PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the historical financial statements and related notes and the pro forma financial information and related notes included elsewhere in this prospectus and the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” before deciding whether to invest in our common stock. Unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” “PQ Group Holdings,” or the “company” refer to PQ Group Holdings Inc. and its consolidated subsidiaries, including PQ Holdings Inc., Eco Services Operations Corp. and PQ Corporation, our primary operating company. We refer to the business of PQ Holdings Inc. prior to the Business Combination as “legacy PQ” and we refer to the business of Eco Services Operations LLC prior to the Business Combination as “legacy Eco.” See “Basis of Financial Presentation.” All information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares, unless otherwise noted.

Our Company

We are a leading global provider of catalysts, specialty materials and chemicals, and services that enable environmental improvements, enhance consumer products, and increase personal safety. Our products and solutions help companies produce vehicles with improved fuel efficiency and cleaner emissions. Our materials are critical ingredients in consumer products that make teeth brighter, skin softer, and wounds heal faster. We produce highly engineered materials that make highways and airports safer for drivers and pilots. Because our products are predominantly inorganic and carbon-free, we believe we contribute to improving the sustainability of our planet.

We believe our products deliver significant value to our customers, as demonstrated by our profit margins. Our products, which are mostly additives, catalysts, and services, typically constitute a small portion of our customers’ overall end-product costs yet are critical to product performance. For example, our catalysts are highly technical, customized products that require customer collaboration and significant lead time, resources, and intellectual property to develop. Through this collaborative innovation process, we have developed zeolite-based catalysts that are an effective and efficient method to reduce pollutants in diesel engines and enable our customers to meet increasingly stringent vehicle emission standards worldwide. In personal care applications, we have collaborated with leading consumer products companies over a number of years to develop a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes. These collaborative efforts with our customers continue to drive our product innovation process.

Our value-added products seek to address global issues that are often either the subject of significant regulations or are driven by consumer preferences, which we believe positions us to grow in excess of gross domestic product growth rates. Consumer preferences and global regulations requiring environmentally friendlier products are at the core of many of our value-added products and, we believe, provide us with high-margin growth opportunities. For example, our products and services facilitate improvement in vehicle fuel efficiency and emissions, enable vehicles to be lighter, and allow tires to roll and engines to run with less friction. The production of higher octane gasoline, which is needed for certain smaller turbocharged engines, has generated additional demand for the alkylation units that use our refinery services.

For the year ended December 31, 2016, we generated sales of $1,064.2 million and pro forma sales of $1,403.0 million, a net loss of $(79.7) million and a pro forma net loss of $(57.7) million, and pro forma Adjusted EBITDA of $420.8 million, which represented a pro forma Adjusted EBITDA margin of approximately 30%. In addition, our zeolite catalysts product group operates through Zeolyst International and Zeolyst C.V. (our 50% owned joint ventures that we refer to collectively as our “Zeolyst Joint Venture”). For the year ended December 31, 2016, 50% of the total net sales of our Zeolyst Joint Venture totaled $131.3 million. Additional information regarding our financial performance and non-GAAP measures, including pro forma Adjusted EBITDA, together with a reconciliation of non-GAAP measures to their most directly comparable GAAP measure, is included in “Summary Historical and Unaudited Pro Forma Financial and Other Data.” See footnote (4) to

 

“Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

We have two reporting segments: environmental catalysts and services and performance materials and chemicals. In our environmental catalysts and services segment, we have three product groups: silica catalysts, zeolite catalysts, and refining services. In our performance materials and chemicals segment, we have two product groups: performance materials and performance chemicals.

