Orion S.A. 10-Q

Item 1. Financial Statements and Supplementary Data (Unaudited) Condensed Consolidated Statements of Operations Three Months Ended March 31, 2021 2020 (In thousands, except per share amounts) Net sales $ 360,077 $ 336,007 Cost of sales 257,557 245,815 Gross profit 102,520 90,193 Selling, general and administrative expenses 52,353 44,519 Research and development costs 4,760 4,956 Other expenses, net 2,554 3,175 Income from operations 42,853 37,543 Interest and other financial expense, net 9,959 9,610 Reclassification of actuarial losses from AOCI 1,228 2,398 Pre-tax income before equity in earnings of affiliated companies 31,666 25,534 Income tax expense 8,274 7,635 Equity in earnings of affiliated companies, net of tax 146 133 Net income $ 23,538 $ 18,032 Weighted-average shares outstanding: Basic 60,648 60,276 Diluted 60,812 61,391 Earnings/(loss) per share: Basic $ 0.39 $ 0.30 Diluted $ 0.39 $ 0.29 See accompanying Notes to these Condensed Consolidated Financial Statements 1 Orion Engineered Carbons S.A. Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2021 2020 (In thousands) Net income $ 23,538 $ 18,032 Other comprehensive income (loss), net of tax Foreign currency translation adjustments ( 5,095 ) ( 24,071 ) Unrealized net gains/(losses) on hedges of a net investment in a foreign operation 70 36 Unrealized net gains/(losses) on cash flow hedges 1,089 ( 656 ) Gains on defined benefit plans 1,209 1,847 Other comprehensive loss ( 2,728 ) ( 22,844 ) Comprehensive income/(loss) $ 20,810 $ ( 4,811 ) See accompanying Notes to these Condensed Consolidated Financial Statements 2 Orion Engineered Carbons S.A. Condensed Consolidated Balance Sheets March 31, 2021 December 31, 2020 (In thousands, except share amounts) Current assets Cash and cash equivalents $ 62,632 $ 64,869 Accounts receivable, net 257,697 234,796 Other current financial assets 2,978 3,630 Inventories, net 157,504 141,461 Income tax receivables 11,415 11,249 Prepaid expenses and other current assets 45,334 44,452 Total current assets 537,560 500,456 Property, plant and equipment, net 605,069 610,530 Right-of-use assets 92,794 85,639 Goodwill 80,721 84,480 Intangible assets, net 42,974 46,772 Investment in equity method affiliates 5,528 5,637 Deferred income tax assets 58,028 52,563 Other financial assets 699 761 Other assets 2,438 2,956 Total non-current assets 888,249 889,337 Total assets $ 1,425,809 $ 1,389,793 Current liabilities Accounts payable $ 141,529 $ 131,250 Current portion of long term debt and other financial liabilities 107,843 82,618 Current portion of employee benefit plan obligation 948 1,118 Accrued liabilities 39,424 49,176 Income taxes payable 28,228 23,906 Other current liabilities 38,700 36,676 Total current liabilities 356,672 324,745 Long-term debt, net 637,127 655,826 Employee benefit plan obligation 79,930 83,310 Deferred income tax liabilities 44,619 38,770 Other liabilities 104,614 106,131 Total non-current liabilities 866,290 884,036 Commitments and contingencies Note M Stockholders' equity Common stock Authorized: 65,035,579 and 65,035,579 shares with no par value Issued – 60,992,259 and 60,992,259 shares with no par value Outstanding – 60,590,526 and 60,487,117 shares 85,323 85,323 Less 401,733 and 505,142 shares of common treasury stock, at cost ( 7,345 ) ( 8,515 ) Additional paid-in capital 68,356 68,502 Retained earnings 107,945 84,407 Accumulated other comprehensive loss ( 51,432 ) ( 48,705 ) Total stockholders' equity 202,846 181,013 Total liabilities and stockholders' equity $ 1,425,809 $ 1,389,793 See accompanying Notes to these Condensed Consolidated Financial Statements 3 Orion Engineered Carbons S.A. Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2021 2020 (In thousands) Cash flows from operating activities: Net income $ 23,538 $ 18,032 Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 25,627 23,845 Amortization of debt issuance costs 539 501 Share-based incentive compensation 1,060 ( 1,139 ) Deferred tax (benefit)/provision ( 2,068 ) ( 1,865 ) Foreign currency transactions 3,641 1,219 Reclassification of actuarial losses from AOCI 1,228 2,398 Other operating non-cash items 204 360 Changes in operating assets and liabilities, net of effects of businesses acquired: Trade receivables ( 30,535 ) ( 31,097 ) Inventories ( 19,845 ) ( 11,681 ) Trade payables 11,383 4,391 Other provisions ( 7,946 ) ( 11,365 ) Income tax liabilities 4,206 12,016 Other assets and liabilities ( 9,226 ) ( 711 ) Net cash provided by operating activities 1,805 4,905 Cash flows from investing activities: Acquisition of intangible assets and property, plant and equipment ( 27,227 ) ( 50,851 ) Net cash used in investing activities ( 27,227 ) ( 50,851 ) Cash flows from financing activities: Repayments of long-term debt ( 2,072 ) ( 2,006 ) Cash inflows related to current financial liabilities 35,465 109,813 Cash outflows related to current financial liabilities ( 7,734 ) — Dividends paid to shareholders — ( 12,045 ) Taxes paid for shares issued under net settlement feature ( 36 ) ( 1,202 ) Net cash provided by financing activities 25,623 94,560 Increase/(decrease) in cash, cash equivalents and restricted cash 202 48,614 Cash, cash equivalents and restricted cash at the beginning of the period 67,865 68,231 Effect of exchange rate changes on cash ( 2,572 ) ( 6,630 ) Cash, cash equivalents and restricted cash at the end of the period 65,495 110,215 Less restricted cash at the end of the period 2,863 2,675 Cash and cash equivalents at the end of the period $ 62,632 $ 107,540 See accompanying Notes to these Condensed Consolidated Financial Statements 4 Orion Engineered Carbons S.A. Condensed Consolidated Statements of Changes in Stockholders’ Equity Common stock (In thousands, except per share amounts) Number Amount Treasury shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Balance at January 1, 2021 60,487,117 $ 85,323 $ ( 8,515 ) $ 68,502 $ 84,407 $ ( 48,705 ) $ 181,013 Net income — — — — 23,538 — 23,538 Other comprehensive loss, net of tax — — — — — ( 2,728 ) ( 2,728 ) Share based compensation — — — 1,024 — — 1,024 Issuance of stock under equity compensation plans 103,409 — 1,170 ( 1,170 ) — — — Balance at March 31, 2021 60,590,526 $ 85,323 $ ( 7,345 ) $ 68,356 $ 107,945 $ ( 51,432 ) $ 202,846 Common stock (In thousands, except per share amounts) Number Amount Treasury shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Balance at January 1, 2020 60,224,147 $ 85,032 $ ( 8,515 ) $ 65,562 $ 78,296 $ ( 34,362 ) $ 186,013 Net income — — — — 18,032 — 18,032 Other comprehensive loss, net of tax — — — — — ( 22,844 ) ( 22,844 ) Dividends paid - $ 0.20 per share — — — — ( 12,045 ) — ( 12,045 ) Share based compensation — — — ( 2,632 ) — — ( 2,632 ) Issuance of stock under equity compensation plans 262,970 291 — — — — 291 Balance at March 31, 2020 60,487,117 $ 85,323 $ ( 8,515 ) $ 62,930 $ 84,283 $ ( 57,206 ) $ 166,815 See accompanying Notes to these Condensed Consolidated Financial Statements 5 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statement (Unaudited) Table of Contents—Notes Note A. Organization, Description of the Business and Summary of Significant Accounting Policies 7 Note B. Recent Accounting Pronouncements Not Yet Adopted 7 Note C. Leases 8 Note D . Inventories 9 Note E . Accounts Receivable 9 Note F . Debt and Other Obligations 9 Note G . Financial Instruments and Fair Value Measurement 10 Note H . Employee Benefit Plans 10 Note I . Restructuring Expenses 11 Note J . Accumulated Other Comprehensive Income/(Loss) 11 Note K . Earnings Per Share 12 Note L . Income Taxes 13 Note M . Commitments and Contingencies 13 Note N . Financial Information by Segment 15 6 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note A. Organization, Description of the Business and Summary of Significant Accounting Policies Orion Engineered Carbons S.A.’s unaudited condensed consolidated financial information includes Orion Engineered Carbons S.A. and its subsidiaries (“Orion” or the “Company”). The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report in Form 10-K for the fiscal year ended December 31, 2020. The accompanying unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year. Summary of Significant Accounting Policies Adoption of accounting standards In January 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-01, Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) . The amendments in this update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We adopted this standard on January 1, 2021. The adoption of this standard did not materially impact our Consolidated Financial