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, 2018. The filing describes two segments: Environmental Catalysts & Services and Performance Materials & Chemicals. The request metadata names Ecovyst, but the filing itself identifies PQ Group Holdings Inc. as the registrant.
Unless noted otherwise, amounts below are in millions of dollars. Quarterly and year-to-date results are not necessarily indicative of full-year performance; certain product groups are seasonal.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $427.2 | $391.8 | $1,228.1 | $1,114.0 |
| Gross profit | $107.5 | $102.6 | $294.0 | $292.7 |
| Gross margin | 25.2% | 26.2% | 23.9% | 26.3% |
| Operating income | $48.9 | $46.4 | $126.1 | $139.1 |
| Operating margin | 11.4% | 11.8% | 10.3% | 12.5% |
| Net income (loss) attributable to PQ Group Holdings | $14.2 | $(3.3) | $30.2 | $(7.4) |
| Diluted EPS | $0.11 | $(0.03) | $0.22 | $(0.07) |
| Adjusted EBITDA (non-GAAP) | $118.1 | $119.9 | $354.9 | $343.9 |
For the nine months, operating cash flow was $166.0, capital expenditures paid were $95.3, investing cash outflow was $95.9, and financing cash outflow was $77.8. Cash, cash equivalents and restricted cash ended at $58.0; balance-sheet cash and equivalents were $56.7.
At September 30, total debt was $2,205.9 ($2,168.5 net of original issue discount and deferred financing costs); long-term debt excluding current maturities was $2,147.1. The company reported $170.9 of ABL availability and total available liquidity of $227.6, including cash. It stated that it was in compliance with debt covenants. Current assets were $575.6 and current liabilities $242.1.
Material changes versus the prior comparable period
- Q3 sales grew 9.0%, but gross margin fell 1.0 percentage point and Adjusted EBITDA declined 1.5%. Management attributed the sales increase to volume, cost pass-through pricing and customer mix; higher manufacturing, transportation and labor costs and lower-margin mix weighed on gross profit.
- For the nine months, sales rose 10.2%, while gross profit was nearly flat and operating income fell 9.3%. Higher prices and volumes were offset by increased manufacturing costs, unfavorable mix, higher depreciation and increased SG&A.
- Net income improved versus losses in both 2017 comparison periods. Lower interest expense—down $20.9 in Q3 and $59.4 year to date—was a major contributor, reflecting lower average debt and refinancing. Equity income from affiliates declined in Q3, mainly because of lower Zeolyst Joint Venture earnings, but increased year to date.
- Operating cash flow increased $56.2 year to date, while working capital used $43.1, including a $43.1 receivables outflow. Capital spending was broadly similar to 2017; lower acquisition spending helped reduce investing cash outflow.
- Environmental Catalysts & Services Q3 sales increased 21.0%; Performance Materials & Chemicals sales rose 4.0%, but its Adjusted EBITDA fell 4.2%. Year-to-date sales and Adjusted EBITDA increased in both segments.
Outlook, management commentary, risks and unusual items
- No specific numerical sales, earnings or cash-flow guidance is provided. Management said existing cash, operating cash flow and ABL availability should cover anticipated needs for at least the next 12 months; strategic acquisitions could affect future cash requirements.
- In February 2018, the company refinanced its term loans with a $1,267.0 facility maturing in February 2025 at LIBOR plus 2.50%, and prepaid $45.0 of principal in Q3. The company reported annualized interest expense of approximately $54.0 on the new facility using the September 30 rate. Variable-rate exposure remains: management estimated a one-percentage-point rate change would affect annual interest expense by about $12.3 before hedging.
- Key operating risks include raw-material, energy, labor and transportation cost inflation; customer demand and concentration; competition; seasonal demand and working-capital needs; foreign exchange; production disruption; substantial indebtedness; and environmental, health and safety regulation. The filing notes that results can be affected by weather and summer demand patterns.
- Foreign currency translation and transaction effects remain material. Cross-currency swaps hedge a €280.0 million notional net investment; management estimated that a 10% dollar/euro move would have an approximately $32 million fair-value effect on the swaps, offset by a similar estimated change in the designated net investment. A 10% decline in the exchange rate from the September 30 level could require an estimated $32 million payment to counterparties at termination or expiry.
- Environmental remediation reserves include identified site matters, and the filing says additional Rahway remediation costs may exist but cannot yet be reasonably estimated. Management reported no pending litigation it believed likely to have a material adverse effect. Existing risk factors were reported as materially unchanged.
- Unusual items include $6.7 of year-to-date debt extinguishment costs associated mainly with refinancing, $11.1 of net losses on asset disposals, and $2.5 of Hurricane Harvey insurance proceeds. The 2018 tax provision was affected by tax reform and GILTI; Adjusted Net Income excludes certain tax effects and other items and is a non-GAAP measure.
- The company reversed its plan to close its Kirchheimbolanden, Germany facility as customer demand improved; production was expanded during Q3, while remaining severance payments are expected through 2019. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the issuer and security identity: the supplied filing is for PQ Group Holdings Inc., although the request metadata says Ecovyst.
- Review the reconciliation and recurring nature of Adjusted EBITDA and Adjusted Net Income adjustments; these non-GAAP measures are not substitutes for GAAP earnings or cash flow.
- Assess whether price increases and pass-throughs can continue to offset raw-material, labor, transportation and maintenance cost inflation, and monitor the decline in reported margins.
- Evaluate debt-service capacity, variable-rate exposure, refinancing terms, covenant headroom and the liquidity effect of working-capital seasonality.
- Track receivables and cash conversion, capital spending and the status and potential cost of environmental remediation matters.
- Monitor Zeolyst Joint Venture performance, foreign-exchange and hedge exposures, and the final effects of tax reform and GILTI.