of a consolidated profit for the period of $86.9 million, adjustments primarily for depreciation of $96.7 million and cash inflows from changes in operating assets and liabilities of $17.7 million including changes in Net Working Capital of $49.8 million.

Net cash used in investing activities in 2019 amounted to $155.8 million comprised of $100.2 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as $50.6 million environmental improvements of our U.S.

Net cash provided by operating activities in 2020 amounted to $125.3 million and consisted of a consolidated profit for the period of $18.2 million and adjustments primarily for depreciation of $96.5 million and increases of net working capital of approximately $11.1 million.

Net cash used in investing activities in 2020 was $144.9 million comprised of approximately $84.0 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as approximately $60.9 million environmental improvements of our U.S.

based facilities to address the EPA requirements.

Net cash used in financing activities in 2019 amounted to $68.6 million.

Cash inflows during the fiscal year of $97.0 million are related to local bank loan facilities while $101.3 million of cash outflows were used during the year for repayments of those and other current borrowings, $8.0 million regular debt repayment and $48.0 million dividend payments.

Net cash provided by financing activities in 2020 were $13.5 million comprised of a net $35.0 million draw down on credit facilities while cash outflows of $8.2 million were for debt repayment and $12.0 million dividends paid.

Net cash provided by operating activities in 2019 amounted to $231.5 million and consisted of a consolidated profit for the period of $86.9 million, adjustments primarily for depreciation of $96.7 million and cash outflows from Net Working Capital of $49.8 million.

Net cash used in investing activities in 2018 amounted to $88.1 million.

It comprises proceeds from our land sale in Korea and $36.6 million were used in connection with the acquisition of the acetylene carbon black manufacturer Société du Noird'Acétylène de l'Aubette, SAS (“SN2A”), SN2A, now known as Orion Engineered Carbons SAS.

The remaining capital expenditure for maintenance and overhaul projects, as well as expenditures associated with our efforts to consolidate our two productions plants in South Korea were approximately $103.8 million as well as expenditures of $12.6 million used in commencing the EPA related investments.

Net cash used in investing activities in 2019 amounted to $155.8 million comprised of $100.2 million capital expenditure for maintenance and overhaul projects and associated expenditures as well as $50.6 million environmental improvements of our U.S.

based facilities to address the EPA requirements.

Net cash used in financing activities in 2019 amounted to $68.6 million.

$26.4 million was used for repayments of current borrowing, $8.3 million of regular debt repayments, $4.9 million used for share repurchases and $47.7 million for dividend payments.

Cash inflows of $49.0 million is related to local bank loan facilities.

Cash inflows during the fiscal year were $97.0 million and are related to local bank loan facilities while $101.3 million of cash outflows were used during the year for repayments of those and other current borrowings, $8.0 million regular debt repayment and $48.0 million dividend payments.

Net cash provided by operating activities in 2018 amounted to $122.0 million and consisted of a consolidated profit for the period of $121.3 million, adjustments primarily for depreciation of $98.2 million, cash outflows from changes in operating assets and liabilities of $113.9 million including changes in Net Working Capital of $65.6 million.

Net cash used in investing activities in 2017 amounted to $90.3 million for capital expenditure for maintenance and overhaul projects as well as expenditures associated with our efforts to consolidate our two production plants in South Korea.

Cash outflows from financing activities in 2017 amounted to $68.5 million.

$28.9 million reflecting repayments of borrowing, of which $20.7 million was paid as voluntary redemption of our Term Loan.

In addition, $45.7 million was used for dividend payments.

Cash inflows of $11.7 million is related to local ancillary bank loan facilities.

Net cash used in investing activities in 2018 amounted to $88.1 million.

It comprised proceeds from a land sale in Korea while $36.6 million were used to acquire the acetylene carbon black manufacturer Société du Noird'Acétylène de l'Aubette, SAS (“SN2A”), SN2A, now known as Orion Engineered Carbons SAS.

The remaining capital expenditures, including expenditures associated with consolidating our two production plants in South Korea, were $103.8 million, of which $12.6 million were used in connection with

commencing the EPA related investments.

Net cash used in financing activities in 2018 amounted to $43.8 million including $26.4 million used for repayments of current borrowing, $8.3 million of regular debt repayments, $4.9 million used for share repurchases and $47.7 million for dividend payments.

Cash inflows of $49.0 million is related to local bank loan facilities.

Sources of Liquidity

Our principal sources of liquidity are the net cash generated from our operating activities, the cash balances, amounts available under our multicurrency, senior secured Revolving Credit Facility and financing sources like the subsidiaries facilities with local financial institutions.

We believe that our cash position and cash generated from operations will be adequate to support the further growth of our business.

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 December 31, 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.

As of December 31, 2020, the company had estimated liquidity of $341.6 million, including cash and equivalents of $64.9 million, $236.5 million remaining under our revolving credit facility, including ancillary lines, and $40.2 million under other available credit lines.

