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,
2023 2022 2023 2022
(In millions, except share and per share data)
Net sales $ 458.8 $ 541.2 $ 959.5 $ 1,025.7
Cost of sales 341.7 421.4 706.0 788.0
Gross profit 117.1 119.8 253.5 237.7
Selling, general and administrative expenses 55.0 59.7 112.7 117.2
Research and development costs 5.9 5.9 12.1 11.4
Other (income) expenses, net ( 2.7 ) 1.3 ( 3.7 ) 1.6
Income from operations 58.9 52.9 132.4 107.5
Interest and other financial expense, net 13.5 10.5 28.7 18.9
Reclassification of actuarial gain from AOCI ( 2.3 ) — ( 4.5 ) —
Income before earnings in affiliated companies and income taxes 47.7 42.4 108.2 88.6
Income tax expense 17.8 12.8 36.1 26.6
Earnings in affiliated companies, net of tax 0.2 0.1 0.3 0.2
Net income $ 30.1 $ 29.7 $ 72.4 $ 62.2
Weighted-average shares outstanding (in thousands):
Basic 59,012 60,807 59,646 60,880
Diluted 59,510 61,010 60,085 61,237
Earnings per share:
Basic $ 0.51 $ 0.49 $ 1.21 $ 1.02
Diluted $ 0.51 $ 0.49 $ 1.20 $ 1.02
See accompanying Notes to these Condensed Consolidated Financial Statements
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Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
(In millions)
Net income $ 30.1 $ 29.7 $ 72.4 $ 62.2
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments ( 5.2 ) ( 18.8 ) ( 12.5 ) ( 7.0 )
Net gains (losses) on derivatives ( 0.4 ) 8.5 ( 2.2 ) 21.5
Defined benefit plans, net ( 1.5 ) 0.1 ( 2.9 ) 0.2
Other comprehensive income (loss) ( 7.1 ) ( 10.2 ) ( 17.6 ) 14.7
Comprehensive income $ 23.0 $ 19.5 $ 54.8 $ 76.9
See accompanying Notes to these Condensed Consolidated Financial Statements
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Condensed Consolidated Balance Sheets
June 30, 2023 December 31, 2022
(In millions, except share data)
ASSETS
Current assets
Cash and cash equivalents $ 77.3 $ 60.8
Accounts receivable, net 269.6 367.8
Inventories, net 268.6 277.9
Income tax receivables 15.2 5.2
Prepaid expenses and other current assets 68.8 66.8
Total current assets 699.5 778.5
Property, plant and equipment, net 838.8 818.5
Right-of-use assets 112.2 97.6
Goodwill 74.8 73.4
Intangible assets, net 25.8 27.8
Investment in equity method affiliates 5.3 5.0
Deferred income tax assets 35.6 29.1
Other assets 51.2 58.8
Total non-current assets 1,143.7 1,110.2
Total assets $ 1,843.2 $ 1,888.7
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 170.3 $ 184.1
Current portion of long-term debt and other financial liabilities 189.0 258.3
Accrued liabilities 35.8 44.7
Income taxes payable 34.5 31.3
Other current liabilities 46.5 34.4
Total current liabilities 476.1 552.8
Long-term debt, net 666.9 657.0
Employee benefit plan obligation 51.8 50.0
Deferred income tax liabilities 73.7 70.0
Other liabilities 110.5 99.5
Total non-current liabilities 902.9 876.5
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 – 58,640,846 and 60,571,556 shares
85.3 85.3
Treasury stock, at cost, 2,351,413 and 420,703
( 54.0 ) ( 8.8 )
Additional paid-in capital 75.3 76.4
Retained earnings 387.7 319.0
Accumulated other comprehensive loss ( 30.1 ) ( 12.5 )
Total stockholders' equity 464.2 459.4
Total liabilities and stockholders' equity $ 1,843.2 $ 1,888.7
TY
See accompanying Notes to these Condensed Consolidated Financial Statements
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Condensed Consolidated Statements of Cash Flows
7
Six Months Ended June 30,
2023 2022
(In millions)
Cash flows from operating activities:
Net income $ 72.4 $ 62.2
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 52.9 54.7
Amortization of debt issuance costs 1.3 0.8
Share-based incentive compensation 4.7 3.1
Deferred tax provision 1.4 4.1
