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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-17 · 175 added, 142 removed, 160 unchanged (66% of the section changed)

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

The following discussion and analysis summarize the significant factors affecting our results of operations and financial condition during the years ended December 31, 2021, 2020 and 2019 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 years ended December 31, 2022 and 2021, and should be read in conjunction with the information included under Item 1.

Business and Item 8.

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GAAP”) and in U.S.

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

This section discusses year-to-year comparisons between 2022 and 2021, except as noted below.

For discussions on year-to-year comparison between 2021 and 2020, refer to Part II, Item 7.

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report in Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on February 17, 2022 (the “Prior Annual Report”).

As described under “Reconciliation of Non-GAAP Financial Measures” below, we implemented certain changes to our financial reporting structure during the fourth quarter of 2022, including the use of new non-GAAP measures (Gross profit per ton) to evaluate our performance, which measures are not discussed in the Prior Annual Report.

Accordingly, this section also includes a discussion of year-to-year comparisons of these measures for 2022 compared to 2021, and for 2021 compared to 2020.

In 2022, our net sales were $2,030.9 million, sales volume was 962.9 kmt, net income was $106.2 million, and Adjusted EBITDA was $312.3 million.

• Specialty Carbon Black Segment —Adjusted EBITDA was $143.9 million, and the Adjusted EBITDA Margin was 21.3%.

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Key Factors Affecting Our Results of Operations

We believe that certain factors have had, and will continue to have, a material effect on our results of operations and financial condition.

We believe certain factors had, and will continue to have, a material effect on our results of operations and financial condition.

As many of these factors are beyond our control and certain of these factors have historically been volatile, past performance will not necessarily be indicative of future performance, and it is difficult to predict future performance with any degree of certainty.

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General Economic Conditions, Cyclicality and Seasonality

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

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

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

Our 2022 operating results reflect strong demand for Rubber Carbon Black compared to our 2021 fiscal year.

However, this was partly offset by lower demand for our Specialty Carbon Black in 2022 compared with our 2021 fiscal year.

Operating results were driven by a favorable product mix in both segments and Rubber segment volume growth, as well as our ability to adjust sales prices to conform to energy prices, raw material costs and cost of utilities, to deliver products that drive enhanced performance in customers’ applications, and to increase global and regional capacity utilization.

Our ability to generate a financial return on our Rubber Carbon Black business, investments in debottlenecking, yield improvement technologies, etc., including U.S.

Environmental Protection Agency (“EPA”) related projects, contributed to improved operating results.

In late February 2022, Russia invaded Ukraine, significantly amplifying already existing geopolitical tensions among Russia and other countries in the region and in the West.

Currently, the conflict has impacted exports of Russian crude oil and natural gas.

The volatility, trading volumes, and prices in global crude oil and natural gas are expected to continue indefinitely.

The extent or length of any adverse effects of the war in Ukraine on the supply of oil and natural gas and the quality and availability of carbon black oil is difficult to quantify.

We are monitoring the stability of the natural gas supply in Europe though there is less concern this winter as many businesses and households have reduced consumption.

The European Union (“EU”) has proposed a voluntary gas demand reduction target of 15% to be achieved between August 1, 2022 and March 31, 2023.

To reach that target, Member States were encouraged to decrease gas consumption by the public sector and businesses, as well as households.

We have identified investments and operational changes which we believe would allow us to achieve between 35% and 40% reduction in natural gas without significantly affecting our production levels.

Reconciliation of 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.

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

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

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

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

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

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

We define Net Working Capital as inventories plus current trade receivables minus trade payables.

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

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

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

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

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

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

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

Orion Engineered Carbons S.A

operations being evaluated.

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

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

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

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

These non-GAAP measures include, but are not limited to, Gross profit per metric ton, Adjusted EBITDA, Net Working Capital, Capital Expenditures and Segment Adjusted EBITDA Margin (in percentage).

• Gross profit per metric ton —Gross profit divided by volume measured in metric tons.

• Adjusted EBITDA —Income from operations before depreciation and amortization, share-based compensation, and non-recurring items (such as, restructuring expenses, consulting fees related to Company strategy, legal settlement gain, etc.) plus Earnings in affiliated companies, net of tax.

• Net Working Capital —Inventories, net plus Accounts receivable, net minus Accounts payable.

• Capital Expenditures —Cash paid for the acquisition of property, plant and equipment.

• Segment Adjusted EBITDA Margin (in percentage )—Segment Adjusted EBITDA divided by segment revenue.

