Orion Engineered Carbons S.A. — Q2 2020 Form 10-Q
Business context and reporting period. For the quarter and six months ended June 30, 2020. Orion manufactures specialty and rubber carbon black, with operations across multiple regions. Results were materially affected by the COVID-19 downturn and reduced customer demand, particularly in automotive and tire markets. Financial figures are unaudited; dollar amounts are in millions unless otherwise stated.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $202.6 | $399.0 | $538.7 | $783.7 |
| Gross profit | $33.9 | $104.0 | $124.1 | $202.0 |
| Operating income/(loss) | $(12.9) | $41.5 | $24.7 | $76.2 |
| Net income/(loss) | $(17.8) | $24.7 | $0.3 | $43.7 |
| Basic EPS | $(0.30) | $0.41 | $0.00 | $0.73 |
| Adjusted EBITDA (non-GAAP) | $15.2 | $71.5 | $79.1 | $136.1 |
| Operating cash flow | $85.7 | $48.0 | $90.6 | $74.1 |
| Capital expenditures | $38.6 | $38.4 | $89.4 | $60.9 |
- Q2 gross margin was approximately 16.7%, versus 26.1% a year earlier. Q2 Adjusted EBITDA margin was 7.5%, versus 17.9%.
- Q2 sales volume fell 42.0% to 156.9 thousand metric tons. Six-month volume fell 26.5% to 392.0 thousand metric tons.
- Q2 Contribution Margin, a non-GAAP measure, declined to $74.3 million from $143.4 million; per-ton contribution margin was $473.6, down from $530.3.
- Q2 segment Adjusted EBITDA: Specialty $16.5 million; Rubber loss of $1.2 million. Rubber’s Q2 sales fell 58.3%; Specialty sales fell 32.2%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $143.4 million, compared with $63.7 million at year-end 2019. Current assets were $479.9 million and current liabilities $315.1 million.
- Total debt and other financial liabilities were $762.8 million, versus $666.7 million at December 31, 2019; the increase primarily reflects short-term borrowing. Long-term debt, net, was $625.8 million. Approximate debt less cash was $619.4 million.
- Six-month operating cash flow of $90.6 million was largely supported by $43.9 million of cash inflows from operating asset and liability changes. Investing cash outflow was $89.4 million; financing provided $81.7 million, including local bank borrowing to bolster liquidity.
- Net working capital, a non-GAAP measure, decreased to $190.5 million from $221.1 million at year-end, mainly due to lower volumes and oil prices.
- The €250 million revolving credit facility matures in 2024. At June 30, $44.8 million was drawn under the RCF and $44.9 million under ancillary facilities; local credit lines in Korea and Brazil were also drawn. Management stated that cash, operating cash flow and borrowings should be sufficient for operating expenses, debt service and capital spending for the foreseeable future.
Material changes and management commentary
- Compared with Q2 2019, sales declined 49.2% and Adjusted EBITDA declined 78.7%, primarily due to pandemic-related demand and volume reductions. Lower feedstock costs reduced reported sales, while cost actions and lower freight costs partly offset the pressure.
- Six-month net income was nearly breakeven, versus $43.7 million a year earlier. Six-month interest and other financial expense increased to $17.9 million from $14.0 million, including $7.3 million of net foreign-currency revaluation expense.
- Q2 included $2.7 million of COVID-19-related costs; six-month Adjusted EBITDA also includes $3.6 million of EPA-related expenses. These are among the adjustments in management’s non-GAAP reconciliation.
- The company paid a $0.20-per-share dividend in Q1 2020, totaling $12.0 million; no Q2 dividend was paid. Management cautioned that the ability to maintain historical dividends is uncertain.
Outlook, risks and contingencies
- The filing provides no numerical earnings or sales guidance. Management described substantial uncertainty around the duration and effects of COVID-19, including demand, customer payment delays or defaults, supply disruption, commodity prices and liquidity.
- EPA consent-decree pollution-control work at four U.S. plants is estimated to require total capital expenditures of $230–$270 million; approximately $98 million had been spent to date. The estimate remains uncertain. COVID-19 delayed work at Ivanhoe, and the EPA had not confirmed Orion’s requested schedule extension; Orange construction was completed on schedule.
- Orion is pursuing arbitration against Evonik to enforce an environmental indemnity. Evonik has not honored Orion’s claims and has asserted counterclaims. Recovery is uncertain, and the company expects some EPA-related costs to exceed indemnity coverage.
- The credit agreement’s first-lien leverage covenant has a 5.5x maximum when testing is triggered. Management reported leverage above 2.75x at quarter-end, resulting in a 25-basis-point increase in the RCF margin after submission of the compliance certificate.
- Other exposures include variable-rate debt and LIBOR transition risk, foreign exchange movements, raw-material purchase commitments of $196.6 million, pension obligations, environmental compliance, and ordinary-course litigation. The company reported no off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- Whether customer demand and volumes recover, and how quickly Rubber segment profitability improves after its Q2 Adjusted EBITDA loss.
- Cash generation excluding working-capital movements, continued access to RCF and ancillary borrowing, and compliance with the leverage covenant.
- Final EPA project scope, cost, timing, permit and emissions outcomes, and the status of the Ivanhoe extension request.
- Potential recovery from Evonik, related arbitration counterclaims, and the resulting net environmental cash burden.
- Dividend policy, given the downturn, planned EPA spending and management’s statement that future payments are uncertain.