Orion S.A. 10-Q

Item 1. Financial Statements and Supplementary Data (Unaudited) Condensed Consolidated Statements of Operations Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per share amounts) Net sales $ 393,066 $ 282,036 $ 1,154,119 $ 820,691 Cost of sales 294,345 202,854 842,801 617,372 Gross profit 98,721 79,182 311,318 203,319 Selling, general and administrative expenses 52,872 43,155 160,289 126,221 Research and development costs 5,677 7,352 16,379 16,757 Gain related to litigation settlement — — ( 82,858 ) — Other (income) expenses, net ( 103 ) 4,528 1,904 11,530 Income from operations 40,275 24,147 215,604 48,811 Interest and other financial expense, net 11,456 10,768 30,366 28,656 Reclassification of actuarial losses from AOCI 1,197 2,273 3,649 7,325 Income before earnings in affiliated companies and income taxes 27,622 11,106 181,589 12,830 Income tax expense 6,753 2,250 48,517 4,006 Equity in earnings of affiliated companies, net of tax 143 141 536 426 Net income $ 21,012 $ 8,997 $ 133,608 $ 9,250 Weighted-average shares outstanding: Basic 60,740 60,487 60,680 60,408 Diluted 60,840 61,259 60,756 61,296 Earnings per share: Basic $ 0.35 $ 0.15 $ 2.20 $ 0.15 Diluted $ 0.35 $ 0.15 $ 2.20 $ 0.15 See accompanying Notes to these Condensed Consolidated Financial Statements 1 Orion Engineered Carbons S.A. Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Net income $ 21,012 $ 8,997 $ 133,608 $ 9,250 Other comprehensive income (loss), net of tax Foreign currency translation adjustments ( 10,708 ) ( 3,619 ) ( 8,086 ) ( 27,060 ) Unrealized net gains (losses) on hedges of a net investment in a foreign operation 364 ( 66 ) 414 ( 61 ) Unrealized net losses on cash flow hedges ( 2,103 ) ( 1,134 ) ( 440 ) ( 3,399 ) Gains on defined benefit plans 951 990 2,877 4,432 Other comprehensive loss ( 11,496 ) ( 3,829 ) ( 5,235 ) ( 26,088 ) Comprehensive income (loss) $ 9,516 $ 5,168 $ 128,373 $ ( 16,838 ) See accompanying Notes to these Condensed Consolidated Financial Statements 2 Orion Engineered Carbons S.A. Condensed Consolidated Balance Sheets September 30, 2021 December 31, 2020 (In thousands, except share amounts) ASSETS Current assets Cash and cash equivalents $ 62,334 $ 64,869 Accounts receivable, net 300,697 234,796 Other current financial assets 2,958 3,630 Inventories, net 192,898 141,461 Income tax receivables 9,946 11,249 Prepaid expenses and other current assets 38,065 44,451 Total current assets 606,898 500,456 Property, plant and equipment, net 655,185 610,530 Right-of-use assets 90,516 85,639 Goodwill 79,716 84,480 Intangible assets, net 38,794 46,772 Investment in equity method affiliates 5,252 5,637 Deferred income tax assets 59,317 52,563 Other financial assets 712 761 Other assets 2,536 2,955 Total non-current assets 932,028 889,337 Total assets $ 1,538,926 $ 1,389,793 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 150,152 $ 131,250 Current portion of long term debt and other financial liabilities 70,597 82,618 Current portion of employee benefit plan obligation 1,055 1,118 Accrued liabilities 49,662 49,176 Income taxes payable 51,559 23,906 Other current liabilities 41,210 36,677 Total current liabilities 364,235 324,745 Long-term debt, net 639,270 655,826 Employee benefit plan obligation 78,968 83,310 Deferred income tax liabilities 44,889 38,770 Other liabilities 98,818 106,129 Total non-current liabilities 861,945 884,035 Commitments and contingencies 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 – 60,633,302 and 60,487,117 shares 85,323 85,323 Treasury stock, at cost, 358,957 and 505,142 ( 6,546 ) ( 8,515 ) Additional paid-in capital 69,893 68,502 Retained earnings 218,015 84,407 Accumulated other comprehensive loss ( 53,939 ) ( 48,704 ) Total stockholders' equity 312,746 181,013 Total liabilities and stockholders' equity $ 1,538,926 $ 1,389,793 TY See accompanying Notes to these Condensed Consolidated Financial Statements 3 Orion Engineered Carbons S.A. Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 133,608 $ 9,250 Adjustments to reconcile net income 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 74,610 69,721 Amortization of debt issuance costs 3,756 1,531 Share-based incentive compensation 3,396 1,242 Deferred tax (benefit) ( 2,693 ) ( 11,224 ) Foreign currency transactions ( 8,979 ) ( 1,782 ) Reclassification of actuarial losses from AOCI 3,649 7,325 Other operating non-cash items, net ( 2,436 ) 118 Changes in operating assets and liabilities, net: Trade receivables ( 75,696 ) ( 6,682 ) Inventories ( 57,967 ) 39,576 Trade payables 12,584 ( 31,662 ) Other provisions 6,519 ( 4,899 ) Income tax liabilities 30,861 16,298 Other assets and liabilities, net 57 3,540 Net cash provided by operating activities 121,269 92,352 Cash flows from investing activities: Acquisition of property, plant and equipment ( 113,682 ) ( 120,343 ) Net cash used in investing activities ( 113,682 ) ( 120,343 ) Cash flows from financing activities: Proceeds from long-term debt borrowings 213,427 — Repayments of long-term debt ( 212,250 ) ( 6,077 ) Payments for debt issue costs ( 2,750 ) — Cash inflows related to current financial liabilities 81,367 191,041 Cash outflows related to current financial liabilities ( 87,345 ) ( 110,859 ) Dividends paid to shareholders — ( 12,045 ) Taxes paid for shares issued under net settlement feature ( 36 ) ( 1,202 ) Net cash provided by (used in) financing activities ( 7,587 ) 60,858 Increase in cash, cash equivalents and restricted cash — 32,867 Cash, cash equivalents and restricted cash at the beginning of the period 67,865 68,231 Effect of exchange rate changes on cash ( 2,703 ) ( 703 ) Cash, cash equivalents and restricted cash at the end of the period 65,162 100,395 Less restricted cash at the end of the period 2,828 2,859 Cash and cash equivalents at the end of the period $ 62,334 $ 97,536 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 $ ( 48,704 ) $ 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 ) 202,847 Net income — — — — 89,058 — 89,058 Other comprehensive income, net of tax — — — — — 8,989 8,989 Share based compensation — — — 1,216 — — 1,216 Balance at June 30, 2021 60,590,526 85,323 ( 7,345 ) 69,572 197,003 ( 42,443 ) 302,110 Net income — — — — 21,012 — 21,012 Other comprehensive loss, net of tax — — — — — ( 11,496 ) ( 11,496 ) Share based compensation — — — 1,120 — — 1,120 Issuance of stock under equity compensation plans 42,776 — 799 (799) — — — Balance at September 30, 2021 60,633,302 $ 85,323 $ ( 6,546 ) $ 69,893 $ 218,015 $ ( 53,939 ) $ 312,746 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 — — — — 18,033 — 18,033 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 84,284 ( 57,206 ) 166,816 Net loss — — — — ( 17,780 ) — ( 17,780 ) Other comprehensive income, net of tax — — — — — 585 585 Share based compensation — — — 1,199 — — 1,199 Balance at June 30, 2020 60,487,117 85,323 ( 8,515 ) 64,129 66,504 ( 56,621 ) 150,820 Net income — — — — 8,997 — 8,997 Other comprehensive loss, net of tax — — — — — ( 3,829 ) ( 3,829 ) Share based compensation — — — 1,182 — — 1,182 Balance at September 30, 2020 60,487,117 $ 85,323 $ ( 8,515 ) $ 65,311 $ 75,501 $ ( 60,450 ) $ 157,170 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. Leases 8 Note C . Inventories 8 Note D . Accounts Receivable 8 Note E . Debt and Other Obligations 9 Note F . Financial Instruments and Fair Value Measurement 10 Note G . Employee Benefit Plans 11 Note H . Restructuring Expenses 12 Note I . Accumulated Other Comprehensive Income/(Loss) 13 Note J . Earnings Per Share 14 Note K . Income Taxes 14 Note L . Commitments and Contingencies 14 Note M . Financial Information by Segment 15 Note N. Subsequent Events 18 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. 