Adjusted EBITDA is used by our chief operating decision maker (“CODM”) to evaluate our operating performance and to 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 use this measure, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing our business.

We believe these measures are useful measures of financial performance in addition to Net income, Income from operations and other profitability measures under GAAP, because they facilitate operating performance comparisons from period to period.

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

In addition, we believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business.

However, other companies and analysts may calculate non-GAAP financial measures differently, so making comparisons among companies on this basis should be done carefully.

Non-GAAP measures are not performance measures under GAAP and should not be considered in isolation or construed as substitutes for Net sales, Net income, Income from operations, Gross profit and other GAAP measures as an indicator of our operations in accordance with GAAP.

Reconciliation of Non-GAAP Financial Measures

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

Reconciliation of Contribution Margin and Contribution Margin per Metric Ton to gross profit is as follows:

Year Ended December 31,

(In millions, except per ton data)

$ 1,546.8 $ 1,136.4

Variable costs

Gross profit per metric ton (A Non-GAAP Financial Measure)

In the fourth quarter of 2022, we implemented certain changes to our financial reporting structure.

We now use Gross profit and Gross profit per metric ton to evaluate our performance instead of Contribution margin and Contribution margin per metric ton.

This change had no impact on our historical Consolidated Financial Statements or the Footnotes to the Consolidated Financial Statements.

This change was made because we believe Gross profit and Gross profit per metric ton better reflect the overall operation of our business.

Reconciliation of Gross profit per metric ton is as follows:

Year Ended December 31, Year-Over-Year

2022 2021 2020 Delta

2021 2021 vs 2020

(In millions, except per ton data and percentage)

$ 2,030.9 $ 1,546.8 $ 1,136.4 $ 484.1 31.3 % $ 410.4 36.1 %

Contribution margin 566.9 463.9

Freight 92.9 68.8

Cost of sales

(1,582.1) (1,160.2) (844.1) (421.9) 36.4 % (316.1) 37.4 %

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Volume (in kmt) 962.9 964.3 866.8 (1.4) (0.1) % 97.5 11.2 %

Contribution margin per metric ton $ 587.9 $ 535.2

Gross profit per metric ton $ 466.1 $ 400.9 $ 337.3 $ 65.2 16.3 % 63.6 18.9 %

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

Year Ended December 31,

Orion Engineered Carbons S.A

Reconciliation of Net income to Adjusted EBITDA (A Non-GAAP financial Measure)

Reconciliation of Net income to Adjusted EBITDA is as follows:

Year Ended December 31, Year-Over-Year

2022 2021 Delta

(In millions) %

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Income from operations 197.1 228.5 (31.4) (13.7) %

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

Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 105.7 104.1 1.6 1.5 %

EBITDA 302.8 332.6 (29.8) (9.0) %

Earnings in affiliated companies, net of tax 0.5 0.7 (0.2) (28.6) %

Extraordinary expense items related to COVID-19 — 3.9

Evonik legal settlement:

Cash settlement (79.5) —

Release of legal reserve, net (3.4) —

Gain related to litigation settlement — (82.9) 82.9 (100.0) %

Long term incentive plan 7.7 5.2 2.5 48.1 %

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Adjusted EBITDA $ 312.3 $ 268.4 $ 43.9 16.4 %

Adjusted EBITDA Specialty Carbon Black

Specialty Carbon Black Adjusted EBITDA

$ 143.9 $ 148.4 $ (4.5) (3.0) %

Adjusted EBITDA Rubber Carbon Black

Rubber Carbon Black Adjusted EBITDA

$ 168.4 $ 120.0 $ 48.4 40.3 %

Orion Engineered Carbons S.A

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Net income $ 106.2 $ 134.7 $ (28.5) (21.2)%

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

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

Net sales increased by $484.1 million, or 31.3%, from $1,546.8 million in 2021 to $2,030.9 million in 2022, driven primarily by improved base price, passing through higher feedstock costs, impact of favorable product mix across both segments, plus higher volume in the Rubber Carbon Black segment.

Those were partially offset by lower volume in the Specialty Carbon Black segment, and unfavorable foreign currency translation impacted both segments.

Increased cogeneration revenue, a by-product, also benefited both segments.

Volumes decreased by 1.4 kmt, or 0.1%, to 962.9 kmt, year-over-year.

