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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-04 · 107 added, 146 removed, 175 unchanged (59% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three and nine months ended September 30, 2021 and 2020 and should be read in conjunction with the information included under Item 1.

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three months ended March 31, 2022 and 2021 and should be read in conjunction with the information included under Item 1.

Financial Statements and Supplementary Data (Unaudited) elsewhere in this report.

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Non-GAAP Financial Measures

We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies.

We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and which may not be comparable to other similarly titled measures of other companies.

For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, see section Reconciliation of Non-GAAP Financial Measures below.

These non-GAAP measure are — but are not limited to — Contribution Margin, Contribution Margin per metric ton (collectively, “Contribution Margins”), Adjusted EBITDA, Net Working Capital and Capital Expenditures.

These non-GAAP measures are, but are not limited to, Contribution Margin, Contribution Margin per metric ton (collectively, “Contribution Margins”), Adjusted EBITDA, Net Working Capital and Capital Expenditures.

We define Contribution Margin as revenue less variable costs (such as raw materials, packaging, utilities and distribution costs).

We define Contribution Margin per Metric Ton as Contribution Margin divided by volume measured in metric tons.

We define Adjusted EBITDA as income from operations before depreciation and amortization, restructuring expenses, consulting fees related to Company strategy, gain related to legal settlement, share of profit or loss of joint venture and certain other items.

Adjusted EBITDA is defined similarly in the Credit Agreement.

We define Adjusted EBITDA as income from operations before depreciation and amortization, restructuring expenses, consulting fees related to Company strategy, gain related to legal settlement, and includes equity earnings (loss) in affiliated companies, net of tax.

Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital, because it excludes the effects of items that have less bearing on the performance of our underlying core business.

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We also use Segment Adjusted EBITDA Margin, which we define as Adjusted EBITDA for the relevant segment divided by the revenue for that segment.

We use Adjusted EBITDA, Contribution Margins and Net Working Capital, as well as Adjusted EBITDA by segment and Segment Adjusted EBITDA Margin, as internal measures of performance to benchmark and compare performance among our own operations.

We use Adjusted EBITDA as an internal measure of performance to benchmark and compare performance among our own operations.

We use these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of our business.

We believe these measures are useful measures of financial performance, in addition to consolidated net income for the period, income from operations and other profitability measures under GAAP, because they facilitate operating performance comparisons from period to period and company to company and, with respect to Contribution Margin, eliminate volatility in feedstock prices.

By eliminating potential differences in results of operations between periods or companies caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures and taxation positions or regimes, we believe that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated.

For these reasons, we believe EBITDA-based measures are often used by the investment community as a means of comparison of companies in our industry.

By eliminating potential differences in results of operations between periods or companies caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures and taxation positions or regimes, Adjusted EBITDA provides a useful additional basis for comparing the current performance of the underlying operations being evaluated.

For these reasons, EBITDA-based measures are often used by the investment community as a means of comparison of companies in our industry.

By deducting variable costs (such as raw materials, packaging, utilities and distribution costs) from revenue, we believe that Contribution Margins can provide a useful basis for comparing the current performance of the underlying operations being evaluated by indicating the portion of revenue that is not consumed by these variable costs and therefore contributes to the coverage of all costs and profits.

Different companies and analysts may calculate measures based on EBITDA, contribution margins and working capital differently, so making comparisons among companies on this basis should be done carefully.

Adjusted EBITDA, Contribution Margins and Net Working Capital are not measures of performance under GAAP and should not be considered in isolation or construed as substitutes for revenue, consolidated net income for the period, income from operations, gross profit and other GAAP measures as an indicator of our operations in accordance with GAAP.

Adjusted EBITDA, Contribution Margins and Net Working Capital are not measures of performance under GAAP and should not be considered in isolation or construed as substitutes for revenue, consolidated net income for the period, income from operations, gross profit or other GAAP measures as an indicator of our operations in accordance with GAAP.

Orion Engineered Carbons S.A.

