Orion S.A. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three and six months ended June 30, 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. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION Non-GAAP Financial Measures We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and 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 measures are, but are not limited to, Contribution margin, Contribution margin per metric ton (collectively, “Contribution margins”), Adjusted EBITDA, Net working capital and Capital expenditures. We define Contribution margin as revenue less variable costs (such as raw materials, packaging, utilities and distribution costs). We define Contribution margin per metric ton as Contribution margin divided by volume measured in metric tons. We define Adjusted EBITDA as Income from operations before depreciation and amortization, restructuring expenses, consulting fees related to Company strategy, gain related to legal settlement, and includes equity earnings (loss) in affiliated companies, net of tax. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital, because it excludes the effects of items that have less bearing on the performance of our underlying core business. We define Net working capital as inventories plus current trade receivables minus trade payables. We define Capital expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the Condensed Consolidated Financial Statements. We also use Segment Adjusted EBITDA margin, which we define as Adjusted EBITDA for the relevant segment divided by the revenue for that segment. We use Adjusted EBITDA 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, 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 or other GAAP measures as an indicator of our operations in accordance with GAAP. 17 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Reconciliation of Non-GAAP Financial Measures Contribution margin and Contribution margin per metric ton (Non-GAAP Financial Measures) Reconciliation of Contribution margin and Contribution margin per metric ton to Gross profit is as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (In millions, unless otherwise indicated) Revenue $ 541.2 $ 401.0 $ 1,025.7 $ 761.1 Variable costs 370.3 247.4 687.5 460.4 Contribution margin 170.9 153.6 338.2 300.7 Freight 25.8 24.0 53.2 46.5 Fixed costs (76.9) (67.5) (153.7) (134.6) Gross profit $ 119.8 $ 110.1 $ 237.7 $ 212.6 Volume (in kmt) 251.4 250.3 504.6 504.4 Contribution margin per metric ton $ 679.8 $ 613.9 $ 670.2 $ 596.2 Gross profit per metric ton $ 476.5 $ 439.8 $ 471.1 $ 421.5 Adjusted EBITDA (A Non-GAAP Financial Measure) Reconciliation of Adjusted EBITDA to consolidated Net income is as follows: 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 Add back Income tax expense 12.8 33.5 26.6 41.8 Add back Equity in earnings of affiliated companies, net of tax (0.1) (0.3) (0.2) (0.4) Income before earnings in affiliated companies and income taxes 42.4 122.3 88.6 154.0 Add back Interest and other financial expense, net 10.5 9.0 18.9 18.9 Add back Reclassification of actuarial losses from AOCI — 1.2 — 2.4 Income from operations 52.9 132.5 107.5 175.3 Add back depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 27.4 25.2 54.7 50.8 EBITDA 80.3 157.7 162.2 226.1 Equity in earnings of affiliated companies, net of tax 0.1 0.3 0.2 0.4 Evonik legal settlement: Cash settlement — (79.5) — (79.5) Release of legal reserve, net — (3.4) — (3.4) Long term incentive plan 1.6 1.2 3.1 2.2 Other adjustments 1.4 2.5 1.1 3.9 Adjusted EBITDA $ 83.4 $ 78.8 $ 166.6 $ 149.7 Adjusted EBITDA Specialty Carbon Black $ 45.4 $ 39.3 $ 87.9 $ 79.1 Adjusted EBITDA Rubber Carbon Black $ 38.0 $ 39.5 $ 78.7 $ 70.6 18 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation A. Operating Results For the three months ended June 30, 2022 compared to three months ended June 30, 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 June 30, Year-Over Year 2022 2021 Delta (In millions) % Net sales $ 541.2 $ 401.0 $ 140.2 35.0 Cost of sales 421.4 290.9 130.5 44.9 Gross profit 119.8 110.1 9.7 8.8 Selling, general and administrative expenses 59.7 55.0 4.7 8.5 Research and development costs 5.9 6.0 (0.1) (1.7) Gain related to litigation settlement — (82.9) 82.9 (100.0) Other (income) expenses, net 1.3 (0.5) 1.8 (360.0) Income from operations 52.9 132.5 (79.6) (60.1) Interest and other financial expense, net 10.5 9.0 1.5 16.7 Reclassification of actuarial losses from AOCI — 1.2 (1.2) (100.0) Income before earnings in affiliated companies and income taxes 42.4 122.3 (79.9) (65.3) Income tax expense 12.8 33.5 (20.7) (61.8) Earnings in affiliated companies, net of tax 0.1 0.3 (0.2) (66.7) Net income $ 29.7 $ 89.1 $ (59.4) (66.7) Net sales Net sales increased by $140.2 million, or 35.0%, in the second quarter of 2022 to $541.2 million, compared to the second quarter of 2021, primarily driven by