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 contract modifications for receivables, debt, and leases related to reference rate reform as well as derivative contracts and certain hedging relationships affected by reference rate reform activities under way in global financial markets. The Company adopted this guidance prospectively from July 1, 2021. The adoption of this standard did not impact our Consolidated Financial Statements. The adoption of this ASU will enable us to update our assessments of effectiveness, probability, and hedged risk in order to continue hedge accounting for the designated hedges that reference LIBOR, which is expected to be discontinued as a result of reference rate reform. The Company will continue to evaluate the guidance to determine the timing and extent to which we will apply other accounting relief provided by the guidance. 7 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note B. Leases The company’s right-of-use assets (“ROU”) and lease liabilities related to operating and finance leases reflected in the Consolidated Balance Sheets are as follows: September 30, 2021 December 31, 2020 (In thousands) ROU Assets Operating leases $ 24,464 $ 25,321 Finance leases 66,052 60,318 Total $ 90,516 $ 85,639 Lease Liabilities (1) Operating leases Current $ 8,605 $ 7,215 Long-term 16,096 18,999 24,701 26,214 Finance leases Current 3,733 4,862 Long-term 62,912 55,527 66,645 60,389 Total $ 91,346 $ 86,603 (1) Reflected in Current and Other liabilities in the Consolidated Balance Sheets. Note C. Inventories Inventories, net of obsolete, unmarketable and slow-moving reserves are as follows: September 30, 2021 December 31, 2020 (In thousands) Raw materials, consumables and supplies, net $ 75,708 $ 57,011 Work in process 151 322 Finished goods, net 117,039 84,128 Total $ 192,898 $ 141,461 Note D. Accounts Receivable The company had the following accounts receivable as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (In thousands) Accounts receivable $ 302,650 $ 240,590 Expected credit losses ( 1,953 ) ( 5,794 ) Accounts receivable, net of expected credit losses $ 300,697 $ 234,796 8 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note E. Debt and Other Obligations The Company had the following debt arrangements in place as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (In thousands) Current Current portion of term loan $ 3,004 $ 8,479 Deferred debt issuance costs - term loan ( 850 ) ( 1,501 ) Other short-term debt and obligations 68,443 75,640 Current portion of long-term debt and other financial liabilities 70,597 82,618 Non-current Term loan 644,369 659,502 Deferred debt issuance costs - term loan ( 5,099 ) ( 3,676 ) Long-term debt, net 639,270 655,826 Total $ 709,867 $ 738,444 a. Term Loan In 2014, Orion entered into an $ 895.0 million term loan credit facility (the “Credit Agreement”), which was allocated to a term loan facility denominated in U.S. Dollars of $ 358.0 million and a term loan facility denominated in Euros of € 399.0 million with both having an original maturity date of July 25, 2021 (the “Prior Term Loans”). Initial interest was calculated based on three-month EURIBOR (for the Euro-denominated loan), and three-month USD-LIBOR (for the USD-denominated loan) plus a 3.75 % - 4.00 % margin depending on the Company’s net leverage ratio. For both EURIBOR and USD-LIBOR a floor of 1.0 % applied. At least 1 % of the principal amount is required to be repaid per annum. Subsequent to 2014, Orion entered into a number of amendments, achieving a significant reduction of both interest margins to currently 2.00 % for the U.S. dollar term loan and 2.25 % for the Euro term loan. In addition, the interest margin was no longer linked to Orion's net leverage ratio and the EURIBOR and USD-LIBOR floors were eliminated. In 2017, the duration of the Prior Term Loans was extended to July 25, 2024. In September 2021, Orion entered into the Ninth Amendment to the Credit Agreement, which includes an amended and restated term loan agreement (the "Term Loan"). The term loan credit facility was allocated to a term loan facility denominated in U.S. dollars of $ 300 million and denominated in Euros of € 300 million with both having a maturity date of September 24, 2028 (the “Term Loans”) replacing the existing term loan credit facility. Interest is calculated based on three months EURIBOR (for the Euro-denominated loan) plus a margin of 2.50 %, or three-month USD-LIBOR (for the USD-denominated loan) plus a margin of 2.25 %. For the U.S. dollar loan, a floor of 0.50 % applies and for the Euro denominated loan a floor of 0.00 % applies. 