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Reconciliation of Non-GAAP Financial Measures

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

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

Reconciliation of Contribution margin and Contribution margin per metric ton to Gross profit is as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions, unless otherwise indicated)

1 unchanged sentence

Variable costs

252.6 163.8 712.9 496.4

Contribution margin 167.3 147.1

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

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

(In millions)

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Equity in earnings of affiliated companies, net of tax 0.1 0.1

Extraordinary expense items related to COVID-19 — 0.8 — 3.5

Evonik legal settlement:

Cash settlement — — (79.5) —

Release of legal reserve, net — — (3.4) —

Long term incentive plan 1.5 1.0

9 unchanged sentences

Operating Results

For the three and nine months ended September 30, 2021 compared to three and nine months ended September 30, 2020

For the three months ended March 31, 2022 compared to three months ended March 31, 2021

The table below presents our historical results derived from our Condensed Consolidated Financial Statements for the periods indicated.

Condensed Consolidated Statement of Operations Data Three Months Ended September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Condensed Consolidated Statement of Operations Data Three Months Ended March 31, Year-Over Year

2022 2021 Delta

(In millions) %

4 unchanged sentences

Research and development costs 5.5 4.7 0.8 17.0

Gain related to litigation settlement — — (82.9) —

Other (income) expenses, net (0.2) 4.5 1.9 11.5

Other expenses, net 0.3 2.5 (2.2) (88.0)

Income from operations 54.6 42.9 11.7 27.3

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Income tax expense 13.8 8.3 5.5 66.3

Equity in earnings of affiliated companies, net of tax 0.1 0.1 0.5 0.4

Earnings in affiliated companies, net of tax 0.1 0.1 — —

Net income $ 32.5 $ 23.5 $ 9.0 38.3

Net sales increased by $111.1 million, or 39.4%, in the third quarter of 2021 to $393.1 million compared to the third quarter of 2020 primarily driven by passing through of higher feedstock costs, favorable product mix, and higher volume due to global recovery from COVID-19 across all regions in our Specialty Carbon Black segment.

Volume decreased by 0.1 kmt, in the third quarter of 2021 to 236.9 kmt compared to the third quarter of 2020, primarily due to lower volume in the Rubber Carbon Black segment, partially offset by with higher demand in our Specialty Carbon Black segment.

Net sales increased by $333.4 million, or 40.6%, in the nine months ended September 30, 2021 to $1,154.1 million, year over year, driven primarily by higher sales volume across all regions and segments, impact of passing through of higher feedstock costs, favorable impact of foreign currency translation, and favorable product mix.

Volume increased by 112.2 kmt, or 17.8%, to 741.2 kmt compared to the nine months ended September 30, 2020, with higher demand in both segments, across all application and geographies, driven by a sharp global economic recovery from the COVID-19 induced economic downturn.

Net sales increased by $124.4 million, or 34.5%, in the first quarter of 2022 to $484.5 million, compared to the first quarter of 2021, primarily driven by pricing and favorable product mix in both segments, partially offset by lower Specialty Carbon Black sales volume and impact of unfavorable foreign currency translation.

Volume decreased by 0.9 kmt in the first quarter of 2022 to 253.2 kmt, compared to the first quarter of 2021, primarily due to lower volume in the Specialty Carbon Black segment, partially offset by higher demand in our Rubber Carbon Black segment.

Cost of sales

Cost of sales increased by $91.6 million, or 45.1%, to $294.4 million in the third quarter of 2021 compared to the third quarter of 2020.

Cost of sales increased by $225.4 million, or 36.5%, to $842.8 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase in both comparative periods were primarily due to higher production and associated costs.

Cost of sales increased by $109.0 million, or 42.3%, to $366.6 million in the first quarter of 2022, compared to the first quarter of 2021, primarily due to higher raw material and production associated costs.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $9.7 million, or 22.5%, to $52.9 million in the third quarter of 2021 compared to the third quarter of 2020.

Selling, general and administrative expenses increased by $34.1 million, or 27.0%, to $160.3 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase in both comparative periods were primarily driven by higher freight costs due to increase in sales volumes and higher incentive compensation.

Gain related to litigation settlement

During the second quarter of 2021, Evonik agreed to make a one-time cash payment of €66.55 million ($79.5 million) to settle dispute

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

which originated from the acquisition of the carbon black business by Rhône Capital and Triton Partners in 2011.

The 2011 acquisition agreement provided for a partial indemnity from Evonik against various exposures, including capital investments, fines and costs arising in connection with U.S.

Clean Air Act violations that occurred prior to the closing of the 2011 acquisition (i.e., under Evonik’s control).

