Orion S.A. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the three months ended March 31, 2024 and 2023 and should be read in conjunction with the information included under Item 1. Financial Statements and Supplementary Data (Unaudited) elsewhere in this report. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION Non-GAAP Financial Measures We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and 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. • 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. 14 Table of Contents Orion S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Reconciliation of Non-GAAP Financial Measures The following tables present a reconciliation of each Non-GAAP measure to the most directly comparable GAAP measure: Reconciliation of Gross profit per metric ton: (In millions, except volume and per metric ton data) Three Months Ended March 31, 2024 2023 Delta Net sales $ 502.9 $ 500.7 $ 2.2 0.4 Cost of sales (380.7) (364.3) (16.4) 4.5 Gross profit $ 122.2 $ 136.4 $ (14.2) (10.4) Volume (in kmt) 248.4 233.5 14.9 6.4 Gross profit per metric ton $ 491.9 $ 584.2 $ (92.3) (15.8) Reconciliation of Net income to Adjusted EBITDA: Three Months Ended March 31, 2024 2023 Delta (In millions) % Net income $ 26.7 $ 42.3 $ (15.6) (36.9) Add back Income tax expense 13.5 18.3 (4.8) (26.2) Add back Equity in earnings of affiliated companies, net of tax (0.1) (0.1) — — Income before earnings in affiliated companies and income taxes 40.1 60.5 (20.4) (33.7) Add back Interest and other financial expense, net 12.7 15.2 (2.5) (16.4) Add back Reclassification of actuarial gain from AOCI — (2.2) 2.2 (100.0) Income from operations 52.8 73.5 (20.7) (28.2) Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 28.9 25.7 3.2 12.5 EBITDA 81.7 99.2 (17.5) (17.6) Equity in earnings of affiliated companies, net of tax 0.1 0.1 — — Long term incentive plan 3.5 2.1 1.4 66.7 Other adjustments — (0.3) 0.3 (100.0) Adjusted EBITDA $ 85.3 $ 101.1 $ (15.8) (15.6) Adjusted EBITDA Specialty Carbon Black $ 27.9 $ 37.3 $ (9.4) (25.2) Adjusted EBITDA Rubber Carbon Black $ 57.4 $ 63.8 $ (6.4) (10.0) 15 Table of Contents Orion S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Operating Results The table below presents our historical results derived from our Condensed Consolidated Financial Statements for the periods indicated. Three Months Ended March 31, Year-Over Year 2024 2023 Delta (In millions) % Net sales $ 502.9 $ 500.7 $ 2.2 0.4 Cost of sales 380.7 364.3 16.4 4.5 Gross profit 122.2 136.4 (14.2) (10.4) Selling, general and administrative expenses 61.5 57.7 3.8 6.6 Research and development costs 6.6 6.2 0.4 6.5 Other (income) expenses, net 1.3 (1.0) 2.3 (230.0) Income from operations 52.8 73.5 (20.7) (28.2) Interest and other financial expense, net 12.7 15.2 (2.5) (16.4) Reclassification of actuarial gain from AOCI — (2.2) 2.2 (100.0) Income before earnings in affiliated companies and income taxes 40.1 60.5 (20.4) (33.7) Income tax expense 13.5 18.3 (4.8) (26.2) Earnings in affiliated companies, net of tax 0.1 0.1 — — Net income 26.7 42.3 (15.6) (36.9) Other comprehensive income (loss), net of tax Foreign currency translation adjustments (6.4) (7.3) 0.9 (12.3) Net losses on derivatives (0.5) (1.8) 1.3 (72.2) Defined benefit plans, net 0.1 (1.4) 1.5 (107.1) Total other comprehensive (loss) income, net of tax (6.8) (10.5) 3.7 (35.2) Comprehensive income $ 19.9 $ 31.8 $ (11.9) (37.4) Net sales Net sales for the three months ended March 31, 2024 increased by $2.2 million, or 0.4%, to $502.9 million, year over year, primarily driven by higher volume in both segments. Those were partially offset by the pass-through effect of declining oil prices in both segments and lower cogeneration price due to European electricity prices. Volume for the three months ended March 31, 2024 increased in aggregate by 14.9 kmt to 248.4 kmt, year over year, primarily due to higher volume in both segments. Specialty volume recovery was across all regions and end markets. Cost of sales Cost of sales for the three months ended March 31, 2024 increased by $16.4 million, or 4.5%, to $380.7 million year over year, primarily due to higher volume in both segments and associated costs. Those were partially offset by declining oil prices. Gross profit Gross profit for the three months ended March 31, 2024 decreased by $14.2 million, or 10.4%, to $122.2 million, year over year. The decrease was primarily driven by favorable timing items in the prior year, North American rubber volume, higher fixed costs and lower cogeneration pricing in Europe. Those were partially offset by higher volume in both segments. Gross profit per metric ton decreased by 15.8% to $491.9, year over year, driven by lower margin in both segments. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended March 31, 2024 increased by $3.8 million , or 6.6% to $61.5 million, year over year, due to higher personnel costs. Provision for income taxes For the three months ended March 31, 2024, and 2023 the Company recognized Income before earnings in affiliated companies and income taxes of $40.1 million, compared to $60.5 million, respectively. The provision for income taxes was an expense of $13.5 million and $18.3 million for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate for the three months ended March 31, 2024, and 2023 was 33.7% and 30.2%, respectively. The increase in effective tax rate for three months ended March 31, 2024, 16 Table of Contents Orion S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation as compared to the three months ended March 31, 2023, was primarily attributable to changes in projected pre-tax income mix in countries with varying statutory tax rates. Adjusted EBITDA (A Non-GAAP Financial Measure) Adjusted EBITDA decreased in the first quarter of 2024 by $15.8 million, or 15.6%, to $85.3 million, year over year. The decrease was driven by favorable timing items in the prior year, North American rubber volume, higher fixed costs and lower cogeneration pricing in Europe. Comprehensive Income Comprehensive income decreased in the first quarter of 2024 by $11.9 million to $19.9 million, year over year. The components of Comprehensive income are discussed below: Net income decreased by $15.6 million in the first quarter of 2024 compared to the first quarter of 2023. These were partially offset by, • $0.9 million of net impacts of unrealized changes in foreign currency translation adjustments. • $1.3 million of net impacts related to financial derivative instruments primarily driven by net periodic changes in cross currency and interest rate swaps, and • $1.5 million of net changes in defined pension and other post-retirement benefits. Segment Discussion Our operations are managed through two reportable segments, Specialty Carbon Black and Rubber Carbon Black . We use Segment Adjusted EBITDA as the measure of segment performance and profitability. The table below presents our segment results derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Three Months Ended March 31, (In millions, except volume and percentage data) 2024 2023 Delta Specialty Carbon Black Net sales $ 170.9 $ 162.0 $ 8.9 5.5 Cost of sales 129.2 109.9 19.3 17.6 Gross profit $ 41.7 $ 52.1 $ (10.4) (20.0) Volume (kmt) 63.3 53.0 10.3 19.4 Adjusted EBITDA $ 27.9 $ 37.3 $ (9.4) (25.2) Adjusted EBITDA margin (%) 16.3 23.0 (6.7) (29.1) Rubber Carbon Black Net sales $ 332.0 $ 338.7 $ (6.7) (2.0) Cost of sales 251.5 254.4 (2.9) (1.1) Gross profit $ 80.5 $ 84.3 $ (3.8) (4.5) Volume (kmt) 185.1 180.5 4.6 2.5 Adjusted EBITDA $ 57.4 $ 63.8 $ (6.4) (10.0) Adjusted EBITDA margin (%) 17.3 18.8 (1.5) (8.0) Specialty Carbon Black Net sales for the three months ended March 31, 2024 increased by $8.9 million, or 5.5%, year over year, to $170.9 million, primarily driven by higher volume, partially offset by pass-through effect of declining oil prices. Volume for the three months ended March 31, 2024 increased by 10.3 kmt, or 19.4%, year over year, to 63.3 kmt, primarily due to volume recovery across all regions and end markets. 17 Table of Contents Orion S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Gross profit for the three months ended March 31, 2024 decreased by $10.4 million, or 20.0%, year over year, to $41.7 million, primarily driven by lower margin and lower cogeneration pricing in Europe, partially offset by higher volume. Adjusted EBITDA for the three months ended March 31, 2024 decreased by $9.4 million, or 25.2%, year over year, to $27.9 million, primarily due to lower margin and lower cogeneration pricing in Europe, partially offset by higher volume across all regions and end-markets. Adjusted EBITDA margin for the three months ended March 31, 2024 decreased by 670 basis points, year over year, to 16.3%. Rubber Carbon Black Net sales for the three months ended March 31, 2024 decreased by $6.7 million, or 2.0%, year over year, to $332.0 million. The decrease was primarily due to the pass-through effect of declining oil prices, partially offset by higher volume. Volume for the three months ended March 31, 2024 increased by 4.6 kmt, or 2.5%, year over year, to 185.1 kmt, due to higher demand in Europe/Middle East/Africa and Asia/Pacific regions. Gross profit for the three months ended March 31, 2024 decreased by $3.8 million, or 4.5%, year over year, to $80.5 million. The decrease was primarily due to lower margin and lower cogeneration pricing in Europe, partially offset by and higher volume. Adjusted EBITDA for the three months ended March 31, 2024 decreased by $6.4 million, or 10.0%, year over year, to $57.4 million. The decrease was primarily driven by favorable timing items in the prior year, North American Rubber volume and lower cogeneration pricing in Europe, partially offset by higher European and Asian volume. For the three months ended March 31, 2024, Adjusted EBITDA margin decreased 150 basis points to 17.3%, year over year. Liquidity and Capital Resources Historical Cash Flows The tables below present our historical cash flows derived from our unaudited Condensed Consolidated Financial Statements for the periods indicated. Three Months Ended March 31, 2024 2023 (In millions) Net cash provided by operating activities $ 32.4 $ 108.1 Net cash used in investing activities (33.1) (30.5) Net cash provided by (used in) financing activities 7.0 (62.5) 2024 Net cash provided by operating activities during the three months ended March 31, 2024 was $32.4 million. The cash provided by operating activities primarily reflects changes in working capital. Change in working capital includes $107.6 million sale of certain accounts receivables, discussed in Note B. Accounts Receivable . Net cash used in investing activities in the three months ended March 31, 2024 amounted to $33.1 million. The expenditures were primarily related to safety and maintenance investments. Net cash provided by financing activities during the three months ended March 31, 2024 amounted to $7.0 million. These inflows primarily consisted of $37.5 million related to other short-term debt borrowings, partially offset by $28.4 million, net related to repayment of our ancillary credit facilities. 