Foreign currency transactions 4.9 ( 13.4 )
Reclassification of actuarial gain from AOCI ( 4.5 ) —
Other operating non-cash items, net ( 0.5 ) ( 0.9 )
Changes in operating assets and liabilities, net:
Trade receivables 99.0 ( 137.8 )
Inventories 6.2 ( 68.7 )
Trade payables ( 8.3 ) 46.1
Other provisions ( 9.3 ) ( 6.9 )
Income tax liabilities ( 7.4 ) 7.2
Other assets and liabilities, net ( 6.6 ) ( 1.4 )
Net cash provided by (used in) operating activities 206.2 ( 50.9 )
Cash flows from investing activities:
Acquisition of property, plant and equipment ( 69.1 ) ( 108.7 )
Net cash used in investing activities ( 69.1 ) ( 108.7 )
Cash flows from financing activities:
Proceeds from long-term debt borrowings 7.8 17.2
Repayments of long-term debt ( 1.5 ) ( 1.5 )
Payments for debt issue costs ( 0.2 ) ( 0.8 )
Cash inflows related to current financial liabilities 85.6 178.3
Cash outflows related to current financial liabilities ( 160.4 ) ( 52.2 )
Dividends paid to shareholders ( 2.5 ) ( 2.5 )
Repurchase of common stock under Stock Repurchase Program ( 49.5 ) ( 0.4 )
Net cash provided by (used in) financing activities ( 120.7 ) 138.1
Increase (decrease) in cash, cash equivalents and restricted cash 16.4 ( 21.5 )
Cash, cash equivalents and restricted cash at the beginning of the period 63.4 68.5
Effect of exchange rate changes on cash 0.1 ( 2.5 )
Cash, cash equivalents and restricted cash at the end of the period 79.9 44.5
Less restricted cash at the end of the period
2.6 3.6
Cash and cash equivalents at the end of the period $ 77.3 $ 40.9
See accompanying Notes to these Condensed Consolidated Financial Statements
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Condensed Consolidated Statements of Changes in Stockholders’ Equity
Common stock Total
(In millions, except share and per share amounts) Number Amount Treasury shares Additional paid-in capital Retained earnings Accumulated other comprehensive loss
Balance at January 1, 2023 60,571,556 $ 85.3 $ ( 8.8 ) $ 76.4 $ 319.0 $ ( 12.5 ) $ 459.4
Net income — — — — 42.3 — 42.3
Other comprehensive loss, net of tax — — — — — ( 10.5 ) ( 10.5 )
Dividends $ 0.02 per share — — — — ( 1.3 ) — ( 1.3 )
Repurchases of Common stock ( 1,286,915 ) — ( 29.3 ) — — — ( 29.3 )
Share based compensation — — — 2.1 — — 2.1
Issuance of stock under equity compensation plans 131,550 — 2.9 ( 4.6 ) — — ( 1.7 )
Balance at March 31, 2023 59,416,191 85.3 ( 35.2 ) 73.9 360.0 ( 23.0 ) 461.0
Net income — — — — 30.1 — 30.1
Other comprehensive loss, net of tax — — — — — ( 7.1 ) ( 7.1 )
Dividends $ 0.04 per share — — — — ( 2.4 ) — ( 2.4 )
Repurchases of Common stock ( 822,595 ) — ( 20.2 ) — — — ( 20.2 )
Share based compensation — — — 2.6 — — 2.6
Issuance of stock under equity compensation plans 47,250 — 1.4 ( 1.2 ) — — 0.2
Balance at June 30, 2023 58,640,846 $ 85.3 $ ( 54.0 ) $ 75.3 $ 387.7 $ ( 30.1 ) $ 464.2
j
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 loss — — — — 29.7 — 29.7
Other comprehensive loss, net of tax — — — — — ( 10.2 ) ( 10.2 )
Dividends $ 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
See accompanying Notes to these Condensed Consolidated Financial Statements
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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
7
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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Notes to the Condensed Consolidated Financial Statements—(continued)
Note A. Organization, Description of the Business and Summary of Significant Accounting Policies
Orion S.A.’s (formerly, Orion Engineered Carbons S.A.) unaudited Condensed Consolidated Financial Statements include Orion 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, 2022.