passing through of higher feedstock costs, pricing, favorable product mix in both segments and higher volume in Rubber Carbon Black segment, partially offset by the impact of unfavorable foreign currency translation and lower volume in Specialty Carbon Black segment. Volume increased by 1.1 kmt in the second quarter of 2022 to 251.4 kmt, compared to the second quarter of 2021, primarily due to higher demand in Rubber Carbon Black segment, partially offset by lower volume in the Specialty Carbon Black segment. Cost of sales Cost of sales increased by $130.5 million, or 44.9%, to $421.4 million in the second quarter of 2022, compared to the second quarter of 2021, primarily due to higher raw material and production-associated costs. Gross profit Gross profit increased by $9.7 million, or 8.8%, to $119.8 million, year over year, primarily due to pricing and favorable product mix. Selling, general and administrative expenses Selling, general and administrative expenses increased by $4.7 million, or 8.5%, to $59.7 million in the second quarter of 2022, compared to the second quarter of 2021. The increase was primarily driven by higher freight costs with increased 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 a dispute which originated from the acquisition of the carbon black business by Rhône Capital and Triton 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 net legal reserves, related to this dispute. This was not repeated in 2022. Provision for income taxes For the three months ended June 30, 2022, the Company recognized Income before earnings in affiliated companies and income taxes of $42.4 million, compared to $122.3 million in the three months ended June 30, 2021. The provision for income taxes was an expense of 19 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation $12.8 million and $33.5 million for the three months ended June 30, 2022 and June 30, 2021, respectively. The effective tax rate for the three months ended June 30, 2022, was 30%, as compared to 27% for the three months ended June 30, 2021. The increase in our effective tax rate for the three months ended June 30, 2022, relative to the three months ended June 30, 2021, was primarily attributable to the projected earnings mix by geography and tax jurisdiction compared to the prior period. Contribution margin and Contribution margin per metric ton (Non-GAAP Financial Measures) Contribution margin increased in the second quarter of 2022 by $17.3 million, or 11.3%, to $170.9 million, year over year. Contribution margin per metric ton increased by 10.7% to $679.8 per metric ton in the three months ended June 30, 2022. The increase was primarily driven by pricing in both segments, favorable product mix and higher volume in Rubber Carbon Black segment, partially offset by lower volume in the 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. Adjusted EBITDA (A Non-GAAP Financial Measure) Adjusted EBITDA increased in the second quarter of 2022 by $4.6 million, or 5.8%, to $83.4 million, year over year. The increase was driven by pricing, favorable product mix and higher volumes in Rubber Carbon Black segment, partially offset by lower volume in the Specialty Carbon Black segment and higher selling, general and administrative costs. For the six months ended June 30, 2022 compared to six months ended June 30, 2021 Condensed Consolidated Statement of Operations Data Six Months Ended June 30, Year-Over Year 2022 2021 Delta (In millions) % Net sales $ 1,025.7 $ 761.1 $ 264.6 34.8 Cost of sales 788.0 548.5 239.5 43.7 Gross profit 237.7 212.6 25.1 11.8 Selling, general and administrative expenses 117.2 107.4 9.8 9.1 Research and development costs 11.4 10.7 0.7 6.5 Gain related to litigation settlement — (82.9) 82.9 (100.0) Other (income) expenses, net 1.6 2.1 (0.5) (23.8) Income from operations 107.5 175.3 (67.8) (38.7) Interest and other financial expense, net 18.9 18.9 0.0 — Reclassification of actuarial losses from AOCI — 2.4 (2.4) (100.0) Income before earnings in affiliated companies and income taxes 88.6 154.0 (65.4) (42.5) Income tax expense 26.6 41.8 (15.2) (36.4) Earnings in affiliated companies, net of tax 0.2 0.4 (0.2) (50.0) Net income $ 62.2 $ 112.6 $ (50.4) (44.8) Net sales Net sales increased by $264.6 million, or 34.8%, in the six months ended June 30, 2022 to $1,025.7 million, year over year, driven primarily by passing through of higher feedstock costs, pricing, higher volume in Rubber Carbon Black segment, and favorable product mix, and partially offset by unfavorable impact of foreign currency translation and lower volume in the Specialty Carbon Black segment. Volume increased by 0.2 kmt to 504.6 kmt compared to the six months ended June 30, 2021, primarily due to higher demand in Rubber Carbon Black segment, partially offset by lower demand in the Specialty Carbon Black segment. Cost of sales Cost of sales increased by $239.5 million, or 