Ecovyst Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Ecovyst supplies specialty catalysts and services through Ecoservices and Catalyst Technologies, including its 50% interest in the Zeolyst joint venture. The 2021 comparative results include the Performance Chemicals and Performance Materials businesses as discontinued operations; the Performance Chemicals sale closed in August 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $232.5m | $167.4m | $637.4m | $441.0m |
| Gross profit / margin | $67.7m / 29.1% | $53.6m / 32.0% | $175.3m / 27.5% | $122.2m / 27.7% |
| Operating income / margin | $38.5m / 16.6% | $22.5m / 13.4% | $82.4m / 12.9% | $36.6m / 8.3% |
| Net income (loss) from continuing operations | $21.3m | $4.7m | $48.4m | $(5.9)m |
| Adjusted EBITDA | $75.4m | $69.4m | $207.6m | $164.4m |
| Diluted EPS, continuing operations | $0.16 | $0.03 | $0.35 | $(0.04) |
Quarterly sales rose 38.9%; nine-month sales rose 44.5%. Management attributed growth chiefly to higher selling prices, including pass-through of sulfur and other input costs, and increased volumes. Gross profit increased, but quarterly gross margin declined as manufacturing costs and less favorable mix absorbed part of the pricing and volume benefit. Nine-month gross margin was broadly stable. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Segments and operating trends
- Ecoservices: Sales were $195.7m in Q3, up 42.3%, and $542.7m for nine months, up 51.4%. Adjusted EBITDA was $64.1m for Q3, up 23.5%, and $173.4m for nine months, up 38.3%. Higher pricing and volumes supported results; pricing reflected, among other factors, sulfur cost pass-through.
- Catalyst Technologies: Sales were $36.9m in Q3, up 23.1%, and $94.7m for nine months, up 14.8%. Adjusted EBITDA fell 24.3% to $19.3m in Q3 and 10.7% to $57.7m for nine months. Management cited weaker product mix and higher production/input costs; Zeolyst earnings also declined, primarily on lower sales volumes.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow was $109.3m for the first nine months, compared with $92.3m in 2021. Working capital used $42.5m, versus $18.5m used in the prior-year period.
- Capital expenditures were $39.5m of cash purchases; reported book capital expenditures were $37.5m, comprising $31.5m maintenance and $6.0m growth spending.
- Cash was $121.4m at September 30, down from $140.9m at year-end 2021. Total debt principal was $888.8m, with $9.0m current maturities; net debt was reported as $767.4m. The term loan matures in June 2028.
- Available liquidity was $199.0m: cash of $121.4m plus $77.6m availability under the asset-based revolver, after letters of credit. No revolver borrowings were outstanding. The company said it was in compliance with debt covenants and expected liquidity to cover anticipated needs for at least 12 months.
- Financing cash outflow was $82.6m, primarily reflecting $73.7m of share repurchases and $6.8m of debt repayments. The company had $376.3m remaining under its $450m, four-year repurchase authorization.
Outlook, risks and unusual items
- No specific financial guidance or quantified forecast is provided in the supplied filing text. Management described demand as strong in key markets, including refining/regeneration services, sulfuric acid applications and polyethylene catalysts, while noting that catalyst demand can vary with customer replacement schedules and that Ecoservices regeneration demand is seasonal.
- Inflation in raw materials, energy, freight and labor increased manufacturing costs. Ecoservices contracts commonly include price adjustments and/or take-or-pay protections, but the company noted risks around cost pass-through, supply-chain disruption, customer demand, competition, customer concentration, debt, foreign exchange, environmental and safety regulation, and product liability.
- Interest expense is exposed to variable rates. Before hedging, management estimated that a 1 percentage-point rate change would affect annual interest expense by about $8.9m. Interest-rate caps covered $900m of notional debt at a 1.00% cap rate, with maturities through 2023–2025.
- Q3 2022 other operating expense included severance associated with former executives; nine-month other operating expense also included residual divestiture and transaction costs. Q3 2021 and nine-month 2021 results included $15.2m and $26.9m, respectively, of debt extinguishment costs. Large 2021 discontinued-operation losses make comparisons of total net income with 2022 less representative of continuing business performance.
- The 2022 repurchase program included open-market purchases and a 6.5m-share repurchase from underwriters in connection with an August secondary offering. The Inflation Reduction Act’s 1% excise tax on net repurchases begins in 2023; Ecovyst said it did not expect a material impact based on historical activity, while noting its analysis was ongoing.
- The company corrected a prior-period presentation error in comprehensive income related to discontinued operations, adding $7.1m of comprehensive loss to the 2021 comparative presentation. It concluded the error was not material; there was no impact on income statements, balance sheets or cash flows. Management reported effective disclosure controls, no material change in internal controls, and no pending litigation believed likely to have a material adverse effect.
Most important facts for investors to verify
- Whether higher input costs continue to be passed through, and whether that pricing sustains margins as volumes and product mix change.
- Whether Catalyst Technologies and Zeolyst earnings recover from lower volumes, weaker mix and elevated production costs.
- Working-capital requirements, especially receivables and accrued liabilities, and the resulting conversion of earnings into cash.
- Variable-rate debt exposure, effectiveness and duration of interest-rate caps, covenant compliance, and the availability of revolver capacity.
- The pace and funding of share repurchases, their effect on cash and share count, and the impact of the IRA excise tax beginning in 2023.