1 % of the principal amount is required to be repaid per annum in respect to the Dollar Term Loans whereas there is no scheduled amortization for the Euro Term Loans. The Credit Agreement was also amended to include LIBOR replacement language in preparation for the eventual phase out of the London Interbank Offered Rate (LIBOR). The Term Loans include a sustainability-linked margin adjustment that applies to both the Euro and U.S. dollar term loan credit facilities. The margin adjustment is based on annual SOx and NOx emission reduction targets for the Company’s North American plants between 2022 and 2028, respectively. Specifically, the credit spread on the Term Loans will decline or rise by up to 10 basis points depending on the emissions profile of the Company’s North American plants, in aggregate. Starting in 2022 and continuing through 2025, the Company will review annually whether both interim targets have been met. Only if the Company achieves both targets will it benefit from up to a 10 basis point credit spread reduction for the prospective 12 month period following the submission of the sustainability linked compliance certificate. For the period from 2026 to 2028, a margin step-up by 5 or 10 basis points would occur if Orion does not maintain the reduced emissions profile of one or both targets. Other provisions of the Credit Agreement relating to the Term Loans remained unchanged. In connection with the September 2021 modification of the term loan, Orion incurred approximately $ 7.8 million of refinancing costs of which $ 2.8 million of loan origination costs were capitalized and $ 5.0 million of other fees were directly expensed. In September 2021, the Company restructured its previously existing cross-currency swaps in the amount of $ 197 million, to align them with the new U.S. dollar denominated term loan credit facility. Specifically for changes in the loan interest margin of 2.25 % (formerly 2.0 %) and the three-month USD-LIBOR floor of 0.50 % (formerly 0.00 %). The cross-currency swap became effective on September 30, 2021 and will expire on September 30, 2028, in line with the maturity of the term loan. This cross-currency swap was determined to be highly effective, continues to qualify for hedge accounting and was cost-neutral. 9 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) b. 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 ($ 289 million). As of September 30, 2021, the total commitment of $ 289 million was split between a $ 93 million RCF tranche and $ 197 million of bilateral ancillary facilities established directly with several banks under the RCF. As of September 30, 2021, and December 31, 2020, no RCF borrowings, as defined in the Credit Agreement, had been drawn. However, as of September 30, 2021 and December 31, 2020, $ 50.7 million and $ 70.3 million, respectively, of drawings under ancillary facilities reduced the overall amount available under the RCF to $ 238.8 million and $ 236.5 million, respectively. c. Local bank loans and other short-term borrowings As of September 30, 2021, the Company had partially drawn its uncommitted local credit line in Korea by $ 4.2 million and in Brazil by $ 1.8 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 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 September 30, 2021, the amount outstanding was $ 11.7 million. Due to the short maturity, the carrying value approximates the fair value. For additional information relating to our debt, see Note H. Debt and Other Obligations , included in our Annual Report in Form 10-K for the year ended December 31, 2020. Note F. 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 September 30, 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 September 30, 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 $ 13,377 $ 23,127 Other current liabilities Level 2 1,322 296 Other liabilities (non-current) Level 2 12,055 22,831 Term loan Level 2 $ 647,923 $ 667,980 Local bank loans Level 2 $ 68,443 $ 75,640 10 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) 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 G. 