Orion Engineered Carbons S.A. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited U.S. GAAP financial statements. Orion produces rubber and specialty carbon black. Comparisons are with Q1 2020 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net sales | $360.1 million | $336.0 million |
| Gross profit / gross margin | $102.5 million / 28.5% | $90.2 million / 26.8% |
| Operating income / operating margin | $42.9 million / 11.9% | $37.5 million / 11.2% |
| Net income | $23.5 million | $18.0 million |
| Diluted earnings per share | $0.39 | $0.29 |
| Adjusted EBITDA (non-GAAP) | $70.9 million | $63.8 million |
| Operating cash flow | $1.8 million | $4.9 million |
| Capital expenditures | $27.2 million | $50.9 million |
| Cash and cash equivalents | $62.6 million | $64.9 million at Dec. 31, 2020 |
| Total debt reported in debt note | $745.0 million | $738.4 million at Dec. 31, 2020 |
| Net debt / net leverage, as reported by company | $686.9 million / 3.32x | Not stated here |
| Total liquidity, as reported by company | $310.3 million | Not stated here |
Liquidity comprised $62.6 million in cash, $210.1 million of revolving and ancillary facility capacity, and $37.6 million of other credit-line capacity. The company reported $1.8 million of operating cash flow despite net income of $23.5 million, with working-capital investment among the cash-flow movements. Net working capital rose to $273.7 million from $245.0 million at year-end 2020.
Contribution margin, a non-GAAP measure, increased to $147.1 million from $131.9 million; contribution margin per metric ton rose to $578.90 from $560.80. Sales volume increased 8.1% to 254.1 thousand metric tons. The effective tax rate was 26.0%, versus 29.8%.
Material changes and segment results
- Sales rose 7.2%, primarily on higher volumes in both segments amid a broader global economic recovery; unfavorable product mix partly offset the increase.
- Specialty Carbon Black sales grew 20.4% to $144.2 million. Adjusted EBITDA increased 41.3% to $39.7 million, and segment margin rose to 27.5% from 23.4%.
- Rubber Carbon Black sales were nearly flat at $215.9 million. Adjusted EBITDA fell 12.9% to $31.2 million and margin declined to 14.4% from 16.5%, reflecting higher SG&A and one-time Winter Storm Uri impacts; higher feedstock costs also weighed on gross profit.
- SG&A increased 17.6% to $52.4 million, driven mainly by higher freight costs and incentive compensation accruals. Operating income rose 14.1%.
- Comprehensive income was $20.8 million, compared with a comprehensive loss of $4.8 million in Q1 2020, when foreign-currency translation losses were substantially larger.
- Cash used in investing activities fell to $27.2 million from $50.9 million. Financing provided $25.6 million, including net borrowings; Q1 2020 financing included substantial revolving-credit draws.
Outlook, risks, and unusual items
Orion said cash on hand, operating cash flow, and available borrowings are expected to fund operating expenses, debt service, and capital expenditures for the foreseeable future. The filing provides no specific earnings or revenue guidance. Management cited continued market growth expectations, while noting that actual results may differ.
The EPA consent decree requires pollution-control installations and monitoring at four U.S. plants. Orion estimated total related capital expenditures of approximately $230 million to $270 million, with approximately $133 million spent to date. Ivanhoe work was delayed by COVID-19; Orion declared force majeure and requested a schedule extension, which the EPA had not confirmed. Actual costs and timing remain uncertain, and noncompliance could result in further penalties.
Orion is pursuing arbitration against Evonik over an indemnity for certain pre-acquisition environmental costs; recovery is uncertain, and the company said costs may substantially exceed indemnity coverage. The company also disclosed ordinary-course claims and litigation, including asbestos matters, and stated that outcomes are inherently uncertain. Other cited risks include COVID-19 and economic conditions, raw-material and energy costs, customer and supplier dependence, manufacturing disruptions, environmental regulation, currency and interest-rate changes, and debt-service capacity.
Important facts for investors to verify
- Whether demand, volumes, and specialty-segment profitability remain strong, and whether rubber-segment margins recover.
- Operating cash conversion and working-capital needs, particularly given rising inventories and receivables and sensitivity to oil prices.
- Available liquidity, debt balances, net leverage, and compliance with financing terms.
- EPA project schedule, remaining installation costs, force-majeure extension, and potential Evonik indemnity recovery.