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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

ORION ENGINEERED CARBONS S.A.
(Exact name of registrant as specified in its charter)
Grand Duchy of Luxembourg001-3656300-0000000
(State or other jurisdiction of incorporation or organization)
(Commission file number)
(I.R.S. Employer Identification No.)
4501 Magnolia Cove Drive Suite 106
Houston,
Texas
77345
(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 Shares, no par valueOECNew York Stock Exchange

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 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 is a shell company (as defined in Rule 12b-2 of the Act).     Yes    No  x

The registrant had 60,487,117 shares of common stock outstanding as of November 5, 2020.



TABLE OF CONTENTS

PART I - Financial Information
Item 1. Financial Statements and Supplementary Data (Unaudited)
Consolidated Statements of Operations of Orion Engineered Carbons S.A. (Unaudited)
Consolidated Statements of Comprehensive Income of Orion Engineered Carbons S.A. (Unaudited)
Consolidated Balance Sheets of Orion Engineered Carbons S.A. (Unaudited)
Consolidated Statements of Cash Flows of Orion Engineered Carbons S.A. (Unaudited)
Consolidated Statements of Changes in Stockholders’ Equity of Orion Engineered Carbons S.A. (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other
Item 6. Exhibits
SIGNATURES






PART I - Financial Information
Item 1. Financial Statements and Supplementary Data (Unaudited)

Consolidated Statements of Operations of Orion Engineered Carbons S.A. (Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands, except per share amounts)
Net sales$282,036 $370,195 $820,691 $1,153,925 
Cost of sales202,854 271,481 617,372 853,204 
Gross profit79,182 98,714 203,319 300,721 
Selling, general and administrative expenses43,155 49,636 126,221 157,330 
Research and development costs7,352 4,793 16,757 14,836 
Other expenses, net4,527 3,189 11,529 10,167 
Restructuring expenses 2,710  3,833 
Income from operations24,147 38,386 48,811 114,555 
Interest and other financial expense, net10,769 6,500 28,657 20,509 
Reclassification of actuarial losses from AOCI2,272  7,325  
Income from operations before income tax expense and equity in earnings of affiliated companies11,106 31,886 12,830 94,046 
Income tax expense/(benefit)2,250 7,767 4,006 26,515 
Equity in earnings of affiliated companies, net of tax141 134 426 424 
Net income$8,997 $24,253 $9,250 $67,955 
Weighted-average shares outstanding (in thousands of shares):
Basic60,487 60,212 60,408 59,907 
Diluted61,259 61,453 61,296 61,231 
Earnings/(loss) per share:
Basic$0.15 $0.40 $0.15 $1.13 
Diluted$0.15 $0.39 $0.15 $1.11 
Dividends per share$ $0.20 $0.20 $0.60 

The accompanying notes are an integral part of these consolidated financial statements.


1


Consolidated Statements of Comprehensive Income of Orion Engineered Carbons S.A. (Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Net income/(loss)$8,997 $24,253 $9,250 $67,955 
Other comprehensive loss, net of tax
Foreign currency translation adjustments(3,620)(5,097)(27,060)(8,478)
Unrealized net gains/(losses) on hedges of a net investment in a foreign operation(65)72 (61)72 
Unrealized net losses on cash flow hedges(1,133)(396)(3,399)(6,996)
Gains on defined benefit plans990 121 4,432 138 
Other comprehensive loss(3,829)(5,300)(26,087)(15,264)
Comprehensive income/(loss)$5,168 $18,953 $(16,838)$52,691 

The accompanying notes are an integral part of these consolidated financial statements.

2


Consolidated Balance Sheets of Orion Engineered Carbons S.A. (Unaudited)
September 30, 2020December 31, 2019
(In thousands, except share amounts)
Current assets
Cash and cash equivalents$97,536 $63,726 
Accounts receivable, net of expected credit losses
of$7,955and$6,632215,407 212,565 
Other current financial assets3,200 11,347 
Inventories, net125,313 164,799 
Income tax receivables10,061 17,924 
Prepaid expenses and other current assets39,091 37,358 
Total current assets490,606 507,718 
Property, plant and equipment, net577,776 534,054 
Operating lease right-of-use assets82,681 27,532 
Goodwill80,604 77,341 
Intangible assets, net47,056 50,596 
Investment in equity method affiliates5,311 5,232 
Deferred income tax assets60,120 48,720 
Other financial assets706 2,501 
Other assets2,971 3,701 
Total non-current assets857,225 749,676 
Total assets$1,347,831 $1,257,394 