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 various countries in which the Company operates. Generally, level of benefit depends on the length of service and the remuneration. Net periodic defined benefit pension benefit costs include the following: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Service cost $ 304 $ 287 $ 937 $ 856 Interest cost 256 297 776 875 Amortization of actuarial loss 1,197 2,273 3,649 7,325 Net periodic pension cost $ 1,757 $ 2,857 $ 5,362 $ 9,056 Service costs were recorded within Income from operations in Selling, general and administrative expenses, and interest cost in Interest and other financial expense, net. The amortization of 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 in the Condensed Consolidated Statements of Operations. 11 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note H. Restructuring Expenses During 2016, the Company ceased operations at its plant in Ambes, France as part of the restructuring of its Rubber business segment. Restructuring reserves related to this facility, in the Condensed Consolidated Balance Sheets, are included in Accrued Liabilities. Details of the reserves 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 ) Cash paid ( 43 ) — — — ( 43 ) Foreign currency translation adjustment ( 153 ) ( 10 ) ( 189 ) — ( 352 ) Provision at March 31, 2021 3,041 219 4,062 — 7,322 Charges ( 323 ) — 1,043 — 720 Cash paid ( 49 ) ( 225 ) — — ( 274 ) Foreign currency translation adjustment 46 6 41 — 93 Provision at June 30, 2021 2,715 — 5,146 — 7,861 Charges ( 1 ) — 620 — 619 Cash paid — — ( 66 ) — ( 66 ) Foreign currency translation adjustment ( 69 ) — ( 142 ) — ( 211 ) Provision at September 30, 2021 $ 2,645 $ — $ 5,558 $ — $ 8,203 Personnel Expenses Demolition and Removal Costs Ground Remediation Costs Other Total (In thousands) Provision at January 1, 2020 $ 3,400 $ 561 $ 488 $ 317 $ 4,766 Cash paid ( 514 ) ( 402 ) ( 252 ) ( 263 ) ( 1,431 ) Foreign currency translation adjustment ( 81 ) ( 11 ) ( 14 ) ( 6 ) ( 112 ) Provision at March 31, 2020 2,805 148 222 48 3,223 Cash paid ( 486 ) ( 74 ) ( 148 ) — ( 708 ) Foreign currency translation adjustment 53 2 2 1 58 Provision at June 30, 2020 2,372 76 76 49 2,573 Cash paid ( 814 ) — ( 48 ) — ( 862 ) Foreign currency translation adjustment 108 3 2 2 115 Provision at September 30, 2020 $ 1,666 $ 79 $ 30 $ 51 $ 1,826 12 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note I. Accumulated Other Comprehensive Income/(Loss) Changes in each component of Accumulated other comprehensive income (loss) (“AOCI”), net of tax, are as follows: 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 ) $ ( 48,704 ) Other comprehensive loss before reclassifications ( 4,693 ) 803 — ( 3,890 ) Income tax effects before reclassifications ( 402 ) ( 277 ) — ( 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 ) Other comprehensive income before reclassifications 7,195 1,057 — 8,252 Income tax effects before reclassifications 522 ( 347 ) — 175 Amounts reclassified from AOCI — — 1,224 1,224 Income tax effects on reclassifications — — ( 398 ) ( 398 ) Currency translation AOCI — ( 155 ) ( 109 ) ( 264 ) Balance at June 30, 2021 ( 23,921 ) ( 11,772 ) ( 6,750 ) ( 42,443 ) Other comprehensive income (loss) before reclassifications ( 10,383 ) ( 3,218 ) — ( 13,601 ) Income tax effects before reclassifications ( 325 ) 1,145 — 820 Amounts reclassified from AOCI — — 1,197 1,197 Income tax effects on reclassifications — — ( 390 ) ( 390 ) Currency translation AOCI — 334 144 478 Balance at September 30, 2021 $ ( 34,629 ) $ ( 13,511 ) $ ( 5,799 ) $ ( 53,939 ) Currency Translation Adjustments Hedging Activities Adjustments Pension and Other Postretirement Benefit Liability Adjustment Total (In thousands) Balance at January 1, 2020 $ ( 12,282 ) $ ( 10,891 ) $ ( 11,189 ) $ ( 34,362 ) Other comprehensive 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 ) Other comprehensive