Orion Engineered Carbons S.A. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited and prepared under U.S. GAAP. Orion manufactures carbon black for rubber and specialty applications and operates 13 wholly owned production facilities plus a German joint venture. Unless noted, amounts below are U.S. dollars in millions.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $282.0 | $370.2 | $820.7 | $1,153.9 |
| Gross profit | $79.2 | $98.7 | $203.3 | $300.7 |
| Gross margin | 28.1% | 26.7% | 24.8% | 26.1% |
| Income from operations | $24.1 | $38.4 | $48.8 | $114.6 |
| Net income | $9.0 | $24.3 | $9.3 | $68.0 |
| Diluted EPS | $0.15 | $0.39 | $0.15 | $1.11 |
| Adjusted EBITDA (non-GAAP) | $55.0 | $68.1 | $134.1 | $204.1 |
| Operating cash flow | $1.7 | $68.5 | $92.4 | $142.7 |
| Capital expenditures | $30.9 | $34.5 | $120.3 | $95.3 |
Q3 Adjusted EBITDA margin was 19.5%, compared with 18.4% a year earlier; nine-month margin was 16.3%, versus 17.7%. Operating cash flow less capital expenditures was negative $29.2 million in Q3 and negative $28.0 million for the first nine months.
- Liquidity: Cash and cash equivalents were $97.5 million at September 30, up from $63.7 million at year-end 2019. Current assets were $490.6 million and current liabilities $328.4 million.
- Debt: Total reported debt and other financial liabilities were $763.5 million, including $123.5 million current and $640.0 million long-term. Cash less reported debt implies net debt of approximately $666.0 million. The $250 million revolving facility had no RCF borrowings; $74.6 million of ancillary facilities were outstanding, and local credit lines in Korea and Brazil were fully drawn.
- Working capital: Net working capital, a company-defined non-GAAP measure, was $235.1 million, compared with $221.1 million at December 31, 2019. Inventory declined to $125.3 million from $164.8 million.
- Dividends: No dividend was paid in Q3. A $0.20-per-share dividend was paid in Q1, totaling $12.0 million for the nine-month period; the comparable 2019 nine-month dividend was $0.60 per share.
Material changes versus the prior comparable period
- Q3 sales fell 23.8% year over year; nine-month sales fell 28.9%. Management attributed the declines to passing lower feedstock costs through to customers and lower volumes, with COVID-19-driven demand weakness the main volume factor.
- Q3 total volume declined 7.6% year over year but rose 51.0% sequentially as end markets partially recovered. Nine-month volume declined 20.3%.
- Q3 net income fell to $9.0 million from $24.3 million; nine-month net income fell to $9.3 million from $68.0 million. Nine-month operating income declined 57.4%.
- Q3 Adjusted EBITDA decreased 19.2%; nine-month Adjusted EBITDA decreased 34.3%. Specialty and Rubber nine-month Adjusted EBITDA were $71.0 million and $63.1 million, respectively, versus $90.4 million and $113.8 million.
- Q3 operating cash flow decreased sharply to $1.7 million, mainly reflecting a $27.7 million cash outflow from changes in net working capital. Nine-month operating cash flow also declined year over year.
Outlook, commentary, risks and unusual items
- Management said cash on hand, operating cash flow and available borrowings are expected to be sufficient for operating expenses, debt service and capital expenditures for the foreseeable future. The filing gives no specific earnings or revenue guidance.
- COVID-19 remains a substantial uncertainty: the company cited demand weakness, supply-chain and operating disruptions, possible order cancellations or delays, customer credit risk and unpredictable economic conditions. Management noted sequential volume recovery, but its durability is uncertain.
- EPA consent decree: Required pollution-control and monitoring investments across four U.S. plants are estimated at $230 million to $270 million; approximately $107 million had been spent by the filing date. Nine-month environmental capital spending was $44.5 million. Work at Ivanhoe was delayed by COVID-19; Orion requested an extension and the EPA had not confirmed it. Actual cost and timing remain uncertain, and noncompliance could result in penalties.
- Evonik indemnity dispute: Orion is pursuing arbitration to recover certain environmental costs under an indemnity. Evonik has disputed the claims; recovery is not assured, and Orion expects some costs to exceed indemnity coverage.
- Other notable items include $7.3 million of pension actuarial-loss reclassification expense for the first nine months and $12.4 million of net foreign-currency revaluation expense within financial expense. Adjusted EBITDA includes $3.5 million of COVID-related costs and $5.1 million of EPA-related expenses for the nine months.
- Debt carries variable interest rates linked to LIBOR or EURIBOR; the filing notes uncertainty around LIBOR transition. The credit agreement’s first-lien leverage covenant is capped at 5.5x when its specified utilization trigger applies; reported net leverage was 3.4x.
- Other stated risks include feedstock and energy price volatility, foreign exchange and interest-rate movements, customer and supplier concentration, environmental regulation, litigation, and the company’s ability to service debt and fund operations. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the sequential volume recovery continues, particularly in Rubber, and how demand trends affect revenue and margins.
- Actual cash generation, working-capital needs and capital spending, including the funding impact of EPA-related investments.
- EPA installation timetable, total project cost, force-majeure extension status and any penalties or Evonik indemnity recovery.
- Debt maturities, use and availability of ancillary/local facilities, variable-rate exposure, and covenant headroom.
- How much of reported Adjusted EBITDA reflects recurring operations versus company-defined adjustments; this non-GAAP measure is not a substitute for GAAP earnings or cash flow.