PQ Group Holdings Inc. (now Ecovyst) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company operated two segments: Environmental Catalysts & Services (EC&S) and Performance Materials & Chemicals (PM&C).
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $366.2 million | $332.9 million |
| Gross profit / margin | $78.1 million / 21.3% | $82.7 million / 24.8% |
| Operating income / margin | $28.2 million / 7.7% | $37.7 million / 11.3% |
| Net income (loss) attributable to PQ Group Holdings | $0.2 million | $(2.5) million |
| Adjusted EBITDA (non-GAAP) | $107.9 million | $101.2 million |
| Operating cash flow | $22.0 million | $6.7 million |
| Capital expenditures | $33.3 million cash purchases; $25.3 million book capex | $32.4 million cash purchases; $23.8 million book capex |
Sales rose 10.0%, supported by favorable foreign currency translation, higher volumes, and price/mix. Gross profit fell 5.6% as higher manufacturing costs, unfavorable mix, and depreciation more than offset pricing, currency, and volume benefits. SG&A increased $5.9 million to $40.6 million, partly reflecting IPO-related stock compensation and Sovitec costs. Interest expense declined $17.6 million to $29.2 million, but $5.9 million of debt extinguishment costs and higher other expense limited the improvement in reported earnings. Basic and diluted EPS were each $0.00, versus a $0.02 loss per share in Q1 2017.
Segment sales were $117.2 million for EC&S, up 5.3%, and $249.8 million for PM&C, up 12.2%. Segment Adjusted EBITDA was $58.4 million for EC&S, up 3.5%, and $57.2 million for PM&C, up 9.0%. These are non-GAAP measures and are not equivalent to cash flow or GAAP profit.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $58.8 million at March 31, 2018, down from $66.2 million at year-end 2017. Cash, cash equivalents, and restricted cash totaled $60.0 million at quarter-end.
- Operating cash flow was $22.0 million, while working capital consumed $34.8 million, mainly reflecting inventory builds for the upcoming highway sales season and refining-services plant turnarounds. Investing activities used $33.1 million, primarily for capital spending; financing activities provided $5.4 million.
- Total debt was $2.289 billion; long-term debt, net of financing costs and discount, was $2.196 billion. The company reported $2.160 billion of net debt on its specified basis, excluding certain foreign and New Market Tax Credit debt.
- Available ABL revolver capacity was $150.2 million, after $30.0 million drawn and $19.8 million of letters of credit. Management stated that cash, operating cash flow, and revolver availability were expected to cover anticipated needs for at least 12 months.
- On February 8, 2018, the company refinanced its prior term loans with a $1.267 billion secured term loan due February 2025, bearing interest at LIBOR plus 2.50%. It cited a lower margin, removal of the Euro-tranche interest-rate floor, and extended maturity. The loan requires quarterly amortization of 0.25% of original principal.
Outlook, commentary, and risks
- No numerical full-year guidance was provided. Management noted that Q1 and Q4 are seasonally weaker periods for performance materials and refining services; working-capital needs generally rise in those quarters, so quarterly results may not indicate full-year performance.
- Management attributed operating pressure to raw-material and labor inflation, turnaround timing, higher production costs, unfavorable product mix, and weather effects. Price pass-throughs and hedges mitigate some, but not all, cost and commodity exposure.
- Risks highlighted include substantial indebtedness and variable-rate exposure, foreign exchange movements, raw-material costs and supplier relationships, customer concentration and contract renewals, seasonality, competition, environmental and regulatory obligations, operational disruptions, and acquisition and joint-venture risks. A 1% change in assumed variable interest rates was estimated to affect annual interest expense by approximately $13.1 million before hedging.
- The company recorded a Q1 income tax benefit of $0.5 million and an unusually negative effective tax rate of 1,959.3%, reflecting a very small pretax income base and items including foreign currency losses, foreign earnings, withholding taxes, and state taxes. It continued evaluating tax-reform effects, including GILTI.
- The European Kirchheimbolanden plant was expected to cease production in May 2018, with equipment relocation planned. Additional dismantling, transport, and reassembly costs were estimated at $0.5–$1.0 million. Q1 also included a $1.5 million insurance recovery related to Hurricane Harvey (most recorded against operating expense).
- Environmental reserves included $0.837 million for Rahway remediation, $0.463 million for PCB-impacted soils, $0.837 million for a sold-property matter, and $1.183 million for Martinez remediation. The company said additional Rahway costs could exist but could not yet be reasonably estimated. Management reported no pending litigation it believed likely to have a material adverse effect.
Most important facts for investors to verify
- Whether subsequent quarters recovered the gross and operating margin declines, and whether Q1 cost inflation and turnaround effects were temporary.
- Whether operating cash flow can sustainably fund capital spending, seasonal working-capital needs, and debt service.
- The effective interest cost, refinancing benefits, covenant headroom, and sensitivity of cash interest expense to rate changes.
- How the European plant closure, Sovitec integration, and projected relocation costs affected subsequent operating results and cash flows.
- Whether tax-reform and GILTI estimates, and environmental remediation reserves, changed materially after this filing.