Orion Engineered Carbons S.A. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Orion produces rubber and specialty carbon black. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
- Q3 revenue was $393.1 million, up 39.4%; gross profit was $98.7 million versus $79.2 million. Net income was $21.0 million ($0.35 per diluted share), versus $9.0 million ($0.15).
- Nine-month revenue was $1,154.1 million, up 40.6%; gross profit was $311.3 million versus $203.3 million. Net income was $133.6 million ($2.20 per diluted share), versus $9.3 million ($0.15).
- Adjusted EBITDA, a non-GAAP measure, was $66.4 million in Q3 versus $55.0 million, and $216.1 million for nine months versus $134.1 million. Nine-month 2021 results included an $82.9 million Evonik settlement gain in reported operating income; the gain is excluded from Adjusted EBITDA.
- Segment performance: Q3 Specialty Carbon Black Adjusted EBITDA rose to $39.0 million from $26.5 million, with a 26.0% margin versus 25.5%. Rubber Carbon Black Adjusted EBITDA was $27.4 million versus $28.5 million; its margin fell to 11.3% from 16.0%, as volume declined 3.0%. For nine months, segment Adjusted EBITDA was $118.1 million Specialty and $98.0 million Rubber.
- Cash flow and investment: Nine-month operating cash flow was $121.3 million versus $92.4 million. Capital expenditures were $113.7 million versus $120.3 million; investing cash flow was also $(113.7) million. Financing cash flow was $(7.6) million versus $60.9 million provided in 2020.
- Liquidity and debt: Cash and equivalents were $62.3 million at quarter-end. Total liquidity was $337.0 million, including $238.8 million of RCF/ancillary availability and $35.9 million under other credit lines. Net debt was $653.5 million and net leverage 2.32x. Balance-sheet debt and other financial liabilities totaled $709.9 million, including current obligations.
- Working capital: Net working capital increased to $343.4 million from $245.0 million at year-end 2020, principally reflecting higher inventories and receivables as input prices and demand increased.
Changes and management commentary
- Management attributed revenue growth to higher feedstock-cost pass-through, favorable mix, and stronger demand following the COVID-19 downturn. Nine-month sales volume rose 17.8%; Q3 volume was nearly flat overall, with Specialty growth offset by lower Rubber volume.
- Costs also increased: Q3 cost of sales rose 45.1%, while SG&A rose 22.5%, mainly due to higher freight and incentive compensation. Management cited favorable operating leverage and mix, particularly in Specialty, as supporting profitability.
- In September, Orion refinanced its term loans, extending maturity to September 2028. The new loans carry stated margins of 2.25% for U.S. dollar debt and 2.50% for euro debt, subject to sustainability-linked adjustments of up to 10 basis points. The company incurred approximately $7.8 million in refinancing costs, including $5.0 million expensed.
- The Board declared a $1.25 million interim dividend on October 29, 2021, approximately $0.02 per share, payable January 12, 2022.
Outlook, risks and contingencies
- Management said cash on hand, operating cash flow and borrowing availability are expected to be sufficient to cover operating expenses, debt service and capital expenditures for the foreseeable future. The filing provides no specific earnings or revenue guidance.
- Under the EPA consent decree, Orion estimates total pollution-control and monitoring equipment investment of $270–$290 million; approximately $181 million had been spent by quarter-end. Ivanhoe work was delayed by COVID-19 and Hurricane Ida. Orion declared force majeure and requested a deadline extension, which had not yet been approved.
- Orion noted that project timing, scope, costs, regulations or unforeseen needs could change the EPA investment estimate or affect compliance with emissions targets and deadlines. Noncompliance could result in further penalties.
- Management identified risks including pandemic and economic conditions, raw-material and energy price volatility, manufacturing disruption and severe weather, customer and supplier dependence, regulatory and environmental exposure, litigation, foreign exchange and interest rates, and the ability to service debt. No material change to the previously disclosed risk factors was reported.
Important facts for investors to verify
- How much of reported nine-month earnings growth is attributable to the one-time Evonik settlement rather than ongoing operations.
- Whether working-capital needs and input-cost pass-through affect future cash generation and margins.
- Progress, final cost and approved schedule for EPA projects, especially the delayed Ivanhoe installation.
- Debt terms, refinancing costs, liquidity availability and net leverage, including the effect of sustainability-linked loan adjustments.
- Whether Rubber Carbon Black volume and margin weakness persists, and whether Specialty performance is sustained.