Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the years ended December 31, 2023 and 2022, and should be read in conjunction with the information included under Item 1. Business and Item 8. Financial Statements and Supplementary Data included elsewhere in this Annual Report. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP” or “U.S. GAAP”) and in U.S. Dollars.
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 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”).
Overview
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.
• Specialty Carbon Black Segment —Adjusted EBITDA was $110.7 million, and the Adjusted EBITDA Margin was 18.1%. This segment accounted for 32.2% of our total revenue, 33.3% of total Adjusted EBITDA and 23.8% of our total volume in kmt in 2023.
• Rubber Carbon Black Segment —Adjusted EBITDA was $221.6 million, and Adjusted EBITDA Margin was 17.3%. This segment accounted for 67.8% of our total revenue, 66.7% of total Adjusted EBITDA and 76.2% of our total volume in kmt in 2023.
Key Factors Affecting Our Results of Operations
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. In addition, important factors that could cause our actual results of operations or financial conditions to differ materially from those expressed or implied below, include, but are not limited to, factors indicated under “ Item 1A. Risk Factors ” and “ Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 ” elsewhere in this Annual Report.
Recent Developments and Certain Known Trends
General Economic Conditions, Cyclicality and Seasonality
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.
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
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 their nearest comparable GAAP measures, see section Reconciliation of Non-GAAP Financial Measures below.
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).
We define:
• Gross profit per metric ton —Gross profit divided by volume measured in metric tons.
• 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.
• Capital Expenditures —Cash paid for the acquisition of property, plant and equipment.
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• 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
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)
Year Ended December 31, Year-Over-Year
2023 2022 Delta
(In millions, except per ton data and percentage)
Net sales
$ 1,893.9 $ 2,030.9 $ (137.0) (6.7) %
Cost of sales
(1,442.9) (1,582.1) 139.2 (8.8) %
Gross profit $ 451.0 $ 448.8 $ 2.2 0.5 %
Volume (in kmt) 932.1 962.9 (30.8) (3.2) %
Gross profit per metric ton $ 483.9 $ 466.1 $ 17.8 3.8 %
Reconciliation of Net income to Adjusted EBITDA (A Non-GAAP financial Measure)
Year Ended December 31, Year-Over-Year
2023 2022 Delta
(In millions) %
Net income $ 103.5 $ 106.2 $ (2.7) (2.5) %
Add back Income tax expense 60.3 51.5 8.8 17.1 %
Add back Earnings in affiliated companies, net of tax (0.5) (0.5) — — %
Income before earnings in affiliated companies and income taxes 163.3 157.2 6.1 3.9 %
Add back Interest and other financial expense, net 50.9 39.9 11.0 27.6 %
Add back Reclassification of actuarial gain from AOCI (8.9) — (8.9) — %
Income from operations 205.3 197.1 8.2 4.2 %
Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 113.0 105.7 7.3 6.9 %
EBITDA 318.3 302.8 15.5 5.1 %
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 %
Environmental reserve (2.2) (0.4) (1.8) 450.0 %
Other adjustments 0.3 1.7 (1.4) (82.4) %
Adjusted EBITDA $ 332.3 $ 312.3 $ 20.0 6.4 %
Specialty Carbon Black Adjusted EBITDA
$ 110.7 $ 143.9 $ (33.2) (23.1) %
Rubber Carbon Black Adjusted EBITDA
$ 221.6 $ 168.4 $ 53.2 31.6 %
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Operating Result s
2023 Compared to 2022
Operating results for the periods discussed are as follows:
Year Ended December 31, Year-Over-Year
2023 2022 Delta
(In millions) %
Net sales $ 1,893.9 $ 2,030.9 $ (137.0) (6.7)%
Cost of sales 1,442.9 1,582.1 (139.2) (8.8)%
Gross profit 451.0 448.8 2.2 0.5%
Selling, general and administrative expenses 221.9 227.1 (5.2) (2.3)%
Research and development costs 24.5 21.7 2.8 12.9%
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 (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%
Income tax expense 60.3 51.5 8.8 17.1%
Earnings in affiliated companies, net of tax 0.5 0.5 — —%
Net income $ 103.5 $ 106.2 $ (2.7) (2.5)%
Net sales
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 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
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 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 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
Income tax expense was $60.3 million and $51.5 million in 2023 and 2022, respectively.
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 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. For details regarding this deviation, see Item 8. Financial Statements and Supplementary Data and Note P. Income Taxes to the audited Consolidated Financial Statements.
Adjusted EBITDA (A Non-GAAP Financial Measure)
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 contractual pricing. Those were partially offset by lower volume and cogeneration effects in both segments.
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Comprehensive Income
Year Ended December 31, Year-Over-Year
2023 2022 Delta
(In millions)
Comprehensive income
$ 76.1 $ 142.2 $ (66.1)
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
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 for 2023, and 2022.
Year Ended December 31, Year-Over-Year
2023 2022 Delta
(In millions, unless otherwise indicated) %
Specialty Carbon Black
Net sales $ 610.6 $ 675.4 $ (64.8) (9.6) %
Cost of sales 450.3 474.7 (24.4) (5.1) %
Gross profit $ 160.3 $ 200.7 $ (40.4) (20.1) %
Volume (kmt) 221.4 224.3 (2.9) (1.3) %
Adjusted EBITDA $ 110.7 $ 143.9 $ (33.2) (23.1) %
Adjusted EBITDA Margin (%) 18.1 21.3 (3.2) (15.0) %
Rubber Carbon Black
Net sales $ 1,283.3 $ 1,355.5 $ (72.2) (5.3) %
Cost of sales 992.6 1,107.4 (114.8) (10.4) %
Gross profit $ 290.7 $ 248.1 $ 42.6 17.2 %
Volume (kmt) 710.7 738.6 (27.9) (3.8) %
Adjusted EBITDA $ 221.6 $ 168.4 $ 53.2 31.6 %
Adjusted EBITDA Margin (%) 17.3 12.4 4.9 39.5 %
Specialty Carbon Black
2023 Compared to 2022
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 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.
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Rubber Carbon Black
2023 Compared to 2022
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 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
Historical Cash Flows
The table below presents cash flows derived from our Consolidated Financial Statements.
Year Ended December 31,
2023 2022
(In millions)
Net cash provided by operating activities $ 345.9 $ 81.0
Net cash used in investing activities (172.8) (232.8)
Net cash provided by (used in) financing activities (197.1) 149.3
2023
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.
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. See Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements for further information regarding the Company’s indebtedness.
2022
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” 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 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. See Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements for further discussion on our Term-loan refinancing.
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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 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, 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. 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 components of Net Working Capital at December 31, are as follows:
2023 2022
(In millions)
Inventories, net $ 287.1 $ 277.9
Accounts receivable, net 241.0 367.8
Accounts payable (183.7) (184.1)
$ 344.4 $ 461.6
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. 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 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. See Note C. Accounts Receivable to the accompanying Consolidated Financial Statements for further information on the factoring agreement.
Capital Requirements
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.
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 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. 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
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Certain Known Trends.
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Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. The policies and estimates discussed below are considered by our management to be critical to an understanding of the Consolidated Financial Statements, because their application requires the most significant judgments from management in estimating matters for financial reporting that are inherently uncertain. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes included in this Annual Report in Form 10-K.
Inventories —W e account for our raw materials, work-in-progress and finished goods inventories using average cost method of accounting. The cost of raw materials, which represents a substantial portion of our operating expenses and energy costs generally follow price trends for crude oil and/or natural gas.
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. Due to natural inventory composition changes, variation in pricing from period to period does not necessarily result in a linear lower of cost or market (“LCM”) impact. Fluctuation in the prices from period to period may result in the recognition of charges to adjust the value of inventory to the lower of cost or market in periods of falling prices and the reversal of those charges in subsequent interim periods as market prices recover. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Historically, such write-downs have not been material. 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.
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. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision by a material amount or if the loss is not reasonably estimable but is expected to be material to our financial results. We are currently involved in litigation and other proceedings, as discussed in Note Q. Commitments and Contingencies to the accompanying Consolidated Financial Statements. We have accrued our estimates of the probable losses associated with these matters and associated legal costs are generally recognized as incurred. However, our losses are typically resolved over long periods of time and are often difficult to estimate due to various factors including the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in our estimates related to these matters.
Accruals for Taxes Based on Income —The determination of our provision for income taxes and the calculation of our tax benefits and liabilities is subject to management’s estimates and judgments due to the complexity of the tax laws and regulations in the tax jurisdictions in which we operate. Uncertainties exist with respect to interpretation of these complex laws and regulations.
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.
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.
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.
ACCOUNTING AND REPORTING CHANGES
For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note B. Recent Accounting Pronouncements to the accompanying Consolidated Financial Statements.
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