Ecovyst (ECVT) - 2020 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements for Q3 2020, covering income, balance sheet, cash flows, and explanatory notes Condensed Consolidated Statements of Income 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] Condensed Consolidated Statements of Comprehensive Income 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] Condensed Consolidated Balance Sheets 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] - Total current liabilities decreased by approximately $35 million, contributing to a slight reduction in overall liabilities[17] Condensed Consolidated Statements of Stockholders' Equity 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] - Accumulated other comprehensive loss significantly increased from $(15.3) million to $(32.5) million, primarily due to foreign currency translation impacts[19] Condensed Consolidated Statements of Cash Flows 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] - 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] Notes to Condensed Consolidated Financial Statements Detailed notes explain accounting policies, significant transactions, and financial instrument management, providing context to the financial statements 1. Background and Basis of Presentation 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] - 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] - 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] Basis of Presentation 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] - 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] 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] - The company's manufacturing operations, key vendors, and most key customers have continued to operate with limited interruptions[28] - 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] 2. New Accounting Standards 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 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] - 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] - New guidance simplifying goodwill impairment tests (January 2017) was adopted on January 1, 2020, and will be applied prospectively, with no material impact[31] Accounting Standards Not Yet Adopted 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] - 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] 3. Revenue from Contracts with Customers Revenue is disaggregated by segment and end use, with contract liabilities representing deferred revenue from product line sales recognized over time Disaggregated Revenue 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] Contract Assets and Liabilities 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] - 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] - 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] 4. Fair Value Measurements 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] Restoration plan assets 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] - 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] Derivative contracts 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] - 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] 5. Stockholders' Equity Accumulated other comprehensive loss was significantly impacted by foreign currency, while the company continued its stock repurchase program Accumulated Other Comprehensive Income 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] Stock Repurchase Program 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] - 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] - $47.9 million remained available for additional share repurchases under the program as of September 30, 2020[65] 6. Asset Swap Transaction 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] - The transaction resulted in a pre-tax loss on disposal of $6.5 million, included in other operating expense, net[68] - Goodwill of $7.7 million was recognized and assigned to the Performance Materials segment, expected to be tax-deductible[69] 7. Sale of Product Lines 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 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] - 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] Sulfate Salts Product Line Sale 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] - A contract liability of $9.0 million was deferred for a tolling arrangement, with the majority running until June 2021[73] - Property, plant, and equipment were derecognized under a sales-type leasing arrangement due to an embedded lease in the sale and tolling agreements[73] 8. Goodwill 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] 9. Other Operating Expense, Net 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] - 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] 10. Inventories, Net 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] 11. Investments in Affiliated Companies 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][82] - In March 2020, the company sold its 49% interest in the Quaker Holdings joint venture, receiving $1.0 million for the shares[82] 12. Property, Plant and Equipment 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] 13. Long-term Debt 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] - 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] Other Debt 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] - These 'Other' debt obligations are tied to the Performance Materials business and will be assumed by the buyer upon the segment's sale[90] 14. Financial Instruments 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] - 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] - 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] 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 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] - The company continues to estimate GILTI income inclusion for GAAP purposes, which may change based on future legislative guidance or business changes[115] 16. Benefit Plans The company sponsors defined benefit pension, postretirement healthcare, and supplementary retirement plans, with varying net periodic expenses or benefits Defined Benefit Pension Plans 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 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 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 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] - 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] 18. Reportable Segments 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] 19. Stock-Based Compensation 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] - 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] 20. Earnings per Share 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] 21. Supplemental Cash Flow Information 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 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] - The Performance Materials business will be reported as discontinued operations starting in Q4 2020[145] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and liquidity, including COVID-19 impacts, strategic developments, and operating results for Q3 2020 Forward-looking Statements 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] - 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][152] - The company undertakes no obligation to update publicly any forward-looking statements after the Form 10-Q filing date[152] 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] - Operations are conducted through four segments: Refining Services, Catalysts (including Zeolyst Joint Venture), Performance Materials, and Performance Chemicals[153] - Products are primarily inorganic and aim to improve environmental sustainability[153] Recent Developments 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] - After-tax cash proceeds from the sale are expected to be used to reduce debt and return capital to shareholders[154] - The financial results of the Performance Materials business will be presented as discontinued operations starting in the fourth quarter of 2020[154] Impact of COVID-19 on our Business and Results 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 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] - 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] - 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] Operations and Supply 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] - Limited disruptions in raw material availability have not had a material impact on production to date[158] 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] - 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] - 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] Coronavirus Aid, Relief and Economic Security ("CARES") Act 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] - Deferred amounts are due 50% by December 31, 2021, and 50% by December 31, 2022[159] Key Performance Indicators 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 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] - 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] - 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] Key Factors and Trends Affecting Operating Results and Financial Condition 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 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] - The second quarter was considered the trough of demand decline, with improvement observed in most business areas during the third quarter[162] - 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] Cost of Goods Sold 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] - 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] - 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] Joint Ventures 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] - The Zeolyst Joint Venture produces high-performance, specialty, zeolite-based catalysts for packaging, engineered plastics, emission control, refining, and petrochemical industries[164] 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] - Performance Materials typically has lower sales and profit in Q1 and Q4 due to highway striping projects occurring in warmer months[165] - Refining Services experiences seasonal fluctuations due to higher gasoline demand in summer, leading to higher working capital requirements in Q1 and Q2[165] Foreign Currency 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] - Significant exchange rate exposure exists for the Euro, British pound, Canadian dollar, Brazilian real, and Mexican peso[167] - Currency translation gains and losses can significantly increase or decrease reported sales and earnings when translated to U.S. dollars[167] Results of Operations 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 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 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] - Gross profit decreased by $16.4 million (14.5%) to $96.5 million, mainly due to declining sales volumes[170] - Equity in net income of affiliated companies decreased by $17.1 million (98.8%) to $0.2 million, driven by lower earnings from the Zeolyst Joint Venture[172] Sales (by segment) All segments experienced sales declines in Q3 2020, with Refining Services, Catalysts, Performance Materials, and Performance Chemicals all seeing reduced volumes Sales by Segment (Three Months Ended September 30, in millions): | Segment | 2020 | 2019 | Change ($) | 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] - 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] Gross Profit 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] - 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] Selling, General and Administrative Expenses 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] Other Operating Expense, Net 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] - The decrease was driven by a gain on a product group sale and lower environmental costs, partially offset by higher business optimization charges[179] Equity in Net Income of Affiliated Companies 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] - The decline was primarily due to lower earnings from the Zeolyst Joint Venture, affected by reduced specialty catalyst orders and COVID-19 impacts[180] Interest Expense, Net 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] - 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] Debt Extinguishment Costs 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] - 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] Other Expense, Net 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] - The change was primarily due to foreign currency gains from non-permanent intercompany debt denominated in local currency[184] Provision for Income Taxes 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] - 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] Net Income Attributable to PQ Group Holdings 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] Adjusted EBITDA 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