Orion S.A. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. Financial Statements and Supplementary Data included elsewhere in this Annual Report. We prepare our financial statements in accordance with accounting principles generally accepted in the United States and in US Dollars. Overview 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%. This segment accounted for 39.2% of our total revenue, 54.9% of total Adjusted EBITDA and 26.8% of our total volume in kmt in 2020. Adjusted EBITDA for our Rubber Carbon Black segment was $90.1 million, and Segment Adjusted EBITDA Margin was 13.0%. This segment accounted for 60.8% of our total revenue, 45.1% of total Adjusted EBITDA and 73.2% of our total volume in kmt in 2020. Key Factors Affecting Our Results of Operations We believe that certain factors have had, and will continue to have, a material effect on our results of operations and financial condition. As many of these factors are beyond our control and certain of these factors have historically been volatile, past performance will not necessarily be indicative of future performance and it is difficult to predict future performance with any degree of certainty. 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 ”, and “ Note Regarding Forward-Looking Statements ” of this report. Recent Developments and Certain Known Trends COVID-19 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 Our results of operations are affected by worldwide economic conditions. Because carbon black is used in a diverse group of end products, demand for carbon black has historically been related to real GDP and general global economic conditions. In particular, a large part of our sales has direct exposure to the cyclical automotive industry and, to a lesser extent, the construction industry. As a result, our results of operations experience a level of inherent cyclicality. 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. 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 26 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) 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: Year Ended December 31, 2020 2019 2018 unaudited (in millions, unless otherwise indicated) Revenue (1) $ 1,136.4 $ 1,476.4 $ 1,578.2 Variable costs (2) (672.5) (935.7) (1,000.6) Contribution margin 463.9 540.7 577.6 Freight 68.8 79.0 87.7 Fixed Costs (3) (240.4) (229.8) (235.4) Gross profit (1) $ 292.3 $ 389.9 $ 430.0 Volume (in kmt) 866.8 1,023.2 1,084.7 Contribution margin per metric ton $ 535.1 $ 528.5 $ 532.6 Gross profit per metric ton $ 337.3 $ 380.9 $ 396.4 (1) Separate line item in audited 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). 27 The following table presents a reconciliation of Adjusted EBITDA to consolidated net income for each of the periods indicated: Year Ended December 31, 2020 2019 2018 (in $ millions) Net income $ 18.2 $ 86.9 $ 121.3 Add back income tax expense 8.1 33.2 46.9 Add back equity in earnings of affiliated companies, net of tax (0.5) (0.6) (0.6) Income from operations before income taxes and equity in earnings of affiliated companies 25.8 119.6 167.7 Add back interest and other financial expense, net 38.7 27.6 28.6 Reclassification of actuarial losses from AOCI 9.9 — — Earnings before income taxes and finance income/costs 74.4 147.2 196.3 Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment 96.5 96.7 98.2 EBITDA 170.9 243.9 294.5 Equity in earnings of affiliated companies, net of tax 0.5 0.6 0.6 Restructuring expenses/(income) (1) 7.6 3.6 (24.6) Consulting fees related to Company strategy (2) — 1.3 4.8 Extraordinary expense items related to COVID-19 (3) 3.9 — — Long term incentive plan 4.4 9.4 13.9 EPA-related expenses 5.2 4.0 2.7 Other adjustments (4) 7.6 4.6 2.3 Adjusted EBITDA $ 200.0 $ 267.3 $ 294.1 Thereof Adjusted EBITDA Specialty Carbon Black $ 109.9 $ 122.2 $ 149.3 Thereof Adjusted EBITDA Rubber Carbon Black $ 90.1 $ 145.2 $ 144.9 (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. See Item 8. 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, and costs relating to our assessment of feasibility for inclusion in certain U.S. indices. (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. 28 Operating Result s 2020 Compared to 2019 The table below presents our historical results derived from our consolidated financial statements for the periods indicated. Statement of operations data Year Ended December 31, 2020 2019 (In millions) Net sales $ 1,136.4 $ 1,476.4 Cost of sales 844.0 1,086.6 Gross profit 292.3 389.7 Selling, general and administrative expenses 176.1 206.9 Research and development costs 20.2 19.9 Other expenses, net 14.1 12.2 Restructuring expenses 7.6 3.6 Income from operations 74.4 147.2 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 Income tax expense 8.1 33.2 Equity in earnings of affiliated companies, net of tax 0.5 0.6 Net income $ 18.2 $ 86.9 Net sales 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. 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. 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 $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 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, 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 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. See Item 8. Financial Statements and Supplementary Data—Note O.—Restructuring Expenses for additional information. Interest and other financial expense, net Interest and other financial expense, net comprises interest and other financial income and interest and other financial expenses. 