Orion Engineered Carbons(OEC) - 2022 Q3 - Quarterly Report

PART I - Financial Information Financial Statements and Supplementary Data (Unaudited) Presents unaudited financial statements showing increased sales but lower nine-month net income due to a prior-year litigation gain Condensed Consolidated Statements of Operations Details revenue and profit figures, highlighting a significant year-over-year variance in operating income Key Financial Metrics | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $543.1M | $393.0M | $1,568.8M | $1,154.1M | | Gross profit | $114.4M | $98.7M | $352.1M | $311.3M | | Income from operations | $53.6M | $40.3M | $161.1M | $215.6M | | Net income | $31.8M | $21.0M | $94.0M | $133.6M | | Diluted EPS | $0.52 | $0.35 | $1.53 | $2.20 | - For the nine months ended September 30, 2021, Income from operations included a gain of $82.9 million related to a litigation settlement, which significantly impacted the year-over-year comparison[6] Condensed Consolidated Balance Sheets Outlines the company's assets, liabilities, and equity, showing growth in assets driven by receivables and inventories Key Balance Sheet Items | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $790.7M | $665.0M | | Total assets | $1,843.4M | $1,631.0M | | Total current liabilities | $547.9M | $448.7M | | Total liabilities | $1,412.7M | $1,311.3M | | Total stockholders' equity | $430.7M | $319.7M | - Key changes from Dec 31, 2021, to Sep 30, 2022, include a significant increase in Accounts Receivable (from $288.9M to $403.7M) and Inventories (from $229.8M to $266.7M), contributing to the rise in total assets[12] Condensed Consolidated Statements of Cash Flows Summarizes cash movements, indicating a significant decrease in cash from operations compared to the prior year Cash Flow Summary | Cash Flow Activity (Nine Months Ended Sep 30) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(16.7)M | $121.3M | | Net cash used in investing activities | $(167.1)M | $(113.7)M | | Net cash provided by (used in) financing activities | $167.4M | $(7.6)M | | Cash and cash equivalents at end of period | $43.1M | $62.3M | - The significant decrease in cash from operating activities in 2022 was primarily driven by changes in operating assets and liabilities, particularly a $149.2 million increase in trade receivables and a $65.3 million increase in inventories[15] Notes to the Condensed Consolidated Financial Statements (Unaudited) Provides context on debt, segment reporting, and significant capital expenditures related to environmental compliance - Total debt increased from $782.9 million at year-end 2021 to $879.2 million as of September 30, 2022, primarily due to an increase in other short-term debt and obligations[28] - The company is managed in two operating segments: Rubber Carbon Black and Specialty Carbon Black, with performance evaluated using Adjusted EBITDA[72][74] - Under a consent decree with the EPA, the company has spent $264 million on capital expenditures for pollution control technology at its U.S. facilities as of September 30, 2022[69][70] Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial performance, highlighting sales growth from higher costs and pricing, with strong Rubber segment results Operating Results Compares current period results to the prior year, detailing drivers for changes in net sales and operating income - Q3 2022 vs Q3 2021: Net sales rose 38.2% to $543.1 million, driven by passing through higher feedstock costs, pricing, and higher Rubber segment volume, while gross profit increased 15.9% to $114.4 million[91][92][95] - Nine Months 2022 vs 2021: Net sales grew 35.9% to $1,568.8 million, but income from operations fell to $161.1 million from $215.6 million, as the prior year included an $82.9 million gain from a litigation settlement[102][103][108] - Adjusted EBITDA for Q3 2022 increased 21.2% to $80.5 million, and for the nine months increased 14.3% to $247.1 million, driven by pricing and strong performance in the Rubber Carbon Black segment[88][101][114] Segment Discussion Details the performance of the Specialty and Rubber Carbon Black segments, noting divergent results - Specialty Carbon Black: Q3 Adjusted EBITDA fell 20.3% to $31.1 million, driven by an 18.2% decrease in sales volume due to lower demand and price competition in lower-end markets[116][119][121] - Rubber Carbon Black: Q3 Adjusted EBITDA surged 80.3% to $49.4 million, fueled by a 10.4% increase in volume, strong pricing, and favorable product mix, reflecting higher demand in the Americas and EMEA[116][125][127] Liquidity and Capital Resources Reviews the company's liquidity position, working capital changes, and capital expenditure activities - As of September 30, 2022, the company had total liquidity of $203.3 million, including $43.1 million in cash and $130.3 million available under its revolving credit facility[140] - Net working capital increased from $323.6 million at year-end 2021 to $492.3 million as of September 30, 2022, mainly due to higher oil prices increasing the value of inventories and trade receivables[143][144] - Capital expenditures for the first nine months of 2022 were $167.1 million, up from $113.7 million in the prior year period, primarily for safety, growth, and EPA-mandated emissions reduction technology[148][149] Quantitative and Qualitative Disclosures About Market Risk States no material changes in market risk disclosures from those reported in the 2021 Form 10-K - Information about market risks for the period ended September 30, 2022 does not differ materially from that discussed in the 2021 Form 10-K[157] Controls and Procedures Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls - Based on an evaluation as of September 30, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[158] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[159] PART II - Other Information Legal Proceedings Details ongoing legal matters, which are not expected to materially impact the company's financial condition - The company is involved in various claims and lawsuits arising in the ordinary course of business[161] - Management believes that the aggregate results of current proceedings will not have a material adverse effect on the company's financial condition[161] Risk Factors Updates risk factors, focusing on supply chain disruptions from the Russia-Ukraine conflict and potential tax law changes - A key business risk is the potential for disruptions in carbon black oil and natural gas supplies caused by the ongoing conflict between Russia and Ukraine, which may lead to price volatility and adversely impact operations[163][164] - The company faces risks from potential changes in tax laws, including the imposition of "windfall profit" taxes in various jurisdictions, which could adversely affect financial results[166][167][169] Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds during the period - None reported[170] Exhibits Lists all exhibits filed with the report, including required officer certifications - The report includes filed certifications from the CEO and CFO as required by the Exchange Act, as well as furnished certifications pursuant to 18 U.S.C. Section 1350[171]