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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-18 · 191 added, 237 removed, 111 unchanged (79% of the section changed)

3 unchanged sentences

Financial Statements and Supplementary Data included elsewhere in this Annual Report.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States and in US Dollars.

In 2020, we generated revenue of $1,136.4 million on volumes of 866.8 kmt, resulting in net income of $18.2 million, and Adjusted EBITDA of $200.0 million.

Adjusted EBITDA for our Specialty Carbon Black segment was $109.9 million, and the Segment Adjusted EBITDA Margin was 24.7%.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP” or “U.S.

GAAP”) and in U.S.

This section discusses year-to-year comparisons between 2021 and 2020.

For discussions on year-to-year comparison between 2020 and 2019, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report in Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on February 18, 2021.

In 2021, our net sales was $1,546.8 million, sales volumes was 964.3 kmt, net income was $134.7 million, and Adjusted EBITDA was $268.4 million.

• Specialty Carbon Black Segment —Adjusted EBITDA was $148.4 million, and the Adjusted EBITDA Margin was 24.8%.

This segment accounted for 38.7% of our total revenue, 55.3% of total Adjusted EBITDA and 27.3% of our total volume in kmt in 2021.

Adjusted EBITDA for our Rubber Carbon Black segment was $90.1 million, and Segment Adjusted EBITDA Margin was 13.0%.

• Rubber Carbon Black Segment —Adjusted EBITDA was $120.0 million, and Adjusted EBITDA Margin was 12.7%.

This segment accounted for 61.3% of our total revenue, 44.7% of total Adjusted EBITDA and 72.7% of our total volume in kmt in 2021.

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In addition, important factors that could cause our actual results of operations or financial conditions to differ materially from those expressed or implied below, include, but are not limited to, factors indicated under “ Item 1A.

Risk Factors ”, and “ Note Regarding Forward-Looking Statements ” of this report.

Risk Factors ”, and “ Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 ” elsewhere in this Annual Report.

Recent Developments and Certain Known Trends

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide.

COVID-19 has spread through Asia, Europe, and North and South America, all regions in which we have operations.

In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction.

These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions.

In some areas around the world, government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy relative to early in the second quarter.

Meanwhile, some regions have experienced increasing numbers of COVID-19 cases, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted and economic conditions could weaken.

We continue to monitor the impact of the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain and distribution network and to take action, as appropriate, to address these circumstances.

Our manufacturing facilities generally have continued to operate since the pandemic was declared in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity.

While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, it had a more pronounced effect on our business during the second quarter, primarily as a result of reduced demand in our end markets, The third and fourth quarters of 2020 saw the favorable business momentum initially experienced in the latter part of the second quarter continue, with broad-based improvement in demand.

Nevertheless, we may be required to take further actions to comply with mandates of national, state or local authorities and may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites.

The extent to which our operations may be impacted by COVID-19 during the remainder of the pandemic depends on a variety of factors, including the duration, severity, and scope of the pandemic, which remain highly uncertain.

General Economic Conditions, Cyclicality and Seasonality

Our results of operations are affected by worldwide economic conditions.

Because carbon black is used in a diverse group of end products, demand for carbon black has historically been related to real GDP and general global economic conditions.

In particular, a large part of our sales has direct exposure to the cyclical automotive industry and, to a lesser extent, the construction industry.

As a result, our results of operations experience a level of inherent cyclicality.

The nature of our business and our large fixed asset base make it difficult to rapidly adjust our fixed costs downward when demand for our products declines, which materially affects our results of operations.

In 2021, our business saw a strong rebound in operations compared to fiscal 2020 which was adversely affected by the COVID-19 pandemic.

Despite demand improvement for our products during 2021, COVID-19 pandemic infection rate remains high in many parts of the world, which could impact demand.

Other factors impacting us are high raw material costs, and availability and costs of global transportation.

Reconciliation of Non-GAAP Financial Measures

We use Contribution Margin and Adjusted EBITDA as supplemental measures of our operating performance.

Contribution Margin and Adjusted EBITDA presented in this Management Discussion and Analysis have not been prepared in accordance with GAAP or the accounting standards of any other jurisdiction.

Other companies may use similar non-GAAP financial measures that are calculated differently from the way we calculate these measures.

Accordingly, our Contribution Margin and Adjusted EBITDA may not be comparable to similar measures used by other companies and should not be considered in isolation, or construed as substitutes for revenue, consolidated

net income for the period, income from operations (EBIT), gross profit and other GAAP measures as indicators of our results of operations in accordance with GAAP.

Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures)

We calculate Contribution Margin by subtracting variable costs (such as raw materials, packaging, utilities and distribution costs) from our revenue.

We believe that Contribution Margin is useful because we see this measure as indicating the portion of revenue that is not consumed by such variable costs and therefore contributes to the coverage of all other costs and profits.