43.7%, to $788.0 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to higher raw material costs and associated production costs. Gross profit Gross profit increased by $25.1 million, or 11.8%, to $237.7 million, year over year, primarily due to pricing and favorable product mix. Selling, general and administrative expenses Selling, general and administrative expenses increased by $9.8 million, or 9.1%, to $117.2 million in the six months ended June 30, 2022 20 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation compared to the six months ended June 30, 2021, driven primarily 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 a dispute 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 net legal reserves related to this dispute. This was not repeated in 2022. Provision for income taxes For the six months ended June 30, 2022, the Company recognized Income before earnings in affiliated companies and income taxes of $88.6 million, compared to $154.0 million in the six months ended June 30, 2021. The provision for income taxes was an expense of $26.6 million for the six months ended June 30, 2022, and $41.8 million for the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022, was 30%, as compared to 27% for the six months ended June 30, 2021. The increase in our effective tax rate for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, was primarily attributable to the projected earnings mix by geography and tax jurisdiction as compared to the prior period. Contribution margin and Contribution margin per metric ton (Non-GAAP Financial Measures) Contribution margin increased by $37.5 million, or 12.5%, to $338.2 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to higher margins, favorable product mix, and higher volume in Rubber Carbon Black segment, partially offset by unfavorable impact of foreign currency translation and lower volume in the Specialty Carbon Black segment. Contribution margin per metric ton increased by 12.4%, to $670.2 per metric ton in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Higher margins per ton resulted from price increases to recover environmental and reliability-related Capital expenditures. Adjusted EBITDA (A Non-GAAP Financial Measure) Adjusted EBITDA increased by $16.9 million, or 11.3%, from $149.7 million in the six months ended June 30, 2021 to $166.6 million in the six months ended June 30, 2022. The increase was primarily due to higher margins, favorable product mix and higher volume in Rubber Carbon Black segment, partially offset by unfavorable impact of foreign currency translation and lower volume in the Specialty Carbon Black segment. 21 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Segment Discussion Our operations are managed through two reportable segments, Specialty Carbon Black and Rubber Carbon Black . We use Segment Adjusted EBITDA as the measure of segment performance and profitability. Three months ended June 30, 2022 compared to three months ended June 30, 2021 The table below presents our segment results derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Three Months Ended June 30, Year-Over Year 2022 2021 Delta (In millions, unless otherwise indicated) % Specialty Carbon Black Net sales $ 181.9 $ 156.3 $ 25.6 16.4 Cost of sales 121.3 103.3 18.0 17.4 Gross profit $ 60.6 $ 53.0 $ 7.6 14.3 Volume (kmt) 59.7 68.1 (8.4) (12.3) Adjusted EBITDA $ 45.4 $ 39.3 $ 6.1 15.5 Adjusted EBITDA margin (%) 25.0 25.2 (0.2) (0.8) Rubber Carbon Black Net sales $ 359.3 $ 244.7 $ 114.6 46.8 Cost of sales 300.1 187.6 112.5 60.0 Gross profit $ 59.2 $ 57.1 $ 2.1 3.7 Volume (kmt) 191.7 182.2 9.5 5.2 Adjusted EBITDA $ 38.0 $ 39.5 $ (1.5) (3.8) Adjusted EBITDA margin (%) 10.6 16.1 (5.5) (34.2) Specialty Carbon Black Net sales of the Specialty Carbon Black segment increased by $25.6 million, or 16.4%, to $181.9 million, year over year, primarily driven by pricing and favorable product mix, partially offset by lower sales volume and impact of unfavorable foreign currency translation. Specialty Carbon Black segment volumes decreased by 8.4 kmt, or 12.3%, to 59.7 kmt, year over year. During the second quarter of 2022, Specialty Carbon Black volumes were lower primarily due to lower demand and price competition in lower-end markets. Gross profit of the Specialty Carbon Black segment increased by $7.6 million, or 14.3%, to $60.6 million, year over year, primarily driven by higher margins and favorable product mix. Higher margins resulted from price increases to recover environmental and reliability-related Capital expenditures. Adjusted EBITDA of the Specialty Carbon Black segment increased by $6.1 million, or 15.5%, to $45.4 million, year over year, primarily driven by higher margins and favorable product mix, partially offset by lower sales volume and higher selling, general and administrative costs. Year over year, Adjusted EBITDA margin is comparable despite