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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-24 · 64 added, 140 removed, 195 unchanged (51% of the section changed)

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GAAP”) and in U.S.

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

This section discusses year-to-year comparisons between 2023 and 2022.

For discussions on year-to-year comparison between 2022 and 2021 refer to Part II, Item 7.

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.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report in Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on February 23, 2023 (the “Prior Annual Report”).

In 2023, our net sales were $1,893.9 million, sales volume was 932.1 kmt, net income was $103.5 million, and Adjusted EBITDA was $332.3 million.

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General Economic Conditions, Cyclicality and Seasonality

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.

In 2023, our Net income was $103.5 million.

We had a record Adjusted EBITDA of $332.3 million due to improved contractual pricing and favorable foreign currency exchange impact despite demand softening in both segments compared to 2022.

Operating results were driven by our ability to adjust sales prices to conform to energy prices, raw material costs and cost of utilities and to deliver products that drive enhanced performance in customers’ applications.

Our ability to generate a financial return from investments in debottlenecking, yield improvement technologies, and the 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.

The Russia-Ukraine war, Hamas-Israel conflict, and China’s relations with the U.S.

and with the European Union (“EU”) significantly amplify geopolitical tensions among countries.

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

In addition, increased imports from China and Southeast Asia may impact our future operating and financial results.

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

Reconciliation of Non-GAAP Financial Measures

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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

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.

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

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

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Reconciliation of Non-GAAP Financial Measures

The following tables present a reconciliation of each Non-GAAP measure to the most directly comparable GAAP measure:

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

2023 2022 Delta

2021 2021 vs 2020

(In millions, except per ton data and percentage)

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Gross profit per metric ton $ 483.9 $ 466.1 $ 17.8 3.8 %

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

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Add back Interest and other financial expense, net 50.9 39.9 11.0 27.6 %

Add back Reclassification of actuarial losses from AOCI — 4.8 (4.8) (100.0) %

Add back Reclassification of actuarial gain from AOCI (8.9) — (8.9) — %

Income from operations 205.3 197.1 8.2 4.2 %

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EBITDA 318.3 302.8 15.5 5.1 %

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

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

Equity in earnings of affiliated companies, net of tax 0.5 0.5 — — %

Long term incentive plan 15.4 7.7 7.7 100.0 %

EPA-related expenses — 2.3 (2.3) (100.0) %

Environmental reserve accrual (0.4) 7.2 (7.6) (105.6) %

Environmental reserve (2.2) (0.4) (1.8) 450.0 %

Other adjustments 0.3 1.7 (1.4) (82.4) %

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$ 221.6 $ 168.4 $ 53.2 31.6 %

Orion Engineered Carbons S.A

Operating Result s

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Research and development costs 24.5 21.7 2.8 12.9%

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

Other expenses, net 2.9 8.6 (5.7) (66.3)%

Other expenses/(income) (0.7) 2.9 (3.6) (124.1)%

Income from operations 205.3 197.1 8.2 4.2%

Interest and other financial expense, net 50.9 39.9 11.0 27.6%

Reclassification of actuarial losses from AOCI — 4.8 (4.8) (100.0)%

Reclassification of actuarial (gains)/losses from AOCI (8.9) — (8.9) —%

Income before earnings in affiliated companies and income taxes 163.3 157.2 6.1 3.9%

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Net income $ 103.5 $ 106.2 $ (2.7) (2.5)%

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.

Net sales decreased by $137.0 million, or 6.7%, from $2,030.9 million in 2022 to $1,893.9 million in 2023, driven primarily by the pass-through effect of declining oil prices and lower volume in both segments.

Those were partially offset by improved contractual pricing.

Volume decreased by 30.8 kmt, or 3.2%, to 932.1 kmt, year-over-year reflecting weaker demand across all regions in both segments .

Cost of sales

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.

Cost of sales decreased by $139.2 million, or 8.8%, from $1,582.1 million in 2022 to $1,442.9 million in 2023, primarily due the effect of declining oil prices and lower volume.

