Item 1. Financial Statements
Item 1. Financial Statements and Supplementary Data (Unaudited)
Condensed Consolidated Statements of Operations
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In millions, except share and per share amounts)
Net sales $ 541.2 $ 401.0 $ 1,025.7 $ 761.1
Cost of sales 421.4 290.9 788.0 548.5
Gross profit 119.8 110.1 237.7 212.6
Selling, general and administrative expenses 59.7 55.0 117.2 107.4
Research and development costs 5.9 6.0 11.4 10.7
Gain related to litigation settlement — ( 82.9 ) — ( 82.9 )
Other (income) expenses, net 1.3 ( 0.5 ) 1.6 2.1
Income from operations 52.9 132.5 107.5 175.3
Interest and other financial expense, net 10.5 9.0 18.9 18.9
Reclassification of actuarial losses from AOCI — 1.2 — 2.4
Income before earnings in affiliated companies and income taxes 42.4 122.3 88.6 154.0
Income tax expense 12.8 33.5 26.6 41.8
Earnings in affiliated companies, net of tax 0.1 0.3 0.2 0.4
Net income $ 29.7 $ 89.1 $ 62.2 $ 112.6
Weighted-average shares outstanding (in thousands):
Basic 60,807 60,652 60,880 60,649
Diluted 61,010 60,743 61,237 60,721
Earnings per share:
Basic $ 0.49 $ 1.47 $ 1.02 $ 1.86
Diluted $ 0.49 $ 1.47 $ 1.02 $ 1.85
See accompanying Notes to these Condensed Consolidated Financial Statements
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Orion Engineered Carbons S.A.
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In millions)
Net income $ 29.7 $ 89.1 $ 62.2 $ 112.6
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments ( 18.8 ) 7.6 ( 7.0 ) 2.5
Net gains on derivatives 8.5 0.6 21.5 1.8
Defined benefit plans, net 0.1 0.8 0.2 2.0
Other comprehensive income (loss) ( 10.2 ) 9.0 14.7 6.3
Comprehensive income $ 19.5 $ 98.1 $ 76.9 $ 118.9
See accompanying Notes to these Condensed Consolidated Financial Statements
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Orion Engineered Carbons S.A.
Condensed Consolidated Balance Sheets
June 30, 2022 December 31, 2021
(In millions, except share amounts)
ASSETS
Current assets
Cash and cash equivalents $ 40.9 $ 65.7
Accounts receivable, net 409.4 288.9
Inventories, net 285.3 229.8
Income tax receivables 7.1 12.1
Prepaid expenses and other current assets 68.9 68.5
Total current assets 811.6 665.0
Property, plant and equipment, net 728.2 707.9
Right-of-use assets 93.5 84.6
Goodwill 71.5 78.0
Intangible assets, net 30.2 36.3
Investment in equity method affiliates 4.6 5.3
Deferred income tax assets 61.4 50.4
Other assets 46.5 3.5
Total non-current assets 1,035.9 966.0
Total assets $ 1,847.5 $ 1,631.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 218.3 $ 195.1
Current portion of long term debt and other financial liabilities 263.1 151.7
Accrued liabilities 41.2 50.9
Income taxes payable 18.0 16.9
Other current liabilities 41.0 34.1
Total current liabilities 581.6 448.7
Long-term debt, net 619.6 631.2
Employee benefit plan obligation 68.9 74.4
Deferred income tax liabilities 86.8 61.8
Other liabilities 95.4 95.2
Total non-current liabilities 870.7 862.6
Commitments and contingencies
Stockholders' equity
Common stock
Authorized: 65,035,579 and 65,035,579 shares with no par value
Issued – 60,992,259 and 60,992,259 shares with no par value
Outstanding – 60,749,265 and 60,656,076 shares
85.3 85.3
Treasury stock, at cost, 242,994 and 336,183
( 4.7 ) ( 6.3 )
Additional paid-in capital 72.1 71.4
Retained earnings 276.3 217.8
Accumulated other comprehensive loss ( 33.8 ) ( 48.5 )
Total stockholders' equity 395.2 319.7
Total liabilities and stockholders' equity $ 1,847.5 $ 1,631.0
TY
See accompanying Notes to these Condensed Consolidated Financial Statements
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Orion Engineered Carbons S.A.