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.
Note B. Accounts Receivable
Accounts receivable, net of allowance for credit losses, are as follows:
June 30, 2023 December 31, 2022
(In millions)
Accounts receivable $ 272.0 $ 370.4
Expected credit losses ( 2.4 ) ( 2.6 )
Accounts receivable, net of expected credit losses $ 269.6 $ 367.8
Note C. Inventories
Inventories, net of reserves, are as follows:
June 30, 2023 December 31, 2022
(In millions)
Raw materials, consumables and supplies, net $ 112.4 $ 108.3
Finished goods, net 156.2 169.6
Inventories, net $ 268.6 $ 277.9
Note D. Debt and Other Obligations
Debt and other obligations are as follows:
June 30, 2023 December 31, 2022
(In millions)
Current
Current portion of Term-Loan $ 3.0 $ 3.0
Deferred debt issuance costs - Term-Loan ( 0.7 ) ( 0.7 )
Other short-term debt and obligations 186.7 256.0
Current portion of long-term debt and other financial liabilities 189.0 258.3
Non-current
Term-Loan 617.7 613.2
Deferred debt issuance costs - Term-Loan ( 3.4 ) ( 3.7 )
China Term-Loan 52.6 47.5
Long-term debt, net 666.9 657.0
Total $ 855.9 $ 915.3
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Notes to the Condensed Consolidated Financial Statements—(continued)
a. Term-Loan
The Term-Loan facility was allocated to one term loan facility denominated in U.S. dollars of $ 300 million and another denominated in Euros of € 300 million with both having a maturity date of September 24, 2028. Interest is calculated based on three months EURIBOR (for the Euro-denominated loan) plus a margin of 2.50 %, or three-month USD-LIBOR (for the USD-denominated loan) plus a margin of 2.25 %.
Due to cessation of US dollar LIBOR after June 30, 2023 (“LIBOR cessation date”), in May 2023, the Company entered into the Eleventh Amendment to the Credit Agreement (the “Term-Loan”) to update the referenced floating benchmark rate. The U.S. dollar loan, 3-M USD-Libor will be replaced by USD Term SOFR 3M + CAS (Credit Adjustment Spread) effective for all interest rate periods after June 30, 2023.
Other provisions of the Credit Agreement relating to the Term Loan remained unchanged.
b. Revolving credit facility
The capacity under our revolving credit facility (“RCF”) is € 350 million. Interest is calculated based on EURIBOR (for euro drawings), and USD Term SOFR + CAS (for U.S. Dollar drawings) plus a 1.65 % - 2.70 % margin (depending on leverage ratio).
As of June 30, 2023 and December 31, 2022, borrowings under the RCF were $ 27.2 million and $ 53.3 million, respectively. 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, 2023 and December 31, 2022, availability under the RCF was $ 205.0 million and $ 165.9 million, respectively.
Ancillary Credit Facilities —As part of the RCF, the Company can also establish ancillary credit facilities by converting the commitments of select lenders under the € 350.0 million RCF into bilateral credit agreements. Original borrowings under ancillary credit facilities reduce availability under the RCF. Borrowings under ancillary credit facilities do not count toward debt drawn under the RCF for the purposes of determining whether the financial covenant under the Credit Agreement related to the RCF must be tested.
As of June 30, 2023 and December 31, 2022, committed ancillary credit facilities totaled $ 291.5 million and $ 286.1 million, respectively.
c. Other Short-Term borrowings and Obligations
Other short-term debt and obligations are as follows:
June 30, 2023 December 31, 2022
(In millions)
Revolving credit facility $ 27.2 $ 53.3
Ancillary credit facilities
OEC GmbH outstanding borrowings 132.9 148.7
OEC LLC outstanding borrowings 9.2 5.4
Uncommitted local lines of credit:
Korea (capacity $ 39.7 million)
1.9 —
Brazil (capacity $ 3.3 million)
— 2.9
China working capital 4.1 1.5
Korea working capital loan 11.4 7.9
Repurchase agreement — 36.3
Total of Other short-term debt and obligations $ 186.7 $ 256.0
Supplemental information:
Total ancillary capacity - EUR € 268.3 € 268.3
Total ancillary capacity - U.S. $ $ 291.5 $ 286.1
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Notes to the Condensed Consolidated Financial Statements—(continued)
As of June 30, 2023, we are in compliance with our debt covenants.