Statements. Note B. Recent Accounting Pronouncements Not Yet Adopted Reference Rate Reform (Topic 848)— In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), a new standard. In January 2021, FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform. This guidance permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company will adopt this guidance prospectively and will elect certain optional expedients through the end of the hedging relationship. This will enable the Company to update its assessments of effectiveness, probability, and hedged risk in order to continue hedge accounting for the designated hedges that reference a rate expected to be discontinued as a result of the reference rate reform without requiring de-designation of current hedging relationships. The Company is currently evaluating the potential impact the adoption of this standard will have on its financial statements and it will continue to evaluate the guidance to determine the timing and extent to which it will apply accounting relief provided by the guidance. 7 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note C. Leases The company’s right-of-use assets (“ROU”) assets and lease liabilities related to operating and finance leases reflected in the Consolidated Balance Sheets are as follows: March 31, 2021 December 31, 2020 (In thousands) ROU Assets Operating leases $ 24,863 $ 25,321 Finance leases 67,931 60,318 Total $ 92,794 $ 85,639 Lease Liabilities (1) Operating leases Current $ 6,268 $ 7,215 Long-term 19,395 18,999 25,664 26,214 Finance leases Current 3,019 4,862 Long-term 65,346 55,526 68,365 60,388 Total $ 94,028 $ 86,603 (1) In the Consolidated Balance Sheets are reflected in Current and Other Liabilities 8 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note D. Inventories Inventories, net of obsolete, unmarketable and slow-moving reserves are as follows: March 31, 2021 December 31, 2020 (In thousands) Raw materials, consumables and supplies, net $ 62,850 $ 57,011 Work in process 184 322 Finished goods, net 94,469 84,128 Total $ 157,504 $ 141,461 Note E. Accounts Receivable The company had the following accounts receivable as of March 31, 2021 and December 31, 2020: March 31, 2021 December 31, 2020 (In thousands) Accounts receivable $ 263,374 $ 240,590 Expected credit losses ( 5,676 ) ( 5,794 ) Accounts receivable, net of expected credit losses $ 257,697 $ 234,796 Note F. Debt and Other Obligations The Company had the following debt arrangements in place as of March 31, 2021 and December 31, 2020: March 31, 2021 December 31, 2020 (In thousands) Current Term loan $ 8,261 $ 8,479 Deferred debt issuance costs - term loan ( 1,424 ) ( 1,500 ) Other short-term debt and obligations 101,006 75,640 Current portion of long term debt and other financial liabilities 107,843 82,618 Non-current Term loan 640,289 659,502 Deferred debt issuance costs - term loan ( 3,162 ) ( 3,676 ) Long-term debt, net 637,127 655,826 Total $ 744,970 $ 738,444 Discussion related to Other short-term debt and obligations is as follows: (a) Revolving credit facility To fund operating activities and generally safeguard the Company’s liquidity, the Company has entered into a revolving credit facility (“RCF”) of € 250 million ($ 293 million). As of March 31, 2021, the total commitment of $ 293 million is split between a $ 94 million RCF tranche and $ 199 million of bilateral ancillary facilities established directly with several banks under the RCF. As of March 31, 2021, and December 31, 2020, no RCF borrowings, as defined in the Credit Agreement, had been drawn. However, as of March 31, 2021 and December 31, 2020, $ 83.0 million and $ 70.3 million, respectively, of drawings under ancillary facilities reduced the overall amount available under the RCF to $ 210 million and $ 236.5 million, respectively. (b) Local bank loans and other short-term borrowings As of March 31, 2021, the Company had partially drawn its uncommitted local credit line in Korea by $ 4.4 million and in Brazil by $ 1.7 million (December 31, 2020: $ 4.6 million and $ 0.8 million, respectively). Repurchase Agreement —On March 3, 2021 we entered in to a repurchase agreement to sell European Emission Allowance (“EUA”) certificates. Under the agreement, we sold 260 thousand EUA certificates for € 10.04 million cash to a