Ecovyst Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. Figures below are in millions of dollars unless stated otherwise. The unaudited statements present Performance Materials and Performance Chemicals as discontinued operations; continuing results principally reflect Ecoservices and Catalyst Technologies. The company changed its name from PQ Group Holdings to Ecovyst after the Performance Chemicals sale.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $167.4 | $130.7 | $441.0 | $371.9 |
| Gross profit | $53.6 | $40.8 | $122.2 | $113.4 |
| Gross margin | 32.0% | 31.2% | 27.7% | 30.5% |
| Operating income | $22.5 | $18.8 | $36.6 | $40.6 |
| Net income (loss) from continuing operations | $4.7 | $(22.7) | $(5.9) | $8.3 |
| Net income (loss) attributable to Ecovyst | $(71.3) | $7.5 | $(165.4) | $23.7 |
| Adjusted EBITDA, non-GAAP | $69.4 | $48.1 | $164.4 | $146.7 |
Q3 sales rose 28.1%, supported by sulfur-cost pass-through pricing, stronger regeneration services, and demand for polyethylene and chemical catalysts. Gross margin improved year over year in Q3, but operating margin declined to 13.4% from 14.4%; higher SG&A and operating expenses offset some gross-profit growth. For the nine-month period, operating income and gross margin were below prior year despite higher sales, reflecting increased manufacturing costs, including winter-storm repairs, turnaround maintenance, and inventory absorption costs.
Q3 net loss chiefly reflects discontinued operations, including the Performance Chemicals disposal loss. The final reported loss on that sale was $157.5 million for the nine-month period, after transaction costs; Q3 included a $123.0 million sale-loss charge before tax. Continuing-operations results also included $15.2 million of debt-extinguishment costs in Q3. Q3 adjusted EBITDA and adjusted net income are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
Segment performance: Q3 Ecoservices sales were $137.5 million and segment Adjusted EBITDA was $51.9 million, up 27.8% and 17.2%, respectively. Catalyst Technologies sales were $29.9 million and segment Adjusted EBITDA was $25.4 million, up 29.4% and 116.1%. Catalyst Technologies’ results benefited substantially from higher Zeolyst joint-venture earnings and demand for polyethylene and renewable-fuels catalysts.
Cash flow, debt, and liquidity
- Nine-month cash from operating activities was $84.9 million consolidated, including $92.3 million from continuing operations and $(7.4) million from discontinued operations. Continuing-operations cash flow benefited from improved operating cash generation and lower working-capital use; receivables were a notable cash use.
- Continuing-operations investing cash flow was $892.9 million, including $980.4 million of net proceeds from the Performance Chemicals sale and $42.8 million for the Chem32 acquisition. Continuing-operations financing cash use was $963.5 million, including debt repayment and the special dividend.
- At September 30, 2021, cash was $104.8 million and gross debt was $897.8 million; reported net debt was $793.0 million. Debt was primarily a $900 million floating-rate term loan due 2028. The company repaid $231.4 million of its 2016 term loan and redeemed $295.0 million of senior notes using divestiture proceeds.
- Available liquidity was $165.6 million: cash of $104.8 million plus $60.8 million of ABL availability after $17.5 million of letters of credit. There were no ABL borrowings, and the company reported compliance with debt covenants.
- Cash interest paid in the first nine months was $43.1 million. Management estimated that a one-percentage-point change in variable rates would affect annual interest expense by about $9 million before hedges. Interest-rate caps covered $500 million at 0.84% through July 2022 and $400 million at 1.00% through August 2023.
Material changes, outlook, and risks
- The Performance Chemicals sale closed August 1, 2021 for a stated $1.1 billion subject to adjustments; net proceeds were $980.4 million. The company used proceeds for debt reduction and a special $3.20-per-share dividend, paid August 23, totaling $435.6 million.
- Chem32 was acquired in March for approximately $44 million in cash, net of adjustments. Management said it expands Ecoservices’ refining-industry service offering.
- Management expects cash, operating cash flow, and available ABL capacity to meet anticipated needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management cited recovery in refinery utilization and economic activity, strong polyethylene demand, and demand for catalysts used in renewable fuels. Ecoservices is seasonal, with typically higher sales and working-capital needs in Q2 and Q3. Winter Storm Uri caused facility damage, repairs, shutdowns, and lost sales.
- Risks highlighted include elevated indebtedness and floating-rate exposure, inability to pass through raw-material or energy cost increases, customer concentration or contract termination, seasonal demand, supply or production disruptions, foreign exchange, COVID-19 and broader economic conditions, and environmental, health, and safety obligations. The filing reports no material change to previously disclosed risk factors and no litigation believed likely to have a material adverse effect.
- Other unusual items included $6.7 million of incremental stock-based compensation expense from award modifications associated with the dividend and divestiture, and a $14.1 million failed-sale-leaseback accounting loss tied to assets used under the post-sale manufacturing arrangement.
Important facts for investors to verify
- Final Performance Chemicals sale adjustments, proceeds, and reported disposal loss, and whether transition and supply arrangements affect ongoing costs or sales.
- Debt terms, covenant headroom, floating-rate exposure, and the duration and coverage of interest-rate caps.
- Underlying recurring profitability after considering debt-extinguishment costs, equity compensation, other Adjusted EBITDA adjustments, and Zeolyst joint-venture contributions.
- Working-capital trends, maintenance and growth capital needs, and the sustainability of operating cash flow after the divestitures and special dividend.
- Whether post-storm repairs, turnaround timing, seasonal demand, and pass-through pricing continue to affect margins and sales comparisons.