Net Working Capital (Non-GAAP Financial Measure)

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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 decreased from $282.9 million as of December 31, 2018 to $221.1 million as of December 31, 2019 primarily due to the impact from lower feedstock costs and overall weaker volumes and thus lower receivables at year end.

Our Net Working Capital increased to $245.0 million as of December 31, 2020 compared to $221.1 million as of December 31, 2019.

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 $90.3 million in 2017, $116.2 million in 2018 and $155.8 million in 2019.

We plan to finance our Capital Expenditures, including the increase seen in 2019 related to 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 R.

For the years ended December 31, 2020, 2019 and 2018, our Capital Expenditures amounted to $144.9 million, $155.8 million and $116.2 million, respectively.

We plan to finance our Capital Expenditures, including EPA related 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 commitments to make Capital Expenditures, and do not plan to make Capital Expenditures outside the ordinary course of our business.

See “ Note S.

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

Capital Expenditures in 2019 amounted to $155.8 million and were mainly composed of maintenance and overhaul projects including 50.6 million expenditures associated with our efforts to commencing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in 2018 amounted to $116.2 million and were mainly composed of maintenance and overhaul projects as well as expenditures associated with our efforts to consolidate our to productions plants in South Korea and commencing investments required to address the EPA requirements in the United States of $12.6 million.

Capital Expenditures in 2017 amounted to $90.3 million and were mainly composed of maintenance and overhaul projects.

Capital Expenditures in 2020 were mainly comprised of maintenance and overhaul projects including approximately $60 million in expenditures associated with our continuing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in 2019 were mainly comprised of maintenance and overhaul projects including expenditures associated with our efforts to commencing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in 2018 were were mainly comprised of maintenance and overhaul projects as well as expenditures associated with our efforts to consolidate our two productions plants in South Korea and commencing investments required to address the EPA requirements in the United States.

Research and Development, Patents and Licenses, etc.

Spending on innovation, including both applications technology and process development, amounted to $19.9 million in 2019, $20.3 million in 2018 and $18.2 million in 2017 and was mostly directed towards the development of new specialty carbon black products, new applications for carbon black products and the improvement of process efficiencies, and to a lesser extent towards research on installation of equipment to reduce emission levels in connection with the recent EPA consent decree.

For further information see “ Item 1.

Business—Innovation .”

Spending on innovation, including both applications technology and process development, amounted to $20.2 million, $19.9 million and $20.3 million in 2020, 2019 and 2018, respectively, and was mostly directed towards the development of new specialty carbon black products, new applications for carbon black products and the improvement of process efficiencies, and to a lesser extent towards research on installation of equipment to reduce emission levels in connection with the recent EPA consent decree.

Trend Information

See “ Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Certain Known Trends ”

Off-Balance Sheet Arrangements

5 unchanged sentences

$ 23.5 $ 46.9 $ 651.4 $ — $ 721.8

Revolving credit facility (2)

Term loan (3)

8 unchanged sentences

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

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

(2) Represents the obligation under the Revolving Credit Facility (“RCF”).

As of December 31, 2020, there were no cash amounts drawn under our Revolving Credit Facility of €250.0 million (USD equivalent:

5 unchanged sentences

(5) 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 December 31, 2019 amounted to $21.4 million (see “ Note L.

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

(6) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of December 31, 2020 amounted to $25.3 million.

See “ Note M.

Employee Benefit Plans ” for additional information regarding pension provisions and post-retirement benefits.

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 December 31, 2019 Orion Engineered Carbons GmbH has three guarantees issued by Euler Hermes S.A.

with a total volume of $9.2 million (in prior year four guarantees by Euler Hermes S.A.

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

with a total volume of $10.5 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 $2.5 million (in prior year one guarantee issued by Deutsche Bank AG with a volume of $2.2 million);

two guarantees issued by Liberty Mutual INS.

Europe SE with a volume of $4.2 million (in prior year none).

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

Moreover, Orion has four guarantees issued by UniCredit with a total volume of $0.3 million (in prior year:

none) which reduces the availability 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.

Critical Accounting Policies

We evaluate our estimates and application of our policies on an ongoing basis.

Actual results may differ from these estimates under different assumptions or conditions.

The policies that we believe are critical to the preparation of the consolidated financial statements are the following:

• Revenue Recognitio n

• Intangible Assets and Goodwill Impairment

• Inventories

• Income Taxes

• Financial Instruments

• Pension Benefit Plans

• Environmental provisions

These critical accounting policies and other significant accounting policies are discussed in Item 8.“Financial Statements and Supplementary Data — Note A.

Significant Accounting Policies” to our audited consolidated financial statements included elsewhere in this report.

What changed 10-K

Item 7. Management’s Discussion and Analysis