Condensed Consolidated Statements of Cash Flows
87
Six Months Ended June 30,
2022 2021
(In millions)
Cash flows from operating activities:
Net income $ 62.2 $ 112.6
Adjustments to reconcile Net income to Net cash provided by (used in) operating activities:
Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 54.7 50.8
Amortization of debt issuance costs 0.8 1.1
Share-based incentive compensation 3.1 2.2
Deferred tax (benefit) provision 4.1 ( 1.7 )
Foreign currency transactions ( 13.4 ) ( 7.4 )
Reclassification of actuarial losses from AOCI — 2.4
Other operating non-cash items, net ( 0.9 ) ( 3.0 )
Changes in operating assets and liabilities, net:
Trade receivables ( 137.8 ) ( 71.0 )
Inventories ( 68.7 ) ( 46.2 )
Trade payables 46.1 10.8
Other provisions ( 6.9 ) ( 1.3 )
Income tax liabilities 7.2 32.5
Other assets and liabilities, net ( 1.4 ) 3.3
Net cash (used in)/provided by operating activities ( 50.9 ) 85.1
Cash flows from investing activities:
Acquisition of intangible assets and property, plant and equipment ( 108.7 ) ( 58.3 )
Net cash used in investing activities ( 108.7 ) ( 58.3 )
Cash flows from financing activities:
Proceeds from long-term debt borrowings 17.2 —
Repayments of long-term debt ( 1.5 ) ( 4.2 )
Payments for debt issue costs ( 0.8 ) —
Cash inflows related to current financial liabilities 178.3 36.4
Cash outflows related to current financial liabilities ( 52.2 ) ( 48.8 )
Dividends paid to shareholders ( 2.5 ) —
Other financing activities ( 0.4 ) —
Net cash provided by (used in) financing activities 138.1 ( 16.6 )
Increase (decrease) in cash, cash equivalents and restricted cash ( 21.5 ) 10.2
Cash, cash equivalents and restricted cash at the beginning of the period 68.5 67.9
Effect of exchange rate changes on cash ( 2.5 ) ( 1.1 )
Cash, cash equivalents and restricted cash at the end of the period 44.5 77.0
Less restricted cash at the end of the period 3.6 2.9
Cash and cash equivalents at the end of the period $ 40.9 $ 74.1
See accompanying Notes to these Condensed Consolidated Financial Statements
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Orion Engineered Carbons S.A.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Common stock Treasury shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total
(In millions, except per share amounts) Number Amount
Balance at January 1, 2022 60,656,076 $ 85.3 $ ( 6.3 ) $ 71.4 $ 217.8 $ ( 48.5 ) $ 319.7
Net income — — — — 32.5 — 32.5
Other comprehensive income, net of tax — — — — — 24.9 24.9
Dividends - $ 0.02 per share — — — — ( 1.2 ) — ( 1.2 )
Share based compensation — — — 1.5 — — 1.5
Balance at March 31, 2022 60,656,076 85.3 ( 6.3 ) 72.9 249.1 ( 23.6 ) 377.4
Net income — — — — 29.7 — 29.7
Other comprehensive loss, net of tax — — — — — ( 10.2 ) ( 10.2 )
Dividends paid - $ 0.04 per share — — — — ( 2.5 ) — ( 2.5 )
Share based compensation — — — 1.6 — — 1.6
Issuance of stock under equity compensation plans 93,189 — 1.6 ( 2.4 ) — — ( 0.8 )
Balance at June 30, 2022 60,749,265 $ 85.3 $ ( 4.7 ) $ 72.1 $ 276.3 $ ( 33.8 ) $ 395.2
Balance at January 1, 2021 60,487,117 $ 85.3 $ ( 8.5 ) $ 68.5 $ 84.4 $ ( 48.7 ) $ 181.0
Net income — — — — 23.5 — 23.5
Other comprehensive loss, net of tax — — — — — ( 2.7 ) ( 2.7 )
Share based compensation — — — 1.0 — — 1.0
Issuance of stock under equity compensation plans 103,409 — 1.2 ( 1.2 ) — — —
Balance at March 31, 2021 60,590,526 85.3 ( 7.3 ) 68.3 107.9 ( 51.4 ) 202.8