29 Interest and other financial expense, net amounted to $38.7 million in 2020 compared to $27.6 million in 2019. 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 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. Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures) 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 $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 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 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. 30 The table below presents our segment results derived from our audited consolidated financial statements for 2020, 2019 and 2018. Year Ended December 31, 2020 2019 2018 (In millions, unless otherwise indicated) Specialty Carbon Black Net sales $ 445.2 $ 508.5 $ 545.4 Cost of sales (296.5) (338.0) (346.0) Gross profit $ 148.7 $ 170.4 $ 199.4 Volume (kmt) (1) 232.0 251.0 262.4 Adjusted EBITDA $ 109.9 $ 122.2 $ 149.3 Adjusted EBITDA Margin (%) (2) 24.7 24.0 27.4 Rubber Carbon Black Net sales $ 691.2 $ 967.9 $ 1,032.8 Cost of sales (547.5) (748.6) (802.2) Gross profit $ 143.6 $ 219.3 $ 230.6 Volume (kmt) (1) 634.9 772.1 822.3 Adjusted EBITDA $ 90.1 $ 145.2 $ 144.9 Adjusted EBITDA Margin (%) (2) 13.0 15.0 14.0 (1) Unaudited. (2) Defined as Adjusted EBITDA divided by net sales. Specialty Carbon Black 2020 Compared to 2019 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 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 $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. 31 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 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 Historical Cash Flows The tables below present our historical cash flows derived from our audited consolidated financial statements for 2020, 2019 and 2018. Year Ended December 31, 2020 2019 2018 (In millions) Net cash provided by operating activities $ 125.3 $ 231.5 $ 122.0 Net cash used in investing activities (144.9) (155.8) (88.1) 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 Less restricted cash at the end of the period 3.0 4.5 4.6 Cash and cash equivalents at the end of the period $ 64.9 $ 63.7 $ 57.0 2020 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 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. 2019 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 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. 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. 2018 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 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 32 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 (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) 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. Year Ended December 31, 2020 2019 2018 (In millions) Inventories $ 141.5 $ 164.8 $ 183.6 Trade receivables 234.8 212.6 262.8 Trade payables (131.2) (156.3) (163.6) Net working capital $ 245.0 $ 221.1 $ 282.9 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, we estimate that a $10 per barrel movement in the Brent crude oil price correlates to a movement in our Net Working Capital of approximately $27 million to $30 million within about a two to three month period. In times of relatively stable oil prices, the effects on our Net Working Capital levels are less significant and Net Working Capital swings increase in an environment of high price volatility. Our Net Working Capital increased 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. 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 33 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 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 $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 As of December 31, 2020, we did not have any off-balance sheet arrangements. Contractual Obligations The following table sets forth our contractual obligations as of December 31, 2020: Less than 1 year 1-3 years 4-5 years More than 5 years Total In millions Long-term debt obligations (1) $ 23.5 $ 46.9 $ 651.4 $ — $ 721.8 Term loan (3) 8.5 17.0 642.5 — 668.0 Interest expense on long-term debt (4) 15.0 30.0 8.9 — 53.9 Purchase commitments (5) 125.4 77.0 — — 202.4 Operating leases 12.1 20.9 15.5 78.2 126.7 Total contractual obligations (6) $ 160.9 $ 144.8 $ 666.9 $ 78.2 $ 1,050.9 (1) Sets forth obligations to repay principal and interest under our long-term debt obligations. (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: $306.8 million). (3) Represents the Term Loans and includes the outstanding principal amounts of $277.7 million (U.S. Dollar term loan) and $390.3 million (EUR term loan) which has been translated at an exchange rate at the reporting date of $1.2271 per €1.00. The borrowing costs on the principal of the Euro-denominated Term Loan have been translated applying the same exchange rate. (4) Represents interest expenses related to indebtedness from our Term Loans, assuming future interest based on a forward rate assumption. (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, 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, 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. 34 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 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 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. See also Note M. “Employee Benefit Plans” to our audited consolidated financial statements for information about sensitivities of inputs used with respect to pension provisions. See also Note I. “Business Combinations, Goodwill and Intangible Assets ” to our audited consolidated financial statements with respect to goodwill.