PART I FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Presents unaudited condensed consolidated financial statements for Q3 2020, covering income, balance sheet, cash flows, and explanatory notes [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net income for Q3 2020 significantly decreased to $7.5 million from $26.7 million, primarily due to lower sales, gross profit, and debt extinguishment costs Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | |:------------------------------------------------|:-----------------------------------------------|:-----------------------------------------------| | Sales | $380,319 | $423,801 | | Gross Profit | $96,501 | $112,897 | | Operating Income | $47,049 | $57,574 | | Equity in net (income) from affiliated companies| $(183) | $(17,261) | | Interest expense, net | $18,642 | $27,697 | | Debt extinguishment costs | $14,004 | $1,767 | | Net income attributable to PQ Group Holdings Inc.| $7,512 | $26,713 | | Basic income per share | $0.06 | $0.20 | | Diluted income per share | $0.06 | $0.20 | - For the nine months ended September 30, 2020, net income attributable to PQ Group Holdings Inc. decreased significantly to **$23.7 million** from **$60.4 million** in the prior year, reflecting a challenging operating environment[10](index=10&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for Q3 2020 increased to $21.7 million from $13.2 million, driven by positive foreign currency translation offsetting lower net income Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | |:----------------------------------------------------------|:-----------------------------------------------|:-----------------------------------------------| | Net income | $7,810 | $26,819 | | Foreign currency translation | $13,572 | $(13,872) | | Total other comprehensive income (loss) | $14,497 | $(13,896) | | Comprehensive income attributable to PQ Group Holdings Inc.| $21,700 | $13,227 | - For the nine months ended September 30, 2020, comprehensive income attributable to PQ Group Holdings Inc. was **$6,484 thousand**, a substantial decrease from **$56,969 thousand** in the prior year, largely influenced by a negative foreign currency translation of **$(20.8) million**[12](index=12&type=chunk) [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets remained stable at $4.32 billion as of September 30, 2020, with increased cash, decreased inventories, and slightly lower liabilities Metric | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:----------------------------------------|:----------------------------------|:---------------------------------| | Cash and cash equivalents | $164,348 | $72,284 | | Total current assets | $647,501 | $568,591 | | Total assets | $4,324,442 | $4,320,845 | | Total current liabilities | $234,226 | $269,468 | | Long-term debt, excluding current portion| $1,905,007 | $1,899,196 | | Total liabilities | $2,520,256 | $2,535,527 | | Total PQ Group Holdings Inc. equity | $1,800,487 | $1,779,450 | | Total equity | $1,804,186 | $1,785,318 | - The company's cash and cash equivalents more than doubled from **$72.3 million** at December 31, 2019, to **$164.3 million** at September 30, 2020, indicating improved liquidity[17](index=17&type=chunk) - Total current liabilities decreased by approximately **$35 million**, contributing to a slight reduction in overall liabilities[17](index=17&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Total equity increased to $1.80 billion from $1.79 billion, driven by net income and paid-in capital, offset by share repurchases and comprehensive loss Metric | December 31, 2019 (in thousands) | September 30, 2020 (in thousands) | |:-----------------------------------------|:---------------------------------|:----------------------------------| | Common stock | $1,369 | $1,368 |\n| Additional paid-in capital | $1,696,899 | $1,715,504 |\n| Retained earnings | $103,013 | $126,675 |\n| Treasury stock, at cost | $(6,483) | $(10,534) |\n| Accumulated other comprehensive loss | $(15,348) | $(32,526) |\n| Total PQ Group Holdings Inc. equity | $1,779,450 | $1,800,487 |\n| Noncontrolling interest | $5,868 | $3,699 |\n| Total equity | $1,785,318 | $1,804,186 | - Retained earnings increased from **$103.0 million** to **$126.7 million**, reflecting the company's net income generation[19](index=19&type=chunk) - Accumulated other comprehensive loss significantly increased from **$(15.3) million** to **$(32.5) million**, primarily due to foreign currency translation impacts[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow decreased to $150.6 million, but reduced financing cash outflow led to a substantial increase in cash and equivalents Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | |:----------------------------------------------------------|:----------------------------------------------|:----------------------------------------------| | Net cash provided by operating activities | $150,606 | $181,894 | | Net cash used in investing activities | $(42,051) | $(54,743) | | Net cash used in financing activities | $(10,226) | $(103,251) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash| $(5,955) | $(3,371) | | Net change in cash, cash equivalents and restricted cash | $92,374 | $20,529 | | Cash, cash equivalents and restricted cash at end of period| $166,291 | $80,255 | - The significant reduction in net cash used in financing activities, from **$(103.3) million** in 2019 to **$(10.2) million** in 2020, was a major factor in the improved overall cash position[24](index=24&type=chunk) - Cash, cash equivalents and restricted cash at the end of the period more than doubled, reaching **$166.3 million**, indicating a stronger liquidity position[24](index=24&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes explain accounting policies, significant transactions, and financial instrument management, providing context to the financial statements [1. Background and Basis of Presentation](index=10&type=section&id=1.%20Background%20and%20Basis%20of%20Presentation) PQ Group provides specialty catalysts, materials, chemicals, and services across four segments, with seasonal operations and a planned $650.0 million sale of Performance Materials - PQ Group Holdings Inc. operates four specialty businesses: Refining Services, Catalysts, Performance Materials, and Performance Chemicals[26](index=26&type=chunk) - The Performance Materials and Refining Services segments experience seasonal fluctuations, with lower sales and profit in Q1 and Q4 for Performance Materials due to weather, and similar fluctuations for Refining Services due to higher summer gasoline demand[26](index=26&type=chunk) - On October 15, 2020, the Company entered into a definitive agreement to sell its Performance Materials business for **$650.0 million** in cash, subject to customary adjustments[26](index=26&type=chunk) [Basis of Presentation](index=10&type=section&id=Basis%20of%20Presentation) Unaudited condensed consolidated financial statements are prepared under GAAP for interim reporting, with results not indicative of full-year performance - The condensed consolidated financial statements are unaudited and prepared in accordance with GAAP for interim reporting, with certain information and footnote disclosures condensed or omitted[27](index=27&type=chunk) - Management confirms that all necessary adjustments of a normal and recurring nature have been included, but notes that interim results are not necessarily indicative of full-year results[27](index=27&type=chunk) [COVID-19](index=10&type=section&id=COVID-19) The COVID-19 pandemic impacted economic activity and sales, but manufacturing continued with limited interruptions, and no material estimate updates were required - The COVID-19 pandemic has adversely impacted economic activity and financial markets, leading the company to implement an international travel ban, distribute PPE, and mandate work-from-home for non-manufacturing employees[28](index=28&type=chunk) - The company's manufacturing operations, key vendors, and most key customers have continued to operate with limited interruptions[28](index=28&type=chunk) - The extent and impact of COVID-19 are highly uncertain, but as of the issuance date, no specific event or circumstance required an update to estimates or a revision of asset/liability carrying values[28](index=28&type=chunk) [2. New Accounting Standards](index=11&type=section&id=2.%20New%20Accounting%20Standards) New accounting guidance for credit losses, fair value, and goodwill impairment was adopted in 2020 with no material impact, while other standards are being evaluated [Recently Adopted Accounting Standards](index=11&type=section&id=Recently%20Adopted%20Accounting%20Standards) New FASB guidance on expected credit losses, fair value disclosures, and goodwill impairment was adopted in 2020 with no material financial impact - New guidance on expected credit losses (June 2016) was adopted on January 1, 2020, with no material impact[31](index=31&type=chunk) - New guidance on fair value measurement disclosures (August 2018) was adopted on January 1, 2020, with no impact on disclosures as the company has no Level 3 derivatives or transfers between levels[31](index=31&type=chunk) - New guidance simplifying goodwill impairment tests (January 2017) was adopted on January 1, 2020, and will be applied prospectively, with no material impact[31](index=31&type=chunk) [Accounting Standards Not Yet Adopted](index=11&type=section&id=Accounting%20Standards%20Not%20Yet%20Adopted) New FASB guidance on income taxes is being evaluated, and hedge accounting expedients for LIBOR transition were applied to preserve derivative presentation - New FASB guidance to simplify income tax accounting (December 2019), effective for fiscal years beginning after December 15, 2020, is currently being evaluated for its impact[32](index=32&type=chunk) - The company elected to apply hedge accounting expedients for LIBOR transition (March 2020) during the three months ended September 30, 2020, to maintain consistent derivative presentation[32](index=32&type=chunk) [3. Revenue from Contracts with Customers](index=12&type=section&id=3.%20Revenue%20from%20Contracts%20with%20Customers) Revenue is disaggregated by segment and end use, with contract liabilities representing deferred revenue from product line sales recognized over time [Disaggregated Revenue](index=12&type=section&id=Disaggregated%20Revenue) Sales are disaggregated by segment and end uses like industrial chemicals and highway safety, with total sales for Q3 2020 at $380.3 million Sales by Segment (Three Months Ended September 30, 2020): | Segment | Sales (in thousands) | |:--------------------|:---------------------| | Refining Services | $106,840 | | Catalysts | $23,020 | | Performance Materials| $104,517 | | Performance Chemicals| $145,942 | | Total | $380,319 | Sales by End Use (Three Months Ended September 30, 2020): | End Use | Sales (in thousands) | |:------------------------------|:---------------------|\n| Industrial & process chemicals| $76,418 |\n| Fuels & emission control | $60,722 |\n| Packaging & engineered plastics| $61,386 |\n| Highway safety & construction | $94,225 |\n| Consumer products | $56,304 |\n| Natural resources | $34,707 | - For the nine months ended September 30, 2020, total sales were **$1,101,442 thousand**, down from **$1,214,697 thousand** in the prior year, with Performance Chemicals and Refining Services being the largest segments[44](index=44&type=chunk) [Contract Assets and Liabilities](index=15&type=section&id=Contract%20Assets%20and%20Liabilities) No contract assets were reported; contract liabilities of $10.8 million and $3.1 million represent deferred revenue from product line sales - The company has no contract assets on its condensed consolidated balance sheets as of September 30, 2020, and December 31, 2019[45](index=45&type=chunk) - A contract liability of **$11.5 million** was recognized from the July 2020 magnesium silicate product line sale, with **$10.8 million** remaining as deferred revenue as of September 30, 2020[45](index=45&type=chunk) - A contract liability of **$9.0 million** from the June 2019 sulfate salts product line sale had **$3.1 million** remaining as deferred revenue as of September 30, 2020[45](index=45&type=chunk) [4. Fair Value Measurements](index=16&type=section&id=4.%20Fair%20Value%20Measurements) Financial assets and liabilities are measured at fair value using a three-level hierarchy, primarily Level 1 and 2 inputs for derivatives and restoration plan assets Fair Value Measurements (September 30, 2020): | Asset/Liability | Total Fair Value (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | |:-------------------------|:--------------------------------|:-----------------------|:-----------------------|:-----------------------| | Derivative contracts (assets)| $5,173 | $— | $5,173 | $— | | Restoration plan assets | $3,658 | $3,658 | $— | $— | | Total Assets | $8,831 | $3,658 | $5,173 | $— | | Derivative contracts (liabilities)| $18,762 | $— | $18,762 | $— | - The company's fair value hierarchy prioritizes Level 1 (unadjusted quoted prices in active markets) and Level 2 (observable inputs) for its financial instruments[48](index=48&type=chunk) [Restoration plan assets](index=18&type=section&id=Restoration%20plan%20assets) Restoration plan assets, held in a Rabbi trust for retirement plans, are valued using Level 1 inputs and included in other long-term assets - Restoration plan assets are valued using Level 1 inputs (quoted prices in active markets) and are held in a Rabbi trust to fund defined benefit supplementary retirement plans[52](index=52&type=chunk) - These assets, consisting of various stock and fixed income mutual funds, are reported in other long-term assets, with related gains and losses in other expense, net[52](index=52&type=chunk) [Derivative contracts](index=18&type=section&id=Derivative%20contracts) Derivative contracts, including interest rate caps and natural gas swaps, are fair valued using Level 2 inputs, with credit valuation adjustments applied - Derivative assets and liabilities are valued using market transactions and other market evidence, primarily Level 2 inputs[53](index=53&type=chunk) - The company uses interest rate caps, natural gas swaps, and cross-currency swaps, and applies a credit valuation adjustment based on credit default swaps to reflect credit risk[53](index=53&type=chunk) [5. Stockholders' Equity](index=19&type=section&id=5.%20Stockholders'%20Equity) Accumulated other comprehensive loss was significantly impacted by foreign currency, while the company continued its stock repurchase program [Accumulated Other Comprehensive Income](index=19&type=section&id=Accumulated%20Other%20Comprehensive%20Income) Accumulated other comprehensive loss for the nine months ended September 30, 2020, was $(20.0) million, primarily due to negative foreign currency translation Other Comprehensive Income (Loss) (Nine Months Ended September 30, 2020): | Component | Pre-tax Amount (in thousands) | Tax benefit/(expense) (in thousands) | After-tax Amount (in thousands) | |:--------------------------------|:------------------------------|:-------------------------------------|:--------------------------------| | Benefit plans, net | $(62) | $14 | $(48) | | Net (loss) gain from hedging activities| $1,215 | $(304) | $911 | | Foreign currency translation | $(19,308) | $(1,536) | $(20,844) | | Total | $(18,155) | $(1,826) | $(19,981) | - The accumulated other comprehensive loss increased from **$(15.3) million** at December 31, 2019, to **$(32.5) million** at September 30, 2020, largely due to foreign currency translation[60](index=60&type=chunk) [Stock Repurchase Program](index=21&type=section&id=Stock%20Repurchase%20Program) The Board approved a $50.0 million stock repurchase program in March 2020, with $47.9 million remaining available as of September 30, 2020 - On March 12, 2020, the Board approved a stock repurchase program for up to **$50.0 million** of common stock, valid until March 2022[65](index=65&type=chunk) - As of September 30, 2020, 211,700 shares were repurchased for **$2.1 million**, with no repurchases made during the three months ended September 30, 2020[65](index=65&type=chunk) - **$47.9 million** remained available for additional share repurchases under the program as of September 30, 2020[65](index=65&type=chunk) [6. Asset Swap Transaction](index=22&type=section&id=6.%20Asset%20Swap%20Transaction) A non-cash asset swap in February 2020 resulted in a $6.5 million pre-tax loss on disposal and $7.7 million in goodwill assigned to Performance Materials - On February 19, 2020, the company completed a non-cash asset swap, acquiring a beads business in exchange for its ThermoDrop® product line assets[68](index=68&type=chunk) - The transaction resulted in a pre-tax loss on disposal of **$6.5 million**, included in other operating expense, net[68](index=68&type=chunk) - Goodwill of **$7.7 million** was recognized and assigned to the Performance Materials segment, expected to be tax-deductible[69](index=69&type=chunk) [7. Sale of Product Lines](index=23&type=section&id=7.%20Sale%20of%20Product%20Lines) Two product line sales, magnesium silicate and sulfate salts, generated pre-tax gains of $5.0 million and $11.4 million, respectively, including tolling arrangements [Magnesium Silicate Product Line Sale](index=23&type=section&id=Magnesium%20Silicate%20Product%20Line%20Sale) Sale of magnesium silicate product line for $18.0 million resulted in a $5.0 million pre-tax gain and a $11.5 million deferred revenue contract liability - Sale of magnesium silicate product line on July 1, 2020, for **$18.0 million**, resulting in a pre-tax gain of **$5.0 million**[72](index=72&type=chunk) - A contract liability of **$11.5 million** was recognized for a tolling arrangement, with revenue to be recognized over the agreement term through July 2025[72](index=72&type=chunk) [Sulfate Salts Product Line Sale](index=23&type=section&id=Sulfate%20Salts%20Product%20Line%20Sale) Sale of sulfate salts product line for $28.0 million resulted in a $11.4 million pre-tax gain and a $9.0 million deferred revenue contract liability - Sale of a portion of sulfate salts product line on June 28, 2019, for **$28.0 million**, resulting in a pre-tax gain of **$11.4 million**[73](index=73&type=chunk) - A contract liability of **$9.0 million** was deferred for a tolling arrangement, with the majority running until June 2021[73](index=73&type=chunk) - Property, plant, and equipment were derecognized under a sales-type leasing arrangement due to an embedded lease in the sale and tolling agreements[73](index=73&type=chunk) [8. Goodwill](index=23&type=section&id=8.%20Goodwill) Goodwill increased to $1.26 billion from $1.26 billion, primarily due to a $7.7 million asset swap, partially offset by foreign exchange impact Goodwill Changes (Nine Months Ended September 30, 2020): | Segment | Balance as of Dec 31, 2019 (in thousands) | Goodwill Recognized (in thousands) | Foreign Exchange Impact (in thousands) | Balance as of Sep 30, 2020 (in thousands) | |:--------------------|:------------------------------------------|:-----------------------------------|:---------------------------------------|:------------------------------------------| | Refining Services | $311,892 | $— | $— | $311,892 | | Catalysts | $78,611 | $— | $(522) | $78,089 | | Performance Materials| $275,919 | $7,730 | $(321) | $283,328 | | Performance Chemicals| $593,383 | $— | $(2,839) | $590,544 | | Total | $1,259,805 | $7,730 | $(3,682) | $1,263,853 | - The asset swap transaction contributed **$7.7 million** in goodwill, specifically allocated to the Performance Materials segment[75](index=75&type=chunk) [9. Other Operating Expense, Net](index=24&type=section&id=9.%20Other%20Operating%20Expense,%20Net) Other operating expense, net, decreased to $12.4 million for Q3 2020 due to asset disposal gains and lower environmental costs, offset by restructuring Other Operating Expense, Net (in thousands): | Component | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | |:----------------------------------------|:--------------------------------|:--------------------------------| | Amortization expense | $8,653 | $8,607 | | Transaction and other related costs | $3,116 | $2,930 | | Restructuring, integration and business optimization costs| $4,577 | $539 | | Net (gain) loss on asset disposals | $(4,453) | $1,136 | | Environmental related costs | $7 | $1,174 | | Other, net | $482 | $1,409 | | Total | $12,382 | $15,795 | - For the nine months ended September 30, 2020, other operating expense, net, increased to **$47.1 million** from **$28.4 million** in the prior year, driven by transaction and business optimization costs and a loss on asset disposals[78](index=78&type=chunk) - The current period includes a pre-tax gain of **$5.0 million** from a product line sale and a loss of **$6.5 million** from an asset swap[78](index=78&type=chunk) [10. Inventories, Net](index=24&type=section&id=10.%20Inventories,%20Net) Inventories, net, decreased to $249.7 million from $280.9 million, with the majority being finished products and work in process valued at lower of cost or market Inventories, Net (in thousands): | Category | September 30, 2020 | December 31, 2019 | |:----------------------------------|:-------------------|:------------------| | Finished products and work in process| $201,784 | $222,940 | | Raw materials | $47,878 | $58,005 | | Total | $249,662 | $280,945 | | Valued at lower of cost or market:|\n| LIFO basis | $145,314 | $168,935 | | Valued at lower of cost and net realizable value:|\n| FIFO or average cost basis | $104,348 | $112,010 | - Total inventories decreased by **$31.3 million**, reflecting a reduction in both finished products and raw materials[79](index=79&type=chunk) [11. Investments in Affiliated Companies](index=25&type=section&id=11.%20Investments%20in%20Affiliated%20Companies) Equity in net income from affiliated companies significantly decreased for Q3 2020, primarily due to lower earnings from the Zeolyst Joint Venture Equity in Net Income from Affiliated Companies (in thousands): | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | |:-------------------------------------|:--------------------------------|:--------------------------------| | Sales (100% basis) | $57,923 | $121,471 | | Net income (100% basis) | $3,681 | $37,852 | | Equity in net income from affiliates (Company's share) | $(183) | $(17,261) | - The company's equity in net income from affiliated companies decreased by **$17.1 million** for the three months ended September 30, 2020, and by **$11.6 million** for the nine months ended September 30, 2020, primarily due to lower earnings from the Zeolyst Joint Venture[10](index=10&type=chunk)[82](index=82&type=chunk) - In March 2020, the company sold its 49% interest in the Quaker Holdings joint venture, receiving **$1.0 million** for the shares[82](index=82&type=chunk) [12. Property, Plant and Equipment](index=26&type=section&id=12.%20Property,%20Plant%20and%20Equipment) Property, plant and equipment, net, decreased to $1.14 billion from $1.19 billion, primarily due to increased accumulated depreciation Property, Plant and Equipment (in thousands): | Category | September 30, 2020 | December 31, 2019 | |:---------------------------|:-------------------|:------------------| | Land | $177,308 | $183,117 | | Buildings | $227,923 | $221,449 | | Machinery and equipment | $1,262,777 | $1,236,531 | | Construction in progress | $94,704 | $82,687 | | Total at cost | $1,762,712 | $1,723,784 | | Less: accumulated depreciation| $(626,955) | $(537,014) | | Net | $1,135,757 | $1,186,770 | - Depreciation expense for the nine months ended September 30, 2020, was **$100.0 million**, up from **$97.1 million** in the prior year[85](index=85&type=chunk) [13. Long-term Debt](index=26&type=section&id=13.%20Long-term%20Debt) Total long-term debt was $1.91 billion, with a new $650.0 million term loan facility refinancing existing notes, incurring $14.0 million in extinguishment costs Long-term Debt (in thousands): | Debt Instrument | September 30, 2020 | December 31, 2019 | |:----------------------------------------------|:-------------------|:------------------| | Senior Secured Term Loan Facility due February 2027| $947,497 | $947,497 | | New Senior Secured Term Loan Facility due February 2027| $648,375 | $— | | 6.75% Senior Secured Notes due 2022 | $— | $625,000 | | 5.75% Senior Unsecured Notes due 2025 | $295,000 | $295,000 | | Other | $65,147 | $64,629 | | Total debt | $1,956,019 | $1,932,126 | | Total long-term debt, excluding current portion| $1,905,007 | $1,899,196 | - In July 2020, the company issued a new **$650.0 million** senior secured term loan facility to redeem its existing **$625.0 million** 6.75% Senior Secured Notes due 2022[86](index=86&type=chunk) - Debt extinguishment costs of **$14.0 million** were recorded for the three months ended September 30, 2020, related to the redemption of the 6.75% Senior Secured Notes[89](index=89&type=chunk) [Other Debt](index=27&type=section&id=Other%20Debt) Other debt includes NMTC financing and subsidiary credit agreements, associated with the Performance Materials business and to be assumed by the buyer - Other debt includes NMTC financing arrangements, subsidiary credit agreements (Sovitec), and notes payable (Japan subsidiary)[90](index=90&type=chunk) - These 'Other' debt obligations are tied to the Performance Materials business and will be assumed by the buyer upon the segment's sale[90](index=90&type=chunk) [14. Financial Instruments](index=27&type=section&id=14.%20Financial%20Instruments) Derivative instruments manage interest rate, commodity, and foreign currency risks, designated as cash flow or net investment hedges, with fair values recorded as assets or liabilities - The company uses interest rate, commodity (natural gas), and foreign currency derivatives to manage risk, not for speculation[91](index=91&type=chunk) - Natural gas swaps and interest rate caps are designated as cash flow hedges, with gains/losses recorded in OCI and reclassified to earnings (cost of goods sold or interest expense) when the hedged item affects earnings[91](index=91&type=chunk) - Cross-currency interest rate swaps are designated as net investment hedges, with fair value changes due to spot exchange rates recognized in CTA within OCI[95](index=95&type=chunk) Fair Values of Derivative Instruments (in thousands): | Category | September 30, 2020 | December 31, 2019 | |:----------------------------------------|:-------------------|:------------------| | Derivative assets (total) | $5,173 | $3,928 | | Natural gas swaps | $488 | $— | | Cross-currency interest rate swaps | $4,685 | $3,928 | | Derivative liabilities (total) | $18,762 | $12,415 | | Natural gas swaps | $— | $1,039 | | Interest rate caps | $4,200 | $3,242 | | Cross-currency interest rate swaps | $14,562 | $8,134 | [15. Income Taxes](index=32&type=section&id=15.%20Income%20Taxes) The effective income tax rate for Q3 2020 was 60.1%, significantly higher than 2019, due to income mix, GILTI, asset sales, and foreign exchange impacts Effective Income Tax Rate: | Period | 2020 | 2019 | |:--------------------------------------|:------|:------| | Three Months Ended September 30 | 60.1% | 38.4% | | Nine Months Ended September 30 | 54.5% | 39.3% | - The higher effective tax rates in 2020 were mainly influenced by GILTI impacts, discrete tax effects of asset swap and product line sales, permanent differences from foreign currency exchange, foreign tax rate changes, and pre-tax losses without associated tax benefits[115](index=115&type=chunk) - The company continues to estimate GILTI income inclusion for GAAP purposes, which may change based on future legislative guidance or business changes[115](index=115&type=chunk) [16. Benefit Plans](index=33&type=section&id=16.%20Benefit%20Plans) The company sponsors defined benefit pension, postretirement healthcare, and supplementary retirement plans, with varying net periodic expenses or benefits [Defined Benefit Pension Plans](index=33&type=section&id=Defined%20Benefit%20Pension%20Plans) U.S. defined benefit pension plans reported a net periodic benefit of $(2.4) million, while foreign plans incurred a net periodic expense of $2.8 million for nine months ended September 30, 2020 Net Periodic Expense (Benefit) for Defined Benefit Pension Plans (Nine Months Ended September 30, in thousands): | Component | U.S. 2020 | U.S. 2019 | Foreign 2020 | Foreign 2019 | |:---------------------------|:----------|:----------|:-------------|:-------------| | Service cost | $577 | $751 | $2,989 | $2,464 | | Interest cost | $6,455 | $7,958 | $2,121 | $2,458 | | Expected return on plan assets| $(9,404) | $(8,733) | $(2,429) | $(2,375) | | Amortization of net loss | $— | $— | $121 | $1 | | Amortization of prior service cost| $— | $— | $19 | $18 | | Net periodic expense (benefit)| $(2,372) | $(24) | $2,821 | $2,566 | [Supplemental Retirement Plans](index=34&type=section&id=Supplemental%20Retirement%20Plans) Net periodic expense for supplemental retirement plans was $86 thousand for Q3 2020 and $259 thousand for the nine months, primarily driven by interest costs Net Periodic Expense for Supplemental Retirement Plans (in thousands): | Period | 2020 | 2019 | |:--------------------------------------|:-----|:-----| | Three Months Ended September 30 | $86 | $121 | | Nine Months Ended September 30 | $259 | $364 | [Other Postretirement Benefit Plans](index=34&type=section&id=Other%20Postretirement%20Benefit%20Plans) Other postretirement benefit plans reported a net periodic benefit of $(41) thousand for Q3 2020 and $(123) thousand for the nine months, due to amortization Net Periodic Expense (Benefit) for Other Postretirement Benefit Plans (in thousands): | Period | 2020 | 2019 | |:--------------------------------------|:------|:-----| | Three Months Ended September 30 | $(41) | $— | | Nine Months Ended September 30 | $(123)| $— | [17. Commitments and Contingent Liabilities](index=34&type=section&id=17.%20Commitments%20and%20Contingent%20Liabilities) The company faces various legal claims and proceedings, including environmental and product liability, but management believes no material adverse effect is likely - The company faces various legal claims and proceedings, including environmental, personal injury, and product liability, inherent in chemical manufacturing[122](index=122&type=chunk) - Management believes that the ultimate conclusion of these matters will not materially adversely affect the company's consolidated financial position, results of operations, or liquidity, and has made certain accruals[122](index=122&type=chunk) [18. Reportable Segments](index=35&type=section&id=18.%20Reportable%20Segments) Total sales and Segment Adjusted EBITDA decreased for Q3 2020, with Performance Materials seeing a slight Adjusted EBITDA increase for the nine-month period Sales by Reportable Segment (in thousands): | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | |:--------------------|:--------------------------------|:--------------------------------| | Refining Services | $107,604 | $118,335 | | Catalysts | $23,071 | $25,612 | | Performance Materials| $104,574 | $115,134 | | Performance Chemicals| $148,513 | $167,949 | | Total | $380,319 | $423,801 | Segment Adjusted EBITDA (in thousands): | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | |:--------------------|:--------------------------------|:--------------------------------| | Refining Services | $44,272 | $51,166 | | Catalysts | $11,762 | $31,638 | | Performance Materials| $25,334 | $25,769 | | Performance Chemicals| $33,919 | $36,804 | | Total | $115,287 | $145,377 | - For the nine months ended September 30, 2020, Performance Materials' Adjusted EBITDA increased by **0.9%** to **$66,148 thousand**, while other segments saw declines[125](index=125&type=chunk) [19. Stock-Based Compensation](index=37&type=section&id=19.%20Stock-Based%20Compensation) The company granted 1.16 million restricted stock units and 456,311 performance stock units in 2020, with total stock-based compensation expense of $18.4 million Stock-Based Compensation Activity (Nine Months Ended September 30, 2020): | Category | Restricted Stock Units (Number of Units) | Performance Stock Units (Number of Units) | |:--------------------------|:-----------------------------------------|:------------------------------------------| | Nonvested as of Dec 31, 2019| 1,628,436 | 550,676 | | Granted | 1,158,605 | 456,311 | | Vested | (482,907) | — | | Forfeited | (129,036) | (41,251) | | Nonvested as of Sep 30, 2020| 2,175,098 | 965,736 | - Total stock-based compensation expense was **$18.4 million** for the nine months ended September 30, 2020, up from **$13.6 million** in 2019[134](index=134&type=chunk) - Unrecognized compensation cost at September 30, 2020, was **$21.5 million** for restricted stock units (average 1.56 years) and **$10.8 million** for performance stock units (average 1.88 years)[134](index=134&type=chunk) [20. Earnings per Share](index=38&type=section&id=20.%20Earnings%20per%20Share) Basic and diluted EPS for Q3 2020 were $0.06 and $0.17 respectively, significantly lower than prior year, with adjustments for dilutive equity awards Net Income Per Share: | Period | Basic EPS 2020 | Basic EPS 2019 | Diluted EPS 2020 | Diluted EPS 2019 | |:--------------------------------------|:---------------|:---------------|:-----------------|:-----------------| | Three Months Ended September 30 | $0.06 | $0.20 | $0.06 | $0.20 | | Nine Months Ended September 30 | $0.17 | $0.45 | $0.17 | $0.45 | Weighted Average Shares Outstanding (in thousands): | Period | Basic 2020 | Basic 2019 | Diluted 2020 | Diluted 2019 | |:--------------------------------------|:------------|:------------|:-------------|:-------------| | Three Months Ended September 30 | 135,107 | 134,512 | 135,979 | 135,650 | | Nine Months Ended September 30 | 135,292 | 134,214 | 136,188 | 135,305 | - Approximately **1.5 million** anti-dilutive restricted stock awards, restricted stock units, and performance stock units were excluded from diluted EPS calculation for the three months ended September 30, 2020[140](index=140&type=chunk) [21. Supplemental Cash Flow Information](index=41&type=section&id=21.%20Supplemental%20Cash%20Flow%20Information) Cash paid for income taxes was $21.5 million and for interest was $75.3 million, with non-cash investing activities including capital expenditures and right-of-use assets Supplemental Cash Flow Information (Nine Months Ended September 30, in thousands): | Category | 2020 | 2019 | |:------------------------------------------|:--------|:--------| | Cash paid for income taxes, net of refunds| $21,507 | $13,261 | | Cash paid for interest | $75,345 | $82,349 | | Capital expenditures acquired on account | $7,425 | $13,265 | | Right-of-use assets obtained for new lease liabilities (operating leases)| $13,058 | $5,148 | Reconciliation of Cash, Cash Equivalents and Restricted Cash (in thousands): | Category | September 30, 2020 | September 30, 2019 | |:------------------------------------------|:-------------------|:-------------------| | Cash and cash equivalents | $164,348 | $78,510 | | Restricted cash | $1,943 | $1,745 | | Total | $166,291 | $80,255 | [22. Subsequent Events](index=41&type=section&id=22.%20Subsequent%20Events) Post-September 30, 2020, the company agreed to sell its Performance Materials business for $650.0 million and redeemed $21.0 million in debt, resulting in a $5.4 million gain - On October 15, 2020, the company agreed to sell its Performance Materials business for **$650.0 million** in cash, with proceeds to reduce debt and return capital to shareholders[145](index=145&type=chunk) - The Performance Materials business will be reported as discontinued operations starting in Q4 2020[145](index=145&type=chunk) - In October 2020, the company redeemed **$21.0 million** of debt from a 2013 NMTC financing arrangement, resulting in a **$5.4 million** gain on debt forgiveness[147](index=147&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, condition, and liquidity, including COVID-19 impacts, strategic developments, and operating results for Q3 2020 [Forward-looking Statements](index=43&type=section&id=Forward-looking%20Statements) Forward-looking statements are subject to risks like COVID-19, economic conditions, and debt levels, and are not updated after the filing date - Forward-looking statements are based on current expectations and projections about future events and financial trends, including the sale of the Performance Materials segment and the impact of COVID-19[150](index=150&type=chunk) - Key risks include the impact of COVID-19, general economic conditions, exchange rate fluctuations, legal and regulatory compliance, competition, raw material prices, customer relationships, and substantial indebtedness[150](index=150&type=chunk)[152](index=152&type=chunk) - The company undertakes no obligation to update publicly any forward-looking statements after the Form 10-Q filing date[152](index=152&type=chunk) [Overview](index=45&type=section&id=Overview) PQ Group Holdings Inc. is a global provider of specialty catalysts, materials, chemicals, and services across four segments, focusing on environmental sustainability - The company is a leading integrated global provider of specialty catalysts, materials, chemicals, and services[153](index=153&type=chunk) - Operations are conducted through four segments: Refining Services, Catalysts (including Zeolyst Joint Venture), Performance Materials, and Performance Chemicals[153](index=153&type=chunk) - Products are primarily inorganic and aim to improve environmental sustainability[153](index=153&type=chunk) [Recent Developments](index=45&type=section&id=Recent%20Developments) The company agreed to sell its Performance Materials business for $650.0 million, with proceeds for debt reduction and capital return, to be reported as discontinued operations - On October 15, 2020, the company entered into a definitive agreement to sell its Performance Materials business for **$650.0 million**[154](index=154&type=chunk) - After-tax cash proceeds from the sale are expected to be used to reduce debt and return capital to shareholders[154](index=154&type=chunk) - The financial results of the Performance Materials business will be presented as discontinued operations starting in the fourth quarter of 2020[154](index=154&type=chunk) [Impact of COVID-19 on our Business and Results](index=46&type=section&id=Impact%20of%20COVID-19%20on%20our%20Business%20and%20Results) COVID-19 impacted sales volumes, but manufacturing continued with limited interruptions, with cost mitigation and CARES Act benefits supporting liquidity, though full impact remains uncertain [Near Term Trends on Business Segment End Uses](index=46&type=section&id=Near%20Term%20Trends%20on%20Business%20Segment%20End%20Uses) COVID-19 led to lower sales volumes in Q3 2020 across segments, with varying demand impacts on Refining Services, Performance Materials, Performance Chemicals, and Catalysts - Refining Services experienced a significant rebound in demand from Q2 lows, with gasoline consumption recovering to approximately **90%** of 2019 levels in Q3[156](index=156&type=chunk) - Performance Materials saw reduced demand for highway safety products in Europe and industrial engineered glass, but North American highway safety sales had higher average selling prices[156](index=156&type=chunk) - Performance Chemicals experienced lower volumes of sodium silicate and reduced demand in consumer cleaning, while Catalysts saw strong polyolefin catalyst results but slumped demand for emission control catalysts[156](index=156&type=chunk) [Operations and Supply](index=48&type=section&id=Operations%20and%20Supply) Manufacturing facilities continued operating with limited interruptions despite COVID-19, providing critical materials, with no material impact on production to date - Manufacturing facilities continued to operate, providing critical materials with limited interruptions, despite some production delays due to employee absenteeism[158](index=158&type=chunk) - Limited disruptions in raw material availability have not had a material impact on production to date[158](index=158&type=chunk) [Liquidity](index=48&type=section&id=Liquidity) Total available liquidity was $345.4 million as of September 30, 2020, with debt maturities extended and interest expense reduced through refinancing actions - As of September 30, 2020, the company had **$164.3 million** in cash and cash equivalents and **$345.4 million** in total available liquidity[159](index=159&type=chunk) - The company amended its Term Loan Facility and ABL Facility to reduce interest rates and extend maturities to February 2027 and March 2025, respectively[159](index=159&type=chunk) - A new **$650.0 million** senior secured term loan facility was entered into in July 2020 to refinance existing 6.75% Senior Secured Notes due 2022, reducing interest expense and extending maturity to February 2027[159](index=159&type=chunk) [Coronavirus Aid, Relief and Economic Security ("CARES") Act](index=48&type=section&id=Coronavirus%20Aid,%20Relief%20and%20Economic%20Security%20(%22CARES%22)%20Act) The company deferred employer social security taxes under the CARES Act, expecting $6.0 million in additional liquidity in 2020, with payments due in 2021 and 2022 - The company deferred employer social security tax payments under the CARES Act, expecting **$6.0 million** in additional liquidity in 2020[159](index=159&type=chunk) - Deferred amounts are due **50%** by December 31, 2021, and **50%** by December 31, 2022[159](index=159&type=chunk) [Key Performance Indicators](index=48&type=section&id=Key%20Performance%20Indicators) Non-GAAP measures, Adjusted EBITDA and Adjusted Net Income, are used to evaluate operating performance by excluding non-core items, providing insights into period-to-period results [Adjusted EBITDA and Adjusted Net Income](index=48&type=section&id=Adjusted%20EBITDA%20and%20Adjusted%20Net%20Income) Adjusted EBITDA and Adjusted Net Income are non-GAAP measures excluding non-operating, non-cash, or nonrecurring items, used for performance assessment and business planning - Adjusted EBITDA is defined as net income (loss) attributable to PQ Group Holdings before interest, taxes, depreciation, and amortization, further adjusted for non-operating, non-cash, nonrecurring items, and the company's **50%** share of Zeolyst Joint Venture's depreciation, amortization, and interest[160](index=160&type=chunk) - Adjusted Net Income is defined as net income (loss) attributable to PQ Group Holdings adjusted for non-operating income/expense and certain non-cash, nonrecurring items[160](index=160&type=chunk) - These non-GAAP measures are used for evaluating operating performance and business planning, but should not be considered in isolation or as alternatives to GAAP results[160](index=160&type=chunk) [Key Factors and Trends Affecting Operating Results and Financial Condition](index=49&type=section&id=Key%20Factors%20and%20Trends%20Affecting%20Operating%20Results%20and%20Financial%20Condition) Operating results are influenced by sales trends, cost of goods sold, joint venture performance, seasonality, and foreign currency fluctuations, with COVID-19 impacting sales [Sales](index=49&type=section&id=Sales) Sales were negatively impacted by COVID-19, with Q3 2020 showing improvement after a Q2 trough, and sales based on purchase orders or long-term contracts - Sales have been negatively impacted by COVID-19, with reduced demand for products across the portfolio due to declining GDP, lower gasoline demand, and work restrictions[162](index=162&type=chunk) - The second quarter was considered the trough of demand decline, with improvement observed in most business areas during the third quarter[162](index=162&type=chunk) - Sales in Refining Services, Performance Chemicals, and Catalysts segments are made on both purchase order and long-term contract bases, while Performance Materials sales are principally on a purchase order basis[162](index=162&type=chunk) [Cost of Goods Sold](index=49&type=section&id=Cost%20of%20Goods%20Sold) Cost of goods sold includes variable and fixed manufacturing costs, with mitigation strategies for raw material and energy price volatility through contracts and hedging - Cost of goods sold comprises variable product costs (raw materials, energy, packaging), fixed manufacturing expenses, depreciation, and freight[163](index=163&type=chunk) - Refining Services contracts often include take-or-pay volume protection and quarterly price adjustments for commodity inputs, labor, and natural gas, covering over **90%** of 2019 sales[163](index=163&type=chunk) - The company hedges natural gas price exposure in the U.S. and makes forward purchases in North America and Europe, also structuring customer contracts to pass through raw material and natural gas costs[163](index=163&type=chunk) [Joint Ventures](index=49&type=section&id=Joint%20Ventures) Equity joint ventures, including Zeolyst Joint Venture, are accounted for under the equity method, producing zeolite-based catalysts for various industries - Investments in equity joint ventures, such as the Zeolyst Joint Venture, are accounted for under the equity method[164](index=164&type=chunk) - The Zeolyst Joint Venture produces high-performance, specialty, zeolite-based catalysts for packaging, engineered plastics, emission control, refining, and petrochemical industries[164](index=164&type=chunk) [Seasonality](index=49&type=section&id=Seasonality) Performance Materials and Refining Services segments are affected by seasonal changes and weather, leading to lower sales in specific quarters and higher working capital needs - Performance Materials and Refining Services segments are affected by seasonality and weather conditions[165](index=165&type=chunk) - Performance Materials typically has lower sales and profit in Q1 and Q4 due to highway striping projects occurring in warmer months[165](index=165&type=chunk) - Refining Services experiences seasonal fluctuations due to higher gasoline demand in summer, leading to higher working capital requirements in Q1 and Q2[165](index=165&type=chunk) [Foreign Currency](index=50&type=section&id=Foreign%20Currency) Approximately 40% of sales are in non-U.S. currencies, exposing the company to significant foreign currency translation gains and losses that impact reported results - Approximately **40%** of the company's sales for the nine months ended September 30, 2020, were in currencies other than the U.S. dollar[167](index=167&type=chunk) - Significant exchange rate exposure exists for the Euro, British pound, Canadian dollar, Brazilian real, and Mexican peso[167](index=167&type=chunk) - Currency translation gains and losses can significantly increase or decrease reported sales and earnings when translated to U.S. dollars[167](index=167&type=chunk) [Results of Operations](index=50&type=section&id=Results%20of%20Operations) Detailed comparative analysis of financial performance for Q3 2020 and nine months ended September 30, 2020, covering sales, income, and Adjusted EBITDA [Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019](index=50&type=section&id=Three%20Months%20Ended%20September%2030,%202020%20Compared%20to%20the%20Three%20Months%20Ended%20September%2030,%202019) Q3 2020 saw significant declines in sales, gross profit, and net income due to lower volumes, reduced joint venture earnings, and substantial debt extinguishment costs [Highlights](index=50&type=section&id=Highlights) Q3 2020 sales decreased by $43.5 million (10.3%) to $380.3 million, gross profit by $16.4 million (14.5%), and operating income by $10.6 million (18.4%) - Sales decreased by **$43.5 million** (**10.3%**) to **$380.3 million**, primarily due to lower sales volumes and unfavorable foreign currency translation[169](index=169&type=chunk) - Gross profit decreased by **$16.4 million** (**14.5%**) to **$96.5 million**, mainly due to declining sales volumes[170](index=170&type=chunk) - Equity in net income of affiliated companies decreased by **$17.1 million** (**98.8%**) to **$0.2 million**, driven by lower earnings from the Zeolyst Joint Venture[172](index=172&type=chunk) [Sales (by segment)](index=51&type=section&id=Sales%20(by%20segment)) All segments experienced sales declines in Q3 2020, with Refining Services, Catalysts, Performance Materials, and Performance Chemicals all seeing reduced volumes Sales by Segment (Three Months Ended September 30, in millions): | Segment | 2020 | 2019 | Change ($) | Change (%) | |:--------------------|:------|:------|:-----------|:-----------| | Refining Services | $107.6| $118.3| $(10.7) | (9.0)% | | Catalysts | $23.1 | $25.6 | $(2.5) | (9.8)% | | Performance Materials| $104.6| $115.1| $(10.5) | (9.1)% | | Performance Chemicals| $148.5| $167.9| $(19.4) | (11.6)% | | Total sales | $380.3| $423.8| $(43.5) | (10.3)% | - Refining Services sales decreased due to lower gasoline production from COVID-19, Hurricane Laura, and lower sulfur pricing[174](index=174&type=chunk) - Performance Chemicals sales declined due to lower sodium silicate volumes across multiple applications and reduced demand in the zeolites market, exacerbated by unfavorable foreign currency translation[176](index=176&type=chunk) [Gross Profit](index=52&type=section&id=Gross%20Profit) Gross profit decreased by $16.4 million (14.5%) to $96.5 million, primarily due to lower sales volumes, unfavorable product mix, and customer pricing - Gross profit decreased by **$16.4 million** (**14.5%**) to **$96.5 million**[177](index=177&type=chunk) - The decrease was driven by lower volumes (**$19.8 million**), unfavorable product mix (**$3.6 million**), and unfavorable customer pricing (**$1.8 million**), partially offset by **$10.4 million** in favorable manufacturing costs[177](index=177&type=chunk) [Selling, General and Administrative Expenses](index=52&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling, general and administrative expenses decreased by $2.4 million (6.1%) to $37.1 million for Q3 2020 due to cost control initiatives - Selling, general and administrative expenses decreased by **$2.4 million** to **$37.1 million**, attributed to cost controlling initiatives[178](index=178&type=chunk) [Other Operating Expense, Net](index=52&type=section&id=Other%20Operating%20Expense,%20Net) Other operating expense, net, decreased by $3.3 million (21.0%) to $12.4 million due to asset sale gains and lower environmental costs, partially offset by optimization charges - Other operating expense, net, decreased by **$3.3 million** to **$12.4 million**[179](index=179&type=chunk) - The decrease was driven by a gain on a product group sale and lower environmental costs, partially offset by higher business optimization charges[179](index=179&type=chunk) [Equity in Net Income of Affiliated Companies](index=52&type=section&id=Equity%20in%20Net%20Income%20of%20Affiliated%20Companies) Equity in net income of affiliated companies decreased significantly by $17.1 million (98.8%) to $0.2 million due to lower Zeolyst Joint Venture earnings - Equity in net income of affiliated companies decreased by **$17.1 million** to **$0.2 million**[180](index=180&type=chunk) - The decline was primarily due to lower earnings from the Zeolyst Joint Venture, affected by reduced specialty catalyst orders and COVID-19 impacts[180](index=180&type=chunk) [Interest Expense, Net](index=52&type=section&id=Interest%20Expense,%20Net) Interest expense, net, decreased by $9.1 million (32.9%) to $18.6 million due to lower interest rates on variable debt and reduced average debt balances - Interest expense, net, decreased by **$9.1 million** to **$18.6 million**[181](index=181&type=chunk) - The decrease was primarily due to lower interest rates on variable debt, reduced average debt balances, and a favorable increase in variable versus fixed rate debt[181](index=181&type=chunk) [Debt Extinguishment Costs](index=53&type=section&id=Debt%20Extinguishment%20Costs) Debt extinguishment costs increased significantly to $14.0 million due to prepayment premiums and write-offs from redeeming 6.75% Senior Secured Notes - Debt extinguishment costs increased to **$14.0 million** in 2020 from **$1.8 million** in 2019[183](index=183&type=chunk) - The increase was mainly due to a **$10.6 million** prepayment premium and the write-off of **$2.1 million** in deferred financing costs and **$1.2 million** in original issue discount from redeeming the 6.75% Senior Secured Notes due 2022[183](index=183&type=chunk) [Other Expense, Net](index=53&type=section&id=Other%20Expense,%20Net) Other expense, net, shifted from a $1.9 million expense to a $5.0 million income, primarily driven by foreign currency gains on intercompany debt - Other expense, net, changed from an expense of **$1.9 million** in Q3 2019 to income of **$5.0 million** in Q3 2020[184](index=184&type=chunk) - The change was primarily due to foreign currency gains from non-permanent intercompany debt denominated in local currency[184](index=184&type=chunk) [Provision for Income Taxes](index=53&type=section&id=Provision%20for%20Income%20Taxes) Provision for income taxes decreased to $11.8 million, but the effective tax rate increased to 60.1% due to income mix, GILTI, asset sales, and foreign exchange - Provision for income taxes decreased to **$11.8 million** from **$16.7 million**, but the effective tax rate increased to **60.1%** from **38.4%**[185](index=185&type=chunk) - The effective tax rate fluctuated due to changes in income mix, GILTI tax rules, discrete impacts of product line and asset sales, and foreign exchange gains/losses[185](index=185&type=chunk) [Net Income Attributable to PQ Group Holdings](index=53&type=section&id=Net%20Income%20Attributable%20to%20PQ%20Group%20Holdings) Net income attributable to PQ Group Holdings Inc. decreased significantly to $7.5 million from $26.7 million, reflecting lower sales, reduced JV earnings, and higher debt costs - Net income attributable to PQ Group Holdings Inc. decreased to **$7.5 million** from **$26.7 million**[186](index=186&type=chunk) [Adjusted EBITDA](index=53&type=section&id=Adjusted%20EBITDA) Total Segment Adjusted EBITDA decreased by $30.1 million (20.7%) to $115.3 million, with all segments experiencing declines, particularly Catalysts Segment Adjusted EBITDA (Three Months Ended September 30, in millions): | Segment | 2020 | 2019 | Change ($) | Change (%) | |:--------------------|:------|:------|:-----------|:-----------| | Refining Services | $44.3 | $51.2 | $(6.9) | (13.5)% | | Catalysts | $11.8 | $31.6 | $(19.8) | (62.7)% | | Performance Materials| $25.3 | $25.8 | $(0.5) | (1.9)% | | Performance Chemicals| $33.9 | $36.8

Financial Data and Key Metrics Changes - The company's top line improved by 6% from the second quarter, with adjusted EBITDA largely in line with the second quarter, resulting in a healthy adjusted EBITDA margin of 27% [9][20] - Sales for the year are projected to be in the range of $1.43 billion to $1.46 billion, with adjusted EBITDA expected to be between $410 million and $425 million, maintaining a margin of approximately 27% [25][26] Business Line Data and Key Metrics Changes - Refining Services: Sales of $108 million were down 9% year-over-year, but regeneration services volume was up nearly 30% from the second quarter [21] - Catalysts: Silica catalysts sales of $23 million declined by $2.5 million from the prior year, while sales in the Zeolyst Joint Venture were about half of prior year levels [22] - Performance Chemicals: Sales of $149 million were down 12% versus last year, reflecting lower volumes from weaker demand in various applications [23] - Performance Materials: Sales of $105 million declined 9%, with steady demand in North America but slowed striping activity due to COVID-related work restrictions [24] Market Data and Key Metrics Changes - Global gasoline demand has been steady at above 90% of 2019 levels since June, with US refinery utilization recovering to about 80% before temporary shutdowns due to hurricanes [11][12] - Demand for high-grade virgin sulfuric acid improved significantly, with volumes up 20% from the second quarter [21] - Automotive sales in the US continued to increase to greater than 90% of 2019 levels [13] Company Strategy and Development Direction - The company announced the sale of Performance Materials at an attractive valuation, representing a significant milestone in its strategy to focus on higher-margin and higher-growth potential businesses [10][30] - The strategic review of Performance Chemicals may lead to a sale in 2021, aimed at unlocking greater shareholder value [30][31] - The company plans to focus on refining services and catalysts, emphasizing businesses with higher margins and growth potential [32][33] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism that the trough is behind them, with expectations for demand recovery in the fourth quarter and beyond, except for catalysts which will have a delayed recovery timeline [19] - The company remains confident in its position with existing customers and anticipates utilization rates to return to normal levels [42] Other Important Information - The company is suspending adjusted EPS guidance for the year due to ongoing tax effects from the divestiture [27] - Plans to deploy up to $250 million to a special dividend, subject to board authorization [28] Q&A Session Summary Question: Q4 guidance appears wide; can you discuss business momentum? - Management noted continued volume recovery and maintained expectations for Q4 based on October performance [39] Question: Thoughts on Performance Chemicals in the portfolio? - Management confirmed a firm plan is in place and execution is ongoing [40] Question: Outlook for refining services business in 2021? - Management expressed confidence in the existing customer base and expected utilization rates to be at 90% to 92% [42] Question: CapEx outlook for core businesses? - Approximately 80% of remaining capital is for maintenance, with 20% for growth [44] Question: Insights on chemicals portfolio and long-term growth prospects? - Management highlighted recovery in end-user demand and positive outlook for Q4 and beyond [47] Question: Catalysts market outlook and potential pent-up demand? - Management anticipates recovery in 2021, with stronger acceleration expected towards the end of 2022 [50] Question: Impact of recent hurricanes on operations? - Management reported no substantial impact from recent hurricanes [54] Question: Silica catalysts guidance for Q4? - Management clarified that the yellow color in guidance indicates stabilization, not a drop in demand [57] Question: Changes in highway striping business due to COVID? - Management explained that operational procedures, not lockdowns, caused slowdowns in certain states [59]

[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2020, including income, balance sheets, and cash flows, highlighting COVID-19 impact and debt refinancing Condensed Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | **Sales** | $359,525 | $431,675 | $721,123 | $790,896 | | **Gross Profit** | $92,839 | $115,495 | $181,438 | $196,405 | | **Operating Income** | $41,178 | $70,301 | $64,537 | $99,764 | | **Net Income Attributable to PQ** | $15,926 | $30,574 | $16,150 | $33,725 | | **Diluted EPS** | $0.12 | $0.23 | $0.12 | $0.25 | Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | $587,704 | $568,591 | | **Total Assets** | $4,247,210 | $4,320,845 | | **Total Current Liabilities** | $221,118 | $269,468 | | **Total Liabilities** | $2,471,036 | $2,535,527 | | **Total Equity** | $1,776,174 | $1,785,318 | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended, in thousands) | Metric | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $62,109 | $59,992 | | **Net cash used in investing activities** | ($36,222) | ($33,857) | | **Net cash used in financing activities** | ($5,955) | ($401) | | **Net change in cash** | $16,671 | $24,233 | [Note 1. Background and Basis of Presentation](index=10&type=section&id=Note%201.%20Background%20and%20Basis%20of%20Presentation) This note describes the company's specialty businesses and the significant impact of the COVID-19 pandemic on economic activity, while manufacturing continued with limited interruptions - The company operates four specialty businesses: Refining Services, Catalysts, Performance Materials, and Performance Chemicals[24](index=24&type=chunk) - The COVID-19 outbreak was declared a national emergency in March 2020, impacting economic activity; the company's manufacturing operations have continued with limited interruptions[26](index=26&type=chunk) - Seasonality affects the Performance Materials and Refining Services segments, with lower sales typically in Q1 and Q4 for Performance Materials and fluctuations in Refining Services tied to gasoline demand[24](index=24&type=chunk) [Note 6. Asset Swap Transaction](index=22&type=section&id=Note%206.%20Asset%20Swap%20Transaction) On February 19, 2020, the company executed a non-cash asset swap, exchanging its ThermoDrop® product line for a beads business, resulting in **$7.7 million** goodwill and a **$6.5 million** pre-tax loss - On February 19, 2020, the company entered into a non-cash asset swap, exchanging its ThermoDrop® product line for a beads business to expand its geographic footprint[64](index=64&type=chunk)[65](index=65&type=chunk) Asset Swap Purchase Price Allocation (in thousands) | Item | Amount | | :--- | :--- | | Total consideration | $28,598 | | Fair value of net assets acquired | $20,868 | | **Goodwill** | **$7,730** | | Pre-tax loss on disposal recognized | $6,475 | [Note 13. Long-term Debt](index=27&type=section&id=Note%2013.%20Long-term%20Debt) As of June 30, 2020, total debt was approximately **$1.93 billion**, with a subsequent July 2020 refinancing of **$625 million** notes via a new **$650 million** term loan Long-term Debt Summary (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Term Loan Facility | $947,497 | $947,497 | | 6.75% Senior Secured Notes | $625,000 | $625,000 | | 5.75% Senior Unsecured Notes | $295,000 | $295,000 | | **Total debt** | **$1,932,981** | **$1,932,126** | - In July 2020, the company refinanced its **$625 million** 6.75% Senior Secured Notes with a new **$650 million** senior secured term loan facility at a floating rate of LIBOR + 3.0% (with a 1.0% floor)[85](index=85&type=chunk) [Note 18. Reportable Segments](index=34&type=section&id=Note%2018.%20Reportable%20Segments) This note details sales and Segment Adjusted EBITDA by segment for Q2 2020, showing declines across most segments except for growth in Catalysts sales Sales by Segment (Three Months Ended June 30, in thousands) | Segment | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Refining Services | $90,432 | $117,290 | (22.9)% | | Catalysts | $25,208 | $20,857 | 20.9% | | Performance Materials | $104,203 | $118,872 | (12.3)% | | Performance Chemicals | $142,641 | $177,828 | (19.8)% | | **Total Sales** | **$359,525** | **$431,675** | **(16.7)%** | Segment Adjusted EBITDA (Three Months Ended June 30, in thousands) | Segment | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Refining Services | $34,996 | $42,824 | (18.2)% | | Catalysts | $25,312 | $29,607 | (14.5)% | | Performance Materials | $27,306 | $29,221 | (6.5)% | | Performance Chemicals | $34,011 | $41,165 | (17.5)% | | **Total Segment Adjusted EBITDA** | **$121,625** | **$142,817** | **(14.8)%** | [Note 22. Subsequent Events](index=40&type=section&id=Note%2022.%20Subsequent%20Events) Significant post-balance sheet events in July 2020 include the sale of a non-core product line, a major debt refinancing, and new interest rate cap agreements - In July 2020, the company sold a non-core product line in its Performance Chemicals segment for **$18 million** and entered into a related tolling arrangement with the buyer through July 2025[127](index=127&type=chunk) - In July 2020, the company completed a major debt refinancing, issuing a new senior secured term loan to redeem its 6.75% Senior Secured Notes due 2022[127](index=127&type=chunk) - In July 2020, the company entered into new interest rate cap agreements on a notional amount of **$400 million**[127](index=127&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes financial performance for Q2 and YTD 2020, detailing the significant negative impact of COVID-19 on sales and outlining liquidity management actions - The COVID-19 pandemic led to unprecedented disruptions and an overall lower sales volume demand during Q2 2020, with the Refining Services segment being impacted the most due to significant reductions in U.S. gasoline demand[136](index=136&type=chunk) - To mitigate the slowdown, the company adjusted production levels, reduced discretionary spending, implemented furloughs, and deferred capital maintenance expenditures[136](index=136&type=chunk) - As of June 30, 2020, the company had total available liquidity of **$285.3 million** and believes its existing cash and credit facilities are sufficient to meet cash needs for at least the next twelve months[210](index=210&type=chunk) [Results of Operations - Three Months Ended June 30, 2020 vs 2019](index=47&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030%2C%202020%20vs%202019) Q2 2020 sales decreased **16.7%** to **$359.5 million**, with gross profit down **19.7%** and net income attributable to PQ Group Holdings falling **48.0%** Q2 2020 vs Q2 2019 Performance (in millions) | Metric | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Sales** | $359.5 | $431.7 | $(72.2) | (16.7)% | | **Gross Profit** | $92.8 | $115.5 | $(22.7) | (19.7)% | | **Operating Income** | $41.2 | $70.3 | $(29.1) | (41.4)% | | **Net Income (to PQ)** | $15.9 | $30.6 | $(14.7) | (48.0)% | - Refining Services sales fell **22.9%** due to lower gasoline consumption from COVID-19 stay-at-home orders; Catalysts sales grew **20.6%** due to increased demand for chemical and polyolefin catalysts[155](index=155&type=chunk) - Performance Chemicals sales decreased **19.8%** due to lower volumes of sodium silicate sold to industrial customers affected by COVID-19 related slowdowns[157](index=157&type=chunk) [Results of Operations - Six Months Ended June 30, 2020 vs 2019](index=55&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030%2C%202020%20vs%202019) YTD 2020 sales decreased **8.8%** to **$721.1 million**, with gross profit down **7.6%** and net income attributable to PQ Group Holdings falling **51.9%** YTD 2020 vs YTD 2019 Performance (in millions) | Metric | YTD 2020 | YTD 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Sales** | $721.1 | $790.9 | $(69.8) | (8.8)% | | **Gross Profit** | $181.4 | $196.4 | $(15.0) | (7.6)% | | **Operating Income** | $64.5 | $99.7 | $(35.2) | (35.3)% | | **Net Income (to PQ)** | $16.2 | $33.7 | $(17.5) | (51.9)% | - Catalysts sales grew **36.5%** YTD due to higher customer demand for polyolefin catalysts and timing of chemical catalyst orders[184](index=184&type=chunk) - Other operating expense increased by **$22.1 million**, driven by transaction-related costs and asset write-offs from the asset swap, compared to a prior-year period that included a gain on an asset sale[189](index=189&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=65&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) The company's liquidity sources include cash from operations and its ABL facility, with **$285.3 million** available liquidity as of June 30, 2020, deemed sufficient for the next 12 months Cash Flow Summary (Six Months Ended June 30, in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $62.1 | $60.0 | | Net cash used in investing activities | $(36.2) | $(33.9) | | Net cash used in financing activities | $(5.9) | $(0.3) | - Capital expenditures were significantly lower in the first six months of 2020 (**$33.7 million**) compared to 2019 (**$51.4 million**), with reductions in both maintenance and growth spending[220](index=220&type=chunk) - As of June 30, 2020, total debt was **$1.933 billion**, with net debt of **$1.844 billion** after accounting for **$88.6 million** in cash[217](index=217&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to market risks, including foreign currency, interest rates, and commodity prices, and its use of derivative instruments for hedging - The company's major market risks are foreign currency exchange, interest rate, commodity price, and credit risk[228](index=228&type=chunk) - In 2020, the company entered into several new interest rate cap agreements to manage interest rate risk, including agreements in February, March, and July covering notional amounts of **$500 million** and **$400 million**[229](index=229&type=chunk) [Item 4. Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls were effective as of June 30, 2020, with remote work due to COVID-19 not materially affecting internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2020[231](index=231&type=chunk) - Despite the majority of office personnel working remotely due to COVID-19, there were no changes that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[232](index=232&type=chunk) [PART II OTHER INFORMATION](index=72&type=section&id=PART%20II%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) The company believes no pending litigation is likely to have a material adverse effect on its business, financial condition, or operations - The company is not aware of any pending litigation that is likely to have a material adverse effect on its business, financial condition, or operations[235](index=235&type=chunk) [Item 1A. Risk Factors](index=72&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, focusing on the significant and ongoing adverse effects of the COVID-19 pandemic on operations, sales demand, and supply chain disruptions - The COVID-19 pandemic has adversely affected the company's operations and is expected to have continued negative effects, the full extent of which is unpredictable[236](index=236&type=chunk) - The pandemic has led to lower sales volume demand, especially in the Refining Services, Performance Chemicals, and Catalysts segments, and has caused disruptions in the availability of raw materials[236](index=236&type=chunk) - Employee absenteeism related to COVID-19 has caused production delays at several manufacturing facilities, and further outbreaks or government orders could lead to additional disruptions[236](index=236&type=chunk) [Item 6. Exhibits](index=73&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including the new Term Loan Credit Agreement and required Sarbanes-Oxley Act certifications from the CEO and CFO - A key exhibit filed is the New Term Loan Credit Agreement from July 2020, reflecting the company's recent debt refinancing activities[238](index=238&type=chunk) - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[238](index=238&type=chunk)

Financial Performance and Key Metrics - The company reported revenues of $360 million for Q2 2020, leading to adjusted EBITDA of $113 million, which exceeded the recently increased guidance [9][10] - Adjusted EBITDA margins for the quarter were 28%, consistent with the previous year, reflecting effective cost management despite lower demand [9][10] - Adjusted free cash flow for the quarter totaled $44 million, significantly higher than the prior year, driven by capital discipline and reduced interest costs [25] Business Segment Performance - **Refining Services**: Sales decreased by 23% to $90 million, primarily due to lower volumes from reduced driving miles, but volumes improved by approximately 10% in June compared to April [26] - **Catalysts**: Silica Catalysts sales increased by 24% to $25 million, driven by strong demand for packaging and engineering plastics, while Zeolyst Joint Venture sales rose 5% to $41 million [28] - **Performance Materials**: Sales declined by 11% on a constant currency basis, with stable North American highway safety volumes offset by weakness in industrial applications [29] - **Performance Chemicals**: Sales were down 15% to $143 million, with a favorable sales mix offset by an 18% decline in volumes [30] Market Trends and Key Indicators - Approximately 70% of product sales are expected to come from end uses that are stable or improving in the second half of the year [15] - Gasoline consumption in the U.S. rebounded to about 90% of 2019 levels by the end of June, indicating a potential recovery in demand [16] - Demand for sodium silicates is expected to improve as GDP growth drives industrial and construction activities [70] Company Strategy and Industry Competition - The company is focused on safeguarding existing business and securing new contracts, with nearly 15% of future annual volume locked in under long-term contracts [8][21] - The company aims to maintain high margins and cash flows while exploring additional ways to reshape its portfolio for future growth [42][90] - The management emphasized the importance of cost management and capital discipline to navigate the ongoing challenges presented by the COVID-19 pandemic [46] Management Commentary on Operating Environment and Future Outlook - Management expressed cautious optimism about demand recovery in the second half of the year, despite uncertainties regarding the timing [12][36] - The company is raising its adjusted free cash flow outlook for the full year to $145 million to $155 million, reflecting improved operating cash flow and lower interest costs [40] - Management highlighted the importance of maintaining a strong focus on safety and operational integrity during the ongoing pandemic [45] Other Important Information - The company completed a comprehensive refinancing during the quarter, extending maturities and significantly lowering cash interest costs [10][32] - The company has a strong liquidity position with $285 million of availability, including $89 million in cash [34] Q&A Session Summary Question: Trends in Silica Catalysts business - Management noted that demand was pulled forward in the Silica Catalysts business, with some orders accelerated into the quarter [50] Question: Margin improvement sustainability - Management indicated that cost savings will continue to benefit margins, guiding for a full-year margin around 27% [53] Question: Free cash flow and EBITDA conversion - Management explained that lower interest costs and tight working capital management contributed to improved cash conversion rates [56] Question: Asset monetization pipeline - Management confirmed a pipeline of smaller transactions aimed at optimizing the quality of earnings and cash flow [58] Question: Capital allocation strategy - Management emphasized debt reduction as the top priority, with potential for dividends and bolt-on acquisitions in the future [62] Question: Recovery expectations for Performance Chemicals - Management anticipates a steady recovery in sodium silicate orders as GDP growth stabilizes [70] Question: Catalysts business outlook for 2021 - Management expects a positive rebound in the Catalysts segment, particularly in hydrocracking demand [74]

[PART I—FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) This section presents the unaudited condensed consolidated financial statements for PQ Group Holdings Inc., including statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with detailed notes. Key financial highlights for Q1 2020 include a significant decrease in net income attributable to the company, a comprehensive loss, and an increase in total debt, while cash and cash equivalents improved. The notes provide context on business operations, accounting policies, segment performance, and the initial impact of COVID-19 [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Condensed Consolidated Statements of Income | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Sales | $361,598 | $359,221 | +0.7% | | Cost of goods sold | $272,999 | $278,311 | -1.9% | | Gross profit | $88,599 | $80,910 | +9.5% | | Operating income | $23,359 | $29,463 | -20.8% | | Income before income taxes and noncontrolling interest | $1,936 | $5,888 | -67.1% | | Net income | $509 | $3,441 | -85.2% | | Net income attributable to PQ Group Holdings Inc. | $224 | $3,151 | -92.9% | | Basic income per share | $0 | $0.02 | -100% | | Diluted income per share | $0 | $0.02 | -100% | [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Condensed Consolidated Statements of Comprehensive Income | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :------------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income | $509 | $3,441 | | Other comprehensive income (loss), net of tax: | | | | Pension and postretirement benefits | $(15) | $(30) | | Net loss from hedging activities | $(529) | $(1,552) | | Foreign currency translation | $(46,355) | $7,167 | | Total other comprehensive income (loss) | $(46,899) | $5,585 | | Comprehensive income (loss) | $(46,390) | $9,026 | | Comprehensive income (loss) attributable to PQ Group Holdings Inc. | $(43,187) | $8,421 | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change | | :------------------------------------ | :------------------------------ | :------------------------------- | :----- | | Cash and cash equivalents | $107,667 | $72,284 | +$35,383 | | Total current assets | $611,083 | $568,591 | +$42,492 | | Total assets | $4,296,871 | $4,320,845 | -$23,974 | | Total current liabilities | $246,354 | $269,468 | -$23,114 | | Long-term debt, excluding current portion | $1,961,687 | $1,899,196 | +$62,491 | | Total liabilities | $2,555,731 | $2,535,527 | +$20,204 | | Total equity | $1,741,140 | $1,785,318 | -$44,178 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Condensed Consolidated Statements of Stockholders' Equity | Equity Component | Balance, Dec 31, 2019 (in thousands) | Net Income (in thousands) | Other Comprehensive Income (in thousands) | Repurchases of Common Shares (in thousands) | Stock Compensation Expense (in thousands) | Balance, March 31, 2020 (in thousands) | | :--------------------------------- | :----------------------------------- | :------------------------ | :---------------------------------------- | :------------------------------------------ | :---------------------------------------- | :------------------------------------- | | Common stock | $1,369 | — | — | — | — | $1,373 | | Additional paid-in capital | $1,696,899 | — | — | — | $5,920 | $1,702,996 | | Retained earnings | $103,013 | $224 | — | — | — | $103,237 | | Treasury stock, at cost | $(6,483) | — | — | $(3,889) | — | $(10,372) | | Accumulated other comprehensive income (loss) | $(15,348) | — | $(43,411) | — | — | $(58,759) | | Noncontrolling interest | $5,868 | $285 | $(3,488) | — | — | $2,665 | | Total | $1,785,318 | $509 | $(46,899) | $(3,889) | $5,920 | $1,741,140 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | Change (YoY) | | :---------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Net cash provided by operating activities | $4,531 | $26,838 | -$22,307 | | Net cash used in investing activities | $(22,198) | $(29,267) | +$7,069 | | Net cash provided by (used in) financing activities | $58,301 | $(2,552) | +$60,853 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | $(4,263) | $(660) | -$3,603 | | Net change in cash, cash equivalents and restricted cash | $36,371 | $(5,641) | +$42,012 | | Cash, cash equivalents and restricted cash at end of period | $110,288 | $54,085 | +$56,203 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Background and Basis of Presentation](index=10&type=section&id=Note%201.%20Background%20and%20Basis%20of%20Presentation) - PQ Group Holdings Inc. operates four specialty businesses: Refining Services, Catalysts, Performance Materials, and Performance Chemicals, providing inorganic products and services globally[24](index=24&type=chunk) - The Performance Materials and Refining Services segments experience seasonal fluctuations, with lower sales and profit in Q1 and Q4 for Performance Materials (due to warmer weather for highway striping) and higher demand for gasoline products in summer months for Refining Services. This seasonality leads to higher working capital requirements in Q1 and Q2[24](index=24&type=chunk) - The COVID-19 pandemic did not have a material adverse impact on the company's results of operations for the three months ended March 31, 2020, though the company continues to monitor its effects[26](index=26&type=chunk) [Note 2. New Accounting Standards](index=10&type=section&id=Note%202.%20New%20Accounting%20Standards) - Adopted new FASB guidance on expected credit losses (effective Jan 1, 2020) with no material impact[27](index=27&type=chunk) - Adopted new FASB guidance modifying fair value measurement disclosures (effective Jan 1, 2020) with no impact on disclosures as no Level 3 assets/liabilities or transfers occurred[30](index=30&type=chunk) - Adopted new FASB guidance eliminating the second step of the goodwill impairment test (effective Jan 1, 2020), applying it prospectively[30](index=30&type=chunk) - Evaluating new FASB guidance to simplify income tax accounting, effective for fiscal years beginning after December 15, 2020[31](index=31&type=chunk) [Note 3. Revenue from Contracts with Customers](index=12&type=section&id=Note%203.%20Revenue%20from%20Contracts%20with%20Customers) Disaggregated Sales by Segment and End Use (Three Months Ended March 31, 2020 vs 2019) | End Use | Refining Services (2020) | Catalysts (2020) | Performance Materials (2020) | Performance Chemicals (2020) | Total (2020) | Refining Services (2019) | Catalysts (2019) | Performance Materials (2019) | Performance Chemicals (2019) | Total (2019) | | :-------------------------------- | :----------------------- | :--------------- | :--------------------------- | :--------------------------- | :----------- | :----------------------- | :--------------- | :--------------------------- | :--------------------------- | :----------- | | Industrial & process chemicals | $19,359 | $47 | $12,123 | $59,833 | $91,362 | $18,402 | $276 | $13,028 | $59,652 | $91,358 | | Fuels & emission control | $55,710 | — | $40 | — | $55,750 | $57,690 | — | — | — | $57,690 | | Packaging & engineered plastics | $10,734 | $24,817 | $17,471 | $14,275 | $67,297 | $12,689 | $15,590 | $17,382 | $14,730 | $60,391 | | Highway safety & construction | — | — | $32,643 | $20,190 | $52,833 | — | — | $27,360 | $21,938 | $49,298 | | Consumer products | — | — | — | $64,026 | $64,026 | — | — | — | $68,509 | $68,509 | | Natural resources | $14,887 | — | $3,292 | $15,955 | $34,134 | $17,063 | — | $3,319 | $15,633 | $36,015 | | **Total Sales (after eliminations)** | **$99,765** | **$24,817** | **$65,515** | **$171,501** | **$361,598** | **$104,957** | **$15,590** | **$61,041** | **$177,633** | **$359,221** | - The company recognized **$1,269 thousand** in revenue from a contract liability related to the sale of a sulfate salts product line during Q1 2020, with **$5,175 thousand** remaining as deferred revenue[39](index=39&type=chunk) [Note 4. Fair Value Measurements](index=13&type=section&id=Note%204.%20Fair%20Value%20Measurements) - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[44](index=44&type=chunk) Fair Value Measurements (March 31, 2020 vs December 31, 2019) | Asset/Liability | March 31, 2020 (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | December 31, 2019 (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :--------------------------- | :---------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------------------- | :--------------------- | :--------------------- | :--------------------- | | **Assets:** | | | | | | | | | | Derivative contracts | $10,604 | — | $10,604 | — | $3,928 | — | $3,928 | — | | Restoration plan assets | $3,435 | $3,435 | — | — | $4,199 | $4,199 | — | — | | **Total Assets** | **$14,039** | **$3,435** | **$10,604** | **—** | **$8,127** | **$4,199** | **$3,928** | **—** | | **Liabilities:** | | | | | | | | | | Derivative contracts | $5,217 | — | $5,217 | — | $12,415 | — | $12,415 | — | - Restoration plan assets are valued using Level 1 inputs (quoted prices in active markets) and include stock and fixed income mutual funds held in a Rabbi trust[47](index=47&type=chunk) - Derivative contracts (interest rate caps, natural gas swaps, cross-currency swaps) are fair valued using Level 2 inputs, with credit valuation adjustments based on credit default swaps[48](index=48&type=chunk) [Note 5. Stockholders' Equity](index=16&type=section&id=Note%205.%20Stockholders%27%20Equity) Components of Other Comprehensive Income (Loss), Net of Tax (Three Months Ended March 31, 2020 vs 2019) | Component | 2020 After-tax amount (in thousands) | 2019 After-tax amount (in thousands) | | :---------------------------------------- | :----------------------------------- | :----------------------------------- | | Defined benefit and other postretirement plans, net | $(15) | $(30) | | Net loss from hedging activities | $(529) | $(1,552) | | Foreign currency translation | $(46,355) | $7,167 | | **Total Other Comprehensive Income (Loss)** | **$(46,899)** | **$5,585** | - The accumulated other comprehensive loss **increased** from **$(15,348) thousand** at December 31, 2019, to **$(58,759) thousand** at March 31, 2020, primarily due to a **$(42,867) thousand** foreign currency translation loss before reclassifications[52](index=52&type=chunk) - The Board of Directors authorized a **$50 million** stock repurchase program in March 2020, valid until March 2022. By March 31, 2020, the company repurchased **211,700 shares** for **$2,059 thousand**, with **$47,941 thousand** remaining[57](index=57&type=chunk) [Note 6. Asset Swap Transaction](index=19&type=section&id=Note%206.%20Asset%20Swap%20Transaction) - On February 19, 2020, the company entered into a non-cash asset swap, exchanging its ThermoDrop® product line assets for a beads business (inventory, production equipment, two manufacturing facilities) from a thermoplastic producer[58](index=58&type=chunk) - A preliminary loss on disposal of **$9,907 thousand** was recognized during Q1 2020, included in other operating expense, net[61](index=61&type=chunk) - The acquisition of the beads business resulted in the recognition of **$5,764 thousand** in goodwill, assigned to the Performance Materials segment, aimed at expanding geographic footprint and achieving synergies[61](index=61&type=chunk) [Note 7. Goodwill](index=21&type=section&id=Note%207.%20Goodwill) Goodwill Carrying Amount by Segment (March 31, 2020 vs December 31, 2019) | Segment | Balance as of Dec 31, 2019 (in thousands) | Goodwill Recognized (in thousands) | Foreign Exchange Impact (in thousands) | Balance as of March 31, 2020 (in thousands) | | :---------------------- | :---------------------------------------- | :------------------------- | :------------------------------------- | :---------------------------------------- | | Refining Services | $311,892 | — | — | $311,892 | | Catalysts | $78,611 | — | $(1,438) | $77,173 | | Performance Materials | $275,919 | $5,764 | $(1,745) | $279,938 | | Performance Chemicals | $593,383 | — | $(13,652) | $579,731 | | **Total** | **$1,259,805** | **$5,764** | **$(16,835)** | **$1,248,734** | [Note 8. Other Operating Expense, Net](index=22&type=section&id=Note%208.%20Other%20Operating%20Expense%2C%20Net) Other Operating Expense, Net (Three Months Ended March 31, 2020 vs 2019) | Expense Type | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Amortization expense | $8,637 | $8,664 | | Transaction and other related costs | $1,869 | — | | Restructuring and other related costs | $1,989 | — | | Net loss on asset disposals | $9,420 | $820 | | Other, net | $27 | $1,255 | | **Total Other Operating Expense, Net** | **$21,942** | **$10,739** | - The net loss on asset disposals of **$9,420 thousand** in Q1 2020 includes a **$9,907 thousand** loss from the asset swap and a **$672 thousand** gain from the sale of interest in the Quaker Holdings joint venture[65](index=65&type=chunk) [Note 9. Inventories, Net](index=22&type=section&id=Note%209.%20Inventories%2C%20Net) Inventories, Net (March 31, 2020 vs December 31, 2019) | Inventory Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Finished products and work in process | $217,426 | $222,940 | | Raw materials | $47,616 | $58,005 | | **Total Inventories, Net** | **$265,042** | **$280,945** | [Note 10. Investments in Affiliated Companies](index=22&type=section&id=Note%2010.%20Investments%20in%20Affiliated%20Companies) - The company accounts for investments in affiliated companies under the equity method, including **50%** ownership in PQ Silicates Ltd., Zeolyst International, and Zeolyst C.V[67](index=67&type=chunk) - In March 2020, the company sold its **49%** interest in the Quaker Holdings joint venture, receiving a liquidating dividend of **$729 thousand** and **$1,032 thousand** from the sale of shares[69](index=69&type=chunk) Summarized Combined Investments Information (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :----------------- | :----------------------------------------------- | :----------------------------------------------- | | Sales | $71,207 | $68,094 | | Gross profit | $31,139 | $19,414 | | Operating income | $21,009 | $9,207 | | Net income | $20,035 | $9,240 | [Note 11. Property, Plant and Equipment](index=23&type=section&id=Note%2011.%20Property%2C%20Plant%20and%20Equipment) Property, Plant and Equipment, Net (March 31, 2020 vs December 31, 2019) | Asset Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :------------------------------ | :------------------------------- | | Land | $176,502 | $183,117 | | Buildings | $220,898 | $221,449 | | Machinery and equipment | $1,226,748 | $1,236,531 | | Construction in progress | $76,375 | $82,687 | | Less: accumulated depreciation | $(552,644) | $(537,014) | | **Total Property, Plant and Equipment, Net** | **$1,147,879** | **$1,186,770** | - Depreciation expense was **$33,501 thousand** for the three months ended March 31, 2020, compared to **$33,154 thousand** for the same period in 2019[70](index=70&type=chunk) [Note 12. Long-term Debt](index=24&type=section&id=Note%2012.%20Long-term%20Debt) Long-term Debt Summary (March 31, 2020 vs December 31, 2019) | Debt Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------------------------------------- | :------------------------------ | :------------------------------- | | Term Loan Facility | $947,497 | $947,497 | | 6.75% Senior Secured Notes due 2022 | $625,000 | $625,000 | | 5.75% Senior Unsecured Notes due 2025 | $295,000 | $295,000 | | ABL Facility | $63,989 | — | | Other | $65,283 | $64,629 | | **Total debt** | **$1,996,769** | **$1,932,126** | | Less: current portion | $(8,489) | $(7,766) | | **Total long-term debt, excluding current portion** | **$1,961,687** | **$1,899,196** | - The Term Loan Facility was amended in Q1 2020 to reduce interest rates (LIBOR plus **2.25%**) and extend maturity to February 7, 2027, resulting in **$2,188 thousand** of new financing costs and **$325 thousand** of written-off deferred financing costs/original issue discount as debt extinguishment costs[76](index=76&type=chunk) - The ABL Facility was amended on March 20, 2020, **increasing** revolving loan commitments by **$50 million** to **$250 million**, reducing interest rates, and extending maturity to March 20, 2025[77](index=77&type=chunk) [Note 13. Financial Instruments](index=24&type=section&id=Note%2013.%20Financial%20Instruments) - The company uses interest rate derivatives (caps), commodity derivatives (natural gas swaps), and foreign currency derivatives (cross-currency interest rate swaps) to manage market risks, not for speculation[78](index=78&type=chunk) - Natural gas swaps are designated as cash flow hedges, with gains/losses recorded in OCI and reclassified to cost of goods sold when inventory is sold. As of March 31, 2020, **3.1 million MMBTU** notional quantity remains through December 2021[81](index=81&type=chunk) - Interest rate cap agreements are cash flow hedges, with gains/losses recorded in OCI and reclassified to interest expense. In Q1 2020, the company restructured **$500 million** notional variable-rate debt interest rate cap agreements to lower the cap rate to **0.84%** (from **2.50%**) through July 2022, incurring an additional **$900 thousand** premium[81](index=81&type=chunk) Fair Values of Derivative Instruments (March 31, 2020 vs December 31, 2019) | Derivative Type | Balance Sheet Location | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :--------------------------------------- | :------------------------------ | :------------------------------- | | **Derivative Assets:** | | | | | Cross-currency interest rate swaps | Prepaid and other current assets | $5,234 | $3,928 | | Cross-currency interest rate swaps | Other long-term assets | $5,370 | — | | **Total Derivative Assets** | | **$10,604** | **$3,928** | | **Derivative Liabilities:** | | | | | Natural gas swaps | Accrued liabilities | $995 | $813 | | Interest rate caps | Accrued liabilities | $1,073 | $420 | | Natural gas swaps | Other long-term liabilities | $386 | $226 | | Interest rate caps | Other long-term liabilities | $2,763 | $2,822 | | Cross-currency swaps | Other long-term liabilities | — | $8,134 | | **Total Derivative Liabilities** | | **$5,217** | **$12,415** | [Note 14. Income Taxes](index=27&type=section&id=Note%2014.%20Income%20Taxes) Effective Income Tax Rate (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Provision for income taxes | $1,427 | $2,447 | | Effective tax rate | 73.7% | 41.6% | - The **effective tax rate** for Q1 2020 was **73.7%**, up from **41.6%** in Q1 2019, mainly due to permanent differences from foreign currency exchange gain/loss, GILTI impacts, discrete tax impacts of the asset swap, pre-tax losses with no associated tax benefit, and state taxes[89](index=89&type=chunk) - The company elected to treat taxes incurred from GILTI provisions as a current-period expense and uses the tax law ordering approach for assessing deferred tax assets[92](index=92&type=chunk) [Note 15. Benefit Plans](index=28&type=section&id=Note%2015.%20Benefit%20Plans) Defined Benefit Pension Plans - Net Periodic Expense (Benefit) (Three Months Ended March 31, 2020 vs 2019) | Component | U.S. 2020 (in thousands) | U.S. 2019 (in thousands) | Foreign 2020 (in thousands) | Foreign 2019 (in thousands) | | :--------------------------------- | :----------------------- | :----------------------- | :-------------------------- | :-------------------------- | | Service cost | $192 | $219 | $997 | $806 | | Interest cost | $2,152 | $2,507 | $707 | $833 | | Expected return on plan assets | $(3,331) | $(2,757) | $(810) | $(603) | | Amortization of net loss | — | — | $41 | — | | Amortization of prior service cost | — | — | $6 | — | | **Net periodic expense (benefit)** | **$(987)** | **$(31)** | **$941** | **$1,036** | Supplemental Retirement Plans - Net Periodic Expense (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Interest cost | $86 | $121 | | **Net periodic expense** | **$86** | **$121** | Other Postretirement Benefit Plans - Net Periodic Expense (Benefit) (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :--------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Service cost | — | $3 | | Interest cost | $24 | $38 | | Amortization of prior service credit | $(58) | $(33) | | Amortization of net gain | $(7) | $(8) | | **Net periodic expense (benefit)** | **$(41)** | **—** | [Note 16. Commitments and Contingent Liabilities](index=29&type=section&id=Note%2016.%20Commitments%20and%20Contingent%20Liabilities) - The company faces environmental impact risks in chemical manufacturing and is subject to various lawsuits and claims (personal injury, product liability, waste disposal)[97](index=97&type=chunk) - Management believes existing accruals are adequate and that these matters will not materially adversely affect the company's consolidated financial position, results of operations, or liquidity[97](index=97&type=chunk) [Note 17. Reportable Segments](index=30&type=section&id=Note%2017.%20Reportable%20Segments) Segment Sales (Three Months Ended March 31, 2020 vs 2019) | Segment | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | Change (YoY) | | :---------------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Refining Services | $100,690 | $105,844 | -4.8% | | Catalysts | $24,864 | $15,866 | +56.7% | | Performance Materials | $65,569 | $61,089 | +7.3% | | Performance Chemicals | $174,279 | $180,462 | -3.4% | | **Total Sales (after eliminations)** | **$361,598** | **$359,221** | **+0.7%** | Segment Adjusted EBITDA (Three Months Ended March 31, 2020 vs 2019) | Segment | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | Change (YoY) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Refining Services | $37,183 | $39,731 | -6.4% | | Catalysts | $22,667 | $18,127 | +25.0% | | Performance Materials | $13,507 | $10,515 | +28.4% | | Performance Chemicals | $40,474 | $42,673 | -5.2% | | **Total Segment Adjusted EBITDA** | **$113,831** | **$111,046** | **+2.5%** | - Adjusted EBITDA for the Zeolyst Joint Venture (included in Catalysts segment) was **$13,725 thousand** in Q1 2020, up from **$8,357 thousand** in Q1 2019, driven by **increased** equity in net income and joint venture depreciation, amortization, and interest[100](index=100&type=chunk) [Note 18. Stock-Based Compensation](index=31&type=section&id=Note%2018.%20Stock-Based%20Compensation) - Total stock-based compensation expense for Q1 2020 was **$5,920 thousand**, up from **$3,400 thousand** in Q1 2019[109](index=109&type=chunk) - In Q1 2020, the company granted **1,144,072 restricted stock units** (service-based vesting) and **456,311 performance stock units** (**50%** financial target, **50%** TSR goal over three years)[105](index=105&type=chunk) - Unrecognized compensation cost for nonvested restricted stock units and performance stock units was **$31,661 thousand** and **$13,709 thousand**, respectively, as of March 31, 2020, to be recognized over weighted-average periods of **2.04** and **2.4 years**[109](index=109&type=chunk) Stock-Based Compensation Activity (Three Months Ended March 31, 2020) | Award Type | Nonvested as of Dec 31, 2019 (Number of Units) | Granted (Number of Units) | Vested (Number of Units) | Forfeited (Number of Units) | Nonvested as of March 31, 2020 (Number of Units) | | :-------------------- | :--------------------------------------------- | :------------------------ | :----------------------- | :-------------------------- | :----------------------------------------------- | | Restricted Stock Units | 1,628,436 | 1,144,072 | (431,755) | (77,848) | 2,262,905 | | Performance Stock Units | 550,676 | 456,311 | — | (31,069) | 975,918 | [Note 19. Earnings per Share](index=34&type=section&id=Note%2019.%20Earnings%20per%20Share) Earnings Per Share (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Net income attributable to PQ Group Holdings Inc. | $224 | $3,151 | | Weighted average shares outstanding – Basic | 135,240,897 | 133,946,308 | | Weighted average shares outstanding – Diluted | 136,086,082 | 134,894,354 | | Basic income per share | $0 | $0.02 | | Diluted income per share | $0 | $0.02 | - Anti-dilutive awards, including restricted stock awards, stock options with performance-only targets not yet achieved, and other anti-dilutive stock options, were excluded from diluted EPS calculations[115](index=115&type=chunk) [Note 20. Supplemental Cash Flow Information](index=36&type=section&id=Note%2020.%20Supplemental%20Cash%20Flow%20Information) Supplemental Cash Flow Information (Three Months Ended March 31, 2020 vs 2019) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | | :---------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Cash paid for income taxes, net of refunds | $10,346 | $4,387 | | Cash paid for interest | $19,973 | $23,740 | | Capital expenditures acquired on account but unpaid | $11,660 | $15,391 | | Right-of-use assets obtained for new lease liabilities | $1,850 | $508 | Reconciliation of Cash, Cash Equivalents and Restricted Cash (March 31, 2020 vs 2019) | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | | Cash and cash equivalents | $107,667 | $52,341 | | Restricted cash included in prepaid and other current assets | $2,621 | $1,744 | | **Total cash, cash equivalents and restricted cash shown in condensed consolidated statements of cash flows** | **$110,288** | **$54,085** | [Note 21. Subsequent Events](index=36&type=section&id=Note%2021.%20Subsequent%20Events) - No additional items to disclose from subsequent events evaluation since the balance sheet date[119](index=119&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=37&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2020, compared to the prior year. It highlights the slight **increase** in sales but a significant **decrease** in net income, largely influenced by an asset swap loss, debt extinguishment costs, and foreign currency impacts. The discussion also details the anticipated near-term effects of the COVID-19 pandemic on demand, operations, and liquidity, as well as segment-specific performance and key financial metrics like Adjusted EBITDA and Adjusted Net Income [Forward-looking Statements](index=37&type=section&id=Forward-looking%20Statements) - The report contains forward-looking statements regarding future events, financial results, business strategy, and financial needs, identified by words like "believe," "may," "will," "estimate," "continue," "anticipate," "intend," and "expect"[122](index=122&type=chunk) - Key risks and uncertainties include the impact of the COVID-19 pandemic, local business risks, general economic conditions, exchange rate fluctuations, legal and regulatory compliance, technological changes, raw material prices, competition, customer non-payment, seasonal fluctuations, and substantial indebtedness[122](index=122&type=chunk)[124](index=124&type=chunk) - The company does not undertake any obligation to publicly update forward-looking statements after the Form 10-Q filing date[124](index=124&type=chunk) [Overview](index=39&type=section&id=Overview) - PQ Group Holdings Inc. is a leading global provider of specialty catalysts, materials, chemicals, and services, with products predominantly inorganic and contributing to environmental sustainability[125](index=125&type=chunk) - The company operates through four reporting segments: Refining Services, Catalysts (including Zeolyst Joint Venture), Performance Materials, and Performance Chemicals[125](index=125&type=chunk) - Each segment serves distinct markets: Refining Services (sulfuric acid recycling), Catalysts (silica catalysts, zeolites for emission control), Performance Materials (transportation reflective safety markings), and Performance Chemicals (sodium silicates for industrial and consumer uses)[125](index=125&type=chunk) [Impact of COVID-19 on our Business and Results](index=39&type=section&id=Impact%20of%20COVID-19%20on%20our%20Business%20and%20Results) - The COVID-19 pandemic did not materially impact businesses in Q1 2020, but near-term demand is expected to **decrease** for certain products due to ongoing restrictions[129](index=129&type=chunk) - Anticipated demand impacts include reduced sulfuric acid demand in Refining Services, weaker demand for engineered glass materials and highway safety products outside the U.S. in Performance Materials, and lower demand for sodium silicate in industrial applications and consumer products in Performance Chemicals[129](index=129&type=chunk)[130](index=130&type=chunk) - Manufacturing operations continue as essential businesses, but limited and temporary shutdowns/slowdowns, production delays due to employee absenteeism, and minor raw material disruptions have occurred[131](index=131&type=chunk) - To strengthen liquidity, the company drew **$64.0 million** on its revolving credit facility, resulting in **$107.7 million** cash and **$236.3 million** total available liquidity as of March 31, 2020[132](index=132&type=chunk) - The Term Loan Facility and ABL Facility were amended to reduce interest rates and extend maturities, with no significant debt maturities before November 2022. The CARES Act had no material impact on Q1 2020 financial statements[132](index=132&type=chunk)[133](index=133&type=chunk) [Stock Repurchase Program](index=42&type=section&id=Stock%20Repurchase%20Program) - A **$50.0 million** share repurchase program was authorized by the Board of Directors on March 12, 2020, valid for **24 months**[136](index=136&type=chunk) - As of March 31, 2020, **211,700 shares** were repurchased for **$2.1 million** at an average price of **$9.73**, with **$47.9 million** remaining available under the program[136](index=136&type=chunk) [Key Performance Indicators](index=42&type=section&id=Key%20Performance%20Indicators) - Adjusted EBITDA and Adjusted Net Income are non-GAAP financial measures used for evaluating operating performance, business planning, and competitive comparison[137](index=137&type=chunk) - Adjusted EBITDA is defined as EBITDA adjusted for non-operating income/expense, certain non-cash/nonrecurring items, and the company's **50%** share of Zeolyst Joint Venture's depreciation, amortization, and interest[137](index=137&type=chunk) - Adjusted Net Income is defined as net income attributable to PQ Group Holdings adjusted for non-operating income/expense and certain non-cash/nonrecurring items[137](index=137&type=chunk) [Key Factors and Trends Affecting Operating Results and Financial Condition](index=42&type=section&id=Key%20Factors%20and%20Trends%20Affecting%20Operating%20Results%20and%20Financial%20Condition) [Sales](index=42&type=section&id=Sales_KeyFactors) - Sales in Refining Services and Catalysts segments have **grown** due to expansion into new end applications (emission control, polymer, refining catalysts) and supply share gains[138](index=138&type=chunk) - Performance Materials and Performance Chemicals segments have historically stable demand, with **growth** from new applications (personal care, consumer cleaning) and highway safety spending[138](index=138&type=chunk) - The COVID-19 pandemic is expected to **decrease** near-term demand for certain products, primarily in Refining Services and Performance Chemicals, and to a lesser extent in Catalysts and Performance Materials[138](index=138&type=chunk) [Cost of Goods Sold](index=43&type=section&id=Cost%20of%20Goods%20Sold) - Cost of goods sold comprises variable product costs (raw materials, energy, packaging), fixed manufacturing expenses, depreciation, and freight[140](index=140&type=chunk) - Refining Services contracts often include take-or-pay volume protection and quarterly price adjustments for commodity inputs, labor, and natural gas, covering over **90%** of 2019 sales[140](index=140&type=chunk) - Approximately **50%** of North American silicate sales (Performance Chemicals) include raw material pass-through clauses, with a **3-9 month** time lag for price changes[140](index=140&type=chunk) - The company hedges natural gas price exposure in the U.S. and makes forward purchases in various regions to mitigate volatility[140](index=140&type=chunk) [Joint Ventures](index=43&type=section&id=Joint%20Ventures) - Investments in equity joint ventures, including the largest, Zeolyst Joint Venture, are accounted for under the equity method[141](index=141&type=chunk) - The Zeolyst Joint Venture produces high-performance, specialty, zeolite-based catalysts for emission control, refining, petrochemical, and broader chemicals industries[141](index=141&type=chunk) [Seasonality](index=43&type=section&id=Seasonality) - Performance Materials segment experiences lower sales and profit in Q1 and Q4 due to highway striping projects occurring in warmer weather[142](index=142&type=chunk) - Refining Services segment experiences seasonal fluctuations due to higher gasoline demand in summer months[142](index=142&type=chunk) - Seasonality results in higher working capital requirements in the first and second quarters, potentially affecting liquidity and cash flows[142](index=142&type=chunk) [Foreign Currency](index=43&type=section&id=Foreign%20Currency) - Approximately **40%** of the company's sales are in currencies other than the U.S. dollar, leading to exposure to foreign currency translation gains and losses[143](index=143&type=chunk) - Significant exchange rate exposure exists for the Euro, British pound, Canadian dollar, Brazilian real, and Mexican peso[143](index=143&type=chunk) [Results of Operations (Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019)](index=43&type=section&id=Results%20of%20Operations%20(Three%20Months%20Ended%20March%2031%2C%202020%20Compared%20to%20the%20Three%20Months%20Ended%20March%2031%2C%202019)) [Highlights](index=43&type=section&id=Highlights) - Sales **increased** by **$2.4 million** to **$361.6 million**, primarily due to higher sales volumes, partially offset by lower sulfur pricing pass-through and unfavorable foreign currency translation[146](index=146&type=chunk) - Gross profit **increased** by **$7.7 million** to **$88.6 million**, mainly due to **increased** sales volumes, partially offset by unfavorable foreign currency translation[147](index=147&type=chunk) - Operating income **decreased** by **$6.0 million** to **$23.4 million**, driven by a loss from an asset swap arrangement, partially offset by **increased** gross profit[148](index=148&type=chunk) - Equity in net income of affiliated companies **increased** by **$6.3 million** to **$8.4 million**, primarily due to higher earnings from the Zeolyst Joint Venture[149](index=149&type=chunk) [Sales](index=45&type=section&id=Sales_Results) Sales by Segment (Three Months Ended March 31, 2020 vs 2019) | Segment | 2020 Sales (in millions) | 2019 Sales (in millions) | Change ($M) | Change (%) | | :---------------------- | :----------------------- | :----------------------- | :---------- | :--------- | | Refining Services | $100.7 | $105.8 | $(5.1) | (4.8)% | | Catalysts | $24.9 | $15.9 | $9.0 | 56.6% | | Performance Materials | $65.5 | $61.1 | $4.4 | 7.2% | | Performance Chemicals | $174.3 | $180.5 | $(6.2) | (3.4)% | | **Total Sales** | **$361.6** | **$359.2** | **$2.4** | **0.7%** | - Refining Services sales **decreased** by **$5.1 million** (**4.8%**) due to lower average selling prices from the pass-through of lower sulfur pricing, partially offset by **increased** sales volumes[152](index=152&type=chunk) - Catalysts sales **increased** by **$9.0 million** (**56.6%**) due to higher customer demand for polyolefin catalysts and timing of methyl methacrylate catalyst orders[152](index=152&type=chunk) - Performance Materials sales **increased** by **$4.4 million** (**7.2%**) due to **increased** demand for North American highway safety products, favorable weather, and price increases, partially offset by unfavorable foreign currency translation[153](index=153&type=chunk)[155](index=155&type=chunk) - Performance Chemicals sales **decreased** by **$6.2 million** (**3.4%**) due to lower sales volumes in consumer products and unfavorable foreign currency translation, partially offset by higher average selling prices and favorable mix[155](index=155&type=chunk) [Gross Profit](index=47&type=section&id=Gross%20Profit_Results) Gross Profit (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :----------- | :----------------- | :----------------- | :---------- | :--------- | | Gross profit | $88.6 | $80.9 | $7.7 | 9.5% | - The **increase** in gross profit was primarily due to **increased** sales volumes (**$14.4 million**) and favorable manufacturing costs (**$4.1 million**), partially offset by unfavorable product mix (**$5.7 million**), customer pricing (**$3.8 million**), and foreign currency translation (**$1.2 million**)[156](index=156&type=chunk) [Selling, General and Administrative Expenses](index=47&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses_Results) Selling, General and Administrative Expenses (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :----------------------------------------- | :----------------- | :----------------- | :---------- | :--------- | | Selling, general and administrative expenses | $43.3 | $40.7 | $2.6 | 6.4% | - The **increase** in SG&A expenses was primarily due to an **increase** in stock compensation expense[157](index=157&type=chunk) [Other Operating Expense, Net](index=47&type=section&id=Other%20Operating%20Expense%2C%20Net_Results) Other Operating Expense, Net (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :-------------------------- | :----------------- | :----------------- | :---------- | :--------- | | Other operating expense, net | $21.9 | $10.8 | $11.1 | 102.8% | - The **increase** was due to a loss incurred from an asset swap arrangement and **increased** transaction-related costs[158](index=158&type=chunk) [Equity in Net Income of Affiliated Companies](index=47&type=section&id=Equity%20in%20Net%20Income%20of%20Affiliated%20Companies_Results) Equity in Net Income of Affiliated Companies (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :----------------------------------------- | :----------------- | :----------------- | :---------- | :--------- | | Equity in net (income) from affiliated companies | $(8.4) | $(2.1) | $(6.3) | 300.0% | - The **increase** was primarily due to **$6.3 million** of higher earnings from the Zeolyst Joint Venture, driven by **increased** sales of emission control catalysts[159](index=159&type=chunk) [Interest Expense, Net](index=47&type=section&id=Interest%20Expense%2C%20Net_Results) Interest Expense, Net (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :-------------------- | :----------------- | :----------------- | :---------- | :--------- | | Interest expense, net | $24.5 | $28.6 | $(4.1) | (14.3)% | - The **decrease** in interest expense was due to lower average debt balances, mainly from prior year prepayments on the Term Loan Facility[160](index=160&type=chunk) [Debt Extinguishment Costs](index=47&type=section&id=Debt%20Extinguishment%20Costs_Results) Debt Extinguishment Costs (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :------------------------ | :----------------- | :----------------- | :---------- | :--------- | | Debt extinguishment costs | $2.5 | — | $2.5 | — | - Debt extinguishment costs of **$2.5 million** in Q1 2020 resulted from amending the senior secured term loan facility, including **$2.2 million** in new financing fees and **$0.3 million** write-off of unamortized deferred financing costs and original issue discount[161](index=161&type=chunk) [Other Expense, Net](index=48&type=section&id=Other%20Expense%2C%20Net_Results) Other (Income) Expense, Net (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :------------------------ | :----------------- | :----------------- | :---------- | :--------- | | Other (income) expense, net | $2.9 | $(3.0) | $5.9 | (196.7)% | - The change was primarily due to **$3.3 million** of foreign currency losses in Q1 2020, compared to **$2.7 million** of foreign currency gains in Q1 2019, driven by fluctuations in non-permanent intercompany debt[163](index=163&type=chunk) [Provision for Income Taxes](index=48&type=section&id=Provision%20for%20Income%20Taxes_Results) Provision for Income Taxes (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :------------------------ | :----------------- | :----------------- | :---------- | :--------- | | Provision for income taxes | $1.4 | $2.4 | $(1.0) | (41.7)% | | Effective tax rate | 73.7% | 41.6% | | | - The **effective tax rate** **increased** to **73.7%** in Q1 2020 from **41.6%** in Q1 2019, primarily due to income shifts in jurisdictions with differing rates, GILTI impacts, foreign exchange gains/losses, discrete tax impacts from the asset swap, pre-tax losses with no associated tax benefit, and state taxes[164](index=164&type=chunk) [Net Income Attributable to PQ Group Holdings](index=48&type=section&id=Net%20Income%20Attributable%20to%20PQ%20Group%20Holdings_Results) Net Income Attributable to PQ Group Holdings Inc. (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :----------------------------------------- | :----------------- | :----------------- | :---------- | :--------- | | Net income attributable to PQ Group Holdings Inc. | $0.2 | $3.2 | $(3.0) | (93.8)% | - The significant **decrease** in net income attributable to PQ Group Holdings Inc. was due to the combined effects of **increased** other operating expenses, debt extinguishment costs, foreign currency losses, partially offset by higher gross profit and equity in net income from affiliates[165](index=165&type=chunk) [Adjusted EBITDA (by segment)](index=48&type=section&id=Adjusted%20EBITDA%20(by%20segment)) Total Adjusted EBITDA (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :---------------------- | :----------------- | :----------------- | :---------- | :--------- | | Total Adjusted EBITDA | $103.1 | $101.0 | $2.1 | 2.1% | Segment Adjusted EBITDA (Three Months Ended March 31, 2020 vs 2019) | Segment | 2020 (in millions) | 2019 (in millions) | Change ($M) | Change (%) | | :---------------------- | :----------------- | :----------------- | :---------- | :--------- | | Refining Services | $37.2 | $39.7 | $(2.5) | (6.3)% | | Catalysts | $22.7 | $18.1 | $4.6 | 25.4% | | Performance Materials | $13.5 | $10.5 | $3.0 | 28.6% | | Performance Chemicals | $40.5 | $42.7 | $(2.2) | (5.2)% | | **Total Segment Adjusted EBITDA** | **$113.8** | **$111.0** | **$2.8** | **2.5%** | - Refining Services Adjusted EBITDA **decreased** due to higher raw material usage and production costs[169](index=169&type=chunk) - Catalysts Adjusted EBITDA **increased** due to higher customer demand for polyolefin, methyl methacrylate, and pressure products catalyst groups, partially offset by unfavorable inventory absorption[169](index=169&type=chunk) - Performance Materials Adjusted EBITDA **increased** due to **increased** demand for North American highway safety products and favorable weather conditions[169](index=169&type=chunk) - Performance Chemicals Adjusted EBITDA **decreased** due to lower volumes sold to the consumer products end use and the strengthening of the U.S. dollar[169](index=169&type=chunk) [Adjusted Net Income](index=52&type=section&id=Adjusted%20Net%20Income) Adjusted Net Income (Three Months Ended March 31, 2020 vs 2019) | Metric | 2020 After-tax (in millions) | 2019 After-tax (in millions) | Change ($M) | | :-------------------------------- | :--------------------------- | :--------------------------- | :---------- | | Net income attributable to PQ Group Holdings Inc. | $0.2 | $3.2 | $(3.0) | | Amortization of investment in affiliate step-up | $1.1 | $1.6 | $(0.5) | | Debt extinguishment costs | $1.6 | — | $1.6 | | Net loss on asset disposals | $7.1 | $0.5 | $6.6 | | Foreign currency exchange loss (gain) | $1.0 | $(2.0) | $3.0 | | LIFO expense | $(0.2) | $6.5 | $(6.7) | | Transaction and other related costs | $1.3 | $0.1 | $1.2 | | Equity-based compensation | $3.8 | $2.2 | $1.6 | | Restructuring, integration and business optimization expenses | $1.3 | $0.5 | $0.8 | | Defined benefit pension plan (benefit) cost | $(0.1) | $0.6 | $(0.7) | | Other | $0.7 | $0.6 | $0.1 | | Impact of non-cash GILTI tax | $3.9 | $3.7 | $0.2 | | **Adjusted Net Income** | **$21.7** | **$17.5** | **$4.2** | - The non-cash GILTI tax impact is excluded from core operations as it does not affect cash taxes (due to available U.S. NOLs) and foreign tax credits are expected to offset GILTI impacts once NOLs are exhausted[177](index=177&type=chunk)[179](index=179&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=53&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) [Cash Flow](index=53&type=section&id=Cash%20Flow) Net Cash Flow Summary (Three Months Ended March 31, 2020 vs 2019) | Cash Flow Activity | 2020 (in millions) | 2019 (in millions) | Change ($M) | | :---------------------------------------------------- | :----------------- | :----------------- | :---------- | | Net cash provided by operating activities | $4.5 | $26.8 | $(22.3) | | Net cash used in investing activities | $(22.1) | $(29.2) | $7.1 | | Net cash provided by (used in) financing activities | $58.2 | $(2.5) | $60.7 | | Net change in cash, cash equivalents and restricted cash | $36.4 | $(5.6) | $42.0 | - The **decrease** in operating cash flow was primarily due to unfavorable working capital changes, including higher accounts receivable and prepaid assets, and lower accrued liabilities[186](index=186&type=chunk) - Investing activities included **$28.1 million** in capital expenditures in Q1 2020 (down from **$33.6 million** in Q1 2019) and **$2.4 million** from the sale of a non-core asset[186](index=186&type=chunk) - Financing activities were significantly boosted by **$64.7 million** in net borrowings under revolving credit facilities in Q1 2020[186](index=186&type=chunk) [Debt](index=56&type=section&id=Debt) Total Debt (March 31, 2020 vs December 31, 2019) | Debt Type | March 31, 2020 (in millions) | December 31, 2019 (in millions) | | :---------------------------------------------------- | :--------------------------- | :------------------------------ | | Term Loan Facility | $947.5 | $947.5 | | 6.75% Senior Secured Notes due 2022 | $625.0 | $625.0 | | 5.75% Senior Unsecured Notes due 2025 | $295.0 | $295.0 | | ABL Facility | $64.0 | — | | Other | $65.3 | $64.6 | | **Total debt** | **$1,996.8** | **$1,932.1** | - Net debt as of March 31, 2020, was **$1,889.1 million**, including cash and cash equivalents of **$107.7 million**[188](index=188&type=chunk) - The company had **$128.6 million** available under its ABL revolving credit facility and was in compliance with all debt covenants as of March 31, 2020[180](index=180&type=chunk) - Interest rate caps are in place on **$1.0 billion** of notional variable debt at a **3.00%** cap rate through July 2020, and on **$500.0 million** at a **0.84%** cap rate from July 2020 through July 2022[180](index=180&type=chunk) [Capital Expenditures](index=57&type=section&id=Capital%20Expenditures) Capital Expenditures (Three Months Ended March 31, 2020 vs 2019) | Type | 2020 (in millions) | 2019 (in millions) | Change ($M) | | :--------------------------- | :----------------- | :----------------- | :---------- | | Maintenance capital expenditures | $12.9 | $18.5 | $(5.6) | | Growth capital expenditures | $3.8 | $6.7 | $(2.9) | | **Total capital expenditures** | **$16.7** | **$25.2** | **$(8.5)** | - Maintenance capital expenditures **decreased** due to fewer plant maintenance projects, and growth capital expenditures **decreased** due to reduced spending on production facility capacity enhancement[190](index=190&type=chunk) [Pension Funding](index=57&type=section&id=Pension%20Funding) - Cash contributions to defined benefit pension and other post-retirement plans were **$3.2 million** in Q1 2020, compared to **$3.4 million** in Q1 2019[191](index=191&type=chunk) [Off-Balance Sheet Arrangements](index=57&type=section&id=Off-Balance%20Sheet%20Arrangements) - The company had **$18.8 million** of outstanding letters of credit on its ABL Facility as of March 31, 2020[192](index=192&type=chunk) [Contractual Obligations](index=57&type=section&id=Contractual%20Obligations) - No significant changes to contractual obligations since December 31, 2019, except for amendments to the Term Loan Facility and ABL Facility[192](index=192&type=chunk) - The Term Loan Facility amendment is anticipated to reduce annual interest payments by **$2.4 million** at current interest rates[192](index=192&type=chunk) [Critical Accounting Policies and Estimates](index=57&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - No material changes in critical accounting policies and estimates from those described in the Annual Report on Form 10-K[193](index=193&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually (October 1) or more frequently if circumstances change[195](index=195&type=chunk) - As of October 1, 2019, the fair values of all four reporting units (Refining Services, Catalysts, Performance Materials, Performance Chemicals) exceeded their carrying amounts by **179%**, **67%**, **27%**, and **18%** respectively[195](index=195&type=chunk) - Management believes fair values still exceed carrying values as of March 31, 2020, but will continue to monitor for potential future impairments, especially given the impact of the COVID-19 pandemic on economic **growth**, customer demand, and supply chains[195](index=195&type=chunk) [Goodwill and Intangible Assets](index=57&type=section&id=Goodwill%20and%20Intangible%20Assets) - Goodwill and indefinite-lived intangible assets are tested for impairment annually (October 1) using a combination of market and discounted cash flow approaches[195](index=195&type=chunk) - Key assumptions for fair value estimation include operating margin/revenue **growth** rates, weighted average cost of capital, perpetual **growth** rate, and market multiples[195](index=195&type=chunk) - As of October 1, 2019, fair values exceeded carrying amounts for Refining Services (**179%**), Catalysts (**67%**), Performance Materials (**27%**), and Performance Chemicals (**18%**)[195](index=195&type=chunk) - No interim goodwill or intangible asset impairment assessments were considered necessary at March 31, 2020, but the company will continue to monitor for potential future impacts from the COVID-19 pandemic[195](index=195&type=chunk) [Accounting Standards Not Yet Adopted](index=59&type=section&id=Accounting%20Standards%20Not%20Yet%20Adopted_Critical) - For accounting standards not yet adopted, refer to Note 2 of the condensed consolidated financial statements[196](index=196&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=59&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company manages market risks related to foreign currency, interest rates, commodity prices, and credit through hedging activities, which are regularly reviewed by the audit committee. No material changes in overall market risk were reported from the Annual Report on Form 10-K, except for further restructuring of interest rate cap agreements in Q1 2020 to lower the cap rate on a portion of its variable-rate debt - Major market risk exposures include foreign currency exchange rate risk, interest rate risk, commodity price risk, and credit risk[197](index=197&type=chunk) - The audit committee regularly reviews foreign exchange, interest rate, and commodity hedging activity and monitors compliance with the hedging policy, avoiding speculative use of financial instruments[197](index=197&type=chunk) - No material changes in market risks were reported from the Annual Report on Form 10-K, other than the interest rate risk adjustments[197](index=197&type=chunk) [Interest Rate Risk](index=59&type=section&id=Interest%20Rate%20Risk) - In February and March 2020, the company restructured **$500.0 million** notional interest rate cap agreements (effective July 31, 2020, through July 31, 2022) to lower the interest cap rate to **0.84%** (from **2.50%**)[198](index=198&type=chunk) - These restructurings involved additional premiums of **$0.1 million** (February) and **$0.9 million** (March), bringing the total cumulative annuitized premium to **$4.4 million** to be paid through July 31, 2022[198](index=198&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=59&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, assessed the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, concluding they were effective at a reasonable assurance level. The shift to remote work due to the COVID-19 pandemic has not materially impacted the internal control over financial reporting, with appropriate resources provided to personnel - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020[199](index=199&type=chunk)[201](index=201&type=chunk) - The shift to remote work for most office and management personnel due to COVID-19 has not materially affected internal control over financial reporting, and appropriate resources have been provided[202](index=202&type=chunk) [Evaluation of Disclosure Controls and Procedures](index=59&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Disclosure controls and procedures are designed to ensure timely recording, processing, summarizing, and reporting of information required under the Exchange Act[201](index=201&type=chunk) - Based on evaluation, the CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020[201](index=201&type=chunk) [Changes in Internal Control Over Financial Reporting](index=60&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - The shift to remote work for most office and management personnel due to the COVID-19 pandemic has not materially affected the company's internal control over financial reporting[202](index=202&type=chunk) - No other material changes in internal control over financial reporting occurred during the quarter ended March 31, 2020[202](index=202&type=chunk) [PART II—OTHER INFORMATION](index=61&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=61&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is involved in various legal claims and proceedings typical of its business, including those related to personal injury, product liability, and environmental matters. Management believes that no current litigation is likely to have a material adverse effect on the company's financial position, results of operations, or liquidity - The company is subject to various legal claims and proceedings, including personal injury, product liability, waste disposal, and environmental matters, arising in the normal course of business[205](index=205&type=chunk) - Management believes no pending litigation is likely to have a material adverse effect on the business, consolidated financial position, results of operations, or liquidity[205](index=205&type=chunk) [ITEM 1A. RISK FACTORS](index=61&type=section&id=ITEM%201A.%20RISK%20FACTORS) The COVID-19 pandemic presents significant and rapidly evolving risks to the company's operations, including potential **decreases** in product demand (especially in Refining Services and Performance Chemicals), disruptions in raw material supply, and production delays due to employee absenteeism or facility shutdowns. The full extent and duration of these impacts remain uncertain - The COVID-19 pandemic may adversely affect the company's operations, with unpredictable future negative effects, and the longer it persists, the more material the ultimate effects are likely to be[206](index=206&type=chunk) - Expected near-term impacts include **decreased** demand for products in Refining Services (reduced sulfuric acid demand due to lower gasoline demand) and Performance Chemicals (lower sodium silicate demand, decline in consumer spending)[206](index=206&type=chunk) - Disruptions in raw material availability (e.g., glass cullet suppliers suspending operations) and production delays due to employee absenteeism or potential facility shutdowns are also risks[206](index=206&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=62&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) In Q1 2020, the company purchased common stock from employees to cover tax withholding obligations and initiated a new **$50 million** share repurchase program, under which it repurchased **$2.1 million** worth of shares by March 31, 2020 Common Stock Purchases (Three Months Ended March 31, 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Shares Purchased Under Publicly Announced Plans or Programs | Maximum Value Remaining Under Plans (in thousands) | | :--------------------------------- | :------------------------------- | :--------------------------- | :---------------------------------------------------------- | :------------------------------------------------- | | January 1, 2020 - January 31, 2020 | 109,564 | $16.70 | N/A | N/A | | February 1, 2020 - February 29, 2020 | — | — | N/A | N/A | | March 1, 2020 - March 31, 2020 | 211,700 | $9.73 | 211,700 | $47,941 | - Shares purchased in January were from employees to satisfy income tax withholding obligations related to restricted stock vesting[209](index=209&type=chunk) - The March repurchases were part of a **$50 million** share repurchase program authorized on March 12, 2020, with **$47.9 million** remaining as of March 31, 2020[209](index=209&type=chunk) [ITEM 6. EXHIBITS](index=63&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits accompanying the Quarterly Report on Form 10-Q, including key amendment agreements for credit facilities, stock incentive plan documents, required certifications from executive officers, and financial statements formatted in Inline XBRL - Exhibits include the First Amendment Agreement to the ABL Credit Agreement (March 20, 2020), Form of Performance Stock Unit Award Agreement, and the Amended and Restated 2017 Omnibus Incentive Plan[211](index=211&type=chunk) - Certifications from the CEO and CFO (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) are included[211](index=211&type=chunk) - The report includes Inline XBRL formatted financial statements and document/entity information[211](index=211&type=chunk) [SIGNATURES](index=64&type=section&id=SIGNATURES) The Quarterly Report on Form 10-Q was officially signed on May 11, 2020, by Michael Crews, Executive Vice President and Chief Financial Officer of PQ Group Holdings Inc - The report was signed on May 11, 2020, by Michael Crews, Executive Vice President and Chief Financial Officer of PQ Group Holdings Inc[216](index=216&type=chunk)

Sales Performance - Total sales attributable to the Zeolyst Joint Venture for the year ended December 31, 2019, were $170.3 million, representing 50% of its total sales[1]. - For the year ended December 31, 2019, total sales reached $1,567.1 million, with Performance Chemicals contributing 43.7% of total sales at $685.1 million[40]. - Fuels & Emission Controls accounted for 22% of total sales in 2019, driven by global regulatory requirements to reduce nitrogen oxides and sulfur emissions[2]. - Consumer Products represented 15% of total sales, with growth driven by the demand for environmentally friendly chemical additives[2]. - Highway Safety & Construction sales were 18% of total sales, supported by the demand for enhanced visibility in road markings[2]. - Industrial & Process Chemicals made up 20% of total sales, with demand in the tire industry for reduced rolling resistance[2]. - The Refining Services segment generated sales of $447.1 million, accounting for 28.5% of total sales, with an adjusted EBITDA of $175.6 million, representing 34.1% of total adjusted EBITDA[40]. - Approximately 25% of the company's sales for the year ended December 31, 2019, were derived from its top 10 customers, with no single customer representing more than 4% of total sales[116]. - About 19% of the company's sales for the year ended December 31, 2019, were from products sold into highway safety applications, making them sensitive to government budget allocations[118]. Market Position and Competition - In 2019, the company held an estimated number one supply share position in the U.S. for sulfuric acid regeneration, based on sales volume exceeding 50%[28]. - The company has developed zeolite-based catalysts to help customers meet stringent vehicle emission standards worldwide[30]. - The Silica Catalysts product group competes primarily with W.R. Grace, while the Zeolyst Joint Venture faces competition from global producers like BASF and UOP[52]. - The company’s strategic presence in the Gulf Coast and California enhances its competitive advantage in the North American refining services industry[44]. - The company faces significant competition from large international producers and smaller regional competitors, which could adversely affect its financial condition and results of operations[113]. Financial Stability and Risks - The company maintained stable margins and cash flow generation despite changing macroeconomic cycles, supported by long-term sales contracts and material cost pass-through[37]. - The company has a substantial indebtedness totaling approximately $1,932.1 million as of December 31, 2019, which could limit operational flexibility and increase vulnerability to economic conditions[109]. - The company reported $245.1 million of net operating losses for U.S. federal income tax purposes, providing cash tax savings as taxable income is generated[37]. - The company’s cash flow generation is supported by disciplined capital investment and tax attributes, enhancing overall financial stability[37]. - The company is exposed to risks from non-payment or non-performance by customers, which could materially affect its business and financial condition[114]. - The company may face challenges in passing on increases in raw material prices to customers, which could negatively impact profitability[110]. - The company is exposed to product liability claims and recalls, which could result in unexpected expenditures and affect consumer confidence[123]. Research and Development - The company operates six research and development facilities globally, focusing on new product development and customer collaboration[80]. - The company is investing significantly in research and development for new products, but there is a risk of technical or market failure, which could impact competitive positioning[106]. - As of December 31, 2019, the company owned 50 patented inventions in the U.S. and had approximately 326 patents issued worldwide[81]. Environmental and Regulatory Compliance - The company has implemented a sustainability function and hired a dedicated sustainability manager in 2019[85]. - The company is subject to extensive environmental regulations, with potential liabilities for contamination and noncompliance that could significantly impact financial condition[127]. - Existing and proposed regulations to limit greenhouse gas emissions may lead to significant additional operating and capital expenses for the company[131]. - The company has established reserves of approximately $6.6 million for environmental remediation and enforcement matters[129]. Employee and Labor Relations - As of December 31, 2019, the company had 3,279 employees worldwide, with 1,491 in the United States and 956 in Europe[86]. - Approximately 50% of the company's employees were represented by a union or other employee representative body[86]. - The company employs 3,279 employees globally, with approximately 50% represented by unions, and labor disputes could disrupt operations[149]. Strategic Initiatives and Acquisitions - Strategic acquisitions and joint ventures, such as the Business Combination and Zeolyst Joint Venture, may present financial and operational challenges, including integration difficulties[137]. - The company may opportunistically pursue asset dispositions, which could adversely affect its financial condition and liquidity[139]. Currency and Market Risks - The company generated 40% of its sales in currencies other than U.S. dollars for the year ended December 31, 2019, exposing it to currency transaction risks[100]. - The company has experienced economic loss due to foreign currency exchange rate fluctuations, impacting financial results[100]. Miscellaneous Risks - The company may face damages from customer claims if products fail to meet quality specifications, which could harm its reputation and financial condition[136]. - The company is currently subject to various asbestos premises liability claims related to employee or contractor exposure, which could result in significant liability[150]. - Information technology risks, including cyber attacks and data breaches, could materially disrupt operations and harm financial condition[147].

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-38221 PQ Group Holdings Inc. Delaware 81-3406833 (State or other jurisdiction of incorporation or organiz ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-38221 PQ Group Holdings Inc. Delaware 81-3406833 (State or other jurisdiction of incorporation or organization ...

PART I FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Unaudited condensed consolidated financial statements for Q1 2019 show sales of **$359.2 million** and net income of **$3.2 million**, up from **$0.2 million** in Q1 2018 [Condensed Consolidated Statements of Income](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Q1 2019 sales slightly decreased to **$359.2 million**, while gross profit increased to **$80.9 million** and net income rose significantly to **$3.15 million** Financial Performance (Three months ended March 31) | Financial Metric | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Sales | $359,221 | $366,197 | | Gross Profit | $80,910 | $78,121 | | Operating Income | $29,463 | $28,189 | | Net Income Attributable to PQ Group Holdings Inc. | $3,151 | $214 | | Diluted Income Per Share | $0.02 | $— | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$4.38 billion** as of March 31, 2019, with new lease guidance recognizing **$57.2 million** in right-of-use assets Balance Sheet Summary (as of) | Balance Sheet Item | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $52,341 | $57,854 | | Total current assets | $570,332 | $558,616 | | Total assets | $4,382,276 | $4,327,425 | | Long-term debt, excluding current portion | $2,103,070 | $2,106,720 | | Total liabilities | $2,707,004 | $2,663,280 | | Total equity | $1,675,272 | $1,664,145 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities increased to **$26.8 million** in Q1 2019, while investing and financing activities used **$29.3 million** and **$2.6 million** respectively Cash Flow Activities (Three months ended March 31) | Cash Flow Activity | Three months ended March 31, 2019 (in thousands) | Three months ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,838 | $22,035 | | Net cash used in investing activities | ($29,267) | ($33,135) | | Net cash (used in) provided by financing activities | ($2,552) | $5,384 | | Net change in cash, cash equivalents and restricted cash | ($5,641) | ($7,227) | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the company's reorganization into four segments and the adoption of new lease accounting standards, recognizing right-of-use assets and liabilities - Effective March 1, 2019, the company reorganized into **four independent business segments**: Refining Services, Catalysts, Performance Materials, and Performance Chemicals[27](index=27&type=chunk) - New lease guidance adopted January 1, 2019, led to recognition of **$60.7 million** in right-of-use lease assets and **$58.9 million** in lease liabilities[32](index=32&type=chunk) Segment Sales Performance (Q1) | Segment | Sales (Q1 2019, in thousands) | Sales (Q1 2018, in thousands) | | :--- | :--- | :--- | | Refining Services | $105,844 | $100,714 | | Catalysts | $15,866 | $16,473 | | Performance Materials | $61,089 | $62,742 | | Performance Chemicals | $180,462 | $189,963 | | **Total** | **$363,261** | **$369,892** | Segment Adjusted EBITDA (Q1) | Segment | Adjusted EBITDA (Q1 2019, in thousands) | Adjusted EBITDA (Q1 2018, in thousands) | | :--- | :--- | :--- | | Refining Services | $39,731 | $35,532 | | Catalysts | $18,127 | $22,889 | | Performance Materials | $10,515 | $12,058 | | Performance Chemicals | $42,673 | $45,094 | | **Total Segment Adjusted EBITDA** | **$111,046** | **$115,573** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q1 2019 sales decreased by **1.9%** to **$359.2 million**, while gross profit increased by **3.6%** to **$80.9 million**, and total Adjusted EBITDA decreased by **6.4%** to **$101.0 million** - Sales decreased by **$7.0 million (1.9%)** to **$359.2 million** in Q1 2019, driven by lower volumes and unfavorable currency, partially offset by higher pricing[126](index=126&type=chunk)[131](index=131&type=chunk) - Gross profit increased by **$2.8 million (3.6%)** to **$80.9 million**, primarily due to favorable pricing and product mix[127](index=127&type=chunk)[135](index=135&type=chunk) - Equity in net income from affiliated companies decreased by **$9.8 million**, mainly due to lower earnings from the Zeolyst Joint Venture[129](index=129&type=chunk)[138](index=138&type=chunk) Segment Performance (Q1 2019 vs Q1 2018 Change) | Segment Performance | Q1 2019 vs Q1 2018 Change | | :--- | :--- | | **Sales** | | | Refining Services | ▲ 5.1% due to higher prices and favorable mix | | Catalysts | ▼ 3.6% due to lower volumes and unfavorable currency | | Performance Materials | ▼ 2.6% due to unfavorable currency and lower volumes | | Performance Chemicals | ▼ 5.0% due to unfavorable currency and lower volumes | | **Adjusted EBITDA** | | | Refining Services | ▲ 11.8% driven by contract renewals | | Catalysts | ▼ 21.0% from lower sales to fuels and emission control industries | | Performance Materials | ▼ 13.2% due to higher manufacturing costs in Europe | | Performance Chemicals | ▼ 5.3% due to lower volumes and stronger U.S. dollar | - Total available liquidity as of March 31, 2019, was **$222.5 million**, comprising **$52.3 million** in cash and **$170.2 million** from its asset-based lending facility[156](index=156&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes occurred in the company's market risk exposures, including foreign currency, interest rate, commodity, and credit risks, since the 2018 Annual Report - No material changes in foreign exchange, interest rate, commodity, or credit risks have occurred since the 2018 Annual Report on Form 10-K[172](index=172&type=chunk) [Item 4. Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were **effective** at a reasonable assurance level as of March 31, 2019[174](index=174&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter[175](index=175&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is not involved in any litigation expected to have a material adverse effect on its business operations - The company believes no pending litigation is likely to have a material adverse effect on its business[177](index=177&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes have occurred to the risk factors described in the company's Annual Report on Form 10-K[178](index=178&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q1 2019, **88,567** common shares were received from employees for tax withholding related to restricted stock unit vesting - In January 2019, **88,567** common shares were delivered by employees to satisfy tax withholding obligations from restricted stock unit vesting[179](index=179&type=chunk)[180](index=180&type=chunk) [Item 6. Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including award agreements, employment letters, and CEO/CFO certifications - Exhibits include CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, along with various employment and award agreements[181](index=181&type=chunk)

Sales Performance - Total sales attributable to the Zeolyst Joint Venture for the year ended December 31, 2018, were $156.7 million, representing 50% of its total sales[1] - Total sales for the year ended December 31, 2018, reached $1,608.2 million, with adjusted EBITDA of $464.0 million, representing 100% of total adjusted EBITDA[38] - The Environmental Catalysts and Services segment generated $527.7 million in sales, accounting for 32.8% of total sales, with refining services contributing $455.6 million[38] - The Performance Materials and Chemicals segment reported sales of $1,083.8 million, representing 67.4% of total sales, with performance chemicals alone contributing $717.3 million[38] - The top ten customers represented approximately 23% of total sales in 2018, with no single customer exceeding 4% of total sales, indicating a diversified customer base[30] Market Dynamics - Fuels and emission controls accounted for 21% of total sales in 2018, with significant growth drivers including global regulatory requirements for nitrogen oxides and sulfur removal[24] - Consumer products represented 16% of total sales in 2018, driven by demand for environmentally friendly chemical additives and improved product quality[24] - Highway safety and construction applications contributed 19% to total sales, with growth driven by demand for enhanced visibility in road markings[24] - Industrial and process chemicals made up 20% of total sales, with growth supported by demand in the tire industry and municipal water treatment[24] - The company estimates a market share of over 50% in the U.S. for regenerated sulfuric acid, significantly larger than its closest competitor[41] Innovation and Development - The company has developed zeolite-based catalysts to meet increasingly stringent vehicle emission standards, showcasing its innovation capabilities[29] - Recent innovations include the ThermoDrop® product for road striping and the Visilok® faster-drying road marking system, aimed at improving operational efficiency and safety[53] - The company operates six research and development facilities across the US, Canada, the UK, the Netherlands, France, and Spain, focusing on new product development and customer collaboration[67] - As of December 31, 2018, the company owned 52 patented inventions in the US and approximately 309 patents issued worldwide, with 120 patent applications pending[68] Financial Health - The company maintained stable margins and cash flows across different macroeconomic environments, with cash flow generation supported by disciplined capital investment and tax attributes[33] - As of December 31, 2018, the company reported $284.2 million in net operating losses for U.S. federal income tax purposes, which may provide future cash tax savings[33] - The company had approximately $1,157.5 million of debt indexed to LIBOR as of December 31, 2018, and is affected by the potential phase-out of LIBOR by the end of 2021[138] - As of December 31, 2018, the company's total indebtedness was approximately $2,148.4 million, which could limit its operational flexibility and increase vulnerability to economic conditions[94] Operational Challenges - The company faces substantial competition from both large international producers and smaller regional competitors, which could adversely affect its market position and financial results[98] - The company is subject to extensive environmental regulations, including the ISO 14001 standard, and has implemented a corporate audit program for compliance[76] - Seasonal fluctuations affect the performance materials and refining services product groups, leading to higher working capital requirements in the first and fourth quarters[71] - The company experiences seasonal fluctuations in sales, particularly lower sales in the first and fourth quarters due to weather conditions affecting demand[105] Risk Management - The company has implemented a hedging program to mitigate exposure to natural gas price volatility, but the effectiveness of this strategy is uncertain[97] - The company is exposed to risks from litigation and regulatory proceedings, which could materially harm its business and financial condition[134] - The company faces risks associated with product liability claims, which could result in substantial unexpected expenditures[108] - The company is currently subject to various asbestos premises liability claims related to employee exposure, which could result in significant liabilities[134] Customer and Supplier Relations - Approximately 40% of Performance Chemicals sales in 2018 included raw material pass-through clauses, providing protection against price volatility[32] - The company maintains long-term supply contracts with key raw material suppliers, which helps mitigate the impact of price volatility[63] - The company relies on a limited number of customers, with its top 10 customers representing approximately 23% of sales, which increases the risk of profitability loss if any significant customer is lost[100] Environmental and Regulatory Compliance - The company is subject to extensive environmental, health, and safety regulations, which may become more stringent over time, potentially resulting in significant fines or penalties[112] - A 2007 Consent Decree required the company to pay a $2 million penalty and invest approximately $34 million in air pollution controls, with ongoing compliance efforts since then[114] - The company anticipates incurring additional operating and capital expenses due to regulations addressing greenhouse gas emissions, particularly under the E.U. Emissions Trading System[116] Employee and Labor Relations - The company had 3,188 employees worldwide as of December 31, 2018, with approximately 50% represented by unions or employee representative bodies[72] - Approximately 70% of the U.S. unionized employees were covered under collective bargaining agreements expiring on or before December 31, 2019, which could lead to labor disruptions if agreements are not reached[133] Strategic Initiatives - The company has reorganized from a products-based to a markets-based business model to better align offerings with customer needs[34] - Strategic acquisitions and joint ventures may present risks, including operational disruptions and integration challenges, which could impact financial performance[122] - The company may engage in strategic acquisitions or dispositions, which could present financial and operational challenges, including integration difficulties and unforeseen liabilities[122]