Accounts Receivable Factoring Facilities ― We entered into agreements with various third-party financial institutions for the sale of certain Accounts receivable. We have concluded that there would generally be no risk of loss to us from non-payment of the sold receivables because:
• The transferred financial assets have been isolated beyond the reach of our creditors, even in bankruptcy or other receivership;
• The party purchasing accounts receivables has the right to pledge and or exchange the transferred assets without restrictions; and
• We do not retain effective control over the transferred financial assets.
In the Condensed Consolidated Statements of Operations, the loss on receivables sale is reflected in Other expenses, net. For the three and six months ended June 30, 2023 the loss on receivables sale were not material. No sales were made during 2022.
For the three and six months ended June 30, 2023, the gross amount of receivables sold were as $ 125.2 million and $ 194.1 million, respectively.
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, 2022.
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, 2023 or December 31, 2022.
Cash flow hedge
Due to LIBOR cessation, the Company in May 2023 amended its previously existing cross-currency swaps in the amount of $ 197 million to update the referenced floating benchmark rate. The effective date to transition from US dollar LIBOR 3M to US dollar Term SOFR 3M + CAS (Credit Adjustment Spread) will be on September 29, 2023. Other terms of the cross-currency swaps remained unchanged. The cross-currency swap will expire on September 30, 2028, in line with the maturity of the term loan.
In 2021 we adopted Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 848, Reference Rate Reform (“ASC 848 ”). This guidance permits entities to elect certain optional expedients for contract modifications for debt, and leases related to reference rate reform as well as derivative contracts and for the continued application of hedge accounting to certain hedging relationships affected by reference rate reform activities.
We applied the practical expedients allowed under ASC 848 as follows:
• Accounted for the modification to our term loan facility as if the modification was not substantial in accordance with ASC 470-50, Modifications and Extinguishment and thus a continuation of the existing contract.
• The cross-currency swaps in cash-flow hedging relationships were not de-designated as a result of the modifications and continue to be highly effective and qualify for hedge accounting.
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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, 2023 December 31, 2022 Balance Sheet Classification
Notional Amount Fair Value Notional Amount Fair Value
(In millions)
Assets
Derivatives designated as hedges:
Cross currency swaps $ 197.0 $ 40.1 $ 197.0 $ 46.6 Other financial assets (non-current)
Interest rate swaps 298.8 8.7 293.3 9.6 Other financial assets (non-current)
Total $ 495.8 $ 48.8 $ 490.3 $ 56.2
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 2023 or 2022.
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 Condensed Consolidated Balance Sheets.
June 30, 2023 December 31, 2022
Notional Amount Fair Value Notional Amount Fair Value
(In millions)
Non-derivatives:
Liabilities:
Term-Loan $ 620.7 $ 609.8 $ 616.2 $ 596.8
China Term loan 52.6 48.0 47.5 42.9
Total $ 673.3 $ 657.8 $ 663.7 $ 639.7
Term-Loan and China Term-Loan in the table above are classified as Level 2.
At both June 30, 2023 and December 31, 2022, the fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments.
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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
2023 2022 2023 2022
(In millions)
Derivatives designated as hedges:
Cross currency swaps $ ( 0.8 ) $ 8.3 $ 0.4 $ 0.4 Interest and other financial expense, net
Interest rate swaps — 3.8 — — Interest and other financial expense, net
Total $ ( 0.8 ) $ 12.1 $ 0.4 $ 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
2023 2022 2023 2022
(In millions)
Derivatives designated as hedges:
Cross currency swaps $ ( 3.0 ) $ 20.9 $ 0.8 $ 0.9 Interest and other financial expense, net
Interest rate swaps ( 0.9 ) 9.7 — — Interest and other financial expense, net
Total $ ( 3.9 ) $ 30.6 $ 0.8 $ 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, 2022, 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,
2023 2022 2023 2022
(In millions)
Service cost $ 0.2 $ 0.3 $ 0.5 $ 0.6
Interest cost 0.7 0.4 1.3 0.8
Amortization of actuarial (gain) ( 2.3 ) — ( 4.5 ) —
Net periodic pension cost $ ( 1.4 ) $ 0.7 $ ( 2.7 ) $ 1.4
Service costs were recorded in Income from operations in Selling, general and administrative expenses, and interest costs were recorded in Interest and other financial expense, net.