Cost of sales

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

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

Cost of sales increased by $421.9 million, or 36.4%, from $1,160.2 million in 2021 to $1,582.1 million in 2022, primarily due to higher raw material costs and production-associated costs.

2022 Gross profit increased by $62.2 million or 16.1%, from $386.6 million in 2021 to $448.8 million in 2022, and gross profit per metric ton increased by 16.3% or $65.2 to $466.1.

The increase was primarily driven by improved base price, favorable product mix in both segments and higher volume in the Rubber Carbon Black segment.

Those were partially offset by lower volume in the Specialty Carbon Black segment.

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

2021 Gross profit increased by $94.3 million or 32.3% from $292.3 million in 2020 to $386.6 million in 2021 and gross profit per metric ton increased by 18.9% or $63.6 to $400.9.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $34.3 million, or 19.5%, from $176.1 million in 2020 to $210.4 million in 2021 driven primarily by higher freight costs associated with increase in sales volumes and higher incentive compensation.

Selling, general and administrative expenses increased by $16.7 million, or 7.9%, from $210.4 million in 2021 to $227.1 million in 2022 driven primarily by higher freight and personnel costs, partially offset by the impact of foreign currency translation.

Gain related to litigation settlement

During the second quarter of 2021, Evonik agreed to make a one-time cash payment of €66.55 million ($79.5 million) to settle dispute which originated from the acquisition of the carbon black business line from Evonik, completed on July 29, 2011 by Rhône Capital and Triton Partners.

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

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

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

Other expenses, net

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

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

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

Orion Engineered Carbons S.A

Income from operations

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

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

Interest and other financial expense, net

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

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

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

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.

Income tax expense

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

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

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

For details regarding this deviation, see Item 8.

Financial Statements and Supplementary Data and Note P.

Income Taxes to the audited Consolidated Financial Statements.

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

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

tax credits of $3.6 million.

Income tax expense was $51.5 million and $51.7 million in 2022 and 2021, respectively.

The 2022 effective income tax rate was 32.7% compared with 27.7% in 2021.

The increase in the effective tax rate was mainly due to change in valuation allowance and tax rate differences.

Those were partially offset by the effects of earnings in various countries with lower statutory tax rates and tax-free income.

For details regarding this deviation, see Item 8.

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Income Taxes to the audited Consolidated Financial Statements.

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

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

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

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

Adjusted EBITDA (A Non-GAAP Financial Measure)

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

Adjusted EBITDA increased by $43.9 million, or 16.4%, from $268.4 million in 2021 to $312.3 million in 2022.

The increase was primarily due to improved base price, impact of favorable product mix across both segments and higher volume in the Rubber Carbon Black segment.

Those were partially offset by lower volume in the Specialty Carbon Black segment and the unfavorable impact of foreign currency translation.

Increased cogeneration revenue, a by-product, also benefited both segments.

Comprehensive Income

Year Ended December 31, Year-Over-Year

2022 2021 2020 Delta

2021 2021 vs 2020

(In millions)

Comprehensive income

$ 142.2 $ 134.9 $ 3.8 $ 7.3 $ 131.1

2022 vs 2021 ―Comprehensive income increased by $7.3 million, from $134.9 million to $142.2 million, primarily due to:

• $32.5 million related to financial derivative instruments primarily driven by net periodic changes in cross currency and interest rate swaps, and

• $9.1 million related to net changes in defined pension and other post-retirement benefits driven by discount rates and higher actual returns.

Those increases were partially offset by

• $28.5 million of lower net income;

2021 net income included gain related to litigation legal settlement not repeated in 2022, and

• $5.8 million of net unfavorable impacts of unrealized changes in foreign currency translation adjustments.

Relative to the U.S.

dollar, the value of the euro weakened during 2022, resulting in net losses related to unrealized changes in foreign currency translation which are reflected in the Consolidated Statements of Comprehensive Income.

2021 vs 2020 ―Comprehensive income increased by $131.1 million from $3.8 million to $134.9 million, primarily due to:

• $116.5 million of higher net income;

2021 net income included gain related to litigation legal settlement not included in 2020,

• $6.7 million net favorable impacts of unrealized changes in foreign currency translation adjustments.

Relative to the U.S.

dollar, the value of the euro increased during 2021, resulting in net gain related to unrealized changes in foreign currency translation which are reflected in the Consolidated Statements of Comprehensive Income,

• $5.3 million of net favorable impacts of financial derivative instruments primarily driven by periodic changes in cross currency and interest rate swaps and

• $2.6 million of net favorable changes in defined pension and other post-retirement benefits.