counterparty. The counterparty has 9 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) an obligation to resell, and we have the obligation to purchase, the same or substantially the same EUA certificates at December 22, 2021 for € 10.06 million. The difference between the consideration received and the amount of consideration to be paid is recognized as interest expense. At March 31, 2021, the amount outstanding is $ 11.8 million. Due to the short maturity, the carrying value approximates the fair value. Note G. Financial Instruments and Fair Value Measurement The Company measures financial instruments, such as derivatives, at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 —Unadjusted quoted market prices in active markets for identical assets or liabilities that the entity can access at the measurement date. • Level 2 —Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices such as quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves), and market-corroborated inputs. • Level 3 —Unobservable inputs for the asset or liability. For financial assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period. The following table shows the fair value measurement at March 31, 2021 and December 31, 2020. All measurements are based on observable inputs such as interest rates and are classified as Level 2 within the fair value hierarchy: Fair Value Hierarchy March 31, 2021 December 31, 2020 (In thousands) Receivables from hedges / derivatives $ 4 $ 195 Prepaid expenses and other current assets Level 2 4 195 Liabilities from derivatives $ 15,044 $ 23,127 Other current liabilities Level 2 2,838 296 Other liabilities (non-current) Level 2 12,206 22,831 Term loan Level 2 $ 648,550 $ 667,980 Local bank loans Level 2 $ 101,006 $ 75,640 See Note L. Accounting for Derivative Instruments and Hedging Activities , included in our Annual Report in Form 10-K for the year ended December 31, 2020, for additional information relating to our derivatives instruments. Note H. Employee Benefit Plans Provisions for pensions are established to cover benefit plans for retirement, disability and surviving dependents’ pensions. The benefit obligations vary depending on the legal, tax and economic circumstances in the various countries in which the Company operates. Generally, the level of benefit depends on the length of service and the remuneration. Net periodic defined benefit pension benefit costs include the following: 10 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Three Months Ended March 31, 2021 2020 (In thousands) Service cost $ 321 $ 303 Interest cost 257 295 Amortization of actuarial loss 1,228 2,398 Net periodic pension cost $ 1,806 $ 2,996 Service costs were recorded within income from operations under selling, general and administrative expenses, interest cost in interest and other financial expense, net. The actuarial losses associated with the pension obligations recorded in prior years in accumulated other comprehensive income exceeding 10 % of the defined benefit obligation are recorded ratably over the current year through profit and loss separately from income from operations and amounted to $ 1.2 million and $ 2.4 million for the three months ended March 31, 2021 and 2020, respectively. Note I. Restructuring Expenses During 2016, the Company ceased operations at its plant in Ambes, France as part of the restructuring of its Rubber business segment. Details of restructuring activities and the related reserves for this facility were as follows: Personnel expenses Demolition and Removal costs Ground remediation costs Other Total (In thousands) Provision at January 1, 2021 $ 3,559 $ 229 $ 4,251 $ — $ 8,039 Charges ( 322 ) — — — ( 322 ) Cost charged against liabilities (assets) — — — — — Cash paid ( 43 ) — — — ( 43 ) Foreign currency translation adjustment ( 153 ) ( 10 ) ( 189 ) — ( 352 ) Provision at March 31, 2021 $ 3,041 $ 219 $ 4,062 $ — $ 7,321 Provision at January 1, 2020 $ 3,400 $ 561 $ 488 $ 317 $ 4,765 Charges — — — — — Cost charged against liabilities (assets) — — — — — Cash paid ( 514 ) ( 402 ) ( 252 ) ( 263 ) ( 1,432 ) Foreign currency translation adjustment ( 81 ) ( 11 ) ( 14 ) ( 6 ) ( 113 ) Provision at March 31, 2020 $ 2,805 $ 147 $ 221 $ 48 $ 3,221 Note J. Accumulated Other Comprehensive Income/(Loss) Comprehensive income (loss) combines net income (loss) and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets. Changes in each component of Accumulated other comprehensive income (loss) (“AOCI”), net of tax, are as follows for the three months ended March 31, 2021 and 2020. 