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

Selling, general and administrative expenses increased by $5.1 million, or 9.7%, to $57.5 million in the first quarter of 2022, compared to the first quarter of 2021.

The increase was primarily driven by higher freight costs.

Income from operations

Income from operations increased by $16.2 million to $40.3 million in the third quarter of 2021, year over year, driven primarily by passing through higher feedstock costs, favorable product mix, and favorable operating leverage associated with higher sales volume in our Specialty Carbon Black segment, partially offset by higher selling, general and administrative costs.

Income from operations increased by $166.8 million to $215.6 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

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

Reclassification of actuarial losses from AOCI

The actuarial losses associated with our pension obligations recorded in prior years in accumulated other comprehensive income exceeding 10% of the defined benefit obligation are recorded ratably in the Condensed Consolidated Statements of Operations.

Income from operations increased by $11.7 million to $54.6 million in the first quarter of 2022, year over year, driven primarily by higher margins and favorable product mix, partially offset by lower sales volume in our Specialty Carbon Black segment and higher selling, general and administrative costs.

Higher margins per ton resulted from price increases to recover environmental and reliability-related capital expenditures.

Income before earnings in affiliated companies and income taxes

Income from operations before income taxes and equity in earnings of affiliated companies in the third quarter of 2021 increased by $16.5 million, year over year, driven primarily by favorable operating leverage associated with higher sales volume in our Specialty Carbon Black segment, favorable product mix and the impact of passing through higher feedstock costs, partially offset by higher selling, general and administrative costs.

Income from operations before income tax expense and equity in earnings of affiliated companies increased by $168.8 million from $12.8 million in the nine months ended September 30, 2020 to $181.6 million in the nine months ended September 30, 2021, primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, impact of favorable product mix, and the Evonik legal settlement related gain, partially offset by higher, selling and general and administrative costs.

Income from operations before income taxes and equity in earnings of affiliated companies in the first quarter of 2022 increased by $14.5 million, year over year, driven primarily by higher margins and favorable product mix, partially offset by lower sales volume in our Specialty Carbon Black segment and higher selling, general and administrative costs.

Provision for income taxes

For the three months ended September 30, 2021, the Company recognized income before provision for income taxes of $27.7 million, compared to $11.2 million in the three months ended September 30, 2020.

The provision for income taxes was an expense of $6.7 million for the three months ended September 30, 2021, and $2.2 million for the three months ended September 30, 2020.

The effective tax rate for the three months ended September 30, 2021, was 24%, as compared to 20% for the three months ended September 30, 2020.

The increase in our effective tax rate for the three months ended September 30, 2021 as compared to the three-months ended September 30, 2020, was primarily attributable to the reassessment of the recoverability of deferred tax assets and its projected earnings mix by geography and tax jurisdiction as compared to the prior period.

For the nine months ended September 30, 2021, the Company recognized income before provision for income taxes of $182.1 million, compared to $13.2 million in the nine months ended September 30, 2020.

The provision for income taxes was an expense of $48.5 million for the nine months ended September 30, 2021, and $3.9 million for the nine months ended September 30, 2020.

The effective tax rate for the nine months ended September 30, 2021, was 27%, as compared to 30% for the nine months ended September 30, 2020.

The decrease in our effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, was primarily attributable to the impact of a discrete deferred tax gain impacting the valuation allowance on deferred tax assets.

Net income, in the third quarter of 2021, increased by $12.0 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales in our Specialty Carbon Black segment, partially offset by higher, selling and general and administrative costs and income tax expense.

Our net income in the nine months ended September 30, 2021 amounted to $133.6 million, an increase of $124.3 million, primarily due to higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, favorable product mix, and the Evonik legal settlement related gain, partially offset by higher, selling and general and administrative costs and income tax expense.

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

Contribution margin increased in the third quarter of 2021 by $22.3 million, or 18.9%, to $140.5 million, year over year.

Contribution margin per metric ton increased by 19.0%, to $593.1 per metric ton in the three months ended September 30, 2021

Contribution Margin increased by $116.9 million, or 36.0%, to $441.2 million in the nine months ended September 30, 2021 compared to

For the three months ended March 31, 2022, the Company recognized income before provision for income taxes of $46.3 million, compared to $31.8 million in the three months ended March 31, 2021.

The provision for income taxes was an expense of $13.8 million for the three months ended March 31, 2022, and $8.3 million for the three months ended March 31, 2021.