Orion Engineered Carbons S.A

Segment Discussion

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

Our business operations are divided into two operating 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 audited Consolidated Financial Statements for 2021, and 2020.

The table below presents our segment results for 2022, and 2021.

Year Ended December 31, Year-Over-Year

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2022 Compared to 2021

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

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

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

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

Net sales of the Specialty Carbon Black segment increased by $77.2 million, or 12.9%, from $598.2 million in 2021 to $675.4 million in 2022.

The net sales increase in 2022 was primarily driven by improved base price and favorable product mix, partially offset by lower sales volume and an unfavorable impact of foreign currency translation.

Volume of the Specialty Carbon Black segment decreased by 38.9 kmt, or 14.8%, from 263.2 kmt in 2021 to 224.3 kmt in 2022.

The volumes were lower due to customer destocking and lower demand, primarily in polymers, related to the weakening economy.

Gross profit of the Specialty Carbon Black segment increased marginally by $3.1 million, or 1.6%, from $197.6 million in 2021 to $200.7 million in 2022, primarily driven by higher margins and favorable product mix.

Adjusted EBITDA of the Specialty Carbon Black segment decreased by $4.5 million, or 3.0%, from $148.4 million in 2021 to $143.9 million in 2022.

Adjusted EBITDA decrease was due to lower volume, impact of unfavorable foreign currency translation and higher selling, general and administrative costs.

Those were partially offset by higher profit margins and favorable product mix.

Rubber Carbon Black

2022 Compared to 2021

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

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

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

Net sales of the Rubber Carbon Black segment increased by $406.9 million, or 42.9%, from $948.6 million in 2021 to $1,355.5 million in 2022.

The increase was primarily due to improved base price, pass through of feed stock costs, higher volume and favorable product mix, partially offset by the impact of unfavorable foreign currency translation.

Volume of the Rubber Carbon Black segment increased by 37.5 kmt, or 5.3%, from 701.1 kmt in 2021 to 738.6 kmt in 2022.

The increase reflects higher demand in Americas and Europe/Middle East/Africa.

Gross profit of the Rubber Carbon Black segment increased by $59.1 million, or 31.3%, from $189.0 million in 2021 to $248.1 million in 2022.

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

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

Adjusted EBITDA of the Rubber Carbon Black segment increased by $48.4 million, or 40.3%, from $120.0 million in 2021 to $168.4 million in 2022.

The increase was primarily due to pricing, higher volume and product mix, partially offset by the impact of unfavorable foreign currency translation and higher selling, general and administrative costs.

Orion Engineered Carbons S.A

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

Liquidity and Capital Resources

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Net cash provided by financing activities 149.3 73.3

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

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

Operating Activities —Cash provided by operating activities primarily reflected our Net income, adjusted for non-cash items and changes in working capital.

Investing Activities— Cash used by investing activities primarily reflects $165.8 million expenditures for safety, maintenance and growth investments and $67.0 million to install emissions reduction technology to meet the Environmental Protection Agency (“EPA”) requirements in the U.S.

See “ Note Q.

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

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

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

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

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

Commitments and Contingencies ” to the accompanying Consolidated Financial Statements for further discussion of the Company’s commitments and contingencies relating to the EPA.

Financing Activities— $149.3 million of cash provided by financing activities primarily reflects $91.0 million of net borrowings under our Revolving credit facilities (“RCF”) and ancillary facilities, $47.8 million to partially finance the construction of our Huaibei facility, China, $36.3 million proceeds from Repurchase agreement, and Other short-term debt and obligations, net.

Those were partially offset by a $30.2 million reduction in local uncommitted credit lines, scheduled debt repayments, dividend distributions and stock buybacks.

Debt and Other Obligations to the accompanying Consolidated Financial Statements for further information regarding the Company’s indebtedness.

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

Investing Activities— Approximately $119.8 million related to capital expenditures comprises a combination of safety, maintenance, sustainability and growth investments.

Additionally, approximately $94.9 million was associated with our ongoing efforts to install emissions reduction technology to meet EPA requirements.

Financing Activities— Net cash provided by financing activities is composed primarily of net borrowings under our revolving credit facility of $75.8 million for our working capital.

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

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

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

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

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

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

Debt and Other Obligations to the accompanying Consolidated Financial Statements for further discussion on our Term-loan refinancing.

