F-1/A 1 d733085df1a.htm AMENDMENT NO. 2 TO FORM F-1 AMENDMENT NO. 2 TO FORM F-1
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As filed with the Securities and Exchange Commission on July 14, 2014

Registration No. 333-196593

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

ORION ENGINEERED CARBONS S.À R.L.

(to be converted into Orion Engineered Carbons S.A.)

(Exact Name of Registrant as Specified in Its Charter)

 

Grand Duchy of Luxembourg   2890   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification Number)

15 rue Edward Steichen

L-2540 Luxembourg, Grand Duchy of Luxembourg

+352 270 48 06 0

No. B 160558

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Corporation Service Company

1180 Avenue of the Americas

New York, NY 10036

(800) 927-9800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David B. Harms

Robert W. Downes

Sullivan & Cromwell LLP

125 Broad Street

New York, NY 10004

(212) 558-4000

 

Marc D. Jaffe

Wesley C. Holmes

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1281

Approximate date of commencement of proposed sale to the public: As promptly as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed
Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common Stock, no par value

  $496,800,000   $63,987.84

 

 

(1)  Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2)  Includes common shares that the underwriters have the option to purchase.
(3)  Of this amount $38,640 has been previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. The Selling Shareholder identified in this preliminary prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Dated July 14, 2014

ORION ENGINEERED CARBONS S.A.

 

LOGO

18,000,000 COMMON SHARES

 

 

This is the initial public of offering of common shares of Orion Engineered Carbons S.A. (the “Company”). The common shares are being offered by Kinove Luxembourg Holdings 1 S.à r.l., referred to herein as “Kinove Holdings” or the “Selling Shareholder.” The Company will not receive any proceeds from the sale of common shares by the Selling Shareholder.

This is the initial public offering of our common shares and no public market for our common shares exists. We anticipate that the initial public offering price will be between $21 and $24 per common share.

 

We intend to apply to list the common shares on the New York Stock Exchange (the “NYSE”) under the symbol “OEC”.

Currently, the Company is named Orion Engineered Carbons S.à r.l., and is a Luxembourg limited libility company (société à responsabilité limitée). Following the date of this prospectus, but prior to the completion of this offering, the Company will change its legal form to become a Luxembourg joint stock corporation (société anonyme or S.A.) and will change its name to “Orion Engineered Carbons S.A.”

 

Investing in the common shares involves risks. See “Risk Factors” beginning on page 18.

 

 

     Price to Public      Underwriting
Discounts and
Commissions(1)
     Proceeds, before
Expenses, to
Selling
Shareholder
     Proceeds, after
Expenses, to
Selling
Shareholder
 

Per Common Share

   $                            $                            $                            $                        

Total

   $                            $                            $                            $                        

 

(1)  We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.

The Selling Shareholder has granted the underwriters the right to purchase up to an additional 2,700,000 common shares at the initial public offering price less the underwriting discount.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common shares to purchasers on     , 2014.

 

 

 

MORGAN STANLEY    GOLDMAN, SACHS & CO.
UBS INVESTMENT BANK
Barclays    J.P. Morgan
KeyBanc Capital Markets    Macquarie Capital

, 2014


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TABLE OF CONTENTS

 

     Page  

NOTE REGARDING FORWARD-LOOKING STATEMENTS

     ii   

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     v   

INDUSTRY, RANKING AND OTHER DATA

     vi   

TRADEMARKS AND TRADE NAMES

     vi   

SUMMARY

     1   

THE OFFERING

     13   

RISK FACTORS

     18   

USE OF PROCEEDS

     42   

DIVIDEND POLICY

     43   

CAPITALIZATION

     44   

DILUTION

     46   

PRO FORMA FINANCIAL INFORMATION

     47   

CURRENCIES AND EXCHANGE RATES

     56   

SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

     57   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      59   

INDUSTRY

     97   

BUSINESS

     107   

MANAGEMENT

     143   

PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER

     153   

RELATED PARTY TRANSACTIONS

     156   

DESCRIPTION OF MATERIAL INDEBTEDNESS

     159   

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION

     162   

SHARES ELIGIBLE FOR FUTURE SALE

     180   

CERTAIN TAXATION CONSIDERATIONS

     182   

UNDERWRITING

     191   

EXPENSES OF THE OFFERING

     196   

ENFORCEMENT OF CIVIL LIABILITIES

     197   

VALIDITY OF COMMON SHARES

     199   

EXPERTS

     199   

WHERE YOU CAN FIND MORE INFORMATION

     200   

INDEX TO FINANCIAL STATEMENTS

     F-1   

None of the Company, the Selling Shareholder, or the underwriters have authorized anyone to provide any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses prepared by, or on behalf of, the Company. The Company, the Selling Shareholder and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the common shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business. 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,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target” and other words of similar meaning. These forward-looking statements include, without limitation, statements about the following matters:

 

    our strategies for (i) strengthening our position in specialty carbon blacks and rubber carbon blacks, (ii) increasing our rubber carbon black margins and (iii) strengthening the competitiveness of our operations;

 

    the proposed acquisition of QECC (as defined below);

 

    the proposed Refinancing (as defined below);

 

    the outcome of the tax audit in respect of our South Korean operations and its impact on the Company;

 

    the outcome of any pending or possible litigation or regulatory proceedings, including the U.S. Environmental Protection Agency (the “EPA”) enforcement action described herein; and

 

    our expectation that the markets we serve will continue to grow.

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:

 

    negative or uncertain worldwide economic conditions;

 

    volatility and cyclicality in the industries in which we operate;

 

    operational risks inherent in chemicals manufacturing, including disruptions as a result of severe weather conditions and natural disasters;

 

    our dependence on major customers;

 

    our ability to compete in the industries in which we operate;

 

    our ability to develop new products and technologies successfully and the availability of substitutes for carbon black;

 

    our ability to implement our business strategies;

 

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    volatility in the costs and availability of raw materials and energy;

 

    our ability to realize benefits from investments, joint ventures, acquisitions or alliances;

 

    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;

 

    our exposure to political or country risks inherent in doing business in some countries;

 

    environmental, health and safety regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities;

 

    current and potentially future investigations and enforcement actions by the EPA;

 

    our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases;

 

    litigation or legal proceedings, including product liability and environmental claims;

 

    our ability to protect our intellectual property rights;

 

    our ability to generate the funds required to service our debt and finance our operations;

 

    fluctuations in foreign currency exchange and interest rates;

 

    the availability and efficiency of hedging;

 

    changes in international and local economic conditions, including with regard to the Euro and the Eurozone debt crisis, dislocations in credit and capital markets and inflation;

 

    potential impairments or write-offs of certain assets;

 

    required increases in our pension fund contributions;

 

    the adequacy of our insurance coverage;

 

    changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions;

 

    our indemnities to and from Evonik (as defined below);

 

    challenges to our decisions and assumptions in assessing and complying with our tax obligations;

 

    the absence of a previous public market for our common shares;

 

    potential conflicts of interests with our principal shareholders; and

 

    our status as a foreign private issuer.

In light of these risks, our results could differ materially from the forward-looking statements contained in this prospectus. For further information regarding factors that could affect our business and financial results and the related forward-looking statements, see “Risk Factors.”

 

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All subsequent forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. New risk factors and uncertainties emerge from time to time and 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. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information, other than as required by applicable law.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The Company (also referred to in this prospectus as the “Successor”) was incorporated on April 13, 2011. On July 29, 2011, the Company completed the acquisition from Evonik Industries AG (“Evonik”) of its carbon black business line (referred to in this prospectus as “Evonik Carbon Black” or the “Predecessor”).

In this prospectus, references to “Euro” and “€” are to the single currency adopted by participating member states of the European Union relating to Economic and Monetary Union, references to “$”, “US$” and “U.S. Dollars” are to the lawful currency of the United States of America and references to “Korean Won” are to the lawful currency of the Republic of Korea.

Non-IFRS Financial Measures

The financial statements included in this prospectus were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

In this prospectus, we present certain financial measures that are not recognized by IFRS and that may not be permitted to appear on the face of IFRS-compliant financial statements or notes thereto.

The non-IFRS financial measures used in this prospectus are Contribution Margin, Contribution Margin per Metric Ton (collectively, “Contribution Margins”), Adjusted EBITDA, Net Working Capital and Capital Expenditures. We define Contribution Margin as revenue less variable costs (raw materials, packaging, utilities and distribution costs). We define Contribution Margin per Metric Ton as Contribution Margin divided by sales volume measured in metric tons. We define Adjusted EBITDA as operating result (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to group strategy, share of profit or loss of associates and certain other items. Adjusted EBITDA is defined similarly in the indenture governing our senior secured notes due 2018 (the “Senior Secured Notes”). Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of certain items that have less bearing on our underlying business performance. We define Net Working Capital as inventories plus current trade receivables minus trade payables. We define Capital Expenditures as Cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the consolidated financial statements.

We also use Segment Adjusted EBITDA Margin, which we define as Adjusted EBITDA for the relevant segment divided by the revenue for that segment. Adjusted EBITDA for our segments and Segment Adjusted EBITDA Margin are financial measures permitted under IFRS.

We use Adjusted EBITDA, Contribution Margins and Net Working Capital, as well as Adjusted EBITDA by segment and Segment Adjusted EBITDA Margin, as internal measures of performance to benchmark and compare performance among our own operations. We use these measures, together with other measures of performance under IFRS, to compare the relative performance of operations in planning, budgeting and reviewing the performance of our business. We believe these measures are useful measures of financial performance in addition to consolidated profit (or loss) for the period, operating result (EBIT) and other profitability measures under IFRS because they facilitate operating performance comparisons from period to period and company to company and, with respect to Contribution Margin, eliminate volatility in feedstock prices. By eliminating potential differences in results of operations between periods or companies caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures and taxation positions or regimes, we believe that Adjusted EBITDA can provide a useful additional basis for comparing the current performance of the underlying operations being evaluated. For these reasons, we believe EBITDA-based measures are often used by the investment community as a means of comparison of companies in our industry. By deducting variable costs (raw materials, packaging, utilities and distribution costs) from revenue, we believe that Contribution Margins can provide a useful basis for comparing the current

 

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performance of the underlying operations being evaluated by indicating the portion of revenue that is not consumed by variable costs (raw materials packaging, utilities and distribution costs) and therefore contributes to the coverage of all costs and profits.

Different companies and analysts may calculate measures based on EBITDA, contribution margins and working capital differently, so making comparisons among companies on this basis should be done carefully. Adjusted EBITDA, Contribution Margins and Net Working Capital are not measures of performance under IFRS and should not be considered in isolation or construed as substitutes for revenue, consolidated profit (loss) for the period, operating result (EBIT), gross profit and other IFRS measures as an indicator of our operations in accordance with IFRS.

Reconciliation of Non-IFRS Financial Measures

The non-IFRS financial measures contained in this prospectus are unaudited (except for Adjusted EBITDA) and have not been prepared in accordance with IFRS 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-IFRS financial measures to the most directly comparable IFRS measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-IFRS Financial Measures.”

INDUSTRY, RANKING AND OTHER DATA

Information included in this prospectus relating to industries, industry size, share of industry sales, industry position, industry capacities, industry demand, growth rates, penetration rates, average prices and other industry data pertaining to our business consists of estimates based on data reports compiled by professional third-party organizations and analysts, on data from external sources, on our knowledge of our sales and industries in which we operate and on our own calculations based on such information. In particular, certain information is based on industry reports issued by Notch Consulting Group and trade journal articles. Share of industry sales estimates are derived from information provided in reports published by Notch Consulting Group. In many cases, there is no readily available external information (whether from trade associations, government bodies or other organizations) to validate industry-related analyses and estimates, thus requiring us to rely on internally developed estimates. While we have compiled, extracted and reproduced industry data from external sources, including third-party, industry or general publications, we have not independently verified the data and cannot assure you of its accuracy or completeness. Similarly, while we believe our internal estimates to be reasonable, they have not been verified by any independent sources, and we cannot assure you as to their accuracy. Forecasts and other forward-looking information with respect to industry and ranking are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.  See “Note Regarding Forward-Looking Statements.”

TRADEMARKS AND TRADE NAMES

We own or have rights to certain trademarks and trade names that we use in conjunction with the operations of our business. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the “®” or “™” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. Capitalized terms used but not defined in this summary are defined in this prospectus. Investors should consider this prospectus in its entirety, including the information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and the financial statements included elsewhere herein, prior to making an investment in our common shares. The basis of certain information in this prospectus regarding industry share and our position relative to our competitors is described under “Industry, Ranking and Other Data.”

In this prospectus, unless the context indicates otherwise, the term “Company” refers (i) as of any time prior to the change of legal form to a Luxembourg joint stock corporation (société anonyme or S.A) as described below, to Orion Engineered Carbons S.à r.l. and (ii) as of any time after the change of legal form to Orion Engineered Carbons S.A., and the terms “Orion,” “we,” “our,” “us” and “the Group” refer to the Company and its consolidated subsidiaries. Our fiscal year is a calendar year.

Overview

We are a leading global producer of carbon black. Carbon black is a form of carbon used to improve certain properties of materials into which it is added. It is used as a pigment and as a performance additive in coatings, polymers, printing and special applications (specialty carbon black) and in the reinforcement of rubber in tires and mechanical rubber goods (rubber carbon black). Historically, our business operated as a business line of Evonik and was acquired from Evonik on July 29, 2011 (the “Acquisition”) by investment funds managed by affiliates of Rhône Capital L.L.C. (the “Rhône Investors”) and investment funds managed directly or indirectly by Triton Managers III Limited and TFF III Limited (the “Triton Investors”). Prior to the Acquisition, the Company had no operations.

In 2013 and the three months ended March 31, 2014, we generated revenue of €1,339.6 million and €330.5 million on sales volume of 968.3 kilo metric tons (“kmt”) and 249.3 kmt, respectively, Adjusted EBITDA of €191.1 million and €50.0 million, respectively, and a loss for the periods of €19.0 million and €0.4 million, respectively. We operate a diversified carbon black business with more than 280 specialty carbon black grades and approximately 80 rubber carbon black grades. Our product portfolio is one of the broadest in the industry and is divided into the following segments:

 

    Specialty Carbon Black. We are one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 23% in 2013 measured by volume in kmt. We believe that our share of global industry sales measured by revenue is higher, since our product portfolio is weighted towards higher priced premium grades. We manufacture specialty carbon black at multiple sites for a broad range of specialized applications. Specialty carbon black imparts specific characteristics, such as high-quality pigmentation, ultraviolet (“UV”) light protection, viscosity control and electrical conductivity. In 2013 and the three months ended March 31, 2014, Adjusted EBITDA for our Specialty Carbon Black segment was €98.0 million and €25.7 million, respectively, and the Segment Adjusted EBITDA Margin was 25.1% and 25.2%, respectively. This segment accounted for 29.1% and 30.9% of our total revenue, 51.3% and 51.4% of our total Adjusted EBITDA and 19.7% and 20.4% of our sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

 

   

Rubber Carbon Black. We are one of the largest global producers of rubber carbon black. We have a global supply network and an estimated share of global industry sales of approximately 7% in 2013 measured by volume in kmt, with industry sales shares by volume equal to or exceeding 17% in each of our major operating regions. In 2013 and the three months ended March 31, 2014, Adjusted EBITDA

 

 

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for our Rubber Carbon Black segment was €93.2 million and €24.3 million, respectively, and Segment Adjusted EBITDA Margin was 9.8% and 10.6%, respectively. This segment accounted for 70.9% and 69.1% of our total revenue, 48.7% and 48.6% of our total Adjusted EBITDA and 80.3% and 79.6% of our total sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

We have over 75 years of experience and enjoy a long-standing reputation for technical capability in the carbon black industry and its served applications. Our experience has enabled us to develop our core competencies and proprietary technologies across the carbon black value chain. We provide consistent product quality, reliability, technical expertise and innovation, built upon continually improving processes and know-how through our advanced innovation group (the “Innovation Group”), which includes our research and development (“R&D”), applications technology and process development teams, and through supply chain execution.

Our Innovation Group works closely with our customers to develop innovative products and applications, while strengthening customer relationships and improving communication. Long-term R&D alliances and sophisticated technical interfaces with customers allow us to develop solutions to meet specific customer requirements. As a result, we have been able to generate attractive margins for our specialized carbon black products. Additionally, our Innovation Group works closely with our operations group to improve process economics with new process equipment designs, operating techniques and raw material selection.

We operate a modern global supply chain network comprising 13 wholly-owned production plants and one jointly-owned production plant. We are currently seeking to acquire the Chinese carbon black manufacturer Qingdao Evonik Chemicals Co. Ltd. (“QECC”), in which Evonik has a majority interest. The acquisition is subject to negotiations with Evonik and between Evonik and its joint venture partner, as well as Chinese government review, and we are unable to predict whether or when the acquisition will occur or whether completion of the acquisition is probable. We believe that this acquisition, if completed, would improve our ability to serve the Chinese market over and above our current use of our global network for exports to China. See “Risk Factors—Risks Related to Our Business—We may not be able to compete successfully in the industries and markets in which we operate.”

The charts below illustrate our revenues (including freight charges) by geographic location of customers for 2013, and our Adjusted EBITDA by segment for the two most recent reported periods, 2013 and the three months ended March 31, 2014:

 

LOGO

  LOGO

 

 

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Our Strengths

We believe that the factors set forth below provide us with a competitive advantage.

Leading Industry Positions in the Growing Specialty and Rubber Carbon Black Markets

We are one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 23% in 2013, measured by sales volume in kmt. We are the third largest producer of rubber carbon black in the world and we have a global rubber carbon black distribution network. We had an estimated share of global industry sales in rubber carbon black of approximately 7% in 2013 measured by volume in kmt. Rubber carbon black sales are largely regional, since transportation costs are high relative to sales prices. We believe that in most of our key operating regions, our estimated rubber carbon black share of industry sales is higher than our global share based on volumes in kmt: approximately 17% in the European Union, 18% in North America, 35% in South Korea, 96% in South Africa and 19% in Brazil in 2013.

We expect the markets we serve to continue growing. Our Specialty Carbon Black segment provides the polymers, printing, coatings and special applications markets with highly customized, application-driven products that impart specific product characteristics, such as high-quality durable pigmentation, UV protection, viscosity control and conductivity. We expect these markets to continue growing because of increasing urbanization, changing packaging requirements and higher quality consumer demands. Our Rubber Carbon Black segment serves the tires and mechanical rubber goods markets and should continue to benefit from increasing mobility trends around the globe, which tend to increase demand for original-equipment tires, and from the larger, more stable market for replacement-tires.

Leading Technology and Product Innovation Platform that Drives Higher Margin, Specialty Niche Product Offering

We have a long-standing reputation in the industry for production expertise and applications knowledge. Our know-how allows us to develop high-quality products tailored to meet customer requirements. We have state-of-the-art research facilities, including pilot plants, simulation technologies and sophisticated testing laboratories where we develop new products, and improve process efficiencies that help improve sales and realize cost savings. Our Innovation Group works closely with our clients to develop innovative products and applications. We believe that this collaboration provides us with an understanding of customer needs and improved industry knowledge, reducing time to market for new products. In 2013, we reorganized and consolidated our Innovation Group in one location in Germany (with branch technical centers in the United States, South Korea and China) and placed it under the leadership of a newly hired Senior Vice President—Innovation. This reorganization strengthens cooperation among our R&D, applications technology and process development teams to facilitate innovation and bring new products to market faster.

Carbon black product properties are influenced by the choice of production technology and operating parameters. We believe that we have the largest array of production and treatment technologies and therefore one of the broadest product offerings in the industry, including products for specialized niche applications and end-uses in higher value sectors. At present, we believe that we are the only global carbon black producer with the ability to produce specialty carbon black using the current four production processes: furnace, gas, lamp and thermal black.

Global, Well Invested and Flexible Production Network

In 2013, we generated approximately 34% of our revenue by sales in Europe, 28% in North America, 23% in Asia, 7% in Brazil, 5% in Africa and the remainder elsewhere. Our production footprint supports this sales pattern as we operate a modern global supply chain network of four plants in the United States, two in South Korea, two in Germany (one wholly-owned and one jointly-owned) and one each in Brazil, Poland, Italy,

 

 

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France, Sweden and South Africa. This global manufacturing presence and sales reach provides us with a competitive platform to serve our customers. Our broad geographical presence supports global purchasing and expands our access to different feedstock sources around the world. Our broad presence allows us to compete regionally on a cost-effective basis because of the relatively high transportation costs of rubber carbon black, which make most inter-regional shipments less competitive. Our global supply network allows us to quickly establish credentials with customers in new locations and those seeking consistent supply across regions. For example, a customer that uses our products in Asia recently opened new facilities in the United States and purchased our product for the new facilities as well. Similar facilities built by Asian producers in Europe and by Japanese producers in China have also sought our materials. In specialty carbon blacks, we have been successful in translating grades for global customers produced in one region to another production site due to the strength of our reputation, our technical support and our consistent global quality.

The geographic diversity of our operations lowers our dependency on any particular region. Our specialty carbon black production sites are located in strategic parts of Europe, North America and Asia and serve customers globally, with plants, technical application staff and labs in close proximity to key customer sites. The scale and breadth of our product offering positions us to take advantage of favorable trends in both developed and emerging countries. We believe we are well placed to serve the key emerging growth markets through our manufacturing presence in South America (Brazil), Sub-Saharan Africa (South Africa), Asia (South Korea) and Eastern Europe (Poland). The acquisition of QECC, if completed, would improve our presence in China. In addition, following the Acquisition, we established a presence in Malaysia, Thailand, India and the UAE and are scheduled to open a business office in Indonesia by the end of 2014. Our diverse and flexible production and sales network also lowers our dependency on individual products, raw materials and end-uses.

We have recently invested in strategic sites to increase the capacity and flexibility of our production platform. For example, we increased our capacity by adding a new rubber carbon black production line in South Korea, which freed capacity in existing units for potential further specialty carbon black production. This line began operations in 2013. We are also making incremental capacity increases at various sites in the United States, Brazil and Southern Europe to meet demand from tire and mechanical rubber goods producers. In addition, in 2014, we commissioned a specialty carbon black after-treatment facility in Germany for higher margin products and are currently revamping a rubber carbon black line in Texas to produce specialty carbon black grades. These improvements allow us to opportunistically shift our capacity to produce higher margin products.

Since the Acquisition and until the end of 2013, we invested €165.5 million to upgrade, make more flexible and streamline our production network, to install cost-saving features such as energy recovery equipment and to provide for technological innovation in our manufacturing process.

Long-standing, Deep Relationships with Blue-chip Customer Base

We are a supplier to approximately 1,000 customers and operate in more than 90 countries, and have been a long-term supplier to many blue-chip companies. We serve approximately 700 customers in our Specialty Carbon Black segment and approximately 300 customers in our Rubber Carbon Black segment. We serve many of the largest, strategically positioned, global users of carbon black, many for over 30 years, including BASF, PolyOne and AkzoNobel in specialty carbon black products, Bridgestone, Goodyear and Michelin in tires and Cooper Standard, Hexpol and Hwaseung in mechanical rubber goods. We believe that our reputation results from our focus on high product quality, consistency, reliability and innovation and our ability to customize our products, combined with locally-based technical product and applications support and key account management. We believe that these qualities have helped us achieve a preferred supplier status with many blue-chip customers. Specialty and rubber carbon black applications require rigorous testing and approval processes, some of which can be lengthy. We believe that these processes, as well as the high degree of customization for a number of our products, help promote long-term customer relationships.

 

 

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Flexible Contracts with the Ability to Pass Through Raw Material Cost Increases

We have a proactive price and contract management strategy, which supports our efforts to preserve our margins by passing feedstock and energy cost increases through to our customers on a timely basis. In recent years, global oil prices have fluctuated significantly; for example, Brent crude oil prices increased from $76 per barrel in May 2010 to a peak of $125 per barrel in March 2012, declining to $108 per barrel by the end of April 2014. A significant portion of our contracts have formula-driven price adjustment mechanisms for changes in raw material and energy costs (approximately 72% in the Rubber Carbon Black segment and approximately 42% in the Specialty Carbon Black segment, based on sales volumes in kmt in 2013). Most of our indexed contracts allow for monthly price adjustments, while a relatively small portion allow for quarterly price adjustments. Terms of our non-indexed contracts are usually short and we review sales prices under these contracts regularly to reflect raw material and energy price fluctuations as well as overall market conditions. We believe that our indexed and short-term contracts position us well to pass changes in raw material and energy costs through to our customers in a reasonably timely fashion. We also believe that this practice has enabled us to maintain our Segment Adjusted EBITDA Margins since the Acquisition, despite significant fluctuations in oil and other raw material prices, and largely obviates our need to engage in financial transactions to hedge against oil price fluctuations. For additional information about our price and contract management strategy, see “Business—Marketing, Sales and Customer Contracts—Flexible Contracts” and “Management’s Discussion of Financial Condition and Results of Operations—Key Factors Affecting our Results of Operations—Raw Materials and Energy Costs.

Strong Operating Earnings Growth and Cash Generation Since the Acquisition

Since the completion of the Acquisition, we improved our profitability by achieving higher operating margins for both the Specialty Carbon Black and Rubber Carbon Black segments, implementing operating efficiencies, enhancing raw material sourcing, improving our production facilities and improving pricing above those price changes resulting from passing through changes in raw materials and energy costs for rubber carbon black. These measures helped increase our Contribution Margin per Metric Ton from €351.7 in the post-Acquisition period ending December 31, 2011 to €409.4 in the full year 2013 (our Gross Profit per Metric Ton was €215.2 in the post-Acquisition period ending December 31, 2011 and €277.6 in the full year 2013). We have also managed to achieve a leaner cost structure on a stand-alone basis, replacing the full overhead structure provided by Evonik while also reducing headcount overall.

We also improved our cash generation by reducing our Net Working Capital requirements by improving inventory and supply chain management, feedstock purchasing, production scheduling and receivables and payables management. Since the Acquisition, our management reduced the average number of days for which we need to maintain Net Working Capital from over 100 days to less than 70 days.

Since the Acquisition, we have been able to reduce our outstanding debt by repaying portions of our Senior Secured Notes, with the outstanding principal amount of those notes declining by €78 million from the end of 2011 to the end of 2013. We were able to reduce our indebtedness during this period despite the significant investments we have made in improving our manufacturing infrastructure since the Acquisition. As a result, coupled with growing Adjusted EBITDA, we have been able to reduce our Net Leverage Ratio (Net Debt (our Senior Secured Notes and Shareholder Loan, excluding capitalized interest, net of cash) at period end as a multiple of Adjusted EBITDA for the trailing 12 months) from 4.77x at the end of 2011 to 3.94x at the end of 2013. We expect to achieve a substantial further reduction in leverage upon the completion of this offering and the Refinancing described below.

Highly Experienced, Entrepreneurial Management Team with Proven Track Record

Our senior management has an average of more than 20 years of business and industry experience. Our chief executive officer, Jack Clem, joined an affiliated joint venture of the business in 2001 and has over 35 years

 

 

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of experience in the performance materials and chemicals industry, with a significant portion of his career in carbon black. Our chief financial officer, Charles Herlinger, has served as chief financial officer for both public and private companies. Our senior managers are veterans of global materials businesses and have a track record of achieving profitable growth and managing through economic cycles. In addition to our experienced management team, the company leadership was further enhanced after the Acquisition by the addition of senior key members. Of our eight Executive Officers who currently report to our chief executive officer, five joined the company after the Acquisition.

Our new management team helped us reach stand-alone status following the Acquisition faster than targeted by our shareholders and achieved substantial improvements in operational processes, such as headcount reduction, talent upgrading, operating margins, customer and product mix management, working capital management, financial transparency and supply chain effectiveness.

Our Risks and Challenges

Our business is subject to numerous risks and challenges that we describe in “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks and challenges before investing in our common shares. Our key risks and challenges include, but are not limited to, the following:

 

    negative or uncertain worldwide and regional economic conditions, which may adversely affect demand for our products in our key markets;

 

    strong competition and fast development of new products that could be used as a substitute for carbon black and reduce demand for our products, or similar developments that could reduce demand for our customers’ products or make us unable to implement our business strategies;

 

    volatility in the industry and in the costs and availability of raw materials and energy, which could adversely affect our profitability and cash flows, especially if we are unable to adjust our pricing quickly enough to pass rising costs to our customers;

 

    high customer concentration and dependence on our major customers;

 

    risk of actual or alleged violations of environmental regulations, investigations by environmental protection agencies in Europe, the United States and elsewhere (including the pending enforcement action relating to our U.S. operations by the EPA) and liabilities that we could incur under such laws and regulations as a result of litigation and regulatory proceedings (including fines, capital expenditures and remediation costs that could arise from the pending EPA investigation). For more information, See “Business—Environmental, Health and Safety Matters—Environmental—Environmental Proceedings”; and

 

    safety and health risks resulting from our operations as a company in the chemical sector.

Our Strategy

We intend to use our core competencies in carbon black production and end-use application knowledge to continue strengthening our market shares, our long-term profitability and our position as a preferred supplier in major markets around the world, as follows:

Continue Strengthening Our Leadership Position in Specialty Carbon Black

We believe that our share of global industry sales for the Specialty Carbon Black segment demonstrate that we are a global leader in these carbon black products. We intend to continue strengthening our position as a

 

 

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premium producer of these products by increasing our presence in the markets we serve. We expect this growth to be driven by new premium performance specialties to address increasing customer requirements and by expanding both our technical sales coverage and production platforms to better supply emerging markets where historically we have been under-represented. Since the Acquisition, we have increased personnel in our specialty carbon black sales force by approximately 15%. We will continue upgrading and expanding our technical sales support capabilities by recruiting and retaining regional industry experts in specialty carbon black applications and key account management. We also plan to implement initiatives to match local production with local demand by expanding our specialty carbon black capacity in regions such as Asia and South America. We will continue our shift to higher margin products as opportunities arise and through ongoing investment in facilities, technology and R&D.

