Orion Engineered Carbons S.A. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Orion is a global carbon black producer serving specialty applications, including coatings, polymers and printing, and rubber applications, principally tires and mechanical rubber goods. It operated 13 wholly owned production facilities and one jointly owned plant. Average plant utilization was approximately 91% in 2019, unchanged from 2018.
Key financial results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,476.4 million | $1,578.2 million | Down 6.5% |
| Gross profit | $389.7 million | $430.0 million | Down 9.4% |
| Gross margin | 26.4% | 27.3% | Down 0.9 percentage points |
| Income from operations | $147.2 million | $196.3 million | Down 25.0% |
| Net income | $86.9 million | $121.3 million | Down 28.4% |
| Diluted EPS | $1.42 | $1.99 | Down 28.6% |
| Adjusted EBITDA (non-GAAP) | $267.3 million | $294.1 million | Down 9.1% |
| Cash provided by operating activities | $231.5 million | $122.0 million | Up $109.5 million |
| Capital expenditures | $155.8 million | $116.2 million | Up $39.6 million |
Operating margin was approximately 10.0%, compared with 12.4% in 2018. Operating cash flow less capital expenditures was approximately $75.7 million, a derived measure. Cash and cash equivalents were $63.7 million at year-end, excluding $4.5 million of restricted cash. Net working capital, a company-defined non-GAAP measure, was $221.1 million, down from $282.9 million.
Segments
| 2019 | Revenue | Volume | Adjusted EBITDA | Segment EBITDA margin |
|---|---|---|---|---|
| Specialty Carbon Black | $508.5 million | 251.0 kmt | $122.2 million | 24.0% |
| Rubber Carbon Black | $967.9 million | 772.1 kmt | $145.2 million | 15.0% |
Specialty Adjusted EBITDA declined 18.1% year over year, while Rubber Adjusted EBITDA was nearly unchanged. Both segments had lower sales volumes; Specialty margins also weakened, while the Rubber segment’s EBITDA margin improved from 14.0% to 15.0%.
Liquidity, debt and capital returns
- Total debt reported on the balance sheet was $666.7 million, comprising $643.1 million of term loans (net of debt issuance costs) and $29.8 million of other short-term debt, offset in part by $6.3 million of current term-loan amounts shown separately in the balance-sheet presentation. Cash was $63.7 million; approximate net debt using the reported total debt and cash is $602.9 million.
- The term loans mature in July 2024, with a scheduled principal repayment of approximately $610.8 million in 2024. The company reported no cash drawn under its revolving credit facility at year-end. The filing describes a 2019 amendment increasing the facility to €250 million, but another contractual-obligations disclosure refers to €175 million; verify the applicable commitment and availability.
- Current assets were $507.7 million and current liabilities were $285.2 million, a derived current ratio of approximately 1.78. Management stated that cash and operating cash generation were expected to support business needs.
- Operating cash flow benefited from working-capital movements, including a $49.8 million inflow from changes in net working capital as described by management. Investing outflows included $50.6 million for U.S. environmental projects. Financing outflows included $48.0 million of dividends and $8.0 million of regular debt repayments.
- The company paid $0.80 per share in dividends during 2019, totaling $48.0 million. Future dividends are discretionary and subject to financial needs and debt covenants.
Material changes and unusual items
- Sales volume fell 5.7%, to 1,023.2 kmt. Management attributed the decline primarily to lower Rubber volumes in South Korea following the Seoul plant closure, and softer demand in Europe and China; Specialty volumes also declined, notably in North America.
- Lower feedstock-linked selling prices and foreign-currency translation reduced reported sales, partly offset by $40.8 million in base-price increases. Adjusted EBITDA fell less than sales, partly due to lower bonus expense.
- 2018 included a $40.3 million restructuring income item, including a $24.6 million gain associated with the South Korea land sale. Its absence contributed to the year-over-year decline in operating income. 2019 restructuring expense was $3.6 million.
- Quarterly unaudited results show Q4 2019 sales of $322.4 million and net income of $19.0 million, versus $386.0 million and $15.7 million, respectively, in Q4 2018. Q4 2019 operating income was $32.6 million, compared with $26.7 million.
- The 2019 effective tax rate was 27.6%; a favorable $3.2 million prior-year tax adjustment, primarily related to a Polish tax audit conclusion, contributed to the lower tax expense.
- Adoption of lease accounting standards added approximately $30 million of right-of-use assets and $31 million of lease liabilities at adoption, with no material effect on earnings or cash flows.
Outlook, risks and contingencies
- The filing provides no quantified 2020 or longer-term earnings or revenue guidance. Management described plans to improve utilization and asset availability, develop higher-margin products and expand specialty capacity; a new specialty line in Ravenna was expected to start production in 2021.
- The EPA consent decree requires emissions controls and monitoring at four U.S. plants over approximately six years. Estimated total capital expenditure was about $190 million, subject to further design and cost estimates; $50.6 million was spent on environmental improvements in 2019. Noncompliance could result in penalties.
- Orion began arbitration against Evonik in June 2019 seeking indemnification for certain historical Clean Air Act costs. The company said Evonik was not honoring its claim and that substantial costs may exceed indemnity coverage by tens of millions of dollars; recovery is uncertain.
- Other significant exposures include volatile feedstock and energy prices, cyclical automotive and industrial demand, customer concentration, foreign-exchange and variable-rate debt risk, environmental and product-liability claims, and potential regulation or reclassification of carbon black as a nano-material or health hazard.
- The company reported a $72.8 million net defined-benefit pension liability, up from $61.2 million, with the year-end discount rate falling to 1.0% from 1.9%. The filing identifies uncertain tax positions as a critical audit matter; year-end unrecognized tax benefits were $11.6 million.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end.
Important facts for investors to verify
- Reconcile the reported revolving-credit commitment: the amendment disclosure says €250 million, while another section states €175 million.
- Track actual EPA project spending, final installation costs and deadlines against the approximately $190 million estimate, and assess available funding and liquidity.
- Monitor arbitration and potential recoveries from Evonik, including the limits and caps on indemnification.
- Assess whether lower segment volumes and Specialty Carbon Black profitability recover, and whether reported base-price increases offset feedstock, currency and demand pressures.
- Review term-loan repayment and refinancing risk ahead of the large 2024 maturity, alongside dividends and capital-expenditure needs.
- Check the source financial statements for exact presentation of debt components and net working capital; the filing’s narrative and tabular disclosures contain differing descriptions in some places.