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, 2024 and 2023, 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 2024 and 2023. For discussions on year-to-year comparison between 2023 and 2022 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Annual Report in Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on February 15, 2024 (the “ Prior Annual Report ”).
Overview
In 2024, our net sales were $1,877.5 million, sales volume was 934.8 kmt, net income was $44.2 million, and Adjusted EBITDA was $302.2 million.
• Specialty Carbon Black Segment —Adjusted EBITDA was $108.1 million. This segment accounted for 34.4% of our total revenue, 35.8% of total Adjusted EBITDA and 26.3% of our total volume in kmt in 2024.
• Rubber Carbon Black Segment —Adjusted EBITDA was $194.1 million. This segment accounted for 65.6% of our total revenue, 64.2% of total Adjusted EBITDA and 73.7% of our total volume in kmt in 2024.
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
Throughout 2024, Rubber Carbon Black markets faced headwinds from soft global demand, capacity additions and economic uncertainty. Higher tire imports in the U.S. and Europe also adversely impacted our Rubber Carbon Black segment. In contrast, Specialty Carbon Black segment benefited from demand recovery.
In 2024, our Net income was $44.2 million. A criminal scheme that resulted in multiple fraudulently-induced outbound wire transfers to accounts controlled by unknown third parties aggregating to $42.9 million, net of $16.4 million of tax benefit, also adversely impacted our net income.
Adjusted EBITDA of $302.2 million was lower compared to 2023, primarily due to demand softening in the Rubber Carbon Black segment, higher fixed costs and lower cogeneration. However, improved demand for Specialty Carbon Black products, across all regions, positively impacted our Adjusted EBITDA.
Availability of, and volatility in the prices for various carbon black feedstocks including those that are oil based, can be influenced by a variety of geopolitical considerations, for example, government policy on climate change, the ongoing Russian-Ukraine war, the Middle-East conflicts, and the incoming U.S. administration’s energy policy in the United States, among others. While it is reasonable to expect continued volatility in the global energy-related commodity markets, we have worked to mitigate risks associated with such volatility by incorporating the aforementioned raw material cost pass-through provisions in our supply agreements when possible, and by qualifying multiple sources of feedstocks and energy sources for our manufacturing operations. Depending upon how the tariff measures unfold as discussed in Item 1A. Risk Factors, increased imports may impact our future operating and financial results.
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.
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These non-GAAP measures include, but are not limited to, Adjusted EBITDA, Net Working Capital and Capital Expenditures.
We define:
• Adjusted EBITDA —Income from operations before depreciation and amortization, stock-based compensation, and non-recurring items (such as, restructuring expenses, Loss due to misappropriation of assets, net, 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.
Our operations are managed by senior executives who report to our Chief Executive Officer (“CEO”), the chief operating decision maker (“CODM”). Adjusted EBITDA is used by 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.
Operating Result s
2024 Compared to 2023
Operating results for the periods discussed are as follows:
Year Ended December 31, Year-Over-Year
2024 2023 Delta
(In millions, except volume) %
Volume (in kmt) 934.8 932.1 2.7 0.3%
Net sales $ 1,877.5 $ 1,893.9 $ (16.4) (0.9)%
Cost of sales 1,448.7 1,442.9 5.8 0.4%
Gross profit 428.8 451.0 (22.2) (4.9)%
Selling, general and administrative expenses 237.8 221.9 15.9 7.2%
Research and development costs 27.1 24.5 2.6 10.6%
Loss due to misappropriation of assets, net 59.3 — 59.3 —%
Other expense (income), net 1.9 (0.7) 2.6 (371.4)%
Income from operations 102.7 205.3 (102.6) (50.0)%
Interest and other financial expense, net 49.4 50.9 (1.5) (2.9)%
Reclassification of actuarial gains from AOCI — (8.9) 8.9 (100.0)%
Income before earnings in affiliated companies and income taxes 53.3 163.3 (110.0) (67.4)%
Income tax expense 9.7 60.3 (50.6) (83.9)%
Earnings in affiliated companies, net of tax 0.6 0.5 0.1 20.0%
Net income $ 44.2 $ 103.5 $ (59.3) (57.3)%
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (24.3) (7.6) (16.7) 219.7%
Net gains (losses) on derivatives (5.3) (8.3) 3.0 (36.1)%
Defined benefit plans, net (0.4) (11.5) 11.1 (96.5)%
Other comprehensive income (loss) (30.0) (27.4) (2.6) 9.5%
Comprehensive income $ 14.2 $ 76.1 $ (61.9) (81.3)%
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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:
Reconciliation of Net income to Adjusted EBITDA (A Non-GAAP financial Measure)
Year Ended December 31, Year-Over-Year
2024 2023 Delta
(In millions) %
Net income $ 44.2 $ 103.5 $ (59.3) (57.3) %
Add back Income tax (benefit) expense 9.7 60.3 (50.6) (83.9) %
Add back Equity in earnings of affiliated companies, net of tax (0.6) (0.5) (0.1) 20.0 %
Income before earnings in affiliated companies and income taxes 53.3 163.3 (110.0) (67.4) %
Add back Interest and other financial expense, net 49.4 50.9 (1.5) (2.9) %
Add back Reclassification of actuarial gain from AOCI — (8.9) 8.9 — %
Income from operations 102.7 205.3 (102.6) (50.0) %
Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets 125.3 113.0 12.3 10.9 %
EBITDA 228.0 318.3 (90.3) (28.4) %
Equity in earnings of affiliated companies, net of tax 0.6 0.5 0.1 20.0 %
Loss due to misappropriation of assets, net
Misappropriation of assets, net 55.7 — 55.7 — %
Professional fees related to misappropriation of assets 3.6 — 3.6 — %
Long term incentive plan 15.3 15.4 (0.1) (0.6) %
Environmental reserves — (2.2) 2.2 (100.0) %
Other adjustments (1.0) 0.3 (1.3) (433.3) %
Adjusted EBITDA $ 302.2 $ 332.3 $ (30.1) (9.1) %
Specialty Carbon Black Adjusted EBITDA
$ 108.1 $ 110.7 $ (2.6) (2.3) %
Rubber Carbon Black Adjusted EBITDA
$ 194.1 $ 221.6 $ (27.5) (12.4) %
Net sales
Volume increased marginally by 2.7 kmt, or 0.3%, to 934.8 kmt, year-over-year, primarily due to higher Specialty Carbon Black segment volume, partially offset by lower Rubber Carbon Black segment volume .
Net sales decreased marginally by $16.4 million, or 0.9%, from $1,893.9 million in 2023 to $1,877.5 million in 2024, driven primarily by pass-through effect of lower oil prices, lower Rubber Carbon Black segment volume and unfavorable foreign currency translation impact, partially offset by broad-based recovery in the Specialty Carbon Black segment across all regions.
Cost of sales
Cost of sales increased marginally by $5.8 million, or 0.4%, from $1,442.9 million in 2023 to $1,448.7 million in 2024, primarily to associated costs of higher Specialty Carbon Black segment volume and higher fixed costs.
Gross profit
Gross profit decreased by $22.2 million or 4.9%, from $451.0 million in 2023 to $428.8 million in 2024.
The decrease was primarily driven by higher fixed costs, unfavorable impact from pass-through of raw material costs and lower cogeneration.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $15.9 million, or 7.2%, from $221.9 million in 2023 to $237.8 million in 2024 driven primarily by higher freight and personnel costs.
Loss due to misappropriation of assets, net
During the third quarter of 2024, we were the target of a criminal scheme that resulted in multiple fraudulently induced outbound wire transfers to accounts controlled by unknown third parties aggregating to $55.7 million, net of recoveries. In addition, we incurred $3.6
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million of professional fees in connection with our investigations. For more information, refer to Note Q. Commitments and Contingencies to the Condensed Consolidated Financial Statements.
Income tax expense
Income tax expense was $9.7 million and $60.3 million in 2024 and 2023, respectively.
The 2024 effective income tax rate was 18.0% compared with 36.9% in 2023. The decrease in the effective tax rate was mainly due to the release of uncertain tax positions and impacts from changes in U.S. international tax laws. Those were partially offset by the effects of valuation allowances on tax losses and nondeductible expenses.
We recognized $16.4 million of tax benefit related to Loss due to misappropriation of assets, net. For further discussion refer to Note Q. Commitments and Contingencies to the Condensed Consolidated Financial Statements.
The 2024 effective tax rate was particularly impacted by:
• the release of uncertain tax positions of $13.3 million and associated interest, and
• benefits from the changes in U.S. international laws of $9.6 million.
For further details, see Note P. Income Taxes in Item 8. Financial Statements and Supplementary Data, to the audited Consolidated Financial Statements.
Adjusted EBITDA (A Non-GAAP Financial Measure)
Adjusted EBITDA decreased by $30.1 million, or 9.1%, from $332.3 million in 2023 to $302.2 million in 2024. The decrease was primarily due to higher selling, general and administrative expenses, lower Rubber Carbon Black segment volume and lower cogeneration. Those were partially offset by higher volume in the Specialty Carbon Black segment.
Comprehensive Income
2024 vs 2023 ―Comprehensive income decreased by $61.9 million, from $76.1 million to $14.2 million, primarily due to a decrease in net income. The activities from the remaining components of Comprehensive income are discussed below.
• $16.7 million unfavorable foreign currency translation adjustments due to U.S. dollar versus euro.
Those decreases were partially offset by:
• $11.1 million related to net favorable changes in defined pension and other post-retirement benefits, and
• $3.0 million related to net favorable impacts related to financial derivative instruments primarily driven by net periodic changes in cross currency swaps.
Segment Discussion
Our business operations are divided into two operating segments—Specialty Carbon Black and Rubber Carbon Black. We use Segment Adjusted EBITDA as a measure of segment performance and profitability. The table below presents our segment results for 2024 and 2023.
Year Ended December 31, Year-Over-Year
2024 2023 Delta
(In millions, unless otherwise indicated) %
Specialty Carbon Black
Volume (kmt) 245.8 221.4 24.4 11.0 %
Net sales $ 646.3 $ 610.6 $ 35.7 5.8 %
Cost of sales 494.4 450.3 44.1 9.8 %
Gross profit $ 151.9 $ 160.3 $ (8.4) (5.2) %
Adjusted EBITDA $ 108.1 $ 110.7 $ (2.6) (2.3) %
Rubber Carbon Black
Volume (kmt) 689.0 710.7 (21.7) (3.1) %
Net sales $ 1,231.2 $ 1,283.3 $ (52.1) (4.1) %
Cost of sales 954.3 992.6 (38.3) (3.9) %
Gross profit $ 276.9 $ 290.7 $ (13.8) (4.7) %
Adjusted EBITDA $ 194.1 $ 221.6 $ (27.5) (12.4) %
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Specialty Carbon Black
2024 Compared to 2023
Specialty Carbon Black segment volume increased by 24.4 kmt, or 11.0%, from 221.4 kmt in 2023 to 245.8 kmt in 2024, primarily due to demand recovery across all regions and end markets.
Net sales of the Specialty Carbon Black segment increased by $35.7 million, or 5.8%, from $610.6 million in 2023 to $646.3 million in 2024. The net sales increase in 2024 was primarily due to higher volume across all regions, partially offset by unfavorable product mix and unfavorable foreign currency translation impact.
Gross profit of the Specialty Carbon Black segment decreased by $8.4 million, or 5.2%, from $160.3 million in 2023 to $151.9 million in 2024, primarily driven by higher fixed costs and lower cogeneration, partially offset by higher volume.
Adjusted EBITDA of the Specialty Carbon Black segment decreased by $2.6 million, or 2.3%, from $110.7 million in 2023 to $108.1 million in 2024. The decrease was primarily due to higher fixed costs and lower cogeneration. Those were partially offset by higher volume.
Rubber Carbon Black
2024 Compared to 2023
Volume of the Rubber Carbon Black segment decreased by 21.7 kmt, or 3.1%, from 710.7 kmt in 2023 to 689.0 kmt in 2024. The decrease was primarily due to lower demand in the Americas region.
Net sales of the Rubber Carbon Black segment decreased by $52.1 million, or 4.1%, from $1,283.3 million in 2023 to $1,231.2 million in 2024. The decrease was primarily due to lower volume and the pass-through effect of lower oil prices, partially offset by favorable price.
Gross profit of the Rubber Carbon Black segment decreased by $13.8 million, or 4.7%, from $290.7 million in 2023 to $276.9 million in 2024. The decrease in the period was primarily driven by lower volume and lower cogeneration, partially offset by favorable price.
Adjusted EBITDA of the Rubber Carbon Black segment decreased by $27.5 million, or 12.4%, from $221.6 million in 2023 to $194.1 million in 2024. The decrease was primarily due to lower volume in Americas region, lower cogeneration and higher fixed costs. Those were partially offset by favorable price.
Liquidity and Capital Resources
Historical Cash Flows
The table below presents cash flows derived from our Consolidated Financial Statements.
Year Ended December 31,
2024 2023
(In millions)
Net cash provided by operating activities $ 125.3 $ 345.9
Net cash used in investing activities (206.7) (172.8)
Net cash provided by (used in) financing activities 89.3 (197.1)
2024
Operating Activities —Cash provided by operating activities primarily reflected our Net income, adjusted for non-cash items and changes in working capital. The $55.7 million Loss due to misappropriation of assets, net of recoveries, $3.6 million of related professional fees and $16.4 million associated tax benefit are also included in cash provided by operating activities.
Investing Activities— Cash used by investing activities amounted to $206.7 million. The expenditures were primarily related to maintenance and growth investments, including $66.4 million related to construction of the facility in La Porte, Texas.
Financing Activities— Net cash provided by financing activities was $89.3 million. These inflows primarily consisted of $68.2 million, net borrowings under our ancillary credit facilities and $48.0 million related to other short-term debt borrowings. Those were partially offset by scheduled debt repayments, dividend distributions and repurchase of shares of Common stock. See Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements for further information regarding the Company’s indebtedness.
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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, 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, 2024, the Company had liquidity of $201.6 million, including cash and equivalents of $44.2 million, $127.5 million in availability remaining under our revolving credit facility, including ancillary lines and $29.9 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:
2024 2023
(In millions)
Inventories, net $ 290.4 $ 287.1
Accounts receivable, net 211.9 241.0
Accounts payable (156.2) (183.7)
$ 346.1 $ 344.4
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 increased to $346.1 million as of December 31, 2024 compared to $344.4 million as of December 31, 2023. The primary working capital change drivers, year over year, were as follows:
• Accounts receivable, net —Improved payment terms and the factoring of certain Accounts receivable reduced this balance. See Note C. Accounts Receivable to the accompanying Consolidated Financial Statements for further information on the factoring agreement.
This was partially offset by:
• Accounts payable —Decrease in accounts payable was primarily due to timing of payments and lower production.
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 material commitments to make capital expenditures except for the under-construction facility at La Porte, Texas. We do not plan to make any other capital expenditures outside the ordinary course of our business.
Debt and Other Obligations —Our gross debt balance as of December 31, 2024 was $908.7 million, an increase of $90.5 million compared to December 31, 2023. In 2025, we will repay $8.7 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.
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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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