The following table reconciles Contribution Margin and Contribution Margin per Metric Ton to gross profit:

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 measures 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, and includes equity earnings (loss) in affiliated companies, net of tax.

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 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 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

Orion Engineered Carbons S.A

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.

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:

Year Ended December 31,

2020 2019 2018

(in millions, unless otherwise indicated)

(In millions, except per ton data)

$ 1,546.8 $ 1,136.4

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Freight 92.9 68.8

Fixed Costs (3)

(273.2) (240.4)

Gross profit $ 386.6 $ 292.3

$ 292.3 $ 389.9 $ 430.0

Volume (in kmt) 964.3 866.8

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Gross profit per metric ton 400.9 337.2

(1) Separate line item in audited Financial Statements.

(2) Includes costs such as raw materials, packaging, utilities and distribution.

(3) Includes costs such as depreciation, amortization and impairment of intangible assets and property, plant and equipment, personnel and other production related costs.

Adjusted EBITDA (Non-GAAP Financial Measure)

We define Adjusted EBITDA as income from operations (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Company strategy, share of profit or loss of joint venture and certain other items.

Adjusted EBITDA is defined similarly in our Credit Agreements.

Our use of Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our financial results as reported under GAAP.

Some of these limitations are:

(a) although Adjusted EBITDA excludes the impact of depreciation and amortization, the assets being depreciated and amortized may have to be replaced in the future and thus the cost of replacing assets or acquiring new assets, which will affect our operating results over time, is not reflected;

(b) Adjusted EBITDA does not reflect interest or certain other costs that we will continue to incur over time and will adversely affect our profit or loss, which is the ultimate measure of our financial performance and (c) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently.

Because of these and other limitations, Adjusted EBITDA should be considered alongside our other GAAP-based financial performance measures, such as revenue, consolidated net income for the period or income from operations (EBIT).

The following table presents a reconciliation of Adjusted EBITDA to consolidated net income for each of the periods indicated:

Reconciliation of Adjusted EBITDA to consolidated net income is as follows:

Year Ended December 31,

2020 2019 2018

(In millions)

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Add back income tax expense 51.7 8.1

Add back equity in earnings of affiliated companies, net of tax (0.5) (0.6) (0.6)

Income from operations before income taxes and equity in earnings of affiliated companies 25.8 119.6 167.7

Add back earnings in affiliated companies, net of tax (0.7) (0.5)

Income before earnings in affiliated companies and income taxes 185.7 25.8

Add back interest and other financial expense, net 38.0 38.7

Reclassification of actuarial losses from AOCI 9.9 — —

Earnings before income taxes and finance income/costs 74.4 147.2 196.3

Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment 96.5 96.7 98.2

Add back reclassification of actuarial losses from AOCI 4.8 9.9

Income from operations 228.5 74.4

Add back depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 104.1 96.6

EBITDA 332.6 171.0

Equity in earnings of affiliated companies, net of tax 0.5 0.6 0.6

Restructuring expenses/(income) (1)

7.6 3.6 (24.6)

Consulting fees related to Company strategy (2)

Earnings in affiliated companies, net of tax 0.7 0.5

Extraordinary expense items related to COVID-19 — 3.9

Evonik legal settlement:

Cash settlement (79.5) —

Release of legal reserve, net (3.4) —

Long term incentive plan 5.2 4.4

EPA-related expenses 2.3 5.2

Environmental reserve accrual 7.2 —

Other adjustments 3.3 15.0

Adjusted EBITDA $ 268.4 $ 200.0

Thereof Adjusted EBITDA Specialty Carbon Black

$ 109.9 $ 122.2 $ 149.3

Thereof Adjusted EBITDA Rubber Carbon Black

Adjusted EBITDA Specialty Carbon Black

$ 148.4 $ 110.0

(1) Restructuring expenses for the periods ended December 31, 2020 and 2019 were related to the strategic restructuring of our worldwide Rubber footprint, Restructuring income in the period ended December 31, 2018 is primarily due to a gain recognized from the land sale in the restructuring of our South Korea footprint.

Financial Statements and Supplementary Data—Note O.—Restructuring Expenses for additional information.

(2) Consulting fees related to the Orion strategy include external consulting for establishing and executing Company strategies relating to Rubber footprint realignment, conversion to U.S.

dollar and U.S.

GAAP, and costs relating to our assessment of feasibility for inclusion in certain U.S.

(3) Extraordinary expense items related to COVID-19 reflect costs incurred to address impacts associated with the global coronavirus pandemic.

These items include select production costs, expenses related to providing personal protection equipment and costs related to protective measures carried out at our facilities to ensure the safety of our employees, among other expenditures.

(4) Other adjustments (from items with less bearing on the underlying performance of the Company’s core business) in the period ended December 31, 2020 mainly relate to legal fees associated with a dispute concerning intellectual property of $2.7 million, severance costs of $1.5 million, and hurricane related costs of $2.5 million.