income (loss) before reclassifications 799 ( 2,224 ) — ( 1,425 ) Income tax effects before reclassifications ( 169 ) 708 — 539 Amounts reclassified from AOCI — — 2,654 2,654 Income tax effects on reclassifications — — ( 904 ) ( 904 ) Currency translation AOCI — ( 124 ) ( 155 ) ( 279 ) Balance at June 30, 2020 ( 35,723 ) ( 13,151 ) ( 7,747 ) ( 56,621 ) Other comprehensive income (loss) before reclassifications ( 3,503 ) ( 1,284 ) — ( 4,787 ) Income tax effects before reclassifications ( 116 ) 294 — 178 Amounts reclassified from AOCI — — 2,272 2,272 Income tax effects on reclassifications — — ( 919 ) ( 919 ) Currency translation AOCI — ( 209 ) ( 364 ) ( 573 ) Balance at September 30, 2020 $ ( 39,342 ) $ ( 14,350 ) $ ( 6,758 ) $ ( 60,450 ) 13 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Note J. 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. The following table reflects the income and share data used in the basic and diluted EPS computations: Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per share amounts) Net income attributable to ordinary equity holders $ 21,012 $ 8,997 $ 133,608 $ 9,250 Weighted average number of ordinary shares 60,740 60,487 60,680 60,408 Basic EPS $ 0.35 $ 0.15 $ 2.20 $ 0.15 Dilutive effect of share based payments 100 772 76 888 Weighted average number of diluted ordinary shares 60,840 61,259 60,756 61,296 Diluted EPS $ 0.35 $ 0.15 $ 2.20 $ 0.15 Note K. 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 September 30, 2021 and 2020 were $ 6.8 million and $ 2.3 million, respectively. Income tax expense for the nine months ended September 30, 2021 and 2020 were $ 48.5 million and $ 4.0 million, respectively. Our effective income tax rates were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Effective income tax rates 24.3 % 20.0 % 26.6 % 30.2 % The decrease in our effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, was primarily attributable to the impact of a discrete deferred tax gain impacting the valuation allowance on deferred tax assets. The increase in our effective tax rate for the three months ended September 30, 2021 as compared to the three-months ended September 30, 2020, was primarily attributable to the reassessment of the recoverability of deferred tax assets and its projected earnings mix by geography and tax jurisdiction as compared to the prior period. Note L. 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 14 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) 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 (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 (“DOJ”) 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, the construction at the Ivanhoe facility has been subject to COVID-19 and hurricane Ida-related delays. 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. Orion is negotiating the extension of the EPA CD deadlines, but that extension has not yet been approved by the government as of this date, and, when it is, it must also be submitted to the court for approval. 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 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 $ 270 million to $ 290 million of which approximately $ 181 million has been spent to date. However, factors, such as timing, locations, target levels, changing scope or cost estimates as well as local regulations or unforeseen necessities could cause actual capital expenditures to exceed or be lower than current expectations or could affect Orion’s ability to meet the agreed target emission levels or target dates for installing required equipment as anticipated or at all. Under the EPA CD, 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. 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), provided 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. In June 2019, Orion initiated arbitration proceedings to enforce its rights against Evonik. In June 2021, Orion and Evonik agreed to settle all claims made under this partial indemnity as well as certain other claims and counterclaims Orion and Evonik asserted against each other. Evonik made a one-time cash payment of € 66.55 million ($ 79.5 million) to Orion which resolved all pending claims as well as counterclaims of $ 3.4 million. In the Condensed Consolidated Financial Statements, Orion recorded a gain aggregating $ 82.9 million. 