Ecovyst Inc. quarterly report, Q2 FY2019

Business context and reporting period

This is PQ Group Holdings Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The filing registrant is PQ Group Holdings Inc.; the supplied company metadata identifies Ecovyst. The company operates four specialty businesses: Refining Services, Catalysts, Performance Materials and Performance Chemicals.

Effective March 1, 2019, the company reorganized its reporting segments into those four businesses; prior-period segment information was recast, with no change to prior consolidated financial statements.

Financial performance and position

Operating margin was 16.3% in Q2 versus 11.3% a year earlier, and 12.6% for the first half versus 9.6%. The company’s non-GAAP Adjusted EBITDA excludes specified items and is not a substitute for GAAP results or cash flow.

For the six months, operating cash flow was $60.0m, investing cash outflow $33.9m and financing cash outflow $0.4m. Purchases of property, plant and equipment were $65.5m, making operating cash flow less those purchases approximately negative $5.5m before other investing items. Cash and cash equivalents were $82.2m at June 30; total liquidity, including $171.3m available on the ABL facility, was $253.5m.

Gross debt was $2,146.2m ($2,114.7m net of unamortized discounts and financing costs); net debt was reported as $2,064.0m. Long-term debt excluding current maturities was $2,104.6m. The company reported compliance with debt covenants at quarter-end.

Material changes versus prior comparable periods

• Q2 sales declined 0.7%; first-half sales declined 1.2%. Lower volumes and unfavorable foreign-exchange translation offset higher prices and favorable mix.
• Q2 gross profit rose 6.5%, supported by favorable pricing; first-half gross profit rose 5.3%, with pricing, mix and lower depreciation partly offset by manufacturing costs and lower volumes.
• Q2 attributable net income nearly doubled, while first-half attributable net income rose 110.6%. The increases include a gain from the sale of a non-core product line; operating results should be considered in that context.
• First-half Adjusted EBITDA decreased 1.4% to $233.5m despite essentially flat segment Adjusted EBITDA, as unallocated corporate expenses increased. Performance Chemicals and Performance Materials segment Adjusted EBITDA declined; Refining Services increased.
• Equity income from affiliates fell to $14.4m for the first half from $25.5m, principally due to lower Zeolyst joint-venture earnings.
• First-half operating cash flow improved from $50.1m to $60.0m, mainly as working-capital cash use narrowed to $60.2m from $81.9m. Capital spending remained substantial.

Outlook, commentary, risks and unusual items

Management stated that cash, operating cash flow and ABL availability were expected to meet anticipated needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance. Management noted that seasonal demand and weather can affect Performance Materials and Refining Services, with working-capital needs typically higher in the first half.

On June 28, the company sold part of its sulfate salts product line for $28.0m, subject to a working-capital adjustment, and recorded a pretax gain of $11.4m. It deferred $9.0m of proceeds as a contract liability and entered a tolling arrangement, mostly running through June 2021. On August 7, after quarter-end, it prepaid $100.0m of Term Loan principal.

Key risks disclosed include substantial indebtedness and variable-rate exposure, foreign exchange, raw-material and energy prices, customer outages and concentration, seasonal demand, competition, environmental and other regulation, litigation, and production or distribution disruption. A 1 percentage-point change in assumed variable interest rates would have an annual interest-expense impact of approximately $11.7m before hedging; interest-rate caps covered $1.0bn of notional debt. Management said environmental and other claims were not expected to have a material adverse effect, while noting legal proceedings can still entail costs and management distraction. No material change to previously disclosed risk factors was reported.

The company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; management said adoption had no impact on operating results or liquidity. The effective tax rate was 40.0% for the first half; the filing describes ongoing uncertainty around estimating the effect of GILTI tax provisions.

Important facts for investors to verify

• Confirm the issuer identity and relationship between the filing’s registrant, PQ Group Holdings Inc., and the Ecovyst company metadata.
• Assess how much of improved operating income and net income came from the $11.4m product-line sale gain, and the tolling agreement’s deferred revenue and obligations.
• Review the drivers and sustainability of pricing gains, volume declines, currency effects and weaker affiliate earnings, particularly at Zeolyst.
• Monitor debt reduction following the $100.0m post-quarter repayment, remaining variable-rate exposure, covenant compliance and ABL availability.
• Compare cash generation with capital expenditures and seasonal working-capital needs; reported first-half cash flow less PP&E purchases was approximately negative $5.5m.
• Review the non-GAAP Adjusted EBITDA adjustments and the company’s tax assumptions, including GILTI.