Business context and reporting period
This is PQ Group Holdings Inc.’s Form 10-K for the fiscal year ended December 31, 2020, filed March 17, 2021. The supplied filing identifies the registrant as PQ Group Holdings Inc., not Ecovyst. It reports continuing operations in Refining Services, Catalysts and Performance Chemicals; the former Performance Materials business is reported as discontinued operations after its December 2020 sale.
In December 2020, the company sold Performance Materials for a stated purchase price of $650 million and received $624.3 million in net cash proceeds. On March 1, 2021, it announced an agreement to sell Performance Chemicals for $1.1 billion, subject to customary adjustments and closing conditions. The company expected that transaction to close by year-end 2021 and to report Performance Chemicals as discontinued operations beginning in first-quarter 2021.
Financial performance and liquidity
Unless noted otherwise, figures below are for continuing operations and in U.S. dollars.
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Sales | $1,107.4 million | $1,199.9 million | Down 7.7% |
| Gross profit / margin | $273.4 million / 24.7% | $298.4 million / 24.9% | Profit down $25.0 million |
| Operating income (loss) / margin | $(162.9) million / (14.7)% | $147.5 million / 12.3% | Includes $260.0 million goodwill impairment |
| Net income (loss) from continuing operations | $(179.5) million | $65.7 million | Down $245.2 million |
| Net income (loss) attributable to PQ Group Holdings | $(278.8) million | $79.5 million | Includes discontinued-operations loss |
| Adjusted EBITDA, non-GAAP | $338.0 million | $394.0 million | Down 14.2% |
| Cash from continuing operating activities | $205.3 million | $227.7 million | Down $22.3 million |
| Cash purchases of property, plant and equipment | $97.1 million | $111.1 million | Down $14.0 million |
Gross profit declined mainly from lower sales volumes, weaker pricing and foreign exchange, partly offset by $30.9 million of favorable manufacturing costs. Adjusted EBITDA fell in all three segments: Refining Services $157.2 million (down 10.5%), Catalysts $74.5 million (down 30.9%), and Performance Chemicals $142.4 million (down 6.0%). Catalysts’ result includes the company’s share of Zeolyst joint-venture earnings.
At year-end, gross debt was $1,426.4 million, versus $1,867.5 million a year earlier; net debt was $1,290.9 million. Cash was $135.5 million and available ABL revolver capacity was $102.5 million, for reported total liquidity of $238.0 million. There were no ABL borrowings, and the company reported compliance with debt covenants. Cash interest paid in 2020 was $90.3 million. The company stated that available cash, operating cash flow and revolver availability were expected to meet anticipated needs for at least the next 12 months.
Material changes and unusual items
- COVID-19 reduced demand and volumes, especially in Refining Services and Performance Chemicals; management reported a demand recovery in several end markets during the fourth quarter.
- The $260.0 million Performance Chemicals goodwill impairment was non-cash and recorded in the fourth quarter following a lower fair-value assessment amid a strategic review.
- The Performance Materials sale generated a $70.9 million pre-tax loss on sale and a $102.2 million net loss from discontinued operations for 2020. The company paid a $1.80-per-share special dividend, totaling approximately $243.7 million, and used sale proceeds and cash on hand for debt repayment and the dividend.
- The company refinanced its $625 million 6.75% secured notes due 2022 with a new $650 million secured term loan, and amended/repriced other term debt. Debt-extinguishment costs were $25.0 million.
- Other operating expense rose to $51.0 million from $21.4 million, reflecting restructuring, asset-related and divestiture costs, including costs associated with the Performance Chemicals strategic review.
- Continuing-operations sales fell in Refining Services (10.1%) and Performance Chemicals (8.3%); Catalysts sales increased 9.7%, primarily on stronger polyolefin catalyst demand.
Outlook, risks and contingencies
No formal numerical earnings or revenue guidance is provided in the supplied filing. Management anticipated improving refinery utilization and continued recovery in several markets during 2021, while noting that recovery remained variable. It expected first-half 2021 refinery catalyst demand to be weaker, with improvement later in the year; polyolefin catalyst demand was described as strong. These expectations are forward-looking and subject to uncertainty.
- COVID-19 and end-market exposure: Continued pandemic effects, economic weakness, refinery utilization, customer production and changing demand could affect volumes and cash generation.
- Leverage and interest rates: Substantial debt, variable-rate exposure and LIBOR transition create refinancing, covenant and interest-cost risks. A 100-basis-point increase in assumed variable rates was estimated to add about $11.3 million in annual interest expense before hedging.
- Environmental matters: The company reported $4.1 million of reserves for environmental remediation and enforcement matters. It identified ongoing investigations or remediation at several current or former sites and noted actual costs could exceed estimates.
- Pensions: Pension and other postretirement plans were underfunded by $44.0 million at year-end; changes in discount rates, asset returns or actuarial assumptions may affect future costs and funding.
- Legal and regulatory matters: Disclosed exposures include asbestos premises-liability claims and a Brazilian antitrust investigation concerning alleged historical cartel activity. The filing says management believed no pending litigation was likely to have a material adverse effect, but adverse outcomes remain possible.
- Divestiture and capital allocation: The proposed Performance Chemicals sale remained subject to approvals and closing conditions. The company announced an intended $2.50–$3.25-per-share special dividend from anticipated proceeds, subject to board approval and declaration; proceeds were also expected to reduce debt.
Important facts for investors to verify
- Confirm the issuer identity and corporate relationship: the supplied 10-K is for PQ Group Holdings Inc., while the request names Ecovyst.
- Track completion, final proceeds and purchase-price adjustments for the announced $1.1 billion Performance Chemicals sale, and the resulting debt and dividend actions.
- Assess underlying earnings and cash generation excluding the goodwill impairment, discontinued-operations loss, divestiture effects and other adjustments; compare GAAP results with non-GAAP Adjusted EBITDA.
- Review debt maturities, variable-rate exposure, available liquidity and covenant headroom after the sale and debt repayments.
- Monitor the environmental reserves, pension funding position, and legal and regulatory matters for changes in estimated exposure.