Sources of Liquidity

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

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

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

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

As of December 31, 2022, the Company had liquidity of $292.2 million, including cash and equivalents of $60.8 million, $165.9 million in availability remaining under our revolving credit facility, including ancillary lines, $25.0 million undrawn on the term-loan for Huaibei, China, and $40.5 million under other available credit lines.

Orion Engineered Carbons S.A

Net Working Capital (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 total of Inventories, net and Accounts receivable, net, less Accounts payable.

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

Year Ended December 31,

The components of Net Working Capital at December 31, are as follows:

(In millions)

Inventories $ 229.8 $ 141.5

Trade receivables 288.9 234.8

Trade payables (195.1) (131.2)

Net working capital $ 323.6 $ 245.1

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.

Inventories, net $ 277.9 $ 229.8

Accounts receivable, net 367.8 288.9

Accounts payable (184.1) (195.1)

$ 461.6 $ 323.6

Our Net Working Capital position can vary significantly 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.

Our inventories and trade receivables increased primarily due to higher carbon black oil prices and higher Rubber Carbon Back sales volume.

These increases are partially offset by related increases in Accounts payable.

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.

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Our Net Working Capital increased to $461.6 million as of December 31, 2022 compared to $323.6 million as of December 31, 2021.

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

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

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

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

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

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

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

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

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

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

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

• Accounts receivable, net —Increase was driven by higher sales due to higher product demand and passing through of higher feedstock costs.

Those increases were partially offset by:

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

• Accounts payable —Decrease in accounts payable was primarily due to timing of payments, partially offset by higher production and higher oil prices.

Capital Requirements

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

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

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

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

Capital Expenditures —We define Capital Expenditures as cash paid for the Acquisition of property, plant and equipment.

We plan to finance our capital expenditures with cash generated by our operating activities and/or utilizing existing debt capacity.

We currently do not have any material commitments to make capital expenditures and do not plan to make capital expenditures outside the ordinary course of our business.

See “ Note Q.

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

Commitments and Contingencies ” to the accompanying Consolidated Financial Statements for further details regarding our prior settlement with the EPA.

Debt and Other Obligations —Our gross debt balance as of December 31, 2022 was $919.7 million, an increase of $131.2 million compared to December 31, 2021.

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

Maturities of $3.0 million of term loan debt, due in 2023, excluding net unamortized premiums and discounts, will be paid from current cash balances and cash generated by operations.

For more information on Debt, refer to Note J.

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

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

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

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

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

Orion Engineered Carbons S.A

Debt and Other Obligations to the accompanying Consolidated Financial Statements.

Contractual Obligations —We do not have material contractual obligations.

We believe other contractual obligations would be met with cash generated by our operating activities and/or utilizing existing debt capacity.

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

Commitments and Contingencies ” to the accompanying Consolidated Financial Statements.

Leases —We do not have material short-term lease obligations.

We believe lease obligations would be met with cash generated by our operating activities and/or utilizing existing debt capacity.

For operating and finance leases, refer to Note G.

Leases to the accompanying Consolidated Financial Statements.

Trend Information

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

Orion Engineered Carbons S.A

Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

For 2021 we performed a qualitative impairment assessment and for 2020 we performed a quantitative impairment assessment of our reporting units.

For 2022 and 2021, we performed a qualitative impairment assessment of our reporting units.

Both periods indicated the fair value of our reporting units was greater than their carrying value including goodwill.

Accordingly, a quantitative goodwill impairment test was not required in 2021.

No goodwill impairment was recognized in 2021 or 2020.

Accordingly, a quantitative goodwill impairment test was not required and no goodwill impairment was recognized in 2022 or 2021.

Loss Contingencies —We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable.

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Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

Orion Engineered Carbons S.A

We recognize future tax benefits to the extent that the realization of these benefits is more likely than not.

Our current provision for income taxes is impacted by the recognition and release of valuation allowances related to net deferred tax assets in certain jurisdictions.

Further changes to these valuation allowances may impact our future provision for income taxes, which will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.

Further changes to these valuation allowances may impact our future provision for income taxes, which will include no tax benefit with respect to

Orion Engineered Carbons S.A

losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.

We recognize the financial statement benefits with respect to an uncertain income tax position that we have taken or may take on an income tax return when we believe it is more likely than not that the position will be sustained with the tax authorities.

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For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note B.

Recent Accounting Pronouncements to the Consolidated Financial Statements.

Recent Accounting Pronouncements to the accompanying Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis