Orion Engineered Carbons(OEC) - 2022 Q4 - Annual Report

PART I This section provides an overview of the company's business, risk factors, properties, and legal proceedings Item 1. Business Orion Engineered Carbons S.A. is a leading global manufacturer of carbon black products across two segments, focusing on innovation and sustainability - Orion Engineered Carbons S.A. is a Luxembourg joint stock corporation, incorporated on July 28, 2014[19] - The company is a leading global manufacturer of carbon black products, used as additives for polymers, batteries, printing inks, and coatings (Specialty Carbon Black) and in the reinforcement of rubber polymers (Rubber Carbon Black)[20] - Orion operates 14 wholly-owned production facilities and one jointly-owned facility across Europe, North and South America, South Africa, and Asia, with its principal executive office in Spring, Texas, and R&D center in Cologne, Germany[21] Overview - Orion Engineered Carbons S.A. is a Luxembourg joint stock corporation, incorporated on July 28, 2014, with its principal executive office in Spring, Texas, U.S.[19] - The company is a leading global manufacturer of carbon black products, categorized into Specialty Carbon Black (for polymers, batteries, printing inks, coatings) and Rubber Carbon Black (for rubber reinforcement)[20] - Orion operates 14 wholly-owned production facilities and one jointly-owned facility globally, with its main R&D center in Cologne, Germany[21] Products and Applications - Carbon black is manufactured through a controlled process to produce particles with varied structure and surface chemistry, resulting in diverse performance characteristics for various applications[24] Specialty Carbon Black - Specialty Carbon Black is manufactured for applications such as polymers, batteries, printing, and coatings, enhancing physical, electrical, and optical properties[25] - Products include grades for pigmentation, conductivity, UV protection, and mechanical property enhancement in coatings, inks, plastics, adhesives, toners, and batteries[26] - Orion is one of the largest global producers of Specialty Carbon Black, competing with two other major global producers[29] Rubber Carbon Black - Rubber Carbon Black products are used in tires and mechanical rubber goods (MRG) to enhance physical properties, such as tread durability, rolling resistance, traction, strength, fluid resistance, and conductivity[30] - The company offers a broad range of carbon black for tires, including high reinforcing and semi-reinforcing grades, and advanced grades like ECORAX® for specific performance requirements[34] - Orion is a leading global producer of Rubber Carbon Black, competing with two other global companies and multiple regional suppliers, with competition based on product quality, innovation, and customer service[32] Drivers of Demand - Demand for Specialty Carbon Black is driven by growth in coatings, polymers, printing, and battery industries, influenced by industrialization, automotive OEM demand, infrastructure, consumer spending, and electric vehicle penetration[33] - Demand for Rubber Carbon Black is largely driven by the automotive tire, commercial tire, and MRG industries, influenced by replacement and OEM tire production, miles driven, vehicle trends, and regulatory changes[33] - Demand in developed regions is driven by demographics, quality requirements, truck freight, and stable tire replacement, while developing markets are influenced by a growing middle class, industrialization, infrastructure, and increasing car ownership[36] Customer Contracts - Most long-term contracts (12+ months) include formula-driven price adjustment mechanisms for raw material and/or energy costs, covering approximately 70% of global volumes[37] - Non-indexed contracts (shorter than three months) have sales prices reviewed regularly to reflect raw material, energy price fluctuations, and market conditions[37][38] Raw Materials - The primary raw material is carbon black oil, derived from residual heavy oils from petroleum refining, coal tar distillation, and ethylene production[39] - Natural gas is also used in carbon black production, and raw material costs are influenced by availability, supply/demand, and transportation costs[39] Seasonality - The business is generally not seasonal, though operating results are typically weaker in the last three months of a calendar year[40] Innovation - Orion maintains a strong reputation for carbon black product and process technology, applications knowledge, and innovation, with product innovations being a key competitive factor[41] - The Innovation Group, with centers in Europe, Asia, and the Americas (leading center in Cologne, Germany), focuses on applications technology (customer collaboration, tailored solutions) and process development (improving production, quality, cost structure)[42][43][45] - Intellectual property development and management, including patents and trademarks, are considered a strategic competitive advantage[47] Human Capital - Orion employs approximately 1,600 individuals across 24 locations in 13 countries, focusing on attracting, recruiting, training, and developing a diverse global workforce[50] - Talent management programs include formal learning, on-the-job training, mentoring, succession planning, performance reviews, and individual development plans[50] - The company emphasizes promoting from within, leading to increased internal fill rates and identifying future leaders[52] Labor Relations - Approximately 70% of Orion's employees worldwide are covered by collective bargaining agreements with labor unions or works councils[54] - The company maintains stable relations with employees and experiences low voluntary turnover[54] Environmental, Health and Safety Matters - Orion operates under an integrated global management system based on Responsible Care, ISO 9001, ISO 14001, and ISO 45001 standards, with all operating sites third-party certified to ISO 14001 and ISO 9001[56] - Key environmental challenges include managing exhaust gas from production processes (containing CO, NOx, sulfur compounds), with 8 sites utilizing energy co-generation[59] - The company's U.S. facilities are subject to EPA's Clean Air Act and a consent decree, requiring significant monitoring, record-keeping, and reporting, with installations of pollution control technology ongoing[62] - Orion's EU production facilities are subject to the European Emission Trading System (EU ETS) for CO2 emissions, and South Korea has a similar ETS[65] - Carbon black is classified by IARC as a Group 2B substance (possible human carcinogen) and by the MAK Commission as a suspect carcinogen (Category 3), which could lead to increased operating costs or affect sales[79] Further Regulatory Matters - Orion is subject to various governmental regulations concerning product safety, export/import control, data protection, and competitive conduct[83] - Future changes in regulatory requirements or enforcement could materially affect the business, financial condition, results of operations, or cash flows[83] Item 1A. Risk Factors Orion Engineered Carbons faces a range of material risks, including those related to global economic conditions, operational hazards, dependence on major customers and suppliers, intense competition, and the ability to innovate - Worldwide economic conditions, particularly the cyclical automotive and construction industries, materially affect Orion's operations and demand for carbon black[85] - Operational risks inherent in chemicals manufacturing, such as fires, explosions, natural disasters, and supply chain disruptions, could significantly impact the business[87][88] - The company is dependent on major customers, with the top ten accounting for approximately 51% of its volume in 2022, making it vulnerable to changes in these relationships[90] - Volatility in raw material (carbon black oil) and energy costs, which are significant components of production, can decrease production volumes and margins if not effectively passed through to customers[100][101] - Orion's financial leverage and debt instruments impose operating and financial restrictions, potentially limiting its ability to fund growth, pay dividends, or pursue strategic opportunities[147][149] - Extensive environmental, health, and safety laws and regulations, including those related to GHG emissions and the classification of carbon black as a possible carcinogen, could lead to significant compliance costs and liabilities[120][126][127] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments were reported[172] Item 2. Properties Orion Engineered Carbons operates 14 wholly-owned production facilities and one jointly-owned facility globally, with most certified to ISO 9001 and ISO 14001 standards - Orion operates 14 wholly owned production facilities and one jointly-owned facility in Europe, North and South America, South Africa, and Asia[172] - The Huaibei, China facility is scheduled to begin commercial production in 2023[172] - Most production facilities are ISO 9001 and ISO 14001 certified[172] Item 3. Legal Proceedings Orion is involved in various claims and lawsuits, including product-related, liability, employment, and asbestos litigation, and a steam supply contract dispute - Orion is involved in various claims and lawsuits, including product-related, liability, employment, and asbestos litigation[173] - The company believes the aggregate outcome of these proceedings will not have a material adverse effect on its financial condition, but may be material to operating results and cash flow for any particular period[173] - A dispute with the City of Hürth, Germany, regarding a steam supply contract has resulted in open receivables for Orion totaling $9.8 million as of December 31, 2022[488] Item 4. Mine Safety Disclosures This item is not applicable to Orion Engineered Carbons S.A - This item is not applicable[174] PART II This section covers the market for the registrant's common equity, financial condition, results of operations, and market risk disclosures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Orion's common stock is listed on the NYSE under "OEC", with a stock repurchase program approved in November 2022 - Orion Engineered Carbons S.A.'s common stock is listed on the New York Stock Exchange (NYSE) under the symbol "OEC"[175] - As of February 17, 2023, there were approximately 11 record holders of common stock[175] - The Board of Directors approved a stock repurchase program on November 3, 2022, authorizing the purchase of up to $50 million of outstanding common stock[179] Stock Repurchase Program Activity (December 2022) | Period | Total number of stock purchased | Average price paid per stock | Total dollar value of stocks purchased as part of publicly announced plans ($ million) | Maximum approximate dollar value of stocks yet be purchased ($ million) | | :---------------------- | :------------------------------ | :--------------------------- | :----------------------------------------------------------------------- | :----------------------------------------------------------------------- | | December 1 — 31, 2022 | 244,032 | $17.61 | 4.3 | 45.7 | Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Orion's financial condition and results of operations for 2022 and 2021 - The discussion and analysis summarize significant factors affecting results of operations and financial condition for 2022 and 2021, prepared in accordance with U.S. GAAP and in U.S. Dollars[186] 2022 Key Financial Highlights | Metric | Value (2022) | | :---------------- | :------------- | | Net sales | $2,030.9 million | | Sales volume | 962.9 kmt | | Net income | $106.2 million | | Adjusted EBITDA | $312.3 million | Overview 2022 Key Financial Highlights | Metric | Value (2022) | | :---------------- | :------------- | | Net sales | $2,030.9 million | | Sales volume | 962.9 kmt | | Net income | $106.2 million | | Adjusted EBITDA | $312.3 million | Key Factors Affecting Our Results of Operations - Operating results are materially affected by worldwide economic conditions, which are often volatile and beyond the company's control[189] - Factors such as demand for products, product mix, ability to adjust sales prices to raw material and energy costs, and global/regional capacity utilization significantly influence financial performance[190] Recent Developments and Certain Known Trends - 2022 operating results showed strong demand for Rubber Carbon Black, partially offset by lower demand for Specialty Carbon Black, driven by favorable product mix and pricing adjustments[190] - The Russia-Ukraine conflict amplified geopolitical tensions, causing volatility in crude oil and natural gas prices, with long-term impacts on supply chains and energy markets[191] - Orion has identified investments and operational changes to achieve a 35-40% reduction in natural gas consumption without significantly affecting production[192] Reconciliation of Non-GAAP Financial Measures - Orion uses non-GAAP measures like Gross profit per metric ton, Adjusted EBITDA, Net Working Capital, Capital Expenditures, and Segment Adjusted EBITDA Margin to evaluate performance and allocate capital[194] - In Q4 2022, the company shifted from Contribution margin to Gross profit and Gross profit per metric ton as key performance indicators, believing they better reflect overall business operations[196] Gross Profit and Volume Trends (2020-2022) | Metric | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | 2022 vs. 2021 Delta ($ million) | 2022 vs. 2021 Delta (%) | 2021 vs. 2020 Delta ($ million) | 2021 vs. 2020 Delta (%) | | :------------------------ | :--------------- | :--------------- | :--------------- | :------------------------------ | :---------------------- | :------------------------------ | :---------------------- | | Net sales | 2,030.9 | 1,546.8 | 1,136.4 | 484.1 | 31.3% | 410.4 | 36.1% | | Cost of sales | (1,582.1) | (1,160.2) | (844.1) | (421.9) | 36.4% | (316.1) | 37.4% | | Gross profit | 448.8 | 386.6 | 292.3 | 62.2 | 16.1% | 94.3 | 32.3% | | Volume | 962.9 kmt | 964.3 kmt | 866.8 kmt | (1.4) kmt | (0.1)% | 97.5 kmt | 11.2% | | Gross profit per metric ton | $466.1/metric ton | $400.9/metric ton | $337.3/metric ton | $65.2/metric ton | 16.3% | $63.6/metric ton | 18.9% | Adjusted EBITDA Reconciliation (2021-2022) | Metric | 2022 ($ million) | 2021 ($ million) | Delta ($ million) | Delta (%) | | :--------------------------------------------------------------------------------- | :--------------- | :--------------- | :---------------- | :-------- | | Net income | 106.2 | 134.7 | (28.5) | (21.2)% | | Add back Income tax expense | 51.5 | 51.7 | (0.2) | (0.4)% | | Add back Earnings in affiliated companies, net of tax | (0.5) | (0.7) | 0.2 | (28.6)% | | Income before earnings in affiliated companies and income taxes | 157.2 | 185.7 | (28.5) | (15.3)% | | Add back Interest and other financial expense, net | 39.9 | 38.0 | 1.9 | 5.0% | | Add back Reclassification of actuarial losses from AOCI | — | 4.8 | (4.8) | (100.0)% | | Income from operations | 197.1 | 228.5 | (31.4) | (13.7)% | | Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets | 105.7 | 104.1 | 1.6 | 1.5% | | EBITDA | 302.8 | 332.6 | (29.8) | (9.0)% | | Earnings in affiliated companies, net of tax | 0.5 | 0.7 | (0.2) | (28.6)% | | Gain related to litigation settlement | — | (82.9) | 82.9 | (100.0)% | | Long term incentive plan | 7.7 | 5.2 | 2.5 | 48.1% | | EPA-related expenses | — | 2.3 | (2.3) | (100.0)% | | Environmental reserve accrual | (0.4) | 7.2 | (7.6) | (105.6)% | | Other adjustments | 1.7 | 3.3 | (1.6) | (48.5)% | | Adjusted EBITDA | 312.3 | 268.4 | 43.9 | 16.4% | | Specialty Carbon Black Adjusted EBITDA | 143.9 | 148.4 | (4.5) | (3.0)% | | Rubber Carbon Black Adjusted EBITDA | 168.4 | 120.0 | 48.4 | 40.3% | Operating Results Consolidated Operating Results (2021-2022) | Metric | 2022 ($ million) | 2021 ($ million) | Delta ($ million) | Delta (%) | | :------------------------------------------------------- | :--------------- | :--------------- | :---------------- | :-------- | | Net sales | 2,030.9 | 1,546.8 | 484.1 | 31.3% | | Cost of sales | 1,582.1 | 1,160.2 | 421.9 | 36.4% | | Gross profit | 448.8 | 386.6 | 62.2 | 16.1% | | Selling, general and administrative expenses | 227.1 | 210.4 | 16.7 | 7.9% | | Research and development costs | 21.7 | 22.0 | (0.3) | (1.4)% | | Gain related to litigation settlement | — | (82.9) | 82.9 | (100.0)% | | Other expenses, net | 2.9 | 8.6 | (5.7) | (66.3)% | | Income from operations | 197.1 | 228.5 | (31.4) | (13.7)% | | Interest and other financial expense, net | 39.9 | 38.0 | 1.9 | 5.0% | | Reclassification of actuarial losses from AOCI | — | 4.8 | (4.8) | (100.0)% | | Income before earnings in affiliated companies and income taxes | 157.2 | 185.7 | (28.5) | (15.3)% | | Income tax expense | 51.5 | 51.7 | (0.2) | (0.4)% | | Earnings in affiliated companies, net of tax | 0.5 | 0.7 | (0.2) | (28.6)% | | Net income | 106.2 | 134.7 | (28.5) | (21.2)% | - Net sales increased by $484.1 million (31.3%) in 2022, driven by improved base price, higher feedstock cost pass-through, favorable product mix, and higher Rubber Carbon Black volume, partially offset by lower Specialty Carbon Black volume and unfavorable foreign currency translation[202] - Gross profit increased by $62.2 million (16.1%) in 2022, with gross profit per metric ton rising by 16.3% to $466.1, primarily due to improved base price, favorable product mix, and higher Rubber Carbon Black volume[205][206] - Adjusted EBITDA increased by $43.9 million (16.4%) to $312.3 million in 2022, driven by similar factors as gross profit, but partially offset by lower Specialty Carbon Black volume and unfavorable foreign currency translation[213] Comprehensive Income Comprehensive Income (2020-2022) | Metric | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | 2022 vs. 2021 Delta ($ million) | 2021 vs. 2020 Delta ($ million) | | :------------------- | :--------------- | :--------------- | :--------------- | :------------------------------ | :------------------------------ | | Comprehensive income | 142.2 | 134.9 | 3.8 | 7.3 | 131.1 | - Comprehensive income increased by $7.3 million in 2022, primarily due to $32.5 million from financial derivative instruments and $9.1 million from defined pension and other post-retirement benefits, partially offset by lower net income and unfavorable foreign currency translation[214][215] Segment Discussion - Orion's business is managed in two operating segments: Specialty Carbon Black and Rubber Carbon Black, with Segment Adjusted EBITDA used as the primary measure of performance[217][493][497] Segment Performance (2021-2022) | Segment | Metric | 2022 ($ million) | 2021 ($ million) | Delta ($ million) | Delta (%) | | :-------------------- | :---------------------- | :--------------- | :--------------- | :---------------- | :-------- | | Specialty Carbon Black | Net sales | 675.4 | 598.2 | 77.2 | 12.9% | | | Cost of sales | (474.7) | (400.6) | (74.1) | 18.5% | | | Gross profit | 200.7 | 197.6 | 3.1 | 1.6% | | | Volume | 224.3 kmt | 263.2 kmt | (38.9) kmt | (14.8)% | | | Adjusted EBITDA | 143.9 | 148.4 | (4.5) | (3.0)% | | | Adjusted EBITDA Margin (%) | 21.3 | 24.8 | (3.5) | (14.1)% | | Rubber Carbon Black | Net sales | 1,355.5 | 948.6 | 406.9 | 42.9% | | | Cost of sales | (1,107.4) | (759.6) | (347.8) | 45.8% | | | Gross profit | 248.1 | 189.0 | 59.1 | 31.3% | | | Volume | 738.6 kmt | 701.1 kmt | 37.5 kmt | 5.3% | | | Adjusted EBITDA | 168.4 | 120.0 | 48.4 | 40.3% | | | Adjusted EBITDA Margin (%) | 12.4 | 12.7 | (0.3) | (2.4)% | Specialty Carbon Black - Specialty Carbon Black net sales increased by $77.2 million (12.9%) in 2022, driven by improved base price and favorable product mix, despite a 14.8% decrease in volume due to customer destocking and weakening economy[219][220] - Adjusted EBITDA for Specialty Carbon Black decreased by $4.5 million (3.0%) to $143.9 million in 2022, primarily due to lower volume, unfavorable foreign currency translation, and higher SG&A costs, partially offset by higher profit margins[221] Rubber Carbon Black - Rubber Carbon Black net sales increased by $406.9 million (42.9%) in 2022, driven by improved base price, pass-through of feedstock costs, higher volume (up 5.3% to 738.6 kmt), and favorable product mix[222][223] - Adjusted EBITDA for Rubber Carbon Black increased by $48.4 million (40.3%) to $168.4 million in 2022, primarily due to pricing, higher volume, and product mix, partially offset by unfavorable foreign currency translation and higher SG&A costs[225] Liquidity and Capital Resources - Orion's principal sources of liquidity are net cash from operating activities and financing activities, including committed revolving credit facilities and local credit lines[234] - As of December 31, 2022, the company had total liquidity of $292.2 million, comprising $60.8 million in cash and equivalents, $165.9 million in RCF availability, $25.0 million undrawn on the Huaibei term-loan, and $40.5 million from other credit lines[236] Historical Cash Flows Cash Flow Summary (2021-2022) | Cash Flow Category | 2022 ($ million) | 2021 ($ million) | | :------------------------- | :--------------- | :--------------- | | Net cash provided by operating activities | 81.0 | 145.2 | | Net cash used in investing activities | (232.8) | (214.7) | | Net cash provided by financing activities | 149.3 | 73.3 | - In 2022, cash used in investing activities primarily reflected $165.8 million for safety, maintenance, and growth investments, and $67.0 million for EPA emissions reduction technology[229] - Net cash provided by financing activities in 2022 was $149.3 million, mainly from net borrowings under RCF and ancillary facilities ($91.0 million), Huaibei facility financing ($47.8 million), and repurchase agreements ($36.3 million)[230] Sources of Liquidity - Orion's primary liquidity sources are operating cash flow, committed multi-currency senior secured revolving credit facility (RCF), ancillary facilities, uncommitted local credit lines, and term loan borrowings[234] - The company believes its anticipated future operating cash flow and existing credit facilities will be sufficient to finance planned capital expenditures, commitments, and working capital needs[235] - As of December 31, 2022, total liquidity was $292.2 million, including $60.8 million in cash and equivalents and $165.9 million available under the RCF[236] Net Working Capital (Non-GAAP Financial Measure) - Net Working Capital is defined as Inventories, net plus Accounts receivable, net minus Accounts payable[237] Net Working Capital Components (2021-2022) | Component | 2022 ($ million) | 2021 ($ million) | | :---------------------- | :--------------- | :--------------- | | Inventories, net | 277.9 | 229.8 | | Accounts receivable, net | 367.8 | 288.9 | | Accounts payable | (184.1) | (195.1) | | Total Net Working Capital | 461.6 | 323.6 | - Net Working Capital increased to $461.6 million in 2022 from $323.6 million in 2021, primarily due to higher oil prices and increased production leading to higher raw material and finished goods inventory, and increased accounts receivable from higher sales[238][243] Capital Requirements - Capital Expenditures are defined as cash paid for the acquisition of property, plant and equipment, planned to be financed by operating cash flow and/or existing debt capacity[239] - Gross debt balance increased by $131.2 million to $919.7 million as of December 31, 2022[240] - The company does not have material contractual obligations or short-term lease obligations, expecting to meet them with operating cash flow or existing debt capacity[241][242] Trend Information - Refer to 'Recent Developments and Certain Known Trends' for information on trend information[243] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make significant estimates and assumptions that affect reported amounts, with actual results potentially differing materially[245][246] Inventories - Inventories are valued at the lower of cost or net realizable value using the average cost method[247] - Periodic reviews for obsolescence and declines in anticipated selling prices are conducted, with write-downs if market conditions are less favorable than projected[248] Goodwill Impairment - Goodwill is reviewed for impairment at least annually (September 30) or more frequently if circumstances indicate impairment[249] - For 2022 and 2021, a qualitative impairment assessment indicated that the fair value of reporting units was greater than their carrying value, thus no goodwill impairment was recognized[251] Loss Contingencies - Liabilities for loss contingencies are recorded when probable and reasonably estimable, with disclosures for potential material excesses or non-estimable material losses[252] - Estimates are inherently uncertain due to long resolution periods, unknown conditions, changing regulations, and multiple third parties[252] Accruals for Taxes Based on Income - The provision for income taxes and calculation of tax benefits/liabilities involve management estimates and judgments due to complex tax laws in multiple jurisdictions[253] - Deferred tax assets and liabilities are based on temporary differences and measured using enacted tax rates, with valuation allowances provided when realization is not more likely than not[254][255] ACCOUNTING AND REPORTING CHANGES - For potential impacts of new accounting pronouncements, refer to Note B. Recent Accounting Pronouncements in the Consolidated Financial Statements[257] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Orion is exposed to market risks from foreign exchange, interest rates, and commodities, using derivative financial instruments solely for hedging purposes - Orion is exposed to market risks related to foreign exchange, interest rates, and commodity prices[258] - Derivative financial instruments are used solely for hedging these risks, not for speculative purposes, with a systematic financial and risk management system in place[258] Interest Rate Risk - Interest rate risk arises from new liabilities and variable interest rate term loans, which expose Orion to market changes in yield curves[260] - Hedging instruments are used to mitigate exposure to increasing interest rates[260] Interest Rate Sensitivity (December 31, 2022) | Scenario | Increase by 0.50% ($ million) | Decrease by 0.50% ($ million) | | :------------------------------------------ | :--------------------- | :--------------------- | | (Increase) decrease in interest expense | (0.7) | 0.8 | | Increase (decrease) in total comprehensive income before taxes | 0.7 | (0.8) | Foreign Currency Risk - Orion is exposed to foreign currency risk due to a significant portion of reporting entities using the Euro as functional currency while the reporting currency is the U.S. dollar, impacting Comprehensive income[263] - The company uses foreign exchange contracts and cross-currency swaps to minimize the effects of net currency exchange exposures, with a daily monitoring of net foreign currency positions[266] Euro/U.S. Dollar Exchange Rate Sensitivity (December 31, 2022) | Scenario | Value of the U.S. Dollar in relation to the Euro - Increase by 10% (In thousands) | Value of the U.S. Dollar in relation to the Euro - Decrease by 10% (In thousands) | | :------------------------ | :---------------------------------------------------------------- | :---------------------------------------------------------------- | | FX gain (loss) in financial result | 9.0 | (11.0) | Commodity Risk - Commodity risk arises from fluctuations in market prices for raw materials, primarily carbon black oil, and energy[269] - Approximately 70% of Orion's sales volume is based on formula-driven price adjustment mechanisms for raw material costs, helping to maintain Segment Adjusted EBITDA Margins[270] - The company employs worldwide purchasing activities and optimized processes to reduce purchasing risks[269] Item 8. Financial Statements and Supplementary Data This section presents Orion's audited consolidated financial statements for 2022, 2021, and 2020, prepared in accordance with U.S. GAAP - The section includes the audited Consolidated Financial Statements for the years ended December 31, 2022, 2021, and 2020[277][288] - Financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP)[277][288] - Ernst & Young LLP and Ernst & Young GmbH provided unqualified audit opinions on the financial statements and internal control over financial reporting[277][278][288][520][521] Financial Statements Consolidated Statements of Operations (2020-2022) | Metric | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | | :------------------------------------------------------- | :--------------- | :--------------- | :--------------- | | Net sales | 2,030.9 | 1,546.8 | 1,136.4 | | Cost of sales | 1,582.1 | 1,160.2 | 844.1 | | Gross profit | 448.8 | 386.6 | 292.3 | | Selling, general and administrative expenses | 227.1 | 210.4 | 176.1 | | Research and development costs | 21.7 | 22.0 | 20.2 | | Gain related to litigation settlement | — | (82.9) | — | | Other expenses, net | 2.9 | 8.6 | 21.6 | | Income from operations | 197.1 | 228.5 | 74.4 | | Interest and other financial expense, net | 39.9 | 38.0 | 38.7 | | Reclassification of actuarial losses from AOCI | — | 4.8 | 9.9 | | Income before earnings in affiliated companies and income taxes | 157.2 | 185.7 | 25.8 | | Income tax expense | 51.5 | 51.7 | 8.1 | | Earnings in affiliated companies, net of tax | 0.5 | 0.7 | 0.5 | | Net income | 106.2 | 134.7 | 18.2 | | Basic EPS | $1.74 | $2.22 | $0.30 | | Diluted EPS | $1.73 | $2.21 | $0.30 | Consolidated Statements of Comprehensive Income (2020-2022) | Metric | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | | :---------------------------------- | :--------------- | :--------------- | :--------------- | | Net income | 106.2 | 134.7 | 18.2 | | Foreign currency translation adjustments | (13.4) | (7.6) | (14.3) | | Net gains (losses) on derivatives | 35.2 | 2.7 | (2.6) | | Defined benefit plans, net | 14.2 | 5.1 | 2.5 | | Other comprehensive income (loss) | 36.0 | 0.2 | (14.4) | | Comprehensive income | 142.2 | 134.9 | 3.8 | Consolidated Balance Sheets (December 31, 2021-2022) | Asset/Liability/Equity | 2022 ($ million) | 2021 ($ million) | | :------------------------------------ | :--------------- | :--------------- | | ASSETS | | | | Cash and cash equivalents | 60.8 | 65.7 | | Accounts receivable, net | 367.8 | 288.9 | | Inventories, net | 277.9 | 229.8 | | Total current assets | 778.5 | 665.0 | | Property, plant and equipment, net | 818.5 | 707.9 | | Goodwill | 73.4 | 78.0 | | Total non-current assets | 1,110.2 | 966.0 | | Total assets | 1,888.7 | 1,631.0 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | 184.1 | 195.1 | | Current portion of long term debt and other financial liabilities | 258.3 | 151.7 | | Total current liabilities | 552.8 | 448.7 | | Long-term debt, net | 657.0 | 631.2 | | Employee benefit plan obligation | 50.0 | 74.4 | | Total non-current liabilities | 876.5 | 862.6 | | Total stockholders' equity | 459.4 | 319.7 | | Total liabilities and stockholders' equity | 1,888.7 | 1,631.0 | Consolidated Statements of Cash Flows (2020-2022) | Cash Flow Category | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | | :--------------------------------------------------------------------------------- | :--------------- | :--------------- | :--------------- | | Net cash provided by operating activities | 81.0 | 145.2 | 125.3 | | Net cash used in investing activities | (232.8) | (214.7) | (144.9) | | Net cash provided by financing activities | 149.3 | 73.3 | 13.5 | | Increase (decrease) in cash, cash equivalents and restricted cash | (2.5) | 3.8 | (6.1) | | Cash, cash equivalents and restricted cash at the beginning of the period | 68.5 | 67.9 | 68.2 | | Effect of exchange rate changes on cash | (2.6) | (3.2) | 5.8 | | Cash, cash equivalents and restricted cash at the end of the period | 63.4 | 68.5 | 67.9 | | Less restricted cash at the end of the period | 2.6 | 2.8 | 3.0 | | Cash and cash equivalents at the end of the period | 60.8 | 65.7 | 64.9 | | Cash paid for interest, net | (33.5) | (22.8) | (20.8) | | Cash paid for income taxes | (23.9) | (37.6) | (7.9) | Consolidated Statements of Changes in Stockholders' Equity (2020-2022) | Metric | 2022 ($ million) | 2021 ($ million) | 2020 ($ million) | | :------------------------------------ | :--------------- | :--------------- | :--------------- | | Balance at January 1 | 319.7 | 181.0 | 186.0 | | Net income | 106.2 | 134.7 | 18.2 | | Other comprehensive income (loss), net of tax | 36.0 | 0.2 | (14.4) | | Dividends paid | (5.0) | (1.3) | (12.0) | | Repurchases of Common stock | (4.3) | — | — | | Share based compensation | 7.7 | 5.1 | 2.9 | | Issuance of stock under equity compensation plans | (0.9) | — | 0.3 | | Balance at December 31 | 459.4 | 319.7 | 181.0 | Notes to the Consolidated Financial Statements - Note A outlines significant accounting policies, including principles of consolidation, use of estimates, cash and cash equivalents, accounts receivable, inventories, property, plant and equipment, goodwill, intangible assets, equity method investments, income taxes, other provisions, concentrations of credit risk, foreign currency translation, revenue recognition, stock-based compensation, leases, and financial instruments/hedging activities[310][311][313][314][316][317][318][320][324][327][329][333][337][339][340][341][346][349][351] - Note B details the adoption of ASU No. 2021-10, Disclosures by Business Entities About Government Assistance, effective January 1, 2022, which did not materially impact the financial statements[367] - Note J provides details on debt and other obligations, including Term Loans, China Term Loan, Revolving Credit Facility, and other short-term debt, and confirms compliance with debt covenants as of December 31, 2022[385][388][392][393][394][413] - Note P details income tax provisions, effective tax rates, deferred tax assets and liabilities, and tax uncertainties, including unrecognized tax benefits of $11.6 million as of December 31, 2022[466][471][473][475][478] - Note Q outlines commitments and contingencies, including long-term raw material purchase commitments ($34.2 million), restructuring costs ($3.8 million remaining), environmental reserves ($4.8 million), and legal proceedings such as the EPA consent decree, which has incurred $277 million in capital expenditures[481][482][484][486][491] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[509] Item 9A. Controls and Procedures Management concluded that Orion's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - As of December 31, 2022, the CEO and CFO concluded that Orion's disclosure controls and procedures were effective[510] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2022, based on the COSO framework (2013), concluding it was effective[513] - No material changes in internal control over financial reporting occurred during the fiscal year ended December 31, 2022[515] Item 9B. Other Information This item contains no other information - No other information was reported under this item[516] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Orion Engineered Carbons S.A - This item is not applicable[516] PART III This section covers corporate governance, executive compensation, and related party disclosures Item 10. Directors, Executive Officers and Corporate Governance This section provides information on Orion's Directors, Executive Officers, and corporate governance practices, including the Code of Conduct and Code of Ethics - Information on Directors and certain governance details are incorporated by reference from the 2023 Proxy Statement[528] Executive Officers | Name | Age | Title | | :---------------- | :-- | :-------------------------------------------- | | Corning F. Painter | 60 | Chief Executive Officer | | Jeffrey Glajch | 60 | Chief Financial Officer | | Sandra Niewiem | 46 | Senior Vice President, Global Specialty Carbon Black and EMEA Region | | Pedro Riveros | 52 | Senior Vice President, Global Rubber Carbon Black and Americas Region | | Carlos J. Quinones | 58 | Senior Vice President, Global Operations | - Orion has adopted a Code of Conduct for all employees and directors, and a Code of Ethics specifically for the CEO, CFO, and Chief Accounting Officer, both available on the company website[534] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Executive compensation information is incorporated by reference from the 2023 Proxy Statement[535] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership of beneficial owners and management, along with related stockholder matters, is incorporated by reference from the 2023 Proxy Statement - Information on security ownership of beneficial owners and management is incorporated by reference from the 2023 Proxy Statement[536] Item 13. Certain Relationships and Related Transactions, and Director Independence Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2023 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement[537] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement[538] PART IV This section details exhibits and financial statement schedules Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, with a detailed Exhibit Index provided - Financial statements are included in Item 8 of this Form 10-K[540] - Schedules are omitted if not applicable or if the required information is included in the consolidated financial statements and notes[540] - A detailed Exhibit Index is provided, with exhibit numbers corresponding to Item 601 of Regulation S-K[541] Item 16. 10-K Summary This item is not applicable and contains no summary - This item is not applicable[542]