In 2016, we served over 4,000 customers globally across many end uses and, as of June 30, 2017, operated out of 72 manufacturing facilities, which are strategically located across six continents. We believe we are a leader in each of our product groups, holding what we estimate to be a number one or number two supply share position for products that generated more than 90% of our 2016 pro forma sales. We believe that our global footprint and efficient network of strategically located manufacturing facilities provide us with a strong competitive advantage in serving our customers. We serve these customers both regionally as well as globally. We believe that we hold our leading supply share positions in the key regions that we serve while also benefiting from leading global presence and capabilities. Within our performance chemicals product group, we estimate that we had approximately three times the sodium silicate supply share of our closest competitor based on 2016 sales volume. This product group, which is the backbone across our additives and catalyst platform, is highly regionalized because of the expense of shipping sodium silicates extended distances due to their water content. Our refining services product group is also a highly regionalized business due to shipping costs and customer integration requirements, and in 2016 we estimate that we had a regenerated sulfuric acid supply share in excess of 50% in the United States, which we believe is substantially larger than our closest competitor. We recently reorganized our business to be market-based rather than product-based in order to better align our product groups with similar end uses to meet our customers’ needs.

We are highly diversified by business, geography, and end use, and in 2016 the majority of our pro forma sales were into applications that have historically had relatively predictable, consistent demand patterns driven by consumption or frequent replacement cycles.

 

2016 Pro Forma Sales and Zeolyst Joint Venture Total Net Sales by End Use (1)(2)		2016 Pro Forma Sales and Zeolyst Joint Venture Total Net Sales by Geography (1)(2)(3)

 

(1)	Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.

(2)

Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

(3)	Based on the delivery destination for products sold in 2016.

 

Our Industry

We compete in the specialty chemicals and materials industry. Our industry is characterized by constant development of new products and the need to support customers with new product innovation and technical services to meet their challenges. In addition, customers demand consistent product quality and a reliable source of supply. Products sold to our customers can be highly value-added even when they represent only a small portion of the overall end product costs, and success can be achieved by helping customers improve their product performance, value, and quality. As a result, operating margins in this sector have historically been high and generally stable through economic cycles. In addition, many products in the specialty chemicals and materials industry benefit from economics that favor incumbent producers because the capital cost to expand existing capacity is typically significantly less than the capital cost necessary to build a new plant. The combination of attractive operating margins and moderate and generally predictable maintenance capital expenditure requirements can produce attractive cash flows. Our industry is also characterized by the need to produce consistent quality in a safe and environmentally sustainable manner.

The table below summarizes our key end use applications and products as well as the significant growth drivers in those applications.

 

Key End Uses		2016 Pro Forma Sales and Zeolyst Joint Venture Total Net Sales(1)(2)				Significant Growth Drivers		Key PQ Products
Fuels & Emissions Controls			20	%		•  Global regulatory requirements to:   •  Remove nitrogen oxides from emissions   •  Remove sulfur from diesel and gasoline   •  Increase gasoline octane in order to improve fuel efficiency while lowering vapor pressure to regulated levels for premium fuels   •  Improve lubricant characteristics to improve fuel efficiencies		•  Refinery catalysts   •  Emissions control catalysts   •  Catalyst recycling services
Consumer Products			18	%		•  Substitution of silicate materials for less environmentally friendly chemical additives in detergent and cleaning end uses   •  Demand for improved quality and shelf life of beverages   •  Demand for improved oral hygiene and appearance		•  Silica gels for edible oil and beer clarification   •  Precipitated silicas and zeolites for the surface coating, dentifrice, and dishwasher and laundry detergent applications
Highway Safety & Construction			16	%		•  Demand for enhanced “dry and wet” visibility of road and airport markings to improve safety   •  Drive for weight reduction in cements		•  Reflective markings for roadways and airports   •  Hollow glass beads, or microspheres, for cement additives

 

Key End Uses		2016 Pro Forma Sales and Zeolyst Joint Venture Total Net Sales(1)(2)				Significant Growth Drivers		Key PQ Products
Packaging & Engineered Plastics			17	%		•  Demand for increased process efficiency and reduction of by-products in production of chemicals   •  Demand for high-density polyethylene lightweighting of automotive components   •  Enhanced properties in plastic composites for the automotive and electronics industries		•  Catalysts for high-density polyethylene and chemicals syntheses   •  Antiblocks for film packaging   •  Solid and hollow microspheres for composite plastics
Industrial & Process Chemicals			21	%		•  Demand in the tire industry for reduced rolling resistance   •  Usage of silicate in municipal water treatment to inhibit corrosion in aging pipelines   •  Growth in manufacturing in North America driving demand for metal finishing		•  Silicate precursors for the tire industry   •  Silicate for water treatment   •  Glass beads, or microspheres, for metal finishing end uses
Natural Resources			8	%		•  More environmentally friendly drilling fluids for oil and gas production   •  Recovery in global oil drilling / U.S. copper production   •  Growing demand for lighter weight cements in oil and natural gas wells		•  Silicates for drilling muds   •  Hollow glass beads, or microspheres, for oil well cements   •  Sulfur derivatives for copper mining   •  Bleaching aids for paper