Current liabilities
Accounts payable$105,590 $156,298 
Current portion of long term debt and other financial liabilities123,483 36,410 
Current portion of employee benefit plan obligation947 908 
Accrued liabilities39,620 44,931 
Income taxes payable 19,645 14,154 
Other current liabilities39,148 32,509 
Total current liabilities328,433 285,211 
Long-term debt, net640,027 630,261 
Employee benefit plan obligation74,562 71,901 
Deferred income tax liabilities49,686 43,308 
Other liabilities97,953 40,701 
Commitments and contingenciesNote N
Total non-current liabilities862,228 786,171 
Stockholders' equity
Common stock
Authorized: 65,035,579 and 65,035,579 shares with no par value
Issued – 60,992,259 and 60,729,289 shares with no par value
Outstanding – 60,487,117 and 60,224,147 shares
85,323 85,032 
Less 505,142 and 505,142 shares of common treasury stock, at cost
(8,515)(8,515)
Additional paid-in capital65,311 65,562 
Retained earnings75,501 78,296 
Accumulated other comprehensive loss(60,449)(34,362)
Total stockholders' equity157,170 186,013 
Total liabilities and stockholders' equity$1,347,831 $1,257,394 

The accompanying notes are an integral part of these consolidated financial statements.
3


Consolidated Statements of Cash Flows of Orion Engineered Carbons S.A. (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Cash flows from operating activities:
Net income$8,997 $24,253 $9,250 $67,955 
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation of property, plant and equipment and amortization of intangible assets23,999 21,991 69,721 71,490 
Amortization of debt issuance costs530 512 1,531 1,602 
Share-based incentive compensation1,182 2,025 1,242 7,137 
Deferred tax (benefit)/provision(4,725)3,847 (11,224)1,773 
Foreign currency transactions(2,013)2,230 (1,782)2,520 
Reclassification of actuarial losses from AOCI2,272  7,325  
Other operating non-cash items(790)862 118 5,154 
Changes in operating assets and liabilities, net of effects of businesses acquired:
(Increase)/decrease in trade receivables(66,152)21,323 (6,682)2,150 
(Increase)/decrease in inventories14,375 (2,210)39,576 4,889 
Increase/(decrease) in trade payables14,080 (13,902)(31,662)(7,038)
Increase/(decrease) in provisions2,633 3,301 (4,899)(11,525)
Increase/(decrease) in tax liabilities7,674 6,150 16,298 3,814 
Increase/(decrease) in other assets and liabilities that cannot be allocated to investing or financing activities(324)(1,844)3,541 (7,254)
Net cash provided by operating activities$1,738 $68,538 $92,352 $142,667 
Cash flows from investing activities:
Cash paid for the acquisition of intangible assets and property, plant and equipment$(30,942)$(34,452)$(120,343)$(95,309)
Net cash used in investing activities$(30,942)$(34,452)$(120,343)$(95,309)
Cash flows from financing activities:
Payments for debt issue costs$ $ $ $(1,721)
Repayments of long-term debt(2,055)(1,987)(6,077)(6,034)
Cash inflows related to current financial liabilities39,690 9,724 191,041 88,411 
Cash outflows related to current financial liabilities(58,500)(25,169)(110,859)(84,501)
Dividends paid to shareholders (12,043)(12,045)(35,989)
Taxes paid for shares issued under net settlement feature  (1,202)(6,475)
Net cash provided by/(used in) financing activities$(20,866)$(29,475)$60,858 $(46,309)
Increase/(decrease) in cash, cash equivalents and restricted cash$(50,070)$4,611 $32,867 $1,049 
Cash, cash equivalents and restricted cash at the beginning of the period146,108 57,696 68,231 61,604 
Effect of exchange rate changes on cash4,357 (1,999)(703)(2,345)
Cash, cash equivalents and restricted cash at the end of the period$100,395 $60,308 $100,395 $60,308 
Less restricted cash at the end of the period2,859 4,356 2,859 4,356 
Cash and cash equivalents at the end of the period$97,536 $55,952 $97,536 $55,952 
Cash paid for interest, net$(5,246)$(6,527)$(14,752)$(15,693)
Cash (paid)/refund for income taxes$1,068 $1,705 $1,067 $(16,175)
Supplemental disclosure of non-cash activity:
Liabilities for leasing - current$3,862 $(1,148)$5,826 $5,778 
Liabilities for leasing - non-current$51,191 $1,113 $57,834 $25,068 