Gross profit increased by $2.2 million or 0.5%, from $448.8 million in 2022 to $451.0 million in 2023, and gross profit per metric ton increased by 3.8% or $17.8 to $483.9.

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.

The increase was primarily driven by improved contractual pricing, partially offset by lower volume in both segments and lower cogeneration effects due to European electricity prices.

Selling, general and administrative expenses

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 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

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.

Selling, general and administrative expenses decreased by $5.2 million, or 2.3%, from $227.1 million in 2022 to $221.9 million in 2023 driven primarily by lower freight costs due to lower volume in both segments.

Income tax expense

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The 2023 effective income tax rate was 36.9% compared with 32.7%% in 2022.

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

The increase in the effective tax rate was mainly due to the increase of valuation allowance, income taxes for prior years and the increase of non-deductible business expenses and taxes.

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

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Adjusted EBITDA increased by $20.0 million, or 6.4%, from $312.3 million in 2022 to $332.3 million in 2023.

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.

The increase was primarily due to improved contractual pricing.

Those were partially offset by lower volume and cogeneration effects in both segments.

Comprehensive Income

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2023 2022 Delta

2021 2021 vs 2020

(In millions)

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$ 76.1 $ 142.2 $ (66.1)

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

2023 vs 2022 ―Comprehensive income decreased by $66.1 million, from $142.2 million to $76.1 million, primarily due to:

• $43.5 million related to net unfavorable impacts related to financial derivative instruments primarily driven by net periodic changes in cross currency and interest rate swaps, and

• $25.7 million related to net unfavorable changes in defined pension and other post-retirement benefits.

Those decreases were partially offset by

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

Segment Discussion

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Volume (kmt) 221.4 224.3 (2.9) (1.3) %

224.3 263.2 (38.9) (14.8) %

Adjusted EBITDA $ 110.7 $ 143.9 $ (33.2) (23.1) %

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2023 Compared to 2022

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.

Net sales of the Specialty Carbon Black segment decreased by $64.8 million, or 9.6%, from $675.4 million in 2022 to $610.6 million in 2023.

The net sales decrease in 2023 was primarily driven by the pass-through effect of declining oil prices.

Volume of the Specialty Carbon Black segment decreased by 2.9 kmt, or 1.3%, from 224.3 kmt in 2022 to 221.4 kmt in 2023.

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.

The volume was lower primarily due to weakness across most geographies.

Gross profit of the Specialty Carbon Black segment decreased by $40.4 million, or 20.1%, from $200.7 million in 2022 to $160.3 million in 2023, primarily driven by the lower margin due to lower demand, unfavorable product mix, and lower cogeneration effects.

Segment Adjusted EBITDA of the Specialty Carbon Black segment decreased by $33.2 million, or 23.1%, from $143.9 million in 2022 to $110.7 million in 2023.

The decrease was primarily due to unfavorable geographic and product mix and lower cogeneration effects due to lower European electricity prices.

Rubber Carbon Black

2023 Compared to 2022

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.

Net sales of the Rubber Carbon Black segment decreased by $72.2 million, or 5.3%, from $1,355.5 million in 2022 to $1,283.3 million in 2023.

The decrease was primarily due to the pass-through effect of declining oil prices and lower volume, partially offset by improved contractual pricing.

Volume of the Rubber Carbon Black segment decreased by 27.9 kmt, or 3.8%, from 738.6 kmt in 2022 to 710.7 kmt in 2023.

The decrease was primarily due to lower demand in the Americas and EMEA region.

Gross profit of the Rubber Carbon Black segment increased by $42.6 million, or 17.2%, from $248.1 million in 2022 to $290.7 million in 2023.

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

The increase in the period was primarily driven by improved contractual pricing, partially offset by lower cogeneration effects.

Segment Adjusted EBITDA of the Rubber Carbon Black segment increased by $53.2 million, or 31.6%, from $168.4 million in 2022 to $221.6 million in 2023.