11 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Currency Translation Adjustments Hedging Activities Adjustments Pension and Other Postretirement Benefit Liability Adjustment Total (In thousands) Balance at January 1, 2021 $ ( 26,543 ) $ ( 13,485 ) $ ( 8,676 ) $ ( 48,705 ) Other comprehensive loss before reclassifications ( 4,693 ) 803 — ( 3,890 ) Income tax effects before reclassifications ( 402 ) ( 276 ) — ( 679 ) Amounts reclassified from AOCI — — 1,228 1,228 Income tax effects on reclassifications — — ( 394 ) ( 394 ) Currency translation AOCI — 632 375 1,007 Balance at March 31, 2021 $ ( 31,638 ) $ ( 12,327 ) $ ( 7,467 ) $ ( 51,432 ) Currency Translation Adjustments Hedging Activities Adjustments Pension and Other Postretirement Benefit Liability Adjustment Total (In thousands) Balance at January 1, 2020 $ ( 12,281 ) $ ( 10,891 ) $ ( 11,189 ) $ ( 34,362 ) Other comprehensive income/(loss) before reclassifications ( 22,735 ) ( 1,241 ) — ( 23,976 ) Income tax effects before reclassifications ( 1,336 ) 426 — ( 910 ) Amounts reclassified from AOCI — — 2,398 2,398 Income tax effects on reclassifications — — ( 776 ) ( 776 ) Currency translation AOCI — 195 225 420 Balance at March 31, 2020 $ ( 36,353 ) $ ( 11,511 ) $ ( 9,342 ) $ ( 57,206 ) The amounts reclassified out of AOCI and into the Condensed Consolidated Statement of Operations for the three months ended March 31, 2021 and 2020 are as follows: Affected Line Item in the Condensed Consolidated Statements of Operations Three Months Ended March 31, 2021 2020 (In thousands) Amortization of actuarial losses Reclassification of actuarial losses from AOCI $ 1,228 $ 2,398 Total before tax 1,228 2,398 Tax impact ( 394 ) ( 776 ) Total after tax $ 834 $ 1,623 The amounts recorded in prior years in AOCI exceeding 10 % of the defined benefit obligation are recorded ratably as reclassification of actuarial losses over the current year through profit and loss separately from income from operations and amounted to $ 1.2 million and $ 2.4 million for the three months ended March 31, 2021 and 2020, respectively. Note K. Earnings Per Share Basic earnings per share (“EPS”) is computed by dividing net income attributable to Orion by the weighted average number of common stock outstanding during the period. Diluted EPS equals net income attributable to Orion divided by the weighted average number of common stock outstanding during the period, adjusted for the dilutive effect of our stock–based and other equity compensation awards. 12 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) The following table reflects the income and share data used in the basic and diluted EPS computations: Three Months Ended March 31, 2021 2020 Net income for the period - attributable to ordinary equity holders of the parent (in thousands) $ 23,538 $ 18,032 Weighted average number of ordinary shares (in thousands of shares) 60,648 60,276 Basic EPS $ 0.39 $ 0.30 Dilutive effect of share based payments (in thousands of shares) 164 1,115 Weighted average number of diluted ordinary shares (in thousands of shares) 60,812 61,391 Diluted EPS $ 0.39 $ 0.29 Note L. Income Taxes The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be recognized, and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period as discrete items. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Income tax expense for the three months ended March 31, 2021 amounted to $ 8.3 million compared to $ 7.6 million for the three months ended March 31, 2020, reflecting the income during this current period. Our effective income tax rate for the three months ended March 31, 2021, was 26.0 %, compared with 29.8 % for the corresponding period of 2020. The decrease in our effective tax rate was primarily attributable to the positive effects of discrete tax items from a deferred tax gain of $ 0.7 million due to the reassessment of recoverability of deferred tax assets in Brazil and the U.S. Our effective income tax rate for the three months ended March 31, 2020 was 29.8 %, compared with 33.4 % for the corresponding