The amortization of actuarial (gain) 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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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, 2023 $ ( 47.5 ) $ 24.4 $ 10.6 $ ( 12.5 )
Other comprehensive income (loss) before reclassifications ( 7.8 ) ( 3.3 ) — ( 11.1 )
Income tax effects 0.5 1.0 — 1.5
Amounts reclassified from AOCI — 0.4 ( 2.2 ) ( 1.8 )
Income tax effects on reclassifications — ( 0.1 ) 0.7 0.6
Currency translation AOCI — 0.2 0.1 0.3
Balance at March 31, 2023 ( 54.8 ) 22.6 9.2 ( 23.0 )
Other comprehensive (loss) ( 5.1 ) ( 0.5 ) — ( 5.6 )
Income tax effects ( 0.1 ) 0.2 — 0.1
Amounts reclassified from AOCI — 0.4 ( 2.3 ) ( 1.9 )
Income tax effects on reclassifications — ( 0.2 ) 0.7 0.5
Currency translation AOCI — ( 0.3 ) 0.1 ( 0.2 )
Balance at June 30, 2023 $ ( 60.0 ) $ 22.2 $ 7.7 $ ( 30.1 )
Balance at January 1, 2022 $ ( 34.1 ) $ ( 10.8 ) $ ( 3.6 ) $ ( 48.5 )
Other comprehensive loss 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 income 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 )
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,
2023 2022 2023 2022
(In millions, except share and per share data)
Net income attributable to ordinary equity holders $ 30.1 $ 29.7 $ 72.4 $ 62.2
Weighted average number of Common stock (in thousands) 59,012 60,807 59,646 60,880
Basic EPS $ 0.51 $ 0.49 $ 1.21 $ 1.02
Dilutive effect of share based payments (in thousands) 498 203 439 357
Weighted average number of diluted Common stock (in thousands) 59,510 61,010 60,085 61,237
Diluted EPS $ 0.51 $ 0.49 $ 1.20 $ 1.02
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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, 2023 and 2022 were $ 17.8 million and $ 12.8 million, respectively.
Income tax expense for the six months ended June 30, 2023 and 2022 were $ 36.1 million and $ 26.6 million, respectively.
Our effective income tax rates were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Effective income tax rates 37.3 % 30.1 % 33.4 % 30.0 %
The increase in our effective tax rate for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 was primarily attributable to the projected earnings mix by geography and tax jurisdiction.
Note J. Commitments and Contingencies
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.
City of Hürth, Germany (Stadtwerke Hürth/Hürth municipal utilities) —In 2020, one of our wholly-owned subsidiaries and the City of Hürth started a long-term steam supply to the City of Hürth. The Hürth municipality financed certain turbines and infrastructure, which are operated by us under a finance lease agreement. In addition, we entered into a long-term supply agreement with the City of Hürth for delivery of heat. 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 had open receivables from the City of Hürth totaling $ 7.2 million and $ 9.8 million as of June 30, 2023 and December 31, 2022, respectively. Open lease payments to the City of Hürth accrued to approximately $ 5.2 million and $ 7.0 million as of June 30, 2023 and December 31, 2022, respectively.
In June 2023, we and the City of Hürth resolved the disagreement and net settled outstanding receivables and lease liabilities for the years ended 2020 and 2021. In addition, we and the City of Hürth resolved the disagreement on certain contract terms for periods after the year 2021. The settlement did not materially impact the Condensed Consolidated Statements of Operations.