higher feedstock prices. Rubber Carbon Black Net sales increased by $114.6 million, or 46.8%, to $359.3 million, year over year, primarily due to passing through of higher feedstock costs, pricing, higher volume and favorable product mix, partially offset by the impact of unfavorable foreign currency translation. Rubber Carbon Black segment volumes increased by 9.5 kmt, or 5.2%, to 191.7 kmt, year over year, reflecting higher demand in Americas and Europe/Middle East/Africa (“EMEA”). Gross profit of the Rubber Carbon Black segment increased by $2.1 million, or 3.7%, to $59.2 million, year over year, primarily driven by higher margins, higher volume and favorable product mix, partially offset by the impact of unfavorable foreign currency translation. Higher margins resulted from price increases to recover environmental and reliability-related Capital expenditures. Rubber Carbon Black Adjusted EBITDA decreased by $1.5 million, or 3.8%, to $38.0 million, year over year, primarily due to impact of unfavorable foreign currency translation and higher selling, general and administrative costs, partially offset by pricing, product mix and higher volume. 22 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Adjusted EBITDA margin decreased 550 basis points to 10.6%, year over year, primarily due to the revenue impact from higher feedstock prices. Six months ended June 30, 2022 compared to six months ended June 30, 2021 The table below presents our segment results derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Six Months Ended June 30, Year-Over Year 2022 2021 Delta (In millions, unless otherwise indicated) % Specialty Carbon Black Net sales $ 359.5 $ 300.4 $ 59.1 19.7 Cost of sales 241.3 194.0 47.3 24.4 Gross profit $ 118.2 $ 106.4 $ 11.8 11.1 Volume (kmt) 125.3 139.5 (14.2) (10.2) Adjusted EBITDA $ 87.9 $ 79.1 $ 8.8 11.1 Adjusted EBITDA margin (%) 24.5 26.3 (1.8) (6.8) Rubber Carbon Black Net sales $ 666.2 $ 460.7 $ 205.5 44.6 Cost of sales 546.7 354.5 192.2 54.2 Gross profit $ 119.5 $ 106.2 $ 13.3 12.5 Volume (kmt) 379.3 364.9 14.4 3.9 Adjusted EBITDA $ 78.7 $ 70.6 $ 8.1 11.5 Adjusted EBITDA margin (%) 11.8 15.3 (3.5) (22.9) Specialty Carbon Black Net sales of the Specialty Carbon Black segment increased by $59.1 million, or 19.7% to $359.5 million, year over year, primarily driven by pricing and favorable product mix, partially offset by unfavorable impact of foreign currency translation and lower volume. Specialty Carbon Black segment volumes decreased by 14.2 kmt, or 10.2%, to 125.3 kmt, year over year. Specialty Carbon Black volumes were lower primarily due to focus on higher margin specialty and rubber products and lower demand. Gross profit of the Specialty Carbon Black segment increased by $11.8 million, or 11.1%, to $118.2 million, year over year, primarily driven by pricing and favorable product mix, partially offset by lower sales volumes. Higher margins resulted from price increases to recover environmental and reliability-related Capital expenditures and optimization of product and customer mix. Adjusted EBITDA of the Specialty Carbon Black segment increased by $8.8 million, or 11.1% to $87.9 million, year over year, primarily driven by pricing, and favorable product mix, partially offset by unfavorable impact of foreign currency translation and lower volume. Year over year, Adjusted EBITDA margin decreased 180 basis points to 24.5%, primarily due to the revenue impact from higher feedstock prices. Rubber Carbon Black Net sales increased by $205.5 million, or 44.6% to $666.2 million, year over year, primarily driven by higher sales volume and favorable product mix, passing through of higher feedstock costs, and pricing, partially offset by unfavorable impact of foreign currency translation. Rubber Carbon Black segment volumes increased by 14.4 kmt, or 3.9%, to 379.3 kmt, year over year, reflecting higher demand in Americas and EMEA. Gross profit of the Rubber Carbon Black segment increased by $13.3 million, or 12.5% to $119.5 million, year over year, primarily reflecting pricing, favorable product mix and higher sales volume. Higher margins resulted from price increases to recover environmental and reliability-related Capital expenditures. Rubber Adjusted EBITDA increased by $8.1 million, or 11.5%, to $78.7 million, year over year, primarily driven by pricing, favorable operating leverage associated with substantially higher sales volume and favorable product mix, partially offset by higher selling, general and administrative costs. Adjusted EBITDA margin declined 350 basis points to 11.8%, year over year primarily due to the revenue impact from higher feedstock prices. 23 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources [Update] Historical Cash Flows The tables below present our historical cash flows derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Six Months Ended June 30, 2022 2021 (In millions) Net cash (used in)/provided by operating activities $ (50.9) $ 85.1 Net cash used in investing activities (108.7) (58.3) Net cash provided by (used in) financing activities 138.1 (16.6) 2022 Net cash used in operating activities during the six months ended June 30, 2022, was $50.9 million. The cash used in operating activities primarily reflects changes in working capital and lower Net income. 2021 operating activities included $82.9 million related to Evonik legal settlement gain not repeated in 2022 Net cash used in investing activities in the six months ended June 30, 2022, amounted to $108.7 million. These expenditures were composed 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 six months ended June 30, 2022, amounted to $138.1 million. Cash inflows during the six months of $126.1 million were primarily related to net drawings under our senior secured revolving credit facilities (“RCF”), $17.2 million borrowings to partially finance our Huaibei facility in China from Bank of China and $7.7 million of short-term working capital borrowings in Korea, partially offset by scheduled debt repayments. 2021 Net cash provided by operating activities for the six months ended June 30, 2021, amounted to $85.1 million. The cash provided by operating activities primarily reflected our Net income, adjusted for non-cash items and changes in our working capital. Net income includes $82.9 million related to Evonik legal settlement gain. See “ Note Q. Commitments and Contingencies ” included in the Annual Report in Form 10-K for the year ended December 31, 2021 for further discussion on Evonik legal settlement. Net cash used in investing activities for the six months ended June 30, 2021, amounted to $58.3 million. These expenditures were composed 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 for the six months ended June 30, 2021, amounted to $16.6 million. Cash outflows during the six months of $12.4 million were primarily related to repayments under our senior secured revolving credit facilities (“RCF”), and scheduled debt repayments of $4.2 million, partially offset by drawings under our local bank loan facilities. 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 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 our debt service obligations and fund Capital expenditures for the foreseeable future. As of June 30, 2022, the company had total liquidity of $228.2 million, including cash and equivalents of $40.9 million, $155.6 million availability under our revolving credit facility, including ancillary lines, and $31.7 million of capacity under other available credit lines. Net debt was $846.5 million, and net leverage was 2.97x. 24 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Net working capital (A Non-GAAP Financial Measure) We define Net working capital as the sum total of current trade receivables and inventories 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 table sets forth the principal components of our Net working capital as of the dates indicated. June 30, 2022 December 31, 2021 (In millions) Trade receivables $ 409.4 $ 288.9 Inventories 285.3 229.8 Trade payables (218.3) (195.1) Net working capital $ 476.4 $ 323.6 Our Net working capital position can vary significantly from month to month, mainly due to fluctuations in oil prices and receipts of carbon black oil shipments. In general, increases in the cost of raw materials lead to an increase in our Net working capital requirements, as our inventories and trade receivables increase as a result of higher carbon black oil prices and related sales levels. These increases are partially offset by related increases in trade payables. Due to the quantity of carbon black oil that we typically keep in stock, such increases in Net working capital occur gradually over a period of two to three months. Conversely, decreases in the cost of raw materials lead to a decrease in our Net working capital requirements over the same period of time. Our Net working capital increased from $323.6 million as of December 31, 2021, to $476.4 million as of June 30, 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; and • 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 June 30, 2022, Orion has open receivables from the city of Hürth totaling $7.2 million, while the city of Hürth argues open claims of approximately $4.9 million related to lease payments. Orion is in negotiations with the city but is prepared to pursue its rights vigorously through legal enforcement if necessary. Those increases were partially offset by: • Accounts payable —higher production and higher oil prices resulted in increased accounts payable. Capital expenditures (A Non-GAAP Financial Measure) We define Capital expenditures as cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the unaudited Condensed Consolidated Financial Statements. We plan to finance our Capital expenditures with cash generated by our operating activities. With the exception of required expenditures in association with our settlement with the EPA, we currently do not have any material obligatory commitments to make Capital expenditures outside the ordinary course of our business. For further discussion on EPA settlement, see Note J. Commitments and Contingencies. Capital expenditures during the six months ended June 30, 2022 amounted to $108.7 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 six months ended June 30, 2021 amounted to $58.3 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 June 30, 2022, we did not have any off-balance sheet arrangements. 