Orion S.A. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three and nine months ended September 30, 2021 and 2020 and should be read in conjunction with the information included under Item 1. Financial Statements and Supplementary Data (Unaudited) elsewhere in this report. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (‘GAAP”). PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION Non-GAAP Financial Measures We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, see section Reconciliation of Non-GAAP Financial Measures below. These non-GAAP measure are — but are not limited to — Contribution Margin, Contribution Margin per metric ton (collectively, “Contribution Margins”), Adjusted EBITDA, Net Working Capital and Capital Expenditures. We define Contribution Margin as revenue less variable costs (such as raw materials, packaging, utilities and distribution costs). We define Contribution Margin per Metric Ton as Contribution Margin divided by volume measured in metric tons. We define Adjusted EBITDA as income from operations before depreciation and amortization, restructuring expenses, consulting fees related to Company strategy, gain related to legal settlement, share of profit or loss of joint venture and certain other items. Adjusted EBITDA is defined similarly in the Credit Agreement. 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. We define Net Working Capital as inventories plus current trade receivables minus trade payables. We define Capital Expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the Condensed Consolidated Financial Statements. We also use Segment Adjusted EBITDA Margin, which we define as Adjusted EBITDA for the relevant segment divided by the revenue for that segment. We use Adjusted EBITDA, Contribution Margins and Net Working Capital, as well as Adjusted EBITDA by segment and Segment Adjusted EBITDA Margin, as internal measures of performance to benchmark and compare performance among our own operations. We use these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of our business. We believe these measures are useful measures of financial performance in addition to consolidated net income for the period, income from operations and other profitability measures under GAAP because they facilitate operating performance comparisons from period to period and company to company and, with respect to Contribution Margin, eliminate volatility in feedstock prices. By eliminating potential differences in results of operations between periods or companies caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures and taxation positions or regimes, we believe that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated. For these reasons, we believe EBITDA-based measures are often used by the investment community as a means of comparison of companies in our industry. By deducting variable costs (such as raw materials, packaging, utilities and distribution costs) from revenue, we believe that Contribution Margins can provide a useful basis for comparing the current performance of the underlying operations being evaluated by indicating the portion of revenue that is not consumed by these variable costs and therefore contributes to the coverage of all costs and profits. Different companies and analysts may calculate measures based on EBITDA, contribution margins and working capital differently, so making comparisons among companies on this basis should be done carefully. Adjusted EBITDA, Contribution Margins and Net Working Capital are not measures of performance under GAAP and should not be considered in isolation or construed as substitutes for revenue, consolidated net income for the period, income from operations, gross profit and other GAAP measures as an indicator of our operations in accordance with GAAP. 18 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Reconciliation of Non-GAAP Financial Measures Contribution Margin and Contribution Margin per Metric Ton (A Non-GAAP Financial Measures) Reconciliation of Contribution Margin and Contribution Margin per Metric Ton to gross profit is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions, unless otherwise indicated) Revenue $ 393.1 $ 282.0 $ 1,154.1 $ 820.7 Variable costs 252.6 163.8 712.9 496.4 Contribution margin 140.5 118.2 441.2 324.3 Freight 23.3 17.9 69.8 48.7 Fixed costs (65.1) (56.9) (199.7) (169.7) Gross profit $ 98.7 $ 79.2 $ 311.3 $ 203.3 Volume (in kmt) 236.9 237.0 741.2 629.1 Contribution margin per metric ton $ 593.1 $ 498.6 $ 595.3 $ 515.6 Gross profit per metric ton $ 416.8 $ 334.1 $ 420.0 $ 323.2 Adjusted EBITDA (A Non-GAAP Financial Measure) Reconciliation of Adjusted EBITDA to consolidated net income is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Net income $ 21.0 $ 9.0 $ 133.6 $ 9.3 Add back income tax expense 6.7 2.2 48.5 3.9 Add back equity in earnings of affiliated companies, net of tax (0.1) (0.1) (0.5) (0.4) Income