period of 2019. The decrease in our effective tax rate was primarily attributable to the discrete tax gain of $ 0.7 million due to the refund of prior year taxes in connection with the land sale in South Korea during 2018, offset by the unfavorable deferred tax expense of $ 0.8 million due to the revaluation of the realizability of deferred tax assets and the earnings mix by geography and tax jurisdiction. The effective income tax rate for the three months ended March 31, 2021 varied from the German overall tax rate of 32.0 %, due to the Company’s reassessment of the recoverability of deferred tax assets and its projected earnings mix by geography and tax jurisdiction. The effective income tax rate of 29.8 % for the three months ended March 31, 2020 varied from the German overall tax rate of 32.0 %, due to the Company’s reassessment of the recoverability of deferred tax assets and its projected earnings mix by geography and tax jurisdiction. The effective income tax rate of 26.0 % for the three months ended March 31, 2021 deviated from the estimated annual tax rate of 28.2 % for 2021, due to the impact of discrete tax items. The effective tax rate of 29.8 % for the three months ended March 31, 2020 deviated from the estimated annual tax rate of 29.2 % for 2020, due to the impact of discrete tax items. Note M. Commitments and Contingencies Environmental Matters EPA Action During 2008 and 2009, the U.S. Environmental Protection Agency (“EPA”) contacted all U.S. carbon black producers as part of an industry-wide EPA initiative, requesting extensive and comprehensive information under Section 114 of the U.S. Clean Air Act. The EPA used that information to determine, for each facility, that either: (i) the facility has been in compliance with the Clean Air Act; (ii) violations have occurred and enforcement litigation may be undertaken; or (iii) violations have occurred and a settlement of an enforcement case is appropriate. In response to information requests received by the Company’s U.S. facilities, the Company furnished information to the EPA on each of its U.S. facilities. EPA subsequently sent notices under Section 113(a) of the Clean Air Act in 2010 alleging violations of Prevention of Significant Deterioration (“PSD”) and Title V permitting requirements under the Clean Air Act at the Company’s Belpre (Ohio) facility. In October 2012, the Company received a corresponding notice and finding of violation (a “NOV”) alleging the failure to obtain PSD and Title V permits reflecting Best Available Control Technology (“BACT”) at several units of the Company’s Ivanhoe 13 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) (Louisiana) facility, and in January 2013 the Company also received a NOV issued by the EPA for its facility in Borger (Texas) alleging the failure to obtain PSD and Title V permits reflecting BACT during the years 1996 to 2008. A comparable NOV for the Company’s U.S. facility in Orange (Texas) was issued by the EPA in February 2013; and EPA issued an additional NOV in March 2016 alleging more recent non-PSD air emissions violations primarily at the dryers and the incinerator of the Orange facility. In 2013, Orion began discussions with the EPA and the U.S. Department of Justice about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC (for purpose of this note M. “Orion”) and the United States (on behalf of the EPA), as well as the Louisiana Department of Environmental Quality. The consent decree (the “EPA CD”) became effective on June 7, 2018. The EPA CD resolves and settles the EPA’s claims of noncompliance set forth in the NOVs and in a respective complaint filed in court against Orion by the United States immediately prior to the filing of the consent decree. All five U.S. carbon black producers have settled with the U.S. government. Under Orion’s EPA CD, Orion is installing certain pollution control technology in order to further reduce emissions at its four U.S. manufacturing facilities in Ivanhoe (Louisiana), Belpre (Ohio), Borger (Texas), and Orange (Texas) over approximately five years . The EPA CD also requires the continuous monitoring of emissions reductions that Orion will need to comply with over a number of years. Orion has commenced the installation works for its Ivanhoe and Orange facilities. While the construction