 

(1)	Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.

(2)

Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

 

Our Business

The table below summarizes certain information regarding our two reporting segments and our five product groups for the year ended December 31, 2016.

 

		Year ended December 31, 2016
(Dollars in millions) Segments and Product Groups		Sales				% of Total Sales				Pro Forma Sales(1)				Zeolyst Joint Venture Total Net Sales(2)				% of Total Pro Forma Sales and Zeolyst Joint Venture Total Net Sales(1)(2)(3)				Net Loss				Pro Forma Adjusted EBITDA(1)(2)				% of Total Pro Forma Adjusted EBITDA(1)(2)(4)				Estimated Supply Share Position(5)
Environmental Catalysts and Services:
Silica Catalysts		$	53.0				5.0	%		$	84.2			$	—				5.5	%															#2
Zeolite Catalysts			—				—				—				131.3				8.5	%															Primarily #1 or #2
Refining Services			373.7				35.0	%			373.7				—				24.3	%															#1
Subtotal		$	426.7				40.0	%		$	457.9			$	131.3				38.3	%						$	221.8				48.9	%
Performance Materials and Chemicals:
Performance Chemicals		$	437.5				41.0	%		$	663.9			$	—				43.2	%															Primarily #1(6)
Performance Materials			206.5				19.4	%			291.3				—				19.0	%															Primarily #1(7)
Sales Eliminations			(5.0	)			(0.4	%)			(8.0	)			—				(0.5	%)
Subtotal		$	639.0				60.0	%		$	947.2			$	—				61.7	%						$	231.8				51.1	%
Eliminations / Corporate			(1.5	)							(2.1	)			—												(32.8	)
Total		$	1,064.2				100.0	%		$	1,403.0			$	131.3				100.0	%		$	(79.7	)		$	420.8				100.0	%

 

(1)	Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.

(2)

Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

(3)	Percentage calculations exclude $2.1 million in intersegment sales eliminations.

(4)	Percentage calculations exclude $32.8 million in corporate expenses.

(5)

Estimated supply share positions are based on management’s estimates based on 2016 sales volume and represent our estimated global supply share positions for each of our product groups, except that the estimated supply share position for our refining services product group reflects our estimate of only our supply share position in the United States and excludes volume attributable to manufacturers who produce primarily for their own consumption.

(6)

We believe we hold #1 supply share positions with respect to products that accounted for approximately 73% of our performance chemicals product group’s 2016 pro forma sales, and that we hold #2 supply share positions with respect to products that accounted for the remaining approximately 27% of our performance chemicals product group’s 2016 pro forma sales.

(7)

We believe we hold #1 supply share positions with respect to products that accounted for approximately 89% of our performance materials product group’s 2016 pro forma sales, and that we hold #2 supply share positions with respect to products that accounted for the remaining approximately 11% of our performance materials product group’s 2016 pro forma sales.

We are an integrated, global provider of catalysts, specialty materials and chemicals, and services that share common end uses, manufacturing techniques, and process technology. For example, all of our product groups address challenges faced by global automotive companies to meet increasingly strict fuel efficiency standards.

 

Our manufacturing platform is based on furnace technology and proprietary knowledge developed from almost two centuries of combined experience at legacy PQ and legacy Eco applying silicates chemistry production and the development of applications across a broadening set of end uses. All of our product groups produce materials through our furnace process, other than our silica catalysts and zeolite catalysts product groups, which are derivatives of our performance chemicals product group. We believe we have a differentiated capability around furnace operations that enables us to operate more efficiently than most of our competitors.

