Orion Engineered Carbons S.A. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; compared with the three months ended March 31, 2021. Orion produces carbon black for rubber applications and specialty uses.
Financial performance
- Revenue: $484.5 million, up 34.5% from $360.1 million. Management attributed growth mainly to pricing and favorable product mix; total volume slipped 0.4% to 253.2 thousand metric tons.
- Profit: Gross profit was $117.9 million, up 15.0%; operating income was $54.6 million, up 27.3%; and net income was $32.5 million, up 38.3%. Diluted EPS rose to $0.53 from $0.39.
- Margins: Gross margin was approximately 24.3%, versus 28.5% a year earlier, as cost of sales rose faster than revenue. Adjusted EBITDA, a non-GAAP measure, increased 17.3% to $83.2 million. Contribution margin per metric ton rose 14.1% to $660.70.
- Segments: Rubber Carbon Black revenue increased 42.1% to $306.9 million and Adjusted EBITDA rose 30.4% to $40.7 million; its EBITDA margin declined to 13.3% from 14.4%. Specialty Carbon Black revenue increased 23.2% to $177.6 million and Adjusted EBITDA rose 7.1% to $42.5 million; its margin fell to 23.9% from 27.5%. Specialty volume declined 8.1%, while Rubber volume increased 2.7%.
- Cash flow and investment: Operating cash flow was negative $27.8 million, versus positive $1.8 million, primarily reflecting working-capital investment. Capital expenditures were $48.8 million, compared with $27.2 million. Financing provided $51.4 million. Cash and cash equivalents ended the quarter at $41.3 million.
- Liquidity and debt: Total liquidity was $198.8 million, including cash, $122.6 million of RCF availability, and $34.9 million under other available credit lines. Net debt was $791.3 million and net leverage was 2.82x. Balance-sheet debt and other financial liabilities totaled $827.3 million, including $202.3 million classified as current. The company reported compliance with debt covenants.
- Working capital: Net working capital, a non-GAAP measure, increased to $422.5 million from $323.6 million at year-end, reflecting higher receivables and inventories, partly offset by higher payables.
Material changes and management commentary
- Pricing and product mix supported revenue and profit growth, including price increases intended to recover environmental and reliability-related capital costs. Higher raw-material and production costs contributed to cost of sales rising 42.3%.
- Management said cash on hand, operating cash flow, and borrowing capacity are expected to cover operating expenses, debt service, and capital expenditures for the foreseeable future. The filing gives no specific earnings or revenue guidance.
- Orion entered an approximately $80 million Bank of China term loan at a fixed 4.5% rate to partially finance its Huaibei facility; principal repayments begin in 2024. It also had $55.5 million outstanding under its revolving credit facility at quarter-end.
- Capital spending includes required U.S. emissions-control work under an EPA consent decree. Orion reported $229 million of related capital expenditures to date, of which approximately $80 million had been reimbursed by Evonik; Ivanhoe equipment was commissioned within the extended timeline, and work was underway at Belpre and Borger.
Risks, contingencies, and unusual items
- Orion warned that the Russia-Ukraine conflict could further disrupt carbon-black-oil and natural-gas supplies, raise input and energy costs, and reduce production volumes or margins. The filing also cites inflation, supply-chain disruption, foreign-exchange and interest-rate exposure, manufacturing and weather risks, customer and supplier dependence, and regulatory risks.
- Environmental reserves were $6.6 million. Management said additional environmental losses are reasonably possible but could not estimate an amount or range. The Ambès, France restructuring had $7.8 million of remaining estimated costs.
- A repurchase agreement involving 450,000 European Emission Allowance certificates generated $37.7 million of short-term financing at quarter-end; Orion must repurchase the certificates in January 2023 for approximately €34.0 million.
- A dispute with the City of Hürth involved $6.5 million of Orion receivables and approximately $4.2 million of claims asserted by the city. Orion was negotiating and reserved the right to pursue legal enforcement.
- The company said pending lawsuits were not expected to have a material adverse effect overall, while noting legal outcomes are uncertain and costs could affect results or cash flow in particular periods.
Important facts for investors to verify
- Whether pricing and mix can continue to offset input-cost inflation, and whether the declines in both segment EBITDA margins persist.
- Whether working-capital needs normalize and operating cash flow improves after the quarter’s cash use and higher capital expenditures.
- Current borrowing availability, debt maturities, net leverage, and compliance with covenants, particularly as short-term borrowing increased.
- Timing, cost, and completion of EPA-related projects, including any further extensions, reimbursements, or environmental obligations.
- Developments in the Russia-Ukraine-related supply and energy risks and the Hürth receivables dispute.