Net loss — — — — 89.1 — 89.1
Other comprehensive income, net of tax — — — — — 9.0 9.0
Share based compensation — — — 1.2 — — 1.2
Balance at June 30, 2021 60,590,526 $ 85.3 $ ( 7.3 ) $ 69.5 $ 197.0 $ ( 42.4 ) $ 302.1
See accompanying Notes to these Condensed Consolidated Financial Statements
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statement (Unaudited)
Table of Contents—Notes
Note A. Organization, Description of the Business and Summary of Significant Accounting Policies
7
Note B. Accounts Receivable
7
Note C. Inventories
7
Note D. Debt and Other Obligations
8
Note E. Financial Instruments and Fair Value Measurement
9
Note F. Employee Benefit Plans
11
Note G. Accumulated Other Comprehensive Income (Loss)
12
Note H. Earnings Per Share
12
Note I. Income Taxes
13
Note J. Commitments and Contingencies
13
Note K. Financial Information by Segment
14
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Note A. Organization, Description of the Business and Summary of Significant Accounting Policies
Orion Engineered Carbons S.A.’s unaudited Condensed Consolidated Financial Statements include Orion Engineered Carbons S.A. and its subsidiaries (“Orion” or the “Company”). The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report in Form 10-K for the year ended December 31, 2021.
The accompanying unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
Summary of Significant Accounting Policies
Adoption of accounting standards
Government Assistance (Topic 832) —On November 17, 2021, the Financial Accounting Standards Board (“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 ; Assistance ; ASC 958-605, Not-for-Profit Entities—Revenue Recognition ). This ASU creates Accounting Standards Codification (“ASC”) Topic 832 (“ASC 832”). 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.
We adopted this standard prospectively on January 1, 2022. The adoption of this standard did not materially impact our Consolidated Financial Statements or related disclosures.
Note B. Accounts Receivable
Accounts receivable, net of allowance for credit losses, are as follows:
June 30, 2022 December 31, 2021
(In millions)
Accounts receivable $ 412.7 $ 291.5
Expected credit losses ( 3.3 ) ( 2.6 )
Accounts receivable, net $ 409.4 $ 288.9
Note C. Inventories
Inventories, net of reserves, are as follows:
June 30, 2022 December 31, 2021
(In millions)
Raw materials, consumables and supplies, net $ 123.3 $ 97.1
Work in process 0.3 0.2
Finished goods, net 161.7 132.5
Total $ 285.3 $ 229.8
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Note D. Debt and Other Obligations
The company financing arrangements are as follows:
June 30, 2022 December 31, 2021
(In millions)
Current
Current portion of Term-Loan $ 3.0 $ 3.0
Deferred debt issuance costs - Term-Loan ( 0.7 ) ( 0.8 )
Other short-term debt and obligations 260.8 149.5
Current portion of long-term debt and other financial liabilities 263.1 151.7
Non-current
Term-Loan 606.4 636.0
Deferred debt issuance costs - Term Loan ( 4.0 ) ( 4.8 )
BOC Term-loan 17.2 —
Long-term debt, net 619.6 631.2
Total $ 882.7 $ 782.9
a. Revolving credit facility
In July 2014, Orion Group Holdings, Inc. (the “Company”) entered in a credit agreement to establish long-term financing (“Term-Loan”) and in a multicurrency revolving credit facility (“RCF”) for the consolidated group. Subsequent to 2014, we entered into a number of amendments related to Term-Loan and RCF.
In May of 2022, we added € 100 million of capacity to our RCF, which expands our facility to € 350 million ($ 363.5 million).
As part of the RCF, the Company can establish ancillary credit facilities by converting the commitments of select lenders under the € 350 million RCF into bilateral credit agreements. Original borrowings under the 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.
As of June 30, 2022 and December 31, 2021, committed ancillary credit facilities totaled $ 218.1 million and $ 192.5 million, respectively.
As of June 30, 2022, the total commitment of € 350 million was split between an € 140 million RCF tranche and € 210 million of bilateral ancillary facilities established directly with several banks under the RCF.
As of June 30, 2022, $ 51.9 million was outstanding under the RCF, and there were no borrowings under the RCF as of December 31, 2021. We classify amounts outstanding under the RCF as current in our Condensed Consolidated Balance Sheets as the borrowings are for short-term working capital needs, typically for one-month periods, and based on management’s intention to repay the amounts outstanding within one year from the date of drawing.
As of June 30, 2022 and December 31, 2021, availability under the RCF was $ 155.6 million and $ 166.7 million, respectively.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
b. Local bank loans and other short-term borrowings
The local credit lines in Brazil and Korea are with local banks that are not lenders under the RCF and were negotiated bilaterally.
The ancillary facilities (under RCF commitments) and uncommitted lines of credit outstanding is as follows:
June 30, 2022 December 31, 2021
(In millions)
Total ancillary capacity - EUR € 210.0 € 170.0
Total ancillary capacity - U.S. $ $ 218.1 $ 192.5
Ancillary credit facilities
OEC GmbH outstanding borrowings $ 138.8 $ 103.0
OEC LLC outstanding borrowings 11.5 13.4
Uncommitted local lines of credit:
Korea (capacity $ 44.2 million)
12.6 30.8
Brazil (capacity $ 3.1 million)
3.0 2.3
Korea working capital loan 7.7 —
Repurchase agreement 35.3 —
RCF 51.9 —
Total of Other short-term debt and obligations $ 260.8 $ 149.5
Repurchase Agreement —On March 15, 2022, we entered into a repurchase agreement to sell European Emission Allowance (“EUA”) certificates. Under the agreement, we sold 450 thousand EUA certificates for € 33.5 million cash to a counterparty. The same counterparty has an obligation to resell, and we have the obligation to purchase, the same or substantially the same EUA certificates on January 27, 2023 for € 34.0 million. The difference between the consideration received and the amount of consideration to be paid will be recognized as interest expense. At June 30, 2022, the amount outstanding was $ 35.3 million. Due to the short maturity, the carrying value approximates the fair value.
Bank of China— To partially finance our Huaibei facility in China, on March 16, 2022, our wholly owned subsidiary, Orion Engineered Carbons (Huaibei) Co., Ltd. (“OECCL”), entered into a 4.5 % fixed interest rate, CNY 500 million (approximately $ 80 million), eight-year term-loan agreement with Bank of China (“BOC Term-Loan”) maturing on December 21, 2029. OECCL is required to repay the BOC Term-Loan principal in semi-annual payments beginning June 2024. Interest is payable quarterly, beginning June 2022. The agreement restricts OECCL’s ability to make external investments or make intercompany loan repayments or dividend distributions. The principal repayments under the agreement are: 2 % in 2024, 10 % in 2025 and 22 % each year thereafter, concluding in June 2029. The BOC Term-Loan is secured with the Huaibei facility’s land, construction in progress, and buildings as collateral.
Korea Working Capital Loan— For working capital flexibility, in June 2022, we entered in a one year term-loan agreement for ₩ 10.0 billion Korean won ($ 7.7 million) with Hana Bank. The interest rate on this loan at inception is 4.3 %. For early repayment, we are required to pay a 1 % prorated early repayment fee. In the Condensed Consolidated Statements of Cash Flows, this loan is reflected in Cash inflows related to current financial liabilities .