The effective tax rate for the three

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

the nine months ended September 30, 2020.

Contribution margin per metric ton increased by 15.4%, to $595.3 per metric ton in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

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

months ended March 31, 2022, was 30%, as compared to 26% for the three months ended March 31, 2021.

The increase in our effective tax rate for the three months ended March 31, 2022, relative to the three months ended March 31, 2021, was primarily attributable to the projected earnings mix by geography and tax jurisdiction as compared to the prior period.

Net income in the first quarter of 2022 increased by $9.0 million, year over year, primarily driven by higher margins and favorable product mix, partially offset by lower sales volumes in our Specialty Carbon Black segment, higher selling, general and administrative costs, and higher income taxes.

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

Contribution margin increased in the first quarter of 2022 by $20.2 million, or 13.7%, to $167.3 million, year over year.

Contribution margin per metric ton increased by 14.1% to $660.7 per metric ton in the three months ended March 31, 2022.

The increase was primarily driven by higher margins and the impact of favorable product mix, partially offset by unfavorable impact of foreign currency translation.

Adjusted EBITDA (A Non-GAAP Financial Measure)

Adjusted EBITDA increased in the third quarter of 2021 by $11.4 million, or 20.8%, to $66.4 million, year over year.

Adjusted EBITDA increased by $82.0 million, or 61.2%, from $134.1 million in the nine months ended September 30, 2020 to $216.1 million in the nine months ended September 30, 2021.

The increase in both comparative periods was primarily driven by higher sales due to sharp global recovery from COVID-19 across all regions, passing through of higher feedstock costs, and impact of favorable product mix, partially offset by higher, selling and general and administrative costs.

Adjusted EBITDA increased in the first quarter of 2022 by $12.3 million, or 17.3%, to $83.2 million, year over year.

The increase was driven by higher margins and the impact of favorable product mix, partially offset by lower Specialty Carbon Black sales volume and higher selling, general and administrative costs.

Segment Discussion

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

We use segment revenue, segment gross profit, segment volume, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin as measures of segment performance and profitability.

Our operations are managed through two reportable segments— Specialty Carbon Black and Rubber Carbon Black .

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

The table below presents our segment results derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated.

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31, Year-Over Year

2022 2021 Delta

(In millions, unless otherwise indicated) %

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Specialty Carbon Black

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Net sales of the Specialty Carbon Black segment increased by $46.6 million, or 45.0% to $150.2 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications.

Specialty Carbon Black segment volumes increased by 5.1 kmt, or 8.7%, to 63.9 kmt, year over year.

Gross profit of the Specialty Carbon Black segment increased by $14.5 million, or 39.0%, to $51.6 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications.

Adjusted EBITDA of the Specialty Carbon Black segment increased by $12.5 million, or 47.4% to $39.0 million, year over year, primarily driven by passing through of higher feedstock costs, favorable product mix, and higher sales due to global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, partially offset by higher, selling and

Three months ended March 31, 2022 compared to three months ended March 31, 2021

Net sales of the Specialty Carbon Black segment increased by $33.4 million, or 23.2%, to $ 177.6 million, year over year, primarily driven by pricing and the impact of favorable product mix, partially offset by lower sales volume and the impact of unfavorable foreign currency translation.

Specialty Carbon Black segment volumes decreased by 5.8 kmt, or 8.1%, to 65.6 kmt, year over year.

During the first quarter of 2022,

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

general and administrative costs.

Year over year, Adjusted EBITDA margin rose 50 basis points to 26.0%.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Net sales of the Specialty Carbon Black segment increased by $132.8 million, or 41.8% to $450.6 million, year over year, primarily driven by higher sales due to sharp global recovery from COVID-19 induced economic downturn reflecting a broad-based demand increase across nearly all applications, passing through of higher feedstock costs, favorable product mix, and favorable impact of foreign currency translation.

Specialty Carbon Black segment volumes increased by 36.8 kmt, or 22.1%, to 203.4 kmt, year over year.

Gross profit of the Specialty Carbon Black segment increased by $56.9 million, or 56.4%, to $158.0 million, year over year, primarily driven by favorable operating leverage associated with higher sales due to sharp global recovery from the COVID-19 induced economic downturn, impact of favorable price, and impact of favorable product mix.