at Orange has been completed according to schedule despite COVID-19 related impacts, the construction at the Ivanhoe facility has been subject to COVID-19-related delays, and as a result we have declared force majeure with respect to the EPA CD and requested an extension of the timeline for completion of installations. The EPA has not confirmed our extension request but has deferred judgment on it at this time. In line with EPA’s respective request, Orion continues to provide regular updates to the EPA on the Ivanhoe installation works timeline and respective COVID-19 related impacts and mitigation measures. Under the EPA CD, Orion can choose either its Belpre or Borger facilities as the next site for installation of pollution control equipment with comparable effectiveness. We expect the capital expenditures for installation of pollution control equipment in the remaining Orion facilities to decrease due to economies of scale and synergies from prior installations. We also expect that the third and fourth plants will require significantly less costly pollution control equipment given the requirements of the EPA CD. We estimate the installations of monitoring and pollution control equipment at all four Orion plants in the U.S. will require capital expenditures in an approximate range between $ 230 million to $ 270 million of which approximately $ 133 million has been spent to date. To narrow this range, the Company is pursuing further scope design and estimation efforts. However, the actual total capital expenditures we might need to incur to fulfill the requirements of the EPA CD remain uncertain. The EPA CD allows some flexibility for Orion to choose among different technology solutions for reducing emissions and the locations where these solutions are implemented. The solutions Orion ultimately chooses to implement at its facilities other than Ivanhoe (Louisiana) and Orange (Texas), may differ in scope and operation from those it currently anticipates (including those discussed in the next paragraph) and, for any and all of its still affected three facilities, factors, such as timing, locations, target levels, changing cost estimates and local regulations, could cause actual capital expenditures to exceed or be lower than current expectations or affect Orion’s ability to meet the agreed target emission levels or target dates for installing required equipment as anticipated or at all. Orion also agreed to and paid a civil penalty of $ 0.8 million and agreed to perform environmental mitigation projects totaling $ 0.6 million. Noncompliance with applicable emissions limits could lead to further penalty payments to the EPA. As part of Orion’s compliance plan under the EPA CD, in April 2018 Orion signed a contract with Haldor Topsoe group to install its SNOX TM emissions control technology to remove SO2, NOx and dust particles from tail gases at Orion’s Ivanhoe, Louisiana Carbon Black production plant. The SNOX TM technology has not been used previously in the carbon black industry. 14 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Orion’s Share Purchase Agreement with Evonik in connection with the acquisition of the carbon black business line from Evonik Industries AG, completed on July 29, 2011 (“Acquisition), provides for a partial indemnity from Evonik against various exposures, including, but not limited to, capital investments, fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011. Except for certain less relevant allegations contained in the second NOV received for the Company’s facility in Orange (Texas) in March 2016, all of the other allegations made by the EPA with regard to all four of the Company’s U.S. facilities - as discussed above - relate to alleged violations before July 29, 2011. The indemnity provides for a recovery from Evonik of a share of the costs (including fines), expenses (including reasonable attorney’s fees, but excluding costs for maintenance and control in the ordinary course of business and any internal cost of monitoring the remedy), liabilities, damages and losses suffered and is subject to various contractual provisions including provisions set forth in the Share Purchase Agreement with Evonik, such as a de minimis clause, a basket, overall caps (which apply to all covered exposures and all covered