EPA Action— Under the EPA CD, Orion LLC had to install certain pollution control technology in order to further reduce emissions at its four U.S. manufacturing facilities. In line therewith, Orion LLC installed emissions control technology to remove SO2, NOx and dust particles from tail gases at its Borger (Texas) facility beginning of 2023, and its Ivanhoe (Louisiana) facility in 2021. Further emissions controls were installed in accordance with the EPA CD at Orion’s facility in Orange (Texas) in 2020. The installation of pollution control technology at its fourth and last U.S. manufacturing facility in Belpre (Ohio) is ongoing and is scheduled to be completed in 2023, in line with the EPA CD terms. The EPA CD also requires continuous monitoring of emissions reductions that Orion LLC will need to comply with over a number of years.
As of June 30, 2023, we have spent $ 296 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 on EPA Action refer to “Note Q. Commitments and Contingencies”, included in our Annual Report in Form 10-K for the year ended December 31, 2022.
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 in which it operates excluding China as collateral under its debt agreements. As of June 30, 2023, the Company had guarantees totaling $ 25.9 million issued by various financial institutions.
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Notes to the Condensed Consolidated Financial Statements—(continued)
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, and
• Specialty Carbon Black —Used for protection, colorization and conductivity in coatings, polymers, batteries, printing and other special applications.
Corporate includes income and expenses that cannot be directly allocated to the business segments or that are managed at the corporate level. This includes finance income and expenses, taxes and items with less bearing on the underlying core business.
Discrete financial information is available for each of the segments, and the Chief Operating Decision Maker (“CODM”) uses operating results of each operating 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, share-based compensation, and non-recurring items (such as restructuring expenses, consulting fees related to Company strategy, legal settlements gains, etc.) plus Earnings 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.
Segment operating results for the three months ended June 30, 2023 and 2022 are as follows:
Rubber Specialty Corporate Total
(In millions)
2023
Net sales from external customers $ 309.3 $ 149.5 $ — $ 458.8
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 17.9 9.3 — 27.2
Equity in earnings of affiliated companies, net of tax 0.2 — — 0.2
Interest and other financial expense, net ( 13.5 ) ( 13.5 )
Reclassification of actuarial gain from AOCI 2.3 2.3
Adjusted EBITDA 57.4 29.9 — 87.3
2022
Net sales from external customers $ 359.3 $ 181.9 $ — $ 541.2
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 17.0 10.4 — 27.4
Equity in earnings of affiliated companies, net of tax 0.1 — — 0.1
Interest and other financial expense, net ( 10.5 ) ( 10.5 )
Adjusted EBITDA 38.0 45.4 — 83.4
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Notes to the Condensed Consolidated Financial Statements—(continued)
Segment operating results for the six months ended June 30, 2023 and 2022:
Rubber Specialty Corporate Total Segments
(In millions)
2023
Net sales from external customers $ 648.0 $ 311.5 $ — $ 959.5
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 33.7 19.2 — 52.9
Equity in earnings of affiliated companies, net of tax 0.3 — — 0.3
Interest and other financial expense, net ( 28.7 ) ( 28.7 )
Reclassification of actuarial gain from AOCI 4.5 4.5
Adjusted EBITDA 121.2 67.2 — 188.4
2022
Net sales from external customers $ 666.2 $ 359.5 $ — $ 1,025.7
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 )
Adjusted EBITDA 78.7 87.9 — 166.6
A reconciliation of Income before earnings in affiliated companies and income taxes to Adjusted EBITDA for each of the periods presented is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
(In millions)
Income before earnings in affiliated companies and income taxes $ 47.7 $ 42.4 $ 108.2 $ 88.6
Corporate charges 1.0 3.0 2.8 4.2
Depreciation and amortization of intangible assets, right of use assets, and property, plant and equipment 27.2 27.4 52.9 54.7
Equity in earnings of affiliated companies, net of tax 0.2 0.1 0.3 0.2
Interest and other financial expense, net 13.5 10.5 28.7 18.9
Reclassification of actuarial gain from AOCI ( 2.3 ) — ( 4.5 ) —
Adjusted EBITDA $ 87.3 $ 83.4 $ 188.4 $ 166.6
Corporate charges include the following:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
(In millions)
Long term incentive plan $ 2.6 $ 1.6 $ 4.7 $ 3.1
Other non-operating ( 1.6 ) 1.4 ( 1.9 ) 1.1
Corporate Charges $ 1.0 $ 3.0 $ 2.8 $ 4.2
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Management’s Discussion and Analysis of Financial Condition and Results of Operation