Orion S.A. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our activities expose us to a variety of market risks. Our primary market risk exposures relate to foreign exchange, interest rate and commodity risks. To manage these risks and our exposure to the unpredictability of financial markets, we seek to minimize potential adverse effects on our financial performance and capital. Where appropriate, we use derivative financial instruments solely for the purpose of hedging the currency, interest and commodity risks arising from our operations and sources of finance. For this purpose, a systematic financial and risk management system has been established. We do not enter into derivative financial instruments for speculative purposes. The following discussion and analysis only addresses our market risk and does not address other financial risks that we face in the normal course of business, including credit risk and liquidity risk. Interest Rate Risk Interest rate risk management aims to protect consolidated net income from negative effects from market interest rate fluctuations. Orion would be exposed to interest rate risk which might arise from incurring new liabilities at this time due to higher interest rates. Since the Term Loans are variable interest rate instruments, we are exposed to the market risk arising from changes in the yield curve. Appropriate hedging instruments are in place to mitigate the exposure arising from increasing interest rates. The table below shows the sensitivity of the interest expense to changes in the interest rate, after the impact of hedge accounting. It shows the change resulting from a hypothetical fluctuation in the three-month LIBOR of 50 basis points (0.50%) as of December 31, 2020 assuming that all other variables remain unchanged. For example, changes in USD/EUR currency rate would have an impact on our interest exposure and vice versa. Changes in interest rates would also have a related impact on our foreign currency (USD) exposure. The sensitivity analysis assumes that the hypothetical interest rate was valid and that the Revolving Credit Facilities was utilized in the full amount over the course of the entire year. The effect of this hypothetical change in the interest rate of the variable rate loan on our consolidated income from operations before taxes and equity in earnings of affiliated companies ("income before taxes" in this section) for the year ended December 31, 2020 is as follows: 35 December 31, 2020 Increase by 0.50% Decrease by 0.50% In thousands Increase (decrease) in the interest expense $ (2,160) $ 780 Increase (decrease) in income before taxes $ 2,160 $ (780) Increase (decrease) in equity (cash flow hedge reserve) $ 1,363 $ (509) Increase (decrease) in total comprehensive income before taxes $ 4,912 $ (1,994) Currency Risk Our functional currency of our Company's main borrowing entity, OEC GmbH, is Euro. Currency risks primarily stem from future cash flows related to interest payments and the U.S. Dollar-denominated Term Loan. In addition to currency risks from operating activities, these interest and principal repayments mainly represent the risk in connection with exchange rate fluctuations. The table below shows the sensitivity with regard to the effect of a change in the Euro/U.S. Dollar exchange rate using the outstanding amount and the interest for the U.S. Dollar-denominated Term Loan. A fluctuation of the Euro/U.S. Dollar exchange rate of 10% as of December 31, 2020 with other conditions remaining unchanged, would have the following effect on our income from operations before taxes and equity in earnings from affiliated companies or capital: December 31, 2020 Value of the U.S. Dollar in relation to the Euro (1) Increase by 10% Decrease by 10% In thousands FX gain / (FX loss) in finance result $ 7,335 $ (8,965) Increase (decrease) in income before taxes $ 7,335 $ (8,965) Increase (decrease) in total comprehensive income before taxes $ 7,335 $ (8,965) (1) U.S. Dollar/Euro exchange rate as of December 31, 2020: 1.2271. Commodity Risk Commodity risk results from changes in market prices for raw materials, mainly carbon black oil. Raw materials are primarily purchased to meet our production requirements. Factors of importance to our risk position are the availability and price of raw materials, energy, starting products and intermediates. In particular, our raw material prices depend on exchange rates and the price of crude oil. Pricing and procurement risks are reduced through worldwide procurement and optimized processes to ensure immediate sourcing of additional raw material requirements. Costs for raw materials and energy have fluctuated significantly in past years and may continue to fluctuate in the future. We endeavor to reduce purchasing risks on the procurement markets through worldwide purchasing activities and optimized processes for the purchase of additional raw materials. Raw materials are purchased exclusively to cover our own requirements. A significant portion of our volume of approximately 75% is sold based on formula-driven price adjustment mechanisms for changes in costs of raw materials. Sales prices under non-indexed contracts are reviewed on a quarterly basis to reflect raw material and market fluctuation. We believe that our contracts enable us to generally maintain our Segment Adjusted EBITDA Margins since the Acquisition. Beginning in 2016 we entered into limited short-term commodity derivatives for a specific carbon black oil grade. 36