Ecovyst Inc. quarterly report, Q3 FY2020

Business context and reporting period

This unaudited Form 10-Q is for the quarter and nine months ended September 30, 2020. The filing registrant is PQ Group Holdings Inc. (NYSE: PQG); the supplied filing does not identify the registrant as Ecovyst Inc. PQ Group Holdings operated four segments: Refining Services, Catalysts, Performance Materials and Performance Chemicals.

Financial performance

Dollar amounts are in millions unless stated otherwise.

Q3 sales fell 10.3% year over year; gross profit declined 14.5%, operating income 18.4%, and attributable net income 71.9%. For the first nine months, sales fell 9.3% and attributable net income fell 60.8%. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.

Q3 segment sales were Refining Services $107.6, Catalysts $23.1, Performance Materials $104.6 and Performance Chemicals $148.5. Segment Adjusted EBITDA was $44.3, $11.8, $25.3 and $33.9, respectively. Catalysts EBITDA fell sharply, primarily reflecting lower Zeolyst joint-venture earnings and customer demand.

Cash flow, debt and liquidity

• For the nine months, operating cash flow was $150.6, compared with $181.9 a year earlier. Capital expenditures were $76.8 on a cash-flow statement basis; reported book capital expenditures were $60.3. Investing cash outflow was $42.1 and financing cash outflow was $10.2.
• Cash and cash equivalents were $164.3 at September 30, 2020, versus $72.3 at December 31, 2019. Total available liquidity was $345.4, including $181.1 of availability under the ABL facility; there were no ABL borrowings. Cash, cash equivalents and restricted cash totaled $166.3 for cash-flow reporting.
• Total debt principal was $1,956.0 and net debt was $1,791.7. The July refinancing replaced $625.0 of 6.75% notes due 2022 with a $650.0 floating-rate term loan due 2027. The company reported no significant maturities before November 2025 and said it was in compliance with debt covenants.
• Cash interest paid in the first nine months was $75.3. Management estimated that a one-percentage-point change in variable interest rates would affect annual interest expense by about $16.1 before hedging; interest-rate caps cover $900.0 of notional debt at stated cap rates and periods.

Material changes and unusual items

• COVID-19 reduced demand across the business, particularly gasoline-related Refining Services, catalysts serving refining and emissions markets, and products tied to industrial and consumer demand. Management said demand improved in many areas from Q2 lows, but expected heavy-duty diesel emissions catalyst demand to remain well below prior-year levels.
• On October 15, 2020, after quarter-end, the company agreed to sell Performance Materials for $650.0 cash, subject to customary adjustments, approvals and closing conditions. Closing was expected by year-end 2020. Management expected to use after-tax proceeds to reduce debt and return capital to shareholders, subject to board approval; the segment was expected to be reported as discontinued operations from Q4.
• The July debt refinancing generated $14.0 of Q3 debt-extinguishment costs, including a $10.6 redemption premium. The nine-month total was $16.5.
• The company sold its magnesium silicate product line in July for $18.0 and recognized a $5.0 pretax gain, while deferring $11.5 of consideration as a liability for future toll-manufacturing obligations. A first-quarter asset swap generated a $6.5 pretax disposal loss and $7.7 of goodwill.
• The effective tax rate rose to 60.1% in Q3 from 38.4%, and to 54.5% for the nine months from 39.3%. The filing attributes fluctuations to factors including GILTI, earnings mix, foreign exchange and transaction-related tax effects.
• In October, an investor exercised a put option under a New Markets Tax Credit arrangement. Settlement retired $21.0 of debt against a $15.6 note receivable, producing a reported $5.4 gain on debt forgiveness.

Outlook, commentary and risks

Management stated that cash, operating cash flow and available ABL capacity should be sufficient for anticipated needs for at least the next 12 months. It cited cost controls, reduced discretionary spending, production adjustments, furloughs and deferred capital maintenance as responses to the pandemic. It also reported limited temporary facility slowdowns and some raw-material availability disruptions, without material production impact to date. The filing provides no numerical full-year earnings or revenue guidance.

Key uncertainties include the duration and economic effects of COVID-19; customer demand and order timing; seasonal demand and working-capital needs; foreign exchange, commodity prices and floating interest rates; substantial indebtedness; the proposed divestiture’s closing and proceeds; environmental and regulatory obligations; and potential impairment if economic conditions weaken. Management said no interim goodwill impairment assessment was considered necessary at September 30, but noted that prolonged deterioration could affect valuations. Management reported disclosure controls were effective at a reasonable assurance level.

Investor facts to verify

• Confirm the issuer identity and any relationship between PQ Group Holdings Inc. and Ecovyst Inc.; this filing names PQ Group Holdings Inc.
• Check whether the Performance Materials sale closed, the final proceeds after adjustments and taxes, and how proceeds were allocated.
• Track post-divestiture debt, liquidity, capital returns and the impact of discontinued-operations presentation.
• Assess whether operating cash flow and margins recover as COVID-related demand and customer order patterns change.
• Review the refinancing’s floating-rate exposure, hedging coverage, covenant terms and debt maturities.
• Evaluate the quality and comparability of Adjusted EBITDA and adjusted net income, including the recurring nature of excluded costs.