before earnings in affiliated companies and income taxes 27.6 11.1 181.6 12.8 Add back interest and other financial expense, net 11.5 10.7 30.4 28.7 Add back reclassification of actuarial losses from AOCI 1.2 2.3 3.6 7.3 Income from operations 40.3 24.1 215.6 48.8 Add back depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 23.8 24.0 74.6 69.7 EBITDA 64.1 48.1 290.2 118.5 Equity in earnings of affiliated companies, net of tax 0.1 0.1 0.5 0.4 Extraordinary expense items related to COVID-19 — 0.8 — 3.5 Evonik legal settlement: Cash settlement — — (79.5) — Release of legal reserve, net — — (3.4) — Long term incentive plan 1.1 1.2 3.4 1.2 EPA-related expenses 0.1 1.5 2.3 5.1 Other adjustments 1.0 3.3 2.6 5.4 Adjusted EBITDA $ 66.4 $ 55.0 $ 216.1 $ 134.1 Adjusted EBITDA Specialty Carbon Black $ 39.0 $ 26.5 $ 118.1 $ 71.0 Adjusted EBITDA Rubber Carbon Black $ 27.4 $ 28.5 $ 98.0 $ 63.1 19 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Operating Results For the three and nine months ended September 30, 2021 compared to three and nine months ended September 30, 2020 The table below presents our historical results derived from our Condensed Consolidated Financial Statements for the periods indicated. Condensed Consolidated Statement of Operations Data Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Net sales $ 393.1 $ 282.0 $ 1,154.1 $ 820.7 Cost of sales 294.4 202.8 842.8 617.4 Gross profit 98.7 79.2 311.3 203.3 Selling, general and administrative expenses 52.9 43.2 160.3 126.2 Research and development costs 5.7 7.4 16.4 16.8 Gain related to litigation settlement — — (82.9) — Other (income) expenses, net (0.2) 4.5 1.9 11.5 Income from operations 40.3 24.1 215.6 48.8 Interest and other financial expense, net 11.5 10.7 30.4 28.7 Reclassification of actuarial losses from AOCI 1.2 2.3 3.6 7.3 Income before earnings in affiliated companies and income taxes 27.6 11.1 181.6 12.8 Income tax expense 6.7 2.2 48.5 3.9 Equity in earnings of affiliated companies, net of tax 0.1 0.1 0.5 0.4 Net income $ 21.0 $ 9.0 $ 133.6 $ 9.3 Net sales Net sales increased by $111.1 million, or 39.4%, in the third quarter of 2021 to $393.1 million compared to the third quarter of 2020 primarily driven by passing through of higher feedstock costs, favorable product mix, and higher volume due to global recovery from COVID-19 across all regions in our Specialty Carbon Black segment. Volume decreased by 0.1 kmt, in the third quarter of 2021 to 236.9 kmt compared to the third quarter of 2020, primarily due to lower volume in the Rubber Carbon Black segment, partially offset by with higher demand in our Specialty Carbon Black segment. Net sales increased by $333.4 million, or 40.6%, in the nine months ended September 30, 2021 to $1,154.1 million, year over year, driven primarily by higher sales volume across all regions and segments, impact of passing through of higher feedstock costs, favorable impact of foreign currency translation, and favorable product mix. Volume increased by 112.2 kmt, or 17.8%, to 741.2 kmt compared to the nine months ended September 30, 2020, with higher demand in both segments, across all application and geographies, driven by a sharp global economic recovery from the COVID-19 induced economic downturn. Cost of sales Cost of sales increased by $91.6 million, or 45.1%, to $294.4 million in the third quarter of 2021 compared to the third quarter of 2020. Cost of sales increased by $225.4 million, or 36.5%, to $842.8 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in both comparative periods were primarily due to higher production and associated costs. Selling, general and administrative expenses Selling, general and administrative expenses increased by $9.7 million, or 22.5%, to $52.9 million in the third quarter of 2021 compared to the third quarter of 2020. Selling, general and administrative expenses increased by $34.1 million, or 27.0%, to $160.3 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in both comparative periods were primarily driven by higher freight costs due to increase in sales volumes and higher incentive compensation. Gain related to litigation settlement During the second quarter of 2021, Evonik agreed to make a one-time cash payment of €66.55 million ($79.5 million) to settle dispute 20 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation which originated from the acquisition of the carbon black business by Rhône Capital and Triton Partners in 2011. The 2011 acquisition agreement provided for a partial indemnity from Evonik against various exposures, including capital investments, fines and costs arising in connection with U.S. Clean Air Act violations that occurred prior to the closing of the 2011 acquisition (i.e., under Evonik’s control). In addition, we released $3.4 million of legal reserves, net, related to this dispute. Income from operations Income from operations increased by $16.2 million to $40.3 million in the third quarter of 2021, year over year, driven primarily by passing through higher feedstock costs, favorable product mix, and favorable operating leverage associated with higher sales volume in our Specialty Carbon Black segment, partially offset by higher selling, general and administrative costs. Income from operations increased by $166.8 million to $215.6 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, favorable product mix, and the Evonik legal settlement related gain, partially offset by higher, selling and general and administrative costs. Reclassification of actuarial losses from AOCI The actuarial losses associated with our 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. Income before earnings in affiliated companies and income taxes Income from operations before income taxes and equity in earnings of affiliated companies in the third quarter of 2021 increased by $16.5 million, year over year, driven primarily by favorable operating leverage associated with higher sales volume in our Specialty Carbon Black segment, favorable product mix and the impact of passing through higher feedstock costs, partially offset by higher selling, general and administrative costs. Income from operations before income tax expense and equity in earnings of affiliated companies increased by $168.8 million from $12.8 million in the nine months ended September 30, 2020 to $181.6 million in the nine months ended September 30, 2021, primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, impact of favorable product mix, and the Evonik legal settlement related gain, partially offset by higher, selling and general and administrative costs. Provision for income taxes For the three months ended September 30, 2021, the Company recognized income before provision for income taxes of $27.7 million, compared to $11.2 million in the three months ended September 30, 2020. The provision for income taxes was an expense of $6.7 million for the three months ended September 30, 2021, and $2.2 million for the three months ended September 30, 2020. The effective tax rate for the three months ended September 30, 2021, was 24%, as compared to 20% for the three months ended September 30, 2020. 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. For the nine months ended September 30, 2021, the Company recognized income before provision for income taxes of $182.1 million, compared to $13.2 million in the nine months ended September 30, 2020. The provision for income taxes was an expense of $48.5 million for the nine months ended September 30, 2021, and $3.9 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021, was 27%, as compared to 30% for the nine months ended September 30, 2020. 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. Net income Net income, in the third quarter of 2021, increased by $12.0 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales in our Specialty Carbon Black segment, partially offset by higher, selling and general and administrative costs and income tax expense. Our net income in the nine months ended September 30, 2021 amounted to $133.6 million, an increase of $124.3 million, primarily due to higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, favorable product mix, and the Evonik legal settlement related gain, partially offset by higher, selling and general and administrative costs and income tax expense. Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures) Contribution margin increased in the third quarter of 2021 by $22.3 million, or 18.9%, to $140.5 million, year over year. Contribution margin per metric ton increased by 19.0%, to $593.1 per metric ton in the three months ended September 30, 2021 Contribution Margin increased by $116.9 million, or 36.0%, to $441.2 million in the nine months ended September 30, 2021 compared to 21 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation the nine months ended September 30, 2020. Contribution margin per metric ton increased by 15.4%, to $595.3 per metric ton in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in both comparative periods was primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions and segments, passing through of higher feedstock costs, and impact of favorable product mix, partially offset by higher, selling and general and administrative costs. Adjusted EBITDA (A Non-GAAP Financial Measure) Adjusted EBITDA increased in the third quarter of 2021 by $11.4 million, or 20.8%, to $66.4 million, year over year. Adjusted EBITDA increased by $82.0 million, or 61.2%, from $134.1 million in the nine months ended September 30, 2020 to $216.1 million in the nine months ended September 30, 2021. The increase in both comparative periods was primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, and impact of favorable product mix, partially offset by higher, selling and general and administrative costs. 