PQ Group Holdings Inc. (now Ecovyst Inc.) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 5, 2019. The filing was submitted under PQ Group Holdings Inc. and reports four businesses: Refining Services, Catalysts, Performance Materials, and Performance Chemicals. Unless stated otherwise, financial figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $423.8 million | $427.2 million | $1,214.7 million | $1,228.1 million |
| Gross profit / margin | $112.9 million / 26.6% | $107.5 million / 25.2% | $309.3 million / 25.5% | $294.0 million / 23.9% |
| Operating income / margin | $57.6 million / 13.6% | $48.9 million / 11.4% | $157.3 million / 13.0% | $126.1 million / 10.3% |
| Net income attributable to PQ Group Holdings | $26.7 million | $14.2 million | $60.4 million | $30.2 million |
| Diluted EPS | $0.20 | $0.11 | $0.45 | $0.22 |
| Adjusted EBITDA | $137.7 million | $118.1 million | $371.2 million | $354.9 million |
Q3 sales decreased 0.8%, while gross profit rose 5.0% and operating income rose 17.8%. For the first nine months, sales fell 1.1%, but gross profit increased 5.2% and operating income increased 24.7%. Management’s non-GAAP Adjusted EBITDA increased 16.6% in Q3 and 4.6% year to date; it is not a substitute for GAAP earnings or cash flow.
- Cash flow: Nine-month operating cash flow was $181.9 million, versus $166.0 million. Purchases of property, plant and equipment were $91.7 million, implying approximately $90.2 million of operating cash flow less those purchases. Cash, cash equivalents and restricted cash ended at $80.3 million.
- Liquidity: Cash and cash equivalents were $78.5 million, with $170.1 million available under the ABL revolving facility after letters of credit; management reported total available liquidity of $248.6 million.
- Debt: Total debt was $2.043 billion and net debt was $1.965 billion at September 30. The company prepaid $100 million of term-loan principal during Q3. Long-term debt, net of discount and financing costs, was $2.007 billion.
- Interest and taxes: Nine-month net interest expense was $84.9 million. The effective tax rate was 39.3% for the nine months, compared with 40.9% in 2018.
Material changes versus the prior comparable periods
- Q3 earnings growth reflected improved pricing, lower selling, general and administrative expenses, and substantially higher equity earnings from affiliates, primarily the Zeolyst joint venture. Q3 equity in affiliate income was $17.3 million, versus $5.6 million.
- Q3 gross profit benefited from $18.7 million of favorable customer pricing, partly offset by lower volumes, higher manufacturing costs, and foreign exchange. The stronger U.S. dollar reduced reported sales.
- For the first nine months, gross profit benefited from $59.8 million of favorable pricing, $6.0 million of favorable mix, and lower depreciation, partly offset by higher manufacturing costs, lower volumes, and currency effects.
- Segment trends were mixed: Q3 Catalysts Adjusted EBITDA rose to $31.6 million from $15.7 million, while Performance Chemicals fell to $36.8 million from $41.8 million. Nine-month Catalysts Adjusted EBITDA increased 27.7%; Performance Chemicals declined 8.4%.
- Nine-month sales decreased in Performance Materials and Performance Chemicals, but increased in Refining Services and Catalysts. Reported segment results use a new four-segment structure implemented in March 2019; prior-period segment data was recast.
Outlook, management commentary, risks and unusual items
- Management said existing cash, operating cash flow, and ABL availability should cover anticipated cash needs for at least the next 12 months. No specific revenue, earnings, or margin guidance is provided in the filing.
- Seasonality affects Refining Services and Performance Materials; first- and fourth-quarter demand and profit can be lower, and working capital needs tend to be higher in the first half. Management cautions that quarterly results may not indicate full-year performance.
- The June 2019 sale of part of the sulfate salts product line generated $28.0 million in proceeds and an $11.4 million pretax gain. The transaction included a tolling arrangement, with $7.965 million of deferred revenue remaining at September 30.
- In October 2019, the company settled and replaced cross-currency swaps with swaps of the same €280 million notional and February 2023 maturity. Settlement generated $38.1 million in cash proceeds, which the company planned to apply to additional term-loan repayment.
- Key exposures identified include substantial indebtedness and variable interest rates, foreign exchange, commodity and raw-material costs, customer concentration and contract renewal, demand and weather seasonality, competition, production disruptions, and environmental, health and safety regulation. A 1 percentage-point change in variable rates would have an estimated annual interest impact of about $10.7 million before hedging effects.
- The filing describes environmental and other ordinary-course claims and lawsuits; management did not expect them to have a material adverse effect. No litigation likely to have a material adverse effect was identified. The company reported compliance with debt covenants and effective disclosure controls.
- Lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet; management reported no material adoption impact on operating results or liquidity.
Most important facts for investors to verify
- Whether earnings and margin improvement persists after separating ongoing operations from the $11.4 million product-line sale gain and other Adjusted EBITDA exclusions.
- Whether Catalysts’ strong results, including the contribution from the Zeolyst joint venture and timing-sensitive customer orders, are repeatable.
- How lower volumes in Performance Chemicals and Performance Materials, foreign currency effects, and customer plant outages affect subsequent-period sales and profitability.
- Debt repayment progress, refinancing or repricing plans, covenant headroom, and sensitivity to interest-rate changes.
- Cash conversion and capital needs, including working-capital seasonality, capital expenditures, and pension funding.