As of June 30, 2022, we are in compliance with our debt covenants.
For additional information relating to our debt, see “ Note J. Debt and Other Obligations” , included in our Annual Report in Form 10-K for the year ended December 31, 2021.
Note E. Financial Instruments and Fair Value Measurement
Risk management
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 June 30, 2022 or December 31, 2021.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Fair value measurement
The following table summarizes outstanding financial instruments that are measured at fair value on a recurring basis:
June 30, 2022 December 31, 2021 Balance Sheet Classification
Notional Amount Fair Value Notional Amount Fair Value
(In millions)
Assets
Derivatives designated as hedges:
Cross currency swaps $ 197.0 $ 40.5 $ 197.0 $ 4.3 Other financial assets (non-current)
Interest rate swaps 285.6 1.3 — — Other financial assets (non-current)
Total $ 482.6 $ 41.8 $ 197.0 $ 4.3
Liabilities
Derivatives designated as hedges:
Interest rate swaps — — 311.5 8.6 Other liabilities (non-current)
Total $ — $ — $ 311.5 $ 8.6
All financial instruments in the table above are classified as Level 2. We present the gross assets and liabilities of our derivative financial instruments in the Condensed Consolidated Balance Sheets.
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 2022 or 2021.
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. Short-term and long-term debt are recorded at amortized cost in the Consolidated Balance Sheets.
June 30, 2022 December 31, 2021
Notional Amount Fair Value Notional Amount Fair Value
(In millions)
Non-derivatives:
Liabilities:
Term loan $ 609.4 $ 571.8 $ 639.0 $ 637.2
Term Loan in the table above is classified as Level 2.
At both June 30, 2022 and December 31, 2021, 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.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
The following tables summarize the pre-tax effect of derivative and non-derivative instruments recorded in Accumulated other comprehensive income (loss) (“AOCI”), the gains (losses) reclassified from AOCI to earnings and additional gains (losses) recognized directly in earnings:
Effect of Financial Instruments
Three Months Ended Jun 30,
Gain (Loss) Recognized in AOCI Gain (Loss) Reclassified from AOCI to Income Income Statement Classification
2022 2021 2022 2021
(In millions)
Derivatives designated as hedges:
Cross currency swaps $ 8.3 $ 1.1 $ 0.4 $ — Interest and other financial expense, net
Interest rate swaps 3.8 ( 0.2 ) — — Interest and other financial expense, net
Total $ 12.1 $ 0.9 $ 0.4 $ —
Effect of Financial Instruments
Six Months Ended June 30,
Gain (Loss) Recognized in AOCI Gain (Loss) Reclassified from AOCI to Income Income Statement Classification
2022 2021 2022 2021
(In millions)
Derivatives designated as hedges:
Cross currency swaps $ 20.9 $ 1.9 $ 0.9 $ — Interest and other financial expense, net
Interest rate swaps 9.7 0.5 — — Interest and other financial expense, net
Total $ 30.6 $ 2.4 $ 0.9 $ —
Our cross currency swaps and interest rate swaps are designated as cash flow hedges of principal and interest payments related to our Term Loan and mature in September 2028. The amount recognized in AOCI related to cash flow hedges that will be reclassified to the Condensed Consolidated Statement of Operations in the next twelve months is approximately $ 1.7 million.
See “ Note K. Financial Instruments and Fair Value Measurement” , included in our Annual Report in Form 10-K for the year ended December 31, 2021, for additional information relating to our derivatives instruments.
Note F. Employee Benefit Plans
Provisions for pensions are established to cover benefit plans for retirement, disability and surviving dependents’ pensions. The benefit obligations vary depending on the legal, tax and economic circumstances in various countries in which the Company operates. Generally, the level of benefit depends on the length of service and the remuneration.
