EX-99.1 2 oecifrsinterimaccountsq2-2.htm 2018-08-02 IAS 34 Exhibit


Exhibit 99.1
Unaudited interim condensed
consolidated financial statements
of Orion Engineered Carbons S.A., Luxembourg,
as at June 30, 2018
 scarapoeccoverimagea08.jpg



Interim condensed consolidated income statements of
Orion Engineered Carbons S.A. for the three and six months ended June 30, 2018 and 2017 - unaudited
 
 
 
 
Three Months Ended 
 Jun 30, 2018
 
Three Months Ended 
 Jun 30, 2017
 
Six Months Ended 
 Jun 30, 2018
 
Six Months Ended 
 Jun 30, 2017
 
 
Note
 
In USD k
 
In USD k
 
In USD k
 
In USD k
Revenue
 
3
 
391,586

 
329,613

 
798,285

 
653,678

Cost of sales
 
 
 
(278,813
)
 
(236,734
)
 
(573,109
)
 
(465,261
)
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
3
 
112,773

 
92,879

 
225,176

 
188,417

 
 
 
 
 
 
 
 
 
 
 
Selling expenses
 
 
 
(35,732
)
 
(32,705
)
 
(73,600
)
 
(63,450
)
Research and development costs
 
 
 
(4,644
)
 
(4,456
)
 
(9,705
)
 
(8,644
)
General and administrative expenses
 
 
 
(18,426
)
 
(18,209
)
 
(39,469
)
 
(38,346
)
Other operating income
 
4
 
296

 
2,127

 
459

 
2,274

Other operating expenses
 
4
 
(1,561
)
 
(1,097
)
 
(3,556
)
 
(4,290
)
 
 
 
 
 
 
 
 
 
 
 
Restructuring income
 
4
 
40,253

 
—

 
40,253

 
—

Restructuring expenses
 
4
 
(10,502
)
 
(319
)
 
(11,768
)
 
(722
)
Restructuring income/(expenses), net
 
4
 
29,751

 
(319
)
 
28,485

 
(722
)
 
 
 
 
 
 
 
 
 
 
 
Operating result (EBIT)
 
 
 
82,457

 
38,220

 
127,790

 
75,239

 
 
 
 
 
 
 
 
 
 
 
Finance income
 
4
 
19,123

 
6,245

 
19,978

 
20,083

Finance costs
 
4
 
(28,475
)
 
(17,147
)
 
(37,420
)
 
(41,355
)
Share of profit or loss of joint ventures
 
 
 
144

 
133

 
293

 
262

 
 
 
 
 
 
 
 
 
 
 
Financial result
 
 
 
(9,208
)
 
(10,769
)
 
(17,149
)
 
(21,010
)
 
 
 
 
 
 
 
 
 
 
 
Profit before income taxes
 
 
 
73,249

 
27,451

 
110,641

 
54,229

 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
8
 
(20,558
)
 
(9,023
)
 
(33,722
)
 
(18,986
)
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
 
 
52,691

 
18,428


76,919

 
35,243

 
 
 
 
 
 
 
 
 
 
 
Earnings per Share ($ per share), basic
 
 
 
0.88

 
0.31

 
1.29

 
0.59

Weighted average number of ordinary shares (in thousands)
 
 
 
59,590

 
59,320

 
59,456

 
59,320

Earnings per Share ($ per share), diluted
 
 
 
0.87

 
0.30

 
1.26

 
0.58

Weighted average number of diluted ordinary shares (in thousands)
 
 
 
60,743

 
60,460

 
60,866

 
60,462


1


Interim condensed consolidated statements of comprehensive income of
Orion Engineered Carbons S.A. for the three and six months ended June 30, 2018 and 2017 – unaudited
 
 
Three Months Ended 
 Jun 30, 2018
 
Three Months Ended 
 Jun 30, 2017
 
Six Months Ended 
 Jun 30, 2018
 
Six Months Ended 
 Jun 30, 2017
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
 
 
 
 
 
 
 
Profit for the period
52,691

 
18,428

 
76,919

 
35,243

 
 
 
 
 
 
 
 
Exchange differences on translation of foreign operations
 
 
 
 
 
 
 
Change in unrealized gains/(losses)
(6,504
)
 
(18,303
)
 
(12,549
)
 
(7,205
)
Income tax effects
(881
)
 
(365
)
 
(872
)
 
(133
)
 
 
 
 
 
 
 
 
Unrealized net gains/(losses) on net investments in a foreign operation
 
 
 
 
 
 
 
Change in unrealized gains/(losses)
(4,875
)
 
10,690

 
(12
)
 
12,914

Income tax effects
1,623

 
(3,455
)
 
4

 
(4,174
)
 
 
 
 
 
 
 
 
Unrealized net gains/(losses) on cash flow hedges
 
 
 
 
 
 
 
Change in unrealized gains/(losses)
(3,474
)
 
21

 
(2,347
)
 
(1,015
)
Income tax effects
964

 
(5
)
 
790

 
223

 
 
 
 
 
 
 
 
Net other comprehensive income to be reclassified to profit or loss in subsequent periods
(13,147
)
 
(11,417
)
 
(14,986
)
 
610

 
 
 
 
 
 
 
 
Actuarial gains (losses) on defined benefit plans
 
 
 
 
 
 
 
Change in unrealized gains/(losses)
2,094

 
(256
)
 
207

 
(833
)
Income tax effects
(661
)
 
109

 
(54
)
 
283

 
 
 
 
 
 
 
 
Net other comprehensive income not to be reclassified to profit or loss in subsequent periods
1,433

 
(147
)
 
153

 
(550
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
(11,714
)

(11,564
)

(14,833
)
 
60

 
 
 
 
 
 
 
 
Total comprehensive income, net of tax all attributable to equity holders of the parent
40,977


6,864


62,086

 
35,303

 







2


Interim condensed consolidated statements of financial position of
Orion Engineered Carbons S.A. as at June 30, 2018 and December 31, 2017 – unaudited
 
 
 
 
Jun 30, 2018
 
Dec 31, 2017
A S S E T S
 
Note
 
In USD k
 
In USD k
Non-current assets
 
 
 
 
 
 
Goodwill
 
 
 
56,555

 
58,180

Other intangible assets
 
 
 
60,650

 
70,722

Property, plant and equipment
 
 
 
429,603

 
462,129

Investment in joint ventures
 
 
 
5,711

 
5,585

Other financial assets
 
7
 
3,175

 
3,564

Other assets
 
 
 
3,499

 
3,883

Deferred tax assets
 
8
 
56,510

 
43,546

 
 
 
 
615,703

 
647,609

Current assets
 
 
 
 
 
 
Inventories
 
6
 
175,228

 
159,334

Trade receivables
 
 
 
277,621

 
234,273

Other financial assets
 
7
 
6,872

 
3,890

Other assets
 
 
 
28,725

 
35,038

Income tax receivables
 
8
 
14,983

 
16,377

Cash and cash equivalents
 
 
 
73,453

 
72,284

 
 
 
 
576,882

 
521,196

 
 
 
 
1,192,585

 
1,168,805

 
 
 
 
 
 
 
 
 
 
 
Jun 30, 2018
 
Dec 31, 2017
E Q U I T Y  A N D  L I A B I L I T I E S
 
Note
 
In USD k
 
In USD k
Equity
 
 
 
 
 
 
Subscribed capital
 
 
 
84,254

 
83,770

Treasury shares
 
5
 
(3,757
)
 
(3,773
)
Reserves
 
 
 
(26,610
)
 
(55,403
)
Profit for the period
 
3
 
76,919

 
75,262

 
 
 
 
130,806


99,856

Non-current liabilities
 
 
 
 
 
 
Pension provisions
 
 
 
64,714

 
65,390

Other provisions
 
 
 
11,576

 
13,344

Financial liabilities
 
7
 
664,441

 
680,699

Other liabilities
 
 
 
66

 
6

Deferred tax liabilities
 
8
 
33,931

 
25,121

 
 
 
 
774,728

 
784,560

Current liabilities
 
 
 
 
 
 
Other provisions
 
 
 
56,746

 
59,471

Trade payables
 
 
 
164,180

 
169,624

Other financial liabilities
 
7
 
8,872

 
7,013

Income tax liabilities
 
8
 
35,741

 
15,539

Other liabilities
 
 
 
21,512

 
32,742

 
 
 
 
287,051

 
284,389

 
 
 
 
1,192,585

 
1,168,805

 



3


Interim condensed consolidated statements of cash flows of
Orion Engineered Carbons S.A. for the three and six months ended June 30, 2018 and 2017 – unaudited
 
 
 
 
Three Months Ended 
 Jun 30, 2018
 
Three Months Ended 
 Jun 30, 2017
 
Six Months Ended 
 Jun 30, 2018
 
Six Months Ended 
 Jun 30, 2017
 
Note
 
In USD k
 
In USD k
 
In USD k
 
In USD k
Profit for the period
3
 
52,691

 
18,428

 
76,919

 
35,243

 
 
 
 
 
 
 
 
 
 
Income taxes
8
 
20,558

 
9,023

 
33,722

 
18,986

 
 
 
 
 
 
 
 
 
 
Profit before income taxes
 
 
73,249

 
27,451

 
110,641

 
54,229

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization of intangible assets and property, plant and equipment
 
 
24,239

 
24,035

 
49,029

 
46,277

Gain on sale of property, plant and equipment
 
 
(40,253
)
 
—

 
(40,253
)
 
—

Other non-cash expenses/(income)
 
 
2,124

 
1,402

 
5,656

 
3,421

(Increase) in trade receivables
 
 
(4,935
)
 
(4,027
)
 
(53,039
)
 
(20,499
)
(Increase) in inventories
6
 
(21,763
)
 
(2,996
)
 
(21,774
)
 
(15,655
)
Increase in trade payables
 
 
594

 
6,926

 
12,552

 
11,436

Decrease in provisions
 
 
10,693

 
(1,663
)
 
(3,179
)
 
(21,560
)
Increase in other assets and liabilities that cannot be allocated to investing or financing activities
 
 
(15,861
)
 
(4,582
)
 
(8,838
)
 
582

Finance income
4
 
(19,123
)
 
(11,743
)
 
(19,978
)
 
(20,083
)
Finance costs
4
 
28,475

 
22,645

 
37,420

 
41,355

Cash paid for income taxes
 
 
(13,288
)
 
(8,905
)
 
(16,869
)
 
(12,388
)
Other cash paid
 
 
(4,741
)
 
—

 
(4,741
)
 
—

 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
19,410

 
48,543

 
46,627

 
67,115

 
 
 
 
 
 
 
 
 
 
Cash received from disposal of property, plant and equipment
 
 
64,672

 
—

 
64,672

 
—

Cash paid for the acquisition of intangible assets and property, plant and equipment
 
 
(33,940
)
 
(18,160
)
 
(59,870
)
 
(36,458
)
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
30,732

 
(18,160
)
 
4,802

 
(36,458
)
 
 
 
 
 
 
 
 
 
 
Repayments of short term borrowings
 
 
(2,054
)
 
(2,028
)
 
(4,188
)
 
(24,702
)
Cash inflows related to current financial liabilities
 
 
2,387

 
4,651

 
7,460

 
10,786

Cash outflows related to current financial liabilities
 
 
(12,298
)
 
(6,631
)
 
(12,298
)
 
(6,631
)
Interest and similar expenses paid
 
 
(13,569
)
 
(11,223
)
 
(23,597
)
 
(17,738
)
Interest and similar income received
 
 
4,612

 
2,678

 
8,732

 
4,428

Dividends paid to shareholders
 
 
(11,944
)
 
(11,169
)
 
(23,808
)
 
(21,955
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
(32,866
)
 
(23,722
)
 
(47,699
)
 
(55,812
)
 
 
 
 
 
 
 
 
 
 
Change in cash
 
 
17,276

 
6,661

 
3,730

 
(25,155
)
 
 
 
 
 
 
 
 
 
 
Change in cash resulting from exchange rate differences
 
 
(3,537
)
 
234

 
(2,561
)
 
2,650

Cash and cash equivalents at the beginning of the period
 
 
59,714

 
48,506

 
72,284

 
77,906

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at the end of the period
 
 
73,453

 
55,401

 
73,453

 
55,401



4


Interim condensed consolidated statements of changes in equity of
Orion Engineered Carbons S.A. for the six months ended June 30, 2018 and 2017 – unaudited
 
 
Subscribed capital
 
Treasury shares
 
Capital
 reserves
 
Translation
 reserve
 
Cash flow hedge reserve
 
Reserve for hedges of a net investment in foreign operation
 
Reserve for
 actuarial gains
 (losses) on defined benefit
 plans
 
Note (2) IFRS 9
 
Total
 equity
Number of common shares
 
Amount
Retained Earnings
 
 
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
In USD k
 
In USD k
As at Jan 1, 2017
59,320,214

 
83,770

 
(3,773
)
 
139,399

 
4,237

 
793

 
(16,055
)
 
(21,006
)
 
(131,622
)
 
55,743

Profit for the period
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
35,243

 
35,243

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(7,338
)
 
(792
)
 
8,740

 
(550
)
 
—

 
60

Total comprehensive income, net of tax
—

 
—


—

 
—


(7,338
)

(792
)
 
8,740

 
(550
)

35,243


35,303

Dividends paid
—

 
—

 
—

 
(21,955
)
 
—

 
—

 
—

 
—

 
—

 
(21,955
)
Share based payments
—

 
—

 
—

 
3,209

 
—

 
—

 
—

 
—

 
—

 
3,209

As at Jun 30, 2017
59,320,214

 
83,770


(3,773
)
 
120,653


(3,101
)

1

 
(7,315
)
 
(21,556
)

(96,379
)

72,300

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at Jan 1, 2018
59,320,214

 
83,770

 
(3,773
)
 
102,529

 
(1,312
)
 
(314
)
 
(1,486
)
 
(23,198
)
 
(64,902
)
 
91,314

Profit for the period
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
76,919

 
76,919

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(13,421
)
 
(1,557
)
 
(8
)
 
153

 
—

 
(14,833
)
Total comprehensive income, net of tax
—

 
—

 
—

 
—

 
(13,421
)
 
(1,557
)
 
(8
)
 
153

 
76,919

 
62,086

 Dividends paid
—

 
—

 
—

 
(23,808
)
 
—

 
—

 
—

 
—

 
—

 
(23,808
)
 Share-based payments
401,737

 
484

 
16

 
714

 
—

 
—

 
—

 
—

 
—

 
1,214

As at Jun 30, 2018
59,721,951

 
84,254

 
(3,757
)
 
79,435

 
(14,733
)
 
(1,871
)
 
(1,494
)
 
(23,045
)
 
12,017

 
130,806


 

5


Notes to the unaudited interim condensed consolidated financial statements
of Orion Engineered Carbons S.A., Luxembourg, as at June 30, 2018
 


                            

6


1.
Organization and principal activities
Orion Engineered Carbons S.A. (“Orion” or the "Company") is entered in the commercial register of Luxembourg under no. B 160558; the Company’s registered office is in Luxembourg; its business address is 6, Route de Trèves, L-2633 Senningerberg (Municipality of Niederanven), Grand Duchy of Luxembourg.
Orion’s unaudited interim condensed consolidated financial statements comprise Orion and its subsidiaries (the “Orion Group” or the “Group”). Orion was incorporated on April 13, 2011. Orion’s fiscal year is the calendar year.
Orion Group is a leading global manufacturer of carbon black products and is based in Luxembourg. Carbon black is a powdered form of carbon that is used to create the desired physical, electrical and optical qualities of various materials. Carbon black products are primarily used as consumables and additives for the production of polymers, printing inks and coatings (“Specialty Carbon Black” or “Specialties”) and in the reinforcement of rubber polymers (“Rubber Carbon Black” or “Rubber”).
Specialty Carbon Black are high-tech materials which are mainly used for polymers, printing systems and coatings applications. The various production processes result in a wide range of different Specialty Carbon Black pigment grades with respect to their primary particle size, structure and surface area/surface chemistry. These parameters affect jetness, tinting strength, undertone, dispersibility, oil absorption, electrical conductivity and other characteristics.
The types of Rubber Carbon Black used in the rubber industry are manufactured according to strict specifications and quality standards. Structure and specific surface area are the key factors in optimizing reinforcement properties in rubber polymers.
As at June 30, 2018, the Orion Group operates 12 wholly owned production facilities in Europe, North and South America, Asia and South Africa and three sales companies. Another ten holding companies and two service companies, as well as two former operating entities in Portugal and France (currently in dissolution), are consolidated in the Orion Group. In June 2018 production ceased at the Bupyeong plant in South Korea and was consolidated into the second production plant in South Korea located in Yeosu. Additionally, the Group operates a joint venture with one production facility in Germany.
Orion’s global presence enables it to supply Specialty Carbon Black customers as well as international customers in the tire and rubber industry with the full range of carbon black grades and particle sizes. Sales activities are supported by sales and representative offices all around the globe. Integrated sales activities with key account managers and customer services are carried out in the United States, Brazil, South Korea, Germany and China.
The Group’s unaudited interim condensed consolidated financial statements were authorized for issue by management on August 2, 2018.

7


2.
Basis of preparation of the interim condensed consolidated financial statements
Basis of preparation
The unaudited interim condensed consolidated financial statements as at and for the six months ended June 30, 2018 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”). Due to the change in the Group's presentation currency from euros to US dollars effective as of January 1, 2018 these unaudited interim condensed consolidated financial statements are prepared in US dollars, the new presentation currency of the Group.

A change in presentation currency is a change in accounting policy which is accounted for retrospectively. Therefore, comparative information for periods prior to January 1, 2018 included in these unaudited interim condensed consolidated financial statements have been restated into US dollars accordingly. Historical financial information included in the Group’s Annual Report on Form 20-F, filed with the SEC on February 23, 2018, for the year ended 31 December 2017 previously reported in euro was the basis for restatement of historical information into US dollars using the procedures outlined below:

–
assets and liabilities denominated in non-US dollar currencies were translated into US dollars at the closing rates of exchange on the relevant balance sheet dates;
–
non-US dollar income and expenditure were translated at the average rates of exchange prevailing for the relevant periods;
–
the cumulative equity and translation reserves were nil at April 13, 2011, the date of incorporation of Orion, and these reserves have been restated on the basis that the Group has reported in US dollars since that date. Share capital, share premium and the other reserves were translated at the historic rates prevailing at April 13, 2011, and subsequent rates prevailing on the date of each transaction;
–
all restated amounts were extracted from the Group’s underlying financial records at applicable historical exchange rates.
All International Financial Reporting Standards ("IFRSs"), interpretations (IFRICs, SICs) originated by the IFRS Interpretations Committee applicable for the period ended June 30, 2018 have been applied.
The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements for the year ended December 31, 2017.
The unaudited interim condensed consolidated financial statements are prepared in US dollars, the presentation currency of the Orion Group. Except where stated otherwise, all figures are presented in thousands of US dollars (USD k) for the sake of clarity. Due to rounding, numbers presented throughout the tables and notes herein may not add up precisely to the totals presented and percentages may not precisely reflect the absolute figures.
First-time adoption of accounting standards
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are - with the exception of IFRS 9 and IFRS 15 - consistent with those followed in the preparation of the Group’s annual financial statements for the year ended December 31, 2017. The following amendments to IFRS were adopted on January 1, 2018:
•
IFRS 9 Financial instruments
IFRS 9 issued on July 24, 2014 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 determines requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The latest issued version supersedes all previous versions. IFRS 9 became effective as of January 1, 2018.
The adoption of IFRS 9 had an effect on the measurement of certain of the Group’s financial instruments while it had no material impact on the hedge accounting models used by the Group.
The impact from the new impairment approach outlined in section 5.4 of IFRS 9 and the required initial recognition of a loss allowance at an amount equal to lifetime expected credit losses for trade receivables did not result in a transition adjustment on retained earnings as of January 1, 2018, as other previously recorded specific allowances are now covered under the new IFRS 9 allowance approach for expected credit losses.
In July 2017 the IASB clarified the accounting treatment for modification of financial liabilities under IFRS 9. A modification gain or loss is required to be calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. Such modification gain or loss is recognized in the income statement in the period of modification, and the modified cash flows are then amortized using the new effective interest rate.

8


The Company has entered into various modifications of its term loan liabilities in the fiscal years 2016 and 2017 while it recorded gains or losses of such modifications over the remaining terms of the respective modifications as permitted under IAS 39. Such modification amounts would have been recorded as immediate gain or loss at each modification date if the Company would have applied IFRS 9 in the past already.
IFRS 9 is generally required to be applied retrospectively; however the recognition of a modification gain or loss for historic modifications made to financial liabilities outstanding on the adoption date is recorded as an accumulative catch up adjustment in retained earnings on the adoption date. The cumulative effect of the modification adjustments amounted to a loss of USD 8,542k net of taxes and is reflected in the retained earnings as of January 1, 2018.
•
IFRS 15 Revenue from contracts with customers
The IASB issued IFRS 15 on May 28, 2014. IFRS 15 intends to combine and harmonize the revenue recognition methods issued in several standards and interpretations. IFRS 15 also determines the time and extent of revenue recognition. IFRS 15 replaces IAS 18 Revenue, IAS 11 Construction Contracts, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC 31 Revenue-Barter Transactions. The Company has completed a group wide review of all material contracts with customers. The changes had no impact on the Company's revenue recognition. Performance obligations are almost entirely the transfer of goods. In a limited number of cases the service to ship goods to the Company's customers may qualify as a separate performance obligation while the price of such ancillary services are deemed to be immaterial and the realization of such services usually occurs at same point of time as the transfer of the main performance obligation. As the changes have no impact on revenue recognition there was no cumulative catch up adjustment recorded in retained earnings under the modified retrospective approach of adoption that is now applied.
Accounting standards issued but not yet effective
The IASB has issued accounting standards which were not yet effective in the current fiscal year. Any new accounting standards which are relevant for the Group’s consolidated financial statements will be adopted when they become effective.
The following relevant pronouncements by the IASB and IFRSIC were not effective as at the reporting date on June 30, 2018 and were not applied by the Group:
•
IFRS 16 Leases
In January 2016, the IASB issued the new standard IFRS 16 “Leases”, which supersedes the existing lease accounting according to IAS 17. The existing concept of operating and finance leases will be replaced and most leases will be recognized in the statement of financial position. IFRS 16 will be effective as of January 1, 2019.
The Group has operating lease contracts as well as very limited finance leases and the new standard will have an impact on Group accounting policies, procedures as well as financial statements and our key performance indicators. The Group has started to analyze the impact of IFRS 16. Refer to note (9.5) Contingent liabilities and other financial obligations in the last annual financial statements for fiscal year 2017 for details of our current lease obligations on an undiscounted basis totaling to $33.3 million. While the Group has not finalized its assessment, according to the provisions of the Standard, the right–to-use leased assets that do not meet the exemption criteria will increase property, plant and equipment and will result in the recognition of a corresponding lease obligation based on the existing contracts at the transition date. The exemption criteria will be applicable in rare cases. In 2017 the Group recorded $9.7 million as operating lease expenses. The Group estimates that a comparable amount of expenses will in the future be recorded as amortization and to a certain amount as finance expenses.
3.
Segment information
Operating segments
The Group’s business is organized by product for corporate management purposes and has the following two operating segments: “Rubber” and “Specialties”.
The performance of the operating segments is assessed by reference to Adjusted EBITDA (as defined below) which is the segment's measure of profit or loss. Group financing (including finance costs and finance income), adjustment items and income taxes are managed on a Group basis and are not allocated to operating segments.

9


Segment reconciliation for the three months ended June 30, 2018 and 2017:
 
 
In USD k
 
In USD k
 
 
For the Three Months Ended 
 Jun 30,
 
For the Three Months Ended 
 Jun 30,
 
 
2018
 
2017
 
 
Rubber
 
Specialties
 
Total
 segments
 
Rubber
 
Specialties
 
Total
 segments
Revenue
 
248,915

 
142,671

 
391,586

 
207,298

 
122,315

 
329,613

Cost of sales
 
(194,191
)
 
(84,622
)
 
(278,813
)
 
(164,179
)
 
(72,555
)
 
(236,734
)
Gross profit
 
54,724

 
58,049

 
112,773

 
43,119

 
49,760

 
92,879

Adjusted EBITDA
 
35,923

 
45,225

 
81,148

 
25,953

 
38,385

 
64,338

Adjusted EBITDA Margin
 
14.4
%

31.7
%

20.7
%
 
12.5
%
 
31.3
%
 
19.5
%
Depreciation amortization and impairment of intangible assets and property, plant and equipment
 
(14,470
)
 
(9,769
)
 
(24,239
)
 
(14,769
)
 
(9,266
)
 
(24,035
)
Share of profit of joint venture
 
(144
)
 
—

 
(144
)
 
(133
)
 
—

 
(133
)
Adjustment items
 
 
 
 
 
25,692

 
 
 
 
 
(1,950
)
EBIT
 
 
 
 
 
82,457

 
 
 
 
 
38,220

Segment reconciliation for the six months ended June 30, 2018 and 2017:
 
 
In USD k
 
In USD k
 
 
For the Six Months Ended 
 Jun 30,
 
For the Six Months Ended 
 Jun 30,
 
 
2018
 
2017
 
 
Rubber
 
Specialties
 
Total
 segments
 
Rubber
 
Specialties
 
Total
 segments
Revenue
 
513,943

 
284,342

 
798,285

 
415,255

 
238,423

 
653,678

Cost of sales
 
(400,798
)
 
(172,311
)
 
(573,109
)
 
(322,827
)
 
(142,434
)
 
(465,261
)
Gross profit
 
113,145

 
112,031

 
225,176

 
92,428

 
95,989

 
188,417

Adjusted EBITDA
 
71,579

 
85,561

 
157,140

 
54,345

 
72,612

 
126,957

Adjusted EBITDA Margin
 
13.9
%

30.1
%
 
19.7
%
 
13.1
%
 
30.4
%
 
19.4
%
Depreciation amortization and impairment of intangible assets and property, plant and equipment
 
(29,374
)
 
(19,655
)
 
(49,029
)
 
(28,771
)
 
(17,506
)
 
(46,277
)
Share of profit of joint venture
 
(293
)
 
—

 
(293
)
 
(262
)
 
—

 
(262
)
Adjustment items
 
 
 
 
 
19,972

 
 
 
 
 
(5,179
)
EBIT
 
 
 
 
 
127,790

 
 
 
 
 
75,239


Definition of “Adjusted EBITDA”
“EBIT” (operating result) is defined as profit or loss for the period before income taxes and finance income and finance costs. “EBITDA” is defined as EBIT before depreciation, amortization and impairment losses. For management reporting purposes and as defined in the credit agreement governing our term loans “Adjusted EBITDA” is defined as EBITDA adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Group strategy, share of profit or loss of joint venture and certain other adjustments. The Company believes that each of these items have less bearing on its performance of the underlying core business. “Adjusted EBITDA” is the management’s measure of the segment result.

10


Adjusted EBITDA is reconciled to profit or loss as follows:
Reconciliation of profit or loss
 
In USD k
 
In USD k

 
For the Three Months Ended Jun 30,
 
For the Six Months Ended Jun 30,
 
 
2018
 
2017
 
2018
 
2017
Profit for the period
 
52,691

 
18,428

 
76,919

 
35,243

Add back income taxes
 
20,558

 
9,023

 
33,722

 
18,986

Profit before income taxes
 
73,249

 
27,451

 
110,641

 
54,229

Add back finance costs
 
28,475

 
17,147

 
37,420

 
41,355

Add back share of profit of joint ventures
 
(144
)
 
(133
)
 
(293
)
 
(262
)
Add back other finance income
 
(19,123
)
 
(6,245
)
 
(19,978
)
 
(20,083
)
Earnings before taxes and finance income/costs (operating result (EBIT))
 
82,457

 
38,220

 
127,790

 
75,239

Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment
 
24,239

 
24,035

 
49,029

 
46,277

EBITDA
 
106,696

 
62,255

 
176,819

 
121,516

Add back share of profit of joint venture
 
144

 
133

 
293

 
262

Add back restructuring (income)/expenses, net (1)
 
(29,751
)
 
319

 
(28,485
)
 
722

Add back consulting fees related to Group strategy (2)
 
151

 
810

 
1,035

 
1,049

Add back long term incentive plan
 
2,853

 
1,609

 
5,953

 
3,209

Add back other adjustments (3)
 
1,055

 
(788
)
 
1,525

 
199

Adjusted EBITDA
 
81,148

 
64,338

 
157,140

 
126,957

(1)    Restructuring income or expenses are related to further actions undertaken to realign our worldwide Rubber footprint and reflects in particular the proceeds of the land sale in South Korea exceeding the associated cessation costs in three and six months ended June 30, 2018.
(2)    Consulting fees related to external consulting fees from establishing and executing Group strategies.
(3) Other adjustments in the three and six months ended June 30, 2018 related in particular to license fees required for certain innovative technologies to meet the EPA requirements of USD 1.1 million. Other adjustments include income in the three months ended June 30, 2017 related to a reimbursement following a successful objection against reassessed real estate transfer taxes in Germany of USD 1.5 million, primarily offset by costs in association with our EPA enforcement action of USD 0.5 million. In addition to the real estate transfer tax reimbursement of USD 1.5 million other adjustments in the six months ended June 30, 2017 include costs of USD 1.4 million in connection with our EPA enforcement action.

11


Geographic information by legal entity
 
Revenues
 
In USD k
 
In USD k
 
For the Three Months Ended Jun 30,
 
For the Six Months Ended Jun 30,
 
2018
 
2017
 
2018
 
2017
Germany
 
157,579

 
135,702

 
324,974

 
261,875

United States
 
100,290

 
82,422

 
196,905

 
166,407

South Korea
 
72,437

 
57,487

 
146,058

 
118,202

Brazil
 
21,349

 
19,503

 
43,265

 
39,096

China
 
16,860

 
12,717

 
38,486

 
25,833

South Africa
 
14,244

 
12,002

 
28,625

 
23,932

Other
 
5,770

 
6,930

 
10,556

 
12,496

Rest of Europe*
 
3,057

 
2,850

 
9,416

 
5,837

Total
 
391,586


329,613

 
798,285

 
653,678

*
Country of domicile of the Group (Luxembourg) USD nil
Goodwill, intangible assets, property, plant and equipment
 
In USD k
 
In USD k
 
As at Jun 30,
 
As at Dec 31,
 
2018
 
2017
Germany
 
136,710

 
145,837

Sweden
 
72,095

 
80,974

Italy
 
65,124

 
72,980

Poland
 
43,466

 
49,933

Rest of Europe
 
3,561

 
4,443

Subtotal Europe
 
320,956


354,167

 
 
 
 
 
United States
 
85,243

 
70,530

South Korea
 
84,943

 
109,905

South Africa
 
29,081

 
32,007

Brazil
 
17,289

 
13,661

China
 
9,261

 
10,733

Other
 
35

 
28

Total
 
546,808


591,031

4.
Other operating income, other operating expenses, restructuring income and expenses, financial result
Other operating income decreased by USD 1,815k from USD 2,274k for the six months ended June 30, 2017 to USD 459k for the six months ended June 30, 2018. Other operating income for the six months ended June 30, 2017 mainly comprised of USD 1,432k reimbursement of property tax paid.
Other operating expenses decreased by USD 734k from USD 4,290k for the six months ended June 30, 2017 to USD 3,556k for the six months ended June 30, 2018. Other operating expenses for the six months ended June 30, 2018 mainly include consulting fees of USD 1,035k and other items that have less bearing on performance of the underlying core business of USD 1,525k compared to USD 1,049k and USD 199k, respectively, in the six months ended June 30, 2017 - for further details please see Note 3 (Segment information). Moreover, other operating expenses for the six months ended June 30, 2018 included allowances on trade receivables of USD 172k compared to USD 637k in six months ended June 30, 2017.
The restructuring of the South Korean footprint concluded in the second quarter of 2018 resulting in cessation of production at the Bupyeong plant and the sale of the land to a third party. Restructuring income is reflecting the proceeds of the land sale less the remaining book value of the land. Restructuring expenses comprise required costs for land restoration of USD 4,021k and cost to consolidate the two South Korean production sites into one remaining site in particular personnel related termination costs of USD 4,363k. This resulted in a net restructuring income of USD 29,751k in the three months ended June 30, 2018. For the six

12


months ended June 30, 2018 net restructuring income amounted to USD 28,485k following restructuring expenses of USD 722k for the six months ended June 30, 2017 related in particular to costs to consolidate the production sites.
Financial result includes finance income, finance costs and share of profit or loss of joint ventures. Financial result decreased by USD 3,861k from USD 21,010k net finance expenses for the six months ended June 30, 2017 to USD 17,149k net finance expenses for the six months ended June 30, 2018. Total net foreign currency revaluation loss in finance result amounted USD 2,667k for the six months ended June 30, 2018 compared to a loss of USD 2,835k for the six months ended June 30, 2017. Interest related to the term loans amounted to USD 11,395k for the six months ended June 30, 2018 compared to USD 12,479k for the six months ended June 30, 2017.
The table below presents a breakdown of financial result for the six months ended June 30, 2018 and 2017:
Financial Result
 
In USD k
 
 
For the Six Months Ended Jun 30,
 
 
2018
 
2017
Interest expense on term loans
 
(11,395
)
 
(12,479
)
Amortization of transaction costs
 
(2,119
)
 
(2,437
)
Commitment bank charge
 
(865
)
 
(612
)
Interest income
 
2,776

 
807

Interest on non-current provisions
 
(1,051
)
 
(920
)
Other interest expense, net
 
(2,110
)
 
(2,796
)
Total net interest expenses
 
(14,764
)
 
(18,437
)
Gains from foreign currency revaluation
 
17,202

 
19,276

Losses from foreign currency revaluation
 
(19,869
)
 
(22,111
)
Net foreign currency revaluation impact
 
(2,667
)
 
(2,835
)
Bank guarantee expense
 
(11
)
 
—

Share of profit of joint ventures
 
293

 
262

Financial Result
 
(17,149
)
 
(21,010
)
5.     Share-based payments
On July 31, 2015 the Company established the Long Term Incentive Plan ("LTIP" or the "2015 Plan") providing for the grant of performance share units (“PSUs”) to employees and officers selected by the Compensation Committee of the Board of Directors (the “Compensation Committee”). PSU awards are earned based on achievement against one or more performance metrics established by the Compensation Committee in respect of a specified performance period. Earned PSUs range from zero to a specified maximum percentage of a participant's target award based on the performance of applicable performance metrics, and are also subject to vesting terms based on continued employment. The first performance period was settled at the beginning of the second quarter of 2018, with PSUs earned based on achievement of EBITDA metrics established by the Compensation Committee and total shareholder return relative to a peer group. Earned and vested, PSUs settled in one share of Company common stock per vested PSU (or, at the Company’s election, cash equal to the fair market value thereof). The first vesting period ended March 31, 2018 (the “2015 Plan”) and PSUs common stocks are issued to participants on April 30, 2018 except for certain PSUs settled in cash at fair market value to cover wage taxes or as substitute for share transfer restrictions. All PSUs are granted under, and are subject to the terms and conditions of, the Company’s 2014 Incentive Compensation Plan, and do not increase the number of shares previously reserved for issuance under that plan. On August 2, 2016 the Compensation Committee established a consecutive LTIP (the "2016 Plan") having consistent terms as compared to the 2015 Plan. On July 31, 2017 the Compensation Committee established a consecutive LTIP (the "2017 Plan"). The following table details the costs charged to the income statement with respect to the 2015 Plan, 2016 Plan and 2017 Plan.

13


 
 
USD k
 
 
For the Six Months Ended Jun 30,
 
 
2018
 
2017
Expense arising from equity-settled share based payment transactions (2015 Plan)
 
777

 
1,241

Expense arising from equity-settled share based payment transactions (2016 Plan)
 
2,253

 
1,968

Expense arising from equity-settled share based payment transactions (2017 Plan)
 
2,360

 
—

Expenses arising form equity-settled share based 2018 incentive
 
563

 
—

Total expenses
 
5,953

 
3,209

The following table illustrates the number of, and movements in, performance share units ("PSUs") during the period.
 
 
2015 Plan
 
2016 Plan
 
2017 Plan
 
Total
 
 
Number of PSUs
 
Number of PSUs
 
Number of PSUs
 
Number of PSUs
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Outstanding at January 1,
 
452,816

 
454,959

 
686,038

 
690,279

 
472,040

 


 
1,610,894

 
1,145,238

Granted during the period
 
—

 
—

 
113

 
—

 
830

 


 
943

 
—

Forfeited during the period
 
(5,694
)
 
(1,515
)
 
(8,544
)
 
(4,241
)
 
(5,521
)
 


 
(19,759
)
 
(5,756
)
Vested during the period
 
(447,122
)
 
—

 
—

 
—

 
—

 


 
(447,122
)
 
—

Outstanding at June 30,
 
—

 
453,444

 
677,607

 
686,038

 
467,349

 
—

 
1,144,956

 
1,139,482

The Company created and registered 400,453 new shares on April 30, 2018 of which 380,436 shares were used to settled the 2015 Plan. The remaining new shares plus 1,284 treasury shares were granted to our Board of Directors as a 2018 incentive. The fair value of the PSUs settled on April 30, 2018 amounted to USD 26.80 per PSU. The remaining portion of PSUs vested on March 31, 2018 was settled in cash at fair market value to cover employee wage tax obligations or in very limited cases as a substitute were share settlement was impeded. All obligations of the Company arising form the 2015 Plan were fulfilled through settlement during the reporting period and settlement is reflected in the consolidated statement of changes in equity of the Company.
The following table lists the inputs to the model used for the grant date fair values of the 2015 Plan, 2016 Plan and 2017 Plan.
 
2015 Plan
 
2016 Plan
 
2017 Plan
Dividend Yield (%)
2.14%
 
2.23%
 
1.88%
Expected Volatility OEC (%)
25.16%
 
32.07%
 
33.77%
Expected Volatility Peer Group (%)
13.90%
 
18.12%
 
17.30%
Correlation
0.5234
 
0.4952
 
0.4574
Risk-free interest rate (%)
0.90%
 
0.76%
 
1.45%
Model used
Monte Carlo
 
Monte Carlo
 
Monte Carlo
Weighted average fair value of PSUs granted in USD
17.41
 
17.21
 
24.89

14

6.    Inventories
The impairment allowance as of June 30, 2018 and June 30, 2017, respectively, amounted to USD 2,073k and USD 4,980k and developed as follows:
 
 
In USD k
 
 
2018
 
2017
As at January 1,
 
1,717

 
4,436

Currency translation
 
(48
)
 
375

Addition
 
1,276

 
2,826

Utilization
 
(342
)
 
(1,920
)
Release
 
(530
)
 
(737
)
As at June 30,
 
2,073

 
4,980

7.
Financial assets and liabilities
The table below presents fair values and the allocation of the fair value measurements to the hierarchy levels as at June 30, 2018 and December 31, 2017.
 
In USD k as at
 
Jun 30, 2018
 
Dec 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Financial assets measured at fair value
 
 
 
 
 
 
 
 
 
 
 
Receivables from derivatives
—

 
4,554

 
—

 
—

 
3,554

 
—

Financial liabilities measured at fair value
 
 
 
 
 
 
 
 
 
 
 
Liabilities from derivatives
—

 
4,473

 
—

 
—

 
5,193

 
—

Liabilities for which fair values are disclosed
 
 
 
 
 
 
 
 
 
 
 
Liabilities to banks
—

 
—

 
—

 
—

 
—

 
—

Term loan
—

 
669,119

 
—

 
—

 
684,234

 
—

Local bank loans
—

 
—

 
—

 
—

 
12,512

 
—

The receivables from derivatives of USD 4,554k and USD 3,554k as at June 30, 2018 and December 31, 2017, respectively, are presented in other non-current financial assets with an amount of USD 570k and USD 2,647k as at June 30, 2018 and December 31, 2017, respectively, and in other current financial assets with an amount of USD 3,984k and USD 907k as at June 30, 2018 and December 31, 2017, respectively. In 2014 and 2017 the Company acquired interest rate caps (both Euro and USD denominated) to hedge interest rate risks on current term loan financing. Since 2017 the Company has been entering into commodity derivative agreements to hedge the impact of raw material price fluctuations on cost of sales for specific sales.
The liabilities from derivatives of USD 4,473k and USD 5,193k as at June 30, 2018 and December 31, 2017, respectively, are presented in other financial liabilities. Those derivatives are solely used to hedge the on balance sheet payables and receivables and interest rate payments on the term loan as part of our hedging strategy.

15


On May 8, 2018 Orion signed an amendment to the credit agreement to reprice its EUR- and USD-denominated outstanding term loans. The repricing on the US dollar tranche reflects a 50 basis point reduction on margin from 2.50% to 2.00%, whereas on the euro tranche there is a 25 basis point reduction on margin from 2.50% to 2.25%. This repricing will reduce Orion's current annual interest payments by approximately USD 2.4 million. Other provisions to this credit agreement remained unchanged. In conjunction with the amendment of the credit agreement Orion effectively converted on May 11, 2018 USD 235,000k of its USD-denominated term loan into EUR by way of a cross currency swap as part of a new hedging approach. This swap transaction impacts both principal and interest payments associated with debt service and will result in a further annual interest payments savings of approximately USD 4.7 million over and above the interest savings achieved by the amendment itself. The swap became effective on May 15, 2018 and will expire on July 25, 2024, in line with maturity of the term loan. As result of the new cross currency swap, Orion terminated the current USD denominated interest rate caps on May 14, 2018, and received the proceeds of the termination of USD 4.0 million on May 16, 2018.
A portion of the USD-denominated term loan was designated as a hedge of the net investment in a foreign operation to reduce the Company's foreign currency exposure. Since January 1, 2015 the Company had designated USD 180 million of the total USD denominated term loan held by a Germany based subsidiary as the hedging instrument to hedge the change in net assets of a US subsidiary, which is held by a Germany based subsidiary, to manage foreign currency risk. Due to the new hedging approach and the new cross currency swap as described above, hedge accounting for the net investment hedge was discontinued on May 15, 2018. An unrealized loss of USD 2.2 million remains within other comprehensive income until it is recycled through profit and loss upon divestment of the hedged item.
In light of the above measures the refinancing activities qualified as an extinguishment and an amount of USD 1.7 million of capitalized transaction costs were released through finance expenses in the three months ended June 30, 2018 while new transaction costs of USD 0.7 million were capitalized and will be amortized over time in line with maturity of the term loan.
The USD-denominated term loan decreased during the first six months ended June 30, 2018 from USD 288,426k at December 31, 2017 to USD 286,669k due to a regular repayment of 0.5% of the initial principal amount. The USD-equivalent of the euro term loan decreased during the first six months of 2018 from USD 395,808k at December 31, 2017 to USD 382,450k due to a regular repayment of 0.5% of the initial principal amount, and foreign exchange revaluation effects.
On May 11, 2018 local Korean entity fully repaid the local term loan facility with KEB Hana Bank amounting to KRW 13.3 billion (equivalent to USD 12.3 million) from proceeds of Korean land sale.
8.
Deferred and current taxes
The development of deferred tax assets and liabilities relates to changes in temporary differences and tax loss carry forwards. Income tax receivables decreased from USD 16,377k at December 31, 2017 to USD 14,983k at June 30, 2018 due to tax refunds received from tax authorities. Income tax liabilities increased from USD 15,539k at December 31, 2017 to USD 35,741k at June 30, 2018 due to the expense calculated for the period.
Income taxes in the six months ended June 30, 2018 amounted to USD 33,722k compared to USD 18,986k in the six months ended June 30, 2017, reflecting profit in these periods.
The effective tax rate of 30.5% for the six months ended June 30, 2018 deviated from the expected group rate of 32.0% primarily due to changes in recognition of valuation allowances on tax losses and deductible temporary differences in Germany, Brazil, South Africa and Luxembourg, impacting the rate by 4.03%. Offsetting these unfavorable impacts by 0.4% were benefits from tax exempt income due to ACE deduction in Italy and other effects by 1.24%. The remaining difference primarily relates to foreign tax rate differentials decreasing the tax rate by 3.9%.
The effective tax rate of 35.0% for the six months ended June 30, 2017 deviated from the expected group rate of 32.0% primarily due to non-creditable withholding taxes on tax exempt dividends received from the South Korean subsidiary. The tax effect for the six months ended June 30, 2016 was 3.3% and the impact of this first quarter event will have a reduced effect on the annual effective tax rate over the remainder of the year. Other non-deductible business expenses and non-deductible interest expenses due to local trade tax adjustments for the Group's German entities also impacted the rate by 5.9%. Offsetting these unfavorable impacts by 1.6% were benefits from tax exempt income due to domestic production activities in the United States and ACE deduction in Italy. Changes in recognition of losses and deductible temporary differences in Luxembourg, Germany, Brazil, South Africa, and Sweden resulted in a further 3.3% decrease. The remaining difference primarily relates to foreign tax rate differentials of favorable 1.9%.

16

9.
Contingent liabilities and other financial obligations
To safeguard the supply of raw materials, contractual purchase commitments under long-term supply agreements for raw materials, especially oil and gas, are in place with the following maturities:
 
 
 
In USD k
 
 
As at Jun 30,
 
As at Dec 31,
Maturity
 
2018
 
2017
Less than one year
 
222,321

 
109,207

1 to 5 years
 
325,122

 
236,639

More than 5 years
 
—

 
—

 
 
 
 
 
Total
 
547,443


345,846


EPA Consent Decree

During 2008 and 2009, the U.S. Environmental Protection Agency (“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 U.S. Clean Air Act. EPA used that information 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 the Company’s U.S. facilities, the Company furnished information to the EPA on each of its U.S. facilities. EPA subsequently sent notices under Section 113(a) of the Clean Air Act in 2010 alleging violations of Prevention of Significant Deterioration (“PSD”) and Title V permitting requirements under the Clean Air Act at the Company’s Belpre (Ohio) facility. In October 2012, the Company received a corresponding notice and finding of violation (an “NOV”) alleging the failure to obtain PSD and Title V permits reflecting Best Available Control Technology (“BACT”) at several units of the Company’s Ivanhoe (Louisiana) facility, and in January 2013 the Company also received an NOV issued by the EPA for its facility in Borger (Texas) alleging the failure to obtain PSD and Title V permits reflecting BACT during the years 1996 to 2008. A comparable NOV the Company’s U.S. facility in Orange (Texas) was issued by the EPA in February 2013; and EPA issued an additional NOV in March 2016 alleging more recent non-PSD air emissions violations primarily at the dryers and the incinerator of the Orange facility.

In 2013, Orion began discussions with the EPA and the U.S. Department of Justice (“DOJ”) about a potential settlement to resolve the NOVs received, which ultimately led to a consent decree executed between Orion Engineered Carbons LLC (“Orion”) and the United States (on behalf of EPA), as well as the Louisiana Department of Environmental Quality. The consent decree (the “EPA CD”) was lodged in the U.S. District Court for the Western District of Louisiana and became effective on June 7, 2018. The consent decree resolves and settles the EPA’s claims of noncompliance set forth in the NOVs and in a respective complaint filed in court against Orion by the United States immediately prior to the lodging of the consent decree.
    
All five U.S. carbon black producers have settled with the U.S. government. Orion was one of the two last carbon black companies to sign a consent decree.

Under Orion’s EPA CD, Orion will install certain pollution control technology in order to further reduce SO2, NOx and particulate matter (PM) emissions at its four U.S. manufacturing facilities in Ivanhoe (Louisiana), Belpre (Ohio), Borger (Texas), and Orange (Texas). Orion estimates that the capital expenditures for these installations, to be incurred over approximately six years, at US dollar amounts of 110 to140 million. We caution, however, that the actual capital expenditures we might need to incur in order to fulfill the requirements of the EPA CD remain uncertain. The EPA CD allows some flexibility for Orion to choose among different technology solutions for reducing emissions and the locations where these solutions are implemented. The solutions Orion ultimately chooses to implement may differ in scope and operation from those it currently anticipates (including those discussed in the next paragraph) and factors, such as timing, locations, target levels, changing cost estimates and local regulations, could cause capital expenditures to exceed current estimates by a significant amount or affect Orion’s ability to meet the agreed target emission levels as anticipated or at all. Orion also agreed to and paid a civil penalty of USD 800,000 and agreed to perform environmental mitigation projects totaling USD 550,000. The EPA CD also requires the continuous monitoring of emissions reductions that Orion will need to comply with over a number of years. Noncompliance with applicable emissions limits could lead to further penalty payments to EPA.


17

As part of Orion’s compliance plan under the EPA CD, in April 2018 Orion signed a contract with Haldor Topsoe group to install its SNOXTM emissions control technology to remove SO2, NOx and dust particles from tail gases at Orion’s Ivanhoe, Louisiana Carbon Black production plant. The SNOXTM technology has not been used previously in the carbon black industry.

Orion’s Share Purchase Agreement with Evonik in connection with the Acquisition provides for a partial indemnity from Evonik against various exposures, including, but not limited to, capital investments, fines and costs arising in connection with Clean Air Act violations that occurred prior to July 29, 2011. Except for certain less relevant allegations contained in the second NOV received for the Company’s facility in Orange (Texas) in March 2016, all of the other allegations made by the EPA with regard to all four of the Company’s U.S. facilities - as discussed above - relate to alleged violations before 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 all covered environmental exposures, in the aggregate), damage mitigation and cooperation requirements, as well as a statute of limitations provision. Due to the cost-sharing and cap provisions in Evonik’s indemnity, the Company expects that substantial costs it has already incurred and will incur in this EPA enforcement initiative and the EPA CD could exceed the scope of the indemnity, perhaps in the tens of millions of Euros. In addition, Evonik has signaled that it may likely defend itself against claims under the indemnity. While the Company intends to enforce its rights vigorously, there is no assurance that the Company will be able to recover costs or expenditures incurred under the indemnity as it expects or at all.
10.    Related parties
In addition to the subsidiaries included in the consolidated financial statements, there is one joint venture of Orion that is accounted for using the equity method which classifies as a related party. Furthermore, related parties include key management personnel having authority and responsibility for planning, directing and monitoring the activities of the Group directly or indirectly and their close family members.
We have not entered into material related party transactions other than in the normal course of business.
Senningerberg (Municipality of Niederanven), August 2, 2018
Orion Engineered Carbons S.A., Luxembourg
 
 
 
 
Jack Clem
 
Charles Herlinger
Managing Director
 
Managing Director

18


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 six months ended June 30, 2018 and 2017 and should be read in conjunction with Orion Engineered Carbons S.A.'s annual report for the year ended December 31, 2017 on Form 20-F (the "form 20-F"), which is available on the EDGAR system of the U.S. Securities and Exchange Commission (www.sec.gov) as well as on our webpage (www.orioncarbons.com).
We believe that certain factors disclosed in the form 20-F have had, and will continue to have, a material effect on our results of operations and financial condition. Those factors, as disclosed under Item 5 "Operating and Financial Review and Prospects–Key Factors Affecting Our Results of Operations" in our form 20-F, have not changed materially subsequent to the filing of the form 20-F.
Due to the change in our presentation currency from euros to US dollars effective as of January 1, 2018, the following discussion and analysis are prepared in US dollars, the new presentation currency of our Group. Comparative financial information as of or for periods prior to January 1, 2018 were derived from our previously reported audited and unaudited (condensed) consolidated financial information which were prepared in euro and as if those comparative financial information had been reported in US dollars as of the respective dates, or for the respective periods, indicated herein. As noted previously, we also plan to convert our financial statements from IFRS to U.S. GAAP, effective by the end of 2018.
As many of the factors described in our form 20-F are beyond our control and certain of these factors have historically been volatile, past performance will not necessarily be indicative of future performance and it is difficult to predict future performance with any degree of certainty. In addition, important factors that could cause our actual results of operations or financial conditions to differ materially from those expressed or implied in any forward-looking statements below, include, but are not limited to, factors indicated in our form 20-F under Item 3. "Key Information–D. Risk Factors" and "Note Regarding Forward-Looking Statements."


19


Non-IFRS Financial Measures
We focus on Contribution Margin and Adjusted EBITDA as measures of our operating performance. Contribution Margin and Adjusted EBITDA contained in this Management Discussion and Analysis 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 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.
We calculate Contribution Margin by subtracting variable costs (such as raw materials, packaging, utilities and distribution costs) from our revenue. We believe that Contribution Margin is useful since we see this measure as indicating the portion of revenue that is not consumed by variable costs and therefore contributes to the coverage of all other costs and profits.
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 joint venture and certain other items. Adjusted EBITDA is defined similarly in our credit agreements. 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. Our use of Adjusted EBITDA has limitations as an analytical tool, and should not be considered 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, Adjusted EBITDA should be considered alongside our other IFRS-based financial performance measures, such as consolidated profit or loss for the period and our other IFRS financial results.
The non-IFRS measures Net Working Capital and Capital Expenditure are discussed below.

US Dollar Reporting

This quarter marks the second time we are reporting our results in US dollars rather than euro. As noted previously, we also plan to convert our financial statements from IFRS to US GAAP, effective by the end of 2018. We believe both the switch to US dollar reporting and the anticipated adoption of US GAAP will benefit investors by allowing more direct comparisons between our results and those of some of our principal competitors. These measures are also among the conditions for inclusion of our stock in certain U.S. equity indices, which may lead to additional demand for Orion's stock from index funds and index-driven investors. Some indices have additional requirements for inclusion. We are analyzing the feasibility of meeting such requirements and the associated costs and issues raised thereby, including those relating to the tax position of Orion and other members of the group. This analysis is ongoing and we can give no assurances regarding the outcome.
Results of Operations and Segment Discussion
Revenue
Revenue increased by $62.0 million, or 18.8%, from $329.6 million ($122.3 million in our Specialty Carbon Black segment and $207.3 million in our Rubber Carbon Black segment) in the second quarter of 2017 to $391.6 million ($142.7 million in our Specialty Carbon Black segment and $248.9 million in our Rubber Carbon Black segment) in the second quarter of 2018, primarily due to the pass through of higher feedstock costs, positive foreign exchange rate translation impacts, increased volumes, increases in the base selling prices and, to a lesser extent, product mix.
Revenues increased by $144.6 million or 22.1%, from $653.7 million ($238.4 million in our Specialty Carbon Black segment and $415.3 million in our Rubber Carbon Black segment) for the six months ended June 30, 2017 to $798.3 million ($284.3 million in our Specialty Carbon Black segment and $513.9 million in our Rubber Carbon Black segment) for the six months ended June 30, 2018, primarily due to positive foreign exchange rate translation impacts, the pass through of higher feedstock costs, increased volumes, increases in the base selling prices and to a lesser extent product mix.
 

20


Total volume increased by 9.1 kmt overall, or 3.4%, from 266.6 kmt (65.3 kmt in our Specialty Carbon Black segment and 201.3 kmt in our Rubber Carbon Black segment) in the second quarter of 2017 to 275.6 kmt (67.8 kmt in our Specialty Carbon Black segment and 207.8 kmt in our Rubber Carbon Black segment) in the second quarter of 2018. This 3.4% increase reflected stronger volumes in both segments particularly in North America and Europe.
Total volume increased by 20.1 kmt overall, or 3.7% from 541.7 kmt (132.3 kmt in our Specialty Carbon Black segment and 409.4 kmt in our Rubber Carbon Black segment) for the six months ended June 30, 2017 to 561.8 kmt (136.9 kmt in our Specialty Carbon Black segment and 424.9 kmt in our Rubber Carbon Black segment) for the six months ended June 30, 2018. Volumes increased in Europe, North America, South Korea and China.
Cost of Sales and Gross Profit
Cost of sales increased by $42.1 million, or 17.8%, from $236.7 million ($72.6 million in our Specialty Carbon Black segment and $164.2 million in our Rubber Carbon Black segment) in the second quarter of 2017 to $278.8 million ($84.6 million in our Specialty Carbon Black segment and $194.2 million in our Rubber Carbon Black segment) in the second quarter of 2018. This increase in cost of sales was primarily due to the increase of higher oil prices of our feedstock costs, unfavorable foreign exchange rate translation effects and to a lesser extend due higher volumes.
Cost of sales increased by $107.8 million , or 23.2%, from $465.3 million ($142.4 million in our Specialty Carbon Black segment and $322.8 million in our Rubber Carbon Black segment) for the six months ended June 30, 2017 to $573.1 million ($172.3 million in our Specialty Carbon Black segment and $400.8 million in our Rubber Carbon Black segment) for the six months ended June 30, 2018. This increase in cost of sales was primarily due to the increase of higher oil prices of our feedstock costs, unfavorable foreign exchange rate translation effects and higher volumes.
The net impact of the aforementioned changes in revenues and cost of sales was that gross profit increased by $19.9 million, or 21.4%, to $112.8 million ($58.0 million in our Specialty Carbon Black segment and $54.7 million in our Rubber Carbon Black segment) in the second quarter of 2018 compared to $92.9 million ($49.8 million in our Specialty Carbon Black segment and $43.1 million in our Rubber Carbon Black segment) in the second quarter of 2017.
The net impact of the aforementioned changes in revenues and cost of sales was that gross profit increased by $36.8 million, or 19.5%, to $225.2 million ($112.0 million in our Specialty Carbon Black segment and $113.1 million in our Rubber Carbon Black segment) for the six months ended June 30, 2018 compared to $188.4 million ($96.0 million in our Specialty Carbon Black segment and $92.4 million in our Rubber Carbon Black segment) for the six months ended June 30, 2017.
Selling Expenses
Sales and marketing expenses increased by $3.0 million from $32.7 million in the second quarter of 2017 to $35.7 million in the second quarter of 2018. This increase was due to impacts from foreign exchange rate translation effects and increased freight costs due to higher volumes as well as general salary increases.
Sales and marketing expenses increased by $10.1 million from $63.5 million in the first half of 2017 to $73.6 million in the first half of 2018. This increase was due to impacts from foreign exchange rate translation effects and increased freight costs due to higher volumes as well as general salary increases.
Research and Development Costs
Research and development costs increased by $0.1 million from $4.5 million in the second quarter of 2017 to $4.6 million in the second quarter of 2018 and remained essentially flat quarter over quarter.
Research and development costs increased by $1.1 million from $8.6 million in the first half of 2017 to $9.7 million in the first half of 2018. This change mainly reflects effects from foreign exchange rate translation effects and the timing of expenditure for individual development programs.
General Administrative Expenses
General administrative expenses increased by $0.2 million from $18.2 million in the second quarter of 2017 to $18.4 million in the second quarter of 2018, and remained essentially flat quarter over quarter.
General administrative expenses increased by $1.2 million from $38.3 million in the first half of 2017 to $39.5 million in the first half of 2018, mainly as a result of foreign exchange rate translation effects.

21


Other Operating Income and Expenses
Other operating income and expenses, net decreased by $2.3 million from a net income of $1.0 million in the second quarter of 2017 to a net expense of $1.3 million in the second quarter of 2018, mainly as a result of the effect on operating income in the second quarter of 2017 associated with a real estate transfer tax reimbursement of $1.4 million.
Other operating income and expenses, net increased by $1.1 million from a net expense of $2.0 million in the first half of 2017 to a net expense of $3.1 million in the first half of 2018 due to the effect on operating income in the first half of 2017 associated with a real estate transfer tax reimbursement of $1.4 million.
Restructuring income and expenses
Net restructuring income or expenses are related to further actions undertaken to realign our worldwide Rubber footprint. The net restructuring income for the three and six months ended June 30, 2018 in particular reflects the proceeds of the Korea land sale. The proceeds exceeded the remaining book value of the land as well as the associated costs of site remediation and required cost to consolidate the two South Korean production sites into one remaining site following the cessation of production at our Seoul plant site end of June 2018. Net restructuring expenses for the three and six month ended June 2017 included preemptive expenses in preparation of the land sale and consolidation of the two production sites.
Operating Result (EBIT)
Operating result increased by $44.3 million, or 115.7%, from $38.2 million in second quarter of 2017 to $82.5 million in the second quarter of 2018 reflecting the effects discussed above.
Operating result increased by $52.6 million or 69.9%, from $75.2 million in the first half of 2017 to $127.8 million in the first half of 2018 reflecting the effects discussed above.
Finance Costs, Net
Finance costs, net (comprise finance income less finance cost) decreased by $1.5 million from a finance cost, net of $10.9 million in the second quarter of 2017 to a finance cost, net of $9.4 million in the second quarter of 2018, primarily due to income from ceased hedging contracts as well as interest savings following our repricing efforts in late 2017 and May 2018. During the second quarter of 2018 we incurred foreign currency exchange losses of $7.2 million. These foreign exchange losses were offset by $5.0 million of foreign currency exchange gains reflecting both our hedging strategies on the term loan and the fluctuation of the euro against the US dollar. These gains and losses are shown gross due to their different nature and the different Group companies involved in the hedging transactions. The foreign currency exchange gains and losses in the second quarter of 2017 amounted to $11.6 million and $13.6 million respectively.
Finance costs, net (comprise finance income less finance cost) decreased by $3.9 million from a finance cost, net of $21.3 million in the first half of 2017 to a finance cost, net of $17.4 million in the first half of 2018, primarily due to income from ceased hedging contracts as well as interest savings following our repricing efforts in late 2017 and May 2018. During the second quarter of 2018 we incurred foreign currency exchange losses of $19.9 million. These foreign exchange losses were offset by $17.2 million of foreign currency exchange gains reflecting both our hedging strategies on the term loan and the fluctuation of the euro against the US dollar. These gains and losses are shown gross due to their different nature and the different Group companies involved in the hedging transactions. The foreign currency exchange gains and losses in the first half of 2017 amounted to $19.3 million and $22.1 million respectively.
Share of Profit or Loss of joint venture
Share of profit or loss of joint venture, which represents the dividend received from our German joint venture, remained unchanged at $0.1 million in the second quarter of 2018 compared to the first quarter of 2017.
Share of profit or loss of joint venture, which represents the dividend received from our German joint venture, remained stable at $0.3 million in the first half of 2018 compared to $0.3 million in the first half of 2017.
Financial Result
Financial result, comprising finance income, finance costs and share of profit or loss of joint venture improved by $1.6 million, or 14.5%, from a net expense of $10.8 million in the second quarter of 2017 to a net expense of $9.2 million in the second quarter of 2018, reflecting the factors discussed above.

22


Financial result, comprising finance income, finance costs and share of profit or loss of joint venture improved by $3.9 million, or 18.4%, from a net expense of $21.0 million in the first half of 2017 to a net expense of $17.1 million in the first half of 2018, reflecting the factors discussed above.
Profit or Loss for the Period Before Income Taxes
Profit before income taxes for the second quarter of 2018 amounted to $73.2 million compared to a profit of $27.5 million in the second quarter of 2017. The profit before income taxes increased by $45.7 million in particular due to the increase in gross profit of $19.9 million and the net restructuring income of $29.8 million.
Profit before income taxes for the first half of 2018 amounted to $110.6 million compared to a profit of $54.2 million in the first half of 2017. The profit before income taxes increased by $56.4 million in particular due to the increase in gross profit of $36.8 million and the net restructuring income of $28.5 million.
Income Taxes
Income taxes in the second quarter of 2018 amounted to $20.6 million compared to $9.0 million in the second quarter of 2017, reflecting profit in these periods, respectively.
Income taxes in the first half of 2018 amounted to $33.7 million compared to $19.0 million in the first half of 2017 reflecting profit in these periods. For discussion of the effects on our effective tax rate of 30.5% for the six months ended June 30, 2018 compared to the expected group rate of 32%, we refer to Note 8. (Deferred and current taxes) above.
Profit or Loss for the Period
Profit for the period for the second quarter of 2018 amounted to $52.7 million, a $34.3 million increase from the $18.4 million profit in the second quarter of 2017, reflecting the effects of the items discussed above.
Profit for the period for the first half of 2018 amounted to $76.9 million, a $41.7 million increase from the $35.2 million profit in the first half of 2017, reflecting the effects of the items discussed above.
Contribution Margin (Non-IFRS Financial Measure)
Contribution margin increased by $25.3 million, or 19.5%, from $129.8 million in the second quarter of 2017 to $155.1 million in the second quarter of 2018, primarily driven by positive foreign exchange rate translation impacts and base price increases as well as volume growth, pass through of higher feedstock cost and increased cogeneration income, somewhat offset by negative feedstock differentials.
Contribution margin increased by $45.6 million, or 17.5%, from $259.7 million in the first half of 2017 to $305.3 million in the first half of 2018, primarily driven by positive foreign exchange rate translation impacts, volume growth and base price increases.
Adjusted EBITDA (Non-IFRS Financial Measure)
Adjusted EBITDA increased by $16.8 million, or 26.1%, to $81.1 million in the second quarter of 2018 compared to $64.3 million in the second quarter of 2017, reflected the increases in Contribution Margin, partially offset by fixed and general administrative cost increases as well as negative foreign exchange rate translation impacts associated with our fixed cost base. The restructuring gain on sale of our former plant site in South Korea is not included in Adjusted EBITDA for the current quarter.
Adjusted EBITDA increased by $30.1 million, or 23.8%, to $157.1 million in the first half of 2018 compared to $127.0 million in the first half of 2017, which is in particular due to the development of gross profit.
Specialty Carbon Black
Revenue of the Specialty Carbon Black segment increased by $20.4 million, or 16.6%, from $122.3 million in the second quarter of 2017 to $142.7 million in the second quarter of 2018, primarily associated with increased product base prices, positive foreign exchange rate translation impacts, increased volumes and pass through of higher cost of feedstock to customers with index-pricing agreements, partially offset by some product mix impacts.
Volume of the Specialty Carbon Black segment increased by 2.5 kmt, or 3.9%, from 65.3 kmt in the second quarter of 2017 to 67.8 kmt in the second quarter of 2018, reflecting growth in the U.S., Korea and China.

23


Gross profit of the Specialty Carbon Black segment increased by $8.2 million, or 16.7%, from $49.8 million in the second quarter of 2017 to $58.0 million in the second quarter of 2018, primarily reflecting positive foreign exchange rate translation impacts, increased product base prices and the increase in sales volumes offset partially by some higher fixed costs and product mix effects. As a result Gross Profit per metric ton increased significantly by 12.3% to $856 in the second quarter of 2018 from $762 in the second quarter of 2017. Sequentially, Gross Profit per ton was up 9.6% from the first quarter of 2018 which reflects further price recovery offsetting higher feedstock costs.
Adjusted EBITDA of the Specialty Carbon Black segment increased by $6.8 million, or 17.8%, from $38.4 million in the second quarter of 2017 to $45.2 million in the second quarter of 2018, primarily reflecting the development of Gross Profit, somewhat offset by increases in general administrative costs and foreign exchange rate translation impacts associated with our cost base. Adjusted EBITDA margin in the second quarter of 2018 was 31.7% as compared to 31.3% in the second quarter of 2017.
Revenue of the Specialty Carbon Black segment increased by $45.9 million, or 19.3%, from $238.4 million in the first half of 2017 to $284.3 million in the first half of 2018, primarily associated with increased product base prices, positive foreign exchange rate translation impacts, increased volumes and pass through of higher cost of feedstock to customers with index-pricing agreements, partially offset by some product mix impacts.
Volume of the Specialty Carbon Black segment increased by 4.5 kmt, or 3.4%, from 132.3 kmt in the first half of 2017 to 136.9 kmt in the first half of 2018, reflecting growth mainly in the U.S. and Korea.
Gross profit of the Specialty Carbon Black segment increased by $16.0 million, or 16.7%, from $96.0 million in the first half of 2017 to $112.0 million in the first half of 2018, primarily reflecting positive foreign exchange rate translation impacts, increase in sales volumes and the increased product base prices. As a result Gross Profit per metric ton increased significantly by 12.8% to $818 in the first half of 2018 from $726 in the first half of 2017.
Adjusted EBITDA of the Specialty Carbon Black segment increased by $13.0 million, or 17.8%, from $72.6 million in the first half of 2017 to $85.6 million in the first half of 2018 primarily reflecting the development of gross profit.
Rubber Carbon Black
Revenue of the Rubber Carbon Black segment increased by $41.6 million, or 20.1%, from $207.3 million in the second quarter of 2017 to $248.9 million in the second quarter of 2018, primarily due to the pass through of higher cost of feedstock to customers with index-pricing agreements, positive foreign exchange rate translation effects, positive impacts from our product mix, increased sales volumes and base price improvements.
Volume for the Rubber Carbon Black segment increased by 6.5 kmt, or 3.2% from 201.3 kmt in the second quarter of 2017 to 207.8 kmt in the second quarter of 2018. This increase in volume was associated with increased volumes in Europe and the U.S.
Gross profit of the Rubber Carbon Black segment increased by $11.6 million, or 26.9%, from $43.1 million in the second quarter of 2017 to $54.7 million in the second quarter of 2018. This Gross Profit increase was primarily due to increased contract base prices, the pass through of higher cost of feedstock to customers with index-pricing agreements, product mix, higher sales volumes and positive foreign exchange rate translation effects, which were partially offset by higher fixed costs.
Adjusted EBITDA of the Rubber Carbon Black segment increased by $9.9 million, or 38.4%, from $26.0 million in the second quarter of 2017 to $35.9 million in the second quarter of 2018, primarily reflecting the development of Gross Profit, partially offset by higher general administrative expenses and foreign exchange translation impacts associated with our fixed cost base. Our Adjusted EBITDA margin rose to 14.4% in the second quarter of 2018 compared to 12.5% in the second quarter of 2017.
Revenue of the Rubber Carbon Black segment increased by $98.6 million, or 23.8%, from $415.3 million in the first half of 2017 to $513.9 million in the first half of 2018, primarily due to the pass through of higher cost of feedstock to customers with index-pricing agreements, positive foreign exchange rate translation effects, increased sales volumes positive impacts from our product mix, and base price improvements.
Volume for the Rubber Carbon Black segment increased by 15.4 kmt, or 3.8% from 409.4 kmt in the first half of 2017 to 424.9 kmt in the first half of 2018. This increase in volume was associated with increased volumes in all regions except for South America and China.

24


Gross profit of the Rubber Carbon Black segment increased by $20.7 million, or 22.4%, from $92.4 million in the first half of 2017 to $113.1 million in the half of 2018. This Gross Profit increase was primarily due to positive foreign exchange rate translation effects, increased contract base prices, the pass through of higher cost of feedstock to customer with index-pricing agreements, product mix, higher sales volumes and which were partially offset by higher fixed costs.
Adjusted EBITDA of the Rubber Carbon Black segment increased by $17.3 million, or 31.7%, from $54.3 million in the first half of 2017 to $71.6 million in the first half of 2018, primarily reflecting the development of Gross Profit, partially offset by higher general administrative expenses and foreign exchange translation impacts associated with our fixed cost base.
Liquidity and Capital Resources
 
 
in USD million
 
in USD million
 
 
Three Months Ended 
 Jun 30,
 
Six Months Ended 
 Jun 30,
 
 
2018
 
2017
 
2018
 
2017
Cash flows from operating activities
 
19.4

 
48.5

 
46.6

 
67.1

Cash flows used in investing activities
 
30.7

 
(18.2
)
 
4.8

 
(36.5
)
Cash flows used in financing activities
 
(32.9
)
 
(23.7
)
 
(47.7
)
 
(55.8
)
 
 
 
 
 
 
 
 
 
Change in cash
 
17.2

 
6.6

 
3.7

 
(25.2
)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at the end of the period
 
73.5

 
55.4

 
73.5

 
55.4

Second Quarter of 2018 Cash Flows
Cash inflows from operating activities in the second quarter of 2018 amounted to $19.4 million, and include cash uses of working capital of $26.1 million compared to a working capital use of $0.1 million in second quarter of 2017 and consist of a consolidated profit for the period of $52.7 million, adjusted for depreciation and amortization of $24.2 million and the exclusion of finance costs, net of $9.4 million affecting net income. Net working capital totaled $288.7 million as of June 30, 2018, compared to $274.2 million as of March 31, 2018.
Cash inflows from investing activities in the second quarter of 2018 amounted to $30.7 million, and comprised the proceeds from our land sale in Korea less expenditures for improvements primarily in the manufacturing network throughout the production system including further investments to conclude the consolidation of our South Korean plant network, which was accomplished by end of this quarter.
Cash outflows for financing activities in the second quarter of 2018 amounted to $32.9 million, comprised primarily a $12.3 million repayment of local bank facilities in Korea, a dividend payment of $11.9 million, our regular interest payments for our term loan facilities of $5.4 million and regular debt repayment of $2.1 million.
Second Quarter of 2017 Cash Flows
Cash inflows from operating activities in the second quarter of 2017 amounted to $48.5 million, and include cash uses of working capital of $0.1 million and consist of a consolidated profit for the period of $18.4 million, adjusted for depreciation and amortization of $24.0 million and the exclusion of finance costs, net of $10.9 million affecting net income.
Cash outflows from investing activities in the second quarter of 2017 amounted to $18.2 million composed of expenditures for improvements primarily in the manufacturing network throughout the production system including the commencement of investing activities to restructure the Korean plant network.
Cash outflows for financing activities in the second quarter of 2017 amounted to $23.7 million, comprised primarily a dividend payment of $11.2 million, our regular interest payment for our term loan facilities of $11.2 million and regular debt repayment of $2.0 million.



25



First half of 2018 Cash Flows
Cash inflows from operating activities in the first half of 2018 amounted to $46.6 million, and include cash uses of working capital of $62.3 million compared to a working capital use of $24.7 million in the first half of 2017 and consist of a consolidated profit for the period of $76.9 million, adjusted for depreciation and amortization of $49.0 million and the exclusion of finance cost of $17.4 million. Net working capital totaled $288.7 million as of June 30, 2018, compared to $224.0 million as of December 31, 2017.
Cash inflows from investing activities in the first half of 2018 amounted to $30.7 million, and comprised the proceeds from our land sale in Korea less expenditures for improvements primarily in the manufacturing network throughout the production system including further investments to conclude the consolidation of our South Korean plant network, which was accomplished by end of this quarter.
Cash outflows for financing activities in the first half of 2018 amounted to $47.7 million, comprised primarily a dividend payment of $23.8 million, our regular interest payments for our term loan facilities of $11.0 million and a $12.3 million repayment of local bank facilities in Korea.
First half of 2017 Cash Flows
Cash inflows from operating activities in the first half of 2017 amounted to $67.1 million, consisting of a consolidated profit for the period of $35.2 million, adjusted for depreciation and amortization of $46.3 million and the exclusion of finance cost of $21.3 million, and a cash decrease in working capital of $24.7 million.
Cash inflows from investing activities in the first half of 2017 amounted to $36.5 million, composed of expenditures for improvements primarily in the manufacturing network throughout the production system including the commencement of investing activities to restructure the Korean plant network.
Cash outflows for financing activities in the first half of 2017 amounted to $55.8 million, comprised primarily of dividend payments of $22.0 million, our regular interest payments for our term loan facilities of $17.7 million and a $24.7 million voluntary debt repayment.
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.
 
 
 
Jun 30, 2018
 
Mar 31, 2018
 
Dec 31, 2017
 
 
In USD million
 
In USD million
 
In USD million
Inventories
 
175.2

 
161.5

 
159.3

Trade receivables
 
277.6

 
285.8

 
234.3

Trade payables
 
(164.2
)
 
(173.1
)
 
(169.6
)
 
 
 
 
 
 
 
Net Working Capital
 
288.7

 
274.2

 
224.0

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 feedstock costs 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 about 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 2017 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 $23-26 million within about a three month period. In times of relatively

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stable oil prices, the effects on our Net Working Capital levels are less significant than Net Working Capital swings in an environment of high price volatility. As of June 30, 2018, Net Working Capital increased to $288.7 million compared to $274.2 million as of March 31, 2018.

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Adjusted EBITDA is reconciled to profit or loss as follows:
Reconciliation of profit or loss
 
In USD k
 
In USD k

 
For the Three Months Ended Jun 30,
 
For the Six Months Ended Jun 30,
 
 
2018
 
2017
 
2018
 
2017
Profit or loss for the period
 
52,691

 
18,428

 
76,919

 
35,243

Income taxes
 
20,558

 
9,023

 
33,722

 
18,986

Finance costs
 
28,475

 
17,147

 
37,420

 
41,355

Share of profit of joint ventures
 
(144
)
 
(133
)
 
(293
)
 
(262
)
Other finance income
 
(19,123
)
 
(6,245
)
 
(19,978
)
 
(20,083
)
Earnings before taxes and finance income/costs (operating result (EBIT))
 
82,457

 
38,220

 
127,790

 
75,239

Add back depreciation, amortization and impairment of intangible assets and property, plant and equipment
 
24,239

 
24,035

 
49,029

 
46,277

EBITDA
 
106,696

 
62,255

 
176,819

 
121,516

Share of profit of joint venture
 
144

 
133

 
293

 
262

Restructuring (income)/expenses, net (1)
 
(29,751
)
 
319

 
(28,485
)
 
722

Consulting fees related to Group strategy (2)
 
151

 
810

 
1,035

 
1,049

Long Term Incentive Plan
 
2,853

 
1,609

 
5,953

 
3,209

Other adjustments (3)
 
1,055

 
(788
)
 
1,525

 
199

Adjusted EBITDA
 
81,148

 
64,338

 
157,140

 
126,957


(1)    Restructuring income or expenses are related to further actions undertaken to realign our worldwide Rubber footprint and reflects in particular the proceeds of the land sale in South Korea exceeding the associated cessation costs in three and six months ended June 30, 2018.
(2)    Consulting fees related to external consulting fees from establishing and executing Group strategies.
(3) Other adjustments in the three and six months ended June 30, 2018 related in particular to license fees required for certain innovative technologies to meet the EPA requirements of $1.1 million. Other adjustments include income in the three months ended June 30, 2017 related to a reimbursement following a successful objection against reassessed real estate transfer taxes in Germany of $1.5 million, primarily offset by costs in association with our EPA enforcement action of $0.5 million. In addition to the real estate transfer tax reimbursement of $1.5 million other adjustments in the six months ended June 30, 2017 include costs of $1.4 million in connection with our EPA enforcement action.



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