2023 Net cash provided by operating activities for the three months ended March 31, 2023, amounted to $108.1 million. The cash provided by operating activities primarily reflects changes in working capital and higher Net income. Change in working capital includes $68.9 million sale of certain accounts receivables, discussed in Note B. Accounts Receivable . Net cash used in investing activities for the three months ended March 31, 2023, amounted to $30.5 million. These expenditures were comprised of a combination of safety, maintenance-related and growth investments, as well as $8.4 million of expenditures associated with our, now completed, installation of emissions reduction technology to meet EPA requirements in the U.S. 18 Table of Contents Orion S.A. Management’s Discussion and Analysis of Financial Condition and Results of Operation Net cash used in financing activities for the three months ended March 31, 2023, amounted to $62.5 million. These outflows primarily consisted of $32.9 million related to repayment of our ancillary credit facilities and $29.3 million for repurchase of common stock under the Stock Repurchase Program. 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 (the “RCF”) 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 flows, 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 March 31, 2024, the company had total liquidity of $261.7 million, including cash and equivalents of $43.9 million, $192.6 million availability under our revolving credit facility, including ancillary lines, and $25.2 million of capacity under other available credit lines. Net debt was $773.1 million, and Net leverage was 2.44x. Net working capital (A Non-GAAP Financial Measure) We define Net working capital as the sum total of current Accounts receivable, net and Inventories, net less Accounts payable. Net working capital is a non-GAAP financial measure and other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Net working capital. The following table sets forth the principal components of our Net working capital as of the dates indicated. March 31, 2024 December 31, 2023 (In millions) Accounts receivable, net $ 269.7 $ 241.0 Inventories, net 277.5 287.1 Accounts payable (183.8) (183.7) Net working capital $ 363.4 $ 344.4 Our Net working capital position can vary significantly from month to month, mainly due to fluctuations in oil prices and receipts of carbon black oil shipments. In general, increases in the cost of raw materials lead to an increase in our Net working capital requirements, as our inventories and trade receivables increase as a result of higher carbon black oil prices and related sales levels. These increases are partially offset by related increases in trade payables. Due to the quantity of carbon black oil that we typically keep in stock, such increases in Net working capital occur gradually over a period of two to three months. Conversely, decreases in the cost of raw materials lead to a decrease in our Net working capital requirements over the same period of time. Our Net working capital increased from $344.4 million as of December 31, 2023, to $363.4 million as of March 31, 2024. The drivers of the changes in working capital over the periods were: • Accounts receivable, net —Increase driven by higher sales were partially offset by improved payment terms. • Inventories, net —The primary driver for inventory decreases were lower oil prices. Capital expenditures (A Non-GAAP Financial Measure) 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 by 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. Off-Balance Sheet Arrangements As of March 31, 2024, we did not have any off-balance sheet arrangements. 19 Table of Contents Orion S.A. Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 This report contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target,” “to be” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters: • our strategies for (i) maintaining or strengthening our position in Specialty Carbon Black or Rubber Carbon Black, (ii) maintaining or increasing our Specialty or Rubber Carbon Black margins and (iii) maintaining or strengthening the competitiveness of our operations; • our profit and cash flow projections; • the outcome of any in-progress, pending or possible litigation or regulatory proceedings; • the expectations regarding environmental-related costs and liabilities; • the expectations regarding the performance of our industry and the global economy, including foreign currency rate fluctuations; • the sufficiency of our cash on hand, cash provided by operating activities and borrowings to pay our operating expenses, satisfy our debt obligations and fund capital expenditures; • the ability to pay dividends; • our anticipated spending on, and the timely completion and anticipated impacts of, capital projects including growth projects, and the construction of new plants; • our projections and expectations for pricing, financial results and performance in 2024 and beyond; • the status of contract negotiations with counterparties and the impact of new contracts on our business; and • our expectation that the markets we serve will continue to demand our products. All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others: • possible negative or uncertain worldwide economic conditions and developments; • the volatility and cyclicality of the industries in which we operate; • the operational risks inherent in chemicals manufacturing, including disruptions due to technical facilities, severe weather conditions or natural disasters; • our dependence on major customers and suppliers; • unanticipated fluctuations in demand for our products, including due to factors beyond our control; • our ability to compete in the industries and markets in which we operate; • changes in the nature of transportation in the future, which may impact our customers and our business; • our ability to successfully develop new products and technologies; • the availability of substitutes for our products; • our ability to implement our business strategies; • our ability to respond to changes in feedstock prices and quality; • our ability to realize benefits from investments, joint ventures, acquisitions or alliances; • our ability to negotiate satisfactory terms with counterparties, the satisfactory performance by such counterparties of their obligations to us, as well as our ability to meet our performance obligations towards such counterparties; • our ability to realize benefits from planned plant capacity expansions and site development projects and the impacts of potential delays to such expansions and development projects; • any information technology systems failures, network disruptions and breaches of data security; • our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages; 20 Table of Contents Orion S.A. • our ability to recruit or retain key management and personnel; • our exposure to political or country risks inherent in doing business globally; • any and all impacts from the Russia-Ukraine war and the Hamas-Israel conflict and/or any escalation thereof related energy costs, raw material availability or other economic disruptions; • geopolitical events in the United States (“U.S.”), Middle-East, European Union (“EU”) and China, relations amongst Western countries and their neighbors, as well as future relations between the U.S., EU, China, and other countries and organizations; • all environmental, health and safety laws and regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities; • any possible future investigations and enforcement actions by governmental, supranational agencies or other organizations; • our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases as well as other accidents; • any market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy; • any litigation or legal proceedings, including product liability, environmental or asbestos related claims; • our ability to protect our intellectual property rights and know-how; • our ability to generate the funds required to service our debt and finance our operations; • any fluctuations in foreign currency exchange and interest rates; • the availability and efficiency of hedging; • any changes in international and local economic conditions, dislocations in credit and capital markets and inflation or deflation; • any potential impairments or write-offs of certain assets; • any required increases in our pension fund or retirement-related contributions; • the adequacy of our insurance coverage; • any changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions; • any challenges to our decisions and assumptions in assessing and complying with our tax obligations; • the potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion S.A. (a Luxembourg incorporated entity) in the U.S. or elsewhere outside Luxembourg; and • any current or future changes to disclosure requirements and obligations, including but not limited to new ESG-related disclosures, related audit requirements and our ability to comply with such obligations and requirements. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include those factors detailed under the captions “Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” and “Risk Factors” and in “ Note Q. Commitments and Contingencies” to our audited Consolidated Financial Statements regarding contingent liabilities, including litigation in our Annual Report in Form 10-K for the year ended December 31, 2023 and in our quarterly reports in Form 10-Q and the unaudited Condensed Consolidated Financial Statements contained therein. It is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, as a result of new information, future events or other information, other than as required by applicable law. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the period ended March 31, 2024 does not differ materially from “ Item 7A” in our Annual Report in Form 10-K for the year ended December 31, 2023.