environmental exposures, in the aggregate), damage mitigation and cooperation requirements, as well as a statute of limitations provision. Due to the cost-sharing and cap provisions in Evonik’s indemnity, the Company expects that substantial costs it has already incurred and will incur in this EPA enforcement initiative and the EPA CD likely will substantially exceed the scope of the indemnity. In addition, Evonik signaled that it is not honoring Orion’s claims under the indemnity. In June 2019, Orion initiated arbitration proceedings to enforce its rights against Evonik. Evonik in turn has submitted certain counterclaims related to a tax indemnity and cost reimbursement against Orion, which counterclaims we do not believe to be material. Although Orion believes that it is entitled to the indemnity and that its rights thereunder are enforceable, there is no assurance that the Company will be able to recover costs or expenditures incurred under the indemnity as it expects or at all. Pledges and guarantees The Company has pledged the majority of its assets (amongst others shares in affiliates, bank accounts and receivables) within the different regions excluding China as collateral under the Credit Agreement. As of March 31, 2021, the Company had guarantees totaling $ 18.8 million issued by various financial institutions. Note N. Financial Information by Segment Segment information We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting . We manage our business in two operating segments, Rubber Carbon Black and Specialty Carbon Black. • Rubber carbon black —Used in the reinforcement of rubber in tires and mechanical rubber goods. • Specialties —Used as pigments and performance additives in coatings, polymers, printing and special applications. The CEO, CFO and certain other senior management members, together, are the chief operating decision maker (“CODM”). Discrete financial information is available for each of the segments, and the CODM uses operating results of each operating segments for performance evaluation and resource allocation. Our CODM uses Adjusted EBITDA as the primary measure for reviewing our segment profitability. We define segment Adjusted EBITDA as Income from operations 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. The CODM does not review reportable segment asset or liability information for purposes of assessing performance or allocating resources. The following table shows the percent of revenue recognized in each of the Company’s reportable segment: Three Months Ended March 31, 2021 2020 Rubber 60 % 64 % Specialty 40 % 36 % Adjustment items are not allocated to the individual segments as they are managed on a group basis. 15 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Segment reconciliation for the three months ended March 31, 2021 and 2020: Rubber Specialties Corporate Total segments (In thousands) 2021 Net sales from external customers $ 215,918 $ 144,159 $ — $ 360,077 Adjusted EBITDA $ 31,171 $ 39,680 $ — $ 70,851 Corporate charges — — ( 2,225 ) ( 2,225 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 14,291 ) ( 11,336 ) — ( 25,627 ) Excluding equity in earnings of affiliated companies, net of tax ( 146 ) — — ( 146 ) Interest and other financial expense, net ( 9,959 ) ( 9,959 ) Reclassification of actuarial losses from AOCI ( 1,228 ) ( 1,228 ) Pre-tax income before equity in earnings of affiliated companies 31,666 2020 Net sales from external customers $ 216,228 $ 119,779 $ — $ 336,007 Adjusted EBITDA $ 35,768 $ 28,076 $ — $ 63,844 Corporate charges — — ( 2,323 ) ( 2,323 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 15,293 ) ( 8,552 ) — ( 23,845 ) Excluding equity in earnings of affiliated companies, net of tax ( 133 ) — — ( 133 ) Interest and other financial expense, net ( 9,610 ) ( 9,610 ) Reclassification of actuarial losses from AOCI ( 2,398 ) ( 2,398 ) Pre-tax income before equity in earnings of affiliated companies 25,534 The sales information noted above relates to external customers only. “Corporate” includes income and expense that cannot be directly allocated to the business segments or are managed on corporate level and includes finance income and expenses, taxes and items with less bearing on the underlying core business. 16 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation