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Item 8. Financial Statements and Supplementary Data

2022-02-17 compared with 2021-02-18 · 800 added, 926 removed, 486 unchanged (78% of the section changed)

Financial Statements and Supplementary Data

Table of Contents—Consolidated Financial Statements Page

Reports of Independent Registered Public Accounting Firms (PCAOB ID:

42 and PCAOB ID:

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Changes in Stockholders' Equity

Notes to the Consolidated Financial Statements

Orion Engineered Carbons S.A.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Orion Engineered Carbons S.A.

(the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with the U.S.

generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (2013 framework) and our report dated February 17, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Inventory Reserves- Valuation

Description of the Matter

As of December 31, 2021, the Company recognized $15.9 million of inventory reserves.

As discussed in Note A and D of the financial statements, the Company records an adjustment to the cost basis of inventory when evidence exists that the net realizable value of inventory is lower than its cost, which occurs when the Company has excess or obsolete inventory.

The Company's model to estimate excess or obsolete inventory is based on an analysis of existing inventory quantities compared to historical and expected future consumption.

Expected future consumption is estimated based upon historical consumption, recent purchase volumes, product age and condition, and market factors.

Auditing management's reserves for excess or obsolete inventories involved significant auditor judgement because write-downs of inventories are based on subjective factors including inventory condition and projected sales and usage of inventory which are affected by market and economic conditions outside the Company’s control.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's inventory reserve process.

This included management's assessment of the assumptions and data underlying the inventory reserve.

Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and the accuracy and completeness of the underlying data management used to value excess or obsolete inventory.

We compared inventories on-hand to historical usage and forecasts of future demand obtained from entity-specific and available market information.

We also performed sensitivity analyses over the significant assumptions to evaluate the changes in the excess and obsolete inventory estimates that would result from changes in the underlying assumptions.

//s/ Ernst & Young LLP

We have served as the Company’s auditor since 2021.

February 17, 2022

Orion Engineered Carbons S.A.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Orion Engineered Carbons S.A.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Orion Engineered Carbons S.A.

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

(the Company) as of December 31, 2020, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for the years ended December 31, 2020 and 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for each of the years ended December 31, 2020 and 2019, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

Income Taxes – Uncertain Tax Positions

Description of the Matter The Company operates in various countries and fiscal jurisdictions which are each subject to their respective local and distinct tax regulations and recognizes uncertain tax positions as described in Note R of the consolidated financial statements.

Auditing the Company´s recognition and measurement of uncertain tax positions was complex due to significant estimates and degree of judgment made by management in the assessment of the related tax matters.

The Company´s estimates and judgment involve the interpretation of local tax legislations, the evaluation of the risk of incorrect application of tax legislation, the evaluation of the applicability of tax case law, and the assessment of outcomes from previous tax audits in connection with current tax positions.

Given the complexity and the subjective nature of the assessment of uncertain tax positions, evaluating management´s estimates relating to the determination of the uncertain tax positions requires extensive audit effort and a high degree of auditor judgment.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls to recognize and measure uncertain tax positions.

This included testing controls over the completeness of uncertain tax positions and management’s review of the estimates and judgments described above.

To test the recognition and measurement of the Company’s uncertain tax positions, we performed audit procedures that included, among others, assessing management’s methodology as well as the completeness and mathematical accuracy of underlying data used by the Company in its analysis.

We involved our tax professionals to assist with our procedures.

We evaluated the estimates and significant judgments made by management in determining the recognition and measurement of the uncertain tax positions recorded taking into consideration the Company’s correspondence with the relevant tax authorities, income tax opinions, and third-party advice.

We tested the consistency of the Company’s estimates and judgments in determining its tax positions with relevant jurisdictional income tax regulation, applicable tax case law, previous tax audit outcomes and other relevant information.

We also evaluated the Company’s financial statement disclosures related to these tax matters.

/s/Tobias Schlebusch /s/Titus Zwirner

Wirtschaftsprüfer Wirtschaftsprüfer

(German Public Auditor) (German Public Auditor)

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

We have served as the Company’s auditor since 2011

/s/ Ernst & Young GmbH

We have served as the Company’s auditor from 2011 to 2021

Cologne, Germany

February 18, 2021

Consolidated Statements of Operations of Orion Engineered Carbons S.A.

Orion Engineered Carbons S.A

Consolidated Statements of Operations

Years Ended December 31,

2021 2020 2019

(In thousands, except per share amounts)

(In millions, except share and per share amounts)

Net sales $ 1,546.8 $ 1,136.4 $ 1,476.4

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Research and development costs 22.0 20.2 19.9

Gain related to litigation settlement ( 82.9 ) — —

Other expenses, net 8.6 21.6 15.7

Restructuring income — — 40,253

Restructuring expenses 7,559 3,628 15,620

Income from operations 228.5 74.4 147.2

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Reclassification of actuarial losses from AOCI 4.8 9.9 —

Income from operations before income tax expense and equity in earnings of affiliated companies 25,795 119,579 167,663

Income before earnings in affiliated companies and income taxes 185.7 25.8 119.6

Income tax expense 51.7 8.1 33.3

Equity in earnings of affiliated companies, net of tax 493 558 591

Earnings in affiliated companies, net of tax 0.7 0.5 0.6

Net income $ 134.7 $ 18.2 $ 86.9

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Diluted 60,951 61,407 61,300

Earnings per share (USD per share):

Earnings per share

Basic $ 2.22 $ 0.30 $ 1.45

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The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income of Orion Engineered Carbons S.A.

Orion Engineered Carbons S.A

Consolidated Statements of Comprehensive Income

Years Ended December 31,

2021 2020 2019

(In thousands)

(In millions)

Net income $ 134.7 $ 18.2 $ 86.9

Other comprehensive loss, net of tax

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments ( 7.6 ) ( 14.3 ) ( 1.7 )

Unrealized net gains/(losses) on hedges of a net investment in a foreign operation ( 133 ) 27 ( 269 )

Unrealized net losses on cash flow hedges ( 2,461 ) ( 4,772 ) ( 4,077 )

Net gains (losses) on derivatives 2.7 ( 2.6 ) ( 4.6 )

Gains (losses) on defined benefit plans 5.1 2.5 ( 8.4 )

Other comprehensive loss ( 14,343 ) ( 14,734 ) ( 14,308 )

Other comprehensive income (loss) 0.2 ( 14.4 ) ( 14.7 )

Comprehensive income $ 134.9 $ 3.8 $ 72.2

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Balance Sheets of Orion Engineered Carbons S.A.

(In thousands, except share amounts)

Orion Engineered Carbons S.A

Consolidated Balance Sheets

(In millions, except share amounts)

Current assets

Cash and cash equivalents $ 65.7 $ 64.9

Accounts receivable, net of expected credit losses

of $ 5,794 and $ 6,632 234,796 212,565

Other current financial assets 3,630 11,347

Accounts receivable, net 288.9 234.8

Inventories, net 229.8 141.5

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Property, plant and equipment, net 707.9 610.5

Operating lease right-of-use assets 85,639 27,532

Right-of-use assets 84.6 85.6

Goodwill 78.0 84.5

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Deferred income tax assets 50.4 52.6

Other financial assets 761 2,501

Other assets 3.5 3.7

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Total assets $ 1,631.0 $ 1,389.8

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

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Current portion of long term debt and other financial liabilities 151.7 82.6

Current portion of employee benefit plan obligation 1,118 908

Accrued liabilities 50.9 49.2

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Other liabilities 95.2 106.2

Commitments and contingencies Note S — —

Total non-current liabilities 862.6 884.1

Commitments and contingencies

Stockholders' equity

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Outstanding – 60,656,076 and 60,487,117 shares

85,323 85,032

Less 336,183 and 505,142 shares of common treasury stock, at cost

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The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Statements of Cash Flows of Orion Engineered Carbons S.A.

Orion Engineered Carbons S.A

Consolidated Statements of Cash Flows

Years Ended December 31,

2021 2020 2019

(In thousands)

(In millions)

Cash flows from operating activities:

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Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of property, plant and equipment and amortization of intangible assets 96,526 96,713 98,156

Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 104.1 96.6 96.7

Amortization of debt issuance costs 4.1 2.1 2.1

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Reclassification of actuarial losses from AOCI 4.8 9.9 —

Other operating non-cash items 118 1,813 1,165

Changes in operating assets and liabilities, net of effects of businesses acquired:

(Increase)/decrease in trade receivables ( 16,501 ) 45,412 ( 39,680 )

(Increase)/decrease in inventories 29,951 16,413 ( 31,406 )

Increase/(decrease) in trade payables ( 18,732 ) ( 12,036 ) 5,444

Increase/(decrease) in provisions 2,308 ( 10,375 ) ( 4,427 )

Increase/(decrease) in tax liabilities 16,398 ( 7,254 ) 4,843

Increase/(decrease) in other assets and liabilities ( 2,320 ) ( 14,497 ) ( 48,707 )

Other operating non-cash items, net ( 1.8 ) 0.1 1.8

Changes in operating assets and liabilities, net:

Trade receivables ( 67.6 ) ( 16.5 ) 45.4

Inventories ( 94.9 ) 30.0 16.4

Trade payables 65.0 ( 18.7 ) ( 12.0 )

Other provisions 7.0 2.3 ( 10.4 )

Income tax liabilities ( 6.3 ) 16.4 ( 7.3 )

Other assets and liabilities, net ( 17.9 ) ( 2.4 ) ( 14.5 )

Net cash provided by operating activities 145.2 125.3 231.5

Cash flows from investing activities:

Cash paid for the acquisition of intangible assets and property, plant and equipment $ ( 144,939 ) $ ( 155,848 ) $ ( 116,157 )

Acquisition of businesses, net of cash and cash equivalents acquired — — $ ( 36,571 )

Cash received from the disposal of intangible assets and property, plant and equipment — — $ 64,672

Acquisition of intangible assets and property, plant and equipment ( 214.7 ) ( 144.9 ) ( 155.8 )

Net cash used in investing activities ( 214.7 ) ( 144.9 ) ( 155.8 )

Cash flows from financing activities:

Payments for debt issue costs — ( 1,721 ) ( 741 )

Proceeds from long-term debt borrowings 213.4 — —

Repayments of long-term debt ( 213.0 ) ( 8.2 ) ( 8.0 )

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Dividends paid to shareholders — ( 12.0 ) ( 48.1 )

Repurchase of common stock — — ( 4,926 )

Taxes paid for shares issued under net settlement feature ( 1,202 ) ( 6,475 ) ( 4,741 )

Other financing activities ( 2.9 ) ( 1.2 ) ( 8.1 )

Net cash provided by (used in) financing activities 73.3 13.5 ( 68.6 )

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Supplemental disclosure of non-cash activity:

Liabilities under build-to-suit lease $ — $ — $ 28,657

Liabilities for leasing - current $ 14,005 $ 6,254 $ —

Liabilities for leasing - non-current $ 52,593 $ 26,280 $ —

Lease liabilities $ 11.6 $ 66.6 $ 32.6

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Statements of Changes in Stockholders’ Equity of Orion Engineered Carbons S.A.

(In thousands, except per share amounts) Number of common shares Amount Treasury shares Additional

Orion Engineered Carbons S.A

Consolidated Statements of Changes in Stockholders’ Equity

(In millions, except share and per share amounts) Number Amount Treasury shares Additional

capital Retained

earnings Accumulated other compre-hensive loss Total equity

earnings Accumulated other comprehensive loss Total

As of January 1, 2019 59,518,498 $ 84.2 $ ( 8.7 ) $ 63.6 $ 39.4 $ ( 19.6 ) $ 158.9

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Other comprehensive loss, net of tax — — — — — ( 14.7 ) ( 14.7 )

Distributions from additional paid-in capital — — — ( 47,665 ) — — ( 47,665 )

$ 0.80 per share

Share buyback ( 206,501 ) — ( 4,926 ) — — — ( 4,926 )

Dividends - $ 0.80 per share

— — — — ( 48.1 ) — ( 48.1 )

Share based compensation — — — 2.0 — — 2.0

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Other comprehensive loss, net of tax — — — — — ( 14.4 ) ( 14.4 )

Dividends paid - $ 0.80 per share — — — — ( 48,033 ) — ( 48,033 )

Dividends - $ 0.20 per share — — — — ( 12.0 ) — ( 12.0 )

Share based compensation — — — 2.9 — — 2.9

2 unchanged sentences

Net income — — — — 134.7 — 134.7

Other comprehensive loss, net of tax — — — — — ( 14,343 ) ( 14,343 )

Dividends paid - $ 0.20 per share — — — — ( 12,045 ) — ( 12,045 )

Other comprehensive income, net of tax — — — — — 0.2 0.2

Dividends - $ 0.02 per share — — — — ( 1.3 ) — ( 1.3 )

Share based compensation — — — 5.1 — — 5.1

2 unchanged sentences

The accompanying notes are an integral part of these Consolidated Financial Statements.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Table of Contents—Notes Page

Significant Accounting Policies

Orion’s audited consolidated financial statements are comprised of Orion Engineered Carbons S.A.

and its subsidiaries (“Orion”, “Company”, “we”, and “our”).

The Company's fiscal year comprises the period from January 1, 2020 to December 31, 2020.

Recent Accounting Pronouncements

Accounts Receivable

Prepaid and Other Current Assets

Property, Plant and Equipment, and right-of-use assets

Goodwill and Intangible Assets

Accruals and Other Liabilities

Debt and Other Obligations

Financial Instruments and Fair Value Measurement

Employee Benefit Plans

Stock-Based Compensation

Accumulated Other Comprehensive Income (Loss)

Earnings Per Share

Commitments and Contingencies

Segment Financial Information

Related Parties

Subsequent Events

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Significant Accounting Policies

Orion Engineered Carbons S.A.

(“Orion”, the “Company”, “we”, “us”, “our”, or “OEC”) is a Luxembourg joint stock corporation (société anonyme or S.A.), incorporated on July 28, 2014 as a Luxembourg limited liability company (société à responsabilité limitée).

Principles of Consolidation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.

GAAP”) and are prepared in US Dollars, the presentation currency of the Company.

The consolidated financial statements include the accounts of Orion and its wholly-owned subsidiaries and majority-owned and controlled U.S.

subsidiaries.

Additionally, Orion considers consolidation of entities over which control is achieved through means other than voting rights, of which there were none in the periods presented.

Intercompany transactions have been eliminated in consolidation.

The accompanying Consolidated Financial Statements have been prepared, in U.S.

Dollars, in conformity with accounting principles generally accepted in the United States (“U.S.

GAAP” or “GAAP”).

The Consolidated Financial Statements include the accounts of Orion Engineered Carbons S.A.

and its wholly-owned subsidiaries and majority-owned and controlled entities.

Subsidiaries are defined as being those companies over which we, either directly or indirectly, have control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks.

Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases.

All intercompany transactions and balances have been eliminated in consolidation .

Use of Estimates and Assumptions

We make estimates and use judgments and assumptions in the preparation of our consolidated financial statements that affect the timing and amount of assets, liabilities, equity, revenues and expenses recorded and disclosed.

The more significant estimates and judgments relate to revenue recognition, asset impairment, income taxes, inventories, goodwill, pension benefits, and environmental liabilities.

Actual outcomes could differ from our estimates, resulting in changes in revenues or costs that could have a material impact on the Company’s results of operations, financial position, or cash flows.

Foreign currency translation

The functional currency of the majority of the Company’s foreign subsidiaries is the local currency in which the subsidiary operates.

The results of operations for foreign subsidiaries are translated from these functional currencies into U.S.

dollars using the average monthly currency exchange rates.

Assets and liabilities are translated into U.S.

dollars using exchange rates at the balance sheet dates, and we record the resulting foreign currency translation adjustments as a separate component of Accumulated other comprehensive loss in equity.

Foreign currency transaction gains and losses are recorded, as incurred, as Interest and other financial expense, net in the consolidated statements of operations.

Revenue recognition

The Company recognizes revenue when a performance obligation has been satisfied by transferring a good or a service to a customer.

Revenue is only recognized when control is transferred to the customer.

The amount of revenue, the transaction price, is contractually specified between the parties and is measured at the amount expected to be received less value-added tax, if applicable, and any trade discounts and volume rebates granted.

We also give our customers a limited right to return product that has been damaged, does not satisfy their specifications, or other specific reasons.

Payment terms on product sales to our customers typically range from 30 to 90 days.

Although certain exceptions exist where standard payment terms are exceeded, these instances are infrequent and do not exceed one year and therefore we do not consider there to be a significant financing component associated with the contract.

Shipping and handling costs incurred in connection with the satisfaction of performance obligations are accounted for as fulfillment activities and recorded as sales revenue.

Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the Consolidated Statements of Operations.

The Company records a provision for warranty costs, based on historical trends of warranty costs incurred as a percentage of sales, which management has determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period.

Cost of sales

Cost of Sales consists of the raw and packaging materials, direct manufacturing costs, depreciation, inspection costs, inbound freight cost and shipping, internal handling costs and other overhead expenses necessary to manufacture the products.

Selling and administrative expenses

Selling and administrative expenses consist of salaries and other compensation benefits of sales and office personnel, general office expenses and other expenses not directly related to manufacturing operations.

Research and development costs

Research and development costs include salaries, equipment and material expenditures, and contractor fees and are expensed as incurred.

Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions.

Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries.

We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws.

Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities.

In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations which make the ultimate tax determination uncertain.

Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world.

We have recorded reserves for taxes and associated interest and penalties that may become payable in future years as a result of audits by tax authorities.

Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, and/or our cash flow.

Current income tax receivables and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities.

They are calculated based on the tax rates and tax laws that are enacted on the reporting date.

Deferred tax assets and liabilities are determined based on the estimated future tax effects of differences between financial statement carrying amounts and the tax bases of existing assets and liabilities.

Deferred tax assets are recognized to the extent that realization of those assets is considered to be more likely than not.

They are measured using statutory tax rates that are expected to apply to taxable income in the jurisdictions and years when the asset is realized or the liability is settled, based on tax rates that are enacted at the reporting date.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is established for deferred taxes when it is more likely than not that all or a portion of the deferred tax assets will not be realized.

Orion records benefits for uncertain tax positions based on the assessment of whether the position is more likely than not to be sustained by taxing authorities.

If the threshold is not met, no tax benefit of the uncertain tax position is recognized.

If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement.

The analysis presumes the taxing authorities' full knowledge of the positions taken and all relevant facts, but does not consider the time value of money.

The Company also accrues for interest and penalties on its uncertain tax positions and included such charges in its income tax provision in the Consolidated Statements of Operations.

We make estimates, and assumptions to prepare our financial statements in conformity with GAAP.

Those estimates and assumptions affect the amount we report in our Consolidated Financial Statements and accompanying Notes.

Our actual results could differ from those estimates, and variances could materially affect our financial condition and results of operations in future periods.

Events surrounding the COVID-19 pandemic continue to evolve and the financial statements impact cannot be predicted.

We continue to assess the potential financial statements impacts on our operational and financial performance.

COVID-19 could have a material adverse impact on our business, results of operations, access to sources of liquidity and financial condition.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents comprise bank balances, checks and cash on hand.

They include all highly liquid investments with a maturity of three months or less at date of acquisition.

Restricted cash comprises cash which is not available for immediate use and may not be utilized for any purpose until a certain event or events take place.

A designation for short-term or long-term restricted cash is made based on the expected time of release or distribution.

Cash, cash equivalents and restricted cash are as follows:

(In thousands)

Cash and cash equivalents $ 64,869 $ 63,726

Restricted cash included in current and non-current assets 2,996 4,505

Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 67,865 $ 68,231

Restrictions result from mandatory and voluntary pledges to secure certain guarantee amounts.

Cash and cash equivalents comprise bank balances, checks and cash on hand and include highly liquid investments with maturities of three-months or less at the date of purchase.

We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.

A majority of our restricted cash and cash equivalents serves as cash collateral deposits, voluntary and or mandatory, for third-party bank guarantees.

Debt and Other Obligations for further discussion.

Accounts and Notes Receivables

Accounts receivable are amounts due from customers for merchandise sold or services performed in the ordinary course of business and are carried at transaction price net of allowance for credit losses.

Generally, interest is not charged on past due amounts.

We monitor and evaluate collectability of receivables on an ongoing basis and consider whether an allowance for credit loss is necessary.

Allowance for credit losses is measured using historical loss rates for the respective risk categories and incorporating forward-looking estimates.

The corresponding expense for the credit loss allowance is reflected in Selling, general and administrative expenses.

Accounts receivable are charged off when the accounts are deemed to no longer be collectible.

Accounts receivables in China may at certain times be settled with the receipt of bank issued non-interest-bearing notes.

Financial instruments

Orion’s financial instruments consist primarily of cash and cash equivalents, trade receivables, loans, miscellaneous financial assets, term loan, local bank loans, trade payables and derivative instruments.

The carrying values of Orion’s financial instruments approximate fair value with the exception of variable rate long-term debt, which is recorded at amortized cost.

The fair values of the Company’s financial instruments are based on quoted market prices, if such prices are available.

In situations where quoted market prices are not available, the Company relies on valuation models to derive fair value.

Such valuation takes into account the ability of the financial counterparty to perform and the Company’s own credit risk.

The Company uses derivative financial instruments primarily for purposes of hedging the exposures to fluctuations in foreign currency exchange and interest rates, which exist as part of its ongoing business operations.

Orion does not enter into derivative contracts for speculative purposes, nor does it hold or issue any derivative contracts for trading purposes.

All derivatives are recognized on the Consolidated Balance Sheets at fair value.

Where the Company has a legal right to offset derivative settlements under a master netting agreement with a counterparty, derivatives with that counterparty are presented on a net basis.

The changes in the fair value of derivatives are recorded in Interest and other financial expense, net in the Statement of Operations or AOCI, depending on whether the instrument is designated as part of a hedge transaction and, if designated as part of a hedge transaction, the type of hedge transaction.

The gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period in which earnings are affected by the underlying hedged item.

The ineffective portion of all hedges is recognized in earnings during the period in which the ineffectiveness occurs.

In accordance with Orion’s risk management strategy, the Company may enter into certain derivative instruments that may not be designated as hedges for hedge accounting purposes.

Although these derivatives are not designated as hedges, the Company believes that such instruments are closely correlated with the underlying exposure, thus managing the associated risk.

The Company records the gains or losses from changes in the fair value of derivative instruments that are not designated as hedges in Interest and other financial expense, net in the Statement of Operations.

Cash movements associated with these instruments are presented in the Consolidated Statements of Cash Flows as Cash Flows from Operating Activities because the derivatives are designed to mitigate risk to the Company’s cash flow from operations.

The cash flows related to the principal amount of outstanding debt instruments are presented in the Cash Flows from Financing Activities section of the Consolidated Statements of Cash Flows.

We value inventory at the lower of cost or net realizable value, with cost determined utilizing the average cost method.

The corresponding expense for the credit loss allowance is reflected in Selling, general and administrative expenses in the Consolidated Statements of Operations.

Past due balances are written-off against credit loss allowance when the accounts are deemed no longer to be collectible.

The Company values inventory at the lower of cost or net realizable value using the average cost method.

We periodically evaluate the net realizable value of inventories based primarily upon their age, but also upon assumptions of future usage in production, customer demand and market conditions.

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If actual circumstances are less favorable than those projected by management in its evaluation of the net realizable value of inventories, additional write-downs may be required.

The Company has an investment in DGW (Kommanditgesellschaft Deutsche Gasrußwerke GmbH & Co) and DGW GmbH (Kommanditgesellschaft Deutsche Gasrußwerke GmbH & Co) which is accounted for using the equity method as the Company has the ability to exert significant influence over the affiliates’ operating and financial policies.

Intangible assets and goodwill

We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting.

Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition.

We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination.

The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model.

We estimate the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets.

The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition.

Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.

Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired.

Goodwill is not amortized and is subject to impairment testing annually, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value.

Intangible assets with finite useful lives, which are comprised of trademarks, customer relationships and developed technologies, are amortized on a straight line basis over their estimated useful lives of 3 - 15 years.

The useful lives of intangibles related to customer relationships acquired in business combinations are estimated on the basis of contractual arrangements and the probability of a continuing relationship.

If events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, it is tested for impairment, see below in this note under “Impairment test“.

The useful lives of intangible assets with finite useful lives are re-assessed annually.

Asset Impairment

Intangible Assets and Goodwill

Intangible assets with finite lives are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.

Goodwill is tested for impairment at the reporting unit level annually or more frequently if triggering events occur or as deemed necessary.

A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management.

Specialty Carbon Black and Rubber Carbon Black which are considered separate reporting units, carried our goodwill balances as of December 31, 2020.

Our annual measurement date for testing impairment is as of September 30, 2020.

For the purpose of the goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed.

Alternatively, we may elect to proceed directly to the quantitative goodwill impairment test.

If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result.

The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

The fair value of a reporting unit is based on discounted estimated future cash flows.

The fair value is also benchmarked against the value calculated from a market approach using the guideline public company method.

The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level.

Based on our most recent annual goodwill impairment test performed as of September 30, 2020, the fair values of the Specialty Carbon Black and Rubber Carbon Black reporting units were in excess of their carrying values.

Long-lived Assets

The Company assesses long-lived assets such as property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets to be held and used are assessed for possible impairment by comparing their carrying values with their associated undiscounted, future net cash flows.

Events that can trigger assessments for possible impairments include significant decreases in the market value of an asset, significant change in the extent or manner of use of or a physical change in an asset, and a more-likely-than-not expectation that a long-lived asset or asset group will be sold or otherwise disposed of significantly sooner than the end of its previously estimated useful life.

To test for impairment of assets, Orion generally uses a probability-weighted estimate of the future undiscounted net cash flows of the related assets over their remaining lives to determine if the value of the asset is recoverable.

Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.

An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value.

Any write-downs are treated as permanent reductions in the carrying amount of the assets.

If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset.

In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset.

An impairment loss may not be reversed if the fair value of the impaired asset or asset group increases subsequently.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation.

Property, plant and equipment are recorded at historical cost.

Historical cost includes expenditures that are directly attributable to the acquisition of the items.

Costs may also include borrowing costs incurred on debt during construction of major projects exceeding one year, costs of major maintenance arising from turnarounds of major units and committed decommissioning costs.

Expenditures for major renewals and improvements, which significantly extend the useful lives of the existing property, plant and equipment, are capitalized and depreciated.

Routine maintenance costs are expensed as incurred.

Depreciation is computed using the straight-line method over the estimated useful lives of assets.

Depreciation of property, plant and equipment is calculated using the straight-line method over the expected useful lives of the related assets.

The depreciable lives for Buildings, Plant and machinery as well as Furniture, fixtures and office equipment are between 5 and 50 years, 3 and 25 years, and 3 and 25 years, respectively.

The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in other expenses, net in the Consolidated Statements of Operations.

Expenditures for repairs and maintenance are charged to expenses as incurred.

Expenditures for major renewals and improvements, which significantly extend the useful lives of the existing property, plant and equipment, are capitalized and depreciated.

Asset retirement obligations

Orion estimates incremental costs for special handling, removal and disposal of materials that may or will give rise to conditional asset retirement obligations (“ARO”) and then discounts the expected costs back to the current year using a credit adjusted risk free rate.

Orion recognizes ARO liabilities and costs when the timing and/or settlement can be reasonably estimated.

The ARO reserves were $ 1.7 million and $ 2.9 million as of December 31, 2020 and 2019, respectively, and are included in Accrued liabilities (current) and Other Liabilities (non-current) on the Consolidated Balance Sheets.

We determine if an arrangement is a lease at inception of a contract.

Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.

As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense.

We have lease agreements which require payments for lease and non-lease components and have elected to account for these as a single lease component related to our other operating facilities.

Leases with an initial term of 12 months or less are not recorded on the Balance Sheet and lease expense is recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term.

Please see Note C.

Leases for additional information.

Pension benefit plans

Our defined benefit pension obligations are measured in accordance with the projected unit credit method.

The calculations and the resulting amounts recorded in our consolidated financial statements are affected by assumptions including the discount rate, expected long-term rate of return on plan assets, the annual rate of change in compensation for plan-eligible employees, mortality tables, and other factors.

We evaluate the assumptions used on an annual basis.

The Company recognizes the total actuarial gains or losses recorded in accumulated other comprehensive income exceeding 10% of the defined benefit obligation in the following year through profit and loss separately from its income from operations.

Defined contribution obligations arise from commitments and state pension schemes (statutory pension insurance).

We account for our contributions to a defined contribution plan on an accrual basis.

An asset or liability may result from advance payments or payments due, respectively, to a defined contribution fund.

Stock-based compensation

Orion recognizes stock-based compensation cost measured at the grant date based on the fair value of the award, and recognizes these costs as expense over the service period, which generally represents the vesting period, includes an estimate of the awards that will be forfeited and also includes an estimate of awards that expect to vest based on the anticipated achievement of performance conditions.

Fair value of awards is determined by using a Monte-Carlo simulation.

Awards can be classified as either equity or liability-settled dependent on the Company's obligation to the counterparty and the intended settlement method.

The overarching principle focuses on whether an equity relationship is created through the award.

Orion classifies its awards as equity settled.

Once earned and vested, certain awards can be settled in one share of Company common stock per vested award (or, at the Company’s election, cash equal to the fair market value thereof).

Certain awards are settled for cash at fair market value to cover wage taxes or as a substitute for share transfer restrictions.

When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms not been modified, if those original terms of the award are met.

An additional expense is recognized for any modification that increases the total fair value of the share-based compensation transaction, or is otherwise beneficial to the employee as measured at the date of modification.

Any modifications are accounted for as a new award, which might result in a lower amount of compensation cost than the grant date fair value of the original award or a greater amount of compensation costs than the sum of the grant date fair value of the original award plus the incremental fair value.

Environmental provisions

We accrue for environmental remediation costs and other obligations when it is probable that a liability has been incurred and we can reasonably estimate the amount.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Land is not depreciated.

We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which, for us, is generally at the plant group level.

If it is determined that an asset or asset group’s undiscounted future cash flows will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value.

Gain or loss on retirement or sale of property, plant and equipment is reflected in Other expenses, net in the Consolidated Statements of Operations.

Business Combination

We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any difference compared to the purchase consideration recorded as goodwill or gain on bargain purchase.

Subsequent to the acquisition, and no later than one year from the acquisition date, we may record adjustments to the estimated fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill, to reflect new information obtained about facts and circumstances that existed at the acquisition date.

Thereafter, subsequent adjustments of the estimated fair values are recorded to earnings.

Acquisition-related costs are expensed as incurred.

Goodwill is tested for impairment annually as of September 30, 2021 or whenever events or changes in circumstances indicate that the fair value of a reporting unit with goodwill is below its carrying amount.

We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units.

If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a quantitative test is required.

If the carrying value of the reporting unit including goodwill exceeds its fair value, an impairment charge equal to the excess would be recognized up to a maximum amount of goodwill allocated to that reporting unit.

For 2021, we performed qualitative impairment assessments of our reporting units, which indicated that the fair value of our reporting units was more likely than not greater than their carrying value.

Based on this assessment, a quantitative goodwill impairment test was not required.

For 2020, we elected to proceed directly to the quantitative goodwill impairment test, which indicated that the fair value of our reporting units was greater than their carrying value including goodwill.

No goodwill impairment was recognized in 2021 and 2020.

Intangible Assets

Intangible assets, which are comprised of trade names and trademarks, customer relationships, developed technologies and software costs.

These assets are amortized, using the straight-line method, over their estimated useful lives of 3 - 15 years or over the term of the related agreement.

We evaluate definite-lived intangible assets with the associated long-lived asset group for impairment whenever impairment indicators are present, such as a significant reduction in cash flows associated with the assets.

Investments in Equity Method Affiliates

We account for equity investments (“equity investments”) using the equity method of accounting if we have the ability to exercise significant influence over, but not control of, an investee.

Significant influence generally exists if we have an ownership interest representing between 20% and 50% voting rights.

Under the equity method of accounting, investments are stated initially at cost and are adjusted for subsequent additional investments and our proportionate share of profit or losses and distributions.

We record our share of the profit or losses of the equity method investments, net of income taxes, in the Consolidated Statements of Operations.

When our share of losses in an equity investment equals or exceeds our interest in the equity investment, including any other unsecured receivables, we do not recognize further losses, unless we have incurred obligations or made payments on behalf of the equity investment.

We evaluate our equity method investments for impairment when events or changes in circumstances indicate, in our management’s judgment, that the carrying value of such investments may have experienced other-than-temporary decline in value.

When evidence of loss in value has occurred, we compare the estimated fair value of investment to the carrying value of investment to determine whether an

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

impairment has occurred.

If the estimated fair value is less than the carrying value and our management considers the decline in value to be other-than-temporary, the excess of the carrying value over the estimated fair value is recognized in the Consolidated Financial Statements as an impairment.

We have an investment in Kommanditgesellschaft Deutsche Gasrußwerke GmbH & Co and Kommanditgesellschaft Deutsche Gasrußwerke GmbH & Co , (together “DGW”), which is accounted for using the equity method.

The income tax for the period comprises current and deferred tax.

Income tax is recognized in the Consolidated Statements of Operations, except to the extent that it relates to items recognized in other comprehensive income or directly in equity.

In these cases, the applicable tax amount is recognized in other comprehensive income or directly in equity, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the net tax effects of tax carryforwards.

Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

We recognize uncertain income tax positions in our financial statements when we believe it is more likely than not, based on the technical merits, that the position or a portion thereof will be sustained upon examination.

For a position that is more likely than not to be sustained, the benefit recognized is measured at the largest cumulative amount that is greater than 50 percent likely of being realized.

Other Provisions

Asset retirement obligations— At some sites, we are contractually obligated to decommission our plants upon site exit.

Asset retirement obligations are recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred.

That cost, which is capitalized as part of the related long-lived asset, is depreciated on a straight-line basis over the remaining useful life of the related asset.

Accretion expense in connection with the discounted liability is also recognized over the remaining useful life of the related asset.

Environmental provisions — We accrue for environmental remediation costs and other obligations when it is probable that a liability has been incurred and we can reasonably estimate the amount.

The amount accrued reflects our assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties.

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We adjust these liabilities periodically as remediation efforts progress or as additional technical or legal information becomes available.

Restructuring expenses

Restructuring expenses could include both termination benefits and asset write downs.

We estimate accruals for termination benefits based on various factors including length of service, contract provisions, local legal requirements, projected final service dates, and salary levels.

We also analyze the carrying value of long-lived assets and record estimated accelerated depreciation through the anticipated end of the useful life of the assets affected by the restructuring or record an asset impairment.

In all likelihood, this accelerated depreciation will result in reducing the net book value of those assets to zero at the date operations cease.

While we believe that changes to our estimates are unlikely, the accuracy of our estimates depends on the successful completion of numerous actions.

Changes in our estimates could increase our restructuring costs to such an extent that it could have a material impact on the Company’s results of operations, financial position, or cash flows.

Other events, such as negotiations with unions and works councils, may also delay the resulting cost savings.

Concentrations of Credit Risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations.

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, derivative instruments and undrawn amounts under the Revolving Credit Facility (“RCF”).

Our cash in demand deposit accounts may exceed federally insured limits and could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.

Credit risk is mitigated as we place the cash mainly with our defined core banks which are major financial institutions with investment grade long-term credit ratings.

Our trade accounts receivable are subject to concentrations of credit risk with customers primarily in our Rubber Carbon Black segment.

During 2020, sales to our ten largest customers within our Rubber Carbon Black segment accounted for approximately 66% of total consolidated segment sales.

Sales to our ten largest customers within our Specialty Carbon Black segment accounted for approximately 25% of total consolidated segment sales.

Sales to our top ten customers on a total consolidated basis accounted for approximately 39% of our consolidated net sales.

A default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or customer groups could have a material adverse impact on our financial condition, results of operations and liquidity.

In addition, trade receivables are subject to concentrations of credit risk with customers of specific industries which can be affected by a downturn in the economy.

We estimate the receivables for which we do not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers including considerations of future macroeconomic expectations.

An allowance is recorded in our consolidated financial statements for these estimated amounts.

The concentration of customer credit risk is mitigated by the size and diversity of the customer base as well as its geographic dispersion.

If a counterparty fails to fulfill its performance obligations under a derivative contract, our exposure will equal the fair value of the derivative.

Generally, when the fair value of a derivative contract is positive, the counterparty owes the Company, thus creating a payment risk for the Company.

We minimize counterparty credit or repayment risk by entering into these transactions with major financial institutions of investment grade credit rating.

See Note K-” Financial Instruments and Fair Value Measurements” for additional information on our derivative contracts.

If an RCF lender fails to fulfill its performance obligations, with respect to making funds available, under the credit agreement, Orion’s credit risk comprises a potential cash shortage/refinancing risk amounting to the respective bank's commitment amount.

With regard to the allocation of the total RCF amount all the lenders ins the syndicate carry investment grade long-term credit ratings.

See Note H-” Debt and Other Obligations” for additional information on our revolving credit facility

We believe there is no significant concentration of risk as of December 31 ,2020.

This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic or other conditions.

In addition, we and many of our customers operate worldwide and are therefore exposed to risks associated with the economic and political forces of various countries and geographic areas.

We generally do not obtain any collateral for our receivables.

Segment Financial Information to the Consolidated Financial Statements for additional information about our operations in different geographic areas.

Foreign Currency Translation

Functional and Reporting Currency —Items included in the financial information of each of Orion’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”) and then translated to the U.S.

dollar (“the reporting currency”) as follows:

• Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

• Income and expenses for each income statement are translated at monthly average exchange rates;

• All resulting exchange differences are recognized as a separate component within Other comprehensive income (foreign currency translation adjustments).

Transactions and Balances —Foreign currency transactions are recorded in their respective functional currency using exchange rates prevailing at the dates of the transactions.

Exchange gains and losses, resulting from the settlement of such transactions and from remeasurement of monetary assets and liabilities denominated in foreign currencies at period-end exchange rates, are recognized in Interest and other financial expense, net in the Consolidated Statements of Operations.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Revenue Recognition

We recognizes revenue when the customers obtain control of promised goods or services.

The revenue recognized is the amount of consideration which we expect to receive in exchange for those goods or services.

Our contracts with customers are generally for products only and do not include other performance obligations.

Generally, we consider purchase orders, which in some cases are governed by master supply agreements, to be contracts with customers.

The transaction price as specified on the purchase order or sales contract is considered the standalone selling price for each distinct product.

To determine the transaction price at the time when revenue is recognized, we evaluate whether the price is subject to adjustments, such as for discounts or volume rebates, which are stated in the customer contract, to determine the net consideration to which we expect to be entitled.

Revenue from product sales is recognized based on a point in time model when control of the product is transferred to the customer, which typically occurs upon shipment or delivery of the product to the customer and title, risk and rewards of ownership have passed to the customer.

Taxes collected on sales to customers are excluded from the transaction price.

Shipping and handling activities that occur after the transfer of control to the customer are billed to customers and are recorded as sales revenue, as we consider these to be fulfillment costs.

Shipping and handling costs are expensed in the period incurred and included in Selling, general and administration expenses in our Consolidated Statements of Operations.

Payment terms on product sales to our customers typically range from 30 to 90 days.

When the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, we do not consider there to be a significant financing component associated with the contract.

We do not have contract assets or liabilities that are material.

Stock-based compensation

Equity instruments are measured at fair value on the grant date.

Stock-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards.

We use a Monte Carlo model to determine the fair value of certain share-based awards that contain market and performance-based conditions.

The use of these models requires highly subjective assumptions, such as assumptions about the expected life of the award, vesting probability, expected dividend yield and the volatility of our stock price.

Compensation expense for liability-classified share-based awards are recognized on a straight-line basis over the vesting period as a liability and remeasured, at fair value, at the balance sheet date.

Stock-Based Compensation to the Consolidated Financial Statements for additional information.

At inception of a contract, we determine if the contract contains a lease.

When a lease is identified, we recognize a leased asset (i.e., “Right-of-Use” or “ROU” assets) and a corresponding lease liability based on the present value of the lease payments over the lease term, discounted using our incremental borrowing rate, unless an implicit rate is readily determinable.

Lease payments include fixed and variable lease components derived from usage or market-based indices, such as the consumer price index.

Variable lease payments may fluctuate for a variety of reasons including usage, output, insurance or taxes.

These variable amounts are expensed as incurred and not included in the lease assets or lease liabilities.

Options to extend or terminate a lease are reflected in the lease payments and lease term when it is reasonably certain that we will exercise those options.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations.

Majority of our leases are operating leases for which we recognize lease expense on a straight-line basis over the lease term.

We apply the practical expedient to account for lease and associated nonlease components as a single lease component.

Leases with an initial term of 12 months or less are recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term.

Please see Note H.

Leases to the Consolidated Financial Statements for additional information.

Financial Instruments and Hedging Activities

Pursuant to our risk management policies, we may choose to enter into derivative transactions to manage market risk volatility associated with changes in commodity pricing, currency exchange rates and interest rates.

Derivatives used for this purpose are generally designated as net investment hedges, cash flow hedges or fair value hedges.

Derivative instruments are recorded at fair value in the balance sheet.

Gains and losses related to changes in the fair value of derivative instruments not designated as hedges are recorded in Interest and other financial expense, net, in the Consolidated Statements of Operations.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Cash flows from derivatives designated as hedges are reported in our Consolidated Statements of Cash Flows under the same category as the cash flows from the hedged items unless the derivative contract contains a significant financing element.

Cash flows for derivatives with a significant financing element are classified as Cash flows from financing activities.

Cash Flow Hedges —We enter into cash flow hedges to manage the variability in cash flows of a future transaction.

Our cash flow hedges include cross currency swaps, and options and swaps to hedge interest rate and foreign exchange risk.

For derivatives designated as cash flow hedges, the gains and losses are recorded in Other comprehensive income (loss) and released to earnings in the same line item and in the same period during which the hedged item affects earnings.

We use regression analysis to assess initial hedge effectiveness.

Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based on qualitative factors, if applicable, or regression analysis.

We have cross-currency swap contracts designated as cash flow hedges to reduce our exposure to the foreign currency exchange risk associated with certain intercompany loans and debt denominated in currencies other than the functional currency of the issuer.

Under the terms of these contracts, we make interest payments in euros and receive interest in U.S.

Upon the maturities of these contracts, we will pay the principal amount of the loans in euros and receive U.S.

dollars from our counterparties.

Net Investment Hedges —We enter into foreign currency derivatives and foreign currency denominated debt to reduce the volatility in shareholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S.

Our foreign currency derivatives consist of cross-currency contracts and forward exchange contracts.

For derivatives designated as net investment hedges, gains or losses attributable to changes in spot foreign exchange rates over the designation period are reflected in foreign currency translation adjustments within Other comprehensive income (loss).

Recognition in earnings is delayed until the net investment is sold or substantially liquidated.

At that time, the amount recognized is reported in the same line item as the gain or loss on the liquidation of the hedged foreign operations.

For our cross-currency swaps, the associated interest receipts and payments are recorded in Interest expense.

For our foreign currency forward contracts, we amortize initial forward point values on a straight-line basis to Interest expense over the life of the hedging instrument.

We monitor on a quarterly basis for any overhedged positions requiring de-designation and re-designation of the hedge to remove such over-hedged condition.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

An established hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of Orion.

Unobservable inputs are inputs that reflect our assumptions about the factors that market participants would use in valuing the asset or liability.

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

• Level 1 —inputs are based on quoted prices for identical instruments traded in active markets.

• Level 2 —inputs are based on quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in inactive markets and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

• Level 3 —one or more significant inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar valuation techniques.

We use the following inputs and valuation techniques to estimate the fair value of our financial instruments disclosed in Note K.

Financial Instruments and Fair Value Measurement to the Consolidated Financial Statements:

Cross-Currency Swaps —The fair value of our cross-currency swaps is calculated using the present value of future cash flows discounted using observable inputs such as known notional value amounts, yield curves, basis curves, as applicable, and with the foreign currency leg revalued using published spot and forward exchange rates on the valuation date.

Floating-for-Fixed Interest Rate Swaps —The fair value of our floating-for-fixed interest rate swaps is calculated using the present value of future cash flows using observable inputs such as benchmark interest rates and market yield curves.

Long-Term Debt —The fair value of our Term-Loan is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.

The fair value of our term loan is determined based on a discounted cash flow model using observable inputs such as benchmark interest rates and public information regarding our credit risk.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The carrying amounts that we have reported for financial instruments, including Cash and cash equivalents, Restricted cash and cash equivalents, Accounts receivables, Accounts payable and Short-term debts, approximate their fair values due to the short maturity of those instruments.

Employee Benefits

Pension Plans:

Defined Benefit Plans— Our defined benefit pension obligations are measured in accordance with the projected unit credit method.

The calculations and the resulting amounts recorded in our Consolidated Financial Statements are affected by assumptions including the discount rate, expected long-term rate of return on plan assets, the annual rate of change in compensation for plan-eligible employees, mortality tables, and other factors.

We evaluate the assumptions used on an annual basis.

Past service cost and actual return on plan assets in excess of expected return are initially recorded in Other comprehensive income and subsequently recognized in earnings over the average remaining service period of the participants to the extent it exceeds the "corridor".

The corridor is defined as the greater of 10 percent of the accumulated projected benefit obligation or the fair value of the plan assets as of the beginning of the year.

Defined contribution obligations— Defined contribution obligations arise from commitments and state pension schemes (statutory pension insurance).

We account for our contributions to a defined contribution plan on an accrual basis.

An asset or liability may result from advance payments or payments due, respectively, to a defined contribution fund.

Termination Benefits :

Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan or statutory law.

A liability is recognized for one-time termination benefits when we are committed to (i) make payments and the number of affected employees and the benefits received are known to both parties, and (ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount.

Benefits falling due more than 12 months after the balance sheet date are discounted to present value.

Classification

Certain prior year amounts have been reclassified to conform with the current year presentation, because we believe they no longer meet the criteria for separate disclosure.

Previously reported financial statements have been adjusted to reflect the following changes:

• On the Consolidated Balance Sheets, we previously reported Other current financial assets, Other financial assets, and Current portion of employee benefit plan obligation on the face of this financial statement.

During the fourth quarter of 2021, we concluded that classification of these line items are better reflected in Prepaid expenses and other current assets, Other assets and Other current liabilities , respectively.

• On the Consolidated Statement of Comprehensive Income, we previously reported Unrealized net gains (losses) on hedges of a net investment in a foreign operation and Unrealized net gains (losses) on cash flow hedges separately on the face of this financial statement.

During the fourth quarter of 2021, we combined them in the line item Net gains (losses) on derivatives .

• On the Consolidated Statements of Cash Flows Statement, in Cash flows from financing activities , we previously reported Payments of debt issue costs and Taxes paid for shares issued under net settlement feature separately on the face of this financial statement .

During the fourth quarter of 2021, we combined them in the line item Other financing activities .

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (ASU 2019-12) , which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company adopted this guidance as of January 1, 2021.

The adoption of this guidance will not have a material impact on the Company's financial statements.

In November 2019, the FASB issued ASU No.

2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (ASU 2019-11).

The amendments in this update represents changes to clarify, correct errors in, or improve the codification, and make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications.

For entities that have adopted ASU 2016-13, the amendments in ASU 2019-11 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption is permitted in any interim period after the issuance of ASU 2019-11 as long as the entity has adopted the amendments in ASU No.

The Company adopted ASU 2019-11 as of January 1, 2020.

The adoption of this guidance did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans .

The guidance changes the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans.

It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent.

The guidance is effective for financial statements issued for fiscal years ending after December 15, 2020 for public business entities and fiscal years ending after December 15, 2021 for all other entities.

Early adoption is permitted.

Entities will apply the amendments retrospectively.

The Company adopted ASU No 2018-14 as of January 1, 2020.

The adoption of this guidance did not have a significant impact on the Company's financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Measurement of Financial Losses on Credit Instruments.

The standard introduces a new "expected loss" impairment model that applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables and other financial assets.

Entities are required to estimate expected credit losses over the life of financial assets and record an allowance against the assets’ amortized cost basis to present them at the amount expected to be collected.

The new standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted.

The Company adopted this standard on January 1, 2020.

The adoption of this standard did not materially impact the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04).

The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022.

The Company is currently evaluating the potential impact the adoption of this standard will have on its financial statements.

In January 2020, the FASB issued ASU No.

2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) .

Equity Method Investments —In January 2020, the FASB issued ASU No.

2020-01, Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815 ).

The amendments in this update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.

The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

The Company is currently evaluating the potential impact the adoption of this standard will have on its financial statements.

Orion has entered into lease contracts as a lessee and is not acting as a lessor.

The vast majority of Orion’s lease contracts are for operating lease assets such as rail cars, company cars, offices and office equipment.

The recorded right-of-use assets as of December 31, 2020 amounted to $ 85.6 million, and the corresponding lease liabilities amounted to $ 86.6 million, of which $ 12.1 million were recorded within other current liabilities and $ 74.5 million as other liabilities in our Consolidated Balance Sheets.

The weighted remaining average minimum lease period is 20.6 years.

The undiscounted minimum lease payments are due in and reconcile to the discounted lease liabilities as follows:

December 31, 2020

(In thousands)

Next 12 months $ 12,077

1 to 2 years 10,890

2 to 3 years 9,976

3 to 4 years 8,330

4 to 5 years 7,212

More than 5 years 78,216

Total undiscounted minimum lease payments $ 126,701

Discount ( 40,099 )

Lease liability (current and non-current) $ 86,603

The weighted average discount rate applied to the lease liabilities is 4.01 %.

In September 2020, Orion commenced a district heating project with the utilities provider of its Cologne, Germany neighbor city of Hürth.

The power plant is operated by Orion on a finance lease over a period of 25 years.

During the third quarter of 2020, Orion recorded a right-of-use asset and a respective lease liability in an amount of $ 54.8 million.

Finance lease costs for the years ended December 31, 2020 and 2019 were $ 2.3 million and $ 0.6 million, respectively, and aggregated depreciation expenses of the right-of-use assets were $ 1.4 million, and $ 0.5 million, respectively.

Interest on lease liabilities of $ 0.9 million and $ 0.1 million were recorded for the years ended December 31, 2020 and 2019, respectively.

Cash paid for amounts included in the measurement of lease liabilities from finance leases was $ 1.9 million and $ 0.6 million for the years ended December 31, 2020 and 2019, respectively.

Operating lease costs for the years ended December 31, 2020 and 2019 amounted in total to $ 11.6 million and $ 12.5 million, respectively, and were recorded as operating expenses under cost of sales, selling, general and administrative expenses and under research and development cost.

Cash paid for amounts included in the measurement of lease liabilities from operating leases was $ 8.1 million and $ 8.6 million for the years ended December 31, 2020 and 2019, respectively,

Orion entered into a forward-starting lease agreement in May 2020 for a new warehouse at our facility in Cologne, Germany.

The lessor, a logistics and distribution service provider, is currently constructing the warehouse at our location, with the lease scheduled to commence in 2021 after construction is completed.

The lease agreement will have a total of approximately $ 6 million in undiscounted future lease payments over the 10-year term of the lease.

Inventories, net of obsolete, unmarketable and slow moving reserve, are as follows:

(In thousands)

We adopted this standard on January 1, 2021.

The adoption of this standard did not materially impact our Consolidated Financial Statements.

Reference Rate Reform (Topic 848) —In March 2020, FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04 ), a new standard.

In January 2021, FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform.

This guidance permits entities to elect certain optional expedients and exceptions when accounting for contract modifications for receivables, debt, and leases related to reference rate reform as well as derivative contracts and certain hedging relationships affected by reference rate reform activities under way in global financial markets.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The Company adopted this guidance prospectively from July 1, 2021.

The adoption of this standard did not impact our Consolidated Financial Statements.

The adoption of this ASU will enable us to update our assessments of effectiveness, probability, and hedged risk in order to continue hedge accounting for the designated hedges that reference LIBOR, which is expected to be discontinued as a result of reference rate reform.

The Company will continue to evaluate the guidance to determine the timing and extent to which we will apply other accounting relief provided by the guidance.

Recently Issued Accounting Standards Not Yet Adopted

Government Assistance —On November 17, 2021, the FASB issued Accounting Standards Update (ASU) No.

2021-10, Disclosures by Business Entities About Government Assistance, which requires business entities to provide certain disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance (e.g., a grant model under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance ;

ASC 958-605, Not-for-Profit Entities—Revenue Recognition ).

The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021.

Entities may apply the ASU’s provisions either (1) prospectively to all transactions within the scope of ASC 832 that are reflected in the financial statements as of the adoption date and all new transactions entered into after the date of adoption or (2) retrospectively.

Early adoption is permitted.

The adoption of this ASU is not expected to have a material impact on our future consolidated financial statements and related disclosures.

Accounts Receivable

The company accounts receivable are as follows:

(In millions)

Accounts receivable $ 291.5 $ 240.6

Expected credit losses ( 2.6 ) ( 5.8 )

Accounts receivable, net of expected credit losses $ 288.9 $ 234.8

The company allowance for credit losses are as follows:

(In millions)

Allowance for credit losses as of January 1, $ ( 5.8 ) $ ( 6.6 )

Credit loss expense ( 0.6 ) ( 4.0 )

Credit loss income and utilization 3.6 4.9

Foreign currency translation effects 0.2 ( 0.1 )

Allowance for credit losses as of December 31, $ ( 2.6 ) $ ( 5.8 )

Inventories, net of reserves, are as follows:

(In millions)

Raw materials, consumables and supplies, net $ 97.1 $ 57.0

2 unchanged sentences

Total $ 229.8 $ 141.5

Orion periodically reviews inventories for both obsolescence and loss in value.

In this review, Orion makes assumptions about the future demand for and the future market value of the inventory and, based on these assumptions, estimates the amount of obsolete, unmarketable or slow moving inventory.

The inventory reserve for obsolete, unmarketable and slow moving assets as of December 31, 2020 and 2019 amounted to $ 12.7 million and $ 6.7 million, respectively.

In the periods ended December 31, 2020, 2019 and 2018, $ 9.0 million, $ 6.0 million and $ 1.9 million, respectively, were recognized as an expense for damaged and lost inventories.

As of December 31, 2021 and 2020, inventory reserves were approximately $ 15.9 million and $ 12.7 million, respectively.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Prepaid Expenses and Other Current Assets

(In millions)

VAT $ 23.4 $ 23.0

Deposits 17.5 2.3

Restricted Cash 2.8 3.0

Miscellaneous other receivables 24.8 19.8

Total $ 68.5 $ 48.1

Property, Plant and Equipment, and right-of-use assets

Property, plant and equipment consists of the following:

(In thousands)

(In millions)

Land $ 32.6 $ 35.0

7 unchanged sentences

Depreciation expense was $ 86.5 million, $ 81.0 million and $ 75.3 million for fiscal years ending December 31, 2021, 2020 and 2019, respectively.

Property, plant and equipment amounts include remeasurements due to the finalization of purchase price accounting in the third quarter of 2019 related to the acquisition of SN2A (see Note I.

Business Combinations, Goodwill and Intangible Assets ).

The value of right-of-use assets as of December 31, 2020 was $ 101.5 million.

With accumulated depreciation of $ 15.8 million, the net carrying amount is $ 85.6 million as of December 31, 2020.

Depreciation expense for right-of-use assets was $ 7.3 million and $ 8.5 million for fiscal years 2020 and 2019 , respectively.

Prepaid and other assets

Total Thereof current Thereof non‑current Total Thereof current Thereof non‑current

(In thousands)

Miscellaneous other receivables $ 42,116 $ 41,777 $ 339 $ 36,531 $ 36,189 $ 342

Prepaid expenses 5,292 2,674 2,617 4,529 1,170 3,359

Total $ 47,408 $ 44,452 $ 2,956 $ 41,059 $ 37,358 $ 3,701

Miscellaneous other receivables were primarily VAT ($ 23.0 million and $ 21.5 million as at December 31, 2020 and 2019, respectively), advance payments ($ 2.9 million and $ 1.2 million as of December 31, 2020, and 2019, respectively), down payments ($ 2.3 million and $ 3.1 million as of December 31, 2020 and 2019, respectively), refundable environmental taxes prepaid ($ 0.9 million and $ 3.2 million as of December 31, 2020 and 2019, respectively) and guarantee deposits ($ 1.4 million and $ 1.4 million as of December 31, 2020 and 2019, respectively).

Prepaid expenses primarily include other unamortized transaction costs of $ 3.0 million and $ 3.4 million as of December 31, 2020 and 2019, respectively, (of which $ 2.3 million and $ 2.8 million, respectively, are non-current) incurred in connection with the revolving credit facility that has not been drawn by the respective reporting dates.

Accounts Receivable

The company accounts receivable are as follows:

(In thousands)

Accounts receivable $ 240,590 $ 219,197

Expected credit losses ( 5,794 ) ( 6,632 )

Accounts receivable, net of expected credit losses $ 234,796 $ 212,565

The company allowance for credit losses are as follows:

(In thousands)

Allowance for credit losses as of January 1, $ ( 6,632 ) $ ( 5,081 )

Credit loss expense ( 3,965 ) ( 3,703 )

Credit loss income and utilization 4,924 1,209

Foreign currency translation effects ( 120 ) 943

Allowance for credit losses as of December 31, $ ( 5,794 ) $ ( 6,632 )

Debt and Other Obligations

The company arrangements are as follows:

(In thousands)

Term loan $ 8,479 $ 8,057

Deferred debt issuance costs-term loan

Orion has entered into lease contracts as a lessee and is not acting as a lessor.

The vast majority of Orion’s lease contracts are for operating lease assets such as rail cars, company cars, offices and office equipment.

Lease costs for the years ended December 31, are as follows:

2021 2020 2019

Other short-term debt and obligations 75,640 29,762

Current portion of long-term debt and other financial liabilities 82,618 36,410

Term loan 659,502 634,994

Deferred debt issuance costs-term loan ( 3,676 ) ( 4,733 )

Other long-term debt and obligations — —

Long-term debt, net 655,826 630,261

(In millions)

Finance lease costs $ 6.4 $ 2.3 $ 0.6

Operating lease costs 7.6 8.5 8.6

Short-term leasing costs 3.8 3.1 3.9

Total $ 17.8 $ 13.9 $ 13.1

(a) Term Loan

In 2014, Orion entered into an $ 895.0 million term loan credit facility (“Credit Agreement”), which was allocated to a term loan facility denominated in U.S.

dollars of $ 358.0 million and a term loan facility denominated in Euros of € 399.0 million with both having an original maturity date of July 25, 2021 (the “Term Loans”).

Initial interest was calculated based on three-month EURIBOR (for the euro denominated loan), or three-month USD-LIBOR (for the U.S.

dollar denominated loan) plus a 3.75 % - 4.00 % margin depending on the Company’s net leverage ratio.

For both EURIBOR and USD-LIBOR, a floor of 1.0 % applied.

At least 1.0 % of the principal amount is required to be repaid per annum.

Orion repriced the Term Loans during the years 2016 to 2018, achieving a significant reduction of both interest margins to currently 2.00 % for the U.S.

dollar term loan and 2.25 % for the Euro term loan.

In addition, the interest margin is no longer linked to Orion's net leverage ratio and the EURIBOR and USD-LIBOR floors were eliminated.

The duration of both Term Loans was extended to July 25, 2024.

Other provisions of the Credit Agreement relating to the Term Loans remained unchanged.

Transaction costs incurred directly in connection with the Term Loans reduce their carrying amount and are amortized as finance costs over the term of the loans.

Transaction costs incurred in connection with the subsequent modifications of the Term Loan were directly expensed as incurred as the modified terms were not substantially different.

In connection with the repricing described above further transaction costs of $ 0.7 million in 2018 were incurred and directly expensed.

For the years ended December 31, 2020, 2019 and 2018 an amount of $ 1.4 million , $ 1.4 million and $ 1.4 million , respectively, related to capitalized transaction costs was amortized and recognized as finance costs in this regard.

In May 2018, Orion entered into a $ 235.0 million cross currency swap to synthetically convert its U.S.

dollar liabilities into euro liabilities.

This swap transaction impacts both principal and interest payments associated with debt service and results in a further annual interest payments savings of approximately $ 4.7 million.

The swap became effective on May 15, 2018 and will expire on July 25, 2024, in line with maturity of the term loan.

As part of our financial risk strategy, on December 30, 2020, we exited $ 38.0 million and $ 30 million in cross currency swaps, with maturity dates of 2024 and 2021, respectively, at a loss of approximately $ 6.3 million.

A portion of the U.S.

dollar-denominated term loan was designated as a hedge of the net investment in a foreign operation to reduce the Company's foreign currency exposure.

Since January 1, 2015 the Company had designated $ 180.0 million of the total U.S.

dollar-denominated term loan held by a Germany based subsidiary as the hedging instrument to hedge the change in net assets of a U.S.

subsidiary, which is held by a Germany based subsidiary, to manage foreign currency risk.

Due to the new hedging approach and the new cross currency swap as described above, hedge accounting for the net investment hedge was discontinued on May 15, 2018.

An unrealized loss of $ 2.2 million remains within other comprehensive income until it is recycled through profit and loss upon divestment of the hedged item.

The carrying value of the Term Loans as of December 31, 2020 includes the nominal amount of the Term Loans plus accrued unpaid interest less deferred debt issuance costs - term loan of $ 5.2 million (December 31, 2019:

$ 6.1 million).

(b) Revolving credit facility

To fund operating activities and generally safeguard the Company’s liquidity, the Company has entered into an RCF.

In 2014, the Company entered into a € 115.0 million multicurrency revolving credit facility with an original maturity date of July 25, 2019.

Interest is calculated based on EURIBOR (for euro drawings), and USD-LIBOR (for U.S.

Dollar drawings) plus 2.5 % - 3.0 % margin (depending on leverage ratio).

Transaction costs in the amount of $ 3.3 million originally incurred in connection with the RCF were recorded as deferred expenses and amortized as finance costs on a straight-line basis over the term of the facility (until July 25, 2019).

An amendment to the RCF entered into in May 2017 (i) reduced the commitment fee paid on the unused commitments from 40 % of the Applicable Rate (as defined in the Credit Agreement) to 35 % of the Applicable Rate, (ii) extended the maturity date for the RCF to April 25, 2021 and (iii) increased the aggregate amount of revolving credit commitments to € 175.0 million.

All other terms of the Credit Agreement remained unchanged.

Transaction costs in conjunction with the RCF of $ 2.3 million related to the 2017 amendment to the Credit Agreement are recorded as deferred expenses and amortized as finance costs on a straight-line basis over the term of the facility (until April 25, 2021).

In April 2019, the Company entered into an amendment to the RCF, effective April 10, 2019, which:

(i) extended the maturity date for the RCF by three years to April 25, 2024,

(ii) increased the aggregate amount of revolving credit commitments in Euro by € 75.0 million to EUR € 250.0 million, and

(iii) reduced revolving credit interest expense using a revised pricing grid with lower Applicable Rates (credit spreads).

As of December 31, 2020, the Company’s net leverage ratio was 3.4 x, which corresponds to an Applicable Margin of 2.70 .

All other terms of the RCF remained substantially unchanged, including the commitment fee, which remains at 35 % of applicable margin.

As of December 31, 2020 and 2019, no RCF borrowings, as defined in the Credit Agreement, had been drawn, while $ 70.3 million and $ 28.6 million, respectively, in borrowings under ancillary facilities reduced the overall amount available under the RCF to $ 236.5 million .

Letters of credit can be issued for the amount available under the RCF and ancillary facilities.

The weighted average interest rates on short term borrowings as of December 31, 2020 and 2019 were 2.48 % and 2.51 %, respectively.

For the years ended December 31, 2020 , 2019 and 2018 transaction costs of $ 0.6 million, $ 0.7 million and $ 0.8 million.

respectively, were amortized.

Unamortized transaction costs that were incurred in conjunction with the RCF in July 2014, the amendment on May 30, 2017 and the amendment on April 2, 2019, amount to $ 3.0 million as of December 31, 2020.

Unamortized transaction costs as of December 31 , 2019 amo unted to $ 3.4 million and were incurred in conjunction with the RCF in July 2014 and the amendment on May 30, 2017.

As of December 31, 2020, the Company had partly drawn its uncommitted local credit lines in Korea of $ 4.6 million and Brazil amounting to $ 0.8 million .

Neither facility had any borrowings as of December 31, 2019.

The Company had also established ancillary credit facilities by converting the commitments of select lenders under the € 250.0 million RCF into bilateral credit agreements (usually overdraft facilities).

Borrowings under ancillary lines reduce availability under the RCF but do not count toward debt drawn under the RCF for the purposes of determining whether the financial covenant under the Credit Agreement must be tested.

As of December 31, 2020, the ancillary facilities had $ 70.3 million (as of December 31, 2019:

$ 26.4 million ) outstanding.

The general terms of these ancillary credit facilities are linked to the terms in the RCF.

During the second quarter 2020, the Company established two additional ancillary facilities in an aggregate amount of € 40 million (bringing the number of RCF banks with whom ancillary facilities have been established to six out of ten banks and total ancillary borrowings to € 170 million).

Since June 30, 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.

Using exchange rates applicable as of December 31, 2020 , the € 250 million RCF amounted to approximately $ 307 million.

By converting the existing RCF commitments of select bank group participants, Orion has established local ancillary credit facilities for OEC GmbH and OEC LLC.

As of December 31, 2020, the OEC GmbH facility had $ 43.5 million (prior year:

$ 26.4 million ) outstanding and the OEC LLC facility had $ 26.8 million (prior year:

$ 2.2 million ) outstanding.

Future Years Payment Schedule

The following table shows the residual terms of our Term Loan and its impact on our cash flows based on the agreed maturity date, the repayment schedule, and the total interest amounts.

Implied three months Euro forward interest rates and implied U.S Dollar forward interest rates as applicable on December 31, 2020 were used to calculate the repayment amounts.

Interest Scheduled Repayment Total

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The company’s right-of-use assets (“ROU”) and lease liabilities related to operating and finance leases reflected in the Consolidated Balance Sheets are as follows:

(In millions)

2021 $ 15.0 $ 8.5 $ 23.5

2022 14.9 8.5 23.3

2023 15.1 8.5 23.6

2024 8.9 642.5 651.4

Operating leases $ 20.0 $ 25.3

Finance leases 64.6 60.3

Total $ 84.6 $ 85.6

Covenant Compliance

The Credit Agreement contains certain non-financial covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to (i) incur additional debt, (ii) pay dividends, repurchase shares or make certain other restricted payments or investments, (iii) incur liens, (iv) sell assets, (v) to pay dividends or to make other payments to the Company, (vi) enter into affiliate transactions, (vii) engage in sale and leaseback transactions, and (viii) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets.

These covenants are subject to significant exceptions and qualifications.

In addition, there is one financial covenant under the Credit Agreement, the First Lien Leverage Ratio (“FLLR”), defined as Consolidated First Lien Debt divided by Consolidated Adjusted EBITDA for the trailing twelve months (“TTM”).

The FLLR is not permitted to exceed 5.5 x TTM EBITDA and is tested each quarter RCF utilization exceeds 35 %, as defined in the Credit Agreement (the “Covenant Trigger”).

Notably, not all debt counts toward RCF utilization for purposes of calculating the Covenant Trigger, namely, term debt, debt drawn under ancillary credit facility lines and debt drawn under any uncommitted local credit lines are excluded.

FLLR, Consolidated First Lien Debt and Consolidated Adjusted EBITDA have the meanings given to them in the Credit Agreement.

Business Combinations, Goodwill and Intangible Assets

Business Combination

On October 31, 2018, the acquisition for 100 % of shares of the acetylene carbon black manufacturer Société du Noir d'Acétylène de l'Aubette, SAS (“SN2A”) from LyondellBasell Industries Holdings B.V.

was completed.

The acquisition was accounted for as a business combination.

The acquisition had an aggregate purchase price of $ 36.8 million.

This acquisition is expected to strengthen the Company's position in the Specialty Carbon Black market by adding acetylene carbon black to its product portfolio.

In finalizing the purchase price accounting during the third quarter of 2019, the previously disclosed purchase price allocation as of the closing date was updated to reflect adjustments existing at the acquisition date and identified during the measurement period under ASC 805 - Business Combinations.

The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:

(in thousands)

Other current assets 176

Accounts receivables 1,578

Inventories 924

Property, plant and equipment 5,317

Intangible assets 12,766

Total assets acquired $ 20,974

Current liabilities $ 2,488

Deferred tax liabilities 4,716

Total liabilities assumed $ 7,204

Net assets acquired $ 13,770

Consideration:

Cash consideration paid $ 36,784

Goodwill $ 23,014

The acquisition was accounted for using the acquisition method.

Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the acquisition date.

During the quarter ended September 30, 2019, we completed the purchase accounting for the acquisition of SN2A and we reduced the total fair value of intangible assets acquired from $ 44.3 million to $ 12.8 million based on an improved understanding of the allocation of future expected cash flows since the date of acquisition including an adjustment to the applied discount rate aligned to target specific considerations.

In addition, we reduced the fair value of acquired property, plant and equipment from $ 5.8 million to $ 5.3 million due to third party appraisals and we reduced the related deferred tax liabilities from $ 13.7 million by $ 9.0 million to $ 4.7 million accordingly to reflect the impact of changes in fair values of the tangible and intangible assets.

These changes resulted in $ 23.0 million of goodwill being recorded and allocated to our Specialty Carbon Black Segment.

We also recorded a reduction in depreciation and amortization expense of $ 1.0 million and an increase in net income of $ 0.7 million respectively, in the third quarter of fiscal 2019 related to prior periods as a result of the changes in fair values of tangible and intangible assets and the associated deferred tax liabilities.

The fair values of identifiable assets and liabilities acquired were developed with the assistance of a third-party valuation firm.

The fair value of acquired property, plant and equipment is valued at its "value-in-use" as there are no known plans to dispose of any assets.

The fair value of acquired identifiable intangible assets was determined using the "income approach" on an individual asset basis.

The key assumptions used in the calculation of the discounted cash flows include projected revenues, gross margin, operating expenses, and discount rate.

The valuations and the underlying assumptions have been deemed reasonable by the Company’s management.

There are inherent uncertainties and management judgment required in these determinations.

The carrying amount of goodwill attributable to each reportable segment for period ended December 31, 2020 is as follows:

Lease Liabilities (1)

Operating leases

Current $ 7.9 $ 7.2

Long-term 12.0 19.0

Finance leases

Current 3.7 4.9

Long-term 61.0 55.5

Total $ 84.6 $ 86.6

(1) Reflected in Current and Other liabilities in the Consolidated Balance Sheets.

The weighted remaining average minimum lease period for finance leases and operating leases are 20.6 years and 3.9 years, respectively.

Maturities of operating and finance lease liabilities are as follows:

Finance Leases Operating Leases Total

(In millions)

Next 12 months $ 6.3 $ 8.6 $ 14.9

1 to 2 years 5.1 5.4 10.5

2 to 3 years 4.9 3.7 8.6

3 to 4 years 4.8 2.9 7.7

4 to 5 years 4.4 1.0 5.4

More than 5 years 74.0 0.1 74.1

Total undiscounted minimum lease payments 99.5 21.7 121.2

Imputed interest ( 34.8 ) ( 1.8 ) ( 36.6 )

Lease liability (current and non-current) $ 64.7 $ 19.9 $ 84.6

The weighted average discount rate applied to the lease liabilities is 4.44 %.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Goodwill and Intangible Assets

The carrying amount of goodwill attributable to each reportable segment for the years ended December 31, is as follows:

Goodwill Rubber Specialty Total

(In thousands)

(In millions)

Balance as of January 1, 2020 $ 31.0 $ 46.4 $ 77.4

Goodwill recorded in SN2A acquisition — 23,014 23,014

Foreign currency impact 2.8 4.3 7.1

2 unchanged sentences

Balance as of December 31, 2021 $ 31.2 $ 46.8 $ 78.0

Qualitative impairment testing performed during the fiscal year for the Rubber and Specialty reporting units did no t indicate a goodwill impairment.

Intangible Assets

The following table provides information regarding Orion's intangible assets:

Gross Carrying Value Accumulated Amortization Net Intangible Assets Gross Carrying Value Accumulated Amortization Net Intangible Assets

(In thousands)

Cost Accumulated Amortization Net Cost Accumulated Amortization Net

(In millions)

Developed technology and patents $ 71.5 $ 51.8 $ 19.7 $ 69.4 $ 46.2 $ 23.2

4 unchanged sentences

Total intangible assets $ 218.6 $ 182.3 $ 36.3 $ 235.6 $ 188.8 $ 46.8

Intangible assets are amortized over their estimated useful lives, which range from 3 to 15 years.

The weighted average amortization period for all intangible assets as of December 31, 2020 and 2019 was 9.8 years and 8.4 years, respectively.

Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $ 7.8 million, $ 8.2 million and $ 12.9 million, respectively, and is included in Cost of sales and Selling, general and administrative expenses in the Consolidated Statements of Operations.

Intangible assets include remeasurements due to the purchase price adjustment in the third quarter of 2019 of SN2A acquisition (see Note I.

“ Business Combinations, Goodwill and Intangible Assets”

The estimated aggregate amortization expense for intangible assets for the fiscal years ending December 31, 2021 to 2025 and thereafter are as follows:

Year (In thousands)

The estimated aggregate amortization expense for intangible assets for the fiscal years ending December 31, are as follows:

Year (In millions)

Thereafter 5.3

Total aggregated amortization $ 36.3

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Accruals and Other Liabilities

Current accrued liabilities consist of the following:

(In thousands)

The components of Current accrued liabilities were as follows at December 31:

(In millions)

Accrued employee compensation $ 26.1 $ 21.6

1 unchanged sentence

Accrued liabilities for restructuring 9.3 8.0

Environmental reserves 3.4 0.4

Other accrued liabilities 6.5 12.2

Total $ 50.9 $ 49.2

Other current liabilities consist of the following:

(In thousands)

The components of Other current liabilities were as follows at December 31:

(In millions)

Employee related liabilities $ 5.6 $ 6.6

Customer down payments 922 1,018

Liabilities for environmental tax 385 4,824

Liabilities for withholding tax 155 1,417

Liabilities for VAT 675 555

Liabilities for property tax 785 —

Liabilities for outstanding invoices 7,112 5,902

Liabilities for leases 12,077 7,598

Current lease liabilities (refer to Note G.

Other current liabilities 16.9 19.1

Total $ 34.1 $ 37.8

Other long-term liabilities consist of the following:

(In thousands)

The components of Other long-term liabilities were as follows at December 31:

(In millions)

Employee related liabilities $ 4.9 $ 5.9

Liabilities for asset retirement obligation 4.1 1.7

Environmental protection liabilities 1,250 1,240

Liabilities for leases 74,526 21,463

Environmental reserve 4.4 1.2

Long-term lease liabilities (refer to Note G.

Other non-current liabilities 8.8 22.9

Total $ 95.2 $ 106.2

For the years ended December 31, 2020 and 2019 no liabilities for ARO's were settled.

Debt and Other Obligations

The company arrangements at December 31 are as follows:

(In millions)

Term loan $ 3.0 $ 8.5

Deferred debt issuance costs-term loan ( 0.8 ) ( 1.5 )

Other short-term debt and obligations 149.5 75.6

Current portion of long-term debt and other financial liabilities 151.7 82.6

Term loan 636.0 659.5

Deferred debt issuance costs-term loan ( 4.8 ) ( 3.7 )

Long-term debt, net 631.2 655.8

Total $ 782.9 $ 738.4

(a) Term Loan

In 2014, Orion entered into Credit Agreement, which included an $ 895.0 million term loan, which was allocated to a term loan facility denominated in U.S.

Dollars of $ 358.0 million and a term loan facility denominated in Euros of € 399.0 million with both having an original maturity date of July 25, 2021 (the “Prior Term Loans”).

Initial interest was calculated based on three-month EURIBOR (for the Euro-denominated loan), and three-month USD-LIBOR (for the USD-denominated loan) plus a 3.75 % - 4.00 % margin depending on the Company’s net leverage ratio.

For both EURIBOR and USD-LIBOR a floor of 1.0 % applied.

At least 1 % of the principal amount is required to be repaid per annum.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Subsequent to 2014, Orion entered into a number of amendments, achieving a significant reduction of both interest margins to 2.00 % for the U.S.

dollar term loan and 2.25 % for the Euro term loan at that time.

In addition, the interest margin was no longer linked to Orion's net leverage ratio and the EURIBOR and USD-LIBOR floors were eliminated.

In 2017, the duration of the Prior Term Loans was extended to July 25, 2024.

In September 2021, Orion entered into the Ninth Amendment to the Credit Agreement, which includes an amended and restated term loan agreement (the "Term Loans").

The Term Loan facility was allocated to a term loan facility denominated in U.S.

dollars of $ 300 million and denominated in Euros of € 300 million with both having a maturity date of September 24, 2028, replacing the Prior Term Loans.

Interest is calculated based on three months EURIBOR (for the Euro-denominated loan) plus a margin of 2.50 %, or three-month USD-LIBOR (for the USD-denominated loan) plus a margin of 2.25 %.

dollar loan, a floor of 0.50 % applies and for the Euro-denominated loan no floor exists.

1 % of the principal amount is required to be repaid per annum in respect to the USD-denominated loans, whereas there is no scheduled amortization for the Euro-denominated loans.

The Credit Agreement was also amended to include LIBOR replacement language in preparation for the eventual phase out of the London Interbank Offered Rate (LIBOR).

The Term Loans include a sustainability-linked margin adjustment that applies to both the Euro and U.S.

dollar loans.

The margin adjustment is based on annual SOx and NOx emission reduction targets for the Company’s North American plants between 2022 and 2028, respectively.

Specifically, the credit spread on the Term Loans will decline or rise by up to 10 basis points depending on the emissions profile of the Company’s North American plants, in aggregate.

Starting in 2022 and continuing through 2025, the Company will review annually whether both interim targets have been met.

If the Company achieves both targets, it will benefit from up to a 10-basis point credit spread reduction for the prospective 12 month period following the submission of the annual ESG compliance certificate.

For the period from 2026 to 2028, a margin step-up by 5 or 10 basis points would occur if Orion does not maintain the reduced emissions profile of one or both targets.

Other provisions of the Credit Agreement relating to the Term Loan remained substantially unchanged.

In connection with the September 2021 modification of the Term Loan, Orion incurred approximately $ 7.8 million of refinancing costs of which $ 2.8 million of loan origination costs were capitalized and $ 5.0 million of other fees were directly expensed.

(b) Revolving credit facility

In addition, in 2014, under the Credit Agreement, we entered into a € 115.0 million multicurrency revolving credit facility (“RCF”) with an original maturity date of July 25, 2019.

Interest is calculated based on EURIBOR (for euro drawings), and USD-LIBOR (for U.S.

Dollar drawings) plus a 2.5 % - 3.0 % margin (depending on leverage ratio).

Subsequent to 2014, Orion entered into a number of amendments, which largely were made to increase the RCF capacity.

The latest RCF amendment completed in April 2019, extended the RCF maturity date to April 25, 2024, increased the aggregate amount of revolving credit commitments in Euro by € 75.0 million to the now EUR € 250.0 million, and reduced the interest margin to a 1.7 % to 2.7 % range, using a revised pricing grid.

As of December 31, 2021, the Company’s net leverage ratio was 2.7 x, which corresponds to an interest margin of 2.40 for both USD and Euro denominated borrowings.

All other terms of the RCF remained substantially unchanged, including the commitment fee, which remains at 35 % of the interest margin or 0.8 % at December 31, 2021.

As of and for the years ended December 31, 2021 and 2020, no RCF borrowings, as defined in the RCF agreement, had been drawn.

Letters of credit can be issued for the amount available under the RCF and ancillary facilities.

The weighted average interest rates on the RCF as of December 31, 2021 and 2020 were 2.36 % and 2.48 %, respectively.

For the years ended December 31, 2021 , 2020 and 2019, amortized transaction costs were immaterial.

Unamortized transaction costs included in the Consolidated Balance Sheets, as of December 31, 2021 and 2020 amo unted t o $ 2.2 million and $ 3.0 million, were incurred in conjunction with various RCF amendments.

As part of the RCF, the Company can also establish ancillary credit facilities by converting the commitments of select lenders under the € 250.0 million RCF into bilateral credit agreements.

Original borrowings under ancillary credit facilities reduce availability under the RCF.

Borrowings under ancillary credit facilities do not count toward debt drawn under the RCF for the purposes of determining whether the financial covenant under the Credit Agreement related to the RCF must be tested.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

As of December 31, 2021and 2020, the Company had the following ancillary facilities and uncommitted lines of credit outstanding:

(In millions)

Ancillary credit facilities

Total capacity (€ 170 million)

$ 192.5 $ 208.6

OEC GmbH outstanding borrowings $ 103.0 $ 43.5

OEC LLC outstanding borrowings 13.4 26.7

Uncommitted local lines of credit:

Korea (capacity $ 40.0 million)

Brazil (capacity $ 2.3 million)

Total of Other short-term debt and obligations $ 149.5 $ 75.6

The general terms of the ancillary credit facilities are linked to the terms in the RCF.

The local credit lines in Brazil and Korea are with local banks that are not lenders under the Credit Agreement and were negotiated bilaterally.

During the second quarter 2020, the Company increased the number of RCF banks and total converted ancillary borrowings from € 130 million to € 170 million, resulting in capacity under the RCF at any net leverage level, as even a full RCF utilization won’t trigger the 35 % covenant threshold (see Covenant Compliance section below - First Lien Leverage Ratio covenant).

Using exchange rates applicable as of December 31, 2021, the € 250 million RCF capacity amounted to approximately $ 283 million with availability after ancillary borrowings of $ 166.7 million.

Future Years Payment Schedule

The aggregate principal amounts of long-term debt, excluding finance lease liabilities presented in Note G.

Leases , are as follows:

(In millions)

Total $ 639.0

Covenant Compliance

These covenants are subject to significant exceptions and qualifications.

The FLLR is not permitted to exceed 5.5 x TTM EBITDA and is tested each quarter RCF utilization exceeds 35 %, as defined in the Credit Agreement (the “Covenant Trigger”).

FLLR, Consolidated First Lien Debt and Consolidated Adjusted EBITDA have the meanings given to them in the Credit Agreement.

As of December 31, 2021, we are in compliance with our debt covenants.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Financial Instruments and Fair Value Measurement

The Company measures financial instruments, such as derivatives, at fair value at each balance sheet date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Company uses valuation techniques, including cash flow and present value methods, that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

The FASB authoritative guidance on fair value measurements defines fair value, provides a framework for measuring fair value, and requires certain disclosures about fair value measurements.

The required disclosures focus on the inputs used to measure fair value.

The guidance establishes the following hierarchy for categorizing these inputs:

Level 1 — Unadjusted quoted market prices in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 — Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices such as quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves), and market-corroborated inputs.

Level 3 — Unobservable inputs for the asset or liability.

For financial assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period.

There were no transfers of assets measured at fair value between Level 1 and Level 2 and there were no Level 3 investments during fiscal 2020 or 2019.

The following table shows the fair value measurement based on observable inputs such as interest rates and are classified as Level 2 within the fair value hierarchy:

Derivative Fair Value Hierarchy 2020 2019

(In thousands)

Receivables from hedges/ derivatives $ 195 $ 8,436

Prepaid expenses and other current assets FX hedges Level 2 195 8,434

Other financial assets (non-current) Level 2 — 1

Liabilities from derivatives $ 23,127 $ 9,425

Other current liabilities FX hedges Level 2 296 109

Other liabilities (non-current) Cross currency and interest rate swaps Level 2 22,831 9,316

Term loan Level 2 $ 667,980 $ 643,051

Local bank loans Level 2 $ 75,640 $ 29,762

At both December 31, 2020 and 2019, the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and short term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments.

See Note L- Accounting for Derivative Instruments and Hedging Activities for additional information related to derivatives and fair value.

Accounting for Derivative Instruments and Hedging Activities

Risk management

The Company’s business operations are exposed to changes in interest rates, foreign currency exchange rates and commodity prices because the Company finances certain operations through long and short-term borrowings, denominates transactions in a variety of foreign currencies and purchases certain commoditized raw materials.

Changes in these rates and prices may have an impact on future cash flows and earnings.

The Company manages these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.

The Company has policies governing the use of derivative instruments and does not enter into financial instruments for trading or speculative purposes.

By using derivative instruments, the Company is subject to credit and market risk.

If a counterparty fails to fulfill its performance obligations under a derivative contract, the Company’s credit risk will equal the fair value of the derivative.

Generally, when the fair value of a derivative contract is positive, the counterparty owes the Company, thus creating a payment risk for the Company.

The Company minimizes counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating.

The Company’s exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow.

We have policies governing the use of derivative instruments and do not enter into financial instruments for trading or speculative purposes.

By using derivative instruments, we are subject to credit and market risk.

To minimize counterparty credit (or repayment) risk, we enter into transactions, primarily with investment grade financial institutions.

The market risk exposure is not hedged in a manner to completely eliminate the effects of changing market conditions on earnings or cash flow.

No significant concentration of credit risk existed as of December 31, 2021 and 2020.

Cash flow hedge

The Company has designated, as of November 28, 2014 the entire interest rate caps entered in 2014 and denominated in Euro with an initial nominal amount of € 375.0 million against the Term Loan tranches denominated in Euro with an initial nominal amount of

€ 399.0 million, as well as the entire interest rate caps entered in 2014 and denominated in USD with an initial nominal amount of $ 350.0 million against Term Loan tranches denominated in USD with an initial nominal amount of $ 358.0 million with respect to quarterly interest payments exceeding a three months EURIBOR rate of 1.0 % and a three months USD-LIBOR rate of 2.5 % respectively.

On November 14, 2017 the Company acquired floored forward interest rate swaps to hedge interest rate risk on current Euro-denominated term loan financing.

2 unchanged sentences

In a separate transaction occurring in December 2020, the Company unwound a $ 30 million swap maturing in 2021 at a realized loss of approximately $ 3.9 million.

The Company designated the Euro-denominated interest rate caps, the Euro-denominated interest rate swap at closing in November 2017 and the cross-currency swaps at closing in May 2018 in the same manner.

The Company has performed a hedge effectiveness test based on the critical terms match method (prospectively) and the dollar offset test (retrospectively), both on designation date and as of December 31, 2020, which confirmed hedge effectiveness.

Net Investment Hedge

For net investment hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported as foreign currency translation gains or losses in AOCI while changes in the ineffective portion are reported in earnings.

Effectiveness is assessed based on the hypothetical derivative method.

The gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period in which earnings are affected by the underlying item, such as a disposal or substantial liquidations of the entities being hedged.

To reduce the Company's foreign currency exposure a portion of the U.S.

Dollar denominated Term Loan was designated as a hedge of net investment in a foreign operation.

Since January 1, 2015, the Company had designated $ 180.0 million of the total USD denominated term loan held by a Germany-based subsidiary as the hedging instrument to hedge the change in net assets of a US subsidiary, which is held by a Germany-based subsidiary, to manage foreign currency risk.

Due to the new hedging approach and the new cross currency swap as described above, hedge accounting for the net investment hedge was discontinued on May 15, 2018.

An unrealized loss of $ 2.2 million remains within other comprehensive income until it is recycled through profit and loss upon divestment of the hedged item.

See Note K- ”Financial Instruments and Fair Value Measurement” for additional information related to derivatives and fair value.

We designated the Euro-denominated interest rate swap at closing in November 2017 and the cross-currency swaps at closing in May 2018 in the same manner.

We performed a hedge effectiveness test based on the critical terms match method (prospectively) and the dollar offset test (retrospectively).

In September 2021, the Company restructured its previously existing cross-currency swaps in the amount of $ 197 million, to align them with the new U.S.

dollar denominated term loan credit facility.

Specifically for changes in the loan interest margin of 2.25 % (formerly 2.0 %) and the three-month USD-LIBOR floor of 0.50 % (formerly 0.00 %).

The cross-currency swap became effective on September 30, 2021 and will expire on September 30, 2028, in line with the maturity of the term loan.

This cross-currency swap was determined to be highly effective, continues to qualify for hedge accounting and was cost-neutral.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Fair value measurement

The following table summarizes outstanding financial instruments that are measured at fair value on a recurring basis:

December 31, 2021 December 31, 2020 Balance Sheet Classification

Notional Amount Fair Value Notional Amount Fair Value

(In millions)

Derivatives designated as hedges:

Cross currency swaps $ 197.0 $ 4.3 $ — $ — Prepaid expenses and other current assets

Total $ 197.0 $ 4.3 $ — $ —

Derivatives designated as hedges:

Cross currency swaps $ — $ — $ 197.0 $ 12.7 Other liabilities (non-current)

Interest rate swaps 311.5 8.6 337.5 10.1 Other liabilities (non-current)

Total $ 311.5 $ 8.6 $ 534.5 $ 22.8

All financial instruments in the table above are classified as Level 2.

We present the gross assets and liabilities of our derivative financial instruments on the Consolidated Balance Sheets.

There were no transfers of assets measured at fair value between Level 1 and Level 2 and there were no Level 3 investments during fiscal 2021 and 2020.

The following table presents the carrying value and estimated fair value of our financial instruments that are not measured at fair value on a recurring basis for the periods presented.

Due to the short maturity, the fair value of all non-derivative financial instruments included in Current assets and Current liabilities for which the carrying value approximates fair value are excluded from the table below.

Short-term and long-term debt are recorded at amortized cost in the Consolidated Balance Sheets.

December 31, 2021 December 31, 2020

Notional Amount Fair Value Notional Amount Fair Value

(In millions)

Non-derivatives:

Term loan $ 639.0 $ 637.2 $ 668.0 $ 668.0

Term-Loan in the table above is classified as Level 2.

At both December 31, 2021 and 2020, the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and short term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The following tables summarize the pre-tax effect of derivative and non-derivative instruments recorded in Accumulated other comprehensive loss (“AOCI”), the gains (losses) reclassified from AOCI to earnings and additional gains (losses) recognized directly in earnings:

Effect of Financial Instruments

Year Ended December 31, 2021

Gain (Loss) Recognized in AOCI Gain (Loss) Reclassified from AOCI to Income Additional Gain (Loss) Recognized in Income Income Statement Classification

(In millions)

Derivatives designated as hedges:

Cross currency swaps $ 2.4 $ ( 0.5 ) $ — Interest and other financial expense, net

Interest rate swaps 1.5 — — Interest and other financial expense, net

Total $ 3.9 $ ( 0.5 ) $ —

Effect of Financial Instruments

Year Ended December 31, 2020

Gain (Loss) Recognized in AOCI Gain (Loss) Reclassified from AOCI to Income Additional Gain (Loss) Recognized in Income Income Statement Classification

(In millions)

Derivatives designated as hedges:

Cross currency swaps $ ( 1.0 ) $ — $ ( 6.0 ) Interest and other financial expense, net

Interest rate swaps ( 2.3 ) — — Interest and other financial expense, net

Total $ ( 3.3 ) $ — $ ( 6.0 )

Effect of Financial Instruments

Year Ended December 31, 2019

Gain (Loss) Recognized in AOCI Gain (Loss) Reclassified from AOCI to Income Additional Gain (Loss) Recognized in Income Income Statement Classification

(In millions)

Derivatives designated as hedges:

Cross currency swaps $ ( 1.9 ) $ — $ ( 1.5 ) Interest and other financial expense, net

Interest rate swaps ( 5.3 ) — — Interest and other financial expense, net

Total $ ( 7.2 ) $ — $ ( 1.5 )

The amount recognized in AOCI related to cash flow hedges that will be reclassified to the Consolidated Statement of Operations in the next twelve months is approximately $ 1.9 million.

Our cross currency swaps designated as a cash flow hedge of principal and interest payments related to our Term Loan matures in September 2028.

Employee Benefit Plans

2 unchanged sentences

Generally, the level of benefit depends on the length of service and the remuneration.

In 2020 and 2019, Germany accounted for approximately 93.3 % and 91.8 %, respectively, of provisions for projected defined benefit pension plan obligations.

We have defined benefit plans in Germany and South Korea for which Germany accounted for approximately 93.2 % and 93.3 % in 2021 and 2020, respectively, of provisions for projected defined benefit pension plan obligations.

Effective at the end of 2013, all defined benefit plans in Germany were modified to close access to new participants and freeze benefits accrued under these plans at December 31, 2013 levels.

Interest expense on the frozen obligation relating to these plans will continue to accrue.

There are also defined contribution pension plans in Germany and the United States for which the Company makes regular contributions to off-balance sheet pension funds managed by third party insurance companies.

1 unchanged sentence

Plan assets relating to this plan reduce the pension provision disclosed.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Obligations and Funded Status

1 unchanged sentence

Change in Projected Benefit Obligation December 31

(In thousands)

(In millions)

Present value of projected benefit obligation at the beginning of the year $ 91.3 $ 79.4

6 unchanged sentences

Present value of projected benefit obligation at the end of the year $ 81.9 $ 91.3

Based on the weighted Macaulay method the projected benefit obligation has a duration of 21.0 years (prior year:

Based on the weighted Macaulay method the projected benefit obligation has a duration of 20.0 years ( 21.0 years in 2020 ).

Change in Plan Assets December 31

(In thousands)

(In millions)

Fair value of plan assets at the beginning of the year $ 6.8 $ 6.6

1 unchanged sentence

Employer contributions 0.7 0.3

Actuarial gain/(loss) — —

Benefits paid — ( 0.5 )

Settlement ( 0.7 ) —

Other adjustments — —

Currency translation ( 0.6 ) 0.3

4 unchanged sentences

The actual return on plan assets amounted to $ 0.1 million and $ 0.1 million for the years ended December 31, 2021 and 2020, respectively.

Net Funded Status December 31

(In thousands)

Net Unfunded Status December 31

(In millions)

Projected benefit obligation $ 81.9 $ 91.3

Fair value of plan assets

Net funded status $ 84,428 $ 72,809

Net unfunded status $ 75.6 $ 84.5

Amount Recognized in the Consolidated Balance Sheets December 31

(In thousands)

(In millions)

Non-current assets $ — $ —

2 unchanged sentences

Net liability recognized - pension plans $ 75.6 $ 84.5

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Pension Assumptions and Strategy

12 unchanged sentences

0.5% decrease 0.5% increase 0.5% decrease 0.5% increase

(In thousands)

(In millions)

Impact on projected benefit obligation $ 7.4 $ ( 6.5 ) $ ( 9.2 ) $ 10.2

2 unchanged sentences

2021 2020 2019

(In thousands)

(In millions)

Service cost $ 0.5 $ 0.6 $ 0.6

1 unchanged sentence

Expected return on plan assets ( 0.1 ) ( 0.1 ) ( 0.1 )

Past service cost/(income) and other adjustments — — 253

Net periodic pension cost $ 1.4 $ 1.7 $ 2.2

Effective at the end of 2013, all defined benefit plans in Germany were modified to close access to new participants and freeze benefits accrued under these plans at December 31, 2013 levels.

Interest expense on the frozen obligation relating to these plans will continue to accrue.

In addition, one program during the year ended December 31, 2016 ceased due to the closure of our Ambès (France) plant.

The total expected defined benefit pension contribution amounts to $ 1.3 million in 2022.

The Company paid $ 15.0 million, $ 12.5 million and $ 13.9 million for the years ended December 31, 2021, 2020 and 2019, respectively, for state defined contribution pension schemes (statutory pension insurance) in Germany and other countries.

This amount is also recognized as personnel expenses.

This amount is recognized as personnel expenses in Cost of sales and in Selling, general and administrative expenses in the Consolidated Statements of Operations.

Estimated Future Benefit Payments

The Company expects that the following benefit payments will be made to plan participants in the years from 2022 to 2031:

Benefit payments (In thousands)

Benefit payments (In millions)

2027 - 2031 14.8

The Company does not anticipate making funding contributions to the Pension Plan in 2022.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Amounts Recognized in Accumulated Other Comprehensive (Income)/Loss

Overall net actuarial loss amounted to $ 5.3 million and comprises $ 4.9 million pension-related and $ 0.4 million o ther personnel-related costs.

Amounts recognized in AOCI as of December 31, 2021, 2020 and 2019 related to the Company's defined benefit pension plan were as follows:

Accumulated Other Comprehensive (Income) / Loss December 31

(In thousands)

2021 2020 2019

(In millions)

Net actuarial (gain) loss $ ( 1.7 ) $ 4.9 $ 12.0

2 unchanged sentences

$ ( 1.7 ) $ 4.9 $ 12.0

The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2021:

(In thousands)

Net actuarial (gain) loss $ 4,999

Prior service cost (credit) —

Net amount recognized $ 4,999

The fair value (all Level 2) of Orion's pension plan assets as of December 31, 2020 and 2019, by asset category, is as follows:

(In thousands)

Other securities

No amount is estimated to be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2022.

The fair value (all Level 2) of Orion's pension plan assets as of December 31, 2021 and 2020, are as follows:

(In millions)

Government and corporate fixed income financial instruments

Total pension plan assets

$ 6,831 $ 6,580

Defined Contribution Plans

13 unchanged sentences

For example, the employee would earn one third of the RSU on December 31 starting in the year of the grant and the remaining two thirds each December 31 for 2 years immediately subsequent to the year of the grant.

In April 2018, the Compensation Committee established a stock compensation plan for the Board of Directors under the existing Omnibus Incentive Compensation Plan.

The following table provides detail as to expenses recorded within operating income with respect to stock based compensation:

Years Ended December 31,

2020 2019 2018

(In thousands)

$ — $ — $ 777

— 1,083 4,566

— 3,016 5,052

Stock compensation plan for Board of Directors

2,094 3,435 2,961

Individual RSU incentive 544 453 —

2020 Plan 525 — —

Total expenses $ 4,434 $ 9,438 $ 13,919

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Performance-based Restricted Stock Units

In the following table summarizes the activity of our PSUs within year ended December 31, 2021:

Period granted Performance period

PSUs outstanding at January 1,

PSUs granted Performance based adjustment PSUs settled PSUs forfeited PSUs outstanding at December 31, PSUs expected to vest Weighted average grant date fair value

2017 2017 - 2019 418,252 — ( 40,087 ) ( 378,165 ) — — — $ 24.89

2018 2018 - 2020 355,766 — ( 351,406 ) — ( 4,360 ) — — $ 39.24

2019 2019 - 2021 229,727 1,278 — — ( 20,253 ) 210,753 102,217 $ 11.48

2020 2020 - 2022 — 289,628 — — ( 2,029 ) 287,599 202,766 $ 11.60

Total 2020 1,003,745 290,906 ( 391,493 ) ( 378,165 ) ( 26,642 ) 498,352 304,984

Total 2019 1,594,990 332,891 299,499 ( 977,106 ) ( 246,529 ) 1,003,745 917,255

Total 2018 1,610,894 450,977 110,215 ( 557,337 ) ( 19,759 ) 1,594,990 1,556,011

In the following table summarizes the activity of our RSUs within year ended December 31, 2020:

Period granted Vesting period RSUs outstanding January 1, RSUs granted Performance based adjustment RSUs settled RSUs forfeited RSUs outstanding at December 31, RSUs expected to vest Weighted average grant date fair value

Individual RSU incentive:

2018 2018 - 2021 23,878 — — — — 23,878 23,878 $ 25.81

Number of units Weighted-average grant-date fair value per unit

Unvested at January 1, 2021

498,352 $ 11.55

Granted 360,178 19.01

Forfeited ( 70,195 ) 15.98

Unvested at December 31, 2021

788,335 $ 14.97

During the years ended December 31, 2020 and 2019, we granted 290,906 and 332,891 performance-based units, respectively, with a per unit weighted-average grant-date fair value of $ 11.60 and $ 11.48 , respectively.

The 2019 performance-based PSU grants expired as the performance conditions were not met.

Restricted Stock Units

In the following table summarizes the activity of our Individual RSUs within year ended December 31, 2021:

Number of units Weighted-average grant-date fair value per unit

Unvested at January 1, 2021

370,427 $ 14.53

Granted 214,225 18.46

Settled ( 54,048 ) 19.92

Forfeited ( 16,005 ) 14.09

Unvested at December 31, 2021

514,599 $ 16.09

Total 2020 197,582 182,930 — — ( 10,086 ) 370,427 365,730

Total 2019 35,817 219,197 — ( 11,939 ) ( 45,493 ) 197,582 197,582

Total 2018 — 35,817 — — — 35,817 35,817

In the year ended December 31, 2021, the vested service-based units had an aggregate grant-date fair value of $ 1.1 million.

During the years ended December 31, 2020 and 2019, we granted 182,930 and 219,197 service-based units, respectively, with a per unit weighted-average grant-date fair value of $ 12.75 and $ 15.65 , respectively.

In the year ended December 31, 2020 no RSUs vested.

In the year ended December 31, 2019, the vested service-based units had an aggregate grant-date fair value of $ 0.3 million.

Certain members of our Board of Directors receive compensation in form of restricted shares (“RSs”) in accordance with the 2014 Non-employee Director Plan.

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As of December 31, 2021, we had unrecognized compensation cost of $ 9.0 million, based on the target amounts, related to unvested PSUs, RSUs and RSs, which is expected to be recognized over a weighted average period of 1.79 years.

The closing price of the Company's shares and therefore the intrinsic value of one PSU or RSU outstanding was $ 17.14 as of December 31, 2020, $ 19.30 as of December 31, 2019 and $ 25.28 as of December 31, 2018.

Total intrinsic value of PSUs and RSUs amounted to $ 14.9 million, $ 23.2 million and $ 41.2 million as of December 31, 2020, 2019, and 2018 respectively.

The following table lists the inputs to the valuation model used for calculating the grant date fair values under the 2020, 2019 and 2018 Plans:

2020 Plan PSU 2019 Plan PSU 2018 Plan PSU

Expected term (in years) 3 3 3

Dividend yield (%) — % 4.65 % 1.94 %

Expected volatility OEC (%) 60.84 % 33.30 % 30.22 %

Expected volatility peer group (%) 33.22 % 17.62 % 20.09 %

Correlation 0.7227 0.5205 0.3659

Risk-free interest rate (%) 0.14 % 1.83 % 1.46 %

Model used Monte Carlo Monte Carlo Monte Carlo

Weighted average fair value of PSUs granted $ 11.60 $ 11.48 $ 39.24

In March 2020, 378,165 PSUs (including a performance adjustment reduction of 40,087 PSUs) were settled for the 2017 Plan.

In April 2019, 977,106 PSUs (including performance adjustment of 299,499 PSUs) were exercised for the 2016 Plan.

In April 2018, 557,337 PSUs (including performance adjustment of 110,215 PSUs) were exercised for the 2015 Plan.

The expected term of share awards represents the weighted average period the share awards are expected to remain outstanding.

The remaining contractual terms of share units outstanding is December 2021 for the 2019 Plan and December 2022 for the 2020 Plan.

The Company used a combination of historical and implied volatility of its traded shares, or blended volatility, in deriving the expected volatility assumption.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of stock options.

The dividend yield assumption is based on the Company's history.

Stock-based compensation expense is comprised of the following line items:

Years Ended December 31,

2020 2019 2018

(In thousands)

Cost of sales

$ 299 $ 139 $ 55

Selling expenses

462 1,412 2,711

General and administrative expenses

3,408 7,364 10,394

Research and development costs

Stock-based compensation expense

$ 4,434 $ 9,438 $ 13,919

The assumption for estimating expected forfeitures is based on previous experience and based on a 3 % rate per year.

Actual forfeitures are recorded as they occur.

For the full year 2020 expenses recorded in prior years for 2018 and 2019 Plan were partially reversed as the performance condition for the EBITDA and ROCE metrics are no longer expected to be met.

Restructuring Expenses

Details of all restructuring activities and the related reserves for December 31, 2020, 2019 and 2018 were as follows:

expenses Demolition and

Removal costs Ground

costs Other Total

(In thousands)

Provision at January 1, 2018 $ 646 $ 2,824 $ 4,317 $ 930 $ 8,717

Charges 7,586 1,978 2,919 3,137 15,620

Cost charged against liabilities (assets) ( 324 ) ( 14 ) ( 833 ) ( 8 ) ( 1,180 )

Cash paid ( 5,825 ) ( 2,182 ) ( 3,259 ) ( 3,202 ) ( 14,468 )

Foreign currency translation adjustment 252 ( 64 ) ( 206 ) ( 13 ) ( 32 )

Provision at December 31, 2018 2,334 2,541 2,939 844 8,658

Charges 2,801 9 268 2 3,080

Cost charged against liabilities (assets) — — — — —

Cash paid ( 1,727 ) ( 1,953 ) ( 2,610 ) ( 508 ) ( 6,798 )

Foreign currency translation adjustment ( 9 ) ( 36 ) ( 109 ) ( 20 ) ( 175 )

Provision at December 31, 2019 3,400 561 488 317 4,765

Charges 3,228 146 4,185 — 7,559

Cost charged against liabilities (assets) — — — — —

Cash paid ( 3,219 ) ( 476 ) ( 449 ) ( 315 ) ( 4,460 )

Foreign currency translation adjustment 150 ( 1 ) 28 ( 2 ) 174

Provision at December 31, 2020 $ 3,559 $ 229 $ 4,251 $ — $ 8,039

Orion's reserves for restructuring of its Rubber segment in 2020 are reflected in accrued liabilities on the Consolidated Balance Sheets.

In 2016, the Company ceased operations at its plant in Ambes, France as part of the restructuring of it Rubber business segment.

Expenses related to the closing include personnel costs, demolition, removal costs and remediation costs and were $ 6.5 million, none and $ 3.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Total estimated and recognized costs and total costs remaining as of December 31, 2020 are $ 42.4 million and $ 8.0 million, respectively.

The restructuring of the South Korean footprint concluded in the second quarter of 2018 resulting in cessation of production at the Bupyeong plant and the sale of the land to a third party.

Restructuring income of $ 40.3 million reflects the proceeds of the land sale less the remaining book value of the land.

Restructuring expenses comprise required costs for land restoration of $ 7.2 million and cost to consolidate the two South Korean production sites into one remaining site, including in particular personnel related termination costs of $ 4.4 million incurred in fiscal year 2018.

In the periods ending December 31, 2020 and 2019 restructuring expense, net amounted to $ 7.6 million and $ 3.6 million, respectively.

For the year ended December 31, 2018 restructuring income, net was $ 24.6 million.

During 2021, 2020 and 2019 fiscal years, we recognized compensation expenses of $ 5.2 million, $ 4.4 million and $ 9.4 million, respectively, in our Consolidated Statements of Operations.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Accumulated Other Comprehensive Income (Loss)

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Currency Translation Adjustments Hedging Activities Adjustments Pension and Other Postretirement Benefit Liability Adjustment Total

(In thousands)

(In millions)

Balance at January 1, 2019 $ ( 10.6 ) $ ( 6.2 ) $ ( 2.8 ) $ ( 19.6 )

Other comprehensive income/(loss) before reclassifications ( 8,918 ) ( 6,349 ) 198 ( 15,069 )

Other comprehensive loss before reclassifications ( 1.4 ) ( 7.3 ) ( 12.3 ) ( 21.0 )

Income tax effects before reclassifications ( 0.1 ) 2.4 4.0 6.3

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Balance at December 31, 2019 ( 12.1 ) ( 11.0 ) ( 11.2 ) ( 34.3 )

Other comprehensive income (loss) before reclassifications ( 1,454 ) ( 7,283 ) ( 12,288 ) ( 21,026 )

Other comprehensive loss before reclassifications ( 13.1 ) ( 2.6 ) ( 5.3 ) ( 21.0 )

Income tax effects before reclassifications ( 1.3 ) 0.8 1.8 1.3

Amounts reclassified from AOCI — — 9.9 9.9

Income tax effects on reclassifications — — ( 3.3 ) ( 3.3 )

Currency translation AOCI — ( 0.7 ) ( 0.6 ) ( 1.3 )

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Balance at December 31,2021 $ ( 34.1 ) $ ( 10.8 ) $ ( 3.6 ) $ ( 48.5 )

The amounts reclassified out of AOCI and into the Consolidated Statement of Operations for the fiscal year ended December 31, 2020 are presented in the table below.

There were no reclassifications in 2019 and 2018.

Years Ended December 31,

(In thousands)

Amortization of actuarial losses (gains) (recorded in interest and other finance expense, net) $ 9,916

Total before tax 9,916

Tax impact ( 3,253 )

Total after tax $ 6,663

The amounts recorded in prior years in AOCI exceeding 10 % of the defined benefit obligation are recorded ratably as reclassification of actuarial losses over the current year through profit and loss separately from income from operations and amounted to $ 9.9 million,for the year end December 31, 2020.

Earnings Per Share

Basic EPS is calculated by dividing the profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS is calculated by dividing the profit for the year (numerator) attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares arising from exercising all dilutive ordinary shares (denominator).

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Orion by the weighted average number of common stock outstanding during the period.

