Orion Engineered Carbons S.A. — Q2 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Orion produces Rubber Carbon Black, used in tires and rubber goods, and Specialty Carbon Black, used in coatings, polymers, batteries, printing and other applications.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $541.2 million | $401.0 million | $1,025.7 million | $761.1 million |
| Gross profit | $119.8 million | $110.1 million | $237.7 million | $212.6 million |
| Income from operations | $52.9 million | $132.5 million | $107.5 million | $175.3 million |
| Net income | $29.7 million | $89.1 million | $62.2 million | $112.6 million |
| Diluted EPS | $0.49 | $1.47 | $1.02 | $1.85 |
| Adjusted EBITDA (non-GAAP) | $83.4 million | $78.8 million | $166.6 million | $149.7 million |
Q2 gross margin was approximately 22.1%, versus 27.5% a year earlier; first-half gross margin was approximately 23.2%, versus 27.9%. Adjusted EBITDA rose 5.8% in Q2 and 11.3% in the first half. Sales growth largely reflected higher feedstock costs passed through to customers, pricing and product mix; volume was nearly flat overall in both comparison periods.
Operating cash flow was negative $50.9 million in the first half, versus positive $85.1 million in 2021; working-capital outflows and lower net income were principal factors. Capital expenditures were $108.7 million, up from $58.3 million. Financing cash flow was positive $138.1 million. Cash and cash equivalents were $40.9 million at June 30, 2022.
Debt and other financial liabilities totaled $882.7 million: $263.1 million current and $619.6 million long term. Management reported net debt of $846.5 million and net leverage of 2.97x. Total liquidity was $228.2 million, comprising cash of $40.9 million, $155.6 million of revolving/ancillary facility availability and $31.7 million of other available credit lines. Net working capital increased to $476.4 million from $323.6 million at year-end 2021.
Material changes versus the prior comparable period
- Q2 sales increased 35.0%, but cost of sales rose 44.9%; gross profit increased 8.8%.
- Net income fell 66.7% in Q2 and 44.8% in the first half. Comparisons were affected by the $82.9 million Evonik litigation settlement gain recognized in 2021, which did not recur in 2022.
- Q2 Rubber Carbon Black sales rose 46.8%, with volume up 5.2%, but segment Adjusted EBITDA fell 3.8% and its margin declined to 10.6% from 16.1%, primarily reflecting higher feedstock prices’ effect on reported revenue, foreign exchange and higher overhead.
- Q2 Specialty Carbon Black sales rose 16.4%, while volume fell 12.3%; segment Adjusted EBITDA increased 15.5% to $45.4 million, supported by pricing and mix.
- Short-term borrowings increased, including revolving-credit drawings and local working-capital loans. The company expanded its revolving-credit facility capacity to €350 million in May 2022 and reported compliance with debt covenants at quarter-end.
Outlook, commentary, risks and contingencies
Management said available cash, operating cash flow and borrowings should be sufficient to cover operating expenses, debt service and capital expenditures for the foreseeable future. The filing provides no specific earnings or revenue guidance. Management attributed improved contribution margin and Adjusted EBITDA to pricing, product mix and Rubber Carbon Black volume, while noting weaker Specialty Carbon Black demand and margin pressure from higher feedstock prices.
- First-half capital expenditures included safety, maintenance, growth and EPA-related emissions-control projects. The company had spent $256 million on EPA consent-decree capital expenditures through June 30, 2022, of which approximately $80 million was reimbursed by Evonik. Construction remained underway at Belpre and Borger.
- Environmental reserves were $5.3 million; the company said additional losses are reasonably possible but could not estimate an amount or range. It reported $7.1 million of remaining estimated costs for the closed Ambès, France plant restructuring.
- A dispute with the City of Hürth involved $7.2 million of Orion receivables and approximately $4.9 million of claims asserted by the city related to lease payments; negotiations were ongoing.
- The company cited Russia-Ukraine-related energy and feedstock volatility, supply-chain disruption, inflation, demand and foreign-exchange exposure, manufacturing and regulatory risks, and litigation as risks that could affect results. It warned that continued disruption could reduce production volumes and margins.
- Orion stated that pending lawsuits were not expected to have a material adverse effect on operations or financial condition, while acknowledging that legal outcomes are uncertain and could affect results or cash flow in particular periods.
Important facts for investors to verify
- Whether pricing continues to recover higher feedstock, energy and environmental-compliance costs without further compressing segment margins.
- Working-capital requirements, cash generation and progress in reducing reliance on short-term borrowings.
- Capital spending and completion schedule for the remaining EPA emissions-control installations, including any cost changes or reimbursement assumptions.
- Trends in Specialty Carbon Black demand and Rubber Carbon Black profitability, especially the effects of feedstock prices and foreign exchange.
- Resolution and collectability of the Hürth receivable dispute, and any changes in environmental or legal contingencies.