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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 001-36563
ORION S.A.
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(Exact name of registrant as specified in its charter)
Grand Duchy of Luxembourg00-0000000
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1700 City Plaza Drive, Suite 300
Spring
Texas
77389
(Address of Principal Executive Offices)
(Zip Code)
(281) 318-2959
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stocks, no par valueOECNew York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.       Yes x    No  o 
Indicate by check mark whether the registrant has electronically submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                     Yes  x   No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.     
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o 
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o                                                 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No x 
The aggregate market value of voting and non-voting common equity held by non-affiliates, based upon the closing price for the common stocks, as reported on the New York Stock Exchange on the last business day of the registrant’s most recently completed second fiscal quarter, of $21.22, was approximately $1.24 billion.
The registrant had outstanding 57,898,772 shares of common stock as of February 9, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s 2024 Proxy Statement, in connection with the Company’s 2024 Annual Meeting of Shareholders (in Part III), as indicated herein.
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TABLE OF CONTENTS
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Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
This report contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions.
Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target,” “to be” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters: 
our strategies for (i) maintaining or strengthening our position in Specialty Carbon Black or Rubber Carbon Black, (ii) maintaining or increasing our Specialty or Rubber Carbon Black margins and (iii) maintaining or strengthening the competitiveness of our operations;
our profit and cash flow projections;
the outcome of any in-progress, pending or possible litigation or regulatory proceedings;
the expectations regarding environmental-related costs and liabilities;
the expectations regarding the performance of our industry and the global economy, including foreign currency rate fluctuations;
the sufficiency of our cash on hand, cash provided by operating activities and borrowings to pay our operating expenses, satisfy our debt obligations and fund Capital expenditures;
the ability to pay dividends;
our anticipated spending on, and the timely completion and anticipated impacts of, capital projects including growth projects, and the construction of new plants;
our projections and expectations for pricing, financial results and performance in 2024 and beyond;
the status of contract negotiations with counterparties and the impact of new contracts on our business; and
our expectation that the markets we serve will continue to demand our products.
All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others:
possible negative or uncertain worldwide economic conditions and developments;
the volatility and cyclicality of the industries in which we operate;
the operational risks inherent in chemicals manufacturing, including disruptions due to technical facilities, severe weather conditions or natural disasters;
our dependence on major customers and suppliers;
unanticipated fluctuations in demand for our products, including due to factors beyond our control;
our ability to compete in the industries and markets in which we operate;
changes in the nature of transportation in the future, which may impact our customers and our business;
our ability to successfully develop new products and technologies;
the availability of substitutes for our products;
our ability to implement our business strategies;
our ability to respond to changes in feedstock prices and quality;
our ability to realize benefits from investments, joint ventures, acquisitions or alliances;
our ability to negotiate satisfactory terms with counterparties, the satisfactory performance by such counterparties of their obligations to us, as well as our ability to meet our performance obligations towards such counterparties;
our ability to realize benefits from planned plant capacity expansions and site development projects and the impacts of potential delays to such expansions and development projects;
any information technology systems failures, network disruptions and breaches of data security;
our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages;
our ability to recruit or retain key management and personnel;
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our exposure to political or country risks inherent in doing business globally;
any and all impacts from the Russia-Ukraine war and the Hamas-Israel conflict and/or any escalation thereof related energy costs, raw material availability or other economic disruptions;
geopolitical events in the United States (“U.S.”), Middle-East, European Union (“EU”) and China, relations amongst Western countries and their neighbors, as well as future relations between the U.S., EU, China, and other countries and organizations;
all environmental, health and safety laws and regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities;
any possible future investigations and enforcement actions by governmental, supranational agencies or other organizations;
our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases as well as other accidents;
any market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy;
any litigation or legal proceedings, including product liability, environmental or asbestos related claims;
our ability to protect our intellectual property rights and know-how;
our ability to generate the funds required to service our debt and finance our operations;
any fluctuations in foreign currency exchange and interest rates;
the availability and efficiency of hedging;
any changes in international and local economic conditions, dislocations in credit and capital markets and inflation or deflation;
any potential impairments or write-offs of certain assets;
any required increases in our pension fund or retirement-related contributions;
the adequacy of our insurance coverage;
any changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions;
any challenges to our decisions and assumptions in assessing and complying with our tax obligations;
the potential difficulty in obtaining or enforcing judgments or bringing legal actions against Orion S.A. (a Luxembourg incorporated entity) in the U.S. or elsewhere outside Luxembourg; and
any current or future changes to disclosure requirements and obligations, including but not limited to new ESG-related disclosures, related audit requirements and our ability to comply with such obligations and requirements.
It is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. For further information regarding factors that could affect our business and financial results and the related forward-looking statements, see “Item 1A. Risk Factors.
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PART I
Item 1. Business
Overview
Orion S.A., formerly Orion Engineered Carbons S.A. (“Orion”, “Company”, “we” or “our”), is a Luxembourg joint stock corporation (société anonyme or S.A.), incorporated in 2014 as a Luxembourg limited liability company (société à responsabilité limitée). Our registered office is located at 6, Route de Trèves, L-2633 Senningerberg (Municipality of Niederanven), Grand Duchy of Luxembourg. Our principal executive office is located in Spring, Texas, U.S.
We are a leading global manufacturer of carbon black products. Carbon black is a powdered form of carbon that is used to create the desired physical, electrical and optical qualities of various materials. Carbon black products are primarily used as additives for the production of polymers, batteries, printing inks and coatings (“Specialty Carbon Black” or “Specialty”) and in the reinforcement of rubber polymers (“Rubber Carbon Black” or “Rubber”). Our core competencies include the ability to engineer the physical properties of carbon black to meet the functional needs of our customers. The Company is one of the largest global producers of Specialty and Rubber Carbon Black.
We currently operate 14 wholly owned production facilities in Europe, North and South America, South Africa, and Asia, and one jointly-owned production facility at Dortmund, Germany. In addition to our headquarters in Luxembourg, we have our principal executive office in Spring, Texas (U.S.), as well as offices in Frankfurt (Germany), Cologne (Germany), Shanghai (China), Seoul (South Korea), Tokyo (Japan) and other locations. Our principal research and development (“R&D”) center is located in Cologne (Germany). We also have laboratories to support our customers in Carlstadt, New Jersey (U.S.), Shanghai (China) and Yeosu (South Korea).
We are a premium supplier of carbon black generating long-term benefits for stakeholders while remaining committed to responsible business practices with a focus on team culture, reliability, quality and sustainability.
Our business is organized into two reportable segments: Specialty Carbon Black and Rubber Carbon Black. Our business segments are discussed in more detail later in this section.
Our internet address is www.orioncarbons.com. We make available free of charge on or through our website, our current Annual Reports in Form 10-K, Quarterly Reports in Form 10-Q, reports in Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the U.S. Securities and Exchange Commission (“SEC”). Information appearing on our website is not a part of, and is not incorporated in, this Annual Report in Form 10-K.
Products and Applications
Carbon black is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications.
Specialty Carbon Black
The Company manufactures Specialty Carbon Black for a broad range of specialized applications such as polymers, batteries, printing and coatings. The various production processes result in a wide range of different Specialty Carbon Black grades with respect to their primary particle size, structure, surface area and surface chemistry. These parameters affect jetness, tinting strength, undertone, dispersibility, electrical conductivity and other characteristics. Carbon black is an additive that enhances the physical, electrical and optical properties of our customer’s end products.
We have several post-treated Specialty Carbon Black grades for coatings and printing applications, as well as several high purity carbon black grades for the fiber industry and conductive carbon black grades for batteries, polymers, and coatings. Our specialty grades of carbon black are used to impart color, provide rheology control, enhance conductivity and static charge control, provide UV protection, enhance mechanical properties and provide formulation flexibility through surface treatment. These specialty carbon products are used in a wide variety of applications, such as coatings, inks, plastics, adhesives, toners and batteries.
a.Products
i.Carbon Black for CoatingsWe offer a broad range of Specialty Carbon Black products for coatings, which includes products used for pigmentation in black coatings and protection of various other coatings (e.g., automotive base coats and architectural coatings), for conductivity and for tinting, as well as for paints and for light tinting in transparent coatings (e.g., metallic effects and wood glazing). The diversity of our manufacturing processes allows for the creation of a wide range of Specialty Carbon Black grades with different structures and chemical properties, thereby allowing our products to impart unique characteristics to our customers’ products.
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ii.Carbon Black for PolymersWe offer Specialty Carbon Black for polymers in a diverse range of end markets including pipe (e.g., gas, oil, municipal water, sewage), construction, energy distribution (e.g., power cables), automotive, agriculture and consumer packaging. Certain products within this portfolio provide UV protection against polymer degradation for material such as pipe used for potable water, injection molding, agriculture films and cables. Other products include standard- to high-performance grades designed and modified to provide electrical conductivity, antistatic and reinforcing properties to many different polymer applications, including high-voltage cables, film and high-pressure pipes.
iii.Carbon Black for PrintingWe offer Specialty Carbon Black for printing inks used in different printing systems and applications. We apply different process technologies to offer highly specialized products meeting specific requirements, including compliance with food-contact regulations and specially formulated products that require unique attributes such as color undertone, optical density and gloss.
iv.Carbon Black for BatteriesWe offer conductive additives for a wide range of battery applications such as lithium-ion batteries for electric vehicles, energy storage and consumer applications. We also offer conductive additives for lead-acid batteries, supercapacitors and dry cell batteries. Our products, which are manufactured in different production processes, are differentiated by high purity, high conductivity, low moisture and easy dispersion, enhancing the performance, lifetime and safety of batteries.
b.Competition
We are one of the largest global producers of Specialty Carbon Black. There are two other large global producers of Specialty Carbon Black. Besides that, there are regional Specialty Carbon Black producers as well as technology specialists such as acetylene black producers. Orion differentiates by offering the broadest process technology portfolio and Specialty product portfolio to its customers.
Rubber Carbon Black
Our Rubber Carbon Black products are used in tires and mechanical rubber goods (“MRG”). Rubber Carbon Black are used to enhance the physical properties of the systems and applications in which they are incorporated. Rubber Carbon Black have traditionally been used in the tire industry as a rubber reinforcing agent to increase tread durability and are also used as a performance additive to reduce rolling resistance and improve traction. In MRG, such as hoses, belts, extruded profiles and molded goods, Rubber Carbon Black are used to improve the physical performance of the product, including the product’s physical strength, fluid resistance, conductivity and resistivity.
a.Products
i.Carbon Black for TiresWe offer a broad range of carbon black products for tires, which includes high reinforcing grades and semi-reinforcing grades. Fine particle reinforcing grade carbon black is used mostly in the tread of tires. Other reinforcing grade carbon black is also used in different components of the tire carcass. In addition to standardized grades, we produce advanced grades tailored to meet specific customer performance requirements, such as ECORAX® grades designed to lower rolling resistance and high-performance grades for truck tires and high- and ultra-high-performance passenger car tires.
ii.Carbon Black for Mechanical Rubber GoodsWe produce a wide range of carbon black products for a variety of MRG end-uses, including automotive production, construction, as well as certain food, consumer and medical applications. These grades have an exceptionally high purity and high consistency and satisfy special requirements needed for smooth surfaces and electrical resistance. These grades also disperse well in rubber compounds used in parts like window seals, automotive hoses, transmission belts, damping elements and electrically conductive and antistatic rubber goods.
b.Competition
We are one of the leading global producers of Rubber Carbon Black. We compete with two other global companies and multiple regional companies. The smaller regional suppliers mainly participate in standard and MRG applications and are less likely to provide specialized products used in higher-end tire and MRG applications. Competition for our Rubber Carbon Black products is generally based on product quality and performance, supply reliability, technical innovation and customer service.

Drivers of Demand
Besides general global economic conditions, certain specific drivers of demand for carbon black differ among our operating segments. Specialty Carbon Black has a wide variety of end-uses and demand is largely driven by the growth and development of the coatings, polymers, printing and battery industries. Demand for Specialty Carbon Black in the coatings and polymers industries is mainly influenced by the levels of industrialization, automobile original equipment manufacturer (“OEM”) demand, infrastructure development, consumer spending and construction activity. Demand for Specialty Carbon Black in the printing industry is mainly influenced by developments in print media and packaging materials. Demand for Specialty Carbon Black in the batteries industry is driven by electric vehicle penetration, growth of consumer and industrial batteries business and energy storage systems use. Demand for Rubber Carbon Black is largely driven by the growth and development of the automotive tire, commercial tire and MRG industries. Demand for Rubber Carbon Black in tires is mainly influenced by the number of replacement and original equipment tires produced, which in turn is driven by (i) the number of miles driven and truck traffic, (ii) vehicle trends, including the number of vehicles produced and operated, (iii) demand for larger vehicles, such as trucks and buses, (iv) demand for high-performance tires, (v) consumer and industrial spending on replacement tires and on new
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vehicles, and (vi) changes in regulatory requirements. Demand for Rubber Carbon Black in MRG is mainly influenced by vehicle production and design trends, construction activity and general industrial production.
Customer Contracts
Most of our long-term contracts, 12 months or longer, contain formula-driven price adjustment mechanisms for changes in raw material and/or energy costs. We sell carbon black under the following two main categories of contracts based on price adjustment mechanisms:
Contracts with feedstock adjustments (indexed contracts)—This category includes contracts with monthly or, in some cases, quarterly automatic feedstock and/or energy cost adjustments, which cover approximately 65% of our global volume;
Non-indexed contracts—This category includes short-term contracts (usually shorter than three months) where sales prices of our carbon black products are not linked to carbon black oil market prices.
Many of our indexed contracts allow for periodic price adjustments, while a small portion (by volume sold) allow for quarterly price adjustments. These contracts have enabled us to reduce the impact of fluctuations in oil prices on our margins; however, rapid and significant oil price fluctuations have had and are likely to continue to have significant effects on our earnings and results of operations given (i) not all contracts contain price adjustment mechanisms and (ii) the value of our productivity improvements rises and falls with oil price movements.
See “Item 1A. Risk Factors—Risks Related to Our Business”—We are subject to volatility in the costs, quality and availability of raw materials and energy, which could decrease our production volumes and margins and adversely affect our business, financial condition, results of operations and cash flows. Sales prices under non-indexed contracts are reviewed on a regular basis to reflect raw material and energy price fluctuations as well as overall market conditions.
Raw Materials
The principal raw material used in the manufacture of carbon black is carbon black oil comprised of residual heavy oils derived from petroleum refining operations, the distillation of coal tars and the production of ethylene throughout the world. The majority of our carbon black oil supply is covered by short and long-term contracts with a wide variety of suppliers. Natural gas is also used in the production of carbon black. These raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, supply and demand of such raw materials and related transportation costs. Some carbon black grades are also produced from acetylene gas, an off-gas received from other chemical producers. Changes in our raw material supplier’s operating conditions and demand for their products could reduce the availability of such specialized feedstocks.
Seasonality
Our business is generally not seasonal in nature, although our results of operations are generally weaker in the last three months of a calendar year.
Innovation
We enjoy a long-standing reputation within the industry for carbon black product and process technology, applications knowledge and innovation. Carbon black products are highly versatile and meet specific performance requirements across many industries. This creates significant opportunities for product and process innovation. Further product innovations are a key competitive factor in the industry, even after decades of R&D in this field.
We maintain product applications and process development centers in Europe, Asia and the Americas. Our Innovation Group is divided into applications technology and process development teams, which cover both Specialty Carbon Black and Rubber Carbon Black. The applications technology team works closely with our major clients to develop innovative products and expand the applications range for carbon black products. The process development team works closely with our manufacturing and procurement teams to improve production processes, advance the use of bio-circular feedstocks, product quality and cost structure.
Our Innovation function’s leading center of excellence is located in Cologne (Germany) to support and enhance our global innovation function as well as R&D activities. This center includes applications technology laboratories and process development staff, co-located with our pilot process development facilities. Staffing in our Cologne technical center includes physicists, chemists and engineers who collaborate to create and analyze various carbon black properties with a goal to identify existing products or develop new products to meet customer requirements. Common processes and information technology tools further enhance coordination and communication with our regional technical centers located in China, South Korea and the U.S.
Applications Technology—Our goal is to remain at the forefront of the industry in terms of product development by having dedicated applications technology facilities. Success relies on close collaboration with customers, often through long-term R&D alliances, which create superior technical interfaces. These interactions enable us to develop tailored solutions and meet unique customer requirements.
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Our applications technology team brings together a deep knowledge of carbon black technology with an understanding of the key applications practiced by our customers. This team has access to extensive laboratory and testing facilities using similar formulations, processing and test methods employed by our customers. Customer collaborations often include cooperative testing with customers’ staff in our facilities. Applications technology provides a key customer and market interface and translates specific customer needs into carbon black product attributes.
Applications technology plays a supporting role in the process of new product launches by providing technical data and presentations, training and support, and establishing and monitoring quality targets. Our team works closely with customers to provide support during the qualification cycle, which can be long and may last over several years. Our close cooperation decreases the likelihood of customers switching suppliers once a product has been approved.
Product quality test methods and applications testing are defined within the applications technology team. Methods are developed centrally and deployed worldwide to relevant production and applications laboratories to assure consistency in measurements and reporting.
Intellectual Property—We consider intellectual property development and management as a strategic competitive advantage. We initiate and maintain patents and trademarks, with varying expiration dates, on a number of our products and processes. We sell our products under a variety of patents and trademarks we own and we take reasonable measures to protect them.
In connection with the separation of our business from Evonik Industries AG, Germany (“Evonik”) more than ten years ago, Evonik assigned to us its intellectual property that was exclusively used in its carbon black business and granted certain intellectual property rights that are still also in use in Evonik’s retained business in turn for us granting certain intellectual property rights to Evonik for fields outside of carbon black. Consequently, we may be restricted in leveraging intellectual property that we use on the basis of a license from Evonik or the intellectual property that is subject to grant-back licenses when expanding our business into fields outside of carbon black. For additional information, see “Item 1A. Risk Factors—Legal and Regulatory Risks—We may not be able to protect our intellectual property rights successfully.”
Human Capital
We are a group of individuals who share one common passion: carbon black. Our success depends on attracting, recruiting, training and developing a diverse, talented global workforce. We believe people are at the heart of our business and work to advance a positive work culture. We strive to be an optimal employer for our employees, as well as a valued partner to our communities. We engage with our employees to provide a challenging, dynamic, inclusive and diverse work environment that supports each individual professional development, positive work environment, and long-term health and wellness. We are committed to promoting a workplace of belonging where our employees are informed, engaged and enabled to do their best work and be their best selves. We are also committed to providing our employees with opportunities for learning and personal growth in an environment where creativity and innovation are encouraged.
Aligning employee engagement and enablement remains a key component for the continued success of Orion. We have built a value system around a foundation of appreciating our employees through trust, respect and development. To ensure our employees are both motivated to do their work and equipped with the right tools and training to be successful, we start with listening. We regularly use employee surveys and feedback sessions to help ensure all the voices of our employees are heard. We continue to use the feedback to prioritize our human capital strategy and continue to upgrade our talent management programs, focusing on specific actions to improve learning and to promote employee development and career growth. Our talent programs are made up of several components:
formal learning programs to equip individual employees with the technical and functional skills required for their current and future roles;
on-the-job training through assignments that provide new roles and projects;
formal and informal mentoring programs;
succession planning;
formal and informal performance reviews with line managers and others; and
individual development plans.
Orion is made up of approximately 1,650 employees with four innovation centers and 14 wholly owned plants worldwide producing carbon black. The company’s corporate lineage goes back more than 160 years to Germany, where it operates the world’s longest-running carbon black plant. Orion is a leading innovator, applying a deep understanding of customers’ needs to deliver sustainable solutions, offering the most diverse variety of production processes in the industry.
We believe diversity, equity and inclusion are keys to our success and we strive to create a welcoming environment where everyone can belong, grow and thrive. We place a premium on the freedom for our employees to be their authentic selves and offer an equal chance to bring different skills, backgrounds and experiences to work. To realize our commitments, we strive to:
a.Enable a trusting environment so employees are free to share individual experiences to increase understanding.
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b.Promote an environment where each Orion employee owns the responsibility to exemplify inclusive behavior and treat others with respect, dignity and empathy.
c.Require our leaders to drive a culture that enhances inclusiveness, fairness, the ability to hire people talent whatever their background may be and ensure accountability within the company.
A focus on promoting from within has led to continued increases in internal fill rates for open positions and the involvement of business leaders across the organization in talent reviews to assess employees on performance and future potential. These talent reviews continue to identify high potential employees, build bench strength, increase retention and help us identify our future leaders and innovators. These reviews also allow us to identify gaps in our organization and the actions needed to fill those gaps.
We uphold the freedom of association and fully recognize the right of collective bargaining. Certain of our employees are represented through unions and works councils. We value exchanging information and views with the local unions and works councils with the view to finding solutions to our common issues and ensuring success for both our employees and the Company.
Labor Relations
Our employees are represented by labor unions, industry groups and works councils in accordance with local law and practices. Membership in employee labor unions varies in accordance with the business area, local practice and country. We have entered into collective bargaining agreements with employee labor unions either directly or as members of industry-wide unions or employer organizations. Approximately 67% of our employees are covered by such agreements. These agreements typically govern, among other things, terms and conditions of employment and reflect the prevailing practices in each country. We believe we have stable relations with our employees and voluntary turnover is low.
In 2017, 35 of the former employees in our closed facility in Ambès, France filed claims with the labor court of Bordeaux contesting the termination of their employment and seeking damages. Of these claims, 31 are pending in the courts and our results of operations reflect accruals made by us to satisfy our best estimate of these claims should the former employees prevail.
Environmental, Health and Safety Matters
Protection of people and the environment, fair treatment of our partners and a clear alignment to our customers’ needs are essential components of our activities. We strive not only to comply with all applicable laws and voluntary obligations, but to continuously improve our performance and management systems. Our integrated global management system with established standards and processes is based on the principles of the Responsible Care, International Organization for Standardization’s (“ISO”) 9001 Quality Management System, ISO 14001 Environmental Management Systems and ISO 45001 Safety Management Systems. All of our operating sites are third-party certified to ISO 14001 and ISO 9001 standards, except our new Huaibei facility in China. Our global management system outlines our processes and procedures practiced in relation to environmental protection, occupational safety, industrial hygiene and quality management as well as sustainable compliance and product stewardship.
Our annual sustainability report is accessible on our webpage: www.orioncarbons.com. Our sustainability report is not incorporated by reference into this Annual Report in Form 10-K.
Our operations involve the use, processing, handling, storage and transportation of materials that are subject to international, national and local environmental and safety laws and regulations. All our production facilities require operating permits. We believe that our operations are currently in substantial compliance with all applicable environmental, health and safety laws and regulations. Our management systems and practices are designed to ensure compliance with laws and regulations, and increasingly stringent regulation may require us to make additional unforeseen environmental, health and safety expenditures.
Environmental
Air Quality—One of the main environmental challenges of a carbon black plant is the management of exhaust gas from production processes. This exhaust gas contains a number of regulated pollutants, including carbon monoxide, nitrogen oxides and sulfur compounds. The most common method for controlling these gases is through combustion, which produces useable energy as a by-product. Currently, eleven manufacturing sites, including one jointly owned production facility, have the capability to beneficially utilize these gases through some form of energy co-generation, such as the sale or reuse of steam, gas or electricity.
The primary air pollutants of concern include sulfur dioxide (“SO2”), nitrogen oxides (“NOx”) and particulates. In order to maintain compliance with emission requirements in certain jurisdictions, we utilize various de-NOx and desulfurization processes, as well as controlling sulfur levels in our feedstocks as needed. We control the particulate matter by using bag filter technology.
In the European Union (“EU”), we are subject to the EU Directive No. 2010/75/EU on industrial emissions (“IED Directive”), which regulates pollution from industrial activities and includes rules aiming to reduce emissions into air, water and land and to prevent the generation of waste. In addition to the IED Directive and its implementation, European jurisdictions in which we operate may provide for further regulations regarding emission reduction and safety technology standards that apply to our facilities (for example, the German Emissions Control Act). The EU Commission is currently revising EU measures addressing pollution from large industrial installations, as
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announced in the European Green Deal. The aims of the revision are to progress towards the EU’s zero pollution ambition for a toxic-free environment and to support climate, energy and circular economy policies. This includes the revision of the IED Directive.
In the U.S., we are subject to emissions limitations on prevention of significant deterioration (“PSD”) permits issued under the federal Clean Air Act (“CAA”), as well as analogous state and local laws, which regulate the emission of air pollutants from our facilities and impose significant monitoring, record keeping and reporting requirements. In addition, these laws and regulations require us to obtain pre-approval for the construction or modification of facilities expected to produce or significantly increase air emissions and to obtain and comply with air permits that include stringent conditions on air emissions and operations. In certain cases, we may need to incur capital and operating expenditures for specific equipment or technologies to control emissions. We have incurred, and expect to continue to incur, substantial administrative and capital expenditures to maintain compliance with CAA requirements.
Pursuant to the CAA, the U.S. Environmental Protection Agency (“EPA”) has developed industry-specific National Emission Standards for Hazardous Air Pollutants (“NESHAPs”) for stationary sources classified as “major” on the basis of their hazardous air pollutant emissions. Under these, we are required to comply with Maximum Achievable Control Technology (“MACT”) standards. Our U.S. facilities are subject to MACT standards applicable to carbon black facilities, as well as MACT standards applicable to industrial boilers. The EPA amended existing carbon black MACT standards, which increased stack testing frequency and imposed more stringent startup and operating requirements for our U.S. plants. The U.S. plants are generally in compliance with MACT standards.
In China and South Korea, our operations have been subject to increasingly strict air quality regulations in recent years. We believe we are in substantial compliance with these regulatory changes in China and South Korea. We expect that future regulations may require additional capital and operating expenditures for specific equipment or technologies to control emissions that are being developed as needed to meet these new requirements.
Greenhouse Gas Regulation and Emissions Trading—Our facilities emit significant volumes of CO2. In the EU, all of our production facilities (except for our manufacturing site in France) are subject to the European Emission Trading System (“EU ETS”) for CO2 emissions. Industrial sites to which the EU ETS applies receive a certain volume of allowances in metric tons to emit greenhouse gasses (“GHG”) and must surrender allowances in equivalent volume for each metric ton of greenhouse gas (“GHG”) emitted. Carbon black production is currently listed on the carbon leakage list, which allows receiving the significant share of needed emission allowances free of charge. From January 1, 2021, the EU ETS has stepped into its Phase 4 period running until 2030. However, as part of the EU Green Deal the EU has adopted a climate law enshrining its new climate targets of at least a 55% reduction in GHG emissions by 2030 compared to 1990 levels and net zero by 2050. The European Commission published its first part of the “Fit for 55” package in July 2021 to enable the EU to meet those targets. The actual EU ETS is expected to be subject to regular reviews and possible changes in order to ensure the way to achieve those climate reduction targets.
The design concept of the South Korean Emission Trading System is similar to the EU ETS. We may need to purchase emission rights for our South Korean plant to cover the shortfall where emissions exceed the quantity of free allowances, incurring additional costs.
In the United States, the EPA regulates GHG emissions under the CAA and has adopted rules that require reporting of GHG emissions by owners and operators of facilities in certain source categories, which include our facilities. At the state level, some states have already taken legal measures to reduce emissions of GHG, primarily through the planned development of GHG emission inventories and/or regional GHG cap-and-trade programs. Currently none of our plants are located in states that have implemented GHG cap-and-trade programs, but there is no assurance that future changes will not materially affect our operations or require material capital expenditures. The adoption of legislation or regulations that require reporting of GHG, establish permitting thresholds based on GHG emissions or otherwise limit or impose compliance obligations for emissions of GHG from our equipment and operations could require us to incur costs to obtain and comply with permits, reduce emissions of GHG associated with our operations or purchase carbon offsets or allowances.
There are also ongoing discussions and regulatory initiatives in other countries in which we have production facilities, regarding GHG emission reduction programs. For instance, South Africa has adopted a CO2 tax regime.
Water Quality—Our plants are net consumers of water and are generally subject to laws and regulations related to water management. Most of our plants recycle a substantial amount of the water used in the manufacturing process, which is re-used as “quench water” in the cooling process.
Contamination—As we handle chemicals that could cause water or soil contamination, we may be subject to remediation obligations under national laws. Additionally, third parties have in the past and may in the future be able to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.
In particular, the German Federal Act on Soil Protection requires the prevention of soil contamination by taking adequate precautions. In the United States, our facilities are subject to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”) and similar state laws. CERCLA establishes liability for parties, including current and former site owners and operators, generators, and transporters, in connection with releases of hazardous substances. Under CERCLA, we may be subject to liability without regard to fault or the lawfulness of the disposal or other activity. RCRA is the principal federal statute regulating the generation, treatment, storage and disposal of hazardous and other wastes. RCRA and state hazardous waste regulations impose detailed operating, inspection, training and response standards and requirements for permitting, closure, remediation, financial responsibility, record keeping and reporting. Our sites have areas currently and formerly used as landfills that are subject to
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regulation under RCRA, and certain of our facilities have been investigated and remediated under RCRA. These laws and regulations may also expose us to liability for acts that were in compliance with applicable laws at the time we performed those acts. We could incur significant costs in connection with investigation and remediation activities or claims asserted at current or former facilities or third-party sites.
Non-hazardous and Hazardous Waste—In some jurisdictions in which we operate, we are subject to provisions regarding waste management and the handling and storage of hazardous substances. We generate both hazardous and non-hazardous wastes at our facilities that we manage in accordance with applicable laws and regulations. Waste streams generated at our facilities include but are not limited to office trash, carbon black, solvents, refractory materials, catalyst materials, and non-saleable sulfuric acid. Certain facilities have on-site landfills permitted for the disposal of non-hazardous solid waste, but we are not currently using these landfills to dispose of waste. Any waste that is not recycled or reused is managed off site in compliance with local laws and regulations.
Chemical Regulations—Some jurisdictions we operate in have established regimes to regulate or control chemical products to ensure the safe manufacture, use and disposal of chemicals.
In the EU, the Regulation on Registration, Evaluation, Authorization of Chemicals (“REACH”) requires chemical manufacturers and importers in the European Union to register all chemicals manufactured in or imported into the EU in quantities of more than one metric ton annually. Registration has to be made with the European Chemicals Agency (“ECHA”), and the use of certain “highly hazardous chemicals” must be authorized by ECHA. Furthermore, REACH contains rules on bringing substances to the market that have been identified as substances of very high concern. In the United States, we are subject to federal and state chemical regulations. Under the Toxic Substances Control Act (“TSCA”), the EPA is required to maintain a list of each chemical substance that is manufactured or processed, including imports. This inventory plays a central role in the regulation of most industrial chemicals in the United States. Carbon black is listed and maintained as an active substance in the TSCA Chemical Substance Inventory, and all our facilities are subject to chemical data reporting rules (“CDR”). Under CDR, we are required to submit basic exposure information to EPA every five years. In California, we are subject to the California Safe Drinking Water and Toxic Enforcement Act, which imposes labeling and record keeping requirements. In South Korea, under its Chemical Control Act, coal-based feedstock oils such as crude coal tar (“CCT”), coal tar distillate (“CTD”) and soft pitch oil (“SPO”) containing more than 0.1% quinoline are treated as hazardous chemicals requiring production sites to be duly licensed.
We are a member of the International Carbon Black Association (the “ICBA”). The ICBA seeks to address common environmental, health and safety issues, undertakes research on health implications of carbon black, and serves as the leading advocate for the industry in the regulatory and public-interest arenas. The ICBA funds research on international environmental, health, product safety and workplace safety matters concerning carbon black.
We are also a member of the European consortium for carbon black (“CB4REACH Consortium”) which has pre-registered and registered carbon black with ECHA as required by the REACH Regulation. Besides the Company, the following companies are members of the CB4REACH Consortium: Cabot Corporation, Cancarb Limited, Birla Carbon, Continental Carbon Company, Tokai Carbon CB Ltd. and Imerys Graphite & Carbon.
In addition, we are a member of the European Chemical Industry Council (“CEFIC”), a European trade association for the EU chemical industry. CEFIC offers services and expertise to its members on regulatory, scientific, and technical matters. It engages, advocates, and represents the industry to create the right support and policy frameworks in the EU and beyond. CEFIC flags new EU legislative initiatives and provides information to its members to timely prepare and mitigate impact on their business and operations.