Net periodic defined benefit pension costs include the following:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In millions)
Service cost $ 0.3 $ 0.4 $ 0.6 $ 0.7
Interest cost 0.4 0.2 0.8 0.5
Amortization of actuarial loss — 1.2 — 2.4
Net periodic pension cost $ 0.7 $ 1.8 $ 1.4 $ 3.6
Service costs were recorded within Income from operations in Selling, general and administrative expenses, and interest cost in Interest and other financial expense, net.
The amortization of actuarial losses, associated with the pension obligations recorded in prior years, in Accumulated other comprehensive income exceeding 10 % of the defined benefit obligation are recorded ratably in the Condensed Consolidated Statements of Operations.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Note G. Accumulated Other Comprehensive Income/(Loss)
Changes in each component of AOCI, net of tax, are as follows:
Currency Translation Adjustments Hedging Activities Adjustments Pension and Other Postretirement Benefit Liability Adjustment Total
(In millions)
Balance at January 1, 2022 $ ( 34.1 ) $ ( 10.8 ) $ ( 3.6 ) $ ( 48.5 )
Other comprehensive income before reclassifications 11.2 18.7 — 29.9
Income tax effects before reclassifications 0.6 ( 6.0 ) — ( 5.4 )
Currency translation AOCI — 0.3 0.1 0.4
Balance at March 31, 2022 $ ( 22.3 ) $ 2.2 $ ( 3.5 ) $ ( 23.6 )
Other comprehensive (loss) before reclassifications ( 18.5 ) 12.5 — ( 6.0 )
Income tax effects before reclassifications ( 0.3 ) ( 4.0 ) — ( 4.3 )
Currency translation AOCI — — 0.1 0.1
Balance at June 30, 2022 ( 41.1 ) 10.7 ( 3.4 ) ( 33.8 )
Balance at January 1, 2021 $ ( 26.5 ) $ ( 13.5 ) $ ( 8.7 ) $ ( 48.7 )
Other comprehensive loss before reclassifications ( 4.7 ) 0.9 — ( 3.8 )
Income tax effects before reclassifications ( 0.4 ) ( 0.3 ) — ( 0.7 )
Amounts reclassified from AOCI — — 1.2 1.2
Income tax effects on reclassifications — — ( 0.4 ) ( 0.4 )
Currency translation AOCI — 0.6 0.4 1.0
Balance at March 31, 2021 $ ( 31.6 ) $ ( 12.3 ) $ ( 7.5 ) $ ( 51.4 )
Other comprehensive income before reclassifications 7.2 1.1 — 8.3
Income tax effects before reclassifications 0.5 ( 0.3 ) — 0.2
Amounts reclassified from AOCI — — 1.2 1.2
Income tax effects on reclassifications — — ( 0.4 ) ( 0.4 )
Currency translation AOCI — ( 0.2 ) ( 0.1 ) ( 0.3 )
Balance at June 30, 2021 ( 23.9 ) ( 11.7 ) ( 6.8 ) ( 42.4 )
Note H. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing Net income attributable to Orion by the weighted average number of common stock outstanding during the period. Diluted EPS equals Net income attributable to Orion divided by the weighted average number of common stock outstanding during the period, adjusted for the dilutive effect of our stock–based and other equity compensation awards.
The following table reflects the income and share data used in the basic and diluted EPS computations:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In millions, except share and per share amounts)
Net income attributable to ordinary equity holders $ 29.7 $ 89.1 $ 62.2 $ 112.6
Weighted average number of ordinary shares (in thousands) 60,807 60,652 60,880 60,649
Basic EPS $ 0.49 $ 1.47 $ 1.02 $ 1.86
Dilutive effect of share based payments (in thousands) 203 91 357 72
Weighted average number of diluted ordinary shares (in thousands) 61,010 60,743 61,237 60,721
Diluted EPS $ 0.49 $ 1.47 $ 1.02 $ 1.85
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Note I. Income Taxes
The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be recognized, and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period as discrete items. Valuation allowances are provided against any future tax benefits that arise from losses in jurisdictions for which no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and by the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.
