Orion S.A. — Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. Orion makes rubber and specialty carbon black, reported in its Rubber Carbon Black and Specialty Carbon Black segments. Unless otherwise noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $458.8 million | $541.2 million | $959.5 million | $1,025.7 million |
| Gross profit | $117.1 million | $119.8 million | $253.5 million | $237.7 million |
| Income from operations | $58.9 million | $52.9 million | $132.4 million | $107.5 million |
| Net income | $30.1 million | $29.7 million | $72.4 million | $62.2 million |
| Diluted EPS | $0.51 | $0.49 | $1.20 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $87.3 million | $83.4 million | $188.4 million | $166.6 million |
Q2 gross margin was approximately 25.5%, versus 22.1% a year earlier; first-half gross margin was approximately 26.4%, versus 23.2%. Gross profit per metric ton rose 8.1% in Q2 to $515.2 and 16.8% in the first half to $550.1. Q2 sales fell 15.2%, mainly from lower volumes in both segments and lower oil prices, partly offset by improved contractual Rubber Carbon Black pricing. First-half sales declined 6.5%, also affected by unfavorable foreign currency translation. Management attributed the first-half increase in gross profit and Adjusted EBITDA principally to improved product mix and Rubber Carbon Black pricing.
Segment trends: Q2 Rubber Carbon Black Adjusted EBITDA increased 51.1% to $57.4 million, while Specialty Carbon Black Adjusted EBITDA declined 34.1% to $29.9 million. Specialty weakness reflected lower volume, weaker product mix and reduced cogeneration revenue; Rubber gains reflected contractual pricing and mix, partly offset by lower volume and cogeneration revenue.
Cash flow, debt and liquidity
- First-half operating cash flow was $206.2 million, compared with cash use of $50.9 million in the prior-year period. Receivables factoring contributed materially: $194.1 million of receivables were sold during the first half. Cash flow also reflected working-capital movements and higher net income.
- First-half capital expenditures were $69.1 million, versus $108.7 million. The 2023 amount included $19.4 million for U.S. emissions-control work. Financing activities used $120.7 million, including share repurchases and reductions in short-term debt.
- At June 30, cash and cash equivalents were $77.3 million; total debt and other financial liabilities were $855.9 million. Reported net debt was $782.7 million and net leverage was 2.34x.
- Reported total liquidity was $339.6 million, including cash, revolving-facility availability, undrawn China term-loan capacity and other credit lines. Availability under the revolving credit facility was $205.0 million. Orion said it was in compliance with debt covenants.
- Current assets were $699.5 million and current liabilities were $476.1 million. Net working capital, a non-GAAP measure, was $367.9 million, down from $461.6 million at year-end 2022.
Material changes, outlook and risks
- Q2 revenue and aggregate segment volumes fell, but operating income and Adjusted EBITDA increased. In the first half, sales declined while gross profit, operating income, net income and Adjusted EBITDA rose.
- Interest and other financial expense increased to $13.5 million in Q2 from $10.5 million, and to $28.7 million in the first half from $18.9 million. Effective tax rates also rose: 37.3% for Q2 and 33.4% for the first half, primarily due to projected earnings mix by geography and tax jurisdiction.
- Management gave no specific quantified earnings or revenue guidance in the supplied filing text. It stated that anticipated operating cash flow and available credit were expected to fund planned capital expenditures, commitments and normal working-capital needs for the foreseeable future.
- Risks highlighted include global economic weakness and cyclical demand, feedstock and currency volatility, interest-rate and credit-market conditions, manufacturing disruptions, customer and supplier dependence, and environmental and regulatory obligations. Orion also noted uncertainty around litigation and its ability to service debt and fund operations.
- U.S. EPA consent-decree emissions-control work continued; the final facility installation was scheduled for completion in 2023. Orion reported $296 million of cumulative related capital expenditures through June 30, 2023, with approximately $80 million received as an indemnity from Evonik. Ongoing emissions monitoring is also required.
- Orion and the City of Hürth resolved a contractual dispute in June 2023 and net-settled certain receivables and lease liabilities; the settlement did not materially affect the income statement. The company reported no material adverse effect expected from pending lawsuits, while acknowledging legal outcomes are uncertain.
- A new authorization permits repurchases of up to approximately 6.9 million shares through June 2027. Orion repurchased 822,595 shares for $20.2 million during Q2 and reported $49.5 million of repurchases for the first half.
Important facts for investors to verify
- How much operating cash flow is sustainable without receivables factoring, and how factoring affects future working capital and liquidity.
- Whether lower volumes and economic weakness persist, particularly in Specialty Carbon Black, and whether Rubber Carbon Black pricing and mix continue to support margins.
- Debt maturities, borrowing costs and facility availability, including the transition from U.S. dollar LIBOR to Term SOFR and compliance with covenants.
- Timing, remaining cost and compliance performance of the EPA emissions-control program, including the final facility installation and required monitoring.
- Potential effects of tax-rate changes, foreign exchange and derivative valuations on reported earnings and comprehensive income.