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. The table below presents our segment results derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions, unless otherwise indicated) Specialty Carbon Black Net sales $ 150.2 $ 103.6 $ 450.6 $ 317.8 Cost of sales (98.6) (66.5) (292.6) (216.7) Gross profit $ 51.6 $ 37.1 $ 158.0 $ 101.1 Volume (kmt) 63.9 58.8 203.4 166.6 Adjusted EBITDA $ 39.0 $ 26.5 $ 118.1 $ 71.0 Adjusted EBITDA Margin (%) 26.0 25.5 26.2 22.3 Rubber Carbon Black Net sales $ 242.9 $ 178.4 $ 703.5 $ 502.9 Cost of sales (195.8) (136.3) (550.2) (400.7) Gross profit $ 47.1 $ 42.1 $ 153.3 $ 102.2 Volume (kmt) 173.0 178.2 537.8 462.5 Adjusted EBITDA $ 27.4 $ 28.5 $ 98.0 $ 63.1 Adjusted EBITDA Margin (%) 11.3 16.0 13.9 12.5 Specialty Carbon Black Three months ended September 30, 2021 compared to three months ended September 30, 2020 Net sales of the Specialty Carbon Black segment increased by $46.6 million, or 45.0% to $150.2 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications. Specialty Carbon Black segment volumes increased by 5.1 kmt, or 8.7%, to 63.9 kmt, year over year. Gross profit of the Specialty Carbon Black segment increased by $14.5 million, or 39.0%, to $51.6 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications. Adjusted EBITDA of the Specialty Carbon Black segment increased by $12.5 million, or 47.4% to $39.0 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, partially offset by higher, selling and 22 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation general and administrative costs. Year over year, Adjusted EBITDA margin rose 50 basis points to 26.0%. Nine months ended September 30, 2021 compared to nine months ended September 30, 2020 Net sales of the Specialty Carbon Black segment increased by $132.8 million, or 41.8% to $450.6 million, year over year, primarily driven by higher sales due to sharp global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, passing through of higher feedstock costs, favorable product mix, and favorable impact of foreign currency translation. Specialty Carbon Black segment volumes increased by 36.8 kmt, or 22.1%, to 203.4 kmt, year over year. Gross profit of the Specialty Carbon Black segment increased by $56.9 million, or 56.4%, to $158.0 million, year over year, primarily driven by favorable operating leverage associated with higher sales due to sharp global recovery from the COVID-19 induced economic downturn, impact of favorable price, and impact of favorable product mix. Adjusted EBITDA of the Specialty Carbon Black segment increased by $47.1 million, or 66.2% to $118.1 million, year over year, primarily driven by favorable operating leverage associated with higher sales due to sharp global recovery from the COVID-19 induced economic downturn, impact of favorable price, and impact of favorable product mix. Year over year, Adjusted EBITDA margin increased 390 basis points to 26.2%. Rubber Carbon Black Three months ended September 30, 2021 compared to three months ended September 30, 2020 Net sales increased by $64.5 million, or 36.1% to $242.9 million, year over year, primarily due to passing through of higher feedstock costs, and impact of favorable product mix. Rubber Carbon Black segment volumes decreased by 5.2 kmt, or (3.0)%, to 173.0 kmt, year over year. Gross profit of the Rubber Carbon Black segment increased by $5.0 million, or 12.0% to $47.1 million, year over year, primarily driven by passing through of higher feedstock costs, partially offset by lower volume. Rubber Adjusted EBITDA increased by $1.1 million, to $27.4 million, year over year, primarily due to passing through higher feedstock costs, partially offset by lower volume and higher selling, general and administrative costs. Adjusted EBITDA margin decreased (470) basis points to 11.3%, year over year. 23 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Nine months ended September 30, 2021 compared to nine months ended September 30, 2020 Net sales increased by $200.6 million, or 39.9% to $703.5 million, year over year, primarily driven by passing through of higher feedstock costs, higher sales due to sharp global recovery from COVID-19 induced economic downturn, favorable impact of foreign currency translation, and impact of favorable product mix. Rubber Carbon Black segment volumes increased by 75.3 kmt, or 16.3%, to 537.8 kmt, year over year. reflecting higher demand. Gross profit of the Rubber Carbon Black segment increased by $51.1 million, or 49.9% to $153.3 million, year over year, primarily reflecting higher sales volume, the pass through of higher feedstock costs and favorable product mix. Rubber Adjusted EBITDA increased by $34.9 million, or 55.4%, to $98.0 million, year over year, primarily due to passing-through higher feedstock costs, favorable operating leverage associated with substantially higher sales volume, and favorable product mix, partially offset by higher general and administrative expenses and