Business context and reporting period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2018. The registrant named in the filing is PQ Group Holdings Inc. (not Ecovyst Inc.). PQ operates Environmental Catalysts & Services (EC&S) and Performance Materials & Chemicals (PM&C), supplying specialty catalysts, materials, chemicals and services. Dollar figures below are in millions unless noted.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $434.7 | $389.3 | $800.9 | $722.2 |
| Gross profit | $108.4 | $107.4 | $186.5 | $190.1 |
| Gross margin | 24.9% | 27.6% | 23.3% | 26.3% |
| Operating income | $49.1 | $55.1 | $77.2 | $92.7 |
| Operating margin | 11.3% | 14.1% | 9.6% | 12.8% |
| Net income (loss) attributable to PQ | $15.8 | $(1.6) | $16.0 | $(4.1) |
| Diluted earnings (loss) per share | $0.12 | $(0.02) | $0.12 | $(0.04) |
| Adjusted EBITDA (non-GAAP) | $128.9 | $122.8 | $236.8 | $224.0 |
Q2 sales increased 11.7%, while gross profit was nearly flat and operating income fell 11.2%. For the first half, sales rose 10.9%, but gross profit declined 1.9% and operating income declined 16.7%. Management attributed margin pressure mainly to higher manufacturing and raw-material costs, maintenance timing, labor inflation and an unfavorable mix of lower-margin products. Higher volumes, pricing and currency translation partly offset those pressures. Segment Adjusted EBITDA for the first half was $123.3 million at EC&S (up 2.2%) and $130.5 million at PM&C (up 9.8%).
Interest expense was $27.2 million in Q2 and $56.4 million in the first half, down from $48.2 million and $95.0 million, respectively, in 2017. The first half included $5.9 million of debt-extinguishment costs. The effective tax rate was 45.8% for Q2 and 44.0% for the first half; tax rates were affected by foreign-exchange items, tax-law changes, losses without tax benefits and Sovitec acquisition adjustments.
First-half cash from operations was $50.1 million, versus $21.8 million in 2017; working capital used $81.9 million, primarily reflecting receivables and inventory increases. Investing activities used $66.3 million, including $66.1 million of cash capital expenditures. Financing activities provided $4.7 million. Cash, cash equivalents and restricted cash ended at $53.9 million.
At June 30, 2018, cash and cash equivalents were $52.6 million and total debt was $2.288 billion (net debt, as defined by the company, was $2.165 billion). Current maturities were $54.1 million. The company reported $143.7 million of ABL availability, after letters of credit and revolver borrowings, and total available liquidity of $196.3 million. It stated that liquidity sources should meet anticipated needs for at least 12 months and that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected volume, organic growth, pricing and mix, currency translation, and the inclusion of Sovitec, acquired in June 2017. First-half PM&C sales rose 13.8%; EC&S sales rose 4.8%.
- Profitability weakened at the gross and operating levels despite higher sales. First-half cost of goods sold rose 15.5%, faster than sales.
- Equity income from affiliates increased to $25.5 million for the first half from $14.6 million, primarily due to stronger Zeolyst joint-venture earnings.
- On February 8, 2018, PQ refinanced its prior term loans with a $1.267 billion secured term loan due February 2025 at LIBOR plus 2.50%, reducing the margin and extending maturity. Reported total debt rose modestly from $2.270 billion at year-end 2017 to $2.288 billion.
- Other comprehensive income included a $20.8 million first-half foreign-currency translation loss, compared with a $41.6 million gain in the prior-year period.
Outlook, commentary and risks
No specific full-year revenue or earnings guidance is provided. Management expects cash, operating cash flows and available ABL borrowings to fund working capital, debt service and capital spending for at least the next 12 months. It reported first-half maintenance and expansion capital expenditures of $52.5 million and $6.7 million, respectively. Results are seasonal: highway-safety demand and refining services activity typically strengthen in warmer months, while working-capital needs can be higher in the first and fourth quarters.
Key exposures include substantial indebtedness and variable interest rates, foreign-exchange movements, raw-material and energy costs, customer concentration and contract renewal or termination risks, competition, seasonal demand, production disruptions, and extensive environmental, health and safety regulation. A 1% change in assumed rates on variable-rate credit facilities would affect annual interest expense by approximately $13.1 million before hedging. Environmental remediation reserves include $0.9 million for a New Jersey site and reserves for other sites; the company noted that additional Rahway remediation costs cannot yet be reasonably estimated. It reported no litigation expected to have a material adverse effect. The final effects of U.S. tax reform, including GILTI, remained subject to evaluation.
Unusual items include $5.9 million of first-half debt-extinguishment costs, $2.5 million of Hurricane Harvey insurance proceeds recognized in the first half, Sovitec purchase-accounting charges, and non-GAAP adjustments used in Adjusted EBITDA and Adjusted Net Income. Adjusted Net Income is a non-GAAP measure and excludes selected items; it should not be treated as a substitute for GAAP earnings or cash flow.
Important facts for investors to verify
- Confirm the issuer identity and relationship, if any, between PQ Group Holdings Inc. and Ecovyst Inc.; this filing is for PQ Group Holdings.
- Track whether pricing and volume gains can offset cost inflation, maintenance expense and lower-margin sales, and whether reported margin declines reverse.
- Review debt maturities, refinancing terms, covenant headroom, revolver availability and sensitivity to interest-rate increases.
- Assess cash conversion and working-capital demands, particularly seasonal receivables and inventory, against ongoing capital expenditure needs.
- Monitor Zeolyst joint-venture performance, foreign-currency effects, tax-reform estimates and unresolved environmental remediation exposure.