We have focused our innovation efforts on certain “Lighthouse Projects,” which we define as those critical initiatives targeted at delivering premium products for high value applications such as conductive materials, advanced insulation materials, battery applications and the next generation of coatings. Our investments in after-treatment facilities in Germany came on line in early 2014 and are expected to help support continued growth in these materials. A new generation reactor is planned to commence operation in 2015 in Germany, adding another advanced technology to our production platform. This unit will be directed to specialized materials for proprietary applications. The trend of shifting rubber carbon black production to specialty carbon black capacity will continue with the next line conversion scheduled for late 2014 in the United States. Planning is underway for similar conversions in Asia and South America, following recent conversions at Malmö (Sweden) and Belpre (Ohio).

Continue Increasing Our Rubber Carbon Black Margins While Growing Globally with Our Customers

We expect to grow our business by expanding our production to meet the demands of our customers in our regional markets. These markets are expanding with the growing mobility trends around the world and we are well situated to supply these regions with a strong production footprint.

We have expanded capacity in South Korea and will be using the additional volumes of this unit to address the markets in South Korea and the larger Asia-Pacific region, which should help expand our market share in that region. We are also seeking to acquire QECC, which would give us better access to the Chinese market for rubber carbon black, a market we believe offers significant opportunities for profitable growth and which we currently serve only through export channels. We are also actively seeking other acquisition opportunities and joint venture partners in China to further expand our rubber carbon black production base (as well as provide a future platform for specialty carbon black production). Planning is underway to increase capacities in our facility in Paulinia (Brazil) to meet the demands of major tire and mechanical rubber companies that are expanding in South America. Our plant in Jaslo (Poland) is well situated to serve the growing Eastern European market. As this region grows, we will be prepared to add capacity to this facility. We have recently taken steps to eliminate bottlenecks in our U.S. platform in order to meet demand as tire companies commission new manufacturing facilities in the United States.

We also seek to improve the profitability of our rubber carbon black business by developing applications in higher margin markets for mechanical rubber goods and specialty tire requirements. For example, we recently increased capacity in South Korea and Southern Europe for mechanical rubber goods grades that offer improved performance in compounds for automotive sealing systems. We are also supporting our customers’ efforts to meet labeling requirements for tires in Europe and those to come in the United States, South Korea and other countries, by ensuring consistent quality within tightening specifications from our global network. A major “Lighthouse Project” is also underway to commercialize new grades of rubber carbon black that offer a substantial increase in tread life while maintaining other properties such as rolling resistance and traction. With the increased visibility provided by our recently upgraded global management information system, we are better positioned to continue improving our customer and product mix by shifting to more profitable

 

 

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customer/location/grade combinations in our markets around the world. Our global management information system also supports enhanced efforts in price discipline and management of cost increase pass-throughs where necessary and should help us gain a more strategic balance in our relationships with our global key accounts and larger regional accounts.

Strengthening the Competitiveness of Our Operations

We have improved the operating efficiency of our business since the Acquisition. Our goal is best-in-class operating economics in our production platform and a streamlined business structure for Orion as a whole. We believe that our current operational efficiency, flexibility and reliability give us a competitive foundation for future value-creation. We intend to continue our production and energy efficiency initiatives by further exploiting alternative feedstock sources, while optimizing our feedstock and energy purchasing and pricing methods. We will continue upgrading our production lines with the higher efficiency “Orion Design” reactors, which are expected to help increase yield and improve reliability. We recently commissioned “Orion Design” reactors in Ivanhoe (Louisiana) and Orange (Texas) and plan to install such reactors in several other facilities in the United States as well as in Asia and South Africa. We have seen strong increases in global energy efficiency since we installed upgraded heat-recovery equipment in a number of our plants and expect to continue this upgrade at other plants as opportunities for efficiency improvements arise.

Since the Acquisition we have adopted a series of best-practices in our production network. These new standards and approaches have helped us increase our operating efficiencies without significant capital expenditure and will add more value as we continue to develop them. We will continue to focus managerial resources on bringing all of our facilities in line with these higher standards while systematizing our improved practices to make the gains sustainable.

We have used similar best-practice standards for our High Performance Organization (“HPO”) initiative. HPO is targeted at redesigning work processes and increasing employee involvement to improve productivity. We began operating as an independent company with well over 1,500 employees at the time of the Acquisition. Despite having to hire more than 60 administrative personnel to provide a range of services previously provided by Evonik, as a result of certain headcount reduction initiatives we reduced our personnel to 1,405 at the end of 2013. The closure of our Sines (Portugal) plant in December 2013 will lead to a further headcount reduction of approximately 35 full-time employees (FTEs) in 2014. Our headcount reduction efforts included a continuing talent upgrade program that has resulted in the reduction of well over 250 personnel, replaced with approximately 100 higher-qualified personnel. A key success in this area has been the revamping of our senior management team, replacing a majority of the positions with globally experienced senior managers. In addition, we intend to continue implementing a more efficient corporate and management structure at less senior levels, coupled with compensation arrangements that strengthen incentives for our employees with individual performance-linked bonuses based on value creation and cash generation.

We intend to further improve our global management information system to provide better transparency and improve organizational efficiencies, having completed in 2013 the rollout of our globally standardized SAP platform. Such transparency permits better pricing and portfolio mix decisions, clear cost accountability within the organization and improved performance through continued pursuit of best practices in distribution methods and supply chain management, including global inventory management, integrated sales and production planning, and process efficiency upgrades. Our operations key performance indicator system provides management with a more timely and consistent view of the critical operating parameters of our platform around the globe. A specialized team of engineers is ready to act quickly on anomalies identified by the newly commissioned system.

 

 

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Corporate History and Information

As of the date of this prospectus, we are a Luxembourg limited liability company (société à responsabilité limitée), with a registered office at 15, Rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg. We were incorporated on April 13, 2011 under the name Kinove Luxembourg Holdings 2 S.à r.l. and are registered with the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés) under number B 160558. On May 8, 2014, we changed our name from Kinove Luxembourg Holdings 2 S.à r.l. to Orion Engineered Carbons S.à r.l. Following the date of this prospectus, but prior to the completion of this offering, we will change our legal form to become a Luxembourg joint stock corporation (société anonyme or S.A.) and our name will change to “Orion Engineered Carbons S.A.” Our registered office is located at 15 rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg, and our telephone number is +352 270 48 06 0. Our website address is www.orioncarbons.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus. Our agent for service of process in the United States is Corporation Service Company, located at 1180 Avenue of the Americas, New York, NY 10036, telephone number (800) 927-9800.

Historically, our business operated as a business line of Evonik. Effective July 29, 2011, the Rhône Investors and the Triton Investors indirectly acquired from Evonik the entities operating its carbon black business. Currently, we operate on a fully stand-alone basis.

We operate our businesses through a number of direct and indirect subsidiaries. The following organizational chart presents the percentage ownership and jurisdictions of organization of our significant subsidiaries:

 

LOGO

 

 

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Principal Shareholders and Selling Shareholder

Approximately 88.9% of our shares prior to our change in legal form are held by Kinove Holdings. Prior to this offering (but after giving effect to our change of legal form to a joint stock corporation and the issuance of new shares in connection with the Refinancing described below), approximately 89.69% of our common shares will be held by Kinove Holdings. The remainder will be held by Kinove Luxembourg Coinvestment S.C.A. (“Luxco Coinvest”), an investment vehicle that is owned by members of our management (the “Management Investors”) and Kinove Holdings, and that is managed by Kinove Holdings. All of the common shares to be sold in this offering will be sold by Kinove Holdings, which we refer to as the Selling Shareholder. After giving effect to this offering, Kinove Holdings and Luxco Coinvest will hold 57.81% and 10.31%, respectively, of our outstanding common shares.

Kinove Holdings is currently owned primarily by the Rhône Investors and the Triton Investors, to whom we refer as our “Principal Shareholders.” The remaining ownership interests in Kinove Holdings are held by Luxinva S.A. (the “ADIA Investor”), a wholly-owned subsidiary of the Abu Dhabi Investment Authority, a public institution wholly-owned by the Government of the Emirate of Abu Dhabi.

After giving effect to this offering the Rhône Investors, the Triton Investors and the ADIA Investor will own, indirectly, 27.63%, 27.63% and 6.76%, respectively, of our common shares (25.50%, 25.50% and 6.24%, respectively, assuming full exercise of the underwriters’ option to purchase additional common shares). The Management Investors (including two of our directors) will own, indirectly through Luxco Coinvest, 6.10% of our common shares. For more information about our share ownership, see “Principal Shareholders and Selling Shareholder” and “Related Party Transactions—Management Participation Program.”

We understand that in connection with this offering, the Principal Shareholders and the ADIA Investor intend to enter into a shareholders’ agreement with respect to their holdings in Kinove Holdings. Among other things, this agreement will provide that the shareholders of Kinove Holdings will vote their shares in Kinove Holdings as necessary to appoint to the Company’s Board of Directors two directors nominated by the Rhône Investors, two directors nominated by the Triton Investors and the remaining directors as nominated jointly by the Principal Shareholders. In addition, it is expected that each of the Rhône Investors and the Triton Investors will have the right to appoint non-voting observers to attend any meeting of the Company’s Board of Directors (or any committee thereof) as long as, in each case, their pro rata indirect interest in the Company’s common shares, based on shares held by Kinove Holdings and Luxco Coinvest, is not less than 5%. This right to appoint board observers will lapse three years after the consummation of this offering and the determination to grant this right to Kinove Holdings will be made by the Board of Directors of the Company. Further, the shareholders’ agreement will provide that, generally, for a period of three years following the expiration of the lock-up agreements in connection with this offering, shares of the Company will be sold by Kinove Holdings in a manner that is pro rata among the Rhône Investors, the Triton Investors and the ADIA Investor.

Refinancing

At or prior to the closing of this offering, we intend to take the following steps to refinance our outstanding borrowings and discharge our outstanding preferred equity certificates (the “Refinancing”). The matters described below reflect our current estimates and plans.

 

    Enter into a new credit facility (the “New Credit Facility”) consisting of (i) a senior secured term loan of approximately €665 million, which we expect would have a final maturity in 2021 and would accrue interest at a floating annual rate based on a base rate or LIBOR plus a spread and (ii) a multicurrency, senior secured revolving line of credit of up to €115 million, which we expect would have a final maturity in 2019 and would accrue interest at a floating annual rate based on a base rate or LIBOR plus a spread. The terms of the New Credit Facility have not been finally determined and are subject to change. For a summary of the expected material terms of the New Credit Facility see “Description of Material Indebtedness—New Senior Secured Credit Facility.”

 

 

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    Use the net proceeds from the new term loan described above to do the following:

 

    redeem our Senior Secured Notes in full, in an aggregate amount of approximately €532 million (including principal, premium and estimated accrued interest to the redemption date); this amount is net of approximately €65 million of Senior Secured Notes (including principal, premium and accrued interest) that we redeemed in May 2014; we also made a regular interest payment on the notes of approximately €24 million in June 2014;

 

    discharge our Preferred Equity Certificates held by Kinove Holdings, which we refer to as the “PECs” or our “Shareholder Loan,” in full, in an aggregate amount of approximately $396 million (€287 million) (which includes principal and estimated accrued yield to the discharge date), by (1) paying approximately $110 million (€80 million) in cash to Kinove Holdings in respect of a portion of the PECs and (2) issuing approximately $286 million (€207 million) worth of new shares at the initial public offering price for this offering to Kinove Holdings in respect of the balance, which would be treated as an equity contribution; based upon the mid-point of the estimated price range set forth on the cover of this prospectus, the number of new shares to be issued would be approximately 12,708,102 and would increase by approximately 590,000 common shares for every $1.00 of decrease (or decrease by approximately 540,000 common shares for every $1.00 of increase) in the initial public offering price below (or above) the mid-point of the estimated range;

 

    repay approximately €45 million (including principal and estimated accrued interest to the repayment date) owing under our $250 million existing revolving credit facility (the “Revolving Credit Facility”), in respect of borrowings that we made after March 31, 2014 to the extent they have not been repaid prior to the Refinancing; and

 

    pay approximately €15 million of estimated fees relating to the New Credit Facility.

Prior to the pricing of this offering, we will call the remaining Senior Secured Notes for redemption on a date that will occur after the closing of this offering. The redemption notice will be given at least 30 days in advance of the redemption date and will be irrevocable, subject to the closing of this offering and the Refinancing having occurred. Prior to the closing of this offering, we will place in escrow, for the benefit of the holders of the remaining notes, funds sufficient to redeem the notes on the redemption date and satisfy and discharge the indenture under which they were issued. We will remain obligated to pay the escrowed funds to the note holders on the redemption date. The accrued interest and yield included in the amounts listed above are estimates and will depend on when the closing of this offering and the subsequent redemption date actually occur.

At the closing of this offering, all of our liabilities in respect of the Senior Secured Notes and PECs will be extinguished (subject to our obligation to pay the escrowed funds to the note holders as described above) and, together with our Revolving Credit Facility, of which approximately $188 million is currently undrawn, will be replaced with the term loan and line of credit (which will be undrawn) under the New Credit Facility. As a result of these steps, we expect that our outstanding total liabilities as of March 31, 2014 will be reduced by approximately €161.9 million, or 14.7% (net of reduction for capitalized transaction costs, unamortized discount and accrued interest or yield).

In addition, we would expect the Refinancing to substantially reduce our interest costs, which have reflected annual interest rates of 10.000% (Euro tranche) and 9.625% (U.S. Dollar tranche), in the case of the Senior Secured Notes, and an annual yield rate of 10.573%, in the case of the PECs. In comparison, we estimate that the new term loan will have an overall effective interest rate substantially lower than the current rates listed above. See “Pro Forma Financial Information.” The amounts referred to above assume that the pricing of this

 

 

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offering will occur on July 24, 2014 and, where expressed in Euro, include U.S. Dollar amounts converted at a rate of €1.00 = US$1.3800. If the pricing of this offering occurs on a later date, the amounts of accrued interest and accrued yield (and thus the number of shares to be issued to Kinove Holdings in the Refinancing) described above would increase.

We understand that Kinove Holdings intends to use the net proceeds from its sale of common shares in this offering, together with the funds it receives from us on discharge of the PECs and its own available cash, to repay in full the principal amount of its outstanding PIK Toggle Notes due 2019, at the closing of this offering.

For more information about the potential impact of this offering and the Refinancing on our financial condition and results of operations, see “Capitalization” and “Pro Forma Financial Information.” For more information about the Senior Secured Notes, the PECs and the proposed terms of the New Credit Facility, including restrictive covenants, see “Description of Material Indebtedness.”

 

 

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THE OFFERING

 

Common shares offered by Kinove Holdings

18,000,000 common shares.

 

Common shares to be outstanding

56,458,102 common shares.

immediately after this offering

 

Option to purchase additional common shares

The underwriters have an option for a period of 30 days from the date of this prospectus to purchase from the Selling Shareholder up to 2,700,000 additional common shares at the public offering price, less the underwriting discount.

 

Voting rights

Each common share carries one vote.

 

Use of proceeds

The Selling Shareholder will receive all of the net proceeds from this offering and we will not receive any. All of the common shares to be sold in this offering will be sold by Kinove Holdings.

 

Dividend policy

We have not declared or paid any dividends since the Acquisition, but we currently intend to pay regular annual dividends on our common shares after the completion of this offering, beginning in 2015 in respect of the portion of 2014 following our change of legal form to a Luxembourg joint stock corporation in connection with this offering. The amount of any future dividend has not been determined. In accordance with the Luxembourg Company Law, the amount would have to be approved by the shareholders at their annual general meeting upon the recommendation of the Board of Directors, would depend on the balance sheet profit of the Company and be subject to other Luxembourg law requirements. In addition, it is expected that the New Credit Facility will include a covenant restricting our ability to pay dividends, subject to certain exceptions. For more information see “Dividend Policy.”

 

Listing

We intend to apply to list our common shares on the NYSE under the symbol “OEC”.

Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 2,700,000 common shares from the Selling Shareholder. After giving effect to this offering, the Rhône Investors, the Triton Investors and the ADIA Investor will own, indirectly, 27.63%, 27.63% and 6.76%, respectively, of our common shares (25.50%, 25.50% and 6.24%, respectively, assuming full exercise of the underwriters’ option to purchase additional common shares). The Management Investors (which include two of our directors) will own, indirectly through Luxco Coinvest, 6.10% of our common shares.

 

 

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Unless otherwise indicated, all share ownership information in this prospectus gives effect to the change of legal form of the Company to a Luxembourg joint stock corporation and to the issuance of new shares to Kinove Holdings in the Refinancing.

 

 

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Summary Historical Financial Information and Other Data

The following tables set forth our summary historical financial information and other data for the three months ended March 31, 2014 and 2013 and fiscal years 2013, 2012 and 2011 and as of March 31, 2014 and December 31, 2013, 2012 and 2011. Except for Net Working Capital, Change in Net Working Capital, Total gross profit per Metric Ton, Contribution Margin and Contribution Margin per Metric Ton, the information for fiscal years 2013, 2012 and 2011 and as of December 31, 2013 and 2012 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our balance sheet information as of December 31, 2011 is derived from our audited consolidated financial statements, which are not included in this prospectus. Except for Net Working Capital, Change in Net Working Capital, Total gross profit per Metric Ton, Contribution Margin and Contribution Margin per Metric Ton, the information for the three months ended March 31, 2014 and 2013 and as of March 31, 2014 has been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. This information should be read in conjunction with the consolidated financial statements included elsewhere in this prospectus, the related notes and other financial information included herein. Our historical results are not necessarily indicative of the results that might be expected for future interim periods or for the full fiscal year ending December 31, 2014. The unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

The Company was incorporated on April 13, 2011 and prior to the Acquisition had no operations. The Successor period for 2011 covers the period from incorporation through December 31, 2011 (the Successor “Period ended December 31, 2011”). For the Predecessor period ended July 29, 2011, financial information set forth below has been derived from Evonik Carbon Black’s audited combined financial statements (the Predecessor “Period ended July 29, 2011”).

The following table also contains translations of Euro amounts into U.S. Dollars as of and for the year ended December 31, 2013 and the three months ended March 31, 2014. These translations are solely for the convenience of the reader and were calculated at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York, which as of December 31, 2013 was €1.00 = US$1.3779 and as of March 31, 2014 was €1.00 = US$1.3777. You should not assume that, on that or any other date, one could have converted these amounts of Euro into U.S. Dollars at these or any other exchange rate.

 

    Successor          Predecessor  
Income Statement Data   Three Months Ended
March 31,
    Year Ended December 31,     Period Ended
December 31,
         Period Ended
July 29,
 
    2014     2013     2013     2012     2011          2011  
   

(in US$

million)

    (in € million)     (in US$ million)     (in € million)     (in € million)     (in € million)          (in € million)  

Revenue

    455.3        330.5        341.1        1,845.9        1,339.6        1,397.5        545.1            780.6   

Cost of sales

    (357.6     (259.6     (271.5     (1,475.5     (1,070.8     (1,116.0     (455.1         (611.5

Gross profit

    97.6        70.9        69.6        370.4        268.8        281.6        89.9            169.1   

Selling expenses

    (33.6     (24.4     (23.7     (126.9     (92.1     (96.2     (42.1         (61.2

Research and development costs

    (3.9     (2.8     (3.4     (13.9     (10.1     (9.5     (4.8         (5.8

General and administrative expenses

    (17.0     (12.3     (13.5     (72.4     (52.5     (54.3     (14.1         (19.3

Other operating income

    1.0        0.7        5.1        11.5        8.3        18.5        12.1            145.0   

Other operating expenses

    (5.0     (3.6     (9.1     (53.3     (38.7     (52.5     (57.0         (31.7

Operating result (EBIT)

    39.2        28.5        25.0        115.5        83.8        87.7        (16.0         196.0   

Finance income

    0.6        0.4        15.9        23.6        17.1        5.2        7.6            0.3   

Finance costs

    (33.4     (24.2     (49.9     (155.3     (112.7     (103.1     (76.0         (12.0

Share of profit or loss of joint venture

    0.1        0.1        0.1        0.5        0.4        0.4        0.2            0.5   

Financial Result

    (32.7     (23.7     (33.9     (131.2     (95.2     (97.5     (68.3         (11.3

Profit or loss before income taxes

    6.6        4.8        (8.9     (15.7     (11.4     (9.8     (84.3         184.7   

Income taxes

    (7.1     (5.2     2.4        (10.4     (7.5     (8.9     9.8            (62.1

Profit or loss for the period

    (0.6     (0.4     (6.5     (26.1     (19.0     (18.7     (74.5         122.7   

 

 

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Table of Contents
    Successor          Predecessor  
Balance Sheet Data   As of March 31,     Year Ended December 31,     As of
December 31,
         Period Ended
July 29,
 
    2014     2014     2013     2012     2011          2011  
    (in US$ million)     (in € million)     (in US$ million)     (in € million)     (in € million)     (in € million)          (in € million)  

Cash and cash equivalents

    119.6        86.8        97.1        70.5        74.9        98.9            39.0   

Property, plant and equipment

    450.1        326.7        459.5        333.5        334.6        325.5            319.5   

Total assets

    1,419.5        1,030.3        1,387.5        1,007.0        1,092.7        1,141.7            1,020.2   

Total liabilities

    1,521.7        1,104.5        1,489.8        1,081.2        1,089.5        1,118.0            563.3   

Total equity

    (102.2     (74.2     (102.3     (74.3     3.2        23.7            456.9   

 

    Successor   Predecessor  
Cash Flow Data   Three Months Ended
March 31,
    Year Ended December 31,     Period Ended
December 31,
         Period Ended
July 29,
 
    2014     2014     2013     2013     2012     2011          2011  
    (in US$ million)     (in € million)     (in US$ million)     (in € million)     (in € million)     (in € million)          (in € million)  

Change in Net

Working Capital(1)
(increase)/decrease

    (11.3     (8.2     (11.0     64.3        46.7        54.2        27.3            (87.3

Capital Expenditures(2)

    (10.6     (7.7     (19.5     (106.3     (77.2     (71.3     (17.1         (16.2

 

    Successor          Predecessor  
Other Financial Data   Three Months Ended
March 31,
    Year Ended December 31,     Period Ended
December 31,
         Period Ended
July 29,
 
    2014     2014     2013     2013     2012     2011          2011  
    (in US$ million)     (in € million)     (in US$
million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
         (in € million,
unless
otherwise
indicated)
 

Adjusted EBITDA(3)

    68.9        50.0        45.3        263.3        191.1        188.0        57.9            111.7   

Contribution Margin(4)

    139.3        101.1        98.5        546.2        396.4        402.7        147.0            242.2   

Contribution Margin per Metric Ton (in €/US$)

    558.8        405.6        406.4        564.1        409.4        424.1        351.7            381.0   

Depreciation, amortization and impairment

    26.1        18.9        15.0        104.8        76.1        59.3        23.4            22.4   

Net Working Capital(1)

    316.1        229.5        279.0        305.0        221.3        268.1        322.3            349.6   

 

    Successor          Predecessor  
Operating Segment Data(5)   Three Months Ended
March 31,
    Year Ended December 31,     Period Ended
December 31,
         Period Ended
July 29,
 
    2014     2014     2013     2013     2012     2011          2011  
    (in US$ million)     (in € million)     (in US$
million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
         (in € million,
unless
otherwise
indicated)
 

Volume (in kmt)

               

Specialty Carbon Black

    50.9        50.9        45.2        190.6        190.6        185.2        69.0            114.8   

Rubber Carbon Black

    198.4        198.4        197.1        777.7        777.7        764.4        348.9            520.7   

Total volume

    249.3        249.3        242.3        968.3        968.3        949.6        417.9            635.5   

Revenue

               

Specialty Carbon Black

    140.6        102.0        97.9        537.8        390.3        400.1        138.0            236.9   

Rubber Carbon Black

    314.7        228.4        243.2        1,308.1        949.4        997.5        407.0            543.7   

Total segments

    455.3        330.5        341.1        1,845.9        1,339.7        1,397.6        545.0            780.6   

 

 

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Table of Contents
    Successor          Predecessor  
Operating Segment Data(5)   Three Months Ended
March 31,
    Year Ended December 31,     Period Ended
December 31,
         Period Ended
July 29,
 
    2014     2014     2013     2013     2012     2011          2011  
    (in US$ million)     (in € million)     (in US$
million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
    (in € million,
unless
otherwise
indicated)
         (in € million,
unless
otherwise
indicated)
 

Gross profit

               

Specialty Carbon Black

    44.5        32.3        31.9        169.1        122.8        125.6        39.6            94.9   

Rubber Carbon Black

    53.2        38.6        37.7        201.2        146.1        155.9        50.3            74.1   

Total gross profit

    97.7        70.9        69.6        370.3        268.9        281.5        89.9            169.0   

Total gross profit per Metric Ton (in €/US$)

    391.8        284.4        287.3        382.5        277.6        296.4        215.2            266.0   

Adjusted EBITDA

               

Adjusted EBITDA Specialty Carbon Black

    35.4        25.7        23.7        135.0        98.0        89.4        26.2            69.0   

Adjusted EBITDA Rubber Carbon Black

    33.5        24.3        21.6        128.3        93.1        98.6        31.7            42.7   

Adjusted EBITDA(3)

    68.9        50.0        45.3        263.3        191.1        188.0        57.9            111.7   

 

 

(1) Change in Net Working Capital represents the difference between the Net Working Capital on the balance sheet at the beginning and at the end of the relevant period. Net Working Capital is defined as inventories plus current trade receivables minus trade payables. Net Working Capital is a non-IFRS financial measure. For a reconciliation of non-IFRS financial measures to the most directly comparable IFRS measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-IFRS Financial Measures.” See also “Presentation of Financial and Other Information.”

 

(2) Capital Expenditures is defined as Cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the consolidated financial statements.

 

(3) Adjusted EBITDA represents operating result (EBIT) before depreciation and amortization, adjusted for certain non-recurring and other items. Different companies and analysts may calculate EBITDA-based measures differently, so making comparisons among companies on this basis should be done very carefully. EBITDA-based measures are not measures of performance under IFRS and should not be considered in isolation or construed as substitutes for revenue, consolidated profit or loss for the period, operating result (EBIT), gross profit and other IFRS measures as an indicator of our operations in accordance with IFRS. See “Presentation of Financial and Other Information.” For a reconciliation of non-IFRS financial measures to the most directly comparable IFRS measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-IFRS Financial Measures.”

 

(4) Contribution Margin represents revenue less costs of raw materials, packaging, utilities and distribution. Contribution Margin per Metric Ton represents Contribution Margin divided by sales volume measured in metric tons. We believe that Contribution Margins can provide a useful basis for comparing the current performance of the underlying operations being evaluated, because our revenue is strongly impacted by fluctuations in raw material costs, in particular the cost of carbon black oil, our principal feedstock. Different companies and analysts may calculate contribution margins differently, so making comparisons among companies on this basis should be done very carefully. Contribution Margins are not measures of performance under IFRS and should not be considered in isolation or construed as a substitute for revenue, consolidated profit or loss for the period, operating result (EBIT), gross profit and other IFRS measures as an indicator of our operations in accordance with IFRS. See “Presentation of Financial and Other Information.” For a reconciliation of non-IFRS financial measures to the most directly comparable IFRS measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-IFRS Financial Measures.”

 

(5) Our business is divided between the following two operating segments: Specialty Carbon Black and Rubber Carbon Black. The allocation of income and expenses to the segments is based on agreed procedures as set forth in the notes to our consolidated financial statements included elsewhere in this prospectus. Certain income and expenses are not allocated to the individual segments. These include Acquisition related expenses, restructuring expenses, consulting fees related to Group strategy, share of profit or loss of associates, other amortization and other non-operating expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Discussion.”

 

 

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RISK FACTORS

You should carefully consider the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase our common shares. Additional risks and uncertainties of which we are not presently aware or that we currently deem immaterial could also affect our business operations and financial condition. If any of these risks actually occur, our business, financial condition and results of operations could be materially affected. As a result, the trading price of our common shares could decline and you could lose part or all of your investment.

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 affected by 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 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, our business experiences a level of inherent 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. A global or regional economic downturn may reduce demand for our products, which would decrease our revenue and could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, our results of operations dropped sharply in the wake of the global financial and economic crisis in the second half of 2008 and 2009. In periods with significant market turmoil and tightened credit availability, we expect to experience difficulty in collecting accounts receivable, pricing pressure and reduced global business activity.

Structural changes in the industries in which we operate may result in business volatility and may adversely affect our business, financial condition, results of operations and cash flows.

