Orion Engineered Carbons(OEC) - 2024 Q3 - Quarterly Report

PART I - Financial Information This section presents the company's unaudited financial statements, management's analysis, market risk disclosures, and internal controls assessment Item 1. Financial Statements and Supplementary Data (Unaudited) Orion S.A. reported a significant net loss of $20.2 million for the third quarter of 2024, a sharp decline from a net income of $26.2 million in the same period of 2023. This was primarily driven by a one-time pre-tax charge of $60.7 million due to a misappropriation of assets. For the nine-month period, net income fell to $27.0 million from $98.6 million year-over-year. The balance sheet shows an increase in total assets to $1,996.3 million. Cash flow from operations saw a substantial decrease to $30.8 million for the nine months ended September 30, 2024, compared to $273.7 million in the prior year period Condensed Consolidated Statements of Operations The company experienced a significant operational setback, recording a loss from operations of $15.3 million in Q3 2024, primarily due to a $60.7 million loss from asset misappropriation - The company experienced a significant operational setback, recording a loss from operations of $15.3 million in Q3 2024, compared to an income of $45.7 million in Q3 2023. This was primarily due to a $60.7 million loss from the misappropriation of assets[6] Q3 & Nine Months 2024 vs 2023 Performance (in millions, except per share data) | Metric | Q3 2024 | Q3 2023 | 9 Months 2024 | 9 Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $463.4 | $466.2 | $1,443.3 | $1,425.7 | | Gross Profit | $107.5 | $110.2 | $339.5 | $363.7 | | Loss due to misappropriation of assets, net | $60.7 | $— | $60.7 | $— | | Income (loss) from operations | $(15.3) | $45.7 | $79.1 | $178.1 | | Net income (loss) | $(20.2) | $26.2 | $27.0 | $98.6 | | Diluted EPS | $(0.35) | $0.44 | $0.46 | $1.65 | Condensed Consolidated Balance Sheets Total assets increased to nearly $2.0 billion, primarily driven by growth in property, plant, and equipment, and current assets, financed by increased liabilities Balance Sheet Summary (in millions) | Account | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | $718.1 | $646.1 | | Total assets | $1,996.3 | $1,833.4 | | Total current liabilities | $577.9 | $440.3 | | Total liabilities | $1,520.0 | $1,354.9 | | Total stockholders' equity | $476.3 | $478.5 | - Total assets increased to nearly $2.0 billion, primarily driven by growth in property, plant, and equipment, and current assets. This was financed by an increase in both current and long-term liabilities, while stockholders' equity remained relatively stable[9] Condensed Consolidated Statements of Cash Flows Net cash from operating activities plummeted by 88.7% year-over-year, significantly impacted by lower net income and changes in operating assets and liabilities Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $30.8 | $273.7 | | Net cash used in investing activities | $(135.7) | $(111.0) | | Net cash provided by (used in) financing activities | $119.3 | $(164.9) | - Net cash from operating activities plummeted by 88.7% year-over-year, dropping from $273.7 million to $30.8 million. This significant decrease was influenced by lower net income and changes in operating assets and liabilities[11] Notes to the Condensed Consolidated Financial Statements (Unaudited) The notes detail a significant one-time event: a $59.2 million loss from fraudulently induced wire transfers, plus $1.5 million in related fees. This event also led to an $18.2 million tax benefit. The company's debt increased to $970.5 million. Segment performance shows Rubber Carbon Black sales and volume declined, while Specialty Carbon Black sales grew despite a slight volume decrease in Q3. The company also made a new investment in a French tire recycling company, Alpha Carbone - On August 10, 2024, the company identified a criminal scheme targeting an employee, resulting in fraudulent wire transfers. This led to a pre-tax charge of $59.2 million for unrecovered funds and $1.5 million in professional fees, totaling a $60.7 million loss reported in the income statement[59] - The company invested in Alpha Carbone ("AC"), a French tire recycling company, acquiring shares for approximately $0.3 million and a convertible bond for $1.9 million. An additional $5.6 million in convertible bonds is committed through 2025. This partnership includes a long-term supply agreement for tire pyrolysis oil to produce circular carbon black[55][56] Segment Adjusted EBITDA (in millions) | Segment | Q3 2024 | Q3 2023 | 9 Months 2024 | 9 Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Rubber Carbon Black | $52.9 | $51.2 | $157.4 | $172.4 | | Specialty Carbon Black | $27.2 | $26.1 | $83.1 | $93.3 | | Total Adjusted EBITDA | $80.1 | $77.3 | $240.5 | $265.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributed the 0.6% decrease in Q3 net sales to lower volumes, partially offset by favorable oil price pass-through. The quarter's net loss was dominated by the $60.7 million charge from asset misappropriation. Despite this, Q3 Adjusted EBITDA rose 3.6% to $80.1 million due to favorable pricing. For the nine-month period, Adjusted EBITDA fell 9.5% to $240.5 million, impacted by higher fixed costs and lower volumes in the Rubber segment. The company's liquidity was negatively impacted by the fraud incident, but management believes existing cash flows and credit facilities are sufficient for future needs. Net working capital increased to $399.9 million Operating Results Discussion Q3 2024 net sales decreased by 0.6% due to lower volumes, significantly impacted by a $60.7 million loss from fraudulent wire transfers, while nine-month net sales increased 1.2% - For Q3 2024, net sales decreased by 0.6% to $463.4 million, driven by a 20.0 kmt drop in sales volume, which was partially offset by the favorable pass-through effect of oil prices[81][82] - A significant event in Q3 2024 was a criminal scheme leading to fraudulent wire transfers, resulting in a $59.2 million loss from misappropriated assets and an additional $1.5 million in professional fees[84] - For the nine months ended Sep 30, 2024, net sales increased 1.2% to $1,443.3 million, driven by recovery in the Specialty Carbon Black segment and improved pricing in Rubber Carbon Black, though gross profit fell 6.7% due to higher fixed costs[91][92] Adjusted EBITDA Reconciliation Summary (in millions) | Period | Net Income (Loss) | Adjustments | Adjusted EBITDA | | :--- | :--- | :--- | :--- | | Q3 2024 | $(20.2) | $100.3 | $80.1 | | Q3 2023 | $26.2 | $51.1 | $77.3 | | 9 Months 2024 | $27.0 | $213.5 | $240.5 | | 9 Months 2023 | $98.6 | $167.1 | $265.7 | Segment Discussion Specialty Carbon Black saw Q3 net sales rise 8.0% despite marginal volume decrease, while Rubber Carbon Black experienced a 10.7% volume drop - Specialty Carbon Black: Q3 2024 net sales rose 8.0% to $162.5 million due to an improved product mix, despite a marginal 0.3% volume decrease. For the nine-month period, volume grew 11.7%, driving an 8.0% increase in net sales[100][101] - Rubber Carbon Black: Q3 2024 volume fell 10.7% due to lower demand in the Americas and APAC, causing net sales to decrease by 4.7% to $300.9 million. For the nine-month period, volume was down 3.5% and net sales decreased by 2.0%[105][106] Liquidity and Capital Resources Net cash from operating activities for the first nine months of 2024 sharply declined to $30.8 million, impacted by working capital changes and asset misappropriation - Net cash from operations for the first nine months of 2024 was $30.8 million, a sharp decline from $273.7 million in the same period of 2023. The decrease was primarily due to changes in working capital and the impact of the $59.2 million asset misappropriation[111][112] - The company's net leverage was negatively impacted by the $59.2 million loss from the criminal scheme. However, management believes future operating cash flows and existing credit facilities will be sufficient to meet foreseeable needs[119][120] Net Working Capital (in millions) | Component | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Accounts receivable, net | $267.9 | $241.0 | | Inventories, net | $306.7 | $287.1 | | Accounts payable | $(174.7) | $(183.7) | | Net working capital | $399.9 | $344.4 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its market risk disclosures compared to those reported in its Annual Report on Form 10-K for the year ended December 31, 2023 - Information about market risks for the period ended September 30, 2024, does not differ materially from the disclosures in the Annual Report on Form 10-K for the year ended December 31, 2023[133] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of September 30, 2024. This conclusion was due to a material weakness identified in the internal control over manual wire transfers, which failed to operate effectively and safeguard company assets. Management has implemented remedial measures, including additional controls over cash disbursement and enhanced certifications, and is improving employee training to address the weakness - As a result of an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of September 30, 2024[134] - A material weakness was identified in the internal control over manual wire transfers. Although the controls were believed to be adequately designed, they did not operate effectively to prevent the unauthorized wire transfers[135] - Remediation efforts include implementing additional processes and controls over cash disbursement, enhancing management certifications, and improving employee training on disbursement procedures[136] PART II - Other Information This section details legal proceedings, updates on risk factors, equity security sales, and a list of filed exhibits Item 1. Legal Proceedings The company is involved in various claims and lawsuits in the ordinary course of business. Management believes that the aggregate results of these proceedings will not have a material adverse effect on the company's financial condition, though they could be material to operating results in a specific period - The company is subject to various lawsuits and claims but does not believe the ultimate outcome will have a material adverse effect on its financial condition[139] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes to the risk factors disclosed in the 2023 Form 10-K have occurred[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Under its stock repurchase program authorized through June 2027, the company repurchased a total of 636,402 shares of its common stock during the third quarter of 2024. As of September 30, 2024, approximately 5.4 million shares remain available for repurchase under the program Q3 2024 Stock Repurchases | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | July 2024 | — | $— | | August 2024 | 403,552 | $17.81 | | September 2024 | 232,850 | $16.90 | | Q3 2024 Total | 636,402 | N/A | - As of September 30, 2024, 5,384,000 shares may yet be purchased under the existing stock repurchase program[143] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications from the Principal Executive Officer and Principal Financial Officer, as well as Inline XBRL documents - The report includes standard exhibits such as CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL data files[145]