Ecovyst Inc. (then PQ Group Holdings Inc.) — Q2 2020 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2020. The cover identifies the registrant as PQ Group Holdings Inc. (NYSE: PQG), which operated four segments: Refining Services, Catalysts, Performance Materials and Performance Chemicals. Financial statements are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $359.5 million | $431.7 million | $721.1 million | $790.9 million |
| Gross profit / margin | $92.8 million / 25.8% | $115.5 million / 26.8% | $181.4 million / 25.2% | $196.4 million / 24.8% |
| Operating income / margin | $41.2 million / 11.5% | $70.3 million / 16.3% | $64.5 million / 8.9% | $99.8 million / 12.6% |
| Net income attributable to PQ Group Holdings | $15.9 million | $30.6 million | $16.2 million | $33.7 million |
| Diluted earnings per share | $0.12 | $0.23 | $0.12 | $0.25 |
| Adjusted EBITDA | $113.0 million | $132.5 million | $216.2 million | $233.5 million |
Cash flow and liquidity. For the first six months, operating cash flow was $62.1 million versus $60.0 million; capital expenditures were $50.5 million versus $65.5 million. Cash, cash equivalents and restricted cash ended the period at $90.6 million. At June 30, cash and cash equivalents were $88.6 million, with $196.7 million available under the ABL facility and total available liquidity of $285.3 million. Working capital changes used $64.4 million of cash.
Debt. Total debt was $1.933 billion at June 30, 2020, and reported net debt was $1.844 billion. Long-term debt, net of discounts and financing costs, was $1.899 billion. The company reported no ABL borrowings and said it was in compliance with debt covenants. In July, it refinanced its $625 million 6.75% secured notes due 2022 with a new $650 million floating-rate secured term loan due 2027; management said the transaction was expected to reduce interest expense. The filing states there were no significant debt maturities before November 2025 after the financing actions.
Material changes versus comparable periods
- Q2 sales fell 16.7%, and six-month sales fell 8.8%. Management attributed the declines mainly to lower volumes and unfavorable foreign-currency translation.
- Q2 net income attributable to the company fell 48.0%; six-month net income fell 51.9%. Six-month operating income declined 35.3%.
- Q2 Adjusted EBITDA declined 14.7%; six-month Adjusted EBITDA declined 7.4%. These are non-GAAP measures and are not substitutes for net income or cash flow.
- Refining Services and Performance Chemicals experienced significant six-month sales declines. Catalysts sales rose 36.5% for the six months, largely on higher polyolefin catalyst demand and order timing. Performance Materials six-month sales declined 5.7%.
- Six-month other operating expense increased to $34.7 million from $12.6 million, including asset disposal losses and transaction-related items; the prior-year period included an $11.4 million gain on a product-line sale. Six-month results also included $2.5 million of debt extinguishment costs.
- The effective tax rate rose to 50.0% from 39.8% in Q2 and to 51.4% from 40.0% for the six-month period. The filing cites income mix, GILTI, foreign-exchange-related permanent differences, and asset-swap tax effects.
Outlook, commentary and risks
- COVID-19 reduced demand unevenly across end markets. Refining Services was most affected by lower gasoline consumption; Performance Chemicals saw weaker industrial sodium silicate demand; Catalysts faced lower heavy-duty diesel catalyst demand and deferred refinery catalyst change-outs. Management expected some improvement, but described recovery as uncertain and expected near-term demand weakness in several businesses.
- Management said manufacturing, key suppliers and most key customers continued operating with limited interruptions, while noting temporary slowdowns, employee-absence-related production delays and some raw-material supply disruptions. The company reduced discretionary spending, adjusted production, furloughed some employees, delayed hiring and deferred maintenance capital spending.
- Management believed cash, operating cash flow and ABL availability would cover anticipated needs for at least 12 months. The CARES Act payroll-tax deferral was expected to provide about $6 million of 2020 liquidity, with repayment due in 2021 and 2022.
- In July, the company sold a non-core Performance Chemicals product line for $18 million and entered a tolling arrangement through July 2025. In February, it exchanged ThermoDrop-related assets for a glass-bead business and recognized a $6.5 million pretax disposal loss; $7.7 million of goodwill was allocated to Performance Materials.
- Management reported no need for an interim goodwill or indefinite-lived intangible impairment test as of June 30, but warned that prolonged economic weakness or COVID-related demand and supply impacts could affect valuations and lead to future impairment.
- Other risks include seasonality, foreign-exchange and commodity exposure, substantial indebtedness, environmental regulation and claims, customer concentration or contract nonrenewal, and potential production or supply-chain disruption. The company reported no litigation then pending that it believed likely to have a material adverse effect.
Important facts for investors to verify
- Confirm the company identity and corporate-name relationship: this filing is by PQ Group Holdings Inc., not a registrant named Ecovyst.
- Track post-quarter performance against management’s segment-specific COVID-19 recovery expectations, especially gasoline-related demand, sodium silicate, and catalyst orders.
- Review the terms, interest cost and repayment implications of the July 2020 $650 million refinancing, including the floating rate and redemption premium.
- Assess cash conversion and liquidity, given $64.4 million of working-capital cash use and substantial debt service, and monitor the deferred payroll-tax obligations.
- Evaluate recurring versus excluded costs in Adjusted EBITDA and the effect of asset disposals, restructuring and the prior-year product-line gain on comparisons.
- Monitor goodwill and intangible-asset valuation assumptions, environmental contingencies, and the consequences of continued pandemic-related demand or supply disruptions.