The accompanying notes are an integral part of these consolidated financial statements.
4



Consolidated Statements of Changes in Stockholders’ Equity of Orion Engineered Carbons S.A. (Unaudited)

Common stock
(In thousands, except per share amounts)Number of common sharesAmountTreasury sharesAdditional paid-in capitalRetained earningsAccumulated other comprehensive lossTotal equity
Balance at January 1, 202060,224,147 $85,032 $(8,515)$65,562 $78,296 $(34,362)$186,013 
Net income— — — — 18,032 — 18,032 
Other comprehensive loss, net of tax— — — — — (22,844)(22,844)
Dividends paid -$0.20per share— — — — (12,045)— (12,045)
Share based compensation— — — (2,632)— — (2,632)
Issuance of stock under equity compensation plans262,970 291 — — — — 291 
Balance at March 31, 202060,487,117 $85,323 $(8,515)$62,930 $84,283 $(57,206)$166,815 
Net loss— — — — (17,780)— (17,780)
Other comprehensive income, net of tax— — — — — 585 585 
Share based compensation— — — 1,199 — — 1,199 
Balance at June 30, 202060,487,117 $85,323 $(8,515)$64,128 $66,504 $(56,621)$150,819 
Net income— — — — 8,997 — 8,997 
Other comprehensive loss, net of tax— — — — — (3,829)(3,829)
Share based compensation— — — 1,182 — — 1,182 
Balance at September 30, 202060,487,117 $85,323 $(8,515)$65,311 $75,501 $(60,449)$157,170 

Common stock
(In thousands, except per share amounts)Number of common sharesAmountTreasury sharesAdditional paid-in capitalRetained earningsAccumulated other comprehensive lossTotal equity
Balance at January 1, 201959,518,498 $84,254 $(8,683)$63,544 $39,409 $(19,628)$158,896 
Net income— — — — 18,954 — 18,954 
Other comprehensive loss, net of tax— — — — — (709)(709)
Dividends paid -$0.20per share— — — — (11,904)— (11,904)
Share based compensation— — — 3,553 — — 3,553 
Balance at March 31, 201959,518,498 $84,254 $(8,683)$67,097 $46,459 $(20,337)$168,790 
Net income— — — — 24,748 — 24,748 
Other comprehensive loss, net of tax— — — — — (9,255)(9,255)
Dividends paid -$0.20per share— — — — (12,042)— (12,042)
Share based compensation— — — (5,737)— — (5,737)
Issuance of stock under equity compensation plans693,710 778 — 43 — — 821 
Balance at June 30, 201960,212,208 $85,032 $(8,683)$61,403 $59,165 $(29,592)$167,325 
Net income— — — — 24,253 — 24,253 
Other comprehensive loss, net of tax— — — — — (5,300)(5,300)
Dividends paid -$0.20per share— — — — (12,043)— (12,043)
Share based compensation— — — 2,025 — — 2,025 
Balance at September 30, 201960,212,208 $85,032 $(8,683)$63,428 $71,375 $(34,892)$176,260 
The accompanying notes are an integral part of these consolidated financial statements.

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Notes to the Condensed Consolidated Financial Statements of Orion Engineered Carbons S.A. (Unaudited)
Note A.    Organization, Description of the Business and Summary of Significant Accounting Policies    
    Orion Engineered Carbons S.A.’s unaudited condensed consolidated financial information include Orion Engineered Carbons S.A. and its subsidiaries (“Orion” or the “Company”). The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The accompanying unaudited condensed consolidated financial statements include all adjustments that are necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
The Company is a leading global manufacturer of carbon black products and is incorporated in Luxembourg. 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 consumables and additives for the production of polymers, printing inks and coatings (“Specialty Carbon Black” or “Specialties”) and in the reinforcement of rubber polymers (“Rubber Carbon Black” or “Rubber”).
The Company manufactures Specialty Carbon Black for a broad range of specialized applications such as polymers, printing systems and coatings applications. The various production processes result in a wide range of different Specialty Carbon Black pigment grades with respect to their primary particle size, structure surface area and surface chemistry. These parameters affect jetness, tinting strength, undertone, dispersibility, oil absorption, electrical conductivity and other characteristics.
The types of Rubber Carbon Black used in the rubber industry are manufactured according to strict specifications and quality standards. Structure and specific surface area are the key factors in optimizing reinforcement properties in rubber polymers.
    As of September 30, 2020, the Company operates 13 wholly owned production facilities in Europe, North and South America, Asia and South Africa. Additionally, the Company operates a joint venture with one production facility in Germany.
The Company's global presence enables it to supply Specialty Carbon Black customers as well as international customers in the tire and rubber industry with the full range of carbon black grades.
Risks and Uncertainties

Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of a novel strain of coronavirus (COVID-19). The COVID-19 pandemic has negatively impacted the global economy. We have experienced significant reductions in the demand for our products as a result of the COVID-19 pandemic and further economic uncertainty may cause additional delays, cancellation, or redirections of planned orders. Policymakers around the globe have responded with fiscal, economic and public health policy actions to support the economy and contain the virus. The ultimate magnitude and overall effectiveness of these actions remains uncertain.

The ultimate severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers and suppliers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions, lower demand for our products, commodity price volatility, heightened price sensitivity among customers, higher competitive intensity, inventory revaluations, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. As of the date of issuance of these condensed consolidated financial statements, the ultimate extent to which the COVID-19 pandemic will impact the Company's financial condition, liquidity, or results of operations remains uncertain.

Summary of Significant Accounting Policies
Revenue and Income Recognition

    The Company recognizes revenue when or as it satisfies a performance obligation by transferring a good or a service to a customer. Revenue is only recognized when control is transferred to the customer. The amount of consideration we receive and revenue we recognize is based upon the terms stated in the sales contract, which may contain variable consideration such as discounts or rebates. We also give our customers a limited right to return product that has been damaged or does not satisfy their specifications, or for other specific reasons. Payment terms on product sales to our customers typically range from 30 to 90 days. Although certain exceptions exist where standard payment terms are exceeded, these instances are infrequent and do not exceed one year.

Revenue is recognized according to the five-step model prescribed in ASC 606. Under the first step, the entity has to identify the contract entered with a customer granting the right to receive goods or service in exchange for consideration. The second step requires the identification of distinct performance obligations within a contract. The transaction price of the arrangement is defined in Step 3 of ASC 606. In addition to the contractual fixed price the entity has to take variable considerations into account. If the entity identified more than one separate performance obligation under step 2, it has to account for this contract as a multiple element arrangement resulting in an
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allocation of revenues to the obligations identified. If these conditions are satisfied, revenue from the sale of goods is recognized when control has been transferred to the buyer, either at a point in time, or over time.
    
The Company derives a substantial majority of revenues from selling carbon black to industrial customers for further processing. Revenue recognition and measurement is governed by the following principles. The amount of revenue and the transaction price is contractually specified between the parties and measured at the amount expected be received less value-added tax and any trade discounts and volume rebates granted. Discounts and volume rebates are accounted for as estimates of variable consideration and deducted from revenue.
    
With respect to the sale of goods, sales are recognized at the point in time control over the good transfers to the customer. The timing of the transfer of control varies depending on the individual terms of the sales agreement.

The Company's business is organized by its two carbon black product types. For corporate management purposes and all periods presented the Company had “Rubber” and “Specialty” as reportable operating segments. Rubber carbon black is used in the reinforcement of rubber in tires and mechanical rubber goods; Specialties are used as pigments and performance additives in coatings, polymers, printing and special applications.

Adoption of accounting standards
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (ASU 2020-03). The amendments in this update affect a wide variety of topics in the codification and represent changes to clarify or improve the codification. The amendments make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Issues 1, 2, 4 and 5 within the standard are conforming amendments and are effective upon issuance of ASU 2020-03. Issue 3 is also a conforming amendment and is effective for fiscal years beginning after December 15, 2019. Issues 6 and 7 relate to ASU No. 2016-13 and are effective for fiscal years beginning after December 15, 2019 since Orion previously adopted ASU No. 2016-13 on January 1 2019. The Company adopted ASU 2020-03 as of January 1, 2020. The adoption of this guidance did not have any impact on the Company’s financial statements.
In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)- Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update) (ASU 2020-02). The new standard as it relates to Topic 326 is effective upon a registrant’s adoption of FASB ASC Topic 326 (adopted by Orion on January 1, 2019). The new standard is as it relates to Topic 842 is not applicable. The adoption of ASU 2020-02 did not have any impact on the Company’s financial statements.
In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (ASU 2019-11). The amendments in this update represents changes to clarify, correct errors in, or improve the codification, and make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-11 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of ASU 2019-11 as long as the entity has adopted the amendments in ASU No. 2016-13. The Company adopted ASU 2019-11 as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326) (ASU 2019-05). The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. For entities that have adopted the amendments in ASU No. 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of ASU 2019-05 as long as the entity has adopted the amendments in ASU No. 2016-13. The Company adopted ASU 2019-05 as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04). The updates contained in this ASU provide clarification and correction to ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and is intended to improve the Codification or correct its unintended application. The amendments in ASU 2019-04 related to ASU No. 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period following the issuance of ASU 2019-04 as long as the entity has adopted all of the amendments in ASU No. 2016-01. For entities that have adopted the amendments in update 2016-13, the amendments in ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of ASU 2019-04 as long as the entity has adopted the amendments in ASU No. 2016-13. For entities that have adopted the amendments in ASU No. 2017-12 as of the issuance date of ASU 2019-04, the effective date is as of the beginning of the first annual period beginning after the issuance of ASU 2019-04 (January 1, 2020 for Orion). For those entities, early
7


adoption is permitted, including adoption on any date on or after the issuance of ASU 2019-04. The Company adopted ASU 2019-04 as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance changes the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. The guidance is effective for financial statements issued for fiscal years ending after December 15, 2020 for public business entities and fiscal years ending after December 15, 2021 for all other entities. Early adoption is permitted. Entities will apply the amendments retrospectively. The Company adopted ASU No 2018-14 as of January 1, 2020 The adoption of this guidance did not have a significant impact on the Company's financial statements.
Principles of consolidation
The consolidated financial statements include all subsidiaries indirectly or directly controlled by Orion. Entities are consolidated from the date Orion obtains control, which generally is the acquisition date, and are deconsolidated when control is lost.
Control is achieved when Orion is exposed, or has the right, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Orion re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of these three elements of control.
The Company’s consolidated financial statements are prepared in accordance with uniform accounting policies. Income and expenses, intercompany profits and losses, and receivables and liabilities between consolidated subsidiaries are eliminated.
Use of estimates
The preparation of consolidated financial statements in conformity U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
Foreign currency translation
Foreign currency transactions are measured at the exchange rate at the date of initial recognition. Any gains or losses resulting from the valuation of foreign currency monetary assets and liabilities using the currency exchange rates as of the reporting date are recognized in other expenses, net.
Currency exchange differences relating to financing activities are recognized in interest and other financial income and interest and other financial expense.
The assets and liabilities of foreign operations with functional currencies different from the presentation currency U.S. dollars are translated using closing rates as of the reporting date. Income and expense items are translated at average monthly exchange rates for the respective period. The translation of equity is performed using historical exchange rates. The overall foreign currency impact from translating the statement of financial position and income statement of all the foreign entities is recognized in accumulated other comprehensive income (loss) ("AOCI").
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Note B. Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the potential impact the adoption of this standard will have on its financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the potential impact the adoption of this standard will have on its financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Note C. Leases
Orion has entered into lease contracts as a lessee and is not acting as a lessor. The vast majority of Orion’s lease contracts are concerning operational items such as rail cars, company cars, offices and office equipment.
The recorded right-of-use assets as of September 30, 2020 amounted to $82.7 million, and the corresponding lease liabilities amounted to $84.2 million, of which $11.5 million was recorded within other current liabilities and $72.7 million as other liabilities.    
The weighted remaining average minimum lease period is 17.0 years.
The undiscounted minimum lease payments are due in and reconcile to the discounted lease liabilities as follows:
September 30, 2020
(In thousands)
Next 12 months$11,550 
1 to 2 years10,804 
2 to 3 years10,519 
3 to 4 years9,529 
4 to 5 years8,989 
More than 5 years40,940 
Total undiscounted minimum lease payments92,330 
Discount(8,130)
Lease liability (current and non-current)$84,200 

The weighted average discount rate applied to the lease liabilities is 5.7%.
In September 2020, Orion commenced a district heating project with the utilities provider of its Cologne, Germany neighbor city of Hürth. The power plant is operated by Orion on a finance lease basis over a period of 25 years. During the third quarter of 2020 Orion recorded a right-of-use asset and a respective lease liability in an amount of $54.8 million. Finance lease costs for the three and nine months ended September 30, 2020 amounted to $0.6 million and $0.9 million and were immaterial for the three and nine months ended September 30, 2019, respectively. Operating lease costs for the three and nine months ended September 30, 2020 amounted in total to $2.9 million and $8.4 million, respectively, and were recorded as operating expenses under cost of sales, selling, general and administrative expenses and under research and development cost. The operating lease costs for the three and nine months ended September 30, 2019 recorded as operating expenses amounted in total to $2.7 million and $8.0 million, respectively, and were recorded under cost of sales, selling, general and administrative expenses and under research and development cost. Cash paid for amounts included in the measurement of lease liabilities from operating leases was $2.6 million and $2.3 million for the three months September 30, 2020 and 2019, respectively, and $7.0 million and $7.6 million for the nine months ended September 30, 2020 and 2019, respectively. Cash paid for finance leases was immaterial during the same periods.
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In addition to the above, Orion entered into a forward-starting lease agreement in May 2020 for a new warehouse at our facility in Cologne, Germany. The lessor, a logistics and distribution service provider, is currently constructing the warehouse at our location, with the lease scheduled to commence by the end of 2020 after construction is completed. The lease agreement will have a total of approximately $6 million in undiscounted future lease payments over the 10-year term of the lease.

Note D. Inventories
Inventories, net of obsolete, unmarketable and slow-moving reserves are as follows:
September 30, 2020December 31, 2019
(In thousands)
Raw materials, consumables and supplies, net$56,235 $69,168 
Work in process201 148 
Finished goods, net68,876 95,483 
Total$125,313 $164,799 
Orion periodically reviews inventories for both obsolescence and loss in value. In this review, Orion makes assumptions about the future demand for and the future market value of the inventory and, based on these assumptions, estimates the amount of obsolete, unmarketable or slow-moving inventory.
Note E. Accounts Receivable
The company had the following accounts receivable as of September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
(In thousands)
Accounts receivable$223,362 $219,197 
Expected credit losses(7,955)(6,632)
Accounts receivable, net of expected credit losses$215,407 $212,565 
The expected credit losses developed as follows in the periods indicated:
Fiscal Year 2020Fiscal Year 2019
(In thousands)
Allowance for credit losses as of January 1,$(6,632)$(5,081)
Credit loss expense(3,725)(1,530)
Credit loss income and utilization2,295 968 
Foreign currency translation effects106 295 
Allowance for credit losses as of September 30,$(7,955)$(5,348)




Note F. Debt and Other Obligations
The company had the following debt arrangements in place as of September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
(In thousands)
Current
Term loan$8,254 $8,057 
Deferred debt issuance costs - term loan(1)
(1,441)(1,409)
Other short-term debt and obligations116,670 29,762 
Current portion of long term debt and other financial liabilities123,483 36,410 
Non-current
Term loan643,883 634,994 
Deferred debt issuance costs - term loan(1)
(3,856)(4,733)
Long-term debt, net640,027 630,261 
Total $763,511 $666,671 

(1) According to ASU 2015-03, adopted on January 1, 2016, the Company presents debt issuance costs related to a recognized liability as a direct deduction from the carrying amount of that liability.
(a) Term Loan
On July 25, 2014, Orion entered into a refinancing of its indebtedness. The initial term loan credit facility in U.S. Dollars of $895.0 million was allocated to a term loan facility denominated in U.S. Dollars of $358.0 million and a term loan facility denominated in Euros of €399.0 million with both having an original maturity date of July 25, 2021 (the “Term Loans”). Initial interest was calculated based on three-month EURIBOR (for the Euro denominated loan), or three-month USD-LIBOR (for the USD denominated loan) plus a 3.75% - 4.00% margin depending on the Company’s net leverage ratio. For both EURIBOR and USD-LIBOR a floor of 1.0% applied. At least 1% of the principal amount is required to be repaid per annum; Orion may make additional voluntary repayments. In the years 2015 to 2017 Orion executed several voluntary repayments totaling €56.0 million and $58.0 million.
After several amendments to the Credit Agreement, dated as of July 25, 2014, among the Company, Orion Engineered Carbons Holdings GmbH, Orion Engineered Carbons Bondco GmbH, Orion Engineered Carbons GmbH, OEC Finance US LLC, the revolving borrowers named therein, the guarantors named on the signature page thereto, the lenders named therein, and Goldman Sachs Bank USA as administrative agent, as amended (the Credit Agreement”), Orion repriced the Term Loans during the years 2016 to 2018, achieving a significant reduction of both interest margins to currently 2.00% for the U.S. Dollar term loan and 2.25% for the Euro term loan. In addition, the interest margin is no longer linked to Orion's net leverage ratio and the EURIBOR and USD-LIBOR floors were reduced to 0.00%. Moreover the durations of both term loans were extended by another three years to July 25, 2024. Other provisions of the Credit Agreement relating to the Term Loans remained unchanged.
Transaction costs incurred directly in connection with the incurrence of the Euro and U.S. Dollar denominated term loans, thereby reducing their carrying amount, are amortized as finance costs over the term of the loans. Transaction costs incurred in connection with the modifications of the term loan in the years 2016 to 2018 were directly expensed as incurred as the modified terms were not substantially different. In connection with the repricing described above further transaction costs of $0.7 million in 2018 and $3.5 million equivalent in 2017 and $2.1 million equivalent in 2016 were incurred and directly expensed. For the three and nine months ended September 30, 2020, an amount of $0.4 million and $1.1 million equivalent, respectively, related to capitalized transaction costs was amortized and recognized as finance costs in this regard (prior year: $0.4 million and $1.1 million equivalent, respectively).
On May 11, 2018, Orion entered into a $235.0 million cross currency swap to synthetically convert its U.S. Dollar liabilities into Euros to mitigate foreign currency risk. This swap transaction impacted both principal and interest payments associated with debt service and resulted in annual interest savings of approximately $4.7 million. The swap became effective on May 15, 2018 and will expire on July 25, 2024, in line with maturity of the term loan.
A portion of the U.S. Dollar-denominated term loan was designated as a hedge of the net investment in a foreign operation to reduce the Company's foreign currency exposure. Since January 1, 2015 the Company had designated $180.0 million of the total U.S. Dollar-denominated term loan held by a Germany based subsidiary as the hedging instrument to hedge the change in net assets of a US subsidiary, which is held by a Germany based subsidiary, to manage foreign currency risk. Due to the new hedging approach utilizing cross currency swap as described above, hedge accounting for the net investment hedge was discontinued in May, 2018. An unrealized loss of $2.2 million remains within other comprehensive income until it is recycled through profit and loss upon divestment of the hedged item.
The carrying value of the Term Loans as of September 30, 2020 includes their nominal amounts plus accrued unpaid interest less deferred debt issuance costs of $5.3 million (December 31, 2019: $6.1 million).
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(b) Revolving credit facility
To fund operating activities and generally safeguard the Company’s liquidity, the Company has entered into a revolving credit facility (“RCF”).
As part of the July 25, 2014 refinancing the then-existing revolving facility was replaced by a €115.0 million multicurrency RCF with an original maturity date July 25, 2019. Interest is calculated based on EURIBOR (for EUR drawings), and USD-LIBOR (for USD drawings) plus 2.5% - 3.0% margin (depending on leverage ratio). Transaction costs of $3.3 million originally incurred in connection with the RCF were recorded as deferred expenses and amortized as finance costs on a straight-line basis over the term of the facility (until July 25, 2019).
An amendment to the Credit Agreement entered into on May 5, 2017 (i) reduced the commitment fee paid on the unused commitments from 40% of the Applicable Rate (as defined in the Credit Agreement) to 35% of the Applicable Rate, (ii) extended the maturity date for the RCF to April 25, 2021 and (iii) increased the aggregate amount of revolving credit commitments to €175.0 million. All other terms of the Credit Agreement remained unchanged.
Transaction costs in conjunction with the RCF of $2.3 million related to the 2017 amendment to the Credit Agreement are recorded as deferred expenses and amortized as finance costs on a straight-line basis over the term of the facility (until April 25, 2021).
On April 2, 2019, the Company entered into the eighth amendment (the “Eighth Amendment”) to the Credit Agreement, among the Company and certain of its subsidiaries, as Borrowers or Guarantors, the Lenders from time to time party thereto and Goldman Sachs Bank US, as administrative agent for the Lenders. The Eighth Amendment related to the RCF provided by the Credit Agreement and became effective on April 10, 2019.
The Eighth Amendment:
(i) extended the maturity date for the RCF by three years to April 25, 2024,
(ii) increased the aggregate amount of revolving credit commitments in Euro by €75.0 million to €250.0 million, and
(iii) reduced revolving credit interest expense by way of a revised pricing grid with lower Applicable Rates (credit spreads). As of September 30, 2020, the Company’s net leverage ratio was 3.4x, which corresponds to an Applicable Margin of 2.70%.
All other terms of the Credit Agreement relating to the RCF remained substantially unchanged, including the commitment fee, which remains at 35% of applicable margin. As of September 30, 2020, no RCF borrowings, as defined in the Credit Agreement, had been drawn, while $74.6 million in borrowings under ancillary facilities reduced the overall amount available under the RCF. For further details see Note F. (c) Local bank loans and other short-term borrowings.
During the three and nine months ended September 30, 2020, transaction costs of $0.2 million and $0.5 million, respectively, were amortized (prior year: $0.1 million and $0.5 million, respectively). Unamortized transaction costs that were incurred in conjunction with the RCF in July 2014, the amendment on May 30, 2017 and the amendment on April 2, 2019, amount to $3.0 million as of September 30, 2020. Unamortized transaction costs as of December 31, 2019 amounted to $3.4 million and were incurred in conjunction with the RCF in July 2014 and the amendment on May 30, 2017.
(c) Local bank loans and other short-term borrowings
As of September 30, 2020, the Company had fully drawn its uncommitted local credit lines in Korea of $40.6 million and Brazil amounting to $1.4 million. Neither facility had any borrowings as of December 31, 2019.
The Company had also established ancillary credit facilities by converting the commitments of select lenders under the €250 million RCF into bilateral credit agreements (usually overdraft facilities). Borrowings under ancillary lines reduce availability under the RCF but do not count toward debt drawn under the RCF for the purposes of determining whether the financial covenant under the Credit Agreement must be tested.
As of September 30, 2020, the ancillary facilities had $74.6 million (as of December 31, 2019: $28.6 million) outstanding. The general terms of these ancillary credit facilities are linked to the terms in the RCF.
During the second quarter 2020 the Company established two additional ancillary facilities in an aggregate amount of €40 million (bringing the number of RCF banks with whom ancillary facilities have been established to six out of ten banks and total ancillary borrowings to €170 million). As of September 30, 2020, the Company had converted 68% of its RCF into ancillary capacity, resulting in an ability to borrow the full amount of commitments under the RCF at any net leverage level. Using exchange rates applicable for the quarter ended September 30, 2020, the €250 million RCF amounted to approximately $293 million.

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(d) Covenant Compliance

The Credit Agreement maturing April 25, 2024, contains certain non-financial covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to (i) incur additional debt, (ii) pay dividends, repurchase shares or make certain other restricted payments or investments, (iii) incur liens, (iv) sell assets, (v) to pay dividends or to make other payments to the Company, (vi) enter into affiliate transactions, (vii) engage in sale and leaseback transactions, and (viii) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to significant exceptions and qualifications.

In addition, there is one financial covenant under the Credit Agreement, the First Lien Leverage Ratio (“FLLR”), defined as Consolidated First Lien Debt divided by Consolidated Adjusted EBITDA for the trailing twelve months (“TTM”). The FLLR is not allowed to exceed 5.5x TTM EBITDA and is tested each quarter RCF utilization exceeds 35%, as defined in the Credit Agreement (the “Covenant Trigger”). Notably, not all debt counts toward RCF utilization for purposes of calculating the Covenant Trigger, namely, term debt, debt drawn under ancillary credit facility lines and debt drawn under any uncommitted local credit lines are excluded. FLLR, Consolidated First Lien Debt and Consolidated Adjusted EBITDA have the meanings given to them in the Credit Agreement.

Note G. Financial Instruments and Fair Value Measurement
The Company measures financial instruments, such as derivatives, at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the following fair value hierarchy based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 — Unadjusted quoted market prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 — Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices such as quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves), and market-corroborated inputs.
Level 3 — Unobservable inputs for the asset or liability.
For financial assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period.
The following table shows the fair value measurement at September 30, 2020 and December 31, 2019. All measurements are based on observable inputs such as interest rates and are classified as Level 2 within the fair value hierarchy:
Fair Value HierarchySeptember 30, 2020December 31, 2019
(In thousands)
Receivables from hedges / derivatives$2 $8,436 
Prepaid expenses and other current assets Level 2 8,434 
Other financial assets (non-current)Level 22 1 
Liabilities from derivatives$16,911 $9,425 
Other current liabilitiesLevel 224 109 
Other liabilities (non-current)Level 216,887 9,316 
Term loanLevel 2$652,138 $643,051 
Local bank loansLevel 2$116,670 $29,762 

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Note H. Employee Benefit Plans
Provisions for pensions are established to cover benefit plans for retirement, disability and surviving dependents’ pensions. The benefit obligations vary depending on the legal, tax and economic circumstances in the various countries in which the Company operates. Generally, the level of benefit depends on the length of service and the remuneration.
Net periodic defined benefit pension benefit costs include the following:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Service cost$287 $301 $856 $1,030 
Interest cost298 419 875 1,276 
Amortization of actuarial loss2,272  7,325  
Net periodic pension cost$2,857 $