Ecovyst Inc. (then PQ Group Holdings Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing was submitted under the name PQ Group Holdings Inc.; its businesses span refining services, catalysts, performance materials and performance chemicals. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $361.6 | $359.2 | +0.7% |
| Gross profit / margin | $88.6 / 24.5% | $80.9 / 22.5% | Margin +2.0 percentage points |
| Operating income / margin | $23.4 / 6.5% | $29.5 / 8.2% | Income down $6.0 |
| Net income attributable to company | $0.2 | $3.2 | Down $3.0 |
| Adjusted EBITDA | $103.1 | $101.0 | +2.1% |
| Operating cash flow | $4.5 | $26.8 | Down $22.3 |
| Capital expenditures (cash) | $28.1 | $33.6 | Down $5.5 |
Gross profit improved on higher volume and favorable manufacturing costs, partly offset by unfavorable product mix, pricing and foreign exchange. Operating income fell mainly because of the asset-swap loss and higher operating expenses. Net income also reflected lower equity-method earnings? No: equity in affiliate income rose to $8.4 million from $2.1 million, while interest expense declined to $24.5 million from $28.6 million. The effective tax rate was 73.7%, versus 41.6%.
Segment sales and Adjusted EBITDA were mixed. Catalysts sales rose 56.6% to $24.9 million and Adjusted EBITDA increased 25.4% to $22.7 million, supported by polyolefin catalyst demand and higher Zeolyst joint-venture earnings. Performance Materials sales rose 7.2% to $65.5 million and Adjusted EBITDA rose 28.6% to $13.5 million, aided by North American highway demand and favorable weather. Refining Services sales declined 4.8% to $100.7 million and Adjusted EBITDA fell 6.3% to $37.2 million. Performance Chemicals sales declined 3.4% to $174.3 million and Adjusted EBITDA fell 5.2% to $40.5 million.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $107.7 million; total available liquidity was $236.3 million, including $128.6 million available under the ABL facility after borrowings and letters of credit.
- Total debt was $1,996.8 million, up from $1,932.1 million at December 31, 2019; net debt was $1,889.1 million. Net cash from financing included $64.7 million of net revolving-credit borrowings.
- Operating cash flow declined primarily because working capital used $46.0 million, versus $19.9 million in Q1 2019. Cash paid for interest was $20.0 million. The filing states no significant debt maturities before November 2022.
- The term loan was amended to reduce applicable rates and extend maturity to February 2027; management estimated annual interest savings of $2.4 million at then-current rates. The ABL commitment increased by $50 million to $250 million and maturity was extended to March 2025.
- The company repurchased 211,700 shares for $2.1 million under a new $50 million authorization, leaving $47.9 million available. It also withheld 109,564 shares for employee tax obligations; those were not program repurchases.
Material changes, outlook and risks
- COVID-19: The company reported no material effect on Q1 results, with manufacturing, key vendors and most customers operating with limited interruption. It warned that the future effects could be material. Management expected near-term weakness in Refining Services from lower gasoline demand and high inventories, and in Performance Chemicals from lower industrial demand and potentially weaker consumer spending. It also cited possible disruption to Catalysts and Performance Materials demand, temporary facility slowdowns, absenteeism and raw-material availability.
- Management said existing cash, operating cash flow and ABL availability should meet anticipated cash needs for at least 12 months. This is forward-looking and dependent on evolving business conditions.
- On February 19, the company completed a non-cash asset swap involving its ThermoDrop product line and two glass-bead facilities. It recorded a preliminary $9.9 million disposal loss and $5.8 million of goodwill assigned to Performance Materials; purchase accounting remained subject to change.
- The company sold its 49% interest in Quaker Holdings in March. Proceeds included a $0.7 million liquidating dividend and $1.0 million from the share sale.
- Foreign-currency translation reduced other comprehensive income by $46.4 million in Q1. Management did not consider an interim goodwill impairment assessment necessary, but noted that a prolonged downturn could affect valuations and lead to future impairment.
- Seasonality typically depresses Performance Materials and Refining Services results in Q1 and Q4 and raises working-capital needs in the first half. The filing provides no formal full-year earnings or revenue guidance.
- Management stated that environmental, regulatory, labor, product-liability and other ordinary-course claims were not expected to materially affect the company; it reported no pending litigation believed likely to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer’s corporate identity and reporting continuity: this Q1 2020 filing is in the name PQ Group Holdings Inc., although the request identifies Ecovyst Inc.
- Track COVID-19 effects on demand, production, customer collections and working capital, especially in Refining Services and Performance Chemicals.
- Monitor liquidity and leverage, including the $64.0 million ABL draw, cash conversion and the company’s ability to meet debt service and capital needs.
- Assess whether reported Adjusted EBITDA growth persists; it is a non-GAAP measure and includes adjustments for items such as the asset-disposal loss, stock compensation and restructuring costs.
- Follow the final valuation of the asset swap, potential goodwill impairment indicators and the impact of foreign-exchange movements.