The increase was primarily due to improved contractual pricing, partially offset by lower volume and cogeneration effects.

Liquidity and Capital Resources

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Net cash used in investing activities (172.8) (232.8)

Net cash provided by financing activities 149.3 73.3

Net cash provided by (used in) financing activities (197.1) 149.3

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

The change in working capital was primarily due to improved payment terms and factoring of certain Accounts receivable.

Investing Activities— Cash used by investing activities primarily reflects $143.7 million expenditures for safety, maintenance and growth investments and $29.1 million to install emissions reduction technology to meet the Environmental Protection Agency (“EPA”) requirements in the U.S.

See “ Note Q.

Financing Activities— Net cash used by financing activities was $197.1 million.

These outflows primarily consisted of $97.5 million, net related to repayment of our prior revolving credit facility (the “Prior RCF”) and ancillary credit facilities, $65.6 million for repurchase of common stock under the Stock Repurchase Program and $36.3 million repayment of the repurchase agreement to sell European Emission Allowance certificates (“Repurchase agreement”).

Those were partially offset by proceeds of borrowings to partially finance the construction of our Huaibei facility, China and working capital requirements in Korea.

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

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.

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.

Financing Activities— $149.3 million of cash provided by financing activities primarily reflects $91.0 million of net borrowings under our Prior 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 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 and Accounts receivable factoring.

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 Revolving credit facility and related ancillary facilities, various uncommitted local credit lines, and, from time to time, term loan borrowings and Accounts receivable factoring.

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)

As of December 31, 2023, the Company had liquidity of $279.3 million, including cash and equivalents of $37.5 million, $221.6 million in availability remaining under our revolving credit facility, including ancillary lines and $20.2 million under other available credit lines.

Net Working Capital (A Non-GAAP Financial Measure)

We define Net Working Capital as the total of Inventories, net and Accounts receivable, net, less Accounts payable.

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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.

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

Our Net Working Capital decreased to $344.4 million as of December 31, 2023 compared to $461.6 million as of December 31, 2022.

The decrease in working capital was primarily due to improved payment terms and factoring of certain Accounts receivable.

Accounts Receivable to the accompanying Consolidated Financial Statements for further information on the factoring agreement.

Capital Requirements

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

Debt and Other Obligations —Our gross debt balance as of December 31, 2023 was $818.2 million, a decrease of $101.5 million compared to December 31, 2022.

In 2024, we will repay $4.4 million of long-term debt from cash in hand and cash generated by operating activities.

For more information on Debt, refer to Note J.

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.

Contractual Obligations —We believe our contractual obligations will be met with cash generated by operating activities and/or utilizing existing debt capacity.

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

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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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This discussion should be read in conjunction with our Consolidated Financial Statements and related notes included in this Annual Report in Form 10-K.

Use of Estimates —We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) if different estimates and assumptions were used, the results could have a material impact on the Consolidated Financial Statements.

Estimates and assumptions are based on information available at the time such estimates and assumptions are made.

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 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.

Inventories —W e account for our raw materials, work-in-progress and finished goods inventories using average cost method of accounting.

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However, if actual market conditions are less favorable than those projected by management at the time of the assessment, additional inventory write-downs may be required, which could reduce our gross profit and our earnings.

Goodwill Impairment —We record goodwill for the excess of the cost of an acquisition over the fair value of the net assets of the acquired business.

Goodwill is reviewed for impairment at least annually or more frequently if an event or change in circumstance indicates that an impairment may have occurred.

We also have the option to proceed directly to the quantitative impairment test.

Under the quantitative impairment test, the fair value of each reporting unit, calculated using a discounted cash flow model, is compared to its carrying value including goodwill.

The discounted cash flow model inherently utilizes a significant number of estimates and assumptions including operating margins, tax rates, discount rates, capital expenditures and working capital changes.

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 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 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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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

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.

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.

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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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