Orion Engineered Carbons S.A. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, with unaudited quarterly results also reported for Q4 2020. Orion manufactures specialty and rubber carbon black through global operations; its two reportable segments serve industrial, coatings, polymer, printing, tire and mechanical-rubber markets.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $1,136.4 million | $1,476.4 million |
| Gross profit | $292.3 million | $389.7 million |
| Gross margin | 25.7% | 26.4% |
| Income from operations | $74.4 million | $147.2 million |
| Net income | $18.2 million | $86.9 million |
| Diluted EPS | $0.30 | $1.42 |
| Adjusted EBITDA (non-GAAP) | $200.0 million | $267.3 million |
| Operating cash flow | $125.3 million | $231.5 million |
| Capital expenditures | $144.9 million | $155.8 million |
FY 2020 volume was 866.8 thousand metric tons, down 15.3%. Contribution margin was $463.9 million and contribution margin per metric ton was $535.1, compared with $540.7 million and $528.5 in 2019. Adjusted EBITDA margin was approximately 17.6%, versus 18.1% in 2019. These are non-GAAP measures and should be considered alongside GAAP results.
Q4 2020: Net sales were $315.7 million, gross profit $89.0 million, operating income $25.6 million, and net income $8.9 million. Q4 2019 net sales were $322.4 million and net income was $19.0 million.
Balance sheet and liquidity: Cash and cash equivalents were $64.9 million at year-end. Total debt and other financial obligations on the balance sheet were $738.4 million, including $655.8 million of non-current debt and $82.6 million current. The term loans had approximately $668.0 million principal outstanding and mature in 2024, with $642.5 million of scheduled principal due that year. Estimated liquidity was $341.6 million, including cash, $236.5 million available under the revolving facility and $40.2 million of other credit lines. Net working capital was $245.0 million, up from $221.1 million.
Operating cash flow was below capital expenditures; investing cash outflow was $144.9 million. Financing cash flow was positive $13.5 million, including a net $35.0 million draw on credit facilities and $12.0 million of dividends paid. Total liabilities were $1.21 billion and stockholders’ equity was $181.0 million.
Changes versus prior year
- Sales fell 23.0%, reflecting lower volume and lower feedstock prices passed through to customers. Volume declined primarily due to pandemic-related weakness, especially in Rubber Carbon Black.
- Adjusted EBITDA decreased 25.2%, while net income declined from $86.9 million to $18.2 million. Interest and other financial expense rose to $38.7 million from $27.6 million, mainly due to foreign-currency translation losses and exiting cross-currency swaps.
- Rubber segment sales declined 28.6% and segment Adjusted EBITDA fell 37.9%; Specialty segment sales declined 12.4% and Adjusted EBITDA fell 10.0%.
- Operating cash flow decreased to $125.3 million from $231.5 million. Net working capital increased despite lower sales.
- Annual dividends fell to $0.20 per share from $0.80. The company paid the first-quarter dividend and suspended further payments for the year due to the pandemic and weak business environment.
Outlook, commentary and key risks
- Management reported that the pandemic’s largest demand impact occurred in Q2; broad-based improvement continued in Q3 and Q4. The filing gives no specific numerical earnings or revenue guidance for 2021.
- Management expected cash on hand, operating cash flow and borrowing availability to fund operating expenses, debt service and capital expenditures for the foreseeable future. Dividend levels remain subject to board and shareholder action, cash needs and debt covenants.
- The EPA consent decree requires emissions-control and monitoring installations at four U.S. plants. Estimated total capital spending is $230–$270 million, of which approximately $123.1 million had been incurred. Work at Ivanhoe faced COVID-related delays; Orion requested a schedule extension, which the EPA had not confirmed. Actual costs and timing remain uncertain, and noncompliance could result in penalties.
- Orion is pursuing arbitration against Evonik to enforce a partial indemnity related to environmental liabilities. Recovery is uncertain; the company expects some EPA-related costs to exceed indemnity coverage by tens of millions of dollars. Evonik has asserted counterclaims that Orion says it does not believe are material.
- Principal risks include continued COVID-19 disruption, cyclical automotive demand, customer concentration, raw-material and energy price volatility, environmental and emissions obligations, debt and refinancing exposure, foreign-exchange and interest-rate movements, and litigation. Carbon black’s regulatory classification and evaluation as a potential health concern could also raise costs or constrain sales.
Important facts for investors to verify
- Whether demand recovery and volume trends continued after Q4, particularly in Rubber Carbon Black and key automotive markets.
- Progress, final cost and schedule for the EPA installations, including the status of the requested Ivanhoe extension and potential Evonik indemnity recovery.
- Debt maturity and refinancing plans for the substantial 2024 term-loan repayment, covenant headroom and available liquidity.
- Cash conversion, working-capital requirements and the level of future capital spending relative to operating cash flow.
- Whether management resumes dividends and how any distribution would fit with investment needs, debt covenants and liquidity.
- Assumptions and adjustments underlying Adjusted EBITDA and other non-GAAP measures; the filing reports $3.9 million of COVID-related costs and other adjustments in 2020.