Our business is influenced by structural changes in the industries in which we operate, such as the entry of new suppliers, product substitution, changing technologies, industry consolidation and the migration of customers to lower-cost countries. Some of our customers have in the past shifted, and may continue to shift, manufacturing capacity from mature regions, such as North America and Europe, to emerging regions, such as Asia and South America. Although we have developed and implemented strategies to meet these changes in demand, we cannot be certain that we will be able to successfully expand capacity in emerging regions. Our ability to expand in these regions depends in part on their economic and political conditions and on our ability to establish and finance operations, construct additional manufacturing capacity or form strategic business alliances including acquisitions and joint ventures. Over the last few years, for instance, our competitors in China have aggressively added capacity at a far greater rate than demand has increased, which has resulted in pressured margins in the region. In addition, we may not be successful in reducing capacity in mature regions commensurate with industry demand. Similarly, demand for our customers’ products and our competitors’ reactions to market conditions could affect our results. Our business is also sensitive to changes in industry capacity utilization. Prices tend to decrease when capacity utilization decreases, which could adversely affect our business, financial condition, 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, severe weather and natural disasters, including hurricanes, tornados, ice storms, droughts, floods and

 

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earthquakes, mechanical failures, unscheduled downtime at our production facilities; transportation interruptions; pipeline leaks and ruptures, quality problems, technical difficulties, energy grid shutdowns, discharges or releases of toxic or hazardous substances or gases, other environmental risks, and sabotage, terrorist attacks or other acts of violence as well as potential boycotts, general strikes, sanctions or blockades.

Such events could disrupt our supply of raw materials or otherwise affect 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 factors, such as natural disasters, war, acts of terrorism, strikes, official orders, technical interruptions or material defects, or accidents or other mistakes in internal procedures, such as fire, explosion or release of toxic or hazardous substances. In all of these cases, our property or third-party property or the environment may sustain damage, or there may be human exposure to hazardous substances, personal injuries or fatalities, resulting in material financial liabilities and civil or criminal law consequences, the temporary or permanent closure of the relevant production site or power plant 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 adversely 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 2013, our top ten customers accounted for approximately 57% of our sales volume in kmt. The top five customers in our Specialty Carbon Black segment and the top five customers in our Rubber Carbon Black segment represented approximately 32% and approximately 57% of our Specialty Carbon Black and Rubber Carbon Black segment sales volumes measured in kmt for 2013, respectively. Our success in strengthening relationships and growing business with our largest customers and 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 volumes 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 serve that impairs our customers’ ability to make payments to us could 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 and this competition could harm our business, financial condition, results of operations and cash flows. Competition is 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 emerging regions. More recently, a significant percentage of tire demand is met by imports from, and a shift in production to, low-cost emerging regions. This has adversely impacted utilization rates of carbon black producers in developed regions and resulted in plant closures. While we aim to operate at low cost and are focused on reducing our fixed and variable cost base 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 and adversely affect our business. Furthermore, some of our competitors have greater financial and other resources and larger capitalization than we do. If we are unable to respond successfully to changing competitive conditions, the demand for our products could be adversely affected.

The markets in which we operate are highly competitive and this competition, and the challenges we face to gain share in those markets and new markets, could harm our business, financial condition, results of operations and cash flows. In particular, any inability to increase access to the Chinese market, which is currently the largest carbon black market in the world, could place us at a competitive disadvantage in China. In the event that we do not acquire QECC or we are unable to otherwise increase our access into the Chinese market for carbon black, we may be unable to compete with other producers in that market, as effectively as we would wish,

 

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which could have an adverse effect on our business, financial condition, results of operations and cash flows. We entered into an agreement with Evonik for the acquisition of QECC in 2011, but the agreement has since expired. Currently, the acquisition is subject to negotiations with Evonik and between Evonik and its joint venture partner, as well as Chinese government review, and we are unable to predict whether or when the acquisition of QECC by us will occur or whether completion of the acquisition is probable.

We may not successfully develop new products and technologies that address our customers’ changing requirements or competitive challenges, and our customers may substitute for carbon black 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 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 products from competitors, which could adversely affect our business, financial condition, results of operations and cash flows.

Although carbon black continues to offer significant opportunities for product and process innovation, we cannot be certain that the investments we make in our Innovation Group 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, and 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 rubber, carbon black competes primarily with precipitated silica in combination with silane, which is not 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. For example, Evonik announced in 2010 plans to significantly increase its capacity for precipitated silica to satisfy increasing demand. Increased substitution and competition from precipitated silica producers, including Evonik, 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.

Alternative materials, procedures or technologies may be developed, or existing ones may be improved, and 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 business, 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 our current position and to implement our business strategies for growth successfully. We have undertaken, and will continue to undertake, various initiatives to realign our product portfolio away from standard specialty carbon black and rubber carbon black products to higher margin applications, and we continue to focus on cost reduction

 

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initiatives to optimize our asset base, improve operating efficiencies and generate cost savings. We cannot assure you that we will successfully implement our business strategies or that implementing these strategies will sustain or improve and not harm our results of operations. In particular, 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 greater than we currently anticipate. For example, our ability to complete capacity expansions as planned 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, and other risks customarily associated with construction 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.

Our business strategies are based on our assumptions about future demand for our products and the new products and applications we are developing and on our continuing ability to produce our products profitably. Each of these factors depends, among other things, on our ability to realign our product portfolio, divest businesses or discontinue product lines on favorable terms and with minimal disruptions, finance our operations and product development activities, 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 our 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 and availability of raw materials and energy, which could decrease our 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 worldwide supply and demand as well as other factors beyond our control. In 2013, raw materials accounted for 82% of our cost of sales. Approximately 80% of the cost of raw material used in the production of carbon black is related to petroleum-based or coal-based feedstock, with some limited use of other materials, such as natural gas. We obtain a considerable portion of our raw materials and energy from selected key suppliers. If any of these suppliers is unable to meet its obligations under supply agreements with us on a timely basis or at all, we may be forced to incur higher costs to obtain the necessary raw materials and energy elsewhere or, in certain limited cases, may not be able to obtain carbon black oil or raw materials at all. Additionally, raw material sourcing and related infrastructure in certain jurisdictions where we operate may be subject to local regulations that may reduce, delay or halt the physical supply of raw materials. Our inability to source quality raw materials or energy in a timely fashion and pass through cost increases to our customers could have an adverse impact on our business, financial condition, results of operations and cash flows.

Most of our carbon black supply contracts contain provisions that adjust prices to account for changes in a relevant feedstock price index. While we have recently re-negotiated many of our customer contracts to reduce the time-lag after which we are able to pass through changes in carbon black oil prices to our customers, we are still to some extent exposed to oil price fluctuations and there can be no assurance that we will continue to be able to shift price risks to our customers. Success in offsetting increased raw material and energy costs with price increases is largely 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. Failure to fully offset the effects of increased 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.

 

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Significant movements in the market price for crude oil tend to create volatility in our carbon black feedstock costs, which can affect both our Net Working Capital and operating results. Changes in raw material and energy prices have a direct impact on our Net Working Capital levels. In general, increases in the cost of raw materials lead to an increase in our Net Working Capital requirements, as our inventories and current trade receivables increase as a result of higher carbon black oil and other feedstock prices and related sales price levels, partially offset by an increase in trade payables. Due to the quantity of carbon black oil and finished goods that we typically keep in stock together with the levels of receivables 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. Conversely, decreases in the cost of raw materials lead to a decrease in our Net Working Capital requirements within a two to three-month period following the decrease in costs. Net Working Capital swings are particularly significant in an environment of high price volatility.

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. The success of acquisitions of new technologies, companies and products, or arrangements with third parties is not always predictable and we may not achieve our anticipated objectives. Many of our investments, such as Deutsche Gasrußwerke GmbH & Co. KG (the “German JV”), our joint venture with, among others, the tire manufacturers Continental, Pirelli and Goodyear, require high initial expenditures as well as ongoing expenditures for modernization and expansion. The German JV finances itself independently. However, any potential future lack of external financing sources may jeopardize such joint venture and may result in negative impacts on our own supply chain and business. Our investments can only be operated profitably if their utilization is warranted by corresponding demands. Should we build up overcapacities that remain unused due to erroneous assessments of market development, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Plant capacity expansions and site development projects may be delayed or may not achieve the expected benefits.

Our ability to complete capacity expansions, including capacity conversions from rubber carbon black to specialty carbon black, and other site development projects as planned 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 conditions, and other risks customarily associated with construction projects. Moreover, the costs of these activities could have a negative impact on our results of operations, and in the case of capacity expansion projects, until capacity utilization at the particular facility is sufficient to absorb the incremental costs associated with the expansion. In addition, our ability to expand capacity in emerging countries depends in part on economic and political conditions in these regions 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 and breaches of data security.

Our information technology systems are an important element for effectively operating our business. We have recently implemented new software (SAP) on a Group-wide basis. The global implementation process of SAP is associated with certain risks for our business, such as failures, breakdowns and malfunctioning. This could adversely affect our business operations and materially impact the relationships we have with our customers and suppliers, our reputation and our operating costs and margins.

Information technology systems failures, in particular failures in connection with running SAP, including risks associated with upgrading our systems, network disruptions and breaches of data security could

 

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disrupt our operations by impeding our processing of transactions, our ability to protect customer or company information and our financial reporting leading 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 computer systems, including our back-up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, cybercrimes, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, or errors by our employees. Although we have taken 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.

In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our business, 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 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, and 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 personal information, we are subject to a variety of laws on a global basis that require us to provide notification to the data owners, and that subject 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.

We have experienced losses in the past, and we may experience losses in the future.

We experienced losses of €0.4 million, €19.0 million, €18.7 million and €74.5 million in the three months ended March 31, 2014, fiscal years 2013 and 2012 and the Period ended December 31, 2011, respectively. We may experience losses in the future, and we cannot assure you that we will achieve profitability in future periods.

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 and social plans with our labor unions. We also are required to consult with our employee representatives, such as works councils, on certain matters such as restructurings, acquisitions and divestitures. Although we believe that our relations with our employees are good, there can be no assurance that new agreements will be reached or consultations will be completed without union or works council actions or on terms satisfactory to us. Currently, we are in negotiations with Korean labor unions, in connection with a recent Korean Supreme Court decision pursuant to which recurring fixed bonus payments to Korean employees in certain circumstances constitutes ordinary wages. This decision has raised several issues for Korean companies and generally may result in additional labor costs. We cannot predict the outcome of such negotiations. 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. See “Business—Employees—Labor Relations.”

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. Following the completion of the Acquisition, our management team has been reorganized, including

 

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the establishment of new positions directly reporting to the chief executive officer, and significant competencies have been added to the management team to further strengthen our business. The loss of any member of our reorganized key management team and personnel or an inability to attract, retain, develop and maintain additional personnel could prevent us from implementing our business strategy. In addition, our future growth and success also depend on our ability to attract, train, retain and motivate skilled managerial, sales, administration, operating and technical personnel. The loss of one or more member(s) 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, North America, South Korea, South Africa and Brazil. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following: 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, 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, currency fluctuations and devaluation, the effect of global environmental, health and safety issues on economic conditions, market opportunities and operating restrictions, changes in foreign laws and tax rates, changes in trade sanctions 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 and availability of credit. These factors could adversely affect our business, financial condition, results of operations and cash flows.

Legal and Regulatory Risks

Our operations are subject to environmental and safety regulations. We have been and may in the future be subject to investigations by regulatory authorities (including currently by the EPA as described herein) in respect of alleged violations and may incur significant costs to maintain compliance with, and to address liabilities under, these laws and regulations.

We are subject to extensive 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 production and processing of carbon black and other chemicals we produce 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 these 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; wastewater and storm water discharges; storage, handling and disposal of hazardous substances; and operation, maintenance and closure of landfills. If we violate or otherwise fail to comply with these laws, regulations or permits or other approvals, we may incur fines or other sanctions, be required to undertake significant capital expenditures to achieve compliance, or be subject to other obligations by one or more regulatory authorities.

If environmental harm to soil, groundwater, surface water or natural resources is found to have occurred as a result of our current or historical operations, we may be required to incur significant remediation costs at our current or former production facilities or at third-party sites. Many of our facilities have a long history of operation, which may contribute to our environmental compliance and remediation costs due to past spills, past chemical storage, wastewater treatment and waste disposal practices and other activities. For instance, many of our facilities have onsite landfills that have been in use for a number of years, and we may incur significant costs when these landfills reach capacity in order to close them in accordance with applicable laws and regulations and

 

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to address contamination of soil and groundwater at, under or migrating from the facilities, including costs to address impacts to natural resources. 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, or on persons who may have sent waste to that facility or site for disposal. 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 wastes, including hazardous wastes, generated by our operations and disposed of onsite or at offsite locations, even if we were not responsible for the disposal. Further, we may also incur additional closure and cleanup costs in connection with the closure of plants, including costs relating to decommissioning of equipment, asbestos removal and closure of features such as storage tanks, wastewater treatment systems, ponds and landfills. We are currently experiencing ongoing costs in connection with the 2013 closure of our production facility in Sines, (Portugal).

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 future laws and regulations. The trend in environmental regulation is increasingly stringent restrictions on activities that may affect the environment. 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 greenhouse gas (“GHG”) emissions; stricter requirements for waste handling, storage, transport, disposal; and more stringent cleanup and remediation standards, which, in each case, could have a material adverse effect on our operations and financial condition.

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 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, and our reputation and business could be adversely affected. 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 impair human health or to be carcinogenic. See “Business—Environmental, Health and Safety Matters.”

We are currently involved in an enforcement case with the EPA.

During 2008 and 2009, the EPA contacted all U.S. carbon black producers as part of an industry-wide EPA initiative, requesting extensive and comprehensive information under Section 114 of the Clean Air Act, to determine, for each facility, that either: (i) the facility has been in compliance with the Clean Air Act; (ii) violations have occurred and enforcement litigation may be undertaken; or (iii) violations have occurred and a settlement of an enforcement case is appropriate. In response to information requests received by our U.S. facilities, we have furnished information to the EPA on each of our U.S. facilities. Our Belpre (Ohio) facility was an initial subject of these investigations and received notices from the EPA in 2010 alleging violations of permitting requirements under the Clean Air Act. In October 2012, we received a corresponding notice and finding of violation (an “NOV”) under Section 113(a) of the Clean Air Act alleging the failure to obtain Prevention of Significant Deterioration (“PSD”) permits prior to making major modifications at several units of our Ivanhoe (Louisiana) facility and to include Best Available Control Technology (“BACT)” in the Title V permit. In January 2013 we also received an NOV issued by the EPA for our facility in Borger (Texas) alleging the failure to obtain PSD and Title V permits reflecting BACT during the years 1996 to 2008, and a similar NOV and finding of violation by the EPA was issued for our U.S. facility in Orange (Texas) in February 2013.

In November 2013, we began discussions with the EPA and the United States Department of Justice (the “DOJ”) about a potential settlement to resolve the NOVs. These discussions are currently ongoing. Any

 

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settlement may involve the imposition of civil penalties, an obligation to perform certain environmental mitigation projects, and an obligation to install certain air emissions controls at one or more facilities. We received information from the EPA in November 2013 specifying certain target emission reduction levels, pollution controls and other terms the EPA demands in a settlement. We responded with a counter-proposal. Going forward, further settlement proposals may be exchanged and further meetings with the EPA on these matters may occur.

The EPA action could result in civil penalties, mitigation and significant capital expenditures in connection with air emissions at our U.S. facilities which could have a material adverse effect on our business. If we and the EPA/DOJ fail to reach a settlement agreement, the EPA/DOJ could bring a lawsuit against us.

While we are currently unable to determine the amount of civil penalties, mitigation and capital expenditures resulting from a settlement with or an enforcement of claims by the EPA, we note that Cabot Corporation, one of our competitors, announced in November 2013 that it entered into a settlement with the EPA/DOJ that requires Cabot Corporation to pay a $975,000 civil penalty to the EPA and fund $450,000 in environmental mitigation projects. Cabot Corporation stated that it is also installing certain technology controls as part of the settlement that it estimates will require investments of approximately $85 million. Given that, among other things, Cabot Corporation operates fewer facilities in the U.S. than we do, the aggregate amount to be incurred by us in case of a settlement with or an enforcement of claims by the EPA/DOJ could be significantly higher which could have a material adverse effect on our business. As of May 2014, none of our other domestic competitors have announced settlements with the government.

Our agreement with Evonik in connection with the Acquisition provides for a partial indemnity from Evonik against various exposures, including fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011. The indemnity provides for a recovery from Evonik of a share of the costs (including fines), expenses (including reasonable attorney’s fees, but excluding costs for maintenance and control in the ordinary course of business and any internal cost of monitoring the remedy), liabilities, damages and losses suffered and is subject to various contractual provisions including provisions set forth in the Share Purchase Agreement with Evonik, such as a de minimis clause, a basket, overall caps (which apply to all covered exposures and to all covered environmental exposures, in the aggregate), damage mitigation and cooperating requirements, as well as a statute of limitations provision. Due to the cost-sharing and cap provisions in Evonik’s indemnity, we expect that a substantial portion of the costs we would incur in this enforcement initiative could exceed the scope of the indemnity, perhaps in the tens of millions of Euro. In addition, Evonik has signaled that it may likely defend itself against claims under the indemnity; while we intend to enforce our rights vigorously, there is no assurance that we will be able to recover as we expect or at all. See “Risk-Factors—Risks Related to Indebtedness, Currency Exposure and Other Financial Matters—Our agreements with Evonik in connection with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities. We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect.

We also note that the installation of pollution control technologies at our U.S. plants in response to the EPA action would increase the ongoing operating costs of those plants. We may not be able to pass the cost increases on to our customers.

The foregoing matters could have a material adverse effect on our operating results and cash flows for the particular periods in which we incur the related costs or liabilities. While capital expenditures made in response to the EPA action would be capitalized and amortized over time, civil penalties and the funding costs associated with environmental mitigation projects would reduce our results of operations in the reporting periods in which the costs are incurred or provided for.

 

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Developing regulation of carbon black as a nano-scale material could require us to comply with costly new requirements.

Carbon black consists of particles that are nano-scale. 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 Toxic Substances Control Act. The EPA has proposed rules that would require manufacturers of nano-scale materials to submit additional manufacturing information, exposure and release information and available health and safety data. 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 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 “Business—Environmental, Health and Safety Matters.”

In connection with such regulation, the European Commission is in the process of defining “nanomaterial.” According to its recommendation of October 18, 2011 (2011/696/EU) carbon black is defined as a nano-material. In a similar approach, the 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 impact our business in a manner we cannot predict, including by increasing the costs of doing business.

Regulations requiring a reduction of greenhouse gas emissions could adversely affect our business, financial condition, results of operations and cash flows.

Significant volumes of carbon dioxide (“CO2”), a GHG, are emitted in carbon black manufacturing processes. Over the past few decades, concerns about the relationship between GHGs and global climate change have resulted in increased levels of scrutiny from regulators and the public alike, and have led to proposed and enacted regulations on both national and supranational levels, to monitor, regulate and control emissions of CO2 and other GHGs.

In December 2005, the European Commission published a directive that includes carbon black manufacturing in the combustion sector and in Phase II of the Emissions Trading Scheme for GHGs for the period from 2008 to 2012. The European Commission has developed allowable emission credits for Phase III of the Emissions Trading Scheme (the “EU ETS”), which will apply for the period 2013 to 2020. The EU ETS is anticipated to become progressively more stringent over time, which could have an impact on our costs of compliance under the EU ETS. The European Union member states (“EU Member States”) have included carbon black facilities in their national allocation plans, and we have taken actions to comply with applicable CO2 emission requirements. Certain industry sectors in the European Union, including the carbon black industry, currently receive a certain share of their emission allowances for free. This list of industry sectors is reviewed by the European Commission every five years, with the next review expected to occur later in 2014. Although we anticipate that the carbon black industry will retain its placement, we cannot predict the outcome of the European Commission’s review. Additionally, there can be no assurance that we will be able to purchase emissions credits if our carbon black operations generate more CO2 than our allocations permit or that the cost of such credits will not be excessive.

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, for example a successor international agreement, if any, to the Kyoto Protocol and the European Union’s proposal to consider raising its commitment to reduce carbon emissions by 2020 from a 20% to a 30% reduction. 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

 

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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) and Ivanhoe (Louisiana), and what costs or operational changes these regulations may require in the future. Further, almost one-half of the 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. There is no assurance that, in the future, the current level of regulation will continue at the federal or state level in the states where we operate. There are also ongoing discussions and regulatory initiatives in other countries, including in Brazil and South Korea where we have facilities, regarding GHG emission reduction programs, but those programs have not yet been defined.

Compliance with current or future GHG regulations governing our operations, including those discussed above, may result in significantly increased capital expenditures for measures such as the installation of more environmentally efficient technology or the purchase of allowances to emit carbon dioxide or other GHGs. While their potential effect on our manufacturing operations or financial results cannot be estimated, it could be substantial. There is no way to 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 “Business—Environmental, Health and Safety Matters.”

As a company in the chemical sector, 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.

Our inability to maintain our existing classification registration in member states of the European Union under the REACh legislation or in other countries that introduce comparable legislation may affect our ability to manufacture and sell certain products.

In December 2006, the European Union signed the REACh (Registration, Evaluation, Authorisation and Restriction of Chemicals) legislation. This legislation requires chemical manufacturers and importers in the European Union to demonstrate the safety of the chemical substances contained in their products through a substance registration process. We have successfully registered under REACh, which is a functional prerequisite to the continued sale of our products in the European Union markets. REACh presents a risk to the continued sale of our products in the European Union should our existing classification registration no longer apply as a result of changes in our product mix or purity, or if the European Union seeks to ban or materially restrict the production or importation of the chemical substances used in our products. Also, other countries or organizations, including South Korea and China, have adopted or may in the future adopt comparable or even more restrictive regulations, 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

 

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jurisdictions, and noncompliance may result in material fines or penalties. 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 “Business—Environmental, Health and Safety Matters.”

We may not continue to benefit from an exemption for self-consumption of self-generated electricity under a proposed amendment to the German Renewable Energies Act, which may adversely affect our business, results of operations and cash flows.

In December 2013, the European Commission opened an in-depth investigation procedure regarding certain exemptions from an energy surcharge granted under the German Renewable Energies Act (Erneuerbare-Energiengesetz, EEG”). Under the EEG, energy intensive industries are exempted to a large extent from the energy surcharge that aims to balance above-market payments for green energy. Another exemption exists for the consumption of self-generated electricity.

The German legislature is amending the national regulations of the EEG simultaneously with the drafting of new European guidelines on environmental and energy state aid rules. Under the latest draft regulations, the exemption regarding self-consumption (Eigenverbrauch) of self-produced electricity will be grandfathered for power plants that were installed before August 1, 2014.

We are exempted from the energy surcharge under the current law to the extent that we consume our self-produced energy, and would continue to be exempted under the draft regulation. However, as the drafting of these regulations is still in progress, there is no certainty that we will continue to benefit from such an exemption in the future. The loss of this benefit 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.

We become, from time to time, involved in various claims and lawsuits arising in the ordinary course of our business. Also, certain asbestos related claims have been filed with respect to time periods when Evonik and other preceding owners were in control of our business. Such claims are subject to a limited indemnity from Evonik under the agreements related to the Acquisition. Currently, there is an administrative procedure in France to determine whether our carbon black facility in Ambès, France, may be regarded as an asbestos associated facility for the years 1959 to 1996. If decided to our detriment this could potentially result in claims by (former) employees based on alleged exposure to asbestos during the mentioned time period. Some matters involve claims for large amounts of damages as well as other relief. 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, including employment-related litigation, contract litigation, product liability claims, 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, 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 or have not otherwise provided, 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.

 

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We may not be able to protect our intellectual property rights successfully and we are still subject to restrictions and risks associated with our intellectual property sharing arrangements with Evonik.

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 the 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 significantly weaker than in the United States, countries in the European Union and certain other developed countries. 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 with an adverse effect on our business, financial condition, results of operations and cash flows.

Irrespective of our intellectual property rights, we may 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, could be expensive and time consuming to litigate. If we were to lose such proceedings, we could be subject to injunctions, could be obliged to pay damages or enter into licensing agreements requiring royalty payments and use restrictions, which may 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 on acceptable terms.

In connection with the separation of our business from Evonik, 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 its retained business. 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 black, which licenses are, subject to certain exceptions in areas adjacent to carbon black, exclusive. Accordingly, we may be restricted in leveraging our 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 fields outside of carbon black.

Risks Related to Indebtedness, Currency Exposure and Other Financial Matters

Our significant leverage may make it difficult for us to service our debt and operate our businesses.

We are highly leveraged with significant debt service obligations. See “Description of Material Indebtedness.” We may incur more debt in the future. While we expect to reduce our leverage through the Refinancing, we expect to continue to have high leverage for the foreseeable future. This may have important negative consequences for our business and you, 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, other general corporate purposes and payments of dividends, increasing our vulnerability to economic downturns 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

 

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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 or restructure or refinance all or a portion of our debt on or before maturity. In the worst case scenario, an actual or impending inability to pay debts as they become due and payable could result in our insolvency.

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, and the debt instruments that govern any indebtedness we incur in connection with the Refinancing are expected to impose, significant 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 share capital or redeem or reduce subordinated indebtedness, and make acquisitions or investments.

Our debt instruments contain, and the debt instruments that govern any indebtedness we incur in connection with the Refinancing are expected to 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 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 increase our borrowing costs and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We may enter into various forms of hedging arrangements against currency, interest rate or 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 may be affected by both the transaction effects and the translation effects of foreign currency exchange rate fluctuations. We are exposed to currency fluctuation when we convert currencies that we

 

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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, 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 translated into Euro at the applicable currency exchange rate for inclusion in our consolidated financial statements. Therefore, our financial results in any given period are materially affected by fluctuations in the value of the Euro relative to other currencies, in particular the U.S. Dollar and the Korean Won. Generally, an appreciation of the U.S. Dollar has a negative impact on (by increasing) our Net Working Capital, because a large part of our raw material purchases is in U.S. Dollars. In addition, certain of our outstanding debt obligations are, and certain of our future debt obligations may be, denominated, pay interest and must be repaid in U.S. Dollars and therefore expose us to additional exchange rate risks. An appreciation of the U.S. Dollar would make our financing under U.S. Dollar-denominated instruments more expensive. Significant changes in the value of the Euro relative to the other currencies could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we are 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.

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. Since 2011 we began the discontinuation of our raw material hedging policy to protect us against the time-lag exposure between contract oil price adjustments, and we do not intend at this time to enter into further raw material hedging arrangements in the future. Instead, we now incorporate flexible pricing formulas into our feedstock and sales contracts in an effort to offset price volatility. Based on sales volumes in kmt in 2013, approximately 34% of our contracts were non-indexed, approximately 63% of our contracts were indexed monthly, while approximately 3% of our contracts were indexed on a quarterly basis. The one-month price adjustment mechanism typically results in a two-month delay in reflecting oil price changes in our customer pricing, while the quarterly price adjustment mechanism typically results in a four-month delay. There is no assurance that such formulas in our contracts will fully protect against price volatility, particularly in periods of rapid and significant oil price fluctuations. Additionally, it may be necessary to enter into hedging arrangements in the future to reduce the impact of raw material, energy price volatility currency and exchange rate fluctuation. 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.

We are exposed to substantial risks with regard to the Euro and the Eurozone sovereign debt crisis.

Since 2010, global markets and economic conditions have been negatively affected by market perceptions regarding the ability of certain EU Member States to service their sovereign debt obligations, including Greece, Italy, Ireland, Portugal and Spain. Concerns also persist regarding the outcome of the EU governments’ financial support programs, the possibility that other EU Member States may experience similar financial difficulties, the overall stability of the Euro and the suitability of the Euro as a single currency given the diverse economic and political circumstances in individual EU Member States. This has in the past disrupted equity markets and resulted in volatile bond yields on the sovereign debt of EU Member States leading to a general increase in credit spreads, together with reduced liquidity on the market.

 

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Ongoing deterioration of the sovereign debt of certain EU Member States together with the risk of contagion to other, more stable, countries have raised multiple concerns as to the stability and the overall standing of the European Monetary Union. Concerns that the Eurozone sovereign debt crisis could worsen may lead to the re-introduction of individual currencies in one or more EU Member States, or, in particularly dire circumstances, the possible dissolution of the Euro entirely. This has caused macroeconomic disruption and might also do so going forward. Furthermore, should the Euro dissolve entirely, the legal and contractual consequences for holders of Euro-denominated obligations and for parties subject to other contractual provisions referencing the Euro would be determined by laws in effect at such time. These potential developments, or market perceptions concerning these and related issues, could have adverse consequences for us with respect to our outstanding Euro-denominated debt obligations and, as we have a substantial amount of debt denominated in Euro, could adversely affect our business, financial condition, results of operations and cash flows.

Dislocations in credit and capital markets may make it more difficult for us and our suppliers and customers to borrow money or raise capital.

The ongoing economic weakness in many regions has affected, and may continue to affect, us in several ways. Dislocations 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 for our business and acquisitions or 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, a number of our customers and suppliers rely on access to credit to adequately fund their operations, which may also be limited due to dislocations in the credit markets. 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.

Inflation could adversely affect our business, financial condition, results of operations and cash flows.

Inflation in certain countries where we operate may adversely affect our business by increasing the cost of the raw materials, energy, labor and transportation. Current or future efforts by government to stimulate the economy may increase the risk of significant inflation. In the event of an increase in inflation, we may seek to increase the sales prices of our products in order to maintain satisfactory margins, however such increases may not be accepted by our customers, may not be sufficient to compensate for the negative impact of inflation or may decrease demand for our products and our volume of sales. If we are not able to fully offset the effects of increased inflation, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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. For example, we recorded goodwill impairment losses of €107.0 million in 2009 as a result of the global financial and economic crisis and a weaker performance of our business than expected. As a result of the application of the purchase method of accounting in connection with the Acquisition, the risk of impairments has become even more significant after the completion of the Acquisition than it was historically. We may be required to impair or write off other assets in the future, which could have a material adverse effect on our business, financial condition and results of operations.

 

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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. 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 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. For a more detailed description of our defined benefit plans see our consolidated financial statements and the related notes included elsewhere in this prospectus.