the one-time impact related to Winter Storm Uri. Adjusted EBITDA margin increased 140 basis points to 13.9%, year over year. Liquidity and Capital Resources Historical Cash Flows The tables below present our historical cash flows derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Nine Months Ended September 30, 2021 2020 (In millions) Net cash provided by operating activities $ 121.3 $ 92.4 Net cash used in investing activities (113.7) (120.3) Net cash provided by (used in) financing activities (7.6) 60.9 2021 Net cash provided by operating activities during the nine months ended September 30, 2021, was $121.3 million. The cash provided by operating activities primarily reflected our net income, adjusted for non-cash items and changes in working capital and $82.9 million related to Evonik legal settlement gain. See Note L. Commitments and Contingencies for further discussion on Evonik legal settlement. Net cash used in investing activities in the nine months ended September 30, 2021, amounted to $113.7 million, net. These expenditures were comprised of a combination of safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S. Net cash used in financing activities during the nine months ended September 30, 2021, amounted to $7.6 million. Cash outflows during the nine months of $6.0 million were primarily related to repayments under our senior secured revolving credit facilities (“RCF”). Our financing activity included refinancing of our Term-loan and associated costs. Se e Note E. Debt and Other Obligations for further discussion on Term-loan refinancing. 2020 Net cash provided by operating activities for the nine months ended September 30, 2020, amounted to $92.4 million. The cash provided by operating activities primarily reflected our net income, adjusted for non-cash items and changes in the components of our working capital. Net cash used in investing activities for the nine months ended September 30, 2020, amounted to 120.3 million. These expenditures were comprised of a combination of safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S. Net cash provided by financing activities for the nine months ended September 30, 2020, amounted to $60.9 million, primarily reflecting the company drawing under its revolver to bolster its cash position and enhance financial flexibility to successfully manage through the pandemic. 24 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Sources of Liquidity Our principal sources of liquidity are (i) cash on hand, (ii) net cash generated from operating activities, primarily driven by our operating results and changes in working capital requirements, and (iii) cash available through 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. 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 September 30, 2021, the company had total liquidity of $337.0 million, including cash and equivalents of $62.3 million, $238.8 million under our revolving credit facility capacity, including ancillary lines, and $35.9 million of capacity under other available credit lines. Net debt was $653.5 million and net leverage was 2.32x. Net Working Capital (A 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. September 30, 2021 December 31, 2020 (In millions) Inventories $ 192.9 $ 141.5 Trade receivables 300.7 234.8 Trade payables (150.2) (131.3) Net working capital $ 343.4 $ 245.0 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. Our Net Working Capital increased from $245.0 million as of December 31, 2020, to $343.4 million as of September 30, 2021. The components of working capital that used or provided cash were: • Inventories—due to higher oil prices and increase in production to meet forecasted demand resulted in raw material and finished goods inventory increases; and • Trade receivables—increase was driven by higher sales due to higher product demand. Those increases were partially offset by: • Accounts payable—higher production and higher oil prices resulted in increased accounts payable. Capital Expenditures (A 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 unaudited Condensed Consolidated Financial Statements. We plan to finance our Capital Expenditures with cash generated by our operating activities. With the exception of required expenditures in association with our settlement with the EPA we currently do not have any material obligatory commitments to make Capital Expenditures outside the ordinary course of our business. For further discussion on EPA settlement, see “ Note L. Commitments and Contingencies ”. Capital Expenditures during the nine months ended September 30, 2021, amounted to $113.7 million were primarily associated with safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S. Capital Expenditures in the nine months ended September 30, 2020 amounted to $120.3 million and were mainly comprised of preservation and overhaul projects and in expenditures related to investments required to address the EPA requirements in the United States. Off-Balance Sheet Arrangements As of September 30, 2021, we did not have any off-balance sheet arrangements. 