Other adjustments in the period ended December 31, 2019 mainly relate to an amount of $2.9 million in non-income tax expense incurred during the construction phase of an asset.

Other adjustments in the period December 31, 2018 were primarily related to personnel costs.

Adjusted EBITDA Rubber Carbon Black

Orion Engineered Carbons S.A

Operating Result s

2021 Compared to 2020

The table below presents our historical results derived from our consolidated financial statements for the periods indicated.

Statement of operations data Year Ended December 31,

Operating results for the periods discussed are as follows:

Year Ended December 31, Year-Over-Year

2021 2020 Delta

(In millions) %

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Research and development costs 22.0 20.2 1.8 8.9

Gain related to litigation settlement (82.9) — (82.9) —

Other expenses, net 8.6 21.6 (13.0) (60.2)

Restructuring expenses 7.6 3.6

Income from operations 228.5 74.4 154.1 207.1

1 unchanged sentence

Reclassification of actuarial losses from AOCI 4.8 9.9 (5.1) (51.5)

Income from operations before income tax expense and equity in earnings of affiliated companies 25.8 119.6

Income before earnings in affiliated companies and income taxes 185.7 25.8 159.9 619.8

Income tax expense 51.7 8.1 43.6 538.3

Equity in earnings of affiliated companies, net of tax 0.5 0.6

Earnings in affiliated companies, net of tax 0.7 0.5 0.2 40.0

Net income $ 134.7 $ 18.2 $ 116.5 640.1

Net sales decreased overall by $340.0 million, or 23.0%, from $1,476.4 million in 2019 to $1,136.4 million in 2020.

Volumes declined by 15.3%, or 156.3 kmt to 866.8 kmt, primarily by weakness in the North America and Europe regions of our Rubber Carbon Black business as a result of the global economic impact of COVID-19.

The volume and oil price declines impacted net sales by approximately $214.4 and $148.4 million, respectively, partially offset by certain base price increases.

Cost of sales and Gross profit

Cost of sales decreased by $242.6 million, or 22.3%, from $1,086.6 million in 2019 to $844.0 million in 2020.

Volume declines of 15.3% and lower oil prices were the primary drivers and contributed $70.1 million and $216.0 million, respectively, to the decrease.

Net sales increased overall by $410.4 million, or 36.1%, from $1,136.4 million in 2020 to $1,546.8 million in 2021, driven primarily by the impact of passing through of higher feedstock costs, higher sales volume across all regions and segments, favorable impact of foreign currency translation, and favorable product mix.

Volumes increased by 97.5 kmt, or 11.2%, to 964.3 kmt, year-over-year, primarily driven by higher demand in both segments, across all application and geographies, driven by a sharp global economic recovery from the COVID-19 induced economic downturn in 2020.

Cost of sales

Cost of sales increased by $316.1 million, or 37.4%, from $844.1 million in 2020 to $1,160.2 million in 2021, primarily driven by higher production and associated costs.

Fluctuations in our cost of sales are generally driven by changes in feedstock and energy costs.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $30.7 million, or 14.9%, from $206.9 million in 2019 to $176.1 million in 2020 driven primarily by lower freight costs due to decreased volumes as a result of the effects of COVID-19, lower selling expenses and the implementation of cost reduction initiatives.

Research and development costs

R&D expenses were essentially flat with $20.2 million in 2020 compared to $19.9 million in 2019.

Selling, general and administrative expenses increased by $34.3 million, or 19.5%, from $176.1 million in 2020 to $210.4 million in 2021 driven primarily by higher freight costs associated with 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 which originated from the acquisition of the carbon black business line from Evonik, completed on July 29, 2011 by Rhône Capital and Triton Partners.

The 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 Acquisition (i.e., under Evonik’s control).

In addition, we released $3.4 million of legal reserves, net, related to this dispute.

Other expenses, net

Other expenses, net which comprises other operating income and other operating expenses, increased to $14.1 million in 2020 from $12.2 million in 2019.

The primary driver for the increase of $1.9 million were additional expenses incurred due to COVID-19.

Restructuring expenses/(income), net

In 2020 restructuring expenses increased to $7.6 million compared to 2019 primarily due to increased ground remediation costs related to the plant closing in Ambes, France.

Financial Statements and Supplementary Data—Note O.—Restructuring Expenses for additional information.

Other expenses, net which comprises other operating income and other operating expenses, decreased to $8.6 million in 2021 from $21.6 million in 2020.

The 2020 fiscal year included additional $3.9 million expenses incurred due to COVID-19, which was not repeated in 2021 and higher restructuring cost compared to 2021, partially offset by higher long-term incentive compensation costs and reserves for environmental remediation costs.

Orion Engineered Carbons S.A

Income from operations

Income from operations increased by $154.1 million to $228.5 million compared to 2020.

The increase was primarily driven by passing through of higher feedstock costs, higher sales volume due to sharp global recovery from COVID-19 across all regions, favorable product mix and the Evonik legal settlement related gain, partially offset by higher selling, general and administrative costs.

Interest and other financial expense, net

Interest and other financial expense, net comprises interest and other financial income and interest and other financial expenses.

Interest and other financial expense, net is comprised of interest and other financial income and interest and other financial expenses.

Interest and other financial expense, net amounted to $38.0 million in 2021 compared to $38.7 million in 2020.

The increase of $11.1 million was primarily due to losses on foreign currency translation and the exit of cross currency swaps.

The decrease of $0.7 million was primarily due to lower foreign currency transactions, partially offset by costs associated with refinancing of our Term-Loan during the third quarter of 2021.

Income tax expense

Income tax expense amounted to $8.1 million in 2020 compared to $33.2 million in 2019, as a result of decreased income before taxes.

Income tax expense amounted to $51.7 million in 2021 compared to $8.1 million in 2020, as a result of increased income before taxes.

In 2021, the effective tax rate was in line with the expected Company rate.

Unfavorable impacts from non-deductible business expenses and valuation allowance adjustments of deferred tax assets were offset by the benefit from the reduction in the valuation allowance related tax loss carryforwards in Brazil, interest carryforwards in Germany and a favorable pre-tax earnings mix by jurisdiction.

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data and Note P.

Income Taxes to the audited Consolidated Financial Statements.

In 2020, the effective tax rate was in line with the expected Company rate.

Unfavorable impacts from non-deductible business expenses, pre-tax earnings mix by jurisdiction and valuation adjustments of deferred tax assets primarily associated with the economic downturn related to COVID-19 were offset by the benefit from the reduction in the valuation allowance related to U.S.

1 unchanged sentence

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data—Note R.—Income Taxes to the audited consolidated financial statements.

In 2019, the effective tax rate deviated from the expected Company rate primarily due to the favorable effects from tax rate differentials and income taxes for prior years.

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data—Note R.—Income Taxes to the audited consolidated financial statements.

Equity in earnings of affiliated companies, net of tax

Equity in earnings of affiliated companies represents the equity income from our German JV, which was comparable in 2020 and 2019.

Contribution Margin and Contribution Margin per Metric Ton (Non-GAAP Financial Measures)

Contribution Margin decreased by $76.8 million, or 14.2%, from $540.7 million in 2019 to $463.9 million in 2020, primarily due to lower volumes with an impact of approximately $70.1 million.

Financial Statements and Supplementary Data and Note P.

Income Taxes to the audited Consolidated Financial Statements.

Contribution margin and Contribution margin per metric ton (A Non-GAAP Financial Measures)

Contribution margin increased by $103.0 million, or 22.2%, from $463.9 million in 2020 to $566.9 million in 2021.

Contribution margin per metric ton increased slightly by 9.8%, from $535.2 per metric ton in 2020 to $587.9 per metric ton in 2021.

Adjusted EBITDA (Non-GAAP Financial Measure)

Adjusted EBITDA decreased by $67.3 million, or 25.2%, from $267.3 million in 2019 to $200.0 million in 2020 primarily as a result of lower net income year over year.

2019 Compared to 2018

We refer to our annual report 2019 filed with the SEC on Form 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“ Management's Discussion and Analysis of Financial Condition and Results of Operations”.

The increase was primarily driven by passing through of higher feedstock costs, higher sales volume due to sharp global recovery from COVID-19 across all regions and segments, favorable product mix and higher energy sales, favorable impact of foreign currency translation, partially offset by higher selling, general and administrative costs.

Adjusted EBITDA (A Non-GAAP Financial Measure)

Adjusted EBITDA increased by $68.4 million, or 34.2%, from $200.0 million in 2020 to $268.4 million in 2021, primarily driven by passing through of higher feedstock costs, higher sales volume due to sharp global recovery from COVID-19 across all regions, and impact of favorable product mix, partially offset by higher selling, general and administrative costs.

Orion Engineered Carbons S.A

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.

Our business operations are divided into two operating segments—the Specialty Carbon Black and Rubber Carbon Black.

We use Segment Adjusted EBITDA as measures of segment performance and profitability.

The table below presents our segment results derived from our audited Consolidated Financial Statements for 2021, and 2020.

Year Ended December 31,

2020 2019 2018

Year Ended December 31, Year-Over-Year

2021 2020 Delta

(In millions, unless otherwise indicated) %

7 unchanged sentences

Adjusted EBITDA Margin (%) 24.8 24.7 0.1 0.4

24.7 24.0 27.4

Rubber Carbon Black

3 unchanged sentences

Volume (kmt) 701.1 634.9 66.2 10.4

634.9 772.1 822.3

Adjusted EBITDA $ 120.0 $ 90.0 $ 30.0 33.3

Adjusted EBITDA Margin (%) 12.7 13.0 (0.3) (2.3)

13.0 15.0 14.0

(1) Unaudited.

(2) Defined as Adjusted EBITDA divided by net sales.

Specialty Carbon Black

2021 Compared to 2020

Net sales of the Specialty Carbon Black segment decreased by $63.2 million, or 12.4%, from $508.5 million in 2019 to $445.2 million in 2020, primarily due to lower volumes and the effects of lower feedstock costs passed through to customers, partially offset by base price increases.

Volume of the Specialty Carbon Black segment decreased by 19.1 kmt, or 7.6%, from 251.0 kmt in 2019 to 232.0 kmt in 2020, driven primarily by lower demand in the North America and European markets.

Gross profit of the Specialty Carbon Black segment decreased by $21.7 million, or 12.7%, from $170.4 million in 2019 to $148.7 million in 2020, primarily as a result of lower volumes.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $12.3 million, or 10.0%, from $122.2 million in 2019 to $109.9 million in 2020, primarily reflecting the decrease in gross profit.

2019 Compared to 2018

We refer to our annual report 2019 filed with the SEC on From 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Net sales of the Specialty Carbon Black segment increased by $153.0 million, or 34.4%, from $445.2 million in 2020 to $598.2 million in 2021, primarily driven by passing through of higher feedstock costs, higher sales volumes due to sharp global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, favorable product mix and favorable impact of foreign currency translation.

Volume of the Specialty Carbon Black segment increased by 31.3 kmt, or 13.5%, from 231.9 kmt in 2020 to 263.2 kmt in 2021, driven primarily by sharp global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications.

Gross profit of the Specialty Carbon Black segment increased by $48.9 million, or 32.9%, from $148.7 million in 2020 to $197.6 million in 2021, primarily driven by passing through of higher feedstock costs, higher sales volume due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, and favorable product mix.

Adjusted EBITDA of the Specialty Carbon Black segment increased by $38.4 million, or 34.9%, from $110.0 million in 2020 to $148.4 million in 2021, primarily driven by passing through of higher feedstock costs, higher sales volume due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, passing through of higher feedstock costs, and favorable product mix.

Rubber Carbon Black

2021 Compared to 2020

Net sales of the Rubber Carbon Black segment decreased by $276.7 million, or 28.6%, from $967.9 million in 2019 to $691.2 million in 2020, primarily due to lower volumes and the effects of lower feedstock costs passed through to customers.

Volume of the Rubber Carbon Black segment decreased by 137.2 kmt, or 17.8%, from 772.1 kmt in 2019 to 634.9 kmt in 2020 mainly due to lower demand in all our major regions due to the global economic impact of COVID-19.

Gross profit of the Rubber Carbon Black segment decreased by $75.7 million, or 34.5%, from $219.3 million in 2019 to $143.6 million in 2020, mainly as a result of lower volumes, lower feedstock prices and unfavorable product mix.

Adjusted EBITDA of the Rubber Carbon Black segment decreased by $55.0 million, or 37.9%, from $145.2 million in 2019 to $90.1 million in 2020 reflecting the decline of gross profit partially offset by lower freight costs due to lower volumes.

2019 Compared to 2018

We refer to our annual report 2019 filed with the SEC on Form 10-K.

The comparison of the fiscal years ended December 31, 2019 and 2018 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2019 located within Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”.

Net sales of the Rubber Carbon Black segment increased by $257.4 million, or 37.2%, from $691.2 million in 2020 to $948.6 million in 2021, primarily driven by passing through of higher feedstock costs, higher sales volume due to sharp global recovery from COVID-19 induced economic downturn and favorable impact of foreign currency translation.

Volume of the Rubber Carbon Black segment increased by 66.2 kmt, or 10.4%, from 634.9 kmt in 2020 to 701.1 kmt in 2021, reflecting higher demand.

Gross profit of the Rubber Carbon Black segment increased by $45.4 million, or 31.6%, from $143.6 million in 2020 to $189.0 million in 2021, primarily driven by passing through of higher feedstock costs, and higher sales volume due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications.

Orion Engineered Carbons S.A

Adjusted EBITDA of the Rubber Carbon Black segment increased by $30.0 million, or 33.3%, from $90.0 million in 2020 to $120.0 million in 2021, primarily due to passing through of higher feedstock costs, favorable operating leverage associated with substantially higher sales volume, partially offset by higher general and administrative expenses.

Liquidity and Capital Resources

Historical Cash Flows

The tables below present our historical cash flows derived from our audited consolidated financial statements for 2020, 2019 and 2018.

The table below presents cash flows derived from our Consolidated Financial Statements.

Year Ended December 31,

2020 2019 2018

(In millions)

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Net cash used in investing activities (214.7) (144.9)

Net cash provided by (used in) financing activities 13.5 (68.6) (43.8)

Cash, cash equivalents and restricted cash at the end of the period $ 67.9 $ 68.2 $ 61.6

Less restricted cash at the end of the period 3.0 4.5 4.6

Cash and cash equivalents at the end of the period $ 64.9 $ 63.7 $ 57.0

Net cash provided by operating activities in 2020 amounted to $125.3 million and consisted of a consolidated profit for the period of $18.2 million and adjustments primarily for depreciation of $96.5 million and increases of net working capital of approximately $11.1 million.

Net cash used in investing activities in 2020 was $144.9 million comprised of approximately $84.0 million capital expenditure for maintenance and overhaul projects and expenditures associated as well as approximately $60.9 million environmental improvements of our U.S.

based facilities to address the EPA requirements.

Net cash provided by financing activities in 2020 were $13.5 million comprised of a net $35.0 million draw down on credit facilities while cash outflows of $8.2 million were for debt repayment and $12.0 million dividends paid.

Net cash provided by operating activities in 2019 amounted to $231.5 million and consisted of a consolidated profit for the period of $86.9 million, adjustments primarily for depreciation of $96.7 million and cash outflows from Net Working Capital of $49.8 million.

Net cash used in investing activities in 2019 amounted to $155.8 million comprised of $100.2 million capital expenditure for maintenance and overhaul projects and associated expenditures as well as $50.6 million environmental improvements of our U.S.

based facilities to address the EPA requirements.

Net cash used in financing activities in 2019 amounted to $68.6 million.

Cash inflows during the fiscal year were $97.0 million and are related to local bank loan facilities while $101.3 million of cash outflows were used during the year for repayments of those and other current borrowings, $8.0 million regular debt repayment and $48.0 million dividend payments.

Net cash provided by operating activities in 2018 amounted to $122.0 million and consisted of a consolidated profit for the period of $121.3 million, adjustments primarily for depreciation of $98.2 million, cash outflows from changes in operating assets and liabilities of $113.9 million including changes in Net Working Capital of $65.6 million.

Net cash provided by financing activities 73.3 13.5

Net cash provided by operating activities in 2021 amounted to $145.2 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 Q.

Commitments and Contingencies ” for further discussion on Evonik legal settlement.

Net cash used in investing activities in 2021 was $214.7 million.

Approximately $119.8 million related to capital expenditures comprised of a combination of safety, sustainability and growth investments.

Additionally, approximately $94.9 million was associated with our ongoing efforts to install emissions reduction technology to meet the Environmental Protection Agency (“EPA”) requirements.

Net cash provided by financing activities in 2021 were $73.3 million comprised primarily of net borrowings under our revolving credit facility of $75.8 million for our working capital.

Our financing activity included refinancing of our Term-loan and associated costs.

Debt and Other Obligations for further discussion on our Term-loan refinancing.

Net cash provided by operating activities in 2020 amounted to $125.3 million and consisted of a consolidated profit for the period of $18.2 million, adjustments primarily for depreciation of $96.6 million and changes in working capital.

Net cash used in investing activities in 2020 amounted to $144.9 million.

It comprised proceeds from a land sale in Korea while $36.6 million were used to acquire the acetylene carbon black manufacturer Société du Noird'Acétylène de l'Aubette, SAS (“SN2A”), SN2A, now known as Orion Engineered Carbons SAS.

The remaining capital expenditures, including expenditures associated with consolidating our two production plants in South Korea, were $103.8 million, of which $12.6 million were used in connection with

commencing the EPA related investments.

Net cash used in financing activities in 2018 amounted to $43.8 million including $26.4 million used for repayments of current borrowing, $8.3 million of regular debt repayments, $4.9 million used for share repurchases and $47.7 million for dividend payments.

Cash inflows of $49.0 million is related to local bank loan facilities.

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 in 2020 amounted to $13.5 million, primarily reflecting the company drawing under its revolver to bolster its cash position and enhance financial flexibility to successfully manage through the pandemic.

Sources of Liquidity

Our principal sources of liquidity are the net cash generated (i) from operating activities, primarily driven by our operating results and changes in working capital requirements and (ii) from financing activities, primarily driven by borrowing amounts available under our committed multicurrency, senior secured RCF and related ancillary facilities, various uncommitted local credit lines and, from time to time, term loan borrowings.

Our RCF allows the conversion of revolver capacity to ancillary line capacity.

Because ancillary lines are bilateral agreements directly with individual bank group participants, borrowings under such lines reduce overall RCF availability but do not count towards the 35% RCF utilization test governing our financial covenant.

As of December 31, 2020, the Company had converted 68% of its RCF into ancillary capacity, resulting in an ability to borrow the full amount of commitments under the RCF at any net leverage level.

We expect cash on hand and cash provided by operating activities and borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations and fund capital expenditures for the foreseeable future.

As of December 31, 2020, the company had estimated liquidity of $341.6 million, including cash and equivalents of $64.9 million, $236.5 million remaining under our revolving credit facility, including ancillary lines, and $40.2 million under other available credit lines.

We believe our anticipated future operating cash flow, capacity under our existing credit facilities and uncommitted bilateral lines of credit, along with access to surety bonds will be sufficient to finance our planned capital expenditures, settle our commitments and contingencies and address our normal anticipated working capital needs for the foreseeable future.

As of December 31, 2021, the company had estimated liquidity of $241.6 million, including cash and equivalents of $65.7 million, $166.7 million in availability remaining under our revolving credit facility, including ancillary lines, and $9.2 million under other available credit lines.

Orion Engineered Carbons S.A

Net Working Capital (Non-GAAP Financial Measure)

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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.

The following table set forth the principal components of our Net Working Capital as of the dates indicated.

Year Ended December 31,

2020 2019 2018

(In millions)

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Conversely, decreases in the cost of raw materials lead to a decrease in our Net Working Capital requirements over the same period of time.

Based on 2020 Net Working Capital requirements, we estimate that a $10 per barrel movement in the Brent crude oil price correlates to a movement in our Net Working Capital of approximately $27 million to $30 million within about a two to three month period.

In times of relatively stable oil prices, the effects on our Net Working Capital levels are less significant and Net Working Capital swings increase in an environment of high price volatility.

Our Net Working Capital increased to $323.6 million as of December 31, 2021 compared to $245.1 million as of December 31, 2020.

Capital Expenditures (Non-GAAP Financial Measure)

We define Capital Expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the consolidated financial statements.

For the years ended December 31, 2020, 2019 and 2018, our Capital Expenditures amounted to $144.9 million, $155.8 million and $116.2 million, respectively.

The components of working capital that used or provided cash were:

• Inventories —higher oil prices and an increase in production to meet forecasted demand resulted in increased raw material and finished goods inventory;

• Trade receivables —increase was driven by higher sales due to higher product demand and passing through of higher feedstock costs.

Trade receivables include a long-term steam supply contract between one of our wholly-owned subsidiaries and the city of Hürth, Germany (Stadtwerke Hürth/Hürth municipal utilities).

The municipality financed certain turbines and infrastructure which are operated by us under a finance lease agreement.

In addition, the city of Hürth entered into a long-term supply agreement for heat delivered to the city.

Since the fourth quarter of 2020, the city of Hürth has not fully honored the contractually-stipulated calculation for heat deliveries, amongst other stipulations.

As a result, Orion has open receivables from the city of Hürth totaling $5.5 million as of December 31, 2021 while the city of Hürth argues open claims of approximately $3.3 million related to lease payments.

Orion is in negotiations with the city but is prepared to pursue its rights vigorously through legal enforcement if necessary.

Those increases were partially offset by:

• Accounts payable —higher production and higher oil prices resulted in increased accounts payable.

Capital Requirements

Capital Expenditure —We define Capital Expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the Consolidated Financial Statements.

We plan to finance our Capital Expenditures, including EPA related expenditures, with cash generated by our operating activities.

With the exception of required expenditures in association with our settlement with the EPA we currently do not have

any material commitments to make Capital Expenditures, and do not plan to make Capital Expenditures outside the ordinary course of our business.

See “ Note S.

Commitments and Contingencies ” for further details regarding the EPA settlement.

Capital Expenditures in 2020 were mainly comprised of maintenance and overhaul projects including approximately $60 million in expenditures associated with our continuing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in 2019 were mainly comprised of maintenance and overhaul projects including expenditures associated with our efforts to commencing environmental investments required to address the EPA requirements in the United States.

Capital Expenditures in 2018 were were mainly comprised of maintenance and overhaul projects as well as expenditures associated with our efforts to consolidate our two productions plants in South Korea and commencing investments required to address the EPA requirements in the United States.

Research and Development, Patents and Licenses, etc.

Spending on innovation, including both applications technology and process development, amounted to $20.2 million, $19.9 million and $20.3 million in 2020, 2019 and 2018, respectively, and was mostly directed towards the development of new specialty carbon black products, new applications for carbon black products and the improvement of process efficiencies, and to a lesser extent towards research on installation of equipment to reduce emission levels in connection with the recent EPA consent decree.

To finance construction of the Mintaka facility in China we plan to borrow up to $80 million.

Other than EPA spending, we currently do not have any material commitments to make Capital Expenditures and do not plan to make Capital Expenditures outside the ordinary course of our business.

See “ Note Q.

Commitments and Contingencies ” for further details regarding the EPA settlement in Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report..

Debt and Other Obligations —Our gross debt balance as of December 31, 2021 was $788.5 million, an increase of $44.9 million compared to December 31, 2020.

Maturities of $3.0 million of debt, due in 2022, excluding net unamortized premiums and discounts, will be paid from current cash balances and cash generated by operations.

For more information on Debt, refer to Note J.

Debt and Other Obligations , in Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.

Contractual Obligations —For more information on Contractual obligations, refer to “ Note Q.

Commitments and Contingencies ” in Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.

Leases —For operating and finance leases, refer to Note G.

Leases in Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.

Orion Engineered Carbons S.A

Trend Information

See “ Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Certain Known Trends.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2020:

Less than 1 year 1-3 years 4-5 years More than 5 years Total

Long-term debt obligations (1)

$ 23.5 $ 46.9 $ 651.4 $ — $ 721.8

Term loan (3)

8.5 17.0 642.5 — 668.0

Interest expense on long-term debt (4)

15.0 30.0 8.9 — 53.9

Purchase commitments (5)

125.4 77.0 — — 202.4

Operating leases 12.1 20.9 15.5 78.2 126.7

Total contractual obligations (6)

$ 160.9 $ 144.8 $ 666.9 $ 78.2 $ 1,050.9

(1) Sets forth obligations to repay principal and interest under our long-term debt obligations.

(2) Represents the obligation under the Revolving Credit Facility (“RCF”).

As of December 31, 2020, there were no cash amounts drawn under our Revolving Credit Facility of €250.0 million (USD equivalent:

$306.8 million).

(3) Represents the Term Loans and includes the outstanding principal amounts of $277.7 million (U.S.

Dollar term loan) and $390.3 million (EUR term loan) which has been translated at an exchange rate at the reporting date of $1.2271 per €1.00.

The borrowing costs on the principal of the Euro-denominated Term Loan have been translated applying the same exchange rate.

(4) Represents interest expenses related to indebtedness from our Term Loans, assuming future interest based on a forward rate assumption.

(5) Represents purchase commitments under long-term supply agreements for the supply of raw materials, mainly oil and gas.

(6) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of December 31, 2020 amounted to $25.3 million.

See “ Note M.

Employee Benefit Plans ” for additional information regarding pension provisions and post-retirement benefits.

The level of performance bonds, guarantees and letters of credit required for carbon black oil purchasing could increase as a result of increasing oil prices or other factors (such as our ownership structure).

As at December 31, 2020 Orion Engineered Carbons GmbH has five guarantees issued by Euler Hermes S.A.

with a total volume of $10.5 million (in prior year three guarantees by Euler Hermes S.A.

of $9.2 million;

one guarantee insurance issued by Deutsche Bank AG with a volume of $2.5 million (in prior year one guarantee issued by Deutsche Bank AG with a volume of $2.2 million);

two guarantees issued by Liberty Mutual INS.

Europe SE with a volume of $4.2 million (in prior year none).

None of these guarantees reduce the possible utilization limit of the current RCF.

Moreover, Orion has four guarantees issued by UniCredit with a total volume of $0.3 million (in prior year:

none) which reduces the availability under the RCF.

Borrowings under our Credit Agreement are at variable rates of interest based on USD-LIBOR or EURIBOR rates.

In July 2017, the U.K.

Financial Conduct Authority announced that it intends to stop collecting LIBOR rates from banks after 2021.

The announcement indicates that LIBOR will not continue to exist on the current basis.

We are unable to predict the effect of any changes to LIBOR, the establishment and success of any alternative reference rates, or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United Kingdom or elsewhere.

Such changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives or other financial instruments or extensions of credit held by us.

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities.

We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

The policies and estimates discussed below are considered by our management to be critical to an understanding of the Consolidated Financial Statements because their application requires the most significant judgments from management in estimating matters for financial reporting that are inherently uncertain.

This discussion should be read in conjunction with our Consolidated Financial Statements and related notes included in this Annual Report in Form 10-K.

Use of Estimates —We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) if different estimates and assumptions were used, the results could have a material impact on the Consolidated Financial Statements.

Estimates and assumptions are based on information available at the time such estimates and assumptions are made.

Adjustments made with respect to the use of these estimates and assumptions often relate to information not previously available.

Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Consolidated Financial Statements.

We evaluate our estimates and application of our policies on an ongoing basis.

We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

The policies that we believe are critical to the preparation of the consolidated financial statements are the following:

• Revenue Recognitio n

• Intangible Assets and Goodwill Impairment

• Inventories

• Income Taxes

• Financial Instruments

• Pension Benefit Plans

• Environmental provisions

These critical accounting policies and other significant accounting policies are discussed in Item 8.“Financial Statements and Supplementary Data — Note A.

Significant Accounting Policies” to our audited consolidated financial statements included elsewhere in this report.

What changed 10-K

Item 7. Management’s Discussion and Analysis