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 under insurance policies 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. Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the United States or elsewhere. A direct attack on our assets or assets used by us could have a material adverse effect on our business, financial condition, results of operations and cash flows. Insurance that provides adequate coverage against terrorist attacks has become increasingly expensive and difficult to obtain. 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.

Although we attempt to keep insurance premiums low, 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 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.

Significant changes in our jurisdictional earnings mix or in the tax laws of those jurisdictions 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), 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 could increase our tax rates and adversely impact our financial results in those periods.

We may owe significant additional taxes in respect of our South Korean operations.

In connection with a tax audit of our South Korean operations for 2011, the South Korean tax authorities have questioned the valuation assigned to our acquisition of those operations from Evonik in 2011 and have asked us to establish why the valuation was not at a significantly higher level. A higher valuation would result in a higher capital gains tax due to the authorities, which we would be obligated to pay over as withholding agent on behalf of Evonik. The higher valuation could also result in additional corporate income tax payable by the

 

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Company. We are in the process of responding to the inquiry to defend the valuation used in the Acquisition. However, were the authorities to prevail at the level they have initially asserted, the additional tax liability could be significant, perhaps reaching an amount in the range of €40 million (for the withholding and larger corporate income tax portions combined).

We intend to defend the valuation used in the Acquisition vigorously. We would also expect to seek reimbursement from Evonik for some or all of the tax we may be obligated to pay. Nevertheless, the outcome of this tax audit and its potential impact on the Company are uncertain and could have a material adverse effect on our net profit or loss and on our cash flow in any period in which the liability is incurred or paid. The timing of any impact is also uncertain, although it could occur within the next two or three fiscal quarters. The ongoing tax audit could also result in additional assessments for 2011, as well as for subsequent years, or a higher effective tax rate on our South Korean operations in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Potential South Korean Tax Assessment.”

Our agreements with Evonik in connection with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities. We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect.

In connection with the Acquisition, we agreed to indemnify Evonik with respect to future liabilities related to our business and Evonik agreed to indemnify us, subject to certain limitations, for certain liabilities that it agreed to retain. Our potential exposure for such liabilities could be significant and the scope and terms of these indemnities may be less favorable than if we entered into a similar agreement with an unaffiliated third party. There can be no assurance that we will be able to enforce our claims under the indemnity from Evonik. Even if we ultimately succeed in recovering from Evonik any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. In addition, our ability to enforce claims under our indemnity from Evonik is dependent on Evonik’s creditworthiness at the time we seek to enforce these claims, and there can be no assurance as to what Evonik’s financial condition will be in the future.

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 and assumptions regarding the tax deductibility of certain interest expenses under German tax regulations. 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 we have applied are reasonable and accurate, we cannot assure you that these decisions and assumptions will not be questioned or rejected by the tax authorities. In particular, we are subject to tax audits for the period in which the Acquisition occurred by tax authorities in multiple jurisdictions worldwide, and in many cases (including in South Korea as described above) these audits have not yet begun or have not been completed and could give rise to issues of this kind. If such 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.

 

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Risks Related to This Offering and Ownership of Our Common Shares

There has been no previous public market for our common shares and an active and liquid market for our common shares may not develop.

We have not previously had any securities traded on any exchange and, as a result, have no trading history. We cannot predict the extent to which investor interest in our common shares will create or be able to maintain an active trading market, or how liquid that market will be in the future. Although we expect that our common shares will trade on the NYSE, we cannot assure you that an active public market for the common shares will develop or be sustained after this offering. If an active market for our common shares does not develop after the offering, it may adversely affect the market price and liquidity of our common shares, meaning that you may have difficulty selling your common shares at an attractive price or at all. The price of our common shares in this offering will be determined by negotiation among us, the Selling Shareholder and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common shares at or above the initial public offering price or at any other price, or at the time you would like to sell. An inactive market may also impair our ability to raise capital by selling our common shares, our ability to motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using our common shares as consideration.

The price of our common shares may be highly volatile and may be affected by market conditions beyond our control.

Some factors that may cause the market price of our common shares to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

 

    our operating and financial performance and prospects;

 

    our announcements or our competitors’ announcements regarding new products, enhancements, significant contracts, acquisitions or strategic investments;

 

    changes in earnings estimates or recommendations by securities analysts who cover our securities;

 

    fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

    changes in our capital structure, such as future issuances of securities, sales of large blocks of common shares by our shareholders, including our Principal Shareholders, or the incurrence of additional debt;

 

    departure of key personnel;

 

    reputational issues;

 

    changes in general economic and market conditions;

 

    changes in industry conditions or perceptions or changes in the market outlook for the chemical and automotive industries; and

 

    changes in applicable laws, rules or regulations, regulatory actions affecting us and other dynamics.

In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. If any such litigation is instituted against us, it could materially adversely affect our business, results of operations, financial condition and cash flows.

 

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The interests of our Principal Shareholders may conflict with the interests of the holders of our common shares.

The Company’s articles of association to be in effect upon its change of legal form to a joint stock corporation (the “Articles of Association”) will provide that resolutions may be adopted by a simple majority of the votes cast, unless higher thresholds are required by law. Our Principal Shareholders, through their interest in Kinove Holdings, will indirectly have the ability to cast a majority of the votes cast in the Company’s shareholders’ meetings, which they could use to adopt resolutions relating to, among other things, the election and removal of members of the Board of Directors or the use of balance sheet profits. In addition, our Principal Shareholders will be in a position to reject any shareholders’ resolution proposed by the Board of Directors or by other shareholders. In case of low attendance at shareholders’ meetings, our Principal Shareholders may also be able to direct the voting of two thirds of the share capital at a shareholders’ meeting and, as a result, could adopt resolutions on significant matters such as the conclusion of a domination and profit/loss transfer agreement, amendment of the Company’s Articles of Association, including but not limited to the creation of authorized and contingent capital, capital increases with the exclusion or limitation of subscription rights, capital decreases, changes in the Company’s corporate purpose as well as mergers, demergers and similar matters. We understand that in connection with this offering, the Principal Shareholders and the ADIA Investor intend to enter into a shareholders’ agreement with respect to their holdings in Kinove Holdings, which will provide, among other things, that the shareholders of Kinove Holdings will vote their shares in Kinove Holdings as necessary to elect certain nominees of the Principal Shareholders to the Company’s Board of Directors. See “Summary—Principal Shareholders and Selling Shareholder.”

Future sales of our common shares or the anticipation of future sales in the public market may adversely affect the trading price of our common shares.

Upon completion of this offering, our Principal Shareholders will retain a significant equity interest in the Company. The Principal Shareholders will agree not to dispose of or hedge any of our common shares, or securities convertible into or exchangeable for our common shares without the prior consent of Morgan Stanley & Co. LLC and Goldman, Sachs & Co. for the 180-day period following the date of this prospectus. Thereafter, sales of a substantial number of our common shares by any of the Principal Shareholders, either in the public market or in private transactions, the issuance of a large number of common shares by us or the perception that such sales or issuance may occur, could adversely affect the market price of our common shares and our ability to raise capital through subsequent offerings of equity or equity-related securities.

Exchange rate fluctuations may reduce the amount of U.S. Dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your common shares.

Our common shares will be quoted in U.S. Dollars on the NYSE. Our financial statements are prepared in Euros. Under Luxembourg law, the determination of whether we have sufficient distributable profits to pay dividends is made on the basis of our unconsolidated annual financial statements prepared under the Luxembourg Company Law in accordance with accounting principles generally accepted in Luxembourg. Exchange rate fluctuations may affect the amount in Euro that we are able to distribute, and the amount in U.S. Dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in Euro, if any. Such fluctuations could adversely affect the value of our common shares, and, in turn, the U.S. Dollar proceeds that holders receive from the sale of our common shares.

Transformation into a public company will increase our selling, general and administrative costs and affect the regular operations of our business.

This offering will have a significant transformative effect on us. Our business historically has operated as a privately owned company, and we expect to incur additional legal, accounting, reporting and other expenses as a result of having publicly traded common shares. We will also incur costs that we have not incurred previously, including, but not limited to, costs and expenses for directors’ fees, increased director and officer liability insurance, investor relations and various other costs of a public company.

 

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We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), as amended, as well as rules implemented by the Securities and Exchange Commission (“SEC”) and the NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly. These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance coverage, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have an adverse effect on our ability to recruit and bring on qualified independent directors. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.

The additional demands associated with being a public company may affect regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our business. Any of these effects could adversely affect our business, financial condition, and results of operations and cash flows.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect on our business and share price.

As a public company, we will be required to document and test our internal control over financial reporting in order to satisfy the requirements of Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting and, beginning with our annual report on Form 20-F for the year ended December 31, 2015, a report by our independent registered public accounting firm that addresses the effectiveness of internal control over financial reporting. We have not yet begun the process of reviewing and testing our internal control over financial reporting. During this process, we may identify deficiencies that we may not be able to remediate in a timely manner to meet our deadline for compliance with Section 404 or that constitute a material weakness, which could require a restatement or other revision of our financial statements. Testing and maintaining internal control could divert our management’s attention from other matters that are important to the operation of our business. We also expect that the imposition of these regulations will increase our legal and financial compliance costs and make some management activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified report on the effectiveness of our internal control over financial reporting. In such an event, we could not be certain that our financial statements will be accurate and investors could lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common shares. In addition, if we do not maintain effective internal controls, we may not be able to accurately report our financial information on a timely basis, which could harm the trading price of our common shares, impair our ability to raise additional capital, or jeopardize our stock exchange listing.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our common shares, the market price for our common shares and the trading volume of our common shares could decline.

The trading market for our common shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our common shares, the market price for our common shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our common shares to decline.

 

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Risks Related to Investment in a Luxembourg Company and Our Status as a Foreign Private Issuer

Our exemption as a foreign private issuer from certain rules under the U.S. securities laws may result in less information about us being available to investors than for U.S. companies, which may result in our common shares being less attractive to investors.

As a foreign private issuer (as such term in defined in Rule 405 under the Securities Act of 1933), we are exempt from certain rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. companies. As a foreign private issuer, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and Principal Shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our common shares. Moreover, we are not required to file periodic reports and financial statements with the SEC (such as quarterly reports on Form 10-Q or immediate reports on Form 8-K) as frequently or as promptly as companies that are not foreign private issuers whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. As a result, our shareholders may not have access to information they deem important, which may result in our common shares being less attractive to investors. In addition, while we intend to voluntarily comply with the governance requirements of the NYSE, as a foreign private issuer we are not required to comply with most of such requirements, including those relating to the independence of the members of our Board of Directors and its committees, and we could decide in the future not to comply with them.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

Although we expect that we will continue to maintain our status as a foreign private issuer for some time, we could cease to be a foreign private issuer if a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher than costs we incur as a foreign private issuer, which could have a material adverse effect on our business and financial results.

The rights of our shareholders may differ from the rights they would have as shareholders of a U.S. corporation, which could adversely impact trading in our common shares and our ability to conduct equity financings.

Prior to the completion of this offering the Company will change its legal form to be organized as a Luxembourg joint stock corporation (société anonyme or S.A.) under the laws of Luxembourg.

Our corporate affairs will be governed by our Articles of Association and the laws of Luxembourg, including the Luxembourg Company Law (loi du 10 août 1915 concernant les sociétés commerciales, telle quelle a été modifiée). The rights of our shareholders and the responsibilities of our directors and officers under Luxembourg law are different from those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published by or about U.S. issuers. In addition, Luxembourg law governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state corporation laws in the United States.

Therefore, our shareholders may have more difficulty in protecting their interests in connection with actions taken by our directors and officers or our Principal Shareholders than they would as shareholders of a corporation incorporated in the United States. As a result of these differences, our shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. issuer.

 

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For a summary of certain differences between the governance structure of our Company and the rights of holders of our common shares once we become a joint stock corporation and the corporate governance and rights of holders of common stock of a typical corporation incorporated under the laws of the State of Delaware, see “Description of Share Capital and Articles of Association—Comparison of Corporate Governance and Shareholder Rights.

We are organized under the laws of the Grand Duchy of Luxembourg and it may be difficult for you 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 the Grand Duchy of Luxembourg. The majority of our assets are located outside the United States. Furthermore, the majority of the members of our Board of Directors and officers and some experts named in this prospectus reside outside the United States and a substantial portion of their assets are located outside the United States. Investors may not be able to effect service of process within the United States upon us or these persons or to enforce judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. 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 United States, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Awards of punitive damages in actions brought in the United States or elsewhere are generally not enforceable in Luxembourg.

As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and the Grand Duchy of Luxembourg, courts in Luxembourg will not automatically recognize and enforce a final judgment rendered by a U.S. court. A valid judgment obtained from a court of competent jurisdiction in the United States may be entered and enforced through a court of competent jurisdiction in Luxembourg, subject to compliance with the enforcement procedures (exequatur). The enforceability in Luxembourg courts of judgments rendered by U.S. courts will be subject, prior to any enforcement in Luxembourg, to the procedure and the conditions set forth in the Luxembourg procedural code, which conditions may include the following as of the date of this prospectus (which may change):

 

    the judgment of the U.S. court is final and enforceable (exécutoire) in the United States;

 

    the U.S. court had jurisdiction over the subject matter leading to the judgment (that is, its jurisdiction was in compliance both with Luxembourg private international law rules and with the applicable domestic U.S. federal or state jurisdictional rules);

 

    the U.S. court applied to the dispute the substantive law that would have been applied by Luxembourg courts (based on recent case law and legal doctrine, it is not certain that this condition would still be required for an exequatur to be granted by a Luxembourg court);

 

    the judgment was granted following proceedings where the counterparty had the opportunity to appear and, if it appeared, to present a defense, and the decision of the foreign court must not have been obtained by fraud, but in compliance with the rights of the defendant;

 

    the U.S. court acted in accordance with its own procedural laws; and

 

    the decisions and the considerations of the U.S. court must not be contrary to Luxembourg international public policy rules or have been given in proceedings of a tax or criminal nature or rendered subsequent to an evasion of Luxembourg law (fraude à la loi). Awards of damages made under civil liabilities provisions of the U.S. federal securities laws, or other laws, which are classified by Luxembourg courts as being of a penal or punitive nature (for example, fines or punitive damages), might not be recognized by Luxembourg courts. Ordinarily, an award of monetary damages would not be considered as a penalty, but if the monetary damages include punitive damages, such punitive damages may be considered a penalty.

 

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In addition, actions brought in a Luxembourg court against us or the members of our Boards of Directors, our officers and the experts named herein to enforce liabilities based on U.S. federal securities laws may be subject to certain restrictions. In particular, Luxembourg courts generally do not award punitive damages. 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. Proceedings in Luxembourg would have to be conducted in the French or German language, and all documents submitted to the court would, in principle, have to be translated into French or German. 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 and officers and the experts named in this prospectus. In addition, even if a judgment against our company, the non-U.S. members of our Board of Directors, officers or the experts named in this prospectus based on the civil liability provisions of the U.S. federal securities laws is obtained, 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 the Grand Duchy of Luxembourg and 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 United States 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 shareholders less protection than they would have under U.S. insolvency and bankruptcy laws.

As a company organized under the laws of Luxembourg and with its registered office in Luxembourg, we are subject to Luxembourg insolvency and bankruptcy laws in the event any insolvency proceedings are initiated against us including, amount other things, Council Regulation (EC) No. 1346/2000 of May 29, 2000 on insolvency proceedings. 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 the insolvency proceedings initiated against us. Insolvency and bankruptcy laws in Luxembourg or the relevant other European country, if any, may offer our shareholders 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.

 

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USE OF PROCEEDS

The Selling Shareholder will receive all of the net proceeds from this offering. We understand that Kinove Holdings intends to use the net proceeds from its sale of common shares in this offering, together with the funds it receives from us on the discharge of the PECs in the Refinancing and its own available cash, to repay in full the principal amount of its outstanding PIK Toggle Notes due 2019, at the closing of this offering. The PIK Toggle Notes due 2019 were issued in January 2013 by a subsidiary of Kinove Holdings that is not part of the Group, have an outstanding principal amount of approximately $425 million and bear interest at an annual rate of 9.250%/10.000%, which is payable in cash or in kind by increasing the principal amount. We further understand that Kinove Holdings intends to distribute the remaining net proceeds from this offering to the Principal Shareholders and the ADIA Investor. We will not receive any of the proceeds from the sale of common shares in this offering.

 

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DIVIDEND POLICY

We have not declared or paid any dividends since the Acquisition, but we currently intend to pay regular annual dividends on our common shares after the completion of this offering, beginning in 2015 in respect of the portion of 2014 following our change in legal form to a Luxembourg joint stock corporation in connection with this offering. The amount of any future dividend has not been determined.

In accordance with the Luxembourg Company Law, the general meeting of shareholders 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 shareholders would be paid out shortly after the meeting.

Our ability to pay dividends depends on the existence of legally distributable amounts, which include available profit, distributable reserves and share premium, as determined in accordance with the Luxembourg Company Law and on the basis of the Company’s unconsolidated balance sheet. In order to determine the distributable amounts, the financial profit or loss for the relevant financial period must be adjusted by the profit/loss carried forward from the previous financial years as well as any withdrawals or contributions made to the distributable reserves and share premium. Certain reserves must be established by law (e.g., the Company’s legal reserve, equal to 10% of the Company’s share capital or, in the case of a buy back of its own shares by the Company, a reserve equal to the value of the shares bought back) and deducted when calculating the amount available for distribution. Because the Company is a holding company, it does not generate any distributable profits of its own and is dependent on the transfer of distributable profits by its operating subsidiaries.

It is expected that the New Credit Facility will include a covenant restricting our ability to pay dividends, subject to certain exceptions.

For more information see the summaries of relevant provisions of Luxembourg law and of our Articles of Association under “Description of Share Capital and Articles of Association.” For information regarding the Luxembourg withholding tax applicable to dividends, see “Certain Taxation Considerations—Luxembourg Taxation of Common Shares.” For more information regarding the New Credit Facility, see “Description of Material Indebtedness—New Senior Secured Credit Facility.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2014 on an actual basis and as adjusted to give effect to the following steps that we currently expect to take in the Refinancing:

 

    borrow approximately €665 million under the New Credit Facility term loan;

 

    redeem our Senior Secured Notes in full, in an aggregate amount of approximately €602 million (including principal, premium and accrued interest to March 31, 2014); this amount includes the notes redeemed in May 2014 as well as those to be redeemed out of escrowed funds after the closing of this offering;

 

    discharge our PECs (the Shareholder Loan) in full, in an aggregate amount of $383 million (€278 million) (including principal and accrued yield to March 31, 2014), by (1) paying approximately $110 million (€80 million) in cash to Kinove Holdings in respect of a portion of the PECs and (2) issuing approximately $273 million (€198 million) worth of new shares at the initial public offering price for this offering to Kinove Holdings in respect of the balance, which will be treated as an equity contribution; based upon the mid-point of the estimated price range set forth on the cover page of this prospectus, the number of new shares to be issued would be approximately 12,137,741 and would increase by approximately 560,000 common shares for every $1.00 of decrease (or decrease by approximately 515,000 common shares for every $1.00 increase) in the initial public offering price below (or above) the mid-point of the estimated range; and

 

    pay approximately €15 million of estimated fees relating to the New Credit Facility.

The amount payable to redeem the Senior Secured Notes listed above and reflected in the table below does not include any interest accruing from March 31, 2014 to the redemption date, which will depend on when the notes are called (see “Pro Forma Financial Information—The Refinancing”) and will increase the amount payable on redemption. In addition, the redemption amount listed above does not reflect a reduction of principal in respect of certain unamortized transaction costs that were associated with the original issuance of the notes, but this reduction is reflected in the adjustments in the table below.

The amount payable to discharge the PECs listed above and reflected in the table below does not include any yield accruing from March 31, 2014 to the discharge date, which will depend on the pricing date for this offering and will increase the amount of the equity contribution to be made, and thus the number of shares to be issued to Kinove Holdings in respect thereof, upon discharge. See “Summary—Refinancing” for an updated number of shares that would be issued if the pricing of this offering will occur on July 24, 2014. In addition, the discharge amount listed above does not reflect a reduction of principal in respect of unamortized discount associated with the original issuance of the PECs, but this reduction is reflected in the adjustments in the table below.

The steps listed above and the adjustments in the table below do not reflect our planned repayment of approximately €45 million owing under the Revolving Credit Facility in respect of borrowings that we made after March 31, 2014. This amount includes estimated accrued interest to the repayment date, which we expect to occur on or prior to the closing of this offering, and may vary depending on when the closing occurs.

The as-adjusted information presented in the table below is illustrative only and will adjust based on the actual terms of the Refinancing. The following table also contains translations of Euro amounts as of March 31, 2014. These translations are solely for the convenience of the reader and were calculated at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York, which on March 31, 2014 was €1.00=US$1.3777.

 

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You should read this table in conjunction with “Summary–Refinancing,” “Pro Forma Financial Information,” “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, the related notes and the other financial information included elsewhere in this prospectus.

 

     As of March 31, 2014  
     Actual     As Adjusted  
                 (unaudited)  
     (in US$ millions)     (in € million)     (in US$ millions)     (in € million)  

Cash and cash equivalents(1)

     119.6        86.8        76.6        55.6   

Long-term debt:

        

Long-term Senior Secured Notes(2)

     737.5        535.3                 

PECs (Shareholder Loan)(3)

     353.8        256.8                 

Revolving Credit Facility(4)

     0        0                 

New Credit Facility(5)

                   895.5        650.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt

     1,091.3        792.1        895.5        650.0   

Shareholders’ equity:

        

Share capital(6)

     60.3        43.8        77.0        55.9   

Reserves

     (161.9     (117.5     71.9        52.2   

Retained earnings

     (0.6     (0.4     (77.3     (56.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     (102.2     (74.2     71.6        52.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity attributable to the Company

     (102.2     (74.2     71.6        52.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization (does not include cash and cash equivalents)

     989.1        717.9        966.1        702.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash and cash equivalents at the time of the offering may be different, among other reasons, because of interim trading and current payments on indebtedness. The as-adjusted amount reflects the unamortized portion of the €15 million of estimated fees payable in connection with the New Credit Facility. We estimate that our cash and cash equivalents as of June 30, 2014 were approximately €(4) million (which represents cash and cash equivalents less drawings under the Revolving Credit Facility). The change in this item since March 31, 2014 primarily reflects the redemption of approximately €65 million of Senior Secured Notes (including principal, premium and accrued interest) in May 2014, a regular interest payment on the remaining notes of approximately €24 million in June 2014 and changes in net working capital, with the shortfall funded by drawings under the Revolving Credit Facility after March 31, 2014.

 

(2) The principal amount as of March 31, 2014 reflects a reduction of €12.7 million in respect of unamortized transaction costs associated with the original issuance of the notes.

 

(3) The as-adjusted amount as of March 31, 2014 reflects a reduction of €16.4 million in respect of unamortized discount associated with the original issuance of the PECs.

 

(4) As of March 31, 2014, there were no cash amounts drawn under the Revolving Credit Facility and $249.2 million was available for drawing, representing the difference between $250.0 million and $0.8 million equivalent of guarantees reducing the available amount under the Revolving Credit Facility. After March 31, 2014, we drew approximately €45.0 million under our Revolving Credit Facility to fund working capital. As of June 30, 2014 we have repaid some of this amount and we expect to repay the outstanding portion of the amount and replace this facility with the New Credit Facility in the Refinancing.

 

(5) We intend to enter into the New Credit Facility, consisting of a term loan and a revolving credit line, which will be undrawn, as part of the Refinancing. See “Summary—Refinancing” and “Description of Material Indebtedness—New Credit Facility” for a summary of the proposed terms of the New Credit Facility (which have not been finally determined and are subject to change). The as-adjusted amount outstanding reflects the amortized portion of the €15 million of estimated fees payable in connection with the New Credit Facility.

 

(6) Our actual share capital as of March 31, 2014 was €43,750,000, represented by 43,750,000 shares with a nominal value of €1.00 per share. Our as-adjusted share capital as of March 31, 2014 reflects our change of legal form to a joint stock corporation and would have been €55,887,741, represented by 55,887,741 common shares with no par value. Assuming that the pricing of this offering will occur on July 24, 2014, our as-adjusted share capital following the change of legal form to a joint stock corporation would be €56,458,102, represented by 56,458,102 common shares with no par value. These amounts are based on an assumed initial public offering price of $22.5 per share, which is the midpoint of the range set forth on the cover of this prospectus. Our share capital will be affected by the actual initial public offering price as well as by the Euro to U.S. Dollar exchange rate at the time or the pricing of the offering.

 

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DILUTION

The following table sets forth the difference between the current shareholders of the Company (Kinove Holdings and Luxco Coinvest) and the new investors with respect to the number of common shares purchased, the total consideration paid, or to be paid, and the average price per common share paid, or to be paid, by the current shareholders and by the new investors:

 

     Common
Shares
Purchased
     Total
Consideration
     Average Price
per Common
Shares

(in $)
 
     Number      Amount
(in $)
    

Current shareholders

     56,458,102         390,057,290         6.9   

New investors

     18,000,000         405,000,000         22.5   

A $1.00 increase (decrease) in the assumed public offering price of $22.5 per common share (the midpoint of the estimated price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors by $18 million, assuming the number of common shares offered, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1,000,000 common shares in the number of common shares offered would increase (decrease) the total consideration paid by new investors by $22.5 million (€16.3 million), assuming that the assumed initial public offering price of $22.5 per common share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) remains the same.

Sales by the Selling Shareholder in this offering will reduce the number of common shares held by it to 32,636,990, or approximately 57.81% (approximately 29,936,990 or 53.03%, if the underwriters exercise their option to purchase additional common shares from the Selling Shareholder in full). The number of common shares to be purchased by new investors will represent approximately 31.88% of the total common shares outstanding (approximately 36.66%, if the underwriters exercise their option to purchase additional common shares from the Selling Shareholder in full).

The discussion and table above (i) assume that the pricing of this offering will occur on July 24, 2014, (ii) include 12,708,102 common shares assumed to have been issued to the Selling Shareholder at the assumed public offering price of $22.5 per common share (the midpoint of the estimated price range set forth on the cover page of this prospectus) in consideration for contributing approximately $286 million (€207 million) of PECs as an equity investment in the Company, (iii) except as explicitly set forth above, assume no exercise of the underwriters’ option to purchase additional common shares and (iv) are based on an exchange rate of €1.00=$1.3800. The exact number of shares to be issued to the Selling Shareholder will depend on the actual initial public offering price and the date of pricing of this offering.

 

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PRO FORMA FINANCIAL INFORMATION

Introduction

The following unaudited pro forma financial information for the Company was prepared in conformity with Article 11 of SEC Regulation S-X. The pro forma adjustments are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the impact of the Refinancing transactions described below.

The unaudited pro forma financial information includes a pro forma consolidated statement of financial position as at March 31, 2014, a pro forma consolidated income statement for the three months ended March 31, 2014, a pro forma consolidated income statement for the year ended December 31, 2013 and explanatory notes.

The unaudited pro forma consolidated financial information should be read in conjunction with the historical financial statements of the Company and the related notes thereto included elsewhere in this prospectus. The unaudited pro forma financial information is provided for illustrative purposes only and does not purport to present what the actual results of operations or financial position would have been had the Refinancing transactions actually occurred on the dates indicated, nor do they purport to represent results of operations for any future period or financial position for any future date.

Basis of preparation

The unaudited pro forma consolidated financial information presents the consolidated statement of financial position and income statements of the Company and its subsidiaries assuming that the Refinancing transactions described below had been completed on: (i) January 1, 2013 with respect to the unaudited pro forma consolidated income statements and (ii) March 31, 2014 with respect to the unaudited pro forma consolidated statement of financial position.

The historical financial data as at and for the three months ended March 31, 2014 have been derived from the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The historical financial data for the year ended December 31, 2013 has been derived from the audited consolidated financial statements included elsewhere in this prospectus.

The pro forma financial information is unaudited and includes estimates and assumptions to determine the effect of pro forma events that are directly attributable to the Refinancing available at this time. These estimates and assumptions may differ from the estimates and actual figures in the final accounting for the Refinancing as additional information becomes available, and such differences may be material.

Therefore, the unaudited pro forma consolidated financial information is not necessarily indicative of the results that actually would have been achieved for the periods presented or that may be achieved in the future.

One-off items related to the Refinancing are not recorded in the unaudited pro forma income statement. The effects of these one-off items are recorded in the unaudited pro forma consolidated statement of financial position, as applicable, and illustrated in the notes to the unaudited pro forma consolidated financial statements.

The functional currency for the Company is the Euro, which is the currency of the primary economic environment in which the Company operates. The following exchange rates of U.S. Dollars per €1.00 have been applied:

 

January 1, 2013:

     1.3194   

December 31, 2013:

     1.3791   

March 31, 2014:

     1.3788   

Average for 2013:

     1.3300   

Average for three months ended March 31, 2014:

     1.3706   

 

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As supplementary information, convenience translations are provided as at and for the three months ended March 31, 2014 and for the year ended December 31, 2013. These translations were calculated at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York, which on March 31, 2014 was €1.00=US$1.3777 and on December 31, 2013 was €1.00=US$1.3779.

Additionally, the following German tax rates have been assumed for the calculation of tax charge on our financial result in the unaudited pro forma income statements:

 

German tax rate on December 31, 2013 for the year ended December 31, 2013:

     32.26%   

German tax rate on March 31, 2014 for the three months ended March 31, 2014:

     32.27%   

The Refinancing

Credit structure prior to the Refinancing

The Company’s financial liabilities on March 31, 2014 primarily consisted of:

 

    the PECs (our Shareholder Loan) with a nominal value of $376.7 million, equivalent to €273.2 million, offset by an unamortized discount of €16.4 million;

 

    the Senior Secured Notes having an equivalent nominal principal value of €548.0 million, offset by unamortized transaction costs of €12.7 million; and

 

    an undrawn Revolving Credit Facility with an available amount of $250 million, including capitalized transaction costs of €4.6 million.

The Refinancing Transactions

The redemption of the Senior Secured Notes includes Euro-denominated notes with an original aggregate principal amount of €355 million, maturing on June 15, 2018 and bearing interest at 10.000% per annum, payable semi-annually on each June 15 and December 15, as well as U.S. Dollar-denominated notes with an aggregate principal amount of $350 million (translated at a rate of €1.00=US$1.4308 on the date of the Acquisition (July 29, 2011) to €244.62 million), maturing on June 15, 2018 and bearing interest at 9.625% per annum, payable semi-annually on each June 15 and December 15. In June 2012, we voluntarily redeemed 10% of the Senior Secured Notes. On each of March 31, 2014, December 31, 2013 and March 31, 2013, the outstanding principal amount of Euro-denominated notes was €319.5 million and the outstanding principal amount of U.S. Dollar-denominated notes was $315.0 million.

The redemption of the Senior Secured Notes will result in the de-recognition of liabilities, unamortized transaction costs and a cash flow in the pro forma statement of financial position as at March 31, 2014 and a cash outflow, and the de-recognition of associated interest expenses and foreign currency exchange gains or losses in the pro forma income statements for the three months ended March 31, 2014 and for the year ended December 31, 2013.

The redemption of the Senior Secured Notes will give rise to early redemption fees as set forth in the indenture governing the Senior Secured Notes. It is assumed that the redemption of the Senior Secured Notes will occur in two steps. First, an annual 10% optional redemption of the original aggregate principal amount of notes at a redemption price equal to 103% of the principal amount will be exercised (that is, a redemption of €35.5 million principal amount of Euro-denominated notes and $35.0 million of U.S. Dollar-denominated notes). (This optional redemption occurred in May 2014, after the pro forma balance sheet date.) Second, the remaining principal amounts of both series of notes will be redeemed at an early redemption price equal to 107.500% for the Euro-denominated notes and 107.219% for the U.S. Dollar-denominated notes. The aggregate early redemption fees in connection with the Refinancing will amount to €37.8 million.

 

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Additionally, the discount on the Senior Secured Notes in the amount of €12.7 million is assumed to be written off as part of the redemption in the pro forma statement of financial position and capitalized current financial liabilities of €15.7 million are assumed to be settled.

The new term loan under the New Credit Facility includes a Euro-denominated term loan with a principal amount of €399.0 million and a U.S. Dollar-denominated term loan with a principal amount of $366.8 million, translated at a rate of €1.00=US$1. 3788 as at March 31, 2014 to €266.0 million, resulting in a nominal value of €665.0 million at the balance sheet date. The final terms of the new term loan have not yet been finally determined and are subject to change. For purposes of these pro forma financial statements the following most likely conditions are assumed: a seven year term and a floating annual interest rate that we currently estimate will result in an overall effective annual rate of 4.50%. An increase (decrease) of the overall effective annual rate by 0.125% would increase (decrease) our annual interest costs by €0.85 million. Although the actual rate has not yet been finally determined with the lenders, we believe that, if current market conditions continue to prevail at the time of the borrowing of the term loan, the overall effective annual rate on the new term loan could be lower than the 4.50% rate assumed above. As part of the new term loan, transaction costs amounting to €15.0 million will be capitalized and expensed using the effective interest rate method over the maturity of the new term loan. As a result, transaction costs released to the income statement amount to €0.5 million for the three months ended March 31, 2014 and €1.8 million for the year ended December 31, 2013 and are recognized within finance costs. The new term loan will replace the Senior Secured Notes with a higher principal amount at a lower interest rate. It will be used to cover the redemption costs of the Senior Secured Notes, to repay a part of the Shareholder Loan and to pay estimated fees relating to the New Credit Facility.

The Shareholder Loan is a fully subordinated loan with an initial nominal value of €277.5 million in the form of PECs. The PECs and the accrued yield and compound yield thereon were initially due on July 28, 2021. On February 1, 2013 the Company changed the terms and conditions of the Shareholder Loan by shortening its term by two years and the PECs outstanding at the date of amendment were converted from Euro into U.S. Dollar instruments. Additionally, semi-annual payments of principal and yield are due and payable. This amendment resulted in a nominal yield of 10.57% compared to a yield of 10.0% prior to the amendment.

In connection with the Refinancing, the Shareholder Loan, which is held by Kinove Holdings, will be partially repaid in an amount of €79.7 million (which includes accrued yield to March 31, 2014) and the remaining amount equivalent to €198.2 million (which includes accrued yield to March 31, 2014) will be contributed to equity by Kinove Holdings in consideration for 12,137,741 new shares issued to it at the initial public offering price for this offering, having an aggregate value equal to the amount of the equity contribution. We will issue the new shares to Kinove Holdings after the pricing and before the closing of this offering, and the aggregate value of the new shares (i.e., the final amount of the equity contribution), and thus the number of new shares issued, will reflect accrued yield to the issue date, the amount of which will depend on the actual pricing date and will be greater than the amount of yield reflected as of March 31, 2014. Additionally, the unamortized discount of the Shareholder Loan amounting to €16.4 million is de-recognized in the pro forma statement of financial position and capitalized current financial liabilities of €4.7 million as of March 31, 2014 are settled.

The Revolving Credit Facility in the amount of $250 million is available to support the Company’s liquidity. As at March 31, 2014 the Revolving Credit Facility was undrawn. Unamortized transaction costs that were incurred in connection with entering into the Revolving Credit Agreement in June 2011 amounted to €4.6 million as at March 31, 2014 and are derecognized due to the Refinancing. After March 31, 2014, we borrowed funds under the Revolving Credit Facility and plan to repay them, together with accrued interest, as part of the Refinancing. These transactions are not reflected in the pro forma financial information. See “Summary—Refinancing.”

The New Credit Facility will include a multicurrency, senior secured revolving line of credit of €115 million that will be available to support the Company’s liquidity. As at March 31, 2014 and the time of preparation of the pro forma financial information, this revolving line of credit has not been utilized for cash drawings and accordingly is neither recognized in the pro forma consolidated statement of financial position nor in the pro forma income statement. Although the terms of the new line have not been finally determined, we currently expect that borrowings under the line will bear interest at an annual floating rate based on LIBOR or EURIBOR plus a spread.

 

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Subject to available terms and market conditions, the Company may enter into a rate swap agreement with an unaffiliated third party that would fix the floating interest rate on the new term loan at a fixed annual rate for the life of the loan.

Unaudited pro forma consolidated statement of financial position of Orion Engineered Carbons S.à r.l. as at March 31, 2014

 

    

Orion Engineered

Carbons S.à r.l.

actual

Mar 31, 2014

    

Pro forma

refinancing

adjustments

Mar 31, 2014

   

Orion Engineered

Carbons S.à r.l.

pro forma

Mar 31, 2014

    

USD Convenience

Translation

Mar 31, 2014

 

ASSETS

                          
     In € million      In € million     In € million      In US$ million  

Non-current assets

          

Goodwill

     48.5          –         48.5          66.8    

Other intangible assets

     121.0          –         121.0          166.7    

Property, plant and equipment

     326.7          –         326.7          450.1    

Investment in joint ventures

     4.6          –         4.6          6.3    

Other financial assets

     1.7          –         1.7          2.3    

Other assets

     3.7          (3.2) (i)      0.5          0.7    

Deferred tax assets

     41.6          –         41.6          57.3    
  

 

 

    

 

 

   

 

 

    

 

 

 
     547.8          (3.2)        544.6          750.2    
  

 

 

    

 

 

   

 

 

    

 

 

 

Current assets

          

Inventories

     128.9          –         128.9          177.6    

Trade receivables

     208.4          –         208.4          287.1    

Emission rights

     1.9          –         1.9          2.6    

Other financial assets

     0.4          –         0.4          0.6    

Other assets

     44.0          (1.4) (i)      42.6          58.7    

Income tax receivables

     12.2          –         12.2          16.8    

Cash and cash equivalents

     86.8          (31.2)        55.6          76.6    
        (548.0)(a)            
        (15.7)(c)            
        (37.8)(d)            
        650.0(e)            
        (79.7)(f)            
  

 

 

    

 

 

   

 

 

    

 

 

 
     482.6          (32.6)        450.0          620.0    
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,030.4          (35.8)        994.6          1,370.2    
  

 

 

    

 

 

   

 

 

    

 

 

 

EQUITY AND LIABILITIES

                          
     In € million      In € million     In € million      In US$ million  
Equity           

Subscribed capital

     43.8          12.1 (g)      55.9           77.0    

Reserves

     (117.5)         169.7        52.2           71.9    
        186.1(g)            
        (16.4)(f)            
          

Profit or loss for the period

     (0.4)         (55.7)        (56.1)         (77.3)   
        (12.7)(b)            
        (37.8)(d)            
        (4.6)(i)            
        (0.6)(j)            
  

 

 

    

 

 

   

 

 

    

 

 

 
     (74.1)         126.1         52.0          71.6    
  

 

 

    

 

 

   

 

 

    

 

 

 

 

-50-


Table of Contents
    

Orion Engineered

Carbons S.à r.l.

actual

Mar 31, 2014

    

Pro forma

refinancing

adjustments

Mar 31, 2014

    

Orion Engineered

Carbons S.à r.l.

pro forma

Mar 31, 2014

    

USD Convenience

Translation

Mar 31, 2014

 

EQUITY AND LIABILITIES

  

 

    

 

    

 

    

 

 
     In € million      In € million      In € million      In US$ million  

Non-current liabilities

           

Pension provisions

     36.1         –          36.1         49.7   

Other provisions

     14.7         –          14.7         20.3   

Liabilities to shareholder

     256.8         (256.8)                   
        (273.2)(3)             
        (193.5)(g)                 
        (79.7)(h)                 
        16.4(f)             

Financial liabilities

     539.0         114.7          653.7         900.6   
        (535.3)(1)             
        (548.0)(a)                 
        12.7(b)                 
        650.0(2)             
        665.0(e)                 
        (15.0)(e)                 

Other liabilities

     1.7         –          1.7         2.3   

Income tax liabilities

             –                    

Deferred tax liabilities

     44.6         0.6(j)         45.2         62.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     892.9         (141.5)         751.4         1,035.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

           

Other provisions

     42.0         –          42.0         57.9   

Liabilities to banks

     8.0         –          8.0         11.0   

Trade payables

     107.8         –          107.8         148.5   

Other financial liabilities

     21.3         (20.4)         0.9         1.2   
        (15.7)(c)             
        (4.7)(g)             

Income tax liabilities

     7.3         –          7.3         10.1   

Other liabilities

     25.2         –          25.2         34.7   
  

 

 

    

 

 

    

 

 

    

 

 

 
     211.6         (20.4)         191.2         263.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,030.4         (35.8)         994.6         1,370.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Unaudited pro forma consolidated income statement of Orion Engineered Carbons S.à r.l. for the three months ended March 31, 2014

 

    

Orion Engineered
Carbons S.à r.l.
actual

Jan 1 to Mar 31,
2014

    Pro forma
refinancing
adjustments
Jan 1 to
Mar 31,
2014
    Orion
Engineered
Carbons
S.à r.l. pro
forma Jan
1 to Mar
31, 2014
    USD
Convenience
Translation
Jan 1 to Mar
31, 2014
 
     In € million     In € million     In € million     In US$ million  

Revenue

     330.5               330.5        455.3   

Cost of sales

     (259.6            (259.6     (357.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     70.9               70.9        97.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling expenses

     (24.4            (24.4     (33.6

Research and development costs

     (2.8            (2.8     (3.9

General and administrative expenses

     (12.3            (12.3     (16.9

Other operating income

     0.7               0.7        1.0   

Other operating expenses

     (3.6            (3.6     (5.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating result (EBIT)

     28.5               28.5        39.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

     0.4               0.4        0.6   

Finance costs

     (24.2     14.1        (10.1     (13.9
       22.1 (k)     
       (8.0 )(l)     

Share of profit or loss of joint ventures

     0.1               0.1        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial result

     (23.7     14.1        (9.6     (13.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit or loss before income taxes

     4.8        14.1        18.9        26.0   

Income taxes

     (5.2     (4.5 )(m)      (9.7     (13.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit or loss for the period

     (0.4     9.6        9.2        12.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings Per Share (US$/€ per share)

     (0.01            0.16        0.22   

 

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Table of Contents

Unaudited pro forma consolidated income statement of Orion Engineered Carbons S.à r.l. for the year ended December 31, 2013

 

    

Orion Engineered

Carbons S.à r.l.

actual

Jan 1 to Dec 31,

2013

   

Pro forma

refinancing

adjustments

Jan 1 to Dec 31,

2013

   

Orion Engineered

Carbons S.à r.l.

pro forma

Jan 1 to Dec 31,

2013

   

USD Convenience

Translation

Jan 1 to Dec 31,

2013

 
     In € million     In € million     In € million     In US$ million  

Revenue

     1,339.6               1,339.6        1,845.8   

Cost of sales

     (1,070.8            (1,070.8     (1,475.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     268.8               268.8        370.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling expenses

     (92.1            (92.1     (126.9

Research and development costs

     (10.1            (10.1     (13.9

General and administrative expenses

     (52.5            (52.5     (72.3

Other operating income

     8.3               8.3        11.4   

Other operating expenses

     (38.7            (38.7     (53.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating result (EBIT)

     83.7               83.7        115.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

     17.1        (2.7     14.4        19.8   
       (15.2 )(n)     
       12.5 (o)     

Finance costs

     (112.7     57.4        (55.3     (76.2
       89.6 (n)     
       (32.2 )(o)     

Share of profit or loss of joint ventures

     0.4               0.4        0.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial result

     (95.2     54.7        (40.5     (55.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit or loss before income taxes

     (11.5     54.7        43.2        59.5   

Income taxes

     (7.5     (17.6 )(p)      (25.1     (34.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit or loss for the period

     (19.0     37.1        18.1        24.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings Per Share (€/US$ per share)

     (0.43            0.32        0.44   

 

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Table of Contents

Pro forma Refinancing adjustments

The Company has made certain adjustments and assumptions in the presentation of the unaudited pro forma consolidated statement of financial position as at March 31, 2014 to reflect the intended Refinancing. Therefore the following adjustments are necessary to reflect:

 

  (1) the redemption of the Senior Secured Notes

 

  (a) by recording the redemption of the Senior Secured Notes at a nominal value of €548.0 million;

 

  (b) record the one-time effect of the de-recognition of unamortized transaction costs amounting to €12.7 million;

 

  (c) assume payment of accrued interest liabilities of €15.7 million; and

 

  (d) assume the related cash outflow due to an early redemption fee of €37.8 million.

 

  (2) the drawdown of the new term loan

 

  (e) by recording the drawdown of the new term loan in the amount of €650.0 million (nominal value of €665 million less transaction costs of €15 million). The transaction costs of €15 million will be amortized over the loan term at an effective interest rate of 4.880935% assumed for this purpose (see also note (l));

 

  (3) the partial repayment and equity contribution of the Shareholder Loan (nominal value of €273.2 million)

 

  (f) the de-recognition of unamortized discount amounting to €16.4 million;

 

  (g) the conversion of the remaining balance of the Shareholder Loan to common shares (based on the initial public offering price for this offering) as an equity contribution in the amount of €198.2 million (of which €12.1 million are allocated to subscribed capital and €186.1 million are allocated to reserves) including accrued yield amounting to €4.7 million as at March 31, 2014; and

 

  (h) by recording the partial repayment of €79.7 million of the Shareholder Loan (including accrued yield amounting to €4.7 million on March 31, 2014);

 

  (4) the de-recognition of the Revolving Credit Facility

 

  (i) by reflecting the de-recognition of the capitalized transaction costs of the Revolving Credit Facility in the amount of €4.6 million (thereof €3.2 million non-current and €1.4 million current assets).

 

  (5) the recognition of deferred tax liabilities

 

  (j) by recording the one-time effect on the deferred tax liabilities due to the de-recognition of the Senior Secured Notes and the Shareholder Loan and the drawdown of the new term loan amounting to an increase of €0.6 million of deferred tax liabilities in total. This amount results from the differences between the tax financial position and the financial position according to IFRS of €1.8 million from the Refinancing transactions using an assumed tax rate of 32.27% (which is the applicable German tax rate of the Company as of March 31, 2014).

 

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Table of Contents

The Company has made certain adjustments and assumptions in the presentation of the unaudited pro forma consolidated income statement for the three months ended March 31, 2014 to reflect the intended Refinancing. Therefore the following adjustments are necessary to reflect:

 

  (6) the redemption of the Senior Secured Notes and the de-recognition of the Shareholder Loan

 

  (k) the effects from redemption of the Senior Secured Notes and from the de-recognition of the Shareholder Loan includes de-recognition of losses from foreign currency effects amounting to €0.1m and the de-recognition of interest expense incurred in the amount of €22.0 million (Senior Secured Notes: €14.2 million, Shareholder Loan: €7.8 million). The one-time effect of the unamortized transactions costs in the amount of €12.7 million related to the Senior Secured Notes and the early redemption fee with respect to the Senior Secured Notes in the amount of €37.8 million are not recognized in the pro forma income statement.

 

  (7) the drawdown of the new term loan

 

  (l) the effects from drawdown of the new term loan. This includes the recognition of gains from foreign currency effects of less than €0.01 million and interest expense in the amount of €8.0 million (of which €0.5 million was for amortization of transaction costs).

 

  (8) the recognition of income tax effects

 

  (m) the effects related to income tax effect of €4.5 million at an assumed tax rate of 32.27% (which is the applicable German tax rate of the Company as of March 31, 2014), related to the net pro forma adjustments. The actual effective tax rate after the Refinancing may significantly vary from this estimate, depending upon the relative earnings and deductions in the various tax jurisdictions.

The Company has made certain adjustments and assumptions in the preparation of the unaudited pro forma consolidated income statement for the year ended December 31, 2013 to reflect the intended Refinancing. Therefore the following adjustments are necessary to reflect:

 

  (9) the redemption of the Senior Secured Notes and the de-recognition of the Shareholder Loan

 

  (n) the effects from repayment of the Senior Secured Notes and the de-recognition of the Shareholder Loans includes the de-recognition of gains from foreign currency effects amounting to €15.2m (Senior Secured Notes: gain of €10.3 million, Shareholder Loan: gain of €4.9 million) and the de-recognition of interest expense incurred in the amount of €89.6 million (Senior Secured Notes: €57.3 million, Shareholder Loan: €32.3 million). The one-time effect of the unamortized transactions costs in the amount of €12.7 million related to the Senior Secured Notes and the early redemption fee of the Senior Secured Notes of €37.8 million are not recognized in the pro forma income statement.

 

  (10) the drawdown of the new term loan

 

  (o) the effects from drawdown of the new term loan. This includes the recognition of gains from foreign currency effects in the amount of €12.5 million and the recognition of interest expenses in the amount of €32.2 million (of which €1.8 million was for amortization of transaction costs).

 

  (11) the recognition of income tax effects

 

  (p) the effects related to income tax effect of €17.6 million at an assumed tax rate of 32.26% (which is the applicable German tax rate of the Company on December 31, 2013), related to the net pro forma adjustments. The actual effective tax rate after the Refinancing may significantly vary from this estimate, depending upon the relative earnings and deductions in the various tax jurisdictions.

 

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Table of Contents

CURRENCIES AND EXCHANGE RATES

Our reporting currency is the Euro. Fluctuations in the exchange rate between the Euro and the U.S. Dollar will affect the U.S. Dollar amounts received by owners of our common shares on conversion of dividends, if any, paid in Euro on the common shares and will affect the U.S. Dollar price of our common shares on the NYSE. The following tables set forth, for the periods and dates indicated, the period end, average, high and low exchange rates in U.S. Dollars per €1.00.

Exchange Rates for the Previous Six Months

 

     Period End      Average Rate(1)      High      Low  

January 2014

     1.3500         1.3618         1.3682         1.3500   

February 2014

     1.3806         1.3665         1.3806         1.3507   

March 2014

     1.3777         1.3828         1.3927         1.3731   

April 2014

     1.3870         1.3811         1.3898         1.3704   

May 2014

     1.3640         1.3739         1.3924         1.3596   

June 2014

     1.3690         1.3594         1.3690         1.3522   

July 2014 (through July 3)

     1.3610         1.3649         1.3681         1.3610   

Exchange Rates for the Previous Five Years Ended December 31, 2013

 

     Period End      Average Rate(2)      High      Low  

2009

     1.4332         1.3955         1.5100         1.2547   

2010

     1.3269         1.3216         1.4536         1.1959   

2011

     1.2973         1.4002         1.4875         1.2926   

2012

     1.3186         1.2909         1.3463         1.2062   

2013

     1.3779         1.3303         1.3816         1.2774   

 

(1) The average of the daily exchange rates during the relevant period.

 

(2) The average of the month-end rates during the relevant period.

Our inclusion of these exchange rates and other exchange rates specified elsewhere in this prospectus should not be construed as representations that the Euro amounts actually represent such U.S. Dollar amounts or could have been or could be converted into U.S. Dollars at any particular rate, if at all. The Euro foreign exchange reference rate used in this prospectus is the current noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. On July 3, 2014, this rate was $1.3610 per €1.00. These exchange rates may differ from the exchange rate in effect on and as of the date of this prospectus.

 

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Table of Contents

SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

The following table sets forth selected historical financial information and other data for the three months ended March 31, 2014 and 2013 and fiscal years 2013, 2012 and 2011 and as of March 31, 2014 and December 31, 2013 and 2012. The information for fiscal years 2013, 2012 and 2011 and as of December 31, 2013 and 2012 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our balance sheet information as of December 31, 2011 is derived from our audited consolidated financial statements, which are not included in this prospectus. The information for the three months ended March 31, 2014 and 2013 and as of March 31, 2014 has been derived from our unaudited interim condensed consolidated financial statements. This information should be read in conjunction with the consolidated financial statements included elsewhere in this prospectus, the related notes and other financial information included herein. Our historical results are not necessarily indicative of the results that might be expected for future interim periods or for the full fiscal year ending December 31, 2014. The unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

The Company was incorporated on April 13, 2011 and prior to the Acquisition had no operations. The Successor period for 2011 covers the period from incorporation through December 31, 2011. For the Predecessor period ended July 29, 2011, financial information set forth below has been derived from Evonik Carbon Black’s audited combined financial statements.

For fiscal years 2010 and 2009, the selected historical financial information set forth below has been derived from Evonik Carbon Black’s audited combined financial statements. We historically operated as a business line of Evonik and reported our results as part of Evonik’s business unit “Inorganic Materials.” The combined financial statements of Evonik Carbon Black for each of fiscal years 2010 and 2009 have been prepared on a “carve-out” basis from Evonik’s consolidated financial statements using the historical financial information attributable to Evonik Carbon Black and include allocations of income, expenses, assets, liabilities and cash flows from Evonik. For the preparation of the combined financial statements it was necessary to make assumptions and estimates for carve-out adjustments. Accordingly, the combined financial statements do not necessarily reflect the financial position and performance that would have been presented had Evonik Carbon Black already existed as an independent company during the periods presented and had the transactions between Evonik Carbon Black and other Evonik group companies been carried out between independent companies. The combined financial statements of Evonik Carbon Black present the financial position and performance of Evonik Carbon Black as it existed under Evonik’s ownership, which differs in various respects from the business as it has being operated after the completion of the Acquisition.

 

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Table of Contents

The following table also contains translations of Euro amounts as of December 31, 2013 and the three months ended March 31, 2014. These translations are solely for the convenience of the reader and were calculated at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York, which as of December 31, 2013 was €1.00=US$1.3779 and as of March 31, 2014 was €1.00 = US$1.3777. You should not assume that, on that or any other date, one could have converted these amounts of Euro into U.S. Dollars at these or any other exchange rate.

 

    Successor          Predecessor  
Income Statement Data   As of March 31,     Year Ended December 31,     Period
Ended
December 31,
         Period
Ended
July 29,
        Year Ended
December 31,
 
    2014     2013     2013     2012     2011          2011         2010(1)     2009(1)  
    (in US$
million)
    (in €
million)
    (in US$
million)
    (in €
million)
    (in €
million)
    (in €
million)
         (in €
million)
        (in €
million)
    (in €
million)
 

Revenue

    455.3        330.5        341.1        1,845.9        1,339.6        1,397.5        545.1            780.6          1,186.2        839.5   

Cost of sales

    (357.7)        (259.6)        (271.5)        (1,475.5)        (1,070.8)        (1,116.0)        (455.1)            (611.5)          (942.1)        (714.7)   

Gross profit

    97.6        70.9        69.6        370.4        268.8        281.6        89.9            169.1          244.0        124.8   

Selling expenses

    (33.6)        (24.4)        (23.7)        (126.9)        (92.1)        (96.2)        (42.1)            (61.2)          (103.5)        (90.7)   
Research and development costs     (3.9)        (2.8)        (3.4)        (13.9)        (10.1)        (9.5)        (4.8)            (5.8)          (10.4)        (11.4)   
General and administrative expenses     (17.0)        (12.3)        (13.5)        (72.4)        (52.5)        (54.3)        (14.1)            (19.3)          (48.4)        (42.3)   

Other operating income

    1.0        0.7        5.1        11.5        8.3        18.5        12.1            145.0          18.3        17.9   
Income from reversal of impairments on non-current assets                                                    19.0          

Other operating expenses

    (5.0)        (3.6)        (9.1)        (53.3)        (38.7)        (52.5)        (57.0)            (31.7)          (24.6)        (46.5)   

Impairment loss on non-current assets

                                                   (6.0)        (108.9)   

Operating result (EBIT)

    39.2        28.5        25.0        115.5        83.8        87.6        (16.0)            196.0          84.4        (157.2)   

Finance income

    0.6        0.4        15.9        23.6        17.1        5.2        7.6            0.3          0.8        0.5   

Finance costs

    (33.4)        (24.2)        (49.9)        (155.3)        (112.7)        (103.1)        (76.0)            (12.0)          (17.2)        (12.0)   
Share of profit or loss of joint venture     0.1        0.1        0.1        0.5        0.4        0.4        0.2            0.5          0.4        0.4   

Financial result

    (32.7)        (23.7)        (33.9)        (131.2)        (95.2)        (97.5)        (68.3)            (11.3)          (16.0)        (11.1)   
Profit or loss before income taxes     6.6        4.8        (8.9)        (15.7)        (11.4)        (9.8)        (84.3)            184.7          72.4        (168.3)   

Income taxes

    (7.1)        (5.2)        2.4        (10.4)        (7.5)        (8.9)        9.8            (62.1)          (29.1)        4.6   
Profit or loss for the period     (0.6)        (0.4)        (6.5)        (26.4)        (19.0)        (18.7)        (74.5)            122.7          43.3        (163.7)   

Net Earnings Per Share (US$/€ per share)(2)

    (0.01)        (0.01)        (0.15)        (0.60)        (0.43)        (0.43)        (1.70)            2.80                   

 

     Successor           Predecessor  
Balance Sheet Data    As of March 31,     As of December 31,           As of
December 31,
 
     2014     2014     2013     2012      2011           2010      2009  
    

(in US$

million)

   

(in €

million)

   

(in US$

million)

    (in €
million)
    (in €
million)
     (in €
million)
         

(in €

million)

    

(in €

million)

 

Cash and cash equivalents

     119.6        86.8        97.1        70.5        74.9         98.9             28.2         10.2   

Property, plant and equipment

     450.1        326.7        459.5        333.5        334.6         325.5             368.1         338.4   

Total assets

     1,419.5        1,030.3        1,387.5        1,007.0        1,092.7         1,141.7             1,084.7         935.0   

Total liabilities

     1,521.7        1,104.5        1,489.8        1,081.2        1,089.5         1,118.0             666.9         468.5   

Total equity

     (102.2     (74.2     (102.3     (74.3     3.2         23.7             417.9         466.5   

 

(1) The Predecessor periods for 2010 and 2009 include two subsidiaries that were not part of the Acquisition: QECC and a subsidiary that was closed prior to the Acquisition. These subsidiaries together represented €105.2 million and €43.9 million in revenues in 2010 and 2009, respectively, and €76.0 million and €58.1 million in total assets as of December 31, 2010 and 2009, respectively.

 

(2) Our share capital as of March 31, 2014 was €43,750,000, represented by 43,750,000 shares with a nominal value of €1.00 per share.

 

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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 three months ended March 31, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011 and should be read in conjunction with the information included under “Business”, “Selected Historical Consolidated Financial and Other Data” and our consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with IFRS and our audited consolidated financial statements present separately the Predecessor period prior to the Acquisition and the Successor periods after the Acquisition included elsewhere in this prospectus. The Company was incorporated on April 13, 2011 and prior to the Acquisition had no operations. The Successor period for 2011 covers the period from incorporation through December 31, 2011 (the Successor “Period ended December 31, 2011”). For the Predecessor period ended July 29, 2011, financial information set forth below has been derived from Evonik Carbon Black’s audited combined financial statements (the Predecessor “Period ended July 29, 2011”).

We historically operated as a business line of Evonik and reported our results as part of Evonik’s business unit “Inorganic Materials.” The combined financial statements of Evonik Carbon Black for the Period ended July 29, 2011 have been prepared on a “carve-out” basis from Evonik’s consolidated financial statements using the historical financial information attributable to Evonik Carbon Black and include allocations of income, expenses, assets, liabilities and cash flows from Evonik. For the preparation of the combined financial statements it was necessary to make assumptions and estimates for carve-out adjustments. Accordingly, the combined financial statements do not necessarily reflect the financial position and performance that would have been presented had Evonik Carbon Black existed as an independent company during the periods presented. The combined financial statements of Evonik Carbon Black present the financial position and performance of Evonik Carbon Black as it existed under Evonik’s ownership, which differs in various respects from the business as it has been operated after the completion of the Acquisition.

This discussion is based on comparisons between our financial data for different periods and contains certain forward-looking statements. Our actual results could differ materially from those discussed in any forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus, particularly under the captions “Note Regarding Forward-Looking Statements” and “Risk Factors.” The following discussion also contains translations of Euro amounts into U.S. Dollars as of and for the three months ended March 31, 2014 and the year ended December 31, 2013. These translations are solely for the convenience of the reader and were calculated at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York, which as of December 31, 2013 was €1.00 = US$1.3779 and as of March 31, 2014 was €1.00 = US$1.3777. This rate differs from the consolidation currency translation rate used in our consolidated financial statements included elsewhere in this prospectus. You should not assume that, on that or any other date, one could have converted these amounts of Euro into U.S. Dollars at these or any other exchange rate.

Overview

We are a leading global producer of carbon black. Carbon black is a form of carbon used to improve certain properties of materials into which it is added. It is used as a pigment and as a performance additive in coatings, polymers, printing and special applications (specialty carbon black) and in the reinforcement of rubber in tires and mechanical rubber goods (rubber carbon black). Historically, our business operated as a business line of Evonik and was acquired by our Principal Shareholders from Evonik on July 29, 2011.

In 2013, and the three months ended March 31, 2014, we generated revenue of €1,339.6 million and €330.5 million on sales volume of 968.3 kmt and 249.3 kmt, respectively, Adjusted EBITDA of €191.1 million

 

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and €50.0 million, respectively, and a loss for the periods of €19.0 million and €0.4 million, respectively. We operate a diversified carbon black business with more than 280 specialty carbon black grades and approximately 80 rubber carbon black grades. Our product portfolio is one of the broadest in the industry and is divided into the following segments:

 

    Specialty Carbon Black. We are one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 23% in 2013 measured by volume in kmt. Our estimated share of global industry specialty carbon black sales remained relatively stable in the past three years (23.3% in 2012 and 23.6% in 2011). We believe that our share of global industry sales measured by revenue is higher, since our product portfolio is weighted towards higher priced premium grades. We manufacture specialty carbon black at multiple sites for a broad range of specialized applications. Specialty carbon black imparts specific characteristics, such as high-quality pigmentation, UV light protection, viscosity control and electrical conductivity. In 2013 and the three months ended March 31, 2014, Adjusted EBITDA for our Specialty Carbon Black segment was €98.0 million and €25.7 million, respectively, and the Segment Adjusted EBITDA Margin was 25.1% and 25.2%, respectively. This segment accounted for 29.1% and 30.9% of our total revenue, 51.3% and 51.4% of total Adjusted EBITDA and 19.7% and 20.4% of our sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

 

    Rubber Carbon Black. We are one of the largest global producers of rubber carbon black. We have a global supply network, and an estimated share of global industry sales of approximately 7% in 2013 measured by volume in kmt, with industry sales shares by volume equal to or exceeding 17% in each of our major operating regions. Our estimated market share for this segment remained relatively stable in the past three years (7.2% in 2012 and 8.3% in 2011). In 2013 and the three months ended March 31, 2014, Adjusted EBITDA for our Rubber Carbon Black segment was €93.2 million and €24.3 million, respectively, and Segment Adjusted EBITDA Margin was 9.8% and 10.6%, respectively. This segment accounted for 70.9% and 69.1% of our total revenue, 48.7% and 48.6% of total Adjusted EBITDA and 80.3% and 79.6% of our total sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

We have over 75 years of experience and enjoy a long-standing reputation for technical capability in the carbon black industry and its served applications. We provide consistent product quality, reliability, technical expertise and innovation, built upon continually improving processes and know-how through our advanced Innovation Group and through supply chain execution.

Our Innovation Group works closely with our clients to develop innovative products and applications, while strengthening customer relationships and improving communication. Long-term R&D alliances and sophisticated technical interfaces with customers allow us to develop solutions to meet specific customer requirements. As a result, we have been able to generate attractive margins for our specialized carbon black products. Additionally, our Innovation Group works closely with our operations group to improve process economics with new process equipment designs, operating techniques and raw material selection.

We operate a modern global supply chain network comprising 13 wholly-owned production plants and one jointly-owned production plant. We are currently seeking to acquire QECC, in which Evonik has a majority interest. We believe that this acquisition, if completed, would improve our ability to serve the Chinese market over and above our current use of our global network for exports to China.

Key Factors Affecting Our Results of Operations

We believe that the following factors have 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

 

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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 in this prospectus under “Risk Factors” and “Note Regarding Forward-Looking Statements.

General Economic Conditions, Cyclicality and Seasonality

Our results of operations are affected by 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 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, our results of operations experience a level of inherent 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 materially affects our results of operations. For example, we experienced a decrease in sales volume of approximately 15% in 2009 , in the wake of the global financial and economic crisis, followed by a recovery in sales volume of 14.8% in 2010. As a result, our results of operations dropped sharply in the second half of 2008 and 2009, and recovered again in 2010. Since the Acquisition, our overall results improved in line with the global economic recovery and recovery in underlying industries. In 2011 through 2013, our results of operations in Europe were negatively affected by the European sovereign debt crisis, while other geographic regions showed more positive dynamics.

Our business is generally not seasonal in nature, although we may experience some regional seasonal declines during holiday periods and our results of operations are generally weaker in the last three months of the year.

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 development of the coatings, polymers and printing industries. Demand for specialty carbon black in the coatings and polymers industries is mainly influenced by the levels of industrialization, infrastructure, construction and car ownership. Demand for specialty carbon black in the printing industry is mainly influenced by developments in print media and packaging materials. Demand for rubber carbon black is largely driven by the development of the tire and mechanical rubber goods 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) vehicle trends, including the number of vehicles produced and registered, and the number of miles driven, (ii) demand for high-performance tires, (iii) demand for larger vehicles, such as trucks and buses and (iv) changes in regulatory requirements. Demand for rubber carbon black in mechanical rubber goods is mainly influenced by vehicle trends, construction activity and general industrial production.

Demand in the developed West European and North American regions is mainly driven by demographic changes, customers’ high-quality requirements, stringent tire regulation standards and relatively stable tire replacement demand. Demand in emerging markets, such as China, Southeastern Asia, South America and Eastern Europe, is mainly driven by the growing middle class, rapid industrialization, new infrastructure spending and increasing car ownership trends. The growth in vehicle production in turn drives demand for both original equipment tire manufacturing and replacement tires in developing regions. See “Industry.”

Asset Utilization

Margins in the carbon black industry, and the chemical industry generally, are strongly influenced by industry utilization. As demand for products approaches available supply, utilization rates rise, and prices and margins typically increase over time. Historically, this relationship has been highly cyclical, due to fluctuations in supply resulting from the timing of new investments in capacity and general economic conditions affecting the

 

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relative strength or weakness of demand. Generally, capacity is more likely to be added in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result, and in the past frequently have resulted, in over-capacity, which typically leads to a reduction of margins. For example, some of our customers have shifted, and may continue to shift, manufacturing capacity from mature regions, such as North America and Europe, to emerging regions, such as Asia and South America. Consequently, competitors in China have added capacity at a far greater rate than demand has risen, which has resulted in pressured margins in the region. In response, producers typically reduce capacity utilization or limit further capacity additions, eventually causing the industry to be relatively undersupplied. In recent years, a systematic reduction in capacity in North America and Europe, together with increased manufacturing efficiencies, has enabled us to largely preserve margins and increase our utilization rates.

Although utilization levels can differ significantly by plant, these levels tend to be driven more by variations in demand from specific customers served by each plant rather than by general trends in the region where the plant is located. We estimate our average plant utilization rate to have been at the level of approximately 80% in 2013, as well as approximately 82% in 2012 and approximately 89% in 2011. We have made recent investments in strategic sites to increase the flexibility of our production platform (for example, we have added a new production line in our existing facilities in South Korea, which commenced operations in summer 2013). However, following an intensive review of European carbon black operations, we announced in December 2013 that production would cease at our Sines (Portugal) facility in order to consolidate capacities in the European region. Both actions allow us to opportunistically upgrade and expand our capacity to produce higher margin products, as demand allows, and positions us better to shift additional production capacity to specialty carbon black products and rubber carbon black for higher-end mechanical rubber goods. We intend to achieve further growth in production volume, as customer demand allows, by improving utilization rates, improving the availability of our assets by minimizing planned and unplanned facility downtime and improving the capacity of our assets through systematic supply chain planning and improved operating technologies. Unplanned outages can impact our operating results. Similarly, planned or unplanned outages of our competitors can positively affect our operating results by decreasing the product supply in the industry.

Efficiency Initiatives

Our results of operations are affected by our energy consumption, manufacturing costs and efficiency improvements. We have implemented and will continue to implement production and energy efficiency initiatives by exploiting alternative feedstock sources with a strong focus on feedstock yields, as well as on feedstock prices. We have developed new energy efficient reactor designs and state-of-the-art energy recovery equipment that have already been installed in many of our production sites. In recent years, we have increased our co-generation capabilities and currently twelve of our manufacturing sites have some form of co-generation, transforming combustible exhaust gas, the main by-product of the carbon black production process, into electricity, steam or hot water. We are analyzing available energy recovery options for our production sites currently not equipped with co-generation facilities and plan to expand co-generation capacity of our plants in the future, if economically viable.

Since the Acquisition, we have been focusing on administrative and personnel efficiencies. We had well over 1,500 employees at the time of the Acquisition and successfully reduced headcount to 1,405 as of December 31, 2013, despite having to hire over 60 new administrative personnel required to carry out a range of functions and services previously provided by Evonik entities that were not part of the Acquisition. We also introduced high performance work teams and additionally incentivize our employees by linking their bonus levels to the achievement of predetermined objectives, including individual, team and company-wide targets. We plan to further improve efficiency of our personnel and believe that we will be able to increase sales and production volumes of our business without significant increases in headcount. In addition, after an intensive review of European carbon black operations, we ceased production at our Sines (Portugal) facility in December 2013 to concentrate our European production platform into fewer, more efficient facilities. Termination periods of employees terminated in connection with the Sines closure had not expired by end of 2013 and will lead to a

 

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further headcount reduction of approximately 35 FTEs in 2014. The plant accounted for €4.4 million of depreciation, labor, rent, repair and maintenance, external services and insurance costs in 2013. Additionally, we incurred impairment charges of €5.5 million on the closure of the plant in 2013.

Raw Material and Energy Costs

Our results of operations are affected by fluctuations in raw material and energy prices. Our manufacturing processes consume significant amounts of raw materials and energy, the costs of which are subject to fluctuations in worldwide supply and demand, in addition to other factors beyond our control. In 2013, raw materials accounted for approximately 80% of the total manufacturing cost of the final product. Almost all of the raw material used in the production of carbon black is an oil-based feedstock known as carbon black oil, with some limited use of other materials, such as nitrogen tetroxide, hydrogen and natural gas. The pricing of carbon black oil is linked to the price of heavy fuel oil and is generally benchmarked against Platts indices of three regions: the U.S. Gulf Coast, Rotterdam and Singapore. Platts publishes spot and forward energy price assessments for the energy industry, including benchmark prices for the crude oil and petrochemical markets. The ultimate carbon black oil price also depends on carbon black oil specific quality characteristics, differentials (premiums or discounts), freight costs and regional supply and demand. Carbon black oil procurement is an important factor in achieving best in-class production costs. We purchase approximately 60% of our carbon black oil supply on the spot market and approximately 40% through contracts. Almost all of our purchases have pricing terms that fluctuate with underlying feedstock price indices.

Costs for raw materials and energy have fluctuated significantly and may continue to fluctuate in the future. For example, Brent crude oil prices continuously increased from $76 per barrel in May 2010 to a peak of $127 per barrel in April 2011, declining to $110 per barrel by the end of December 2013. We have a proactive price and contract management strategy, which supports our efforts to preserve margins through a timely pass-through of feedstock cost increases to customers. A significant portion of our sales volume is sold based on formula-driven price adjustment mechanisms for changes in costs of raw materials, that is, approximately 72% in the Rubber Carbon Black segment and approximately 42% in the Specialty Carbon Black segment, based on sales volumes in 2013. (We recently entered into an agreement with an Asia-Pacific customer that, beginning in the second half of 2014, will extend these price-adjustment mechanisms to an approximately 10 percentage points of Rubber Carbon Black segment volumes that were not previously subject to such adjustment mechanisms.) Most of our indexed contracts allow for monthly price adjustments, while a relatively small portion allows for quarterly price adjustments. The one-month oil price adjustment mechanism typically results in a two-month delay in reflecting oil price changes in our customers pricing, while the three-month price adjustment mechanism typically results in a four-month delay. We believe that these contracts enable us to maintain our Segment Adjusted EBITDA Margins since the Acquisition, despite significant fluctuations in oil and other raw material prices. However, in periods of rapid and significant oil or energy price fluctuations, these fluctuations can significantly affect our earning and results of operations, since oil price changes affect our sales prices and our cost of raw materials and energy at different times. We refer to these earnings effects as windfall gains and losses. Sales prices under our non-indexed contracts (approximately 28% in the Rubber Carbon Black segment and approximately 58% in the Specialty Carbon Black segment based on sales volume in kmt in 2013) are reviewed on a quarterly basis to reflect raw material and energy price fluctuations as well as overall market conditions. We believe that the current competitive environment generally allows us to implement price adjustments in a reasonably timely manner, although there can be no guarantee that we will be able to timely adjust prices under our non-indexed contracts in the future, see “Risk Factors—Risks Related to Our Business—We are subject to volatility in the costs and availability of raw materials and energy, which could decrease our margins and adversely affect our business, financial condition, results of operations and cash flows.”

Windfall gains and losses arise from the net impact on our income statement of changes in oil prices on our selling prices to customers and on our feedstock costs. This income statement impact arises because the rate at which we adjust our selling prices differs from the rate at which our feedstock costs change as a result of the

 

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same movement in oil price-related reference indices. In periods where oil prices generally increase, we suffer a loss since this increase is passed on to our customers after the increase has already affected our cost of sales. In periods of generally declining oil prices the reverse applies, and we tend to realize gains.

For the three years ended December 31, 2013, we are unable to quantify the size of these windfall gains and losses. However, in light of our formula-driven price adjustment mechanisms for charges in raw material and/or energy costs, the size and direction of oil price changes in the three years reported and our general estimates, we believe that the net effect of these gains and losses was unlikely to exceed 5% of our gross profit in any of the three years reported.

Foreign Currency Exchange Rate Fluctuations

Our results of operations and Net Working Capital are affected by foreign currency exchange rate fluctuations. Our exposure to foreign currencies comes from three main sources: (i) currency translation, when we translate results of our subsidiaries denominated in local functional currencies into Euros, (ii) transactions, such as when we contract purchases of our feedstock, which are mostly in U.S. Dollars, and (iii) financings, as a large portion of our financial obligations are denominated in U.S. Dollars, some of which are hedged. In 2013, 39%, 28% and 19% of our revenues were generated by our subsidiaries whose functional currency is the Euro, the U.S. Dollar and the Korean Won respectively, with the remainder in other currencies. Fluctuations in currency exchange rates could require us to reduce our prices to remain competitive in foreign regions. In each case, the relevant income or expense is reported in the respective local currency and translated into Euro at the applicable currency exchange rate for inclusion in our consolidated financial statements. Therefore, our financial results in any given period are materially affected by fluctuations in the value of the Euro relative to other currencies, in particular the U.S. Dollar and the Korean Won. Our foreign currency transaction exposure is partially offset by costs and expenses incurred by our subsidiaries in their local functional currencies.

The pricing of carbon black oil, our main raw material, is linked to the price of heavy fuel oil and is generally benchmarked against Platts indices of three regions: the U.S. Gulf Coast, Rotterdam and Singapore. Most of our carbon black oil purchase contracts are denominated in U.S. Dollars. Generally, an appreciation of the U.S. Dollar has a negative impact on our results of operations and Net Working Capital, because our raw material purchases in U.S. Dollars may not be fully offset by our ability to pass-through changes in raw material costs to customers and by the translation effect of our results of operations in the United States. In addition, approximately half of our indebtedness under our Senior Secured Notes is denominated in U.S. Dollars. Following the Refinancing, our exposure to the U.S. Dollar may significantly change, see “Summary—Refinancing.” As such, our cash borrowing costs (in the form of interest expense) and the carrying value of those borrowings may fluctuate based on changes in exchange rates.

We manage our foreign currency exchange exposure through the use of derivative instruments to hedge on balance sheet foreign currency denominated receivables and payables, as well as the U.S. Dollar-denominated portion of our indebtedness under the Senior Secured Notes. We use customary products to manage foreign exchange risk, including forward exchange contracts and currency options. We do not generally use foreign exchange hedging for expected exposure, as our expected exposure from sales is largely offset by our expected exposure from purchases.

Current and Future Environmental Regulations

Our operations are subject to extensive environmental laws and regulations, which require us to invest significant financial and technical resources to maintain compliance with applicable requirements. If environmental harm is found to have occurred as a result of our current or historical operations, we may incur significant remediation costs at current or former production facilities or third-party sites and may have to pay fines and damages. Many of our facilities have a long history of operation and have never been the subject of comprehensive environmental investigations. As a result, our environmental compliance and remediation costs

 

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could increase. Future closure and decommissioning at any one of these facilities, or of process units at these facilities, could result in significant remediation costs. For instance, many of our facilities have onsite landfills, storage tanks, wastewater treatment systems, ponds and other units that have been in use for a number of years, and we may incur significant costs when closing these units in accordance with applicable laws and regulations and when addressing related contamination of soil and groundwater. For more information about information requests made by the EPA to, and alleged violations of the U.S. Clean Air Act by, certain of our facilities located in the United State, see “Business—Environmental, Health and Safety Matters—Environmental—Environmental Proceedings.”

Changes to environmental regulations or laws that may affect previously unregulated aspects of our business may also require us to incur significant compliance costs. New regulations requiring further reductions of GHG and other emissions are being considered in Europe, the United States, China, Brazil and South Korea. Our carbon black operations may generate more CO2 than is permitted under current or future allocation schemes for GHG emissions, requiring us either to purchase emission credits or to modify our production processes to reduce emissions. Additionally, nano-scale materials, including carbon black, are under increased and ongoing scrutiny in multiple jurisdictions, including the European Union, and are likely to be subject to stricter regulation in the future, which may require us to incur significant costs in order to comply with new laws and requirements. Further, carbon black has been classified by certain national and international health organizations as a possible or suspected human carcinogen. A negative reclassification of carbon black by these organizations, or similar classifications of carbon black or other finished products, raw materials or intermediates by other organizations or governmental authorities could adversely affect our compliance costs, operations, sales and reputation.

Environmental considerations can also affect the industries in which we operate, including our position with respect to our competitors. For example, new tire labeling regulatory requirements globally (particularly in Europe) are expected to reduce the threat of low-cost tire imports significantly and to favorably affect demand in developed regions.

In connection with the Acquisition, Evonik agreed, subject to certain deductibles, caps, exclusions and procedural requirements, to indemnify us for certain historical environmental liabilities. See “Risk Factors—Risks Related to Indebtedness, Currency Exposure and Other Financial Matters—Our Agreements with Evonik in connection with the Acquisition require us to indemnify Evonik with respect to certain aspects of our business and require Evonik to indemnify us for certain retained liabilities. We cannot offer assurance that we will be able to enforce claims under these indemnities as we expect.”

Reconciliation of Non-IFRS Financial Measures

We focus on Contribution Margin, Contribution Margin per Metric Ton and Adjusted EBITDA as measures of our operating performance. Contribution Margin, Contribution Margin per Metric Ton and Adjusted EBITDA contained in this prospectus (except for Adjusted EBITDA) are unaudited and have not been prepared in accordance with IFRS or the accounting standards of any other jurisdiction. Other companies may use similar non-IFRS financial measures that are calculated differently from the way we calculate these measures. Accordingly, our Contribution Margin, Contribution Margin per Metric Ton and Adjusted EBITDA may not be comparable to similar measures used by other companies and should not be considered in isolation, or construed as substitutes for, revenue, consolidated profit or loss for the period, operating result (EBIT), gross profit and other IFRS measures as indicators of our results of operations in accordance with IFRS.

 

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Contribution Margin and Contribution Margin per Metric Ton (Non-IFRS Financial Measures)

We calculate Contribution Margin by subtracting variable costs (raw materials, packaging, utilities and distribution costs) from our revenue. We calculate Contribution Margin per Metric Ton by dividing Contribution Margin by sales volume measured in metric tons. We believe that Contribution Margin and Contribution Margin per Metric Ton are useful since we see these measures as indicating the portion of revenue that is not consumed by variable costs (raw materials, packaging, utilities and distribution costs) and therefore contributes to the coverage of all other costs and profits. The following tables reconcile Contribution Margin and Contribution Margin per Metric Ton to revenue:

 

     Three months ended March 31,  
     2014      2014      2013  
            (unaudited)         
     (in US$
million,
unless
indicated
otherwise)
     (in € million, unless
indicated otherwise)
 

Revenue

     455.3         330.5         341.1   

Variable costs(1)

     (316.0)         (229.4)         (242.6)   

Contribution Margin

     139.3         101.1         98.5   

Sales volume (in kmt)

     249.3         249.3         242.3   

Contribution Margin per Metric Ton (in €/US$)

     558.8         405.6         406.3   

 

 

(1) Includes costs such as raw materials, packaging, utilities and distribution.

 

     Successor           Predecessor  
     Year Ended December 31,     Period
Ended
December 31,
          Period
Ended
July 29,
 
     2013      2013      2012     2011           2011  
     (unaudited)           (unaudited)  
     (in US$ million,
unless
otherwise
indicated)
     (in € million, unless otherwise indicated)           (in € million,
unless
indicated
otherwise)
 

Revenue(1)

     1,845.9         1,339.6         1,397.5        545.1             780.6   

Variable costs(2)

     (1,299.6)         (943.2)         (994.8)        (398.1)             (538.4)   

Contribution Margin

     546.2         396.4         402.7        147.0             242.2   

Sales volume (in kmt)

     968.3         968.3         949.6        417.9             635.5   
Contribution Margin per Metric Ton
(in €/US$)
     564.1         409.4         424.1        351.7             381.0   

 

 

(1) Audited

 

(2) Includes costs such as raw materials, packaging, utilities and distribution.

Adjusted EBITDA (Non-IFRS Financial Measure)

We define Adjusted EBITDA as operating result (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Group strategy, share of profit or loss of associates and certain other items. Adjusted EBITDA is defined similarly in the indenture governing our Senior Secured Notes. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of certain items that have less bearing on our underlying business performance.

 

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: (a) although Adjusted EBITDA excludes the impact of depreciation and amortization, the assets being depreciated and amortized may have to be replaced in the future and thus the cost of replacing assets or acquiring new assets, which will affect our operating results over time, is not reflected; (b) Adjusted EBITDA does not reflect interest or certain other costs that we will continue to incur over time and will adversely affect our profit or loss, which is the ultimate measure of our financial performance and (c) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other IFRS-based financial performance measures, such as consolidated profit or loss for the period and our other IFRS financial results. The following tables present a reconciliation of Adjusted EBITDA to consolidated profit or loss for each of the periods indicated:

 

     Three months ended March 31,  
     2014     2014     2013  
     (in US$
million)
    (in € million)  

Profit or loss for the period

     (0.6     (0.4     (6.5

Income taxes

     7.1        5.1        (2.4

Profit or loss before income taxes

     6.6        4.7        (8.9

Share of profit or loss of associates

     (0.1     (0.1     (0.1

Finance costs, net(1)

     32.8        23.8        34.0   

Operating result (EBIT)

     39.2        28.5        25.0   

Depreciation and amortization

     26.1        18.9        15.0   

EBITDA

     65.3        47.4        40.0   

Restructuring expenses(2)

     0.8        0.6        1.1   

Consulting fees related to Group strategy(3)

     2.7        1.9        2.3   

Share of profit or loss of associates

     0.1        0.1        0.1   

Expenses related to capitalized emission rights(4)

                   1.7   

Other non-operating

                   0.2   

Adjusted EBITDA

     68.9        50.0        45.3   

Thereof Adjusted EBITDA Specialty Carbon Black

     35.4        25.7        23.7   

Thereof Adjusted EBITDA Rubber Carbon Black

     33.5        24.3        21.6   

 

 

(1) Finance costs, net consists of Finance income and Finance costs.

 

(2) Restructuring expenses primarily include personnel-related costs and IT-related costs as a result of the Sines (Portugal) plant closure.

 

(3) Consulting fees related to the Group strategy include external consulting fees from establishing and implementing our operating, tax and organizational strategies.

 

(4) Expenses related to capitalized emission rights are a non-cash amortization and result from the consumption and revaluation of emission rights that were capitalized as part of the Acquisition.

 

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    Successor          Predecessor  
    Year Ended December 31,     Period
Ended
December 31,
         Period
Ended
July 29,
 
    2013     2013     2012     2011          2011  
    (in US$
million)
    (in € million)          (in €
million)
 

Profit or loss for the period

    (26.1)        (19.0)        (18.7)        (74.4)            122.7   

Income taxes

    10.4        7.5        8.9        (9.8)            62.1   

Profit or loss before income taxes

    (15.7)        (11.4)        (9.8)        (84.2)            184.7   

Share of profit or loss of associates

    (0.5)        (0.4)        (0.4)        (0.2)            (0.5)   

Finance costs, net(1)

    131.7        95.6        97.9        68.4            11.8   

Operating result (EBIT)

    115.5        83.8        87.7        (16.0)            196.0   

Depreciation and amortization

    104.8        76.1        59.3        23.4            22.4   

EBITDA

    220.2        159.9        146.9        7.4            218.4   

Acquisition related expenses(2)

    0.0        0.0        1.6        40.5            0.0   

Restructuring expenses(3)

    20.9        15.1        20.4        1.0            0.0   

Consulting fees related to Group strategy(4)

    17.2        12.5        12.6        5.1            0.0   

Share of profit or loss of associates

    0.5        0.4        0.4        0.2            0.5   

Expenses related to capitalized emission rights(5)

    3.7        2.7        4.3        9.1            1.0   

Other non-operating(6)

    0.7        0.5        1.8        (5.4)            (108.2)   

Adjusted EBITDA

    263.3        191.1        188.0        57.9            111.7   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Thereof Adjusted EBITDA Specialty Carbon Black

    135.0        98.0        89.4        26.2            69.0   

Thereof Adjusted EBITDA Rubber Carbon Black

    128.3        93.2        98.6        31.7            42.7   

 

 

(1) Finance costs, net consists of Finance income and Finance costs.

 

(2) Acquisition related expenses primarily include direct costs from the Acquisition of Evonik Carbon Black and the formation of Orion.

 

(3) Restructuring expenses primarily include personnel-related costs and IT-related costs as a result of the separation from Evonik systems and Sines (Portugal) plant closure costs.

 

(4) Consulting fees related to the Group strategy include external consulting fees from establishing and implementing our operating, tax and organizational strategies. For the Period ended July 29, 2011, the amount reflects the corporate center charges by Evonik.

 

(5) Expenses related to capitalized emission rights are a non-cash amortization and result from the consumption and revaluation of emission rights that were capitalized as part of the Acquisition.

 

(6) Other non-operating expenses include a reversal of write-offs of inventory in Period ended December 31, 2011 and a debt waiver of Evonik Carbon Black’s debt under an intercompany loan by other Evonik entities in connection with the Acquisition of the Predecessor from Evonik in the Period ended July 29, 2011.

 

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Results of Operations

First Quarter of 2014 Compared to First Quarter of 2013

The table below presents our historical results derived from our unaudited interim condensed consolidated financial statements for the periods indicated.

 

Income Statement Data    Three months ended March 31,  
     2014      2014      2013  
     (in US$ million)      (in € million)  

Revenue

     455.3         330.5         341.1   

Cost of sales

     (357.6)         (259.6)         (271.5)   

Gross profit

     97.7         70.9         69.6   

Selling expenses

     (33.6)         (24.4)         (23.7)   

Research and development costs

     (3.9)         (2.8)         (3.4)   

General and administrative expenses

     (17.0)         (12.3)         (13.5)   

Other operating income

     1.0         0.7         5.1   

Other operating expenses

     (5.0)         (3.6)         (9.1)   

Operating result (EBIT)

     39.2         28.5         25.0   

Finance costs, net(1)

     (32.8)         (23.8)         (34.0)   

Share of profit or loss of associates

     0.1         0.1         0.1   

Financial result

     (32.7)         (23.7)         (33.9)   

Consolidated profit or loss before income taxes

     6.6         4.8         (8.9)   

Income taxes

     (7.1)         (5.2)         2.4   

Consolidated profit or loss for the period

     (0.6)         (0.4)         (6.5)   

 

 

(1) Finance costs, net consists of Finance income and Finance costs.

Revenue

Revenue decreased by €10.6 million, or 3.1%, from €341.1 million (€97.9 million in our Specialty Carbon Black segment and €243.2 million in our Rubber Carbon Black segment) in the first quarter of 2013 to €330.5 million (€102.0 million in our Specialty Carbon Black segment and €228.4 million in our Rubber Carbon Black segment) in the first quarter of 2014. Sales volume increased by 2.9% in the first quarter of 2014 compared to the first quarter of 2013. This increase in sales volume contributed an increase of revenue of 4.1%, or €14.0 million, in the first quarter of 2014 compared to the first quarter of 2013. The volume related increase of revenue was offset by negative impacts to revenue resulting from changes in foreign currency rates of 4.3%, changes in product mix of 1.0% and price changes of 1.9%, or €6.6 million.

Sales volume increased by 7.0 kmt, or 2.9%, from 242.3 kmt (45.2 kmt in our Specialty Carbon Black Segment and 197.1 kmt in our Rubber Carbon Black segment) in the first quarter of 2013 to 249.3 kmt (50.9 kmt in our Specialty Carbon Black segment and 198.4 kmt in our Rubber Carbon Black segment) in the first quarter of 2014, reflecting increased sales volumes in the Specialty Carbon Black segment in the Americas and South Korea due to increased demand in those regions. Sales volumes in our Rubber Carbon Black segment remained flat in these regions.

Cost of Sales and Gross Profit

Cost of sales decreased by €11.9 million, or 4.4%, from €271.5 million (€66.0 million in our Specialty Carbon Black segment and €205.5 million in our Rubber Carbon Black segment) in the first quarter of 2013 to €259.6 million (€69.7 in our Specialty Carbon Black segment and €189.8 million in our Rubber Carbon Black segment) in the first quarter of 2014. This decrease is in line with lower revenue in the first quarter of 2014

 

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compared to the prior year’s first quarter due to decreased carbon black oil prices. Additionally, fixed costs of sales in our Rubber Carbon Black segment were reduced following the closure of our Sines (Portugal) plant and efficiency improvements associated with our capital investment program. In the first quarter of 2013, we expensed €1.7 million of emission rights that were part of the business combination. In 2013, all emission rights acquired on the Acquisition date (July 29, 2011) were used. As no new emission rights are going to be capitalized, no costs have to be incurred as long as the usage does not exceed the emission rights granted to the Company.

Gross profit increased by €1.3 million, or 1.9%, from €69.6 million (€31.9 million in our Specialty Carbon Black segment and €37.7 million in our Rubber Carbon Black segment) in the first quarter of 2013 to €70.9 million (€32.3 million in our Specialty Carbon Black segment and €38.6 million in our Rubber Carbon Black segment) in the first of quarter 2014 despite an increase in depreciation and amortization of €4.0 million resulting from increased capital investments late in 2013. This increase in gross profit was mainly driven by higher sales volume, which contributed an increase of 6.2%, or €4.3 million, in gross profit, in our Specialty Carbon Black segment as well as improvement in efficiency as a result of investments in production facilities and cost savings associated with carbon black oil yield, which primarily affected the performance of our Rubber Carbon Black segment.

Selling Expenses

Sales and marketing expenses increased by €0.7 million or 3.0%, from €23.7 million in the first quarter of 2013 to €24.4 million in the first quarter of 2014. This increase was primarily due to higher sales volume and investments in additional sales personnel to increase market penetration in our Specialty Carbon Black segment in the first quarter of 2014 compared to the first quarter of 2013.

Research and Development Costs

Research and applied technology expenses decreased by €0.6 million or 17.6%, from €3.4 million in the first quarter of 2013 to €2.8 million in the first quarter of 2014. This change does not represent a substantive change in our research and applied technology efforts, but rather the timing of expenditures for individual development programs.

General Administrative Expenses

General administrative expenses decreased by €1.2 million, or 8.9%, from €13.5 million in the first quarter of 2013 to €12.3 million in the first quarter of 2014, reflecting our continued focus on cost saving initiatives, in particular with respect to headcount reduction.

Other Operating Income and Expenses

Other operating income and expenses, net decreased by €1.1 million from €(4.0) million in the first quarter of 2013 to €(2.9) million in the first quarter of 2014, mainly as a result of lower restructuring expenses and consulting fees relating to Group strategy in the first quarter of 2014 compared to the first quarter of 2013.

Operating Result (EBIT)

Operating result increased by €3.5 million, or 14.0%, from €25.0 million in first quarter of 2013 to €28.5 million in first quarter of 2014, reflecting all the factors described above.

Finance Costs, Net

Finance costs, net decreased by €11.2 million, or 32.9%, from €34.0 million in the first quarter of 2013 to €23.8 million in the first quarter of 2014.

 

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Finance costs, net included interest expense on our Senior Secured Notes financing of €13.7 million in the first quarter of 2013 and €13.5 million in the first quarter of 2014, interest expense on the PECs of €8.4 million in the first quarter of 2013 and €7.8 million in the first quarter of 2014, arrangement fees for the Revolving Credit Facility in an amount of €0.5 million in the first quarter of 2013 and €0.4 million in the first quarter of 2014 and the amortization of capitalized transaction costs in an amount of €0.9 million in the first quarter of 2013 and €1.0 million in the first quarter of 2014. Exchange rate losses, net on our long term financial liabilities amounted to €9.3 million in the first quarter of 2013 and €0.1 million in the first quarter of 2014. The decrease in exchange rate losses was due to relatively stable foreign currency exchange rates in the first quarter of 2014 (in particular with respect to the U.S. Dollar), whereas in the first quarter of 2013 the Euro weakened as compared to the U.S. Dollar, affecting our $315 million Senior Secured Notes and our $376.7 million principal amount of PECs, which on February 1, 2013 was converted from Euro to U.S. Dollars.

Share of Profit or Loss of Associates

Share of profit or loss of associates represents the dividend received from our German JV and amounted to €0.1 million in the first quarter of 2013 as well as in the first quarter of 2014.

Financial Result

Financial result is comprised of finance income, finance expenses and share of profit or loss of associates and decreased by €10.2 million, or 30.1%, from €33.9 million in the first quarter of 2013 to €23.7 million in the first quarter of 2014 reflecting the factors discussed above.

Profit or Loss for the Period Before Income Taxes

Profit before income taxes for the first quarter of 2014 amounted to €4.8 million after a loss in first quarter of 2013 of €8.9 million, reflecting all the factors described above.

Income Taxes

Income taxes amounted to €(2.4) million in the first quarter of 2013 and were €5.2 million in first quarter of 2014, reflecting the loss and profit in these periods, respectively.

The effective tax rate for the first quarter of 2014 was primarily due to the tax effect of losses and deductible temporary differences incurred in Portugal, Sweden, Germany, South Africa, and Brazil, as well as an interest carryforward in Italy that expires in the current year. These factors, which reduce the measurement amount of the deferred tax assets, accounted for 32.8% of the rate. Non-deductible interest expenses due to local trade tax adjustments for the Group’s German entities further affected the rate by 22.9%. The remaining differences related to foreign tax rate differentials, non-deductible business expenses, and adjustments to prior year taxes.

The effective tax rate for the first quarter of 2013 was primarily due to the change in measurement amount of deferred tax assets in Germany due to losses recognized, accounting for (11%) of the rate. A benefit from tax exempt income due to domestic production activities in the U.S. further affected the rate by (5%). Offsetting these favorable effects by 8.6% and 6.5% were local trade tax adjustments for the Group’s German entities and foreign tax rate differentials. The remaining differences relate to non-deductible business expenses and adjustments to prior year taxes.

Profit or Loss for the Period

Loss decreased by €6.1 million from €6.5 million in first quarter of 2013 to €0.4 million in first quarter of 2014, reflecting the effects of the items discussed above.

 

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Contribution Margin and Contribution Margin per Metric Ton (Non-IFRS Financial Measures)

Contribution margin increased by €2.7 million, or 2.7%, from €98.5 million in the first quarter of 2013 to €101.1 million in the first quarter of 2014, mainly due to relatively higher sales volume in the Specialty Carbon Black segment in the first quarter of 2014 compared to the first quarter of 2013.

Adjusted EBITDA (Non-IFRS Financial Measure)

Adjusted EBITDA amounted to €45.3 million in the first quarter of 2013 and increased 10.4% to €50.0 million in the first quarter of 2014, reflecting the higher sales volume and related increase of contribution margin and gross profit, as well as our focus on cost saving initiatives, in particular with respect to headcount reduction.

2013 Compared to 2012

The table below presents our historical results derived from our audited consolidated financial statements for the periods indicated.

 

Income Statement Data    Year ended December 31,  
     2013      2013      2012  
     (in US$ million)      (in € million)  

Revenue

     1,845.9         1,339.6         1,397.5   

Cost of sales

     (1,475.5)         (1,070.8)         (1,116.0)   

Gross profit

     370.4         268.8         281.6   

Selling expenses

     (126.9)         (92.1)         (96.2)   

Research and development costs

     (13.9)         (10.1)         (9.5)   

General and administrative expenses

     (72.4)         (52.5)         (54.3)   

Other operating income

     11.5         8.3         18.5   

Other operating expenses

     (53.3)         (38.7)         (52.5)   

Operating result (EBIT)

     115.4         83.7         87.6   

Finance costs, net(1)

     (131.7)         (95.6)         (97.9)   

Share of profit or loss of associates

     0.5         0.4         0.4   

Financial result

     (131.2)         (95.2)         (97.5)   

Profit or loss before income taxes

     (15.7)         (11.4)         (9.8)   

Income taxes

     (10.4)         (7.5)         (8.9)   

Profit or loss for the period

     (26.1)         (19.0)         (18.7)   

 

 

(1) Finance costs, net consists of Finance income and Finance costs.

Revenue

Revenue decreased by €57.9 million, or 4.1%, from €1,397.5 million (€400.1 million in our Specialty Carbon Black segment and €997.5 million in our Rubber Carbon Black segment) in 2012 to €1,339.6 million (€390.3 million in our Specialty Carbon Black segment and €949.4 million in our Rubber Carbon Black segment) in 2013.

Revenue in our Specialty Carbon Black segment increased as a result of oil price changes passed through to our customers by 2.5%, or €2.3 million, as a result of both monthly and quarterly price adjustments. Revenue in our Rubber Carbon Black segment decreased by 1.0%, or €10.1 million, related to oil price changes passed through to our customers, predominately through monthly price adjustments. For additional information about our price and contract management strategy, see “Business—Marketing, Sales and Customer Contracts—Flexible Contracts” and “—Key Factors Affecting our Results of Operations—Raw Material and Energy Costs.”

 

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The percentage decrease in revenue of our Specialty Carbon Black Segment (2.4%) is lower than the percentage decrease in revenue of our Rubber Carbon Black segment (4.8%), reflecting the lower impact of the decrease in carbon black oil prices on the Specialty Carbon Black segment due to the higher margins of specialty carbon black products, lower impacts from foreign currency and base price changes as well as a higher share of volume-related revenue increase compared to the Rubber Carbon Black segment.

Sales volume increased by 18.7 kmt, or 2.0%, from 949.6 kmt (185.2 kmt in our Specialty Carbon Black segment and 764 kmt in our Rubber Carbon Black segment) in 2012 to 968.3 kmt (190.6 kmt in our Specialty Carbon Black segment and 777.7 kmt in our Rubber Carbon Black segment) in 2013, mainly as a result of a larger percentage increase in demand for specialty carbon black products in emerging markets in Asia and the Americas, as well as a smaller percentage increase in demand for rubber carbon black products. The increase in sales volume contributed an increase of revenue of 2.1%, or €29.0 million (2.9%, or €11.5 million, in our Specialty Carbon Black segment and 1.7%, or €17.5 million, in our Rubber Carbon Black segment) in 2013 compared to 2012. The volume related increase of revenue was offset by negative impacts to revenue in 2013 compared to 2012 resulting from changes in foreign currency rates of 3.0%, changes in product mix of 1.3%, and price changes of 1.9%, or €25.8 million.

Cost of Sales and Gross Profit

Cost of sales decreased by €45.2 million, or 4.1%, from €1,116.0 million (€274.5 million in our Specialty Carbon Black segment and €841.5 million in our Rubber Carbon Black segment) in 2012 to €1,070.8 million (€267.5 million in our Specialty Carbon Black segment and €803.3 million in our Rubber Carbon Black segment) in 2013. The 2.0% increase in sales volume in 2013 compared to 2012 resulted in an increase of cost of sales of 1.8%, or €20.1 million (2.0%, or €5.4 million, in our Specialty Carbon Black segment and 1.7%, or €14.7 million, in our Rubber Carbon Black segment) in 2013 compared to 2012. The volume related increase of cost of sales was offset by changes in foreign currency rates of 3.4%, changes in product mix of 1.4%, reduced oil prices of 0.4% and other factors resulting in a decrease of 0.7%. These other factors were offset by a €13.1 million increase in depreciation and amortization, mainly attributable to the installation of our new production line in South Korea in 2013 and our overall increased capital investments, and €5.5 million in write-offs of fixed assets related to the closure of our Sines (Portugal) plant, which ceased operations in December 2013.

Lower revenue as a result of the above mentioned impacts was offset by reduced cost of sales. The percentage decrease in cost of sales of our Specialty Carbon Black segment (2.6%) was slightly higher than the percentage decrease in revenue of that segment, reflecting the decline in carbon black oil price and foreign currency related decreases. The percentage decrease in cost of sales of our Rubber Carbon Black segment (4.5%) was slightly lower than the percentage decrease in revenue of that segment, reflecting the write-offs of fixed assets discussed above, which were attributable to the Rubber Carbon Black segment and partially offset the effects of the decrease in carbon black oil prices and foreign currency related decreases on the cost of sales of that segment.

Gross profit decreased by €12.8 million, or 4.5%, from €281.6 million (€125.6 million in our Specialty Carbon Black segment and €155.9 million in our Rubber Carbon Black segment) in 2012 to €268.8 million (€122.8 million in our Specialty Carbon Black segment and €146.1 million in our Rubber Carbon Black segment) in 2013. The 2.0% increase in sales volume in 2013 compared to 2012 contributed an increase of gross profit of 3.1%, or €8.8 million (4.9%, or €6.1 million, in our Specialty Carbon Black segment and 1.7%, or €2.7 million, in our Rubber Carbon Black segment) in 2013 compared to 2012. The volume related increase of gross profit was offset by negative impacts to gross profit in 2013 compared to 2012 resulting from changes in foreign currency rates of 1.7%, changes in product mix of 1.1% and price changes of 7.6%, or €21.4 million (most of which were base price reductions). Our gross profit increased by 3.0% due to feedstock initiatives and 2.1% due to further efficiency gains offset by a negative impact related to increased fixed cost of sales due to write-offs of fixed assets.

 

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Selling Expenses

Selling expenses decreased by €4.1 million, of 4.3%, from €96.2 million in 2012 to €92.1 million in 2013, despite the increase in sales volume from 949.6 kmt in 2012 to 968.3 kmt in 2013, due to our ability to implement more efficient distribution and sales processes through headcount reduction and sourcing of alternative external logistic partners.

Research and Development Costs

R&D expenses rose by €0.6 million, or 6.3%, from €9.5 million in 2012 to €10.1 million in 2013, due to the relocation and combination of all our German innovation activities at our Cologne (formerly referred to as “Kalscheuren”) production site in 2013, as well as due to our increased spending on innovation projects and the hiring of new higher-skilled personnel to expand our R&D portfolio scope to include projects focused on process and quality improvements.

General Administrative Expenses

General administrative expenses decreased by €1.8 million, or 3.3%, from €54.3 million in 2012 to €52.5 million in 2013, due in part to our strong focus on cost efficiency initiatives, such as headcount reduction.

Other Operating Income and Expenses

In 2013, other operating income amounted to €8.3 million and included, among other things, €3.3 million of income from valuation of derivatives and currency translation effects of €1.2 million. Other operating expenses in 2013 amounted to €38.7 million and primarily comprised of restructuring expenses of €15.1 million (such amount reflecting an offset by the one-time effect of past service cost of €3.9 million associated with the rearrangement of our existing defined benefit plans), consulting fees related to group strategy of €12.5 million and currency translation and valuation of derivatives effects of €5.3 million.

In 2012, other operating income amounted to €18.5 million and included, among other things, currency translation effects of €6.0 million, income from valuation of derivatives of €4.8 million and cost allocations to Evonik in connection with the Acquisition of €2.6 million. Other operating expenses in 2012 amounted to €52.5 million and primarily comprised of restructuring expenses of €20.4 million, consulting fees related to Group strategy of €12.6 million and currency translation and valuation of derivatives effects of €10.8 million.

For additional details on other operating income and expenses see notes 7.2 and 7.3 to the audited consolidated financial statements.

Operating Result (EBIT)

Operating result decreased by €3.9 million, or 4.4%, from €87.7 million in 2012 to €83.8 million in 2013, mainly driven by increased depreciation of €13.1 million related to cost of sales, which was offset by decreased selling expenses of €4.1 million and a net improvement of other operating income and expenses of €3.5 million discussed above.

Finance Costs, Net

Finance costs, net are comprised of interest expense on borrowings as well as income and expenses from exchange rate differences. Finance costs, net declined by €2.3 million, or 2.3%, from €97.9 million in 2012 to €95.6 million in 2013.

Finance costs, net included interest expense on our Senior Secured Notes financing of €58.9 million in 2012 and €54.4 million in 2013, interest expense on the PECs of €29.2 million in 2012 and €32.3 million in

 

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2013, arrangement fees for the Revolving Credit Facility in an amount of €2.8 million in 2012 and €2.3 million in 2013 and the amortization of capitalized transaction costs in an amount of €3.6 million in 2012 and €5.2 million in 2013. Exchange rate losses amounted to €3.9 million in 2012 and €13.6 million in 2013 and other finance expenses were €4.9 million in both 2012 and 2013.

The decrease in interest expenses on our Senior Secured Notes financing from €58.9 million in 2012 to €54.4 million in 2013 was primarily due to a voluntary redemption on June 15, 2012 of 10% of the original aggregate principal amount of Senior Secured Notes, which reduced the interest base rate following the redemption. The increase in our interest expenses on the PECs from €29.2 million in 2012 to €32.3 million in 2013 was due to the change in the terms and conditions to the loan on February 1, 2013, which increased the interest rate from 10.0% to 10.74% and also provided the Company with the advantage of providing for interest to become due and payable on a semi-annual basis rather than at maturity on July 27, 2021.

Finance costs, net in 2012 included finance income of €5.2 million associated with exchange rate gains of €3.7 million and interest income of €1.5 million. In 2013, finance costs, net included finance income of €17.1 million primarily associated with exchange rate gains of €12.7 million related to revaluation impacts on our U.S. Dollar-denominated financing.

Share of Profit or Loss of Associates

Share of profit or loss of associates represents the dividend received from our German JV, which was the same in 2013 as in 2012.

Financial Result

Financial result is comprised of finance income, finance expenses and share of profit or loss of associates and decreased by €2.3 million, or 2.3%, from €97.5 million in 2012 to €95.2 million in 2012 reflecting the factors discussed above.

Profit or Loss for the Period before Income Taxes

Loss for the period increased by €1.6 million from €9.8 million in 2012 to €11.4 million in 2013, reflecting all the factors described above.

Income Taxes

Income taxes decreased by €1.4 million, or 15.7%, from €8.9 million in 2012 to €7.5 million in 2013. The decrease was mainly driven by the change in the mix of profit or loss of our subsidiaries across multiple jurisdictions resulting in a lower tax rate.

The negative effective tax rate of (65.9%) in 2013 was primarily affected by the tax effect of losses and deductible temporary differences of €26.1 million incurred in Germany, South Africa, Brazil, Portugal and Sweden. Non-deductible interest expenses due to local trade tax adjustments for the Group’s German entities further affected the rate by (38.3%). Partially offsetting these unfavorable impacts by 21.7% were benefits from tax exempt income due to domestic production activities in the United States, as well as financing activities in Germany. The remaining differences related to other non-deductible business expenses, foreign tax rate differentials and changes in tax rates.

The negative effective tax rate of (91.0%) in 2012 was primarily due to non-deductible interest expenses resulting from local trade tax adjustments for the Group’s German entities. Non-deductible business expenses related to dividend payments in South Korea and non-creditable foreign income taxes in Germany further affected the rate by (50.6%). The effective tax rate was further affected by the tax effect of losses and deductible temporary differences of €11.7 million incurred in Portugal, Sweden and Germany. Partially offsetting these

 

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unfavorable impacts by 13.7% were benefits from tax exempt income due to domestic production activities in the United States. The remaining differences related to foreign tax rate differentials and changes in tax rates.

Profit or Loss for the Period

Our loss for the period increased by €0.3 million, or 1.6%, from €18.7 million in 2012 to €19.0 million in 2013, reflecting all the factors described above.

Contribution Margin and Contribution Margin per Metric Ton (Non-IFRS Financial Measures)

Contribution Margin declined by €6.3 million, or 1.6%, from €402.7 million in 2012 to €396.4 million in 2013, primarily due to a decrease in base prices of certain rubber carbon black products that were not fully offset by manufacturing efficiencies and the increased sales volume in 2013.

Contribution Margin per Metric Ton declined by €14.7, or 3.5%, from €424.1 in 2012 to 409.4 in 2013 due to the decrease in Contribution Margin described above.

Adjusted EBITDA (Non-IFRS Financial Measure)

Adjusted EBITDA increased by €3.1 million, or 1.6%, from €188.0 million in 2012 to €191.1 million in 2013. This increase was primarily due to cost saving efforts and initiatives.

2012 Compared to 2011

The table below presents our historical results derived from our Successor audited consolidated financial statements for 2012, our Successor audited consolidated financial statements for the period from April 13 through December 31, 2011, and the Predecessor audited combined financial statements for the period from January 1 through July 29, 2011.

 

Income Statement Data    Successor            Predecessor  
     Year ended
December 31,
     Period Ended
December 31,
           Period Ended
July 29,
 
     2012      2011            2011  
     (in € million)            (in € million)  

Revenue

     1,397.5         545.1              780.6   

Cost of sales

     (1,116.0)         (455.1)              (611.5)   

Gross profit

     281.6         89.9              169.1   

Selling expenses

     (96.2)         (42.1)              (61.2)   

Research and development costs

     (9.5)         (4.8)              (5.8)   

General and administrative expenses

     (54.3)         (14.1)              (19.3)   

Other operating income

     18.5         12.1              145.0   

Other operating expenses

     (52.5)         (57.0)              (31.7)   

Operating result (EBIT)

     87.7         (16.0)              196.0   

Finance costs, net(1)

     (97.9)         (68.4)              (11.8)   

Share of profit or loss of associates

     0.4         0.2              0.5   

Financial result

     (97.5)         (68.3)              (11.3)   

Profit or loss before income taxes

     (9.8)         (84.3)              184.7   

Income taxes

     (8.9)         9.8              (62.1)   

Profit or loss for the period

     (18.7)         (74.5)              122.6   

Thereof attributable to Orion

     (18.7)         (74.5)              122.2   

Thereof non-controlling interests

                          0.4   

 

 

(1) Finance costs, net consists of Finance income and Finance costs.

 

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Revenue

Revenue amounted to €780.6 million (€236.9 million in the Specialty Carbon Black segment and €543.7 million in the Rubber Carbon Black segment) in the Period ended July 29, 2011, €545.1 million (€138.0 million in the Specialty Carbon Black segment and €407.0 million in the Rubber Carbon Black segment) in the Period ended December 31, 2011 and €1,397.5 million (€400.1 million in the Specialty Carbon black segment and €997.5 million in the Rubber Carbon Black segment) in 2012, reflecting an increase in base prices and in oil prices passed through to customers in 2012.

Sales volume amounted to 635.5 kmt (114.8 kmt in the Specialty Carbon Black segment and 520.7 kmt in the Rubber Carbon Black segment) in the Period ended July 29, 2011, 417.9 kmt (69.0 kmt in the Specialty Carbon Black segment and 348.9 kmt in the Rubber Carbon Black segment) in the Period ended December 31, 2011 and 949.6 kmt (185.2 kmt in the Specialty Carbon Black segment and 764.4 kmt in the Rubber Carbon Black segment) in 2012, reflecting weakening demand, in particular in Europe, for our rubber carbon black products.

Cost of Sales and Gross Profit

Cost of sales amounted to €611.5 million (€142.0 million in the Specialty Carbon Black segment and €469.5 million in the Rubber Carbon Black segment) in the Period ended July 29, 2011, €455.1 million (€98.4 million in the Specialty Carbon Black segment and €356.7 million the Rubber Carbon Black segment) in the Period ended December 31, 2011 and €1,116.0 million (€274.5 million in the Specialty Carbon Black segment and €841.5 million in the Rubber Carbon Black segment) in 2012, and mainly reflected an increase in carbon black oil prices over the periods under discussion.

Gross profit amounted to €169.1 million (€94.9 million in the Specialty Carbon Black segment and €74.1 million in the Rubber Carbon Black segment) in the Period ended July 29, 2011, €89.9 million (€39.6 million in the Specialty Carbon Black segment and €50.3 million in the Rubber Carbon Black segment) in the Period ended December 31, 2011 and €281.6 million (€125.6 million in the Specialty Carbon Black segment and €155.9 million in the Rubber Carbon Black segment) in 2012.

Selling Expenses

Selling expenses amounted to €61.2 million in the Period ended July 29, 2011, €42.1 million in the Period ended December 31, 2011 and €96.2 million in 2012. Selling expenses included, among other things, amortization of acquired intangibles in the Successor periods and changes in our shipping and transportation costs in each of the periods under discussion.

Research and Development Costs

R&D expenses amounted to €5.8 million in the Period ended July 29, 2011, €4.8 million in the Period ended December 31, 2011 and €9.5 million in 2012. In the time period between the Acquisition and the arrival of our new Senior Vice President–Innovation in the fourth quarter of 2012, we focused only on a limited number of critical R&D projects.

General Administrative Expenses

General administrative expenses amounted to €19.3 million in the Period ended July 29, 2011, €14.1 million in the Period ended December 31, 2011 and €54.3 million in 2012, and reflected reallocations of expenses, mainly between selling expenses and general administrative expenses.

Other Operating Income and Expenses

In 2012, other operating income amounted to €18.5 million and included, among other things, currency translation effects of €6.0 million, income from valuation of derivatives of €4.8 million and cost allocations to

 

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Evonik in connection with the Acquisition of €2.6 million. Other operating expenses in 2012 amounted to €52.5 million and primarily comprised of restructuring expenses of €20.4 million, consulting fees related to Group strategy of €12.6 million and currency translation and valuation of derivatives effects of €10.8 million.

In the Period ended December 31, 2011, other operating income amounted to €12.1 million and primarily comprised of €6.5 million of currency translation effects, €1.4 million of cost allocations to Evonik in connection with the Acquisition and €1.0 million of valuation of derivatives. Other operating expenses in the Period ended December 31, 2011 amounted to €57.0 million and primarily comprised of Acquisition-related expenses of €40.5 million and consumption and revaluation of emission rights of €9.1 million.

In the Period ended July 29, 2011, other operating income amounted to €145.0 million, of which €128.0 million related to the waiver of Evonik Carbon Black’s debt under an intercompany loan by other Evonik entities in preparation for the Acquisition, €6.3 million related to valuation of derivatives and €4.6 million was attributable to currency translation effects. Other operating expenses in the Period ended July 29, 2011 amounted to €31.7 million and primarily comprised of shared service center cost of €21.1 million.

For additional details on other operating income and expenses in 2012 see notes 7.2 and 7.3 to the audited consolidated financial statements.

Operating Result (EBIT)

Operating result (EBIT) amounted to €196.0 million in the Period ended July 29, 2011, €(16.0) million in the Period ended December 31, 2011 and €87.7 million in 2012, reflecting all the factors described above.

Finance Costs, Net

Finance costs, net amounted to €11.8 million in the Period ended July 29, 2011, €68.4 million in the Period ended December 31, 2011 and €97.9 million in 2012.

Finance costs, net included interest expense on loans from Evonik in an amount of €11.1 million in the Period ended July 29, 2011, interest expense on our Senior Secured Notes financing in an amount of €32.1 million in the Period ended December 31, 2011 and €58.9 million in 2012, interest expense on the PECs of €11.5 million for the Period ended December 31, 2011 and €29.2 million in 2012, arrangement fees for the Revolving Credit Facility in an amount of €1.0 million for the Period ended December 31, 2011 and €2.8 million in 2012, and the amortization of capitalized transaction costs in an amount of €1.7 million in the Period ended December 31, 2011 and €3.6 million in 2012. Exchange rate losses amounted to €28.2 million in the Period ended December 31, 2011 and €3.9 million in 2012.

The increase in interest expense on our Senior Secured Notes financing from €32.1 million in the Period ended December 31, 2011 to €58.9 million in 2012 was due to the issuance of the Senior Secured Notes in June 2011. The effect of the shorter time period was partially offset by lower interest expense in 2012 attributable to a voluntary redemption on June 15, 2012 of 10% of the original aggregate principal amount of the Senior Secured Notes. The increase of interest on the PECs from €11.5 million in the Period ended December 31, 2011 to €29.2 million in 2012 resulted from the issuance of the PECs on July 28, 2011.

Finance costs, net in the Period ended July 29, 2011 included financial income of €0.3 million primarily consisting of interest income. Finance costs, net in the Period ended December 31, 2011 included financial income of €7.6 million primarily associated with interest income and foreign exchange gains. In 2012, finance costs, net included finance income of €5.2 million associated with foreign exchange gains of €3.7 million and interest income of €1.5 million.

 

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Share of Profit or Loss of Associates

Share of profit or loss of associates represents the dividend received from our German JV and amounted to €0.5 million in the Period ended July 29, 2011, €0.2 million in the Period ended December 31, 2011 and €0.4 million in 2012.

Financial Result

Financial result is comprised of finance income, finance expenses and share of profit or loss of associates and amounted to €11.3 million in the Period ended July 29, 2011, €68.3 million in the Period ended December 31, 2011 and €97.9 million in 2012 reflecting the factors discussed above.

Profit or Loss for the Period before Income Taxes

Profit or loss for the period before income taxes amounted to €184.7 million in the Period ended July 29, 2011, €(84.3) million in the Period ended December 31, 2011 and €(9.8) million in 2012, reflecting all the factors described above.

Income Taxes

Income taxes represented a tax payment of €62.1 million in the Period ended July 29, 2011, tax refund of €9.8 million in the Period ended December 31, 2011 and a tax payment of €8.9 million in 2012. Our income taxes in the periods under discussion reflected our profitability developments and also included significant tax effects related to the Acquisition.

Profit or Loss for the Period

We recorded consolidated profit of €122.7 million in the Period ended July 29, 2011, a consolidated loss of €74.5 million in the Period ended December 31, 2011 and consolidated loss of €18.7 million in 2012, reflecting all the factors described above. Our consolidated profit or loss in both periods of 2011 were strongly affected by the Acquisition.

Contribution Margin and Contribution Margin per Metric Ton (Non-IFRS Financial Measures)

Contribution Margin amounted to €242.2 million in the Period ended July 29, 2011, €147.0 million in the Period ended December 31, 2011 and €402.7 million in 2012, reflecting base price increases in our Rubber Carbon Black segment that became effective in early 2012.

Contribution Margin per Metric Ton amounted to €381.0 in the Period ended July 29, 2011, €351.7 in the Period ended December 31, 2011 and €424.1 in 2012, reflecting base price increases in our Rubber Carbon Black segment that became effective in early 2012.

Adjusted EBITDA (Non-IFRS Financial Measure)

Adjusted EBITDA amounted to €111.7 million in the Period ended July 29, 2011, €57.9 million in the Period ended December 31, 2011 and €188.0 million in 2012. Adjusted EBITDA in the periods after the Acquisition mainly reflected increased margins associated with base price increases for rubber carbon black products and our cost efficiency measures.

Segment Discussion

Our business operations are divided into two operating segments: the Specialty Carbon Black segment and the Rubber Carbon Black segment. We use segment revenue, segment gross profit, segment sales volume, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin as measures of segment performance and profitability.

 

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The table below presents our segment results derived from our unaudited interim condensed consolidated financial statement for the three months ended March 31, 2014 and 2013.

 

     Three months ended March 31,  
     2014      2014      2013  
     (in US$ million,
unless
otherwise
indicated)
               

Specialty Carbon Black

        

Revenue

     140.6         102.0         97.9   

Cost of sales

     96.1         69.7         66.0   

Gross profit

     44.5         32.3         31.9   

Sales volume (kmt)(1)

     50.9         50.9         45.2   

Adjusted EBITDA

     35.4         25.7         23.7   

Adjusted EBITDA Margin (%)(2)

     25.2         25.2         24.2   

Rubber Carbon Black

        

Revenue

     314.7         228.4         243.2   

Cost of sales

     261.6         189.9         205.5   

Gross profit

     53.2         38.6         37.7   

Sales volume (kmt)(1)

     198.4         198.4         197.1   

Adjusted EBITDA

     33.5         24.3         21.6   

Adjusted EBITDA Margin (%)(2)

     10.6         10.6         8.9   

The table below presents our segment results derived from our Successor audited consolidated financial statements for 2013 and 2012, our Successor audited consolidated financial statements for the period from April 13 through December 31, 2011, and the Predecessor audited combined financial statements for the period from January 1 through July 29, 2011.

 

     Successor     

 

   Predecessor  
     2013      Year ended
December 31,
     Period ended
December 31,
    

 

   Period ended
July 29,
 
        2013      2012      2011     

 

   2011  
     (in US$ million,
unless otherwise
indicated)
     (in € million, unless otherwise
indicated)
           (in € million,
unless
otherwise
indicated)
 

Specialty Carbon Black

             

Revenue

     537.8         390.3         400.1         138.0              236.9   

Cost of sales

     (368.6)         (267.5)         (274.5)         (98.4)              (142.0)   

Gross profit

     169.2         122.8         125.6         39.6              94.9   

Sales volume (kmt)(1)

     190.6         190.6         185.2         69.0              114.8   

Adjusted EBITDA

     135.0         98.0         89.4         26.2              69.0   

Adjusted EBITDA Margin (%)(2)

     25.1         25.1         22.3         19.0              29.1   

Rubber Carbon Black

             

Revenue

     1,308.2         949.4         997.5         407.0              543.7   

Cost of sales

     (1,106.9)         (803.3)         (841.5)         (356.7)              (469.5)   

Gross profit

     201.3         146.1         155.9         50.3              74.1   

Sales volume (kmt)(1)

     777.7         777.7         764.4         348.9              520.7   

Adjusted EBITDA

     128.4         93.1         98.6         31.7              42.7   

Adjusted EBITDA Margin (%)(2)

     9.8         9.8         9.9         7.8              7.9   

 

 

  (1) Unaudited.

 

  (2) Defined as Adjusted EBITDA divided by revenue.

 

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Specialty Carbon Black

First Quarter of 2014 Compared to First Quarter of 2013

Revenue of the Specialty Carbon Black segment increased by €4.1 million, or 4.2%, from €97.9 million in the first quarter of 2013 to €102.0 million in the first quarter of 2014, primarily as a result of increased sales volume.

Sales volume of the Specialty Carbon Black segment increased by 5.7 kmt, or 12.6%, from 45.2 kmt in the first quarter of 2013 to 50.9 kmt in the first quarter of 2014, reflecting increased demand and sales in the Americas and South Korea.

Gross profit of the Specialty Carbon Black segment increased by €0.4 million, or 1.3%, from €31.9 million in the first quarter of 2013 to €32.3 million in the first quarter of 2014, in line with the higher sales volume despite an increase in depreciation and amortization late in 2013.

Adjusted EBITDA of the Specialty Carbon Black segment increased by €2.0 million, or 8.4%, from €23.7 million in the first quarter of 2013 to €25.7 million in the first quarter of 2014 due to stronger gross margins primarily in Europe and reduced fixed costs.

Year 2013 Compared to Year 2012

Revenue of the Specialty Carbon Black segment decreased by €9.8 million, or 2.4%, from €400.1 million in 2012 to €390.3 million in 2013, primarily due to a decrease in carbon black oil prices passed through to our customers and changes in base prices while the impact from increased volumes was offset by a change in product mix.

Sales volume of the Specialty Carbon Black segment increased by 5.4 kmt, or 2.9%, from 185.2 kmt in 2012 to 190.6 kmt in 2013, mainly as a result of an increase in demand in emerging markets in Asia and the Americas.

Gross profit of the Specialty Carbon Black segment declined by €2.8 million, or 2.2%, from €125.6 million in 2012 to €122.8 million in 2013, mainly due to higher depreciation and amortization expenses in 2013 compared to 2012.

Adjusted EBITDA of the Specialty Carbon Black segment increased by €8.6 million, or 9.6%, from €89.4 million in 2012 to €98.0 million in 2013, mainly as a result of the increased sales volume and associated cost efficiency measures.

Year 2012 Compared to Year 2011

Revenue of the Specialty Carbon Black segment amounted to €236.9 million in the Period ended July 29, 2011, €138.0 million in the Period ended December 31, 2011 and €400.1 million in 2012, and primarily reflected an increase in oil prices passed through to our customers, offsetting some erosion of base price.

Sales volume in the Specialty Carbon Black segment amounted to 114.8 kmt in the Period ended July 29, 2011, 69.0 kmt in the Period ended December 31, 2011 and 185 kmt in 2012.

Gross profit of the Specialty Carbon Black segment amounted to €94.9 million in the Period ended July 29, 2011, €39.6 million in the Period ended December 31, 2011 and €125.6 million in 2012, reflecting in part the impact of increased depreciation and amortization, as well as some erosion of base prices.

Adjusted EBITDA of the Specialty Carbon Black segment amounted to €69.0 million in the Period ended July 29, 2011, €26.2 million in the Period ended December 31, 2011 and €89.4 million in 2012, reflecting the erosion of base prices offset by our cost containment efforts.

 

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Rubber Carbon Black

First Quarter of 2014 Compared to First Quarter of 2013

Revenue of the Rubber Carbon Black segment decreased by €14.7 million, or 6.0%, from €243.2 million in the first quarter of 2013 to €228.5 million in the first quarter of 2014 due to decreased carbon black oil prices.

Sales volume of the Rubber Carbon Block segment remained relatively stable, increasing by 1.3 kmt, or 0.6%, from 197.1 kmt in the first quarter of 2013 to 198.4 kmt in the first quarter of 2014.

Gross profit of the Rubber Carbon Black increased by €0.9 million, or 2.4%, from €37.7 million in the first quarter of 2013 to €38.6 million in the first quarter of 2014 despite an increase in depreciation and amortization, primarily as a result of fixed cost savings from the closure of our Sines (Portugal) plant and improved manufacturing efficiencies associated with both headcount savings and our capital investment program, which also provided cost and yield improvement in the use of carbon black oil feedstocks.

Adjusted EBITDA of the Rubber Carbon Black segment increased by €2.7 million, or 12.5%, from €21.6 million in the first quarter of 2013 to €24.3 million in the first quarter of 2014, reflecting the development of gross profit, excluding depreciation and amortization.

Year 2013 Compared to Year 2012

Revenue of the Rubber Carbon Black segment decreased by €48.1 million, or 4.8%, from €997.5 million in 2012 to €949.4 million in 2013, primarily due to a decrease in carbon black oil prices passed through to our customers, as well as some base price reductions in the Americas as well as impacts from foreign currency exchange rates.

Sales volume of the Rubber Carbon Black segment remained relatively stable, increasing by 13.3 kmt, or 1.7%, from 764.4 kmt in 2012 to 777.7 kmt in 2013.

Gross profit of the Rubber Carbon Black segment declined by €9.8 million, or 6.3%, from €155.9 million in 2012 to €146.1 million in 2013, primarily due to the impact of manufacturing efficiency improvements offset by base price reduction, as well as additional depreciation charges relating to the write-off of plant and equipment related to the Sines (Portugal) closure.

Adjusted EBITDA of the Rubber Carbon Black segment declined by €5.5 million, or 5.6%, from €98.6 million in 2012 to €93.1 million in 2013, primarily due to a decline in gross profit, eliminating the effect of increased depreciation and amortization.

Year 2012 Compared to Year 2011

Revenue of the Rubber Carbon Black segment amounted to €543.7 million in the Period ended July 29, 2011, €407.0 million in the Period ended December 31, 2011 and €997.5 million in 2012, and reflected price increases that became effective in early 2012 that covered both an increase in base prices and an increase in oil prices passed through to our customers.

Sales volume in the Rubber Carbon Black segment amounted to 520.7 kmt in the Period ended July 29, 2011, 348.9 kmt in the Period ended December 31, 2011 and 764.4 kmt in 2012, reflecting weakening demand, in particular in Europe.

Gross profit of the Rubber Carbon Black segment amounted to €74.1 million in the Period ended July 29, 2011, €50.3 million in the Period ended December 31, 2011 and €155.9 million in 2012, reflecting our base price increases and manufacturing efficiency savings in 2012.

 

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Adjusted EBITDA of the Rubber Carbon Black segment amounted to €42.7 million in the Period ended July 29, 2011, €31.7 million in the Period ended December 31, 2011 and €98.6 million in the 2012, reflecting the development of gross profit, excluding the effect of depreciation and amortization.

Liquidity and Capital Resources

Historical Cash Flows

The tables below present our historical cash flows derived from our unaudited interim condensed consolidated financial statements for the periods ended March 31, 2014 and March 31, 2013, audited consolidated financial statements for 2013 and 2012, our Successor audited consolidated financial statements for the period from April 13 through December 31, 2011, and the Predecessor audited combined financial statements for the period from January 1 through July 29, 2011.

 

     Three months ended March 31,  
     2014      2014      2013  
     (in
US$ million)
     (in € million)  

Cash flows from (used in) operating activities

     47.1         34.2         20.9   

Cash flows from (used in) investing activities

     (10.6)         (7.7)         (19.5)   

Cash flows from (used in) financing activities

     (14.0)         (10.2)         (27.3)   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

     119.6         86.8         48.4   

 

     Successor    

 

   Predecessor  
     Year ended December 31,      Period ended
December 31,
   

 

   Period ended
July 29,
 
     2013      2013      2012      2011    

 

   2011  
     (in
US$ million)
     (in € million)           (in
€ million)
 

Cash flows from (used in) operating activities

     263.0         190.9         177.1         16.8             5.6   

Cash flows from (used in) investing activities

     (106.3)         (77.2)         (71.3)         (782.7)             (19.8)   

Cash flows from (used in) financing activities

     (158.1)         (114.7)         (131.1)         861.0             27.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

  

 

 

 
Cash and cash equivalents at the end of the period      97.1         70.5         74.9         98.9             39.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

  

 

 

 

Potential South Korean Tax Assessment

In connection with a tax audit of our South Korean operations for 2011, the South Korean tax authorities have questioned the valuation assigned to our acquisition of those operations from Evonik in 2011 and have asked us to establish why the valuation was not at a significantly higher level. A higher valuation would result in a higher capital gains tax due to the authorities, which we would be obligated to pay over as withholding agent on behalf of Evonik. The higher valuation could also result in additional corporate income tax payable by the Company. We are in the process of responding to the inquiry to defend the valuation used in the Acquisition. However, were the authorities to prevail at the level they have initially asserted, the additional tax liability could be significant, perhaps reaching an amount in the range of €40 million (for the withholding and larger corporate income tax portions combined).

We intend to defend the valuation used in the Acquisition vigorously. We would also expect to seek reimbursement from Evonik for some or all of the tax we may be obligated to pay. Nevertheless, the outcome of this tax audit and its potential impact on the Company are uncertain and could have a material adverse effect on our net profit or loss and on our cash flow in any period in which the liability is incurred or paid (though the outcome should not affect our Adjusted EBITDA for any period). The timing of any impact is also uncertain,

 

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although it could occur within the next two or three fiscal quarters. The ongoing tax audit could also result in additional assessments for 2011, as well as for subsequent years, or a higher effective tax rate on our South Korean operations in the future.

First Quarter of 2014

Cash inflows from operating activities in the first quarter of 2014 amounted to €34.2 million and consisted of a consolidated loss for the period of €0.4 million, adjustments of €20.0 million, primarily for non-cash items (of which €18.9 million were depreciation and amortization), cash outflow from Net Working Capital of €7.7 million and the exclusion of net financing costs of €23.8 million.

Cash outflows from investing activities in the first quarter of 2014 amounted to €7.7 million and related to further expansion and improvement projects.

Cash outflows for financing activities represented our interest payments and changes in short term borrowings.

First Quarter of 2013

Cash inflows from operating activities in the first quarter of 2013 amounted to €20.9 million and consisted of a consolidated loss for the period of €6.5 million, adjustments of €13.7 million, primarily for non-cash items (mostly depreciation and amortization), cash outflow from Net Working Capital of €9.4 million, the exclusion of net financing costs of €34.0 million and cash outflow from taxes paid of €10.0 million.

Cash outflows from investing activities in the first quarter of 2013 amounted to €9.5 million and included investments in our Korean production line as well as in our new global SAP platform.

Cash outflows from financing activities was composed of interest paid to our shareholders of €43.0 million offset by income from short term borrowings.

Year 2013

Cash inflows from operating activities in 2013 amounted to €190.9 million and consisted of a consolidated loss for the period of €19.0 million, adjustments primarily for non-cash items of €72.2 million, cash inflows from Net Working Capital of €35.0 million and the exclusion of net financing costs of €95.6 million.

Cash outflows from investing activities in 2013 amounted to €77.2 million. Total capital expenditure in United States amounted to €26.6 million and related primarily to the completion of the implementation of a new global enterprise resource planning (ERP) system and expanding our production capabilities at our Ivanhoe (Louisiana) facility. Total capital expenditure in South Korea amounted to €13.1 million and related primarily to the addition of a new rubber carbon black production line that commenced operations in 2013. Total capital expenditure in Italy amounted to €7.3 million and related primarily to performance improvement measures in our Italian plant. The remainder related to expenditures in our other operating facilities primarily in sustaining and compliance capital projects, investments in energy recovery technology and capital spending required for process technology and production differentiation projects.

Cash outflows from financing activities in 2013 amounted to €115.0 million and primarily reflected a voluntary partial redemption of the Shareholder Loan in the amount of €43.0 million effected on February 1, 2013, a subsequent interest payment of €15.1 million on the Shareholder Loan effected on August 1, 2013, as well as our semi-annual interest payments on the Senior Secured Notes.

Year 2012

Cash inflows from operating activities in 2012 amounted to €177.1 million and consisted of a consolidated loss for the period of €18.7 million, adjustments primarily for non-cash items of €63.8 million, cash inflows from Net Working Capital of €51.4 million and the exclusion of net financing costs of €97.9 million.

 

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Cash outflows from investing activities in 2012 amounted to €71.3 million and primarily related to manufacturing-related investment projects, including the addition of a new rubber carbon black production line in South Korea that commenced operations in 2013, and to the implementation of a new global ERP-system.

Cash outflows from financing activities in 2012 amounted to €131.1 million and reflected a voluntary 10% redemption of our Senior Secured Notes on June 15, 2012 and a corresponding payment in an amount of €63.3 million, as well as our semi-annual interest payments on the Senior Secured Notes.

Period Ended December 31, 2011

Cash inflows from operating activities in the Period ended December 31, 2011 amounted to €16.8 million and consisted of a consolidated loss for the period of €74.5 million, adjustments primarily for non-cash items of €15.3 million, cash inflows from Net Working Capital of €18.1 million and the exclusion of net financing costs of €68.4 million.

Cash outflows from investing activities in the Period ended December 31, 2011 amounted to €782.7 million and primarily reflected a cash payment of €805.2 million in connection with the Acquisition, partially set off by cash of €39.4 million acquired as a result of the Acquisition.

Cash inflows from financing activities in the Period ended December 31, 2011 amounted to €861.0 million and included proceeds from the issuance of the Senior Secured Notes totaling €599.6 million and the utilization of the Shareholder Loan in the amount of €277.5 million.

Period ended July 29, 2011

Cash inflows from operating activities in the Period ended July 29, 2011 amounted to €5.6 million and consisted of a consolidated profit for the period of €122.7 million, adjustments primarily for non-cash income items of €(91.9) million (mainly related to a pre-Acquisition debt waiver of Evonik Carbon Black’s debt under an intercompany loan by other Evonik entities), cash outflows from Net Working Capital of €92.3 million and the exclusion of net financing costs of €11.8 million.

Cash outflows from investing activities in the Period ended July 29, 2011 amounted to €19.8 million and primarily reflected capital expenditures for maintenance projects.

Cash inflows from financing activities in the Period ended July 29, 2011 amounted to €27.1 million and primarily reflected our Predecessor’s preparation for the Acquisition. In this respect, our Predecessor received cash from borrowings of €185.3 million offset by cash paid for borrowings of €135.1 million, as well as making a repayment of equity of €12.7 million and an interest payment of €10.7 million.

Sources of Liquidity

Our principal sources of liquidity are the net cash generated from our operating activities, as well as available cash balances and amounts available under our Revolving Credit Facility and local bank facilities. See “Description of Material Indebtedness.” Upon the Refinancing, we intend to enter into the New Credit Facility, which will include a multicurrency, senior secured revolving line of credit of up to €115 million. See “Summary—Refinancing.” We cannot assure you that our cash position and cash generated from operations will be adequate to support the further growth of our business. Our ability to generate cash from operations depends on our future operating performance, which in turn is dependent on general economic, financial, competitive, market, regulatory and other conditions and factors, many of which are beyond our control. See “Risk Factors.” In addition, there are some statutory restrictions on the ability of our subsidiaries to transfer funds to us (e.g., legislation on permitted dividend payments or currency transfers), although we believe that we have structured our Group treasury operations to minimize the impact of such statutory restrictions on our operations. We intend

 

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to use cash from operating activities, as well as cash balances, to finance our capital needs. Based on our current operating performance and liquidity, we believe that cash provided by our operating activities and available cash balances will be sufficient to cover our Net Working Capital requirements, Capital Expenditures, interest payments and scheduled debt repayments in the next year.

As stated under “Dividend Policy” above, we currently intend to pay dividends on our common shares in 2015, subject to the discretion of the Board of Directors, the general meeting of our shareholders and compliance with applicable legal requirements. We expect that the amount of any future dividend would be subject to the Company’s operating results, cash flows, debt service, capital requirements and other business considerations. In general, we currently expect that any future dividends would tend to offset or replace some portion of the interest savings that we would expect to realize as a result of our Refinancing. See “Pro Forma Financial Information.

Net Working Capital (Non-IFRS Financial Measure)

We define Net Working Capital as the total of inventories and current trade receivables, less trade payables. Net Working Capital is a non-IFRS 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 following tables set forth the principal components of our Net Working Capital as of the dates indicated.

 

     As of March 31,  
     2014      2014      2013  
     (in US$
million)
     (in € million)  

Inventories

     177.5         128.9         145.4   

Trade receivables

     287.2         208.4         246.5   

Trade payables

     148.6         107.8         112.9   
  

 

 

    

 

 

    

 

 

 

Net Working Capital

     316.1         229.5         279.0   

 

     As of December 31,  
     2013      2013      2012      2011  
     (in US$
million)
     (in € million)  

Inventories

     169.8         123.2         153.5         164.3   

Trade receivables

     272.3         197.6         213.0         239.9   

Trade payables

     (137.1)         (99.5)         (98.4)         (81.8)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Working Capital

     305.0         221.3         268.1         322.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our Net Working Capital position can vary significantly from month to month, mainly 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, as our inventories and trade receivables increase as a result of higher carbon black oil prices and related sales levels. These increases are partially offset by related increases in trade payables. 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. Based on 2013 Net Working Capital requirements, we estimate that a $10 per barrel movement in the Brent crude oil price correlates to a movement in our Net Working Capital of approximately €20.0 million within about a two to three month period. In times of relatively stable oil prices, the effects on our Net Working Capital levels are less significant and Net Working Capital swings increase in an environment of high price volatility.

Our Net Working Capital gradually declined from €322.3 million as of December 31, 2011 to €268.1 million as of December 31, 2012, and further to €221.3 million as of December 31, 2013 due to a continued strong focus of our management on the optimization of Net Working Capital since the Acquisition,

 

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including our efforts to adjust inventory to the minimal required levels, shortening the time between production and shipment of product to customers, accelerating cash collections with respect to accounts receivable and extending payment terms with respect to accounts payable. As of March 31, 2014, Net Working Capital increased slightly to €229.5 million, reflecting a regular fluctuation impact at the end the first quarter.

Capital Expenditures (Non-IFRS Financial Measure)

We define Capital Expenditures as Cash paid for the acquisition of intangible assets and property, plant and equipment as shown in the consolidated financial statements.

Our Capital Expenditures amounted to €16.2 million in the Period ended July 29, 2011, €17.1 million in the Period ended December 31, 2011, €71.3 million in 2012, €77.2 million in 2013 and €7.7 million for the three months ended March 31, 2014. We plan to finance our Capital Expenditures with cash generated by our operating activities.

While, prior to the Acquisition, Capital Expenditures mainly consisted of expenditures incurred in connection with the maintenance of our assets, we have increased our investment in expansion and rationalization projects to increase the efficiency of our production facilities for both the Specialty Carbon Black and Rubber Carbon Black segments. The main capital expansion project initiated following the Acquisition was the addition of a new rubber carbon black production line in South Korea driven by growing customer demand. This production line commenced operations in summer 2013. We estimate that our maintenance Capital Expenditure requirements for 2014 will be approximately €20 million to €25 million. 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.

Capital Expenditures in the first quarter of 2014 amounted to €7.7 million and were mainly composed of expenditures for performance improvement projects in the United States and in Germany and maintenance projects in our remaining plants.

Capital Expenditures in 2013 amounted to €77.2 million and included €8.0 million invested in connection with the completion of the new production line in South Korea and smaller investments in various operating efficiency initiatives and “de-bottlenecking” projects that have been initiated to increase production in existing facilities. For example, we invested in the replacement of pre-heaters in our facilities to improve the efficiency of feedstock utilization. Further, we finalized the investment in the re-configuration of our new global SAP-systems of €5.4 million to improve our ability to control and manage our business.

Capital Expenditures in 2012 amounted to €71.3 million and included approximately €8.0 million invested in the new production line in South Korea and smaller investments in various operating efficiency initiatives and “de-bottlenecking” projects that have been initiated to increase production in existing facilities. For example, we invested in the replacement of pre-heaters in our facilities to improve the efficiency of feedstock utilization. Further, we invested significant amounts in the re-configuration of our IT-systems.

Capital Expenditures in the Period ended December 31, 2011 amounted to €17.1 million and comprised of expenditures on property, plant and equipment of €16.3 million and on industrial property rights of €0.8 million which related to asset preservation and compliance, including expenditures to preserve and replace equipment and expenditures to meet regulatory requirements.

Capital Expenditures in the Period ended July 29, 2011 amounted to €16.2 million and mainly comprised of expenditures for maintenance.

Contractual Obligations and Off-Balance Sheet Arrangements

As of December 31, 2013, we did not have any significant off-balance sheet arrangements other than oil and gas purchase commitments and operating leases for certain of our plants. The following table sets forth our

 

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contractual obligations and off-balance sheet arrangements as of December 31, 2013. In connection with the Refinancing, we plan to repay the entire amount of our outstanding long-term debt obligations, see “Summary—Refinancing.”

 

     Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
     Total  
     (unaudited)  
     (in € million)  

Long-term debt obligations(1)

     98.3         166.6         687.1         289.1         1,242.0   

Revolving Credit Facility(2)

     0         0         0         0         0.0   

Senior Secured Notes(3)

     2.8         0.2         547.9         0         550.8   

Shareholder Loan

     12.3         0         0         273.1         285.4   

Interest expense on long-term debt(4)

     83.2         166.4         139.2         16.0         404.8   

Purchase commitments(5)

     205.7         203.8         203.8         227.9         841.3   

Management fees(6)

     3.0         6.0         6.0         3.0 p.a.(7)         n/a(7)   

Operating leases

     3.4         3.5         1.1         1.9         9.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total contractual obligations and off-balance sheet arrangements(9)      310.4         379.9         898.0         518.9(8)         2,107.2(8)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) Sets forth obligations to repay principal and interest under our long-term debt obligations.

 

(2) Represents the obligation under the Revolving Credit Facility. As of March 31, 2014, there were no cash amounts drawn under our Revolving Credit Facility and $249.2 million was available for drawing, representing the difference between $250.0 million and $0.8 million equivalent of guarantees reducing the available amount under the Revolving Credit Facility. As of that date, the full amount available could be drawn without violating any covenants in the Revolving Credit Facility. After March 31, 2014, we drew approximately €45 million under our Revolving Credit Facility to fund working capital purchases. As of June 30, 2014 we have repaid some of this amount, and we expect to repay the outstanding portion of this amount and replace this facility with the New Credit Facility in the Refinancing.

 

(3) Represents the Senior Secured Notes. The principal amount of $315.0 million has been translated at an assumed exchange rate at the maturity date of $1.3791 per €1.00. The borrowing costs on the principal of the U.S. Dollar-denominated Senior Secured Notes have been translated applying the same exchange rate. On May 6, 2014 we redeemed €35.5 million aggregate outstanding principal amount of the Euro-denominated Senior Secured Notes and $35.0 million aggregate outstanding principal amount of the U.S. Dollar-denominated Senior Secured Notes pursuant to our 10% optional redemption right.

 

(4) Represents interest expenses related to indebtedness from our Senior Secured Notes as well as the interest related to our Shareholder Loan, assuming future interest will be paid in cash at an interest rate of 10.57% in each period.

 

(5) Represents purchase commitments under long-term supply agreements for the supply of raw materials, mainly oil and gas.

 

(6) Represents recurring estimated annual fees of €3.0 million associated with the Consulting and Support Agreement that was entered into with the Principal Shareholders upon completion of the Acquisition. The Principal Shareholders have informed the Company that they intend to terminate the Consulting and Support Agreement at the closing of this offering.

 

(7) Since the management fee is payable annually, no absolute amount for an indeterminate period can be specified.

 

(8) Management fees of €3.0 million per year are not included.

 

(9) This amount does not reflect the Company’s obligations under its existing pension arrangements, which as of December 31, 2013 and March 31, 2014 amounted to €35.9 million and €36.1 million, respectively. See note 8.9 to the audited financial statements included elsewhere herein.

The level of performance bonds, guarantees and letters of credit required for carbon black oil purchasing could increase as a result of increasing oil prices. Although this has not been the case since the Acquisition, carbon black oil suppliers may also require additional guarantees due to the new ownership structure. As of December 31, 2013, we had two back-to-back guarantees issued by Commerzbank AG drawn against the Revolving Credit Facility in the total amount of €1.7 million.

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

 

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financial markets, we seek to minimize potential adverse effects on our financial performance and capital. Where appropriate, we use derivative financial instruments solely for the purpose of hedging the currency, 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 addresses our market risk and does not address other financial risks which we face in the normal course of business, including credit risk and liquidity risk. Please see note 10.3 to our audited consolidated financial statements for 2013 included herein for a further discussion of our financial risk management policies and markets risks.