25 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Note Regarding Forward-Looking Statements This report contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target,” “to be,” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters: • our strategies for (i) mitigating the impacts of the global outbreak of the Coronavirus, (ii) strengthening our position in specialty carbon blacks and rubber carbon blacks, (iii) increasing our rubber carbon black margins and (iv) strengthening the competitiveness of our operations; • the ability to pay dividends at historical dividend levels or at all; • cash flow projections; • the installation of pollution control technology in our U.S. manufacturing facilities pursuant to the EPA consent decree described herein; • the outcome of any in-progress, pending or possible litigation or regulatory proceedings; and • our expectation that the markets we serve will continue to grow. All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others: • the effects of the COVID-19 pandemic on our business and results of operations; • negative or uncertain worldwide economic conditions; • volatility and cyclicality in the industries in which we operate; • operational risks inherent in chemicals manufacturing, including disruptions as a result of severe weather conditions and natural disasters; • our dependence on major customers and suppliers; • our ability to compete in the industries and markets in which we operate; • our ability to address changes in the nature of future transportation and mobility concepts which may impact our customers and our business; • our ability to develop new products and technologies successfully and the availability of substitutes for our products; • our ability to implement our business strategies; • volatility in the costs and availability of raw materials and energy; • our ability to respond to changes in feedstock prices and quality; • our ability to realize benefits from investments, joint ventures, acquisitions or alliances; • our ability to realize benefits from planned plant capacity expansions and site development projects and the potential delays to such expansions and projects; • information technology systems failures, network disruptions and breaches of data security; • our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages; • our ability to recruit or retain key management and personnel; • our exposure to political or country risks inherent in doing business in some countries; • geopolitical events in the European Union (“EU”), and in particular the ultimate future relations between the EU and the United Kingdom; • environmental, health and safety regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities; • possible future investigations and enforcement actions by governmental or supranational agencies; 26 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation • our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases; • market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy; • litigation or legal proceedings, including product liability and environmental claims; • our ability to protect our intellectual property rights and know-how; • our ability to generate the funds required to service our debt and finance our operations; • fluctuations in foreign currency exchange and interest rates; • the availability and efficiency of hedging; • changes in international and local economic conditions, including with regard to the Euro, dislocations in credit and capital markets and inflation or deflation; • potential impairments or write-offs of certain assets; • required increases in our pension fund contributions; • the adequacy of our insurance coverage; • changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions; • challenges to our decisions and assumptions in assessing and complying with our tax obligations; and • potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion Engineered Carbons SA (a Luxembourg incorporated entity) in the United States (“U.S.”). Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include those factors detailed under the captions “Note Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in Note S, Commitments and Contingencies . to our audited Consolidated Financial Statements regarding contingent liabilities, including litigation. It is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement - including those in the “2021 Outlook” and “Quarterly Business Segment Results” sections above - as a result of new information, future events or other information, other than as required by applicable law. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the period ended September 30, 2021 does not differ materially from that discussed under Item 7A in our 2020 Form 10-K.