25 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation 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. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target,” “to be,” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters: • our strategies for (i) mitigating the impacts of the global outbreak of the Coronavirus, (ii) strengthening our position in specialty carbon blacks and rubber carbon blacks, (iii) increasing our rubber carbon black margins and (iv) strengthening the competitiveness of our operations; • the ability to pay dividends at historical dividend levels or at all; • cash flow projections; • the installation of pollution control technology in our 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; and • our expectation that the markets we serve will continue to grow. All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others: • the effects of the COVID-19 pandemic on our business and results of operations; • negative or uncertain worldwide economic conditions; • volatility and cyclicality in the industries in which we operate; • operational risks inherent in chemicals manufacturing, including disruptions due to technical facilities, severe weather conditions or natural disasters; • our dependence on major customers and suppliers; • our ability to compete in the industries and markets in which we operate; • our ability to address changes in the nature of future transportation and mobility concepts which may impact our customers and our business; • our ability to develop new products and technologies successfully and the availability of substitutes for our products; • our ability to implement our business strategies; • volatility in the costs and availability of raw materials and energy as a result of the ongoing Russia and Ukraine conflict; • our ability to respond to changes in feedstock prices and quality; • our ability to realize benefits from investments, joint ventures, acquisitions or alliances; • our ability to realize benefits from planned plant capacity expansions and site development projects and the potential delays to such expansions and projects; • information technology systems failures, network disruptions and breaches of data security; • our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages; • our ability to recruit or retain key management and personnel; • our exposure to political or country risks inherent in doing business in some countries; • any and all impacts from the Russian war against the Ukraine and/or any escalation thereof as well as related energy shortages or other economic or physical impairments or disruptions; • 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, supranational agencies or other organizations; 26 Orion Engineered Carbons S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation • our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases; • market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy; • litigation or legal proceedings, including product liability and environmental claims; • our ability to protect our intellectual property rights and know-how; • our ability to generate the funds required to service our debt and finance our operations; • fluctuations in foreign currency exchange and interest rates; • the availability and efficiency of hedging; • changes in international and local economic conditions, including with regard to the dollar and the euro, dislocations in credit and capital markets and inflation or deflation; • potential impairments or write-offs of certain assets; • required increases in our pension fund contributions; • the adequacy of our insurance coverage; • changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions; • challenges to our decisions and assumptions in assessing and complying with our tax obligations; and • potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion Engineered Carbons SA (a Luxembourg incorporated entity) in the 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, 2021 and in “ Note Q. 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 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the period ended June 30, 2022 does not differ materially from that discussed under “ Item 7A” in our 2021 Form 10-K.