Orion Engineered Carbons S.A. — Q3 2022 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2022. Orion produces carbon black through its Rubber Carbon Black and Specialty Carbon Black segments. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Comparisons are with the corresponding 2021 periods, except balance-sheet comparisons, which are with December 31, 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $543.1 | $393.0 | $1,568.8 | $1,154.1 |
| Gross profit | $114.4 | $98.7 | $352.1 | $311.3 |
| Income from operations | $53.6 | $40.3 | $161.1 | $215.6 |
| Net income | $31.8 | $21.0 | $94.0 | $133.6 |
| Diluted EPS | $0.52 | $0.35 | $1.53 | $2.20 |
| Adjusted EBITDA (non-GAAP) | $80.5 | $66.4 | $247.1 | $216.1 |
| Contribution margin (non-GAAP) | $160.8 | $140.5 | $499.0 | $441.2 |
Q3 gross margin was approximately 21.1%, versus 25.1% a year earlier; nine-month gross margin was approximately 22.4%, versus 27.0%. Q3 volume rose 2.7% to 243.3 thousand metric tons; nine-month volume increased 0.9% to 747.9 thousand metric tons. Higher feedstock costs were largely passed through in sales, while pricing and favorable mix supported gross profit and EBITDA.
Cash flow and liquidity. For the first nine months, operating cash flow was negative $16.7, compared with positive $121.3 in 2021. Working-capital outflows included $149.2 from trade receivables and $65.3 from inventories. Investing cash outflow, primarily capital expenditures, was $167.1, up from $113.7. Financing provided $167.4; cash and cash equivalents ended the period at $43.1. Management reported total liquidity of $203.3, comprising cash, $130.3 of revolving-credit availability and $29.9 of other available credit lines.
Debt and balance sheet. Total debt and other financial liabilities were $879.2, compared with $782.9 at year-end 2021. Net debt was $840.4 and net leverage was 2.81x. Current debt and other financial liabilities were $261.0 and long-term debt, net, was $618.2. The company reported compliance with debt covenants. Current assets were $790.7 and current liabilities were $547.9.
Changes versus comparable periods
- Q3 sales increased 38.2% and net income rose 51.4%; adjusted EBITDA increased 21.2%. Higher pricing, favorable mix and stronger Rubber Carbon Black volume contributed, partly offset by higher production costs and weaker Specialty Carbon Black volumes.
- For nine months, sales increased 35.9% and adjusted EBITDA increased 14.3%, but net income declined 29.6% and operating income fell 25.3%. The 2021 comparison included an $82.9 litigation-settlement gain related to Evonik that did not recur.
- Rubber Carbon Black Q3 sales increased 53.8% and adjusted EBITDA increased 80.3%, with volume up 10.4%. Specialty Carbon Black Q3 sales rose 12.9%, but volume fell 18.2% and adjusted EBITDA declined 20.3%, reflecting weaker demand and price competition in lower-end markets.
- Net working capital increased to $492.3 from $323.6 at year-end, primarily reflecting higher receivables and inventory associated with higher prices and sales.
Outlook, risks and unusual items
- Management said cash, operating cash flow and borrowing capacity are expected to fund operating expenses, debt service and capital expenditures for the foreseeable future. The filing provides no specific numerical earnings or revenue guidance.
- Capital expenditures were $167.1 for the first nine months, including safety, maintenance, growth and EPA-required emissions-control investments. Orion reported $264 spent on EPA consent-decree-related capital expenditures to date, of which approximately $80 was received as an Evonik indemnity. Installation at Belpre and Borger was underway.
- Environmental reserves were $4.9. The company said additional losses beyond recorded environmental liabilities are reasonably possible but that it could not estimate an amount or range. The Ambes, France closure reserve was $4.6.
- A dispute with the city of Hürth involved $7.7 of Orion receivables and approximately $5.5 of municipal claims concerning lease payments; negotiations were ongoing, with legal enforcement possible.
- The filing highlights potential impacts from the Russia-Ukraine conflict, energy and feedstock price or supply volatility, inflation, foreign exchange and interest rates, weaker demand, price competition, operational disruptions, environmental regulation, litigation and tax changes. Management cautions that interim results may not indicate full-year results.
- Orion had no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing and mix can continue to offset elevated feedstock, production and capital costs, particularly as Specialty Carbon Black demand and volume weaken.
- Whether working capital normalizes and operating cash flow improves after the significant receivables and inventory outflows.
- Debt maturities, short-term borrowings, available credit capacity and leverage; also the company’s ability to fund planned capital spending while servicing debt.
- Progress, cost and timing of remaining EPA consent-decree projects, and any additional environmental liabilities or legal outcomes.
- Developments in the Hürth contract dispute and any impact on receivables or cash collection.