Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2019. The filing is by PQ Group Holdings Inc., a specialty catalysts, materials, chemicals and services company; it does not identify the registrant as Ecovyst, so investors should verify the entity and any corporate-name or succession relationship.
Effective March 1, 2019, the company reorganized reporting into four segments: Refining Services, Catalysts, Performance Materials and Performance Chemicals. Prior-period segment results were recast for comparison; consolidated financial statements were not changed. Results are seasonal, and management cautions that the first quarter is not necessarily indicative of the full year.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | 359.2 | 366.2 |
| Gross profit / margin | 80.9 / 22.5% | 78.1 / 21.3% |
| Operating income / margin | 29.5 / 8.2% | 28.2 / 7.7% |
| Net income attributable to PQ Group Holdings | 3.2 | 0.2 |
| Diluted earnings per share | $0.02 | $0.00 |
| Operating cash flow | 26.8 | 22.0 |
| Cash and cash equivalents at quarter-end | 52.3 | Not provided here |
| Total debt at quarter-end | 2,146.8 | 2,148.4 at Dec. 31, 2018 |
Interest expense was 28.6, versus 29.2 a year earlier. Net debt was 2,094.5. Current assets were 570.3 and current liabilities 262.8 at March 31. Cash, cash equivalents and restricted cash totaled 54.1 at quarter-end.
Capital expenditures paid were 33.6; net cash used in investing activities was 29.2. Cash declined 5.6 during the quarter. Working capital used 19.9 of cash, primarily reflecting higher inventory. The company reported 170.2 of unused ABL capacity after letters of credit and borrowings, and total available liquidity of 222.5. It stated that cash, operating cash flow and facility availability should cover anticipated needs for at least 12 months.
Changes versus the prior comparable period
- Sales fell 7.0, or 1.9%, mainly from lower volumes and unfavorable foreign-exchange translation, partly offset by pricing and mix.
- Gross profit rose 2.8, with margin improving 1.2 percentage points. Favorable pricing and mix and lower depreciation offset higher manufacturing costs, lower volumes and currency effects.
- Net income attributable to the company increased to 3.2 from 0.2. The prior period included 5.9 of debt-extinguishment costs; the current period benefited from a 3.0 non-operating gain versus a 5.0 expense a year earlier.
- Equity income from affiliates dropped to 2.1 from 11.9, primarily due to weaker Zeolyst joint-venture earnings and lower sales in fuels and emission control markets.
- Adjusted EBITDA, a non-GAAP measure, declined 6.4% to 101.0 from 107.9. Segment Adjusted EBITDA was 111.0 versus 115.6, before unallocated corporate expenses.
- Operating cash flow increased 4.8, as working-capital use was lower than in the prior-year quarter, partly offset by reduced affiliate dividends and other cash-generation differences.
Segments, outlook and risks
Segment sales and Adjusted EBITDA were: Refining Services 105.8 and 39.7; Catalysts 15.9 and 18.1; Performance Materials 61.1 and 10.5; Performance Chemicals 180.5 and 42.7. Refining Services EBITDA increased 11.8%; the other three segments declined, with Catalysts down 21.0% amid weaker fuels and emission-control demand. These are company-defined non-GAAP measures and may not be comparable across companies.
No specific full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management cited seasonal demand and higher first- and second-quarter working-capital needs, foreign-currency exposure, raw-material and energy costs, customer plant outages, and substantial indebtedness. The company hedges interest-rate, natural-gas and currency exposures and said it did not use derivatives for speculation. A 1 percentage-point change in variable borrowing rates was estimated to affect annual interest expense by about 11.7 before hedging.
Management reported compliance with debt covenants. It described environmental, regulatory, litigation, product-liability, customer, supplier, competition, foreign-exchange, operational and leverage risks. Management did not believe pending legal matters were likely to have a material adverse effect, while noting legal proceedings can still impose costs and divert resources. No material change to the annual-report risk factors was reported.
Unusual and accounting items include adoption of lease accounting on January 1, 2019, which added right-of-use assets and lease liabilities without an impact on operating results or liquidity at adoption; a 1.874 reclassification from accumulated other comprehensive income to opening retained earnings; and an estimated 2019 GILTI tax inclusion whose amount could change. The effective tax rate was 41.6% in Q1 2019; management said tax rates fluctuate with income mix, foreign earnings, foreign-exchange items and other factors.
Important facts for investors to verify
- Confirm that this PQ Group Holdings filing is the intended issuer filing for the Ecovyst request and establish the relevant corporate-name or successor relationship.
- Review the sustainability of cash generation against 2.15 billion of debt, interest costs, capital spending and seasonal working-capital needs; confirm current ABL availability and covenant headroom.
- Assess whether the sharp decline in Zeolyst affiliate earnings and Catalysts segment EBITDA is temporary or reflects sustained market weakness.
- Check the drivers and repeatability of Q1 earnings, including foreign-exchange gains, pricing, cost pass-throughs, and items excluded from Adjusted EBITDA and adjusted net income.
- Monitor GILTI tax estimates, foreign-cash repatriation considerations, environmental contingencies and the impact of the new segment structure on future comparisons.