Adjusted EBITDA of the Specialty Carbon Black segment increased by $47.1 million, or 66.2% to $118.1 million, year over year, primarily driven by favorable operating leverage associated with higher sales due to sharp global recovery from the COVID-19 induced economic downturn, impact of favorable price, and impact of favorable product mix.

Year over year, Adjusted EBITDA margin increased 390 basis points to 26.2%.

focus on high margin rubber products and supply chain issues resulted in lower specialty black volumes.

During the first quarter of 2021, higher demand was driven by a sharp global economic recovery from 2020 COVID-19 induced economic downturn.

Gross profit of the Specialty Carbon Black segment increased by $4.2 million, or 7.9%, to $57.6 million, year over year, primarily driven by higher margins and the impact of favorable product mix, partially offset by lower sales volumes reflecting a decrease across nearly all applications.

Higher margins per ton resulted from price increases to recover environmental and reliability-related capital expenditures.

Adjusted EBITDA of the Specialty Carbon Black segment increased by $2.8 million, or 7.1%, to $ 42.5 million, year over year, primarily driven by higher margins, and the impact of favorable product mix, partially offset by lower sales volume, and higher selling, general and administrative costs.

Year over year, Adjusted EBITDA margin decreased 360 basis points to 23.9%.

Rubber Carbon Black

Three months ended September 30, 2021 compared to three months ended September 30, 2020

Net sales increased by $64.5 million, or 36.1% to $242.9 million, year over year, primarily due to passing through of higher feedstock costs, and impact of favorable product mix.

Rubber Carbon Black segment volumes decreased by 5.2 kmt, or (3.0)%, to 173.0 kmt, year over year.

Gross profit of the Rubber Carbon Black segment increased by $5.0 million, or 12.0% to $47.1 million, year over year, primarily driven by passing through of higher feedstock costs, partially offset by lower volume.

Rubber Adjusted EBITDA increased by $1.1 million, to $27.4 million, year over year, primarily due to passing through higher feedstock costs, partially offset by lower volume and higher selling, general and administrative costs.

Adjusted EBITDA margin decreased (470) basis points to 11.3%, year over year.

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

Net sales increased by $200.6 million, or 39.9% to $703.5 million, year over year, primarily driven by passing through of higher feedstock costs, higher sales due to sharp global recovery from COVID-19 induced economic downturn, favorable impact of foreign currency translation, and impact of favorable product mix.

Three months ended March 31, 2022 compared to three months ended March 31, 2021

Net sales increased by $91.0 million, or 42.1%, to $ 306.9 million, year over year, primarily due to pricing, impact of higher volume, and the impact of favorable product mix.

Rubber Carbon Black segment volumes increased by 4.9 kmt, or 2.7%, to 187.6 kmt, year over year.

reflecting higher demand.

Gross profit of the Rubber Carbon Black segment increased by $51.1 million, or 49.9% to $153.3 million, year over year, primarily reflecting higher sales volume, the pass through of higher feedstock costs and favorable product mix.

Rubber Adjusted EBITDA increased by $34.9 million, or 55.4%, to $98.0 million, year over year, primarily due to passing-through higher feedstock costs, favorable operating leverage associated with substantially higher sales volume, and favorable product mix, partially offset by higher general and administrative expenses and the one-time impact related to Winter Storm Uri.

Adjusted EBITDA margin increased 140 basis points to 13.9%, year over year.

Gross profit of the Rubber Carbon Black segment increased by $11.2 million, or 22.8%, to $60.3 million, year over year, primarily driven by higher margins, the impact of higher volume, and the impact of favorable product mix.

Higher margins per ton resulted from price increases to recover environmental and reliability-related capital expenditures.

Rubber Carbon Black Adjusted EBITDA increased by $9.5 million, to $ 40.7 million, year over year, primarily due to higher margins, the impact of higher volume, and the impact of favorable product mix, partially offset by higher selling, general and administrative costs.

Adjusted EBITDA margin decreased 120 basis points to 13.3%, year over year, reflecting dilution from higher input costs..

Liquidity and Capital Resources

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The tables below present our historical cash flows derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated.