Income tax expense for the three months ended June 30, 2022 and 2021 were $ 12.8 million and $ 33.5 million, respectively.
Income tax expense for the six months ended June 30, 2022 and 2021 were $ 26.6 million and $ 41.8 million, respectively.
Our effective income tax rates were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Effective income tax rates 30.1 % 27.3 % 30.0 % 27.1 %
The increase in our effective tax rate for both the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021, were primarily attributable to the projected earnings mix by geography and tax jurisdiction.
Note J. Commitments and Contingencies
Environmental Matters
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 remaining costs to be paid as of June 30, 2022 are $ 46.1 million and $ 7.1 million, respectively. Orion's reserves for the ceased operation at Ambes are reflected in Accrued liabilities on the Condensed Consolidated Balance Sheets. Orion has accrued liabilities for personnel expenses of $ 3.1 million and $ 2.6 million, and for ground remediation costs of $ 4.0 million and $ 6.7 million, as of June 30, 2022 and December 31, 2021, respectively.
Environmental Reserves— Our accrued liability for future environmental reserves at our current and former plant sites and other sites totaled $ 5.3 million and $ 7.8 million as of June 30, 2022 and December 31, 2021, respectively. Environmental-related costs are expected to occur over a number of years and are not concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities recorded will be 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 have a material adverse effect upon our operations, financial condition or Condensed Consolidated Financial Statements.
EPA Action— During 2008 and 2009, the U.S. Environmental Protection Agency (“EPA”) contacted all U.S. carbon black producers as part of an industry-wide EPA initiative, requesting extensive and comprehensive information under Section 114 of the U.S. Clean Air Act. The EPA used that information to determine, for each facility, that either: (i) the facility has been in compliance with the Clean Air Act; (ii) violations have occurred, and enforcement litigation may be undertaken; or (iii) violations have occurred, and a settlement of an enforcement case is appropriate. In response to information requests received by the Company’s U.S. facilities, the Company furnished information to the EPA on each of its U.S. facilities. The EPA subsequently sent notices under Section 113(a) of the Clean Air Act in 2010 alleging violations of Prevention of Significant Deterioration (“PSD”) and Title V permitting requirements under the Clean Air Act at the Company’s Belpre (Ohio) facility. In October 2012, the Company received a corresponding notice and finding of violation (a “NOV”) alleging the failure to obtain PSD and Title V permits reflecting Best Available Control Technology (“BACT”) at several units of the Company’s Ivanhoe (Louisiana) facility, and in January 2013, the Company also received an NOV issued by the EPA for its facility in Borger (Texas) alleging the failure to obtain PSD and Title V permits reflecting BACT during the years 1996 to 2008. A comparable NOV for the Company’s U.S. facility in Orange (Texas) was issued by the EPA in February 2013, and 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.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
In 2013, Orion began discussions with the EPA and the U.S. Department of Justice (“DOJ”) about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC (“Orion LLC” for purposes of this Note J.) and the United States (on behalf of the EPA), as well as the Louisiana Department of Environmental Quality. The consent decree (the “EPA CD”) became effective on June 7, 2018. The EPA CD resolves and settles the EPA’s claims of noncompliance set forth in the NOVs and in a respective complaint filed in court against Orion by the United States immediately prior to the filing of the consent decree.
Under the EPA CD, Orion LLC is installing certain pollution control technology in order to further reduce emissions at its four U.S. manufacturing facilities in Ivanhoe (Louisiana), Belpre (Ohio), Borger (Texas), and Orange (Texas) over approximately five years . The EPA CD also requires 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 LLC’s compliance plan under the EPA CD, Orion LLC installed SNOX TM emissions control technology to remove SO2, NOx and dust particles from tail gases at the Ivanhoe (Louisiana) facility. Less stringent emissions controls were installed in accordance with the EPA CD at Orange (Texas).