Diluted EPS equals net income attributable to Orion divided by the weighted average number of common stock outstanding during the period, adjusted for the dilutive effect of our stock–based and other equity compensation awards.

The following table reflects the income and share data used in the basic and diluted EPS computations:

Years Ended December 31,

2020 2019 2018

Net income for the period - attributable to ordinary equity holders of the parent (in thousands) $ 18,156 $ 86,920 $ 121,310

Weighted average number of ordinary shares (in thousands of shares) 60,430 59,986 59,567

Dollars in millions, shares in thousands and per share amount in dollars 2021 2020 2019

Net income for the period - attributable to ordinary equity holders of the parent $ 134.7 $ 18.2 $ 86.9

Weighted average number of ordinary shares 60,708 60,430 59,986

Basic EPS $ 2.22 $ 0.30 $ 1.45

Dilutive effect of share based payments (in thousands of shares) 977 1,313 1,482

Weighted average number of diluted ordinary shares (in thousands of shares) 61,407 61,300 61,049

Dilutive effect of share based payments 243 977 1,314

Weighted average number of diluted ordinary shares 60,951 61,407 61,300

Diluted EPS $ 2.21 $ 0.30 $ 1.42

In 2018, repurchases of treasury shares were taken into account on a daily basis.

In 2018, 2019 and 2020 new shares were generated and transferred for settlement of stock based compensation ("2015 Plan",”2016 Plan", "RSU Plan", and “2017 Plan”), which was also included in the weighted number of shares.

The dilutive effect of the share-based payment transaction is the weighted number of shares considering the grant date, forfeitures and executions during the respective fiscal years.

The effect is determined by using the treasury stock method.

Anti-dilutive shares were immaterial as of December 31, 2020, 2019 and 2018.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The Company operates in multiple jurisdictions with complex tax and regulatory environments and our income tax returns are periodically audited or subjected to review by tax authorities.

We monitor tax law changes and the potential impact to our results of operations including potential proposals in the U.S.

as a result of a new administration.

Tax provision (benefit) for income taxes consisted of the following:

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2021 2020 2019

(In thousands)

(In millions)

$ 21.7 $ 16.3 $ 16.3

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2021 2020 2019

(In thousands)

(In millions)

$ 89.2 $ 25.6 $ 112.5

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(1) Domestic refers to Germany.

A corporate income tax rate of 15.00 % was used to calculate the current and deferred taxes for the German entities.

A solidarity surcharge of 0.825 % (calculated as 5.5 % on the corporate income tax rate) and a trade tax rate of 16.18 %, for the years ended December 31, 2020, 2019 and 2018, respectively, were also reflected in the calculation.

As a result, the overall tax rate for the German entities was 32.00 %, for the years ended December 31, 2020, 2019 and 2018 respectively.

A statutory corporate income tax rate of 15.00 % was used to calculate the current and deferred taxes for the German entities.

A solidarity surcharge of 0.825 % and a trade tax rate of 16.18 %, for the years ended December 31, 2021, 2020 and 2019, respectively, were also reflected in the calculation.

As a result, the overall statutory income tax rate for the German entities was 32.00 %, for the years ended December 31, 2021, 2020 and 2019.

The current and deferred taxes for the non-German entities were calculated using their respective country-specific tax rates.

The following tax reconciliation shows the difference between the expected income taxes using the German overall tax rate of 32.0 % and the effective income taxes in the income statement, for the years ended December 31, 2020, 2019 and 2018, respectively.

The German tax rate is applied because the primary operating entity located in Germany holds all non-German operations.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The following tax reconciliation shows the difference between the expected income taxes using the German overall statutory income tax rate of 32.0 % and the effective income taxes in the income statement, for the years ended December 31, 2021, 2020 and 2019.

Years Ended December 31,

2021 2020 2019

(In thousands)

(In millions)

Income before income taxes $ 186.4 $ 26.3 $ 120.2

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Tax rate differential ( 9.8 ) ( 1.4 ) ( 3.5 )

Change in valuation allowance on deferred tax assets and for losses without recognition of deferred taxes ( 1,311 ) 450 ( 204 )

Change in valuation allowance ( 6.0 ) ( 1.3 ) 0.5

Change in the tax rate and tax laws — ( 0.1 ) 0.1

Income taxes for prior years ( 1,205 ) ( 3,247 ) 876

Tax on non-deductible interest expenses 1,051 1,232 1,096

Taxes on other non-deductible expenses, and non-deductible taxes 2,755 745 ( 893 )

Effects of changes in permanent differences — ( 45 ) 96

Non-deductible interest expenses 1.2 1.1 1.2

Non-deductible expenses, and non-deductible taxes 5.4 2.8 0.7

Tax effect on tax-free income ( 0.4 ) ( 0.2 ) ( 0.9 )

2 unchanged sentences

Effective tax rate 27.74 % 30.80 % 27.65 %

tax reform enacted in December 2017 reduced the corporate income tax rate from 35.0% to 21.0% in the U.S..

Other non-deductible expenses and non-deductible taxes which are non-creditable in the U.S.

2 unchanged sentences

tax purposes.

Tax rate differential for the year ended December 31, 2018 are mainly driven by a benefit $ 6.3 million from taxable income resulting from a land sale completed in Korea during 2018.

Income taxes for prior year ended December 31, 2019 are mainly driven by result of the conclusion of a tax audit in Poland.

The favorable tax effect from income taxes for prior years was mainly driven by return to provision adjustments from tax return filings in 2020.

The amounts accrued for the return to provision adjustments were released accordingly in 2020.

Tax effect from changes in valuation allowance on deferred tax assets and for losses without recognition of deferred taxes for the year ended December 31, 2020 included the impact from lower pre-tax earnings attributed to the economic downturn from COVID-19.

The unfavorable tax effect from other non-deductible expenses and non-deductible taxes were mainly driven by non-deductible expenses in connection with the Company’s LTIP and non creditable taxes in Brazil in 2021.

The favorable effect from changes in valuation allowance on deferred tax assets for the year ended December 31, 2021 included the impact mainly from Brazil and Germany related to the judgment on the realization of deferred tax assets.

Tax effect from changes in valuation allowance on deferred tax assets for the year ended December 31, 2020 included the impact from lower pre-tax earnings attributed to the economic downturn from COVID-19.

Also included was a benefit from the favorable change of the valuation allowance related to U.S.

tax credits of $ 3.6 million.

The unfavorable tax effect from other non-deductible expenses and non-deductible taxes were mainly driven by non-deductible expenses in connection with the Company’s LTIP.

Income tax expense recognized in the Consolidated Statements of Operations were $ 51.7 million in 2021, $ 8.1 million in 2020 and $ 33.3 million in 2019.

Tax expense/(benefit) recognized directly in equity were $( 4.0 ) million in 2021, $( 1.1 ) million in 2020 and $ 6.2 million in 2019.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Significant components of deferred income taxes were as follows:

Deferred tax assets December 31

(In thousands)

Intangible assets $ 241 $ 197

Property, plant and equipment 5,851 8,363

(In millions)

Deferred tax assets

Financial assets $ — $ 7.9

Inventories 3.3 3.4

Receivables, other assets 3,365 3,212

Provisions 24,710 20,662

Liabilities 32,810 41,434

Deferred compensation 15.8 16.8

Liabilities including leases liabilities 36.3 26.9

Loss carryforwards 47.0 39.8

1 unchanged sentence

Tax credits 8.4 4.3

Other — 2,028

Total deferred tax assets (gross) 136,729 138,463

Valuation allowance ( 42,669 ) ( 41,994 )

Total deferred tax assets (net) $ 94,060 $ 96,468

Deferred tax liabilities December 31

(In thousands)

Total deferred tax assets 120.6 110.3

Deferred tax asset valuation allowances ( 36.3 ) ( 42.7 )

Net deferred tax assets $ 84.3 67.6

Deferred Tax Liabilities

Intangible assets $ 2.9 $ 3.5

Property, plant and equipment 36,426 33,040

Property, plant and equipment including right of use assets 65.9 30.5

Financial assets 1.0 —

Receivables, other assets 14.3 9.2

Provisions 7,882 8,203

Liabilities 5,947 12,568

Other 11.6 10.6

Total deferred tax liabilities $ 95.7 $ 53.8

The following table illustrates the gross and net deferred tax positions after the application of jurisdictional netting.

Net deferred tax assets / (liabilities) $ ( 11.4 ) $ 13.8

Our net deferred tax assets and liabilities reflected in our balance sheet are as follows:

Net deferred tax position December 31

(In thousands)

(In millions)

Deferred tax assets

Gross deferred tax assets $ 94,060 $ 96,468

Net deferred tax assets $ 50.4 $ 52.6

Deferred tax liabilities

Gross deferred tax liabilities 80,267 91,057

Net deferred tax liabilities 61.8 38.8

Net deferred tax asset / (liability) positions $ ( 11.4 ) $ 13.8

Management assesses the recoverability of deferred tax assets.

The assessment depends on future taxable profits being generated during the periods in which tax measurement differences reverse and tax loss carryforwards can be claimed.

Orion expects that sufficient taxable income will be available to recover deferred tax assets.

As of December 31, 2020 and 2019, certain loss carryforwards were subject to restrictions with respect to the offsetting of losses.

No deferred tax assets were recorded on these loss carryforwards if it is not likely that they will be utilized by future taxable income.

The following tax loss and interest carryforwards were recognized as of December 31, 2020 and 2019 (gross amounts):

(In thousands)

Corporate income tax loss carryforwards $ 147,270 $ 149,237

Interest carryforwards for tax purposes 35,338 31,463

Total $ 182,608 $ 180,700

The change between the recognized tax loss and interest carryforwards as of December 31, 2020 compared to 2019 is mainly driven by the taxable income of our German Tax Group and other German entities.

No deferred tax assets were recognized for the following items (gross amounts):

(In thousands)

Deductible temporary differences $ 46,287 $ 41,994

Corporate income tax loss carryforwards 115,078 107,110

Interest carryforwards for tax purposes 35,338 31,463

Total $ 196,703 $ 180,567

As of each reporting date, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdiction's deferred tax assets.

We place greater weight on historical evidence over future predictions of our ability to utilize deferred tax assets.

We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law, as well as available prudent and feasible tax planning strategies that would, if necessary, be implemented to ensure realization of the net deferred tax assets.

Valuation allowance 2021 2020 2019

(In millions)

As of January 1, $ 42.7 $ 41.9 $ 39.3

Additions for Tax Credits 3.5 — 3.2

Additions for Loss carryforwards — 1.8 —

Additions for Interest carryforwards — 1.3 0.9

Additions Other 0.4 0.2 —

Reduction for Tax Credits — ( 2.5 ) ( 1.0 )

Reduction for Loss carryforwards ( 1.8 ) — ( 0.4 )

Reductions for Interest carryforwards ( 8.5 ) — ( 0.1 )

As of December 31, $ 36.3 $ 42.7 $ 41.9

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

The favorable changes in valuation allowance on deferred tax assets and for losses with recognition of deferred taxes for the year ended December 31, 2021, is related to the positive judgment on the realization of deferred tax assets.

The reduction in the interest carryforward is driven by anticipated positive income of the appropriate nature.

A negative judgment on the valuation allowance related to tax credits was recorded or the year ended December 31, 2021.

The following table provides detail surrounding the expiration dates of the gross amount of tax loss carryforwards and tax credits:

Net operating loss carryforwards Tax Credits

(In thousands)

(In millions)

2022 to 2028 $ — $ —

2 unchanged sentences

Total $ 189.3 $ 8.4

As of December 31, 2020, the company's net operating loss carryforwards primarily relate to net operating losses which are due to expire at various dates, but not later than 2036.

No deferred taxes were recognized on a taxable temporary difference of $ 12.6 million (prior years:

$ 14.8 million, 2018:

$ 11.8 million) in connection with subsidiaries.

We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of most of our foreign subsidiaries that would incur incremental tax consequences upon the distribution of such earnings.

As of December 31, 2021, we did not provide for deferred taxes on earnings of most of our foreign subsidiaries that are indefinitely reinvested.

If we were to make a distribution from the unremitted earnings of these subsidiaries, we could be subject to taxes in various jurisdictions.

However, it is not practical to estimate the amount of tax that could ultimately be due if such earnings were remitted.

If our expectations were to change regarding future tax consequences, we may be required to record additional deferred taxes that could have a material effect on our consolidated financial statements.

Deferred tax liabilities amounting $ 0.7 million, (2020:

1 unchanged sentence

$ 1.7 million) were recognized for subsidiaries for which a dividend distribution is expected.

We are not aware of any events which would cause temporary differences, for which a deferred tax liability has not been recognized.

Tax uncertainties

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the following fiscal years:

(In thousands)

The following table summarizes the activity in unrecognized tax benefits:

2021 2020 2019

(In millions)

Balance at beginning of the year $ 13.0 $ 11.6 $ 14.8

2 unchanged sentences

Reductions of tax positions of prior year ( 1.2 ) — ( 3.4 )

Reductions related to settlements — —

Reductions from lapse of statute of limitations — —

Balance at end of the year $ 12.1 $ 13.0 $ 11.6

We recognize interest related to unrecognized tax benefits and penalties as income tax expense.

During 2020 we accrued no penalties and interest of $ 1.1 million to the unrecognized tax benefits (noted above).

As of December 31, 2020, we had $ 5.1 million of accrued penalties and interest.

We recognized no liabilities for penalties and accrued interest of $ 0.5 million during 2019 and had an accrual of $ 4.0 million as of December 31, 2019 for penalties and interest while we recognized no liabilities for penalties and accrued $ 0.5 million interest during 2018.

We accrued penalties and interest in total $ 3.4 million as of December 31, 2018.

We recognize interest and penalties associated with unrecognized tax benefits in income tax expense.

Income tax expense includes a benefit of interest and penalties of $ 0.7 million in 2021 and an expense of interest and penalties totaling $ 1.1 million and $ 0.5 million in 2020 and 2019, respectively.

We had accrued $ 4.4 million, $ 5.1 million and $ 4.0 million for interest and penalties as of December 31, 2021, 2020 and 2019, respectively.

The majority of the unrecognized tax benefits for the fiscal years ended December 31, 2021, 2020 and 2019, respectively would affect our effective income tax rate.

Orion and certain subsidiaries are under audit in several jurisdictions, and in particular in Germany for periods 2011-2017.

A further change in unrecognized tax benefits may occur within the next twelve months related to the potential settlement of one or more of these audits or the lapse of applicable statutes of limitations.

The estimated range of the impact on unrecognized tax benefits cannot be determined at this time.

During the year ending December 31, 2022, it is reasonably possible that our existing liabilities for unrecognized tax benefits may increase or decrease, primarily due to the progression of open audits and the expiration of statutes of limitation.

However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Commitments and Contingencies

Other Long-Term Commitments

To safeguard the supply of raw materials, contractual purchase commitments under long-term supply agreements for raw materials, primarily oil and gas, are in place with the following maturities:

Long-Term Commitments — To safeguard the supply of raw materials, contractual purchase commitments under long-term supply agreements for raw materials, primarily oil and gas, are in place are as follows:

Maturity December 31, 2021

(In thousands)

2021 $ 125,358

2022 to 2025 77,029

(In millions)

2027 and thereafter 22.8

Total $ 164.4

Environmental Matters

During 2008 and 2009, the U.S.

Restructuring —In 2016, the Company ceased operations at its plant in Ambes, France as part of the restructuring of its Rubber business segment.

Expenses related to the closing include personnel costs, demolition, removal costs and remediation costs.

Total estimated and recognized costs and total costs remaining as of December 31, 2021 are $ 44.6 million and $ 9.3 million, respectively.

Orion's reserves for restructuring of its Rubber segment in 2021 are reflected in Accrued liabilities on the Consolidated Balance Sheets.

Orion has accrued liabilities for personnel expenses of $ 2.6 million and $ 3.5 million, and ground remediation costs of $ 6.7 million and $ 4.3 million, as of December 31, 2021 and 2020 respectively.

In the periods ending December 31, 2021, 2020 and 2019 restructuring expense, net including Ambes amounted to $ 2.2 million, $ 7.5 million, and $ 3.6 million, respectively.

Environmental Reserves —Our accrued liability for future environmental reserves at our current and former plant sites and other sites totaled $ 7.8 million and $ 1.7 million as of December 31, 2021 and 2020, respectively.

During the fourth quarter of 2021, we recognized an additional reserve of $ 7.2 million reflected in the Consolidated Statement of Operations in the Other expense, net.

The environmental-related costs are expected to occur over a number of years and not concentrated in any single year.

In our opinion, it is reasonably possible that losses in excess of the liabilities recorded may have been incurred.

However, we cannot estimate any amount or range of such possible additional losses.

New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.

Legal Proceedings —We are subject to various lawsuits and claims, including but not limited to, matters involving contract disputes, environmental damages, personal injury and property damage.

We vigorously defend ourselves and prosecute these matters as appropriate.

We regularly assess the adequacy of legal accruals based on our professional judgment, experience and the information available regarding our cases.

Based on a consideration of all relevant facts and circumstances, we do not believe the ultimate outcome of any currently pending lawsuit against us will not have a material adverse effect upon our operations, financial condition or Consolidated Financial Statements.

EPA Action— During 2008 and 2009, the U.S.

Environmental Protection Agency (“EPA”) contacted all U.S.

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facility in Orange (Texas) was issued by the EPA in February 2013;

and the EPA issued an additional NOV in March 2016 alleging more recent non-PSD air emissions violations primarily at the dryers and the incinerator of the Orange facility.

and EPA issued an additional NOV in March 2016 alleging more recent non-PSD air emissions violations primarily at the dryers and the incinerator of the Orange facility.

In 2013, Orion began discussions with the EPA and the U.S.

Department of Justice about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC (for purpose of this note Q.

“Orion”) and the United States (on behalf of the EPA), as well as the Louisiana Department of Environmental Quality.

Department of Justice (“DOJ”) about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC, a wholly owned subsidiary of the Company (for purpose of this Note Q.

“Orion LLC”) and the United States (on behalf of the EPA), as well as the Louisiana Department of Environmental Quality.

The consent decree (the “EPA CD”) became effective on June 7, 2018.

The consent decree resolves and settles the EPA’s claims of noncompliance set forth in the NOVs and in a respective complaint filed in court against Orion by the United States immediately prior to the filing of the consent decree.

All five U.S.

carbon black producers have settled with the U.S.

Under Orion’s EPA CD, Orion will install certain pollution control technology in order to further reduce emissions at its four U.S.

The EPA CD resolves and settles the EPA’s claims of noncompliance set forth in the NOVs described above and in a respective complaint filed in court against Orion by the United States immediately prior to the filing of the consent decree.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Under Orion LLC’s EPA CD, Orion LLC is required to install certain pollution control technology in order to further reduce emissions at its four U.S.

manufacturing facilities in Ivanhoe (Louisiana), Belpre (Ohio), Borger (Texas), and Orange (Texas) over approximately five years .

The EPA CD also requires the continuous monitoring of emissions reductions that Orion will need to comply with over a number of years.

Orion has commenced the installation works for its Ivanhoe and Orange facilities.

While the construction at Orange has been completed according to schedule despite COVID-19 related impacts, the construction at the Ivanhoe facility has been subject to COVID-19-related delays, and as a result we have declared force majeure with respect to the EPA CD and requested an extension of the timeline for completion of installations.

The EPA has not confirmed our extension request but has deferred judgment on it at this time.

In line with the EPA’s respective request, Orion continues to provide regular updates to the EPA on the Ivanhoe installation works timeline and respective COVID-19 related impacts and mitigation measures.

Under the EPA CD, Orion can choose either its Belpre or Borger facilities as the next site for installation of pollution control equipment with comparable effectiveness.

We expect the capital expenditures for installation of pollution control equipment in the remaining Orion facilities to decrease due to economies of scale and synergies from prior installations.

We also expect that the third and fourth plants will require significantly less costly pollution control equipment given the requirements of the EPA CD.

We estimate the installations of monitoring and pollution control equipment at all four Orion plants in the U.S.

will require capital expenditures in an approximate range between $ 230 million to $ 270 million of which approximately $ 123.1 million has been incurred to date.

To narrow this range, the Company pursues further scope design and estimation efforts.

However, the actual total capital expenditures we might need to incur in order to fulfill the requirements of the EPA CD remain uncertain.

The EPA CD allows some flexibility for Orion to choose among different technology solutions for reducing emissions and the locations where these solutions are implemented.

The solutions Orion ultimately chooses to implement at its facilities other than Ivanhoe (Louisiana) and Orange (Texas), may differ in scope and operation from those it currently anticipates (including those discussed in the next paragraph) and, for any and all of its three facilities, factors, such as timing, locations, target levels, changing cost estimates and local regulations, could cause actual capital expenditures to exceed or be lower than current expectations or affect Orion’s ability to meet the agreed target emission levels or target dates for installing required equipment as anticipated or at all.

Orion also agreed to and paid a civil penalty of $ 0.8 million and agreed to perform environmental mitigation projects totaling $ 0.6 million.

Noncompliance with applicable emissions limits could lead to further penalty payments to the EPA.

As part of Orion’s compliance plan under the EPA CD, in April 2018, Orion signed a contract with Haldor Topsoe group to install its SNOX TM emissions control technology to remove SO2, NOx and dust particles from tail gases at Orion’s Ivanhoe, Louisiana Carbon Black production plant.

The SNOX TM technology has not been used previously in the carbon black industry.

Orion’s Share Purchase Agreement with Evonik in connection with the Acquisition provides for a partial indemnity from Evonik against various exposures, including, but not limited to, capital investments, fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011.

Except for certain less relevant allegations contained in the second NOV received for the Company’s facility in Orange (Texas) in March 2016, all of the other allegations made by the EPA with regard to all of the Company’s U.S.

facilities - as discussed above - relate to alleged violations before July 29, 2011.

The indemnity provides for a recovery from Evonik of a share of the costs (including fines), expenses (including reasonable attorney’s fees, but excluding costs for maintenance and control in the ordinary course of business and any internal cost of monitoring the remedy), liabilities, damages and losses suffered and is subject to various contractual provisions including provisions set forth in the Share Purchase Agreement with Evonik, such as a de minimis clause, a basket, overall caps (which apply to all covered exposures and all covered environmental exposures, in the aggregate), damage mitigation and cooperation requirements, as well as a statute of limitations provision.

Due to the cost-sharing and cap provisions in Evonik’s indemnity, the Company expects that substantial costs it has already incurred and will incur in this EPA enforcement initiative and the EPA CD likely will exceed the scope of the indemnity in the tens of millions of US dollars.

In addition, Evonik signaled that it is not honoring Orion’s claims under the indemnity.

The EPA CD also requires the continuous monitoring of emissions reductions that Orion LLC will need to comply with over a number of years.

In addition, the EPA CD required Orion LLC to pay a fine of $ 0.8 million and perform other environmental mitigation projects that are not anticipated to be material.

As part of Orion’s compliance plan under the EPA CD, in April 2018 Orion signed a contract with Haldor Topsoe group to install its SNOX TM emissions control technology to remove SO 2 , NOx and dust particles from tail gases at Orion LLC’s Ivanhoe, Louisiana Carbon Black production plant.

In 2021, the construction projects at the Ivanhoe (Louisiana) and Orange (Texas) facilities have been completed.

Under the EPA CD, Orion LLC can choose either its Belpre or Borger facilities as the next site for installation of pollution control equipment with comparable effectiveness.

As of December 31, 2021, we have spent $ 210 million of capital expenditures related to the EPA CD.

The Company’s Share Purchase Agreement with Evonik Industries AG, Germany, Evonik Degussa GmbH, Germany and any affiliated companies (“Evonik”) in connection with the acquisition of the carbon black business line from Evonik, completed on July 29, 2011 (the “Acquisition”), provided for a partial indemnity from Evonik against various exposures, including, but not limited to, capital investments, fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011.

In June 2019, Orion initiated arbitration proceedings to enforce its rights against Evonik.

Evonik, in turn, has submitted certain counterclaims related to a tax indemnity and cost reimbursement against Orion, which counterclaims we do not believe to be material.

Although Orion believes that it is entitled to the indemnity and that its rights thereunder are enforceable, there is no assurance that the Company will be able to recover costs or expenditures incurred under the indemnity as it expects or at all.

See “Item 1A.

Risk-Factors-Risks Related to Indebtedness, Currency Exposure and Other Financial Matters-Our agreements with Evonik in connection with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities.

We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect.”

In June 2021, Orion and Evonik agreed to settle all claims made under this partial indemnity as well as certain other claims and counterclaims Orion and Evonik asserted against each other.

Evonik made a one-time cash payment of € 66.55 million ($ 79.5 million) to Orion which resolved all pending claims as well as counterclaims of $ 3.4 million.

In the Consolidated Financial Statements, Orion recorded a gain aggregating $ 82.9 million.

Pledges and guarantees

The Company has pledged the majority of its assets (amongst others shares in affiliates, bank accounts and receivables) within the different regions excluding China as collateral under the Credit Agreement.

The current principal amounts of the outstanding term loans under the Credit Agreement as of December 31, 2020 are $ 277.7 million (U.S.

Dollar Term Loan), and € 390.3 million (Euro Term Loan).

As of December 31, 2020, the Company had thirteen guarantees totaling $ 17.6 million issued by various financial institutions.

Financial Information by Segment & Geographic Area

As of December 31, 2021, the Company had guarantees totaling $ 15.8 million issued by various financial institutions.

Segment Financial Information

Segment information

The Company’s business is organized by its two carbon black product types.

For corporate management purposes and all periods presented, the Company had Rubber Carbon Black and Specialty Carbon Black as reportable operating segments.

Rubber carbon black is used in the reinforcement of rubber in tires and mechanical rubber goods, Specialty carbon black products are used as pigments and performance additives in coatings, polymers, printing and special applications.

The following table shows the relative size of the revenue recognized in each of the Company’s reportable segment:

2020 2019 2018

Rubber 61 % 66 % 65 %

Specialty 39 % 34 % 35 %

The senior management team, which is comprised of the CEO, CFO and certain other senior management members, is the chief operating decision maker (“CODM”).

The senior management team monitors the operating segments’ results separately in order to facilitate decisions regarding the allocation of resources and determine the segments’ performance.

Orion uses Adjusted EBITDA as the segments' performance measure.

We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting.

We manage our business in two operating segments as follows:

• Rubber carbon black —Used in the reinforcement of rubber in tires and mechanical rubber goods.

• Specialties —Used as pigments and performance additives in coatings, polymers, printing and special applications.

Corporate includes income and expense that cannot be directly allocated to the business segments or are managed on corporate level and includes finance income and expenses, taxes and items with less bearing on the underlying core business.

Discrete financial information is available for each of the segments, and the chief operating decision maker (“CODM”) uses operating results of each operating segments for performance evaluation and resource allocation.

Our CODM uses Adjusted EBITDA as the primary measure for reviewing our segment profitability.

We define 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.

The CODM does not review reportable segment asset or liability information for purposes of assessing performance or allocating resources.

Adjustments are not allocated to the individual segments as they are managed on a group basis.

Segment reconciliation for the years ended December 31, 2020, 2019 and 2018:

Rubber Specialties Corporate Total segments

(In thousands)

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Segment operating results are as follows:

Rubber Specialties Corporate Total

(In millions)

Net sales from external customers $ 948.6 $ 598.2 $ — $ 1,546.8

1 unchanged sentence

Corporate charges — — ( 18.0 ) ( 18.0 )

Depreciation and amortization of intangible assets and property, plant and equipment ( 56,968 ) ( 39,558 ) — ( 96,526 )

Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 59.0 ) ( 45.1 ) — ( 104.1 )

Gain related to litigation settlement — — 82.9 82.9

Excluding equity in earnings of affiliated companies, net of tax ( 0.7 ) — — ( 0.7 )

Income from operations before income tax expense and finance costs 32,667 70,358 ( 28,643 ) 74,382

Interest and other financial expense, net — — ( 38.0 ) ( 38.0 )

Reclassification of actuarial losses from AOCI — — ( 4.8 ) ( 4.8 )

Income tax expense — — ( 8,132 ) ( 8,132 )

Equity in earnings of affiliated companies, net of tax 493 — — 493

Net income $ 18,156

Income before earnings in affiliated companies and income taxes $ 185.7

Assets 912.2 582.1 136.7 $ 1,631.0

Total expenditures for additions to long-lived assets $ 111,499 $ 27,286 $ — $ 138,785

Capital expenditures 149.1 65.6 — 214.7

Net sales from external customers $ 691.2 $ 445.2 $ — $ 1,136.4

1 unchanged sentence

Corporate charges — — ( 28.5 ) ( 28.5 )

Depreciation and amortization of intangible assets and property, plant and equipment ( 58,645 ) ( 38,067 ) — ( 96,713 )

Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 57.0 ) ( 39.6 ) — ( 96.6 )

Excluding equity in earnings of affiliated companies, net of tax ( 0.5 ) — — ( 0.5 )

Income from operations before income tax expense and finance costs 85,967 84,100 ( 22,916 ) 147,151

Interest and other financial expense, net — — ( 38.7 ) ( 38.7 )

Income tax expense — — ( 33,216 ) ( 33,216 )

Equity in earnings of affiliated companies, net of tax 558 — — 558

Net income $ 86,920

Reclassification of actuarial losses from AOCI — — ( 9.9 ) ( 9.9 )

Income before earnings in affiliated companies and income taxes $ 25.8

Assets 789.3 467.0 133.5 $ 1,389.8

Total expenditures for additions to long-lived assets $ 132,556 $ 26,147 $ — $ 158,703

Capital expenditures 111.5 27.3 — 138.8

Net sales from external customers $ 967.9 $ 508.5 $ — $ 1,476.4

1 unchanged sentence

Corporate charges — — ( 22.9 ) ( 22.9 )

Depreciation and amortization of intangible assets and property, plant and equipment ( 57,127 ) ( 41,029 ) — ( 98,156 )

Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 58.6 ) ( 38.1 ) — ( 96.7 )

Excluding equity in earnings of affiliated companies, net of tax ( 0.6 ) — — ( 0.6 )

Income from operations before income tax expense and finance costs 87,169 108,226 910 196,305

Interest and other financial expense, net — — ( 27.6 ) ( 27.6 )

Income tax expense — — ( 46,944 ) ( 46,944 )

Equity in earnings of affiliated companies, net of tax 591 — — 591

Net income $ 121,310

Income before earnings in affiliated companies and income taxes $ 119.6

Assets 696.5 417.8 143.1 $ 1,257.4

Total expenditures for additions to long-lived assets $ 67,885 $ 43,171 $ — $ 111,057

The sales information noted above relates to external customers only.

‘Corporate’ includes income and expense that cannot be directly allocated to the business segments or are managed on corporate level and includes finance income and expenses, taxes and items with less bearing on the underlying core business.

Capital expenditures 132.6 26.1 — 158.7

Income from operations before income taxes and finance costs of the segment ‘Corporate’ comprises the following:

2021 2020 2019

(In thousands)

Restructuring expenses/(income) $ 7,559 $ 3,628 $ ( 24,633 )

(In millions)

Consulting fees related to Company strategy $ — $ — $ 1.3

2 unchanged sentences

EPA-related expenses 2.3 5.2 4.0

Environmental reserve accrual 7.2 — —

Other non-operating 3.3 15.0 8.2

Expenses/(income) from operations before income taxes and finance costs $ 18.0 $ 28.5 $ 22.9

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Geographic information:

1 unchanged sentence

2021 2020 2019

(In thousands)

(In millions)

Germany $ 648.6 $ 486.5 $ 593.8

9 unchanged sentences

(1) Only a holding company is located in Luxembourg, accordingly no revenue is generated in the country of domicile.

For the year ended December 31, 2020, one customer accounted for 10% or more revenue in the Rubber segment and amounted to $ 170.3 million.

Revenue from the largest customer in the Rubber segment for the year ended December 31, 2019 was $ 195.6 million and for the year ended December 31, 2018 was $ 201.7 million.

Another customer had 10% or more revenue for the periods 2019 and 2018 amounting to $ 104.1 million and $ 96.8 million, respectively.

For the years ended December 31, 2021 and 2020, one customer accounted for 10% or more revenue in the Rubber segment and amounted to $ 218.6 million and $ 170.3 million, respectively.

For the year ended December 31, 2019, two customers accounted for 10% or more of revenue in the Rubber segment totaling $ 299.7 million.

In 2021, revenue from top ten customers, in the Rubber segment, was approximately $ 590.9 million.

In 2021, revenue from top ten customers, in the Specialties segment, was approximately $ 148.7 million.

Long-lived tangible assets (1)

(In thousands)

(In millions)

Germany $ 149.5 $ 147.9

11 unchanged sentences

Total $ 792.5 $ 696.1

(1) Long-lived assets include property.

plant and equipment, net and Operating lease right-of-use assets

(1) Long-lived assets include property, plant and equipment, net and right-of-use assets, net.

(2) Only a holding company is located in Luxembourg, accordingly no revenue is generated in the country of domicile.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Related Parties

As of December 31, 2020, related parties included one joint venture of Orion that is accounted for using the equity method, "Deutsche Gaßrußwerke" (DGW), and one shareholder of more than 10%.

As of December 31, 2021, related parties primarily includes one joint venture Orion that is accounted for using the equity method, “Deutsche Gaßrußwerke” (DGW).

Related parties include key management personnel having authority and responsibility for planning, directing and monitoring the activities of the Company directly or indirectly and their close family members.

In the normal course of business Orion from time to time receives services from, or sells products to, related unconsolidated parties, in transactions that are either not material or approved in accordance with our Related Party Transaction Approval Policy.

(In thousands)

Trade receivables from DGW KG $ — $ 537

Trade payables to DGW KG $ 11,800 $ 17,671

(In millions)

Trade receivables $ 0.6 $ —

Trade payables 24.9 11.8

Years Ended December 31,

2021 2020 2019

(In thousands)

Purchased carbon black products from DGW KG $ 68,849 $ 89,404 $ 93,536

Sales and services provided to DGW KG $ 1,639 $ 2,724 $ 6,464

Quarterly Financial Information (Unaudited)

Unaudited financial results by quarter for fiscal 2020 and 2019 are summarized below:

Quarters Ended Year Ended

March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 December 31, 2020

(In thousands, except per share amounts)

Net sales $ 336,007 $ 202,648 $ 282,036 $ 315,692 $ 1,136,383

Gross profit $ 90,193 $ 33,944 $ 79,182 $ 89,030 $ 292,348

Income from operations $ 37,543 $ ( 12,879 ) $ 24,147 $ 25,571 $ 74,382

Income from operations before income tax expense and equity in earnings of affiliated companies $ 25,534 $ ( 23,810 ) $ 11,106 $ 12,966 $ 25,795

Net income $ 18,032 $ ( 17,780 ) $ 8,997 $ 8,906 $ 18,156

Earnings per Share (USD per share), basic $ 0.30 $ ( 0.30 ) $ 0.15 $ 0.15 $ 0.30

Earnings per Share (USD per share), diluted $ 0.29 $ ( 0.29 ) $ 0.15 $ 0.15 $ 0.30

Quarters Ended Year Ended

March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 December 31, 2019

(In thousands, except per share amounts)

Net sales $ 384,714 $ 399,016 $ 370,195 $ 322,428 $ 1,476,353

Gross profit $ 97,969 $ 104,038 $ 98,714 $ 88,987 $ 389,708

Income from operations $ 34,699 $ 41,470 $ 38,386 $ 32,596 $ 147,151

Income from operations before income tax expense and equity in earnings of affiliated companies $ 28,256 $ 33,904 $ 31,886 $ 25,533 $ 119,579

Net income $ 18,954 $ 24,748 $ 24,253 $ 18,965 $ 86,920

Earnings per Share (USD per share), basic $ 0.32 $ 0.41 $ 0.40 $ 0.32 $ 1.45

Earnings per Share (USD per share), diluted $ 0.32 $ 0.40 $ 0.39 $ 0.31 $ 1.42

(In millions)

Purchases $ 113.2 $ 68.8 $ 89.4

Sales and services 5.7 1.6 2.7

Subsequent Events

The Company has evaluated events from December 31, 2020 through the date the financial statements were issued.

There were no subsequent events that need disclosure.

On October 29, 2021, the Company’s Board of Directors declared interim dividends in the aggregate amount of $ 1.25 million, which is equivalent to approximately $ 0.02 per common stock of the company.

The interim dividend was paid on January 12, 2022, to holders of record as of the close of business on January 5, 2022.

Orion Engineered Carbons S.A

Notes to the Consolidated Financial Statements

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data