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 September 30, 2021, the Company had guarantees totaling $ 16.4 million issued by various financial institutions. Note M. 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. 15 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Rubber 62 % 63 % 61 % 61 % Specialty 38 % 37 % 39 % 39 % Adjustment items are not allocated to the individual segments as they are managed on a group basis. Segment reconciliation for the three months ended September 30, 2021 and 2020: Rubber Specialties Corporate Total Segments (In thousands) 2021 Net sales from external customers $ 242,848 $ 150,218 $ — $ 393,066 Adjusted EBITDA $ 27,386 $ 39,030 $ — $ 66,416 Corporate charges — — ( 2,188 ) ( 2,188 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 13,333 ) ( 10,477 ) — ( 23,810 ) Excluding equity in earnings of affiliated companies, net of tax ( 143 ) — — ( 143 ) Interest and other financial expense, net ( 11,456 ) ( 11,456 ) Reclassification of actuarial losses from AOCI ( 1,197 ) ( 1,197 ) Income before earnings in affiliated companies and income taxes $ 27,622 2020 Net sales from external customers $ 178,406 $ 103,630 $ — $ 282,036 Adjusted EBITDA $ 28,525 $ 26,477 $ — $ 55,002 Corporate charges — — ( 6,715 ) ( 6,715 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 13,828 ) ( 10,171 ) — ( 23,999 ) Excluding equity in earnings of affiliated companies, net of tax ( 141 ) — — ( 141 ) Interest and other financial expense, net ( 10,768 ) ( 10,768 ) Reclassification of actuarial losses from AOCI ( 2,273 ) ( 2,273 ) Income before earnings in affiliated companies and income taxes $ 11,106 16 Orion Engineered Carbons S.A Notes to the Condensed Consolidated Financial Statements—(continued) Segment reconciliation for the nine months ended September 30, 2021 and 2020: Rubber Specialties Corporate Total Segments (In thousands) 2021 Net sales from external customers $ 703,499 $ 450,620 $ — $ 1,154,119 Adjusted EBITDA $ 98,016 $ 118,066 $ — $ 216,082 Corporate charges — — ( 8,190 ) ( 8,190 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 41,726 ) ( 32,884 ) — ( 74,610 ) Gain related to litigation settlement 82,858 82,858 Excluding equity in earnings of affiliated companies, net of tax ( 536 ) — — ( 536 ) Interest and other financial expense, net ( 30,366 ) ( 30,366 ) Reclassification of actuarial losses from AOCI ( 3,649 ) ( 3,649 ) Income before earnings in affiliated companies and income taxes $ 181,589 2020 Net sales from external customers $ 502,895 $ 317,796 $ — $ 820,691 Adjusted EBITDA $ 63,060 $ 71,024 $ — $ 134,084 Corporate charges — — ( 15,126 ) ( 15,126 ) Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 41,382 ) ( 28,339 ) — ( 69,721 ) Excluding equity in earnings of affiliated companies, net of tax ( 426 ) — — ( 426 ) Interest and other financial expense, net ( 28,656 ) ( 28,656 ) Reclassification of actuarial losses from AOCI ( 7,325 ) ( 7,325 ) Income before earnings in affiliated companies and income taxes $ 12,830 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. In the Consolidated Statements of Operations, shipping and handling costs of $ 23.3 million and $ 17.9 million for the three months ended September 30, 2021 and 2020, respectively, and $ 69.8 million and $ 48.7 million for the nine months ended September 30, 2021 and 2020, respectively, were reflected in Selling, general and administrative expenses. Note N. Subsequent Events On October 29, 2021, the Company’s Board of Directors declared interim dividend in the aggregate amount of $ 1.25 million, which is equivalent to approximately $ 0.02 per common stock of the company. The interim dividend will be paid on January 12, 2022, to holders of record as of the close of business on January 5, 2022. 17 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation