Ecovyst (ECVT) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (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 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] - 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] - 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] Note 6. Asset Swap Transaction 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][65] 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 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] Note 18. Reportable Segments 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 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] - 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] - In July 2020, the company entered into new interest rate cap agreements on a notional amount of $400 million[127] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - To mitigate the slowdown, the company adjusted production levels, reduced discretionary spending, implemented furloughs, and deferred capital maintenance expenditures[136] - 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] Results of Operations - Three Months Ended June 30, 2020 vs 2019 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] - Performance Chemicals sales decreased 19.8% due to lower volumes of sodium silicate sold to industrial customers affected by COVID-19 related slowdowns[157] Results of Operations - Six Months Ended June 30, 2020 vs 2019 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] - 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] Financial Condition, Liquidity and Capital Resources 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Item 4. Controls and Procedures 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] - 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] PART II OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] - 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] - 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] Item 6. Exhibits 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] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[238]