Nine Months Ended September 30,

Three Months Ended March 31,

(In millions)

Net cash provided by operating activities $ 121.3 $ 92.4

Net cash (used in) provided by operating activities $ (27.8) $ 1.8

Net cash used in investing activities (48.8) (27.2)

Net cash provided by (used in) financing activities (7.6) 60.9

Net cash provided by operating activities during the nine months ended September 30, 2021, was $121.3 million.

The cash provided by operating activities primarily reflected our net income, adjusted for non-cash items and changes in working capital and $82.9 million related to Evonik legal settlement gain.

Commitments and Contingencies for further discussion on Evonik legal settlement.

Net cash used in investing activities in the nine months ended September 30, 2021, amounted to $113.7 million, net.

These expenditures were comprised of a combination of safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S.

Net cash used in financing activities during the nine months ended September 30, 2021, amounted to $7.6 million.

Cash outflows during the nine months of $6.0 million were primarily related to repayments under our senior secured revolving credit facilities (“RCF”).

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

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

Net cash provided by operating activities for the nine months ended September 30, 2020, amounted to $92.4 million.

Net cash provided by financing activities 51.4 25.6

Net cash used in operating activities during the three months ended March 31, 2022, was $27.8 million.

The cash used in operating activities primarily reflects changes in working capital, partially offset by higher net income.

Net cash used in investing activities in the three months ended March 31, 2022, amounted to $48.8 million.

These expenditures were comprised of a combination of safety, maintenance-related, and growth investments, as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S.

Net cash provided by financing activities during the three months ended March 31, 2022, amounted to $51.4 million.

Cash inflows during the three months of $52.5 million were primarily related to net drawings under our senior secured revolving credit facilities (“RCF”), partially offset by scheduled debt repayments.

Debt and Other Obligations” included in the Annual Report in Form 10-K for the year ended December 31, 2021 for further discussion on Term-loan refinancing.

Net cash provided by operating activities for the three months ended March 31, 2021, amounted to $1.8 million.

The cash provided by operating activities primarily reflected our net income, adjusted for non-cash items and changes in the components of our working capital.

Net cash used in investing activities for the nine months ended September 30, 2020, amounted to 120.3 million.

Net cash provided by financing activities for the nine months ended September 30, 2020, amounted to $60.9 million, primarily reflecting the company drawing under its revolver to bolster its cash position and enhance financial flexibility to successfully manage through the pandemic.

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Net cash used in investing activities for the three months ended March 31, 2021, amounted to $27.2 million.

These expenditures were comprised of a combination of safety, sustainability and growth investments, as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S.

Net cash provided by financing activities for the three months ended March 31, 2021, amounted to $25.6 million.

Cash inflows during the three months of $27.7 million were primarily related to net drawings under our local bank loan facilities and our senior secured revolving credit facilities (“RCF”), partially offset by scheduled debt repayments.

Sources of Liquidity

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

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

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

As of September 30, 2021, the company had total liquidity of $337.0 million, including cash and equivalents of $62.3 million, $238.8 million under our revolving credit facility capacity, including ancillary lines, and $35.9 million of capacity under other available credit lines.

As of March 31, 2022, the company had total liquidity of $198.8 million, including cash and equivalents of $41.3 million, $122.6 million availability under our revolving credit facility, including ancillary lines, and $34.9 million of capacity under other available credit lines.

Net debt was $791.3 million, and net leverage was 2.82x.

Net Working Capital (A Non-GAAP Financial Measure)

We define Net Working Capital as the total of inventories and current trade receivables, less trade payables.

We define Net Working Capital as the sum total of inventories and current trade receivables less trade payables.

Net Working Capital is a non-GAAP financial measure, and other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Net Working Capital.

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(In millions)

Inventories $ 192.9 $ 141.5

Trade receivables $ 373.6 $ 288.9

Inventories 256.9 229.8

Trade payables (208.0) (195.1)

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

Our Net Working Capital increased from $245.0 million as of December 31, 2020, to $343.4 million as of September 30, 2021.

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

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

• Trade receivables—increase was driven by higher sales due to higher product demand.

Our Net Working Capital increased from $323.6 million as of December 31, 2021, to $422.5 million as of March 31, 2022.

The components of working capital were:

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

• Trade receivables —increase was driven by pricing, timing of payments and higher sales due to higher product demand timing.

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

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

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

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

As a result, as of March 31, 2022, Orion has open receivables from the city of Hürth totaling $6.5 million, while the city of Hürth argues open claims of approximately $4.2 million related to lease payments.