Health and Safety—The health and safety of our employees and customers is one of our highest priorities. We strive to continually improve and attain the top performance on occupational injury and illness rates as compared to the chemical industry. New employees and contractors working and visitors on site are given environmental, health and safety (“EHS”) training, and we keep track of EHS concerns and issues from our employees. Employees are required to report incidents including “near misses” into our electronic EHS management system. Our sites are required to implement and report EHS leading and lagging indicators for EHS performance. Plant managers are required to track and monitor these leading and lagging indicators and take action as appropriate. Leading and lagging indicator data and incidents are reviewed by senior management on a monthly basis.
Product StewardshipCarbon black is produced under controlled conditions and has high purity levels. It therefore differs from other combustion products that may contain high concentrations of hazardous compounds. Due to its high purity, certain carbon black grades are permitted for use in cosmetics or in products in contact with food.
The International Agency for Research on Cancer (“IARC”) classifies carbon black as a Group 2B substance (possible human carcinogen). We have communicated IARC’s classification of carbon black to our customers and employees in accordance with applicable regulatory requirements. Based on IARC’s classification some regulatory jurisdictions now classify carbon black as a possible carcinogen. The Permanent Senate Commission for the Investigation of Health Hazards of Chemical Compounds in the Work Area (the “MAK Commission”) of the German Research Foundation (Deutsche Forschungsgemeinschaft), which uses a different rating system, classifies
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carbon black as a suspect carcinogen (Category 3). Any risk reclassification of our raw materials, intermediates or finished product could result in increased operating costs or affect product lines or sales.
The Community Rolling Action Plan (“CoRAP”) indicates substances for evaluation by the member states of the EU. The evaluation aims to clarify the initial concern that manufacturing and/or use of shortlisted substances could pose a risk to human health or the environment. With ECHA's update of the CoRAP list in March 2016, carbon black was included in CoRAP for substance evaluation in 2018, though such evaluation has been postponed several times. With ECHA’s most recent December 2023 update, the carbon black substance evaluation is proposed to be further delayed to 2026. The substance evaluation for carbon black was proposed by France. The initial reasons of concern raised by the French Agency for Food, Environmental and Occupational Health & Safety (“ANSES”) relate to carbon black being an alleged carcinogenic substance and a suspected reproduction toxicant. Orion is working as a member of the CB4REACH Consortium and ICBA to address the reasons for nomination. The conclusion of the evaluation may have significant business impact should ANSES conclude that carbon black poses a risk to human health. A potential outcome could be a harmonized classification and labeling of carbon black for carcinogenicity and toxicity to reproduction. These developments may significantly affect our business, including increasing costs of doing business.
According to the recommendation of October 18, 2011 (EU COM 2011/696/EU), the majority of carbon black grades are defined as a nanomaterial in Europe. This status for carbon black has not changed with the most recent update of the recommendation of June 10, 2022 (2022/C 229/01). The ISO developed the ISO TC 229 “Nanotechnologies,” which considers carbon black as a “nano-structured material.” Other countries (such as, the U.S., Canada, France, Belgium, Sweden, Switzerland, etc.) have implemented notification schemes related to nanomaterials. In Europe, Commission Regulation (EU) 2018/1881 as of December 3, 2018 amending REACH introduced new information requirements for substances with forms meeting the definition criteria of EU COM 2011/696/EU. The notification of carbon black under the different notification schemes as well as meeting the new nano-related information requirements under REACH requires capital and resource commitments to compile and file dossiers. Furthermore, more and more specific requirements for substances regarded as nanomaterials are emerging within Europe. For example, Germany is planning to introduce a more stringent “Occupational Exposure Limit” for nanomaterials. These developments may significantly affect our business, including increasing costs of doing business.
Further Regulatory Matters
We are subject to further governmental regulation from state, national, EU and other international regulatory authorities concerning, among other things: product safety, export and import control regulations and other customs regulations, data protection, supply chain compliance as well as our competitive and marketplace conduct. We believe that we are in compliance in all material respects with these regulations. We cannot guarantee, however, that any future changes in the requirements or mode of enforcement of these laws and regulations will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
The following risks may have material adverse effects on our business, financial condition and results of operations. Additional risks and uncertainties of which we are not presently aware or that we currently deem immaterial could also materially affect our business operations and financial condition.
Risks Related to Our Business
Negative or uncertain worldwide economic conditions may result in business volatility and may adversely impact our business, financial condition, results of operations and cash flows.
Our operations and performance are materially connected to worldwide economic conditions. Because carbon black is used in a diverse group of end products, demand for carbon black has historically been related to real gross domestic product (“GDP”) and general global economic conditions. In particular, a large part of our sales has direct exposure to the cyclical automotive industry and, to a lesser extent, the construction industry. As a result, certain parts of our business experience a level of cyclicality. The nature of our business and our large fixed asset base make it difficult to rapidly adjust our fixed costs downward when demand for our products declines, which could materially affect our profitability. Global and regional economic downturns have in the past, and may in the future, reduce demand for our products, which have decreased and would decrease our revenue, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. In periods with significant market turmoil and tightened credit availability, we could experience difficulties in accounts receivable collections, pricing pressure and reduced global or local business activity.
Our customers may terminate or attempt to amend their agreements for the purchase of our products due to decline in their demand and production, bankruptcy, lack of liquidity, lack of funding, operational failures, force majeure, hardship or other reasons. The current energy, financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows.
Our business is subject to operational risks, which could adversely affect our business, financial condition, results of operations and cash flows.
Our operations are subject to hazards inherent in chemicals manufacturing and the related use, storage, transportation and disposal of feedstocks, products and wastes, including, but not limited to, fires and explosions, accidents, accidental oil or products releases, severe
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weather and natural disasters (including hurricanes, tornadoes, ice storms, droughts, floods and earthquakes, some of which are significantly increasing in likelihood because of climate change), pandemics (e.g. COVID-19) or epidemics, mechanical failures, unscheduled downtime at our production facilities or at facilities that supply raw materials to us, transportation interruptions, disruption to harbor-, road-, pipeline- or storage tank-access, pipeline, tank and silos leaks and ruptures, quality problems, technical difficulties, energy grid shutdowns, discharges or releases of toxic or hazardous substances or gases, other environmental risks, sabotage, acts of terrorism or other acts of violence as well as potential boycotts, strikes, sanctions or blockades.
Such events have in the past disrupted, and could in the future disrupt, our supply of raw materials or otherwise affect sales, production, transportation and delivery of our products or affect demand for our products. We could incur significant expenditures in connection with such operational risks. These may be caused both by external and internal factors noted above as well as war, military operations, strikes, official orders, technical interruptions, material defects, accidents or mistakes. In all of these cases, our property, third-party property or the environment may sustain damage, or there may be human exposure to hazardous substances, personal injuries or fatalities. Such events could result in material financial liabilities, civil or criminal law consequences, the temporary or permanent closure or loss of control over the relevant production or administrative sites or power plants and a negative impact on our financial condition, results of operations and cash flows.
We are dependent on major customers for a significant portion of our sales, and a significant adverse change in a customer relationship could negatively affect our business, financial condition, results of operations and cash flows.
Customer concentration is driven by the consolidated nature of the industries we serve. In 2023, our top ten customers accounted for approximately 48% of our volume measured in thousand metric tons (“kmt”). Our success in continuing to strengthen relationships and grow our business with our largest customers and in retaining their business over extended time periods could affect our future results. The loss of any of our major customers (including due to industry consolidation) or a reduction in volume sold to them, could adversely affect our results of operations. Any deterioration in the financial condition of any of our customers or the industries they operate in or serve that impairs our customers’ ability to place orders or make payments to us could decrease our sales or increase our uncollectible receivables and could adversely affect our business, financial condition, results of operations and cash flows.
We may not be able to compete successfully in the industries and markets in which we operate.
The industries in which we operate are highly competitive based on price, product innovation, product quality, distribution capability, and industry and customer knowledge. We face competition from global and regional suppliers, both in developed and in emerging regions. While we aim to operate at low cost and are focused on reducing our fixed and variable cost bases across our production chain, there may be improvements in the cost competitiveness of other manufacturers relative to us or in the performance properties of substitutable products and raw materials, which could result in advantages for our competitors that adversely affect our business. Furthermore, some of our competitors may have greater financial and other resources, enhanced access to governmental funding or a larger capitalization than we have. If we are unable to respond successfully to changing competitive conditions, the demand for our products could be adversely affected which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may not successfully develop new products and technologies that address our customers’ changing requirements or competitive challenges, and our customers may substitute our products by using other products we do not offer.
The industries into which we sell our products are subject to periodic technological changes, ongoing product improvements, product substitution and changes in customer requirements. Increased competition from existing or newly developed products offered by our competitors or companies whose products offer a similar or better functionality to our products may negatively affect demand for our products. We work to identify, develop and market innovative products on a timely basis to meet our customers’ changing requirements and competitive challenges. Should we not be able to substantially maintain or further develop our product portfolio, customers may elect to source comparable or other products from competitors, which could adversely affect our business, financial condition, results of operations and cash flows.
Although carbon black continues to offer opportunities for product and process innovation, we cannot be certain that the investments we make in our innovations will result in proportional increases in revenue or profits. In addition, the timely commercialization of products that we are developing may be disrupted or delayed by manufacturing or other technical difficulties, industry acceptance or insufficient industry size to support a new product, competitors’ new products, or difficulties in moving from the experimental stage to the production stage. These disruptions or delays could adversely affect our business, financial condition, results of operations and cash flows.
As a reinforcing agent in certain rubber applications, carbon black competes primarily with precipitated silica in combination with silane, neither of which are part of our product portfolio. Historically, silica has offered some performance benefits over carbon black in the area of rolling resistance. To date, silica-based tire applications have gained position in passenger car tire treads. Although substitution has not been significant due to carbon black’s cost advantage, technological advances and changing customer requirements may lead to increased demand for silica-based tires, especially in developed regions. Increased substitution and competition from precipitated silica producers could adversely affect our business, financial condition, results of operations and cash flows. If we should decide to include precipitated silica in combination with silane in our product portfolio in the future, we may be restricted in our ability to do so under our intellectual property sharing arrangements with Evonik Industries AG (“Evonik”) and its affiliates, one of our previous owners.
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Alternative materials, procedures or technologies may be developed, or existing ones may be improved, and may replace those currently offered in the carbon black industry. If such newly developed or improved products are being offered at lower prices, have preferable features or other advantages, in particular from a regulatory perspective, and we are not able to offer similar new or improved products, we may lose substantial sales volume or customers, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
We may be unable to implement our business strategies in an effective manner.
Our future financial performance and success largely depend on our ability to maintain and improve our current competitive position and to implement our business strategies for growth successfully. We cannot guarantee that we will successfully implement our business strategies or that implementing these strategies will sustain or improve and not harm our results of operations. We may not be able to increase or sustain our manufacturing efficiency or asset utilization, enhance our current portfolio of products or achieve other fixed or variable cost savings. In addition, the costs involved in implementing our strategies may be significantly higher than we currently anticipate. Our ability to complete capacity expansions may be delayed or interrupted by the need to obtain environmental and other regulatory approvals, the availability of labor and materials, unforeseen hazards, such as weather conditions, adverse political or market developments, and other risks associated with construction or expansion projects. Moreover, the cost of expanding capacity could have a negative impact on our financial results until capacity utilization is sufficient to absorb the incremental costs associated with the expansion. Further, labor or governmental restrictions could impede or delay our ability to reduce headcount in the event headcount reduction is deemed to be sensible in our opinion.
Our business strategies are based on our assumptions about future demand for our existing products, the new products and applications we are developing, and on our continuing ability to produce our products profitably. Each of these factors depends on, among other things, our ability to realign our product portfolio, divest businesses on favorable terms and with minimal disruptions, discontinue product lines with minimal disruption, finance our operations and product development activities, negotiate favorable terms, maintain high-quality and efficient manufacturing operations, relocate and close certain manufacturing facilities with minimal disruption to our operations, respond to competitive and regulatory changes, access quality raw materials in a cost-effective and timely manner, and retain and attract highly skilled technical, managerial, marketing and finance personnel. Any failure to develop, revise or implement appropriate business strategies in a timely and effective manner may adversely affect our business, financial condition, results of operations and cash flows.
We are subject to volatility in the costs, quality and availability of raw materials and energy, which could decrease our production volumes and margins and adversely affect our business, financial condition, results of operations and cash flows.
Our manufacturing processes consume significant amounts of raw materials and energy, the costs of which are subject to fluctuations in local and worldwide supply and demand as well as other factors beyond our control. The preponderance of raw material cost used in the production of carbon black is related to petroleum-based or coal-based feedstock known as carbon black oil, with some additional use of other raw materials, such as acetylene, hydrogen and natural gas. We obtain a considerable portion of our raw materials and energy from selected key suppliers. Although we maintain certain raw material reserves, if any of these suppliers is unable to meet its obligations under supply agreements with us on a timely basis or at all, or if we cannot source sufficient supply, we may be forced to incur higher costs to obtain the necessary raw materials and energy elsewhere. Additionally, raw material sourcing and related infrastructure (e.g., harbor access, cargo or ship availability, pipeline, tank, rail, waterway or road-access), may be subject to local developments or regulations in certain jurisdictions where we operate that may reduce, delay or halt the physical supply of raw materials. Our inability to source energy or quality raw materials like carbon black oil, including due to the Russia-Ukraine war, Hamas-Israel conflict and China’s relations with the U.S. and with the EU, or otherwise, in a timely fashion and at costs that we anticipate or that are acceptable to us, or an inability to pass-through any cost increases to our customers, could have an adverse impact on our business, financial condition, results of operations and cash flows.
Most of our Rubber Carbon Black supply contracts contain provisions that adjust prices to account for changes in a relevant feedstock price index. However, we are exposed to oil price and gas price fluctuations, and there can be no assurance that we will be able to shift the price risks to our customers. Success in offsetting increased raw material, energy and tax or tariff costs with related price increases is also influenced by competitive and economic conditions, as well as the speed and severity of such changes, and could vary significantly, depending on the segment served. Such increases may not be accepted by our customers, may not be fully reflected in the indices used in our pricing formulas, may not be sufficient to compensate for increased raw material and energy costs or may decrease demand for our products and our volume of sales. Oil and energy price fluctuations have had, and are likely to continue to have, significant and varying effects on our earnings and results of operations, partly because oil price changes affect our sales prices and our cost of raw materials and energy at different times and amounts, and partly due to other factors, such as differentials affecting the ultimate carbon black oil price paid by us (versus a particular reference price index), carbon black oil usage amounts and ongoing efficiency initiatives, the value of which fluctuates with oil prices. Failure to fully offset the effects of fluctuating raw material or energy costs could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, volatility in costs and pricing could result in commercial disputes with suppliers and customers regarding the interpretations of complex contractual pricing arrangements, which could adversely affect our business.
Significant movements in the market price for crude oil tend to create volatility in our carbon black feedstock costs, which have in the past affected and may in the future affect our Net Working Capital, cash requirements and operating results. Changes in raw material and energy prices have a direct impact on our Net Working Capital levels. Increases in the cost of raw materials lead to an increase in our Net Working Capital. Due to the quantity of carbon black oil and finished goods that we typically keep in stock together with the levels of receivables
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and payables maintained, increases occur gradually over a two to three-month period but can vary depending on inventory levels and working capital levels, generally. Net Working Capital swings are particularly significant in an environment of high price volatility.
We may also be subject to volatility in the cost, quality and availability of raw materials and energy due to factors beyond our control, such as geopolitical conflict. See “Our business, financial condition and results of operations could in the future be adversely affected by disruptions in the carbon black oil and natural gas supplies, including disruptions caused by the ongoing war between Russia in Ukraine, the Hamas-Israel conflict and the growing geopolitical tensions between China and Taiwan. This could have an adverse impact on our business, financial condition, results of operations and cash flows.
Any failure to realize benefits from investments, joint ventures, acquisitions or alliances could adversely affect our business, financial condition, results of operations and cash flows.
We have made, and may continue to make, investments and acquisitions and enter into joint ventures and collaborations. The success of acquisitions of existing facilities, new technologies, companies and products, or arrangements with third parties is not always predictable, and we may not achieve our anticipated objectives. Failure to achieve our respective goals could have an adverse impact on our business, financial condition, results of operations and cash flows.
Plant capacity expansions and site development projects may be delayed, cost more than anticipated and/or may not achieve the expected benefits.
Our ability to complete capacity expansions and consolidations as planned, including capacity conversions from Rubber Carbon Black to Specialty Carbon Black and vice versa, and other site development projects, including those associated with yield efficiency improvements or emission controls, may be delayed, interrupted, or otherwise limited by the need to obtain environmental and other regulatory approvals, unexpected cost increases, availability of labor and materials, unforeseen hazards such as weather or health conditions, and other risks associated with construction projects. In addition, lower oil prices may impact our yield efficiency improvements. Moreover, the costs of these activities could have a negative impact on our results of operations and capacity utilization at any particular facility. We may not be able to absorb the incremental costs associated with capacity expansion projects. In addition, our ability to expand capacity depends in part on economic and political conditions in the regions we focus on and, in some cases, on our ability to establish operations, construct additional manufacturing capacity or form strategic business alliances.
We may be subject to information technology systems failures, network disruptions, cybersecurity attacks and breaches of data security.
We rely on information technology systems to manage and operate our production facilities, to process transactions, and to summarize our operating results. Our information technology systems are an important element for effectively operating our business. Information technology systems failures, particularly in connection with running SAP, including risks associated with upgrading or timely updating our systems, network disruptions, misuse, cybercrime and breaches of data security, could disrupt our production as well as our operations by impeding our processing of transactions, our ability to protect customer or company information and our financial reporting, and lead to increased costs. It is possible that future technological developments could adversely affect the functionality of our computer systems and require further action and substantial funds to prevent or repair computer malfunctions. Our information technology systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cybercrime, internal or external security breaches, catastrophic events such as fires, earthquakes, floods, tornadoes, hurricanes, acts of war or terrorism, and usage errors by our employees or third-party providers. Although we have taken extensive steps to address these concerns by implementing sophisticated network security, back-up systems and internal control measures, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our business, financial condition, results of operations and cash flows. If our information technology systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our production and operations. Any material disruption in our information technology systems, or delays or difficulties in implementing or integrating new systems or enhancing current systems, could have an adverse effect on our business, financial condition or results of operations. We have experienced non-material cybersecurity attacks in the past and may experience additional cybersecurity attacks in the future, potentially with more frequency or sophistication.
While we continually work to safeguard our systems, train our employees and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cybersecurity attacks or security breaches that manipulate or improperly use our systems or networks, compromise or lose confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations and safety tools. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations. In addition, such attacks or breaches could require significant management attention and resources, and result in the diminution of the value of the Company’s intellectual property and other assets. A breakdown in existing controls and procedures around the Company’s cybersecurity and security prevention environment may prevent us from detecting, reporting or responding to cybersecurity incidents in a timely manner and could have a material adverse effect on our financial condition or the market price of our securities.
In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our know-how, technology and business, as well as about our customers and our employees. As our technology continues to evolve, we anticipate that we will collect and store even more data in the future, and that our systems will increasingly use remote cloud-based
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solutions and communication features that are sensitive to both willful and unintentional security breaches. Much of our value is derived from our confidential business information, including customer data, proprietary technology and trade secrets. To the extent the confidentiality of such information is compromised, we may lose our competitive advantage, and our business, financial condition, results of operations and cash flows may suffer. We also collect, retain and use personal information, including data we gather from customers for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this information, we are subject to a variety of laws on a global basis that require us to provide notification to the data owner, and that may expose us to lawsuits, fines and other means of regulatory enforcement. Our reputation could suffer in the event of such a data breach, which could cause customers to purchase from our competitors. Ultimately, any compromise of our data security could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we are unable to successfully negotiate with the representatives of our employees, including labor unions and works councils, we may experience strikes and work stoppages.
We are party to collective bargaining agreements. We also are required to consult with our employee representatives, such as works councils, on certain matters such as restructuring, acquisitions and divestitures. Although we believe that our relations with our employees are good, there can be no assurance that current agreements will not be terminated, new agreements will be reached or consultations completed without union or works council actions or on terms satisfactory to us. Current and future negotiations and consultations with employee representatives could have a material adverse effect on our business. In addition, a material work stoppage or union dispute could adversely affect our business, financial condition, results of operations and cash flows.
We may not be able to recruit or retain key management and personnel.
Our success is dependent on the management and leadership skills of our key management and personnel. The loss of any member of our key leadership team, and personnel or an inability to attract, retain, develop and maintain additional personnel could prevent us from implementing our business strategy. The loss of one or more members of our key management or operating personnel, or the failure to attract, retain and develop additional key personnel, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are exposed to political or country risk inherent in doing business in some countries.
We operate a global network of production plants located in Europe, the U.S., South Korea, China, South Africa and Brazil. Accordingly, our business is subject to risks related to the different legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following: disruption of supply chains and shipping routes, changes in the rate of economic growth; unsettled political or economic conditions; expropriation or other governmental actions; social unrest, war, terrorist activities or other armed conflict; national and regional labor strikes; confiscatory taxation or other adverse tax policies, trade and or tariff disputes between countries; deprivation of contract rights; trade regulations affecting production, pricing and marketing of products; reduced protection of intellectual property rights; restrictions on the repatriation of income or capital; exchange controls; inflation, deflation, and currency fluctuations and devaluation; the effect of global environmental, health and safety issues; pandemics or epidemics, respective lock-downs, changes to economic conditions, market opportunities and operating restrictions; changes in foreign laws and tax rates; changes in trade sanctions or embargoes that result in losing access to customers and suppliers in those countries; costs associated with compliance with anti-bribery and anti-corruption laws; nationalization of private enterprises by foreign governments; and changes in financial policy, free funds flow and availability of credit or financing sources. These factors could adversely affect our business, financial condition, results of operations and cash flows.
Our business, financial condition and results of operations have in the past and could in the future be adversely affected by disruptions in the carbon black oil and natural gas supplies, including disruptions caused by the ongoing Russia-Ukraine war, Hamas-Israel conflict and the growing geopolitical tension between China and Taiwan.
The impacts of war and other geopolitical events, including but not limited to the war in Ukraine and the Hamas-Israel conflict, the growing geopolitical tensions between China and Taiwan, are difficult to predict. For example, the conflict in Ukraine has previously caused, and may continue to cause, volatility in crude oil and natural gas prices. The responses of countries and political bodies to Russia’s actions in Ukraine, the larger overarching tensions, and Ukraine’s military defenses and the potential for wider conflict may generally increase energy market volatility, have severe adverse effects on regional and global economic markets and cause volatility in energy and other product prices. The sanctions, shipping disruptions, collateral war damage, and the potential continuation or expansion of the conflict between Russia and Ukraine, or the conflict between Hamas and Israel, could further disrupt the availability of crude oil and natural gas supplies.
The extent or length of any adverse effects of the war in Ukraine or the Hamas-Israel conflict on the supply of oil and natural gas and the quality and availability of carbon black oil is difficult to quantify.
The continuation or escalation of events like the war in Russia-Ukraine war or the Hamas-Israel conflict could decrease our production volumes and margins and may adversely impact our business operations, financial condition and results of operations and are difficult to predict. The war in Ukraine has caused and may continue to cause curtailed or delayed spending by our customers’ customers, particularly in the automotive industry, and increases the risk of customer defaults or delays in payments. The Hamas-Israel conflict or any escalation thereof could adversely impact our margins.
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These and other conflicts may also lead to increased physical terrorist or cyberattacks, damage to global supply chains, and have other consequences that impact our business, financial condition and results of operations.
Legal and Regulatory Risks
Our operations are subject to environmental, health and safety laws and regulations. We have been and may in the future be subject to investigations by regulatory authorities in respect of alleged violations and may incur significant costs to maintain compliance with, and to address liabilities under, these laws and regulations and respective litigation and proceedings.
We are subject to extensive supranational, domestic, foreign, federal, state and local laws and regulations governing environmental protection and occupational health and safety, all of which may be subject to change in the future. The raw material procurement, as well as the production and processing of carbon black and its byproducts involve the handling, transportation, manufacture, use and disposal of substances or components that may pose environmental risks or be considered toxic, hazardous or carcinogenic under applicable laws. We are also required to obtain permits or other approvals from various regulatory authorities for our operations, which may be required for matters including air emissions as well as wastewater and storm water discharge, storage, handling and disposal of hazardous substances, remediation of soil, tanks, pipelines or buildings and the operation, maintenance and closure of landfills. If we contaminate the environment, violate or are found to have violated or otherwise fail to comply with laws, regulations or permits or other approvals, or fail to receive the timely renewal of and due application for required permits, we may have to limit production, incur fines and civil or criminal sanctions, be required to undertake significant capital expenditures to achieve compliance, or be subject to other obligations by one or more regulatory authorities. Certain environmental laws and regulations could also impose strict liability, meaning the Company could be forced to assume liability for environmental damage caused by a party other than the Company, even in circumstances where the Company’s actions were lawful.
If environmental harm to soil, groundwater, surface water or natural resources is found to have occurred as a result of our current or historical (prior to the existence of the Company) operations, we may be required to incur significant remediation costs at our current or former production facilities, or at third-party sites and for storage facilities. Many of the facilities and third-party storage facilities we utilize have a long history of operation, which might in the future incur environmental compliance and remediation costs due to past spills, contamination, chemical storage, wastewater treatment and waste disposal practices and other activities depending on present and developing laws. For instance, some of our facilities have onsite landfills that have been open for a number of years; we may incur significant costs when these landfills are closed in accordance with applicable laws and regulations. Under certain laws and regulations, the obligations to investigate and remediate contamination at a facility or site may be imposed on current and former owners or operators who disposed of waste on–site. Liability under such laws and regulations may be without regard to fault or to the legality of the activities giving rise to the contamination. As a result, we may incur liabilities for contamination or wastes, including hazardous wastes, generated by our operations and disposed of onsite or at offsite locations, even if we were not responsible at the time the waste was disposed or the contamination occurred. Further, we may also incur additional closure and cleanup costs in connection with the closure of plants or separate feedstock storage sites, including costs relating to decommissioning of equipment, decontamination and clean-up, asbestos removal and relocation or closure of operating equipment such as storage tanks, pipelines, wastewater treatment systems, ponds and landfills.
Our operations inherently create significant hazards when storing carbon black oil, converting carbon black oil to carbon black and packaging and storing of carbon black and shipping the products to our customers. These hazards and risks include fires, explosions, spills, discharges and other releases or exposures, any of which could impact the environment, neighboring community and our employees, which could result in, environmental pollution, personal injury or wrongful death claims, damage to our and neighboring properties and reputational harm. In these cases, authorities could impose fines, and the Company could be required to rectify any damage which occurs in or outside of our fence lines.
Environmental and safety regulations are subject to frequent change, as are the priorities of those who enforce them, and we could incur substantial costs to comply with current or future laws and regulations. The trend in environmental regulation is to impose increasingly stringent restrictions on activities that may affect the environment. Such regulations have in the past included, and may in the future include, laws and rules designed to reduce emissions of GHG, SO2, NOx, particulate matter and other air pollutants. For instance, the EU has enacted GHG legislation and continues to expand the scope of such legislation. The EPA has promulgated regulations applicable to operations involving GHG above certain thresholds, and the United States and certain states within the United States have enacted, or are considering, limitations on GHG emissions. Any new or amended environmental laws and regulations may result in costly measures for matters subject to regulation, including but not limited to more stringent limits or control requirements for our air emissions; new or increased compliance obligations relating to emission of GHG, SO2, NOx, and particulate matter; any impact our operations could have on the environment or surrounding community; which, in each case, could have a material adverse effect on our operations and financial condition and cash flows. We may be unable to offset these impacts or costs with price increases, productivity improvements, or cost-reduction efforts. Any success we do have in offsetting these impacts or costs will depend on competitive and economic conditions that are inherently variable.
Compliance with future more stringent environmental laws and regulations may result in significantly increased capital expenditures related to prevention and remediation. Our business and financial conditions may be impacted if we are unable to finance these increasing compliance costs. Regardless, we may be required to incur non-capital expenditure costs to satisfy climate change and other environmental obligations imposed on us by the various regulations.
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Certain national and international health organizations have classified carbon black as a possible or suspect human carcinogen. To the extent that, in the future, (i) these organizations re-classify carbon black as a known or confirmed carcinogen, (ii) other organizations or government authorities in other jurisdictions classify carbon black or any of our other finished products, raw materials or intermediates as suspected or known carcinogens or (iii) there is discovery of adverse health effects attributable to the production or use of carbon black or any of our other finished products, raw materials or intermediates, we could be required to incur significantly higher costs to comply with environmental, health and safety laws, or to comply with restrictions on sales of our products, our reputation and business could be adversely affected, and we could become the subject of liability, litigation or enforcement actions. In addition, chemicals that are currently classified as harmless may be classified as dangerous in the future, and our products may have characteristics that are not recognized today but may be found in the future to be carcinogenic or otherwise impair human health. See “Item 1. Business, Environmental, Health and Safety Matters.”
Regulations requiring a reduction of or that impose additional taxes or fees on greenhouse gas emissions could adversely affect our business, financial condition, results of operations and cash flows, and an increased awareness as well as adverse publicity about potential impacts on climate change by us or other companies in our industry could harm our reputation.
Despite our efforts to control, significant volumes of CO2, a GHG, are emitted in our carbon black manufacturing processes. Over the past few decades, the relationship between GHGs and global climate change have resulted in increased levels of scrutiny from regulators, investors and the public alike, and have led to proposed and enacted laws and regulations on both national and supranational levels, to monitor, regulate, control and tax emissions of CO2 and other GHGs. These could adversely affect our business, financial condition, results of operations and cash flows. Investors and other financial institutions are also focused on sustainability and climate change as it relates to their investment and financing decisions. Increased awareness in the investment community and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could also harm our reputation.
The international community continues to negotiate a binding treaty that would require reductions in GHG emissions by developed countries. In addition, a number of further measures addressing GHG emissions may be implemented, such as a successor international agreement, if any, to the Kyoto Protocol and the EU’s proposal to consider raising its commitment to reduce carbon emissions to at least 55% below 1990 levels by 2030. The United Nations Conference on Climate Change in December 2015 led to the creation of the Paris Agreement and encourages countries to continuously review and improve their GHG emission reduction goals. While signing the Paris Agreement does not legally bind countries to reduce GHG emissions, countries that participate may respond by enacting legislation or regulations in order to progress in lowering GHG emissions. In the United States, Congress has from time to time considered legislation to reduce emissions of GHGs, but no comprehensive legislation has been enacted to date, and significant uncertainty currently exists as to how any such GHG legislation or regulations would impact large stationary sources, such as our facilities in Belpre (Ohio), Borger (Texas), Orange (Texas) or Ivanhoe (Louisiana), and what costs or operational changes these regulations may require in the future. Some U.S. states have taken legal measures to reduce emissions of GHGs, primarily through the development of GHG emission inventories and/or regional or state GHG cap-and-trade programs. South Africa, where we have an operating plant, has adopted a CO2 tax regime. There are also ongoing discussions and regulatory initiatives in other countries, including in Brazil where we have production facilities, regarding GHG emission reduction programs, but those programs have not yet been defined. There is no assurance that, in the future, the current level of regulation will continue in the jurisdictions where we operate. In addition, several countries, spanning across Europe, the Middle East, Africa, South America and the Asia-Pacific region, are currently evaluating further and more restrictive regulations to reduce GHG emissions and to implement stricter environmental regulations generally.
Compliance with current or future GHG regulations governing our operations may result in significantly increased capital and operating expenditures for measures such as the installation of more environmentally efficient technology or the purchase of allowances to emit GHGs. We may need to purchase emission rights to cover the shortfall where emissions exceed the quantity of allowances (EU and South Korean ETS), which may cause a material financial impact. Examples of such expenditures may include, but are not limited to, becoming subject to carbon and GHG emission trading requirements under which we may be required to purchase carbon credits and other offsets aimed at reducing our ecological footprint if our emission levels exceed our allocations. Costs of complying with regulations could increase, as concerns related to greenhouse gases and climate change continue to emerge. The enactment of new environmental laws and regulations and/or the more aggressive interpretation of existing requirements could require us to incur significant costs for compliance or capital improvements or limit our current or planned operations, any of which could have a material adverse effect on our earnings or cash flow. We attempt to offset the effects of these compliance costs through price increases, productivity improvements and cost reduction efforts. Such price increases may not be accepted by our customers, may not be sufficient to compensate for increased regulatory costs or may decrease demand for our products and our volume of sales. While their potential effect on our manufacturing operations or financial results cannot be estimated, they could be substantial. We cannot reliably predict the form that future regulations may take or to estimate any costs that we may be required to incur with respect to these or any other future requirements. In addition to the increased expenditures outlined above, such requirements could also adversely affect our energy supply, or the costs (and types) of raw materials we use, and ultimately may directly or indirectly restrict our operations or reduce demand for our products. The realization of any or all of these consequences could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Item 1. Business, Environmental, Health and Safety Matters.”
Developing regulation of carbon black as a nano-scale material could require us to comply with costly new requirements.
Carbon black consists of aggregates of primary nano-scale particles. The EPA and other governmental agencies are currently developing a regulatory approach under which they will collect further data on nano-scale materials, including carbon black, under the U.S. Toxic
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Substances Control Act (“TSCA”). In addition, the EPA and other nations’ environmental regulatory authorities, including the European Commission, are also conducting extensive environmental health and safety testing of nano-scale materials. If carbon black is found to be harmful to humans and/or to the environment, it could be subject to more stringent regulatory control, which could require us to incur significantly higher costs to comply with new environmental, health and safety laws and could adversely affect our reputation and business. See “Item 1. Business, Environmental, Health and Safety Matters.”
In the EU, in 2022 the European Commission finalized the process on the revision of the nanomaterial definition. With its updated recommendation on June 10, 2022 of the definition of nanomaterial (2022/C 220/01), the status for carbon black remains unchanged in comparison to the previous version (2011/696/EU). The majority of carbon black grades are defined as nanomaterials. Furthermore, the International Organization for Standardization (“ISO”) developed the ISO TC 229 “Nanotechnologies,” which considers carbon black a “nano-structured material.” The industry is not yet generally affected by these definitions. However, certain regulations regarding cosmetics applications or articles which are intended for food contact have already been implemented, and other regulations are being discussed which may affect the use of carbon black in the future. This development may significantly affect our business in a manner we cannot predict, including by increasing the costs of doing business or decreasing the marketability of our products. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations have the potential to cause environmental and other damage as well as personal injury.
The operation of a chemical manufacturing business as well as the sale and distribution of chemical products involve safety, health and environmental risks. For example, the production and processing of carbon black and other chemicals involves the storage, handling, transportation, manufacture or use of certain substances or components that may be considered toxic or hazardous. Our manufacturing processes and the storage and transportation of chemical products entail risks such as leaks, fires, explosions, toxic releases or mechanical failures. If operational risks materialize, they could result in injury or loss of life, damage to the environment or damage to property. In addition, the occurrence of material operating problems at our facilities due to any of these hazards may result in loss of production, which in turn, may make it difficult for us to meet customer needs. Accordingly, these hazards and their consequences could have a material adverse effect on our business, financial condition, results of operations and cash flows, both during and after the period of operational difficulties, and could harm our reputation.
Environmental, social and governance matters and any related reporting obligations may impact our businesses.
U.S., EU and international regulators, investors and other stakeholders are increasingly focused on environmental, social and governance (ESG) matters. For example, new U.S., EU and international laws and regulations relating to ESG matters, including environmental sustainability and climate change, human capital management and cybersecurity, are under consideration or being adopted, which may include specific, target-driven disclosure requirements or obligations. Our response will require increased costs to comply, including the implementation of new reporting processes, entailing additional compliance risk, enhanced workforce skills, and other incremental investments.
If our ESG practices fail to meet these regulatory requirements, obligations or investor, customer, consumer, employee or other stakeholders' evolving expectations and standards in areas including environmental stewardship, support for local communities, diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, our reputation, brand and employee retention may be negatively impacted. Further, statements about our ESG-related initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. If we do not adapt to, or comply with new regulations, or fail to meet evolving investor, industry or stakeholder expectations and concerns regarding ESG issues, investors may reconsider their capital investment in our Company, which could have a material adverse effect on our reputation, business or financial condition.
The European Union REACH legislation or similar legislation in other countries may affect our ability to manufacture and sell certain products.
The REACH legislation as described under “Chemical Regulation” above or similar legislation in other countries or jurisdictions may limit the ability to market or sell our products, in particular if the relevant authorities may change or amend the registration prerequisites for our products or may narrow their interpretation of such legislation in relation to our products.
Additionally, other organizations and countries, including South Korea and China, have adopted or may in the future adopt comparable or even more restrictive regulations than REACH, which could affect our ability to manufacture and sell certain products in the future.
In certain jurisdictions, carbon black has been added to lists of hazardous products that are subject to labeling and other requirements. Compliance with these requirements is required to sell our products in these jurisdictions, and noncompliance may result in material fines or penalties or other enforcement actions, including injunctions, recalls or seizures, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Changes in the classification of carbon black on these lists or to the applicable regulations could result in more stringent or new requirements and adversely affect our compliance costs. See “Item 1. Business, Environmental, Health and Safety Matters.”
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Market and regulatory changes may affect our ability to sell or otherwise benefit from co-generated energy, which may adversely affect our business, results of operations and cash flows.
Currently, approximately half of our manufacturing sites, including one jointly owned production facility, have some form of co-generation transforming waste heat from combusting exhaust gas, the main by-product of the carbon black production process, into electricity, steam or hot water. Some of this co-generated energy is self-consumed, and the excess may be sold to third parties. Our ability to benefit from co-generation, and in particular our ability to sell it to third parties, may be limited due to general market conditions or regulatory changes, which may adversely affect our business, results of operations and cash flows.
Litigation or legal proceedings could expose us to significant liabilities and thus adversely affect our business, financial condition, results of operations and cash flows.
From time to time, we may be involved in various claims and lawsuits arising in the ordinary course of our business. In particular, certain asbestos related claims have been filed with respect to time periods when previous owners were in control of our business. Some matters involve claims for damage payments as well as other relief. Additional claims by (former) employees or contractors based on alleged past exposure to asbestos or other substances with negative health effects may be received in the future.
We may also be subject to litigation based on environmental matters such has pollution, remediation, contamination, or exposure to hazardous substances either in the workplace or resulting from the use of our products. This litigation could result in substantial liability for
us, which could have a material adverse effect on our business, financial condition and/or profitability. Certain environmental groups could
also initiate litigation against us, which could cause reputational as well as financial harm.
The outcome of legal proceedings is extremely difficult to predict, and we offer no assurances in this regard. Adverse rulings, judgments or settlements in pending or future litigation or administrative proceedings, including employment-related disputes and litigation, contract disputes and litigation, intellectual property disputes and litigation, product liability claims, tort claims and other personal injury claims, claims based on alleged exposure to asbestos, chemicals or to carbon black, environmental permitting disputes or in connection with environmental remediation activities or contamination, could have an adverse effect on our business, financial condition, results of operations and cash flows.
Because many of our products provide critical performance attributes to our customers’ applications and products, the sale of these products involves a risk of product liability claims against us, including claims arising in connection with the use of, or exposure to, our products. Our products have widespread end-uses in a variety of consumer industries. A successful product liability claim, or series of claims, arising out of these various uses that results in liabilities in excess of our insurance coverage or for which we are not indemnified by a third party or have not otherwise provided for could have a material adverse effect on our business, financial condition, results of operations and cash flows. In particular, we could be required to increase our debt or divert resources from other investments in our business in order to discharge any such liabilities.
We may not be able to protect our intellectual property rights successfully.
Our intellectual property rights are important to our success and competitive position. We own various patents and other intellectual property rights and have licenses to use intellectual property rights covering some of our products as well as certain processes and product uses. We often choose not to seek to patent a production method or product in order to avoid disclosure of business specific know-how. In addition to patents, a significant part of our intellectual property are our trade secrets, general know-how and experience regarding manufacturing technology, plant operation and quality management, which third parties, including our competitors, may develop independently without violating our trade secret rights. We make careful assessments with respect to production process improvements and decide whether to apply for patents or retain and protect them as trade secrets. In some of the countries in which we operate or sell products, such as China, the laws protecting patent holders are scoped or interpreted differently than in the U.S., the EU or certain other regions. When we file a patent application, it is usually filed for all countries with active competition where we have existing customers. Nonetheless, because the laws and enforcement mechanisms in some countries may not be as effective as in others, and because our intellectual property rights may, if asserted, ultimately be found to be invalid or unenforceable, we may not be able to protect all of our intellectual property rights successfully. Insufficient protection of intellectual property may limit our ability to make use of technological advantages or result in a reduction of future profits. This may cause competitive restrictions and may have an adverse effect on our business, financial condition, results of operations and cash flows.
We may also be subject to claims that our products, processes or product uses infringe or misappropriate the intellectual property rights of others. These claims, even if without merit, can be expensive and time consuming to defend or litigate. If we were to suffer an adverse ruling, we could be subject to injunctions, obligated to pay damages or enter into licensing agreements requiring royalty payments and use restrictions, all of which could adversely affect our business, financial condition, results of operations and cash flows. In addition, licensing agreements may not be available to us, and, if available, may not be available to us on acceptable terms.
In connection with the separation of our business from Evonik, completed on July 29, 2011 (the “Acquisition”), Evonik assigned to us intellectual property that was exclusively used in its carbon black business as well as certain intellectual property rights that are still in use in Evonik’s retained business. Also, Evonik retained ownership of certain intellectual property that is not material to us. Evonik has granted us a non-exclusive license to use such retained intellectual property in the field of carbon black. In addition, we have granted back to Evonik licenses relating to some of our intellectual property rights to use such intellectual property in all fields outside the field of carbon
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black, which licenses are exclusive, subject to certain exceptions in areas adjacent to carbon black. Accordingly, we may be restricted in leveraging the intellectual property that we use on the basis of a license from Evonik or the intellectual property that is subject to the grant-back licenses to expand our business into certain fields outside of carbon black.
Risks Related to Indebtedness, Currency Exposure and Other Financial Matters
Our financial leverage may make it difficult for us to service that debt and operate our businesses.
We are leveraged with recurring debt service obligations and expect to continue to have leverage for the foreseeable future. We may also incur more debt in the future. This may have negative consequences for our business and investors, including requiring that a substantial portion of the cash flows from our operations be dedicated to debt service obligations; reducing the availability of cash flows to fund internal growth through working capital, capital expenditures, to fund other general corporate purposes, to pay dividends and to finance stock buy-backs; increasing our vulnerability to economic downturns generally or in our industry; exposing us to interest rate increases on our existing indebtedness and indebtedness that we may incur in the future; placing us at a competitive disadvantage compared to our competitors that have less debt in relation to cash flows; limiting our flexibility in planning for or reacting to changes in our business and our industry; restricting us from pursuing strategic acquisitions or exploiting certain business opportunities; and limiting, among other things, our ability to borrow additional funds or raise equity capital in the future and increasing the costs of such additional financings.
If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity financing, restructure or refinance all or a portion of our debt on or before maturity or reduce or cease paying our dividend. In the worst-case scenario, an actual or impending inability to pay debts as they become due and payable could result in our insolvency or an insolvency of one or more of our subsidiaries.
Restrictive covenants in our debt instruments may limit our ability to operate our business. Our failure to comply with these covenants, including as a result of events beyond our control, could result in an event of default that may adversely affect our business, financial condition, results of operations and cash flows.
Our current debt instruments impose some operating and financial restrictions on us. These restrictions include limitations on our ability to, among other things, merge or consolidate with other companies; sell, lease, transfer or dispose of assets; pay dividends, redeem stock capital or redeem or reduce subordinated indebtedness; and make acquisitions or investments. Our debt instruments contain covenants that may adversely affect our ability to finance our future operations and capital needs and to pursue available business opportunities. Our ability to comply with these provisions may be affected by changes in economic or business conditions or other events beyond our control. In addition, our debt instruments contain cross-default provisions such that a default under one particular financing arrangement could automatically trigger defaults under other financing arrangements and cause such indebtedness to become due and payable, together with accrued and unpaid interest. As a result, any default under an indebtedness to which we are party could result in a substantial loss to us and could adversely affect our business, financial condition, results of operations and cash flows.
A deterioration in our financial position or a downgrade of our ratings by a credit rating agency could adversely affect our ability to find new financing and maintain existing financing sources, ensure the continued access to receivables factoring programs, increase our borrowing costs and our business relationships could be adversely affected.
A deterioration of our financial position or a downgrade of our credit ratings for any reason could adversely affect our ability to find new financing and maintain existing financing sources, maintain or expand our receivables programs, increase our borrowing costs and have an adverse effect on our business relationships as well as on the payments and other terms agreeable with customers, suppliers and hedging counterparties. We currently do and may in the future enter into various forms of hedging arrangements against currency and exchange, interest rate, raw material and energy and oil price fluctuations. Financial strength and credit ratings are important to the availability and pricing of these hedging activities. As a result, any downgrade of our credit ratings may make it more costly for us to engage in these activities, and changes to our level of indebtedness may make it more difficult or costly for us to engage in these activities in the future.
In addition, a downgrade could adversely affect our existing financing, limit access to the capital or credit markets, or otherwise adversely affect the availability of other new financing on favorable terms, if at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we incur, increase our borrowing costs, or otherwise adversely affect our business, financial condition, results of operations and cash flows.
Fluctuations in foreign currency exchange and interest rates could adversely affect our business, financial condition, results of operations and cash flows.
We are exposed to market risks relating to fluctuations in foreign currency exchange and interest rates. Our results of operations have in the past been affected and may in the future be affected by both the transaction and translation effects of foreign currency exchange rate fluctuations. We are exposed to currency fluctuation when we convert currencies that we may receive for our products into currencies required to pay our debt, or into currencies in which we purchase raw materials, meet our fixed costs or pay for services, any of which could result in a gain or loss depending on fluctuations in exchange rates. Fluctuations in currency exchange rates could require us to reduce our prices to remain competitive in foreign markets. In each case, the relevant income or expense is reported in the relevant local currency and is translated into the U.S. dollar at the applicable currency exchange rate for inclusion in our consolidated financial
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statements. Therefore, our financial results in any given period are materially affected by fluctuations in the value of the U.S. dollar relative to other currencies, in particular the euros, the Korean won and Chinese renminbi. In addition, certain of our outstanding debt obligations are denominated, pay interest in and must be repaid in euros (and certain of our future debt obligations may be denominated in euros), and therefore expose us to additional exchange rate risks. An appreciation of the euro would make our financing under euro-denominated instruments more expensive. We are also exposed to adverse changes in interest rates. We manage our foreign exchange risk through normal operating and financing activities and, when deemed appropriate, through the selective use of derivative transactions, the effectiveness of which is dependent, in part, upon the counterparties to these contracts honoring their financial obligations to us. We cannot be certain that we will be successful in reducing the risks inherent in exposures to foreign currency and interest rate fluctuations, and our financial results could be adversely affected.
From time to time, it may be necessary for us to enter into hedging arrangements to reduce the impact of price and exchange rate volatility. Unavailability or inefficiency of hedging could adversely affect our business, financial condition, results of operations and cash flows.
In the past, we have entered into certain hedging arrangements to reduce the impact of raw material and energy price volatility as well as interest rate and currency exchange rate fluctuations. It may be necessary for us to enter into hedging arrangements in the future to reduce the impact of raw material or energy price volatility or currency and exchange rate fluctuation, which may or may not be effective. The use of derivative hedging instruments is generally dependent on the availability of adequate credit lines with appropriate financial institutions. As a result, we could be unable to use derivative financial instruments in the future, to the extent necessary or on commercially reasonable terms, and any hedging strategy we employ could therefore be adversely affected. The effectiveness of our derivative hedging instruments will also depend on the relevant hedging counterparties honoring their financial obligations. Any failure by a hedging counterparty to perform its obligations could adversely affect our business, financial condition, results of operations and cash flows.
Disruptions in credit and capital markets may make it more difficult for us and our suppliers and customers to borrow money or raise capital.
Disruptions in the credit markets may result in less credit being made available by banks and other lending institutions. As a result, we may not be able to obtain financing to pursue other business plans or make necessary investments, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Furthermore, the inability of our customers to obtain credit facilities or capital market financing may adversely affect our business by reducing our sales and increasing our exposure to bad debt, while the inability of our suppliers to access adequate financing may adversely affect our business by increasing prices for raw materials, energy and transportation.
We may be required to impair or write off certain assets if our assumptions about future sales and profitability prove incorrect.
In analyzing the value of our inventory, property, plant and equipment, investments and intangible assets, we have made assumptions about future sales (prices and volume), costs and cash generation. These assumptions are based on management’s best estimates, and if the actual results differ significantly from these assumptions, we may not be able to realize the value of the assets recorded, which could lead to an impairment or write-off of certain of these assets which could have a material adverse effect on our business, financial condition and results of operations.
We may be required to increase our pension fund contributions.
We have made pension commitments to our existing and some of our former employees. These commitments are partially covered by pension schemes, pension and benevolent funds and insurance policies some of which are maintained by previous employers. The amount of obligations is based on certain actuarial assumptions, including discount factors, life expectancy, pension trends and future salary development as well as expected interest rates applicable to the plan assets. Actual results deviating from these assumptions could result in a considerable increase of our pension commitments and liabilities and higher allocations to the pension reserves in future years, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our insurance coverage may not be adequate to cover all the risks we may face and it may be difficult to obtain replacement insurance on acceptable terms or at all.
Our plants, equipment and other assets are insured for property damage and business interruption risks, and our business as a whole is insured for public and products liability risks, with reputable insurance companies. We believe these insurance policies are generally in accordance with customary industry practices, including deductibles and coverage limits. However, we cannot be fully insured against all potential hazards incident to our business, including losses resulting from war risks or terrorist acts, or all potential losses, including damage to our reputation. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable at a reasonable cost or may be available only for certain risks. We can provide no assurances that we would be able to obtain replacement insurance on acceptable terms or at all.
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We could experience a material adverse effect on our financial condition if the tax authorities were to successfully challenge decisions and assumptions we have made in assessing and complying with our tax obligations.
We make, and have in the past made, numerous decisions and assumptions in assessing and complying with our tax obligations, including in respect of the tax treatment of the separation of our business from Evonik, the Acquisition, assumptions regarding the tax deductibility of certain interest expenses under German tax regulations, the upholding and recognition of our German tax group and the applicability of the regulations to our business as a group headquartered as a Luxembourg company. Many of the tax laws that apply to us, including tax laws that apply to the separation of our business from Evonik and the Acquisition, are complex and often require judgments to be made when the law is unclear or the facts are uncertain. While we believe the decisions we have made and the assumptions and practices we have applied are reasonable and accurate, we cannot guarantee that these decisions, assumptions and practices will not be questioned or rejected by the tax authorities. In particular, we are subject to tax audits, and could be subject to additional tax audits, for the period in which the Acquisition occurred by tax authorities in multiple jurisdictions worldwide, and in many cases, these audits have not yet begun or have not been completed and could give rise to issues of this kind. If these tax authorities were to successfully challenge such decisions or assumptions, we could be required to pay additional amounts to such authorities to satisfy our tax obligations, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In particular, the German tax authorities are conducting their first audit of Orion Engineered Carbons GmbH following the Acquisition. Currently, we are unable to assess when this audit will be completed or the possible outcome of this audit. While currently we do not believe this audit will have a material adverse impact on our financial position, it could raise one or more issues of the kind referenced above.
Significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions, as well as changes in their interpretation, could adversely affect our business, financial condition, results of operations and cash flows.
Our future tax rates may be adversely affected by a number of factors, including the enactment of new tax legislation, other changes in tax laws or the interpretation of such tax laws, changes in the estimated realization of our net deferred tax assets (arising, among other things, from tax loss carry forwards and the acquisition of the carbon black business line from Evonik), the jurisdictions in which profits are determined to be earned and taxed, adjustments to estimated taxes upon finalization of various tax returns, increases in expenses that are not deductible for tax purposes, including write-offs of acquired in process R&D and impairment of goodwill in connection with acquisitions, changes in available tax credits and additional tax or interest payments resulting from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from period to period. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions, as well as changes in their interpretation, could increase our tax rates and adversely affect our financial results in those periods.
Additionally, during periods of high profitability in certain industries, there are often calls for increased taxes or surcharges on incremental revenues or profits, often called “windfall profit” taxes. Governments in various jurisdictions may impose or increase such taxes for certain companies operating in the energy and oil and gas sector. The imposition of, or increase to, such windfall profit taxes could adversely affect our financial results.
Risks Related to Ownership of our Common Stock
We cannot assure investors that we will pay dividends on our common stock at historical rates or at all.
Our ability to pay dividends on our common stock at historical rates, or at all, is generally dependent on a proposal by our Board of Directors subject to approval by our stockholders and will depend on a number of factors, including, among others, our financial condition and results of future operations, growth opportunities and restrictive covenants in our debt instruments.
The rights of our stockholders may differ from the rights they would have as stockholders of a U.S. corporation, which could adversely affect trading in our common stock and our ability to conduct equity financings.
Our corporate affairs are governed by our Articles of Association and the laws of Luxembourg, including the Luxembourg Company Law. The rights of our stockholders and the responsibilities of our directors and officers under Luxembourg law are different from those applicable to a corporation incorporated in the U.S. Luxembourg laws may not be as extensive as those in effect in the U.S., and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority stockholders as state corporation laws in the U.S. As a result, our stockholders may have more difficulty in protecting their interests in connection with actions taken by our directors and officers than they would as stockholders of a corporation incorporated in the U.S.
We are organized under the laws of Luxembourg and it may be difficult to obtain or enforce judgments or bring original actions against us or the members of our Board of Directors in the United States.
We are organized under the laws of Luxembourg and the majority of our assets are located outside the U.S. Furthermore, some of the members of our Board of Directors and officers reside outside the U.S., and a substantial portion of their assets are located outside the U.S. Investors may not be able to effect service of process within the U.S. upon us or these persons or to enforce judgments obtained against us or these persons in U.S. courts. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the U.S., including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Awards of punitive damages in actions brought in the U.S. or elsewhere are generally not enforceable in Luxembourg.
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As there is no direct treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the U.S. and Luxembourg, courts in Luxembourg will not automatically recognize and enforce a final judgment rendered by a U.S. court. The enforceability in Luxembourg courts of judgments rendered by U.S. courts will be subject to the procedure and the conditions set forth in the Luxembourg procedural code.
Litigation in Luxembourg is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. For these reasons, it may be difficult for a U.S. investor to bring an original action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against us, the members of our Board of Directors or our officers. In addition, even if a judgment is obtained against our Company, the non-U.S. members of our Board of Directors or our officers based on the civil liability provisions of the U.S. federal securities laws, a U.S. investor may not be able to enforce it in U.S. or Luxembourg courts.
Under our Articles of Association, we may indemnify our directors for and hold them harmless against all claims, actions, suits or proceedings brought against them, subject to limited exceptions. The right to indemnification does not exist in the case of gross negligence, fraud or wrongful misconduct. The rights and obligations among or between us and any of our current or former directors and officers are generally governed by the laws of Luxembourg and are subject to the jurisdiction of the Luxembourg courts, unless such rights or obligations do not relate to or arise out of such persons’ capacities listed above. Although there is doubt as to whether U.S. courts would enforce this indemnification provision in an action brought in the U.S. under U.S. federal or state securities laws, this provision could make judgments obtained outside Luxembourg more difficult to enforce against our assets in Luxembourg or in jurisdictions that would apply Luxembourg law.
Luxembourg and European insolvency and bankruptcy laws are substantially different from U.S. insolvency laws and may offer our stockholders less protection than they would have under U.S. insolvency and bankruptcy laws.
We are subject to Luxembourg insolvency and bankruptcy laws. Should courts in another European country determine that the insolvency and bankruptcy laws of that country apply to us in accordance with and subject to such EU regulations, the courts in that country could have jurisdiction over any insolvency proceedings initiated against us. Insolvency and bankruptcy laws in Luxembourg or the relevant other European country, if any, may offer our stockholders less protection than they would have under U.S. insolvency and bankruptcy laws and make it more difficult for them to recover the amount they could expect to recover in a liquidation under U.S. insolvency and bankruptcy laws.
Item 1B. Unresolved Staff Comments
None
Item 1C. Cybersecurity
We are fully committed to protecting our assets and ensuring security across our Information Technology (“IT”) and Operational Technology (“OT”) environments. Our approach to cybersecurity involves implementing technology standards, processes and an organizational design according to industry practices to strengthen our defenses against cyberattacks. We utilize security technologies, like firewalls, intrusion detection systems and encryption tools to establish defenses against cyber threats. We are committed to updating and patching our systems to ensure that vulnerabilities are promptly addressed. Our processes are aligned to identify weaknesses and areas for improvement by conducting cybersecurity audits and assessments. In the event of a cybersecurity incident, we have a defined incident response plan in place. The plan provides guidance on how to effectively respond. Our employees also undergo regular training programs on identified cybersecurity threats, and their role in maintaining a secure environment.
We continually develop solutions to mitigate the impact of cyber risks from external actors cyber activity, including via portals for potential and current partners with capability to report suspected phishing. Furthermore, we have a risk assessment procedure that identifies and examines cyber risks by taking into account their impact and the likelihood of them being exploited. We evaluate risk as part of our cybersecurity management program to validate capabilities and limitations. Together with our third-party IT service providers, we conduct vulnerability and security assessments, penetration testing and scenario-based evaluations to assess the effectiveness of our security measures against cyber threats. This allows us to make informed decisions regarding the prioritization and mitigation of risks in the IT and OT space. In addition, we also benchmark our measures to marketplace security standards such as the U.S. National Institute of Standards and Technology’s (“NIST”) and other cyber security standards. Regular table-top exercises are conducted, and we have a continuous security improvement process in place.
These processes also take into account risks that arise from our external partnerships and we understand that collaborating with external parties introduces vulnerabilities, such as supply chain risks, possibility of third-party data breach and reliance on partner security measures.
Our approach to managing cybersecurity is designed to ensure oversight and strategic leadership. Leading our cybersecurity risk management efforts is our Chief Information Security Officer (“CISO”).
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In the case of cybersecurity incidents, our CISO leads our Cyber Emergency Response Team disclosure process, which is a collaborative process by which our CISO is advised of cyber incidents and communicates and collaborates with relevant departments across the organization to develop and execute an appropriate response.
The Board has delegated cybersecurity monitoring responsibility to the Audit Committee. Regular updates on cybersecurity status, material cyber incidents, and cyber risk management from either the Chief Information Officer (“CIO”) or CISO are provided to both the Board and Audit Committee. The Audit Committee regularly discusses identified security risks with senior management and reviews management proposed mitigation measures, key cyber initiatives and programs. The Board also considers cybersecurity topics including risk mitigation on a regular basis.
We believe that risks from prior cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected our business to date.
Our Risk Factors include further details about the material cybersecurity risks we face. See Item 1A., Risk Factors, above.
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Item 2. Properties
Production Facilities
We currently operate 14 wholly owned production facilities in Europe, North and South America, South Africa and Asia, and one jointly owned production facility at Dortmund, Germany. Most of our production facilities are ISO 9001, Quality Management and ISO 14001, Environmental Management certified.
The map provides an overview of the geographical footprint of our production network as of December 31, 2023:
08_04_22_world_map_version_06_mit_logo.jpg
Item 3. Legal Proceedings    
We have been and expect to become involved from time to time in various claims and lawsuits arising in the ordinary course of our business, such as product related claims, liability claims, employment related claims and asbestos litigation. Some matters involve claims for large amounts of damages as well as other relief. We believe, based on currently available information, that the results of the proceedings referenced above, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results and cash flow for any particular period when the relevant costs are incurred. We note that the outcome of legal proceedings is inherently uncertain, and we offer no assurances as to the outcome of any of these current or future matters or their effect on the Company. For information regarding our material legal proceedings and regulatory matters, see Item 8. Financial Statements and Supplemental Data, Note Q. Commitments and Contingencies.
Item 4. Mine Safety Disclosures
Not applicable.

 
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “OEC”.
As of February 9, 2024, there were approximately 12 record holders of our common stock, i.e. stockholders directly registered under their name in the Company’s physical stock ledger in Luxembourg.
During the fiscal year ended December 31, 2023, we did not sell any equity securities that were not registered under the Securities Act.
From time to time, we may repurchase our common stock in the open market pursuant to programs approved by our Board. See “Stock Repurchase Program” below.
The information required by Item 201(d) of Regulation S-K is incorporated by reference to the Proxy Statement (as defined in Item 10 below) under the heading “Equity Compensation Plan Information at December 31, 2023.”
Dividend Policy
In accordance with the Luxembourg Company Law, the general meeting of stockholders has the power to make a resolution on the payment of dividends upon the recommendation of the Board of Directors. In deciding whether to recommend any future dividend, the Board of Directors would take into account any legal or contractual limitation, our actual and anticipated future earnings, cash flows, debt service and capital requirements, our business plans and such other matters as the Board of Directors believes appropriate, in its discretion. Generally, any dividend approved by a general meeting of stockholders would be paid out shortly after the meeting.
Luxembourg withholding tax at a rate of 15% is deducted from dividend payments, subject to certain exemptions and reductions in certain circumstances.
Stock Repurchase Program
In accordance with the authority granted by the Orion stockholders to the Board of Directors through stockholder resolution, on May 5, 2023, our Board of Directors approved a new stock repurchase program with authorization to management to purchase up to approximately 6.9 million stock of our outstanding common stock from time to time through open market purchases or public tender offers, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions, at any time through June 2027 (“Stock Repurchase Program”). This new stock repurchase program is in addition to our previous stock repurchase program, which was adopted by our Board of Directors in 2022 and authorized management to purchase up to $50 million of our Common stock (“Prior Stock Repurchase Program”).
The common stock repurchases, under the prior Repurchase Program, was completed during the second quarter of 2023.
The maximum number of shares of our Common stock that may yet be purchased is not necessarily an indication of the number of stock that will ultimately be purchased. Each authorization may be suspended or discontinued at any time and does not obligate us to acquire any specific amount of common stock.
PeriodTotal number of Common stocks purchasedAverage price paid per shareTotal number of Common stock purchased as part of publicly announced plansMaximum number of Common stock yet be purchased as part of publicly announced plans
Stock Repurchase Program
October 1 — 31, 2023
178,652 $20.37 178,652 6,157,434 
November 1 — 30, 2023
106,488 21.91 106,488 6,050,946 
December 1 — 31, 2023
29,669 25.28 29,669 6,021,277 
Common stock Repurchased in 2023 fourth quarter
314,809 314,809 6,021,277 

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Performance Graph
The performance graph and the information contained in this section is not “soliciting material,” is being furnished, not filed, with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.
The graph below shows the relative investment performance of Orion Engineered Carbons S.A.'s common stock, the S&P Smallcap 600 Index and S&P Small Cap Chemicals Index since December 31, 2018. The graph assumes that $100 was invested on December 31, 2018 and any dividends paid were reinvested at the date of payment. The graph is presented pursuant to SEC rules and is not meant to be an indication of our future performance.
TSR Graph.gif
201820192020202120222023
Orion S.A.$100.00 $79.57 $71.93 $77.05 $75.21 $117.50 
S&P Smallcap 600100.00122.78136.64173.29145.39168.73
S&P Small Cap Chemicals Index100.00116.09137.69172.61147.72157.00

Item 6. Reserved
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our results of operations and financial condition during the years ended December 31, 2023 and 2022, and should be read in conjunction with the information included under Item 1. Business and Item 8. Financial Statements and Supplementary Data included elsewhere in this Annual Report. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP” or “U.S. GAAP”) and in U.S. Dollars.
This section discusses year-to-year comparisons between 2023 and 2022. For discussions on year-to-year comparison between 2022 and 2021 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report in Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on February 23, 2023 (the “Prior Annual Report”).
Overview
In 2023, our net sales were $1,893.9 million, sales volume was 932.1 kmt, net income was $103.5 million, and Adjusted EBITDA was $332.3 million.
Specialty Carbon Black Segment—Adjusted EBITDA was $110.7 million, and the Adjusted EBITDA Margin was 18.1%. This segment accounted for 32.2% of our total revenue, 33.3% of total Adjusted EBITDA and 23.8% of our total volume in kmt in 2023.
Rubber Carbon Black Segment—Adjusted EBITDA was $221.6 million, and Adjusted EBITDA Margin was 17.3%. This segment accounted for 67.8% of our total revenue, 66.7% of total Adjusted EBITDA and 76.2% of our total volume in kmt in 2023.
Key Factors Affecting Our Results of Operations
We believe certain factors had, and will continue to have, a material effect on our results of operations and financial condition. As many of these factors are beyond our control and certain of these factors have historically been volatile, past performance will not necessarily be indicative of future performance, and it is difficult to predict future performance with any degree of certainty. In addition, important factors that could cause our actual results of operations or financial conditions to differ materially from those expressed or implied below, include, but are not limited to, factors indicated under “Item 1A. Risk Factors” and “Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” elsewhere in this Annual Report.
Recent Developments and Certain Known Trends
General Economic Conditions, Cyclicality and Seasonality
In 2023, our Net income was $103.5 million. We had a record Adjusted EBITDA of $332.3 million due to improved contractual pricing and favorable foreign currency exchange impact despite demand softening in both segments compared to 2022. Operating results were driven by our ability to adjust sales prices to conform to energy prices, raw material costs and cost of utilities and to deliver products that drive enhanced performance in customers’ applications. Our ability to generate a financial return from investments in debottlenecking, yield improvement technologies, and the U.S. Environmental Protection Agency (“EPA”) related projects, contributed to improved operating results.
The Russia-Ukraine war, Hamas-Israel conflict, and China’s relations with the U.S. and with the European Union (“EU”) significantly amplify geopolitical tensions among countries. The extent or length of any adverse effects of the Russia-Ukraine war on the supply of oil and natural gas and the quality and availability of carbon black oil is difficult to quantify. In addition, increased imports from China and Southeast Asia may impact our future operating and financial results.
The volatility in trading volumes, and prices in global crude oil and natural gas are expected to continue.
Reconciliation of Non-GAAP Financial Measures
We present certain financial measures that are not prepared in accordance with GAAP or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. For a reconciliation of these non-GAAP financial measures to their nearest comparable GAAP measures, see section Reconciliation of Non-GAAP Financial Measures below.
These non-GAAP measures include, but are not limited to, Gross profit per metric ton, Adjusted EBITDA, Net Working Capital, Capital Expenditures and Segment Adjusted EBITDA Margin (in percentage).
We define:
Gross profit per metric ton—Gross profit divided by volume measured in metric tons.
Adjusted EBITDA—Income from operations before depreciation and amortization, stock-based compensation, and non-recurring items (such as, restructuring expenses, legal settlement gain, etc.) plus Earnings in affiliated companies, net of tax.
Net Working Capital—Inventories, net plus Accounts receivable, net minus Accounts payable.
Capital Expenditures—Cash paid for the acquisition of property, plant and equipment.
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Segment Adjusted EBITDA Margin (in percentage)—Segment Adjusted EBITDA divided by segment revenue.
Adjusted EBITDA is used by our chief operating decision maker (“CODM”) to evaluate our operating performance and to make decisions regarding allocation of capital, because it excludes the effects of items that have less bearing on the performance of our underlying core business. We use this measure, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing our business. We believe these measures are useful measures of financial performance in addition to Net income, Income from operations and other profitability measures under GAAP, because they facilitate operating performance comparisons from period to period. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization, historic cost and age of assets, financing and capital structures and taxation positions or regimes, we believe that Adjusted EBITDA provides a useful additional basis for evaluating and comparing the current performance of the underlying operations. In addition, we believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business.
However, other companies and analysts may calculate non-GAAP financial measures differently, so making comparisons among companies on this basis should be done carefully. Non-GAAP measures are not performance measures under GAAP and should not be considered in isolation or construed as substitutes for Net sales, Net income, Income from operations, Gross profit and other GAAP measures as an indicator of our operations in accordance with GAAP.
Reconciliation of Non-GAAP Financial Measures
The following tables present a reconciliation of each Non-GAAP measure to the most directly comparable GAAP measure:
Gross profit per metric ton (A Non-GAAP Financial Measure)
Year Ended December 31,Year-Over-Year
20232022Delta
(In millions, except per ton data and percentage)
Net sales
$1,893.9 $2,030.9 $(137.0)(6.7)%
Cost of sales
(1,442.9)(1,582.1)139.2 (8.8)%
Gross profit$451.0 $448.8 $2.2 0.5 %
Volume (in kmt)932.1 962.9 (30.8)(3.2)%
Gross profit per metric ton$483.9 $466.1 $17.8 3.8 %
Reconciliation of Net income to Adjusted EBITDA (A Non-GAAP financial Measure)
Year Ended December 31,Year-Over-Year
20232022Delta
(In millions)%
Net income$103.5$106.2$(2.7)(2.5)%
Add back Income tax expense60.351.58.817.1 %
Add back Earnings in affiliated companies, net of tax(0.5)(0.5)— %
Income before earnings in affiliated companies and income taxes163.3157.26.13.9 %
Add back Interest and other financial expense, net50.939.911.027.6 %
Add back Reclassification of actuarial gain from AOCI(8.9)(8.9)— %
Income from operations205.3197.18.24.2 %
Add back Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets113.0105.77.36.9 %
EBITDA 318.3302.815.55.1 %
Equity in earnings of affiliated companies, net of tax0.50.5— %
Long term incentive plan15.47.77.7100.0 %
Environmental reserve(2.2)(0.4)(1.8)450.0 %
Other adjustments0.31.7(1.4)(82.4)%
Adjusted EBITDA$332.3$312.3$20.06.4 %
Specialty Carbon Black Adjusted EBITDA
$110.7$143.9$(33.2)(23.1)%
Rubber Carbon Black Adjusted EBITDA
$221.6$168.4$53.231.6 %
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Operating Results
2023 Compared to 2022
Operating results for the periods discussed are as follows:
Year Ended December 31,Year-Over-Year
20232022Delta
(In millions)%
Net sales$1,893.9 $2,030.9 $(137.0)(6.7)%
Cost of sales1,442.9 1,582.1 (139.2)(8.8)%
Gross profit451.0448.82.2 0.5%
Selling, general and administrative expenses221.9 227.1 (5.2)(2.3)%
Research and development costs24.5 21.7 2.8 12.9%
Other expenses/(income)(0.7)2.9 (3.6)(124.1)%
Income from operations205.3197.18.2 4.2%
Interest and other financial expense, net50.9 39.9 11.0 27.6%
Reclassification of actuarial (gains)/losses from AOCI(8.9)— (8.9)—%
Income before earnings in affiliated companies and income taxes163.3157.26.1 3.9%
Income tax expense60.3 51.5 8.8 17.1%
Earnings in affiliated companies, net of tax0.5 0.5 — —%
Net income$103.5 $106.2 $(2.7)(2.5)%
Net sales    
Net sales decreased by $137.0 million, or 6.7%, from $2,030.9 million in 2022 to $1,893.9 million in 2023, driven primarily by the pass-through effect of declining oil prices and lower volume in both segments. Those were partially offset by improved contractual pricing.
Volume decreased by 30.8 kmt, or 3.2%, to 932.1 kmt, year-over-year reflecting weaker demand across all regions in both segments.
Cost of sales
Cost of sales decreased by $139.2 million, or 8.8%, from $1,582.1 million in 2022 to $1,442.9 million in 2023, primarily due the effect of declining oil prices and lower volume.
Gross profit
Gross profit increased by $2.2 million or 0.5%, from $448.8 million in 2022 to $451.0 million in 2023, and gross profit per metric ton increased by 3.8% or $17.8 to $483.9.
The increase was primarily driven by improved contractual pricing, partially offset by lower volume in both segments and lower cogeneration effects due to European electricity prices.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by $5.2 million, or 2.3%, from $227.1 million in 2022 to $221.9 million in 2023 driven primarily by lower freight costs due to lower volume in both segments.
Income tax expense
Income tax expense was $60.3 million and $51.5 million in 2023 and 2022, respectively.
The 2023 effective income tax rate was 36.9% compared with 32.7%% in 2022. The increase in the effective tax rate was mainly due to the increase of valuation allowance, income taxes for prior years and the increase of non-deductible business expenses and taxes. Those were partially offset by the effects of earnings in various countries with lower statutory tax rates and tax-free income. For details regarding this deviation, see Item 8. Financial Statements and Supplementary Data and Note P. Income Taxes to the audited Consolidated Financial Statements.
Adjusted EBITDA (A Non-GAAP Financial Measure)
Adjusted EBITDA increased by $20.0 million, or 6.4%, from $312.3 million in 2022 to $332.3 million in 2023. The increase was primarily due to improved contractual pricing. Those were partially offset by lower volume and cogeneration effects in both segments.
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Comprehensive Income
Year Ended December 31,Year-Over-Year
20232022Delta
(In millions)
Comprehensive income
$76.1 $142.2 $(66.1)
2023 vs 2022―Comprehensive income decreased by $66.1 million, from $142.2 million to $76.1 million, primarily due to:
$43.5 million related to net unfavorable impacts related to financial derivative instruments primarily driven by net periodic changes in cross currency and interest rate swaps, and
$25.7 million related to net unfavorable changes in defined pension and other post-retirement benefits.
Those decreases were partially offset by
$5.8 million of net favorable impacts of unrealized changes in foreign currency translation adjustments.
Segment Discussion
Our business operations are divided into two operating segments—Specialty Carbon Black and Rubber Carbon Black. We use Segment Adjusted EBITDA as measures of segment performance and profitability. The table below presents our segment results for 2023, and 2022.
Year Ended December 31,Year-Over-Year
20232022Delta
(In millions, unless otherwise indicated)%
Specialty Carbon Black
Net sales$610.6 $675.4 $(64.8)(9.6)%
Cost of sales450.3 474.7 (24.4)(5.1)%
Gross profit$160.3 $200.7 $(40.4)(20.1)%
Volume (kmt)221.4 224.3 (2.9)(1.3)%
Adjusted EBITDA$110.7 $143.9 $(33.2)(23.1)%
Adjusted EBITDA Margin (%)18.1 21.3 (3.2)(15.0)%
Rubber Carbon Black
Net sales$1,283.3 $1,355.5 $(72.2)(5.3)%
Cost of sales992.6 1,107.4 (114.8)(10.4)%
Gross profit$290.7 $248.1 $42.6 17.2 %
Volume (kmt)710.7 738.6 (27.9)(3.8)%
Adjusted EBITDA$221.6 $168.4 $53.2 31.6 %
Adjusted EBITDA Margin (%)17.3 12.4 4.9 39.5 %
Specialty Carbon Black
2023 Compared to 2022
Net sales of the Specialty Carbon Black segment decreased by $64.8 million, or 9.6%, from $675.4 million in 2022 to $610.6 million in 2023. The net sales decrease in 2023 was primarily driven by the pass-through effect of declining oil prices.
Volume of the Specialty Carbon Black segment decreased by 2.9 kmt, or 1.3%, from 224.3 kmt in 2022 to 221.4 kmt in 2023. The volume was lower primarily due to weakness across most geographies.
Gross profit of the Specialty Carbon Black segment decreased by $40.4 million, or 20.1%, from $200.7 million in 2022 to $160.3 million in 2023, primarily driven by the lower margin due to lower demand, unfavorable product mix, and lower cogeneration effects.
Segment Adjusted EBITDA of the Specialty Carbon Black segment decreased by $33.2 million, or 23.1%, from $143.9 million in 2022 to $110.7 million in 2023. The decrease was primarily due to unfavorable geographic and product mix and lower cogeneration effects due to lower European electricity prices.
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Rubber Carbon Black
2023 Compared to 2022
Net sales of the Rubber Carbon Black segment decreased by $72.2 million, or 5.3%, from $1,355.5 million in 2022 to $1,283.3 million in 2023. The decrease was primarily due to the pass-through effect of declining oil prices and lower volume, partially offset by improved contractual pricing.
Volume of the Rubber Carbon Black segment decreased by 27.9 kmt, or 3.8%, from 738.6 kmt in 2022 to 710.7 kmt in 2023. The decrease was primarily due to lower demand in the Americas and EMEA region.
Gross profit of the Rubber Carbon Black segment increased by $42.6 million, or 17.2%, from $248.1 million in 2022 to $290.7 million in 2023. The increase in the period was primarily driven by improved contractual pricing, partially offset by lower cogeneration effects.
Segment Adjusted EBITDA of the Rubber Carbon Black segment increased by $53.2 million, or 31.6%, from $168.4 million in 2022 to $221.6 million in 2023. The increase was primarily due to improved contractual pricing, partially offset by lower volume and cogeneration effects.
Liquidity and Capital Resources
Historical Cash Flows
The table below presents cash flows derived from our Consolidated Financial Statements.
Year Ended December 31,
20232022
(In millions)
Net cash provided by operating activities$345.9 $81.0 
Net cash used in investing activities(172.8)(232.8)
Net cash provided by (used in) financing activities(197.1)149.3 
2023
Operating Activities—Cash provided by operating activities primarily reflected our Net income, adjusted for non-cash items and changes in working capital. The change in working capital was primarily due to improved payment terms and factoring of certain Accounts receivable.
Investing Activities—Cash used by investing activities primarily reflects $143.7 million expenditures for safety, maintenance and growth investments and $29.1 million to install emissions reduction technology to meet the Environmental Protection Agency (“EPA”) requirements in the U.S.
Financing Activities—Net cash used by financing activities was $197.1 million. These outflows primarily consisted of $97.5 million, net related to repayment of our prior revolving credit facility (the “Prior RCF”) and ancillary credit facilities, $65.6 million for repurchase of common stock under the Stock Repurchase Program and $36.3 million repayment of the repurchase agreement to sell European Emission Allowance certificates (“Repurchase agreement”). Those were partially offset by proceeds of borrowings to partially finance the construction of our Huaibei facility, China and working capital requirements in Korea. See Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements for further information regarding the Company’s indebtedness.
2022
Operating Activities—Cash provided by operating activities primarily reflected our Net income, adjusted for non-cash items and changes in working capital.
Investing Activities—Cash used by investing activities primarily reflects $165.8 million expenditures for safety, maintenance and growth investments and $67.0 million to install emissions reduction technology to meet the Environmental Protection Agency (“EPA”) requirements in the U.S. See “Note Q. Commitments and Contingencies” to the accompanying Consolidated Financial Statements for further discussion of the Company’s commitments and contingencies relating to the EPA.
Financing Activities—$149.3 million of cash provided by financing activities primarily reflects $91.0 million of net borrowings under our Prior RCF and ancillary facilities, $47.8 million to partially finance the construction of our Huaibei facility, China, $36.3 million proceeds from Repurchase agreement, and Other short-term debt and obligations, net. Those were partially offset by a $30.2 million reduction in local uncommitted credit lines, scheduled debt repayments, dividend distributions and stock buybacks. See Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements for further discussion on our Term-loan refinancing.
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Sources of Liquidity
Our principal sources of liquidity are the net cash generated (i) from operating activities, primarily driven by our operating results and changes in working capital requirements and (ii) from financing activities, primarily driven by borrowing amounts available under our committed multicurrency, senior secured Revolving credit facility and related ancillary facilities, various uncommitted local credit lines, and, from time to time, term loan borrowings and Accounts receivable factoring.
We believe our anticipated future operating cash flow, the capacity under our existing credit facilities and uncommitted bilateral lines of credit, along with access to surety bonds, will be sufficient to finance our planned capital expenditures, settle our commitments and contingencies, and address our normal anticipated working capital needs for the foreseeable future.
As of December 31, 2023, the Company had liquidity of $279.3 million, including cash and equivalents of $37.5 million, $221.6 million in availability remaining under our revolving credit facility, including ancillary lines and $20.2 million under other available credit lines.
Net Working Capital (A Non-GAAP Financial Measure)
We define Net Working Capital as the total of Inventories, net and Accounts receivable, net, less Accounts payable. Net Working Capital is a non-GAAP financial measure, and other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Net Working Capital. The components of Net Working Capital at December 31, are as follows:
20232022
(In millions)
Inventories, net$287.1 $277.9 
Accounts receivable, net241.0 367.8 
Accounts payable(183.7)(184.1)
$344.4 $461.6 
Our Net Working Capital position can vary significantly due to fluctuations in oil prices and receipts of carbon black oil shipments. In general, increases in the cost of raw materials lead to an increase in our Net Working Capital requirements. Due to the quantity of carbon black oil that we typically keep in stock, such increases in Net Working Capital occur gradually over a period of two to three months. Conversely, decreases in the cost of raw materials lead to a decrease in our Net Working Capital requirements over the same period of time.
Our Net Working Capital decreased to $344.4 million as of December 31, 2023 compared to $461.6 million as of December 31, 2022. The decrease in working capital was primarily due to improved payment terms and factoring of certain Accounts receivable. See Note C. Accounts Receivable to the accompanying Consolidated Financial Statements for further information on the factoring agreement.
Capital Requirements
Capital Expenditures—We define Capital Expenditures as cash paid for the Acquisition of property, plant and equipment. We plan to finance our capital expenditures with cash generated by our operating activities and or utilizing existing debt capacity. We currently do not have any material commitments to make capital expenditures and do not plan to make capital expenditures outside the ordinary course of our business.
Debt and Other Obligations—Our gross debt balance as of December 31, 2023 was $818.2 million, a decrease of $101.5 million compared to December 31, 2022. In 2024, we will repay $4.4 million of long-term debt from cash in hand and cash generated by operating activities. For more information on Debt, refer to Note J. Debt and Other Obligations to the accompanying Consolidated Financial Statements.
Contractual Obligations—We believe our contractual obligations will be met with cash generated by operating activities and/or utilizing existing debt capacity. For more information on Contractual obligations, refer to “Note Q. Commitments and Contingencies” to the accompanying Consolidated Financial Statements.
Leases—We do not have material short-term lease obligations. We believe lease obligations would be met with cash generated by our operating activities and/or utilizing existing debt capacity. For operating and finance leases, refer to Note G. Leases to the accompanying Consolidated Financial Statements.
Trend Information
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsRecent Developments and Certain Known Trends.
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Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. The policies and estimates discussed below are considered by our management to be critical to an understanding of the Consolidated Financial Statements, because their application requires the most significant judgments from management in estimating matters for financial reporting that are inherently uncertain. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes included in this Annual Report in Form 10-K.
Inventories—We account for our raw materials, work-in-progress and finished goods inventories using average cost method of accounting. The cost of raw materials, which represents a substantial portion of our operating expenses and energy costs generally follow price trends for crude oil and/or natural gas.
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. Due to natural inventory composition changes, variation in pricing from period to period does not necessarily result in a linear lower of cost or market (“LCM”) impact. Fluctuation in the prices from period to period may result in the recognition of charges to adjust the value of inventory to the lower of cost or market in periods of falling prices and the reversal of those charges in subsequent interim periods as market prices recover. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Historically, such write-downs have not been material. However, if actual market conditions are less favorable than those projected by management at the time of the assessment, additional inventory write-downs may be required, which could reduce our gross profit and our earnings.
Loss Contingencies—We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision by a material amount or if the loss is not reasonably estimable but is expected to be material to our financial results. We are currently involved in litigation and other proceedings, as discussed in Note Q. Commitments and Contingencies to the accompanying Consolidated Financial Statements. We have accrued our estimates of the probable losses associated with these matters and associated legal costs are generally recognized as incurred. However, our losses are typically resolved over long periods of time and are often difficult to estimate due to various factors including the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in our estimates related to these matters.
Accruals for Taxes Based on Income—The determination of our provision for income taxes and the calculation of our tax benefits and liabilities is subject to management’s estimates and judgments due to the complexity of the tax laws and regulations in the tax jurisdictions in which we operate. Uncertainties exist with respect to interpretation of these complex laws and regulations.
Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
We recognize future tax benefits to the extent that the realization of these benefits is more likely than not. Our current provision for income taxes is impacted by the recognition and release of valuation allowances related to net deferred tax assets in certain jurisdictions. Further changes to these valuation allowances may impact our future provision for income taxes, which will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.
We recognize the financial statement benefits with respect to an uncertain income tax position that we have taken or may take on an income tax return when we believe it is more likely than not that the position will be sustained with the tax authorities.
ACCOUNTING AND REPORTING CHANGES
For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note B. Recent Accounting Pronouncements to the accompanying Consolidated Financial Statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of market risks. Our primary market risk exposures relate to foreign exchange, interest rate and commodity risks. To manage these risks and our exposure to the unpredictability of financial markets, we seek to mitigate their impact on our financial performance and capital. Where appropriate, we use derivative financial instruments solely for the purpose of hedging the foreign exchange, interest and commodity risks arising from our operations and sources of finance. For this purpose, a systematic financial and risk management system has been established. We do not enter into derivative financial instruments for speculative purposes.
The following discussion and analysis only address our market risk and does not address other financial risks that we face in the normal course of business, including credit risk and liquidity risk.
Interest Rate Risk
Interest rate risk management aims to protect consolidated Net income from negative effects from market interest rate fluctuations. Orion is exposed to interest rate risk, which might arise from incurring new liabilities due to higher interest rates. We also have term loans which are variable interest rate instruments, that exposes us to market risk arising from changes in the yield curve. Appropriate hedging instruments are in place to mitigate the exposure arising from increasing interest rates.
The table below shows the sensitivity of our interest expense to changes in the interest rate, after the impact of hedge accounting. It shows the change resulting from a hypothetical fluctuation of 50 basis points (0.50%) in the three-month LIBOR and the USD Term SOFR 3M + CAS (Credit Adjustment Spread) as of December 31, 2023, assuming that all other variables remain unchanged. For example, changes in U.S. dollar (“USD”)/EUR currency rate would have an impact on our interest exposure and vice versa. Changes in interest rates would also have a related impact on our foreign currency (USD) exposure. The sensitivity analysis assumes that the hypothetical interest rate was valid and that our Revolving credit facility was utilized in the full amount over the course of the entire year.
The effect of this hypothetical change in the interest rate of the variable rate loan to our Consolidated Statements of Operations, Income before earnings in affiliated companies and income taxes ("income before taxes" in this section) is as follows:
December 31, 2023
Increase by 0.50%Decrease by 0.50%
In millions
(Increase) decrease in interest expense$(4.3)$4.4 
Increase (decrease) in total comprehensive income before taxes4.3 (4.4)
Foreign Currency Risk
A significant portion of our reporting entities use the euro as their functional currency. Our reporting currency is the U.S. dollar. The translation gains or losses that result from the process of translating the euro denominated financial statements to U.S. dollar are deferred in Accumulated other comprehensive income until such time as those entities may be substantially liquidated or sold. Changes in the value of the U.S. dollar relative to the euro can therefore have a significant impact on Comprehensive income.
The table below shows the sensitivity with regard to the effect of a change in the euro/U.S. dollar exchange rate using the outstanding amount and the interest for the U.S. dollar-denominated Term Loan issued by a 100% wholly owned subsidiary whose functional currency is the euro. A fluctuation of the euro/U.S. dollar exchange rate of 10% as of December 31, 2023, with other conditions remaining unchanged, would have the following effect on our Income before earnings in affiliated companies and income taxes:
December 31, 2023
Value of the U.S. Dollar in relation to the Euro (1)
 Increase by 10%Decrease by 10%
In thousands
FX gain (loss) in financial result $8.8 $(10.7)
(1) As of December 31, 2023: €1 = $1.105 (U.S.).
Some of our operations enter into transactions that are not denominated in their functional currency. This results in an exposure to foreign currency risk, including, but not limited to, third party and intercompany receivables and payables and intercompany loans.
Our policy is to maintain a balanced position in foreign currencies to minimize exchange gains and losses arising from changes in exchange rates. To minimize the effects of our net currency exchange exposures, we enter into foreign exchange contracts and cross-currency swaps. Our net position in foreign currencies is monitored daily.
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We maintain risk management control practices to monitor foreign currency risk attributable to our intercompany and third party outstanding foreign currency balances. These practices involve the centralization of our exposure to underlying currencies that are not subject to central bank and/or country specific restrictions. By centralizing most of our foreign currency exposure into one subsidiary, we are able to take advantage of any natural offsets, thereby reducing the overall impact of changes in foreign currency rates on our earnings. At December 31, 2023, 2022, and 2021, a 10% fluctuation compared to the U.S. dollar in the underlying currencies that have no central bank or other currency restrictions related to non-hedged monetary assets, net would have resulted in an additional impact to earnings of approximately $2.8 million, $11.0 million, and $8.3 million, respectively.
Interest and other financial expense, net, in the Consolidated Statements of Operations reflected net exchange rate foreign currency losses of $4.0 million, $3.5 million and $6.4 million in 2023, 2022, and 2021, respectively.
Commodity Risk
Commodity risk results from changes in market prices for raw materials, mainly carbon black oil. Raw materials are primarily purchased to meet our production requirements. Costs for raw materials and energy have fluctuated significantly in past years and may continue to fluctuate in the future. We endeavor to reduce purchasing risks on the procurement markets through worldwide purchasing activities and optimized processes for the purchase of additional raw materials. Raw materials are purchased exclusively to cover our own requirements.
A significant portion of our volume, approximately 65%, is sold based on formula-driven price adjustment mechanisms for changes in costs of raw materials. Sales prices under non-indexed contracts are reviewed on a quarterly basis to reflect raw material and market fluctuation. We believe that our contracts enable us to generally maintain our Segment Adjusted EBITDA Margins.
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Item 8. Financial Statements and Supplementary Data
34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Orion S.A.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Orion S.A. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 14, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Cross-Currency Swaps
Description of the Matter
As discussed in notes A and K to the consolidated financial statements, the Company’s financial instruments held a fair value of $35.9 million as of December 31, 2023, of which financial instruments related to cross-currency swaps totaled $31.3 million for the year ended December 31, 2023. The fair value of the cross-currency swaps are calculated using the present value of future cash flows discounted using observable inputs (level 2) including notional value amounts, yield curves, basis curves, and various spot and forward foreign exchange rates on the valuation date.
We identified the valuation of the cross-currency swaps as a critical audit matter. The nature of the arrangement is such that there are multiple legs, with multiple payments, in several periods that creates complexity in the fair value model and requires the use of valuation specialists.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s derivatives process. This included key controls related to the authorization of transactions and management's independent assessment of fair values.
Our substantive audit procedures to test the Company’s cross-currency swaps included, among others, confirmation of existence and key terms with the counterparty. Testing the valuation of cross currency swaps, including, an evaluation of the methodologies and significant inputs used by the Company. With the assistance of our valuation specialists, we performed an independent valuation of the cross-currency swaps to assess the appropriateness of the model used by the Company and its specialist to estimate the fair value, which involved independently obtaining significant inputs from external sources. We also assessed the adequacy of the disclosures related to the fair value measurement.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Houston, TX
February 14, 2024
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Orion S.A
Consolidated Statements of Operations
Years Ended December 31,
202320222021
(In millions, except share and per share data)
Net sales$1,893.9 $2,030.9 $1,546.8 
Cost of sales1,442.9 1,582.1 1,160.2 
Gross profit451.0 448.8 386.6 
Selling, general and administrative expenses221.9 227.1 210.4 
Research and development costs24.5 21.7 22.0 
Gain related to litigation settlement  (82.9)
Other expenses/(income)(0.7)2.9 8.6 
Income from operations205.3 197.1 228.5 
Interest and other financial expense, net50.9 39.9 38.0 
Reclassification of actuarial (gains)/losses from AOCI(8.9) 4.8 
Income before earnings in affiliated companies and income taxes163.3 157.2 185.7 
Income tax expense60.3 51.5 51.7 
Earnings in affiliated companies, net of tax0.5 0.5 0.7 
Net income$103.5 $106.2 $134.7 
Weighted-average shares outstanding (in thousands):
Basic58,995 60,902 60,708 
Diluted59,980 61,378 60,951 
Earnings per share
Basic$1.75 $1.74 $2.22 
Diluted$1.73 $1.73 $2.21 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Orion S.A
Consolidated Statements of Comprehensive Income
Years Ended December 31,
202320222021
(In millions)
Net income$103.5 $106.2 $134.7 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments(7.6)(13.4)(7.6)
Net gains (losses) on derivatives(8.3)35.2 2.7 
Defined benefit plans, net(11.5)14.2 5.1 
Other comprehensive income (loss)(27.4)36.0 0.2 
Comprehensive income$76.1 $142.2 $134.9 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Orion S.A
Consolidated Balance Sheets
December 31
20232022
(In millions, except share data)
ASSETS
Current assets
Cash and cash equivalents$37.5 $60.8 
Accounts receivable, net241.0 367.8 
Inventories, net287.1 277.9 
Income tax receivables6.1 5.2 
Prepaid expenses and other current assets74.4 66.8 
Total current assets646.1 778.5 
Property, plant and equipment, net900.1 818.5 
Right-of-use assets110.6 97.6 
Goodwill76.1 73.4 
Intangible assets, net25.5 27.8 
Investment in equity method affiliates5.1 5.0 
Deferred income tax assets30.0 29.1 
Other assets39.9 58.8 
Total non-current assets1,187.3 1,110.2 
Total assets$1,833.4 $1,888.7 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$183.7 $184.1 
Current portion of long term debt and other financial liabilities137.0 258.3 
Accrued liabilities41.7 44.7 
Income taxes payable34.2 31.3 
Other current liabilities43.7 34.4 
Total current liabilities440.3 552.8 
Long-term debt, net677.3 657.0 
Employee benefit plan obligation60.4 50.0 
Deferred income tax liabilities66.3 70.0 
Other liabilities110.6 99.5 
Total non-current liabilities914.6 876.5 
Stockholders' equity
Common stock
Authorized: 65,035,579 and 65,035,579 shares with no par value
Issued – 60,992,259 and 60,992,259 shares with no par value
Outstanding – 57,898,772 and 60,571,556 shares
85.3 85.3 
Treasury stock, at cost, 3,093,487 and 420,703
(70.1)(8.8)
Additional paid-in capital85.6 76.4 
Retained earnings417.6 319.0 
Accumulated other comprehensive loss(39.9)(12.5)
Total stockholders' equity478.5 459.4 
Total liabilities and stockholders' equity$1,833.4 $1,888.7 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Orion S.A
Consolidated Statements of Cash Flows
Years Ended December 31,
202320222021
(In millions)
Cash flows from operating activities:
Net income$103.5 $106.2 $134.7 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of property, plant and equipment and amortization of intangible assets and right of use assets113.0 105.7 104.1 
Amortization of debt issuance costs2.7 1.9 4.1 
Stock-based incentive compensation15.4 7.7 5.2 
Deferred tax provision6.3 7.2 20.3 
Foreign currency transactions5.0 (8.4)(11.5)
Reclassification of actuarial (gains)/losses from AOCI(8.9) 4.8 
Other operating non-cash items, net0.8 (0.3)(1.8)
Changes in operating assets and liabilities, net:
Trade receivables131.2 (95.6)(67.6)
Inventories(7.7)(60.1)(94.9)
Trade payables1.6 9.2 65.0 
Other provisions(4.4)(3.7)7.0 
Income tax liabilities(2.1)20.3 (6.3)
Other assets and liabilities, net(10.5)(9.1)(17.9)
Net cash provided by operating activities345.9 81.0 145.2 
Cash flows from investing activities:
Acquisition of property, plant and equipment(172.8)(232.8)(214.7)
Net cash used in investing activities(172.8)(232.8)(214.7)
Cash flows from financing activities:
Proceeds from long-term debt borrowings12.6 47.8 213.4 
Repayments of long-term debt(3.0)(3.0)(213.0)
Payments for debt issue costs(2.7)(1.5) 
Cash inflows related to current financial liabilities284.4 223.2 188.4 
Cash outflows related to current financial liabilities(417.9)(107.7)(112.6)
Dividends paid to stockholders(4.9)(5.0) 
Repurchase of common stock under Stock Repurchase Program(65.6)(4.3) 
Other financing activities (0.2)(2.9)
Net cash provided by (used in) financing activities(197.1)149.3 73.3 
Increase (decrease) in cash, cash equivalents and restricted cash(24.0)(2.5)3.8 
Cash, cash equivalents and restricted cash at the beginning of the period63.4 68.5 67.9 
Effect of exchange rate changes on cash0.8 (2.6)(3.2)
Cash, cash equivalents and restricted cash at the end of the period40.2 63.4 68.5 
Less restricted cash at the end of the period2.7 2.6 2.8 
Cash and cash equivalents at the end of the period$37.5 $60.8 $65.7 
Cash paid for interest, net$(38.9)$(33.5)$(22.8)
Cash paid for income taxes$(56.1)$(23.9)$(37.6)
Supplemental disclosure of non-cash activity:
Lease liabilities$30.0 $25.8 $11.6 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Orion S.A
Consolidated Statements of Changes in Stockholders’ Equity
Common stock
(In millions, except share and per share data)NumberAmountTreasury stockAdditional
paid-in
capital
Retained
earnings
Accumulated other comprehensive lossTotal
As of January 1, 202160,487,117 $85.3 $(8.5)$68.5 $84.4 $(48.7)$181.0 
Net income— — — — 134.7 — 134.7 
Other comprehensive income, net of tax— — — — — 0.2 0.2 
Dividends -$0.02
per share
— — — — (1.3)— (1.3)
Stock based compensation— — — 5.1 — — 5.1 
Issuance of stock under equity compensation plans168,959 — 2.2 (2.2)— —  
As of December 31, 202160,656,076 85.3 (6.3)71.4 217.8