The new emissions control equipment was successfully installed at Orange (in 2020) and in Ivanhoe (in 2021). We have started construction on the two remaining sites in Belpre and Borger.
As of June 30, 2022, we have spent $ 256 million on Capital expenditures related to the EPA CD of which approximately $ 80 million was received as an indemnity payment from Evonik. For further discussion refer to “Note Q. Commitments and Contingencies”, included in our Annual Report in Form 10-K for the year ended December 31, 2021.
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 debt agreements. As of June 30, 2022, the Company had guarantees totaling $ 14.5 million issued by various financial institutions.
Note K. Financial Information by Segment
Segment information
We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting . We manage our business in two operating segments 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, batteries, printing and special applications.
Corporate includes income and expenses that cannot be directly allocated to the business segments or that are managed at the corporate level including: 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 segment 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 settlements, 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.
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Segment operating results for the three months ended June 30, 2022 and 2021 are as follows:
Rubber Specialties Corporate Total Segments
(In millions)
2022
Net sales from external customers $ 359.3 $ 181.9 $ — $ 541.2
Adjusted EBITDA 38.0 45.4 — 83.4
Corporate charges — — ( 3.0 ) ( 3.0 )
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 17.0 ) ( 10.4 ) — ( 27.4 )
Excluding equity in earnings of affiliated companies, net of tax ( 0.1 ) — — ( 0.1 )
Interest and other financial expense, net ( 10.5 ) ( 10.5 )
Income before earnings in affiliated companies and income taxes $ 42.4
2021
Net sales from external customers $ 244.7 $ 156.3 $ — $ 401.0
Adjusted EBITDA 39.5 39.3 — 78.8
Corporate charges — — ( 3.7 ) ( 3.7 )
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 14.1 ) ( 11.1 ) — ( 25.2 )
Gain related to litigation settlement — — 82.9 82.9
Excluding equity in earnings of affiliated companies, net of tax ( 0.3 ) — — ( 0.3 )
Interest and other financial expense, net ( 9.0 ) ( 9.0 )
Reclassification of actuarial losses from AOCI ( 1.2 ) ( 1.2 )
Income before earnings in affiliated companies and income taxes $ 122.3
Segment reconciliation for the six months ended June 30, 2022 and 2021:
Rubber Specialties Corporate Total Segments
(In millions)
2022
Net sales from external customers $ 666.2 $ 359.5 $ — $ 1,025.7
Adjusted EBITDA 78.7 87.9 — 166.6
Corporate charges — — ( 4.2 ) ( 4.2 )
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 33.5 ) ( 21.2 ) — ( 54.7 )
Excluding equity in earnings of affiliated companies, net of tax ( 0.2 ) — — ( 0.2 )
Interest and other financial expense, net ( 18.9 ) ( 18.9 )
Income before earnings in affiliated companies and income taxes $ 88.6
2021
Net sales from external customers $ 460.7 $ 300.4 $ — $ 761.1
Adjusted EBITDA 70.6 79.1 — 149.7
Corporate charges — — ( 6.1 ) ( 6.1 )
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment ( 28.4 ) ( 22.4 ) — ( 50.8 )
Gain related to litigation settlement — — 82.9 82.9
Excluding equity in earnings of affiliated companies, net of tax ( 0.4 ) — — ( 0.4 )
Interest and other financial expense, net ( 18.9 ) ( 18.9 )
Reclassification of actuarial losses from AOCI ( 2.4 ) ( 2.4 )
Income before earnings in affiliated companies and income taxes $ 154.0
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Orion Engineered Carbons S.A
Notes to the Condensed Consolidated Financial Statements—(continued)
Expense from operations before income taxes and finance costs of the segment “ Corporate” comprises the following:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In millions)
Long term incentive plan $ 1.6 $ 1.2 $ 3.1 $ 2.2
Other non-operating 1.4 2.5 1.1 3.9
Corporate Charges $ 3.0 $ 3.7 $ 4.2 $ 6.1
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Orion Engineered Carbons S.A.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.