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

Those increases were partially offset by:

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

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Capital Expenditures (A Non-GAAP Financial Measure)

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With the exception of required expenditures in association with our settlement with the EPA, we currently do not have any material obligatory commitments to make capital expenditures outside the ordinary course of our business.

For further discussion on EPA settlement, see “ Note L.

For further discussion on EPA settlement, see Note J.

Commitments and Contingencies.

Capital Expenditures during the nine months ended September 30, 2021, amounted to $113.7 million were primarily associated with safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S.

Capital Expenditures in the nine months ended September 30, 2020 amounted to $120.3 million and were mainly comprised of preservation and overhaul projects and in expenditures related to investments required to address the EPA requirements in the United States.

Capital Expenditures during the three months ended March 31, 2022 amounted to $48.8 million and were primarily associated with safety, sustainability and growth investments as well as expenditures associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements in the U.S.

Capital Expenditures in the three months ended March 31, 2021 amounted to $27.2 million and were mainly comprised of preservation and overhaul projects and expenditures related to investments required to address the EPA requirements in the U.S.

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements.

As of March 31, 2022, we did not have any off-balance sheet arrangements.

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Note Regarding Forward-Looking Statements

Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

This report contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business.

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• cash flow projections;

• the installation of pollution control technology in our U.S.

manufacturing facilities pursuant to the EPA consent decree described herein;

• the installation of pollution control technology in our United States (“U.S.”) manufacturing facilities pursuant to the EPA consent decree described herein;

• the outcome of any in-progress, pending or possible litigation or regulatory proceedings;

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• volatility and cyclicality in the industries in which we operate;

• operational risks inherent in chemicals manufacturing, including disruptions as a result of severe weather conditions and natural disasters;

• operational risks inherent in chemicals manufacturing, including disruptions due to technical facilities, severe weather conditions or natural disasters;

• our dependence on major customers and suppliers;

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• our ability to implement our business strategies;

• volatility in the costs and availability of raw materials and energy;

• volatility in the costs and availability of raw materials and energy as a result of the ongoing Russia and Ukraine conflict;

• our ability to respond to changes in feedstock prices and quality;

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• our exposure to political or country risks inherent in doing business in some countries;

• geopolitical events in the European Union (“EU”), and in particular the ultimate future relations between the EU and the United Kingdom;

• geopolitical events in the European Union (“EU”), relations amongst the EU member states as well as future relations between the EU and other countries and organizations;

• environmental, health and safety regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities;

• possible future investigations and enforcement actions by governmental or supranational agencies;

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

• possible future investigations and enforcement actions by governmental, supranational agencies or other organizations;

• our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases;

• market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy;

Orion Engineered Carbons S.A.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

• litigation or legal proceedings, including product liability and environmental claims;

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• the availability and efficiency of hedging;

• changes in international and local economic conditions, including with regard to the Euro, dislocations in credit and capital markets and inflation or deflation;

• changes in international and local economic conditions, including with regard to the dollar and the euro, dislocations in credit and capital markets and inflation or deflation;

• potential impairments or write-offs of certain assets;

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• challenges to our decisions and assumptions in assessing and complying with our tax obligations;

• potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion Engineered Carbons SA (a Luxembourg incorporated entity) in the United States (“U.S.”).

Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include those factors detailed under the captions “Note Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in Note S, Commitments and Contingencies .

to our audited Consolidated Financial Statements regarding contingent liabilities, including litigation.

• potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion Engineered Carbons SA (a Luxembourg incorporated entity) in the U.S.

Commitments and Contingencies” to our audited Consolidated Financial Statements regarding contingent liabilities, including litigation in the same 10-K..

It is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statement - including those in the “2021 Outlook” and “Quarterly Business Segment Results” sections above - as a result of new information, future events or other information, other than as required by applicable law.

We undertake no obligation to publicly update or revise any forward-looking statement - including those in Note K.

Financial Information by Segment above - as a result of new information, future events or other information, other than as required by applicable law.

Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the period ended September 30, 2021 does not differ materially from that discussed under Item 7A in our 2020 Form 10-K.

Information about market risks for the period ended March 31, 2022 does not differ materially from that discussed under “ Item 7A” in our 2021 Form 10-K.

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-Q

Item 2. Management’s Discussion and Analysis