Ecovyst Inc. quarterly report, Q3 FY2017

Business context and reporting period

This is PQ Group Holdings Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing identifies the registrant as PQ Group Holdings Inc., not Ecovyst Inc.; investors should verify the entity and filing match their intended issuer. PQ operates Performance Materials & Chemicals and Environmental Catalysts & Services businesses. Comparisons for the nine-month period are affected by the May 2016 business combination: 2017 includes legacy PQ for the full period, while 2016 includes it only from May 4 onward. Management also presents pro forma comparisons.

Key financial results

Q3 sales rose 5.9%, primarily from favorable pricing and mix and $13.5 million of Sovitec sales following its June acquisition. Gross profit increased 7.6%; operating income increased 5.0%. Adjusted EBITDA is a non-GAAP measure and excludes items management considers non-core; it is not a substitute for GAAP results or cash flow.

For the pro forma nine-month comparison, sales increased 3.1%, while gross margin was 26.3% versus 26.8%. Adjusted EBITDA increased 7.0%. The filing attributes improvement chiefly to pricing, Sovitec and stronger Zeolyst joint-venture results; higher depreciation and manufacturing costs, foreign-exchange losses and other expenses weighed on results.

Cash flow, debt and liquidity

• Operating cash flow for the first nine months was $109.8 million, compared with $89.3 million. Working capital used $28.0 million, versus providing $18.5 million in the prior-year period; receivables were a significant use of cash.
• Investing cash outflow was $134.5 million, including $90.2 million of property, plant and equipment purchases and $41.6 million for Sovitec. Financing cash inflow was $29.2 million. Cash declined $1.9 million to $68.8 million.
• At September 30, total debt was $2.703 billion, including $35.0 million drawn on the ABL revolver; cash was $68.8 million. ABL availability was $140.6 million after borrowings and letters of credit, for reported total available liquidity of $209.4 million.
• Cash interest paid in the nine-month period was $118.8 million. Management estimated that a one-percentage-point change in variable interest rates would affect annual interest expense by about $18.1 million before hedging effects.
• After quarter-end, the October 3 IPO raised approximately $480.5 million net. Proceeds were used to repay $446.2 million principal of floating-rate senior unsecured notes, plus accrued interest and redemption premiums. The company reported approximately $40.5 million of related debt-extinguishment costs and expected the repayment to reduce annual interest expense by approximately $53.9 million.

Changes, outlook and risks

• On June 12, PQ acquired Sovitec facilities for $41.6 million in cash, excluding assumed debt. Purchase accounting remained preliminary; $37.8 million of goodwill was recorded. The acquisition contributed $17.2 million of sales and $1.1 million of net income through September 30.
• In September, the company announced the planned closure of its Kirchheimbolanden, Germany facility, expected on or about March 31, 2018. It recorded $3.9 million of severance costs and estimated a further $0.5–$1.0 million for equipment dismantling, transport and reassembly.
• Hurricane Harvey caused temporary shutdowns at two Texas refining-services facilities. Management estimated a $5.6 million sales and $4.7 million Adjusted EBITDA impact for the quarter and nine-month periods, and expected to submit insurance claims; recovery was not assured.
• Management said existing cash, operating cash flow and revolver availability should cover anticipated needs for at least the next 12 months. No numerical earnings or revenue guidance was provided. The company cited seasonality, foreign-exchange movements, raw-material and energy costs, customer and supplier concentration, competition, regulation, environmental obligations and substantial indebtedness as risks.
• Environmental and legal matters include remediation reserves at multiple sites and a Pennsylvania air-emissions penalty reserve of $0.2 million after a state penalty assessment was reduced by an administrative judge. Additional Rahway remediation costs could not be reasonably estimated. Management stated that no pending litigation was likely to have a material adverse effect.
• The company reported that disclosure controls were effective as of September 30, 2017. It expected to adopt the new revenue-recognition standard in the first quarter of 2018 and anticipated no material change to existing recognition practices, though disclosures would expand.

Investor verification points

• Confirm that PQ Group Holdings Inc. is the intended issuer despite the request metadata naming Ecovyst Inc.
• Assess the pro forma results separately from historical results, given the business-combination comparability issue and the non-GAAP nature of Adjusted EBITDA and adjusted net income.
• Verify the post-IPO debt reduction, redemption costs and expected interest savings, including their effect on subsequent-period interest expense and liquidity.
• Track working-capital use, capital spending, revolver availability and the company’s ability to service its substantial debt.
• Monitor Sovitec integration and preliminary purchase-price allocations, the German facility closure and related costs, and any Hurricane Harvey insurance recoveries.
• Review environmental remediation exposure, including matters for which the filing says additional liability cannot yet be estimated.