Environmental Catalysts and Services

Our environmental catalysts and services business is a leading global innovator and producer of catalysts for the refinery, emissions control, and petrochemical industries and is also a leading provider of catalyst recycling services to the North American refining industry. We believe our products are mission critical for our customers in these growing applications and impart essential functionality in chemical and refining production processes and in emissions control for engines. Our catalysts are highly technical and customized for our customers and can require up to ten years of development and collaboration with customers in order to commercialize. Catalyst specifications are constantly evolving in order to address changing customer demands and requirements for lower cost and improved quality. As a result, we must continuously collaborate with our customers to create new and more efficient pathways for the production of chemicals and fuels. Our environmental catalysts and services business consists of three product groups: silica catalysts, zeolite catalysts, and refining services.

Silica Catalysts. In our silica catalysts product group, we sell both the finished catalyst and catalyst supports, which are critical catalyst components, for the production of high-density polyethylene (“HDPE”), a high strength and high stiffness plastic used in packaging films, bottles and containers, and other molded applications. We also produce a catalyst that is used globally for the production of methyl methacrylate, the monomer for acrylic engineering resins, a clear scratch-resistant plastic used in sheet or molded form to replace glass and as a durable surface coating.

Zeolite Catalysts. Our zeolite catalysts product group is a leading global supplier of emissions control catalysts as well as a supplier of specialty catalysts, precursors, and formulations to refineries and downstream petrochemicals and chemical companies. We operate through our Zeolyst Joint Venture with CRI Zeolites Inc., which is an affiliate of Royal Dutch Shell (“CRI”). Our Zeolyst Joint Venture is a long-standing partnership dating back to 1988, which combines our expertise in zeolites supply and technology and our partner’s expertise in global refinery catalyst sales and technology. These specialty zeolite-based catalysts are sold to the emissions control industry for use in diesel emission control units in both on-road and non-road diesel engines. In addition, our zeolite catalysts product group is a leading supplier of hydrocracking catalysts as a direct seller and supplier to other catalyst suppliers. This product group also produces other specialty catalysts, including aromatic catalysts that upgrade aromatic by-product streams, dewaxing catalysts that improve lube oil performance and diesel cold flow performance, and paraffin isomerization catalysts that upgrade olefins to high octane gasoline blending components, for refinery and petrochemical customers. From 2015 to 2020, global heavy- and light-duty diesel vehicle production is expected to grow at a compound annual growth rate of 4.1% and 2.8%, respectively. We believe that this estimated vehicle production growth combined with the continuing evolution of governmental regulation and product innovation involving emissions control will afford us with opportunities for growth in our zeolite catalysts product group.

Refining Services. Sulfuric acid is the primary catalyst used in the production of alkylates for gasoline production at refineries. Alkylates are a critical additive that increase octane in gasoline at low vapor pressure, and currently are used in most gasoline in the United States. Alkylate demand is expected to grow because its benefits are needed in certain smaller turbocharged engines to meet increasingly stringent fuel efficiency standards. The number of these turbocharged light-duty vehicles in the United States is expected to make up approximately 83% of all light-duty vehicles by 2025, a significant increase from approximately 18% in 2014,

 

which we believe will increase the demand for higher-octane gasoline. Premium gasoline production grew at a compound annual growth rate of 6.1% between 2011 and 2016 according to the United States Energy Information Administration. Our refining services product group provides recycling and end-to-end logistics for refiners who use sulfuric acid in their alkylation units. These recycling units also produce virgin sulfuric acid and sodium bisulfate, which we sell into the water treatment, mining, and general industrial and chemicals industries.

We estimate that we hold the number one supply share position in the United States for these sulfuric acid recycling services based upon our 2016 sales volume. Our refining services product group is highly regionalized due to shipping costs and customer integration requirements. Our facilities are located near or, in some cases, within our customers’ refineries and our products are often supplied directly to our customers by pipeline. In addition, product can be shipped by barge, rail, and truck. As a result, we believe that our integrated and strategically located network of facilities and end-to-end logistics assets in the United States provides us with a significant competitive advantage and would be costly for our competitors to replicate.

Performance Materials and Chemicals

Our performance materials and chemicals business is a silicates and specialty materials producer with leading supply positions for the majority of our products sold in North America, Europe, South America, Australia and Asia (excluding China) serving diverse and growing end uses such as personal and industrial cleaning products, fuel efficient tires (“green tires”), surface coatings, and food and beverage products. Our products are essential additives, ingredients, and precursors that are critical to the performance characteristics of our customers’ products, yet typically represent only a small portion of our customers’ overall end-product costs. We believe that our global footprint enables us to compete more effectively on a global basis due to the costs associated with shipping these products over extended distances and that our network of strategically located manufacturing facilities allows us to serve our customers at a lower cost than our competitors and with quicker delivery times for our products. Our performance materials are also being used in some cases as a substitute for less environmentally friendly materials. For example, specialty silicates are displacing phosphates in dish detergents, precipitated silicas are displacing carbon black in tires, and hollow and solid microspheres are displacing plastic volumes in transportation lightweighting applications. Our performance materials and chemicals business consists of two product groups: performance chemicals and performance materials.

Performance Chemicals. Our performance chemicals product group includes silicate products and derivatives, which are used in a variety of applications such as adsorbents for surface coatings, clarifying agents for edible oils and beverages, precursors for green tires, and additives for cleaning and personal care products. Silicates are a family of products manufactured primarily from readily available materials, such as industrial sand and soda ash. These raw materials are typically fused in a furnace and then dissolved in water under pressure to form water-soluble silicates for use in our downstream products, such as precipitated silica and silica gels. We sell our performance chemicals products to customers who use silicates as precursors, such as sodium silicates that are used in the growing precipitated silica applications, as well as for downstream derivative products, such as silicas used as additives in toothpaste formulation and silica gels that are used as adsorbents in food and beverage manufacturing. Our network of regional silicate plants is strategically located to support the customers that we serve. In addition, we maintain a few larger dedicated facilities to service our derivative products. Our performance chemicals product technology requires significant know-how and scale in order to be able to operate in a cost effective manner. We believe that we are the only global silicates producer who can supply all of the major regions, and we estimate that we have three times the sodium silicates supply share as our nearest competitor based on 2016 sales volume. Key end uses for our performance chemicals products include catalyst precursors, food and beverage, personal care, cleaning products, coatings, tires, soil stabilization, paper de-inking, and sequestration. According to Notch Consulting, global demand for precipitated silica is estimated to grow at a compound annual growth rate of 5.8% between 2015 and 2020, driven primarily by expected increases in demand from tires, footwear and other rubber applications.

 

Performance Materials. Our performance materials product group includes specialty glass products, such as highly engineered microspheres made from either recycled glass or fresh batch material using our proprietary furnace operations. We believe that we are an industry leader in North America, Europe, South America, and Asia (excluding China) in microspheres. These products are used in the reflective markings used on roads and runways to enhance visibility at night and in poor weather to improve safety. Our microspheres, which can be solid or hollow, are also used as additives in plastics for lightweighting and as abrasive media, where they are used to clean, peen, and debur metal surfaces, such as for turbine blades used in aerospace and power generation industries.

Our Competitive Strengths

Leading Global and Regional Positions in Attractive End Uses

We believe that we maintain a leading supply position in each of our major product groups, holding what we estimate to be the number one or two supply share position in 2016 for products that generated more than 90% of our pro forma sales. We believe that our global footprint and efficient network of strategically located manufacturing facilities provides us with a strong competitive advantage in serving our customers both globally and regionally, and that it would be costly for our competitors to replicate our network.

In our environmental catalysts and services business, we primarily compete on a global basis, with the exception of our refining services product group, where we compete on a more regional basis due to the costs associated with shipping these products over extended distances. We are a leading supplier of refinery hydrocracking catalysts and emissions control catalysts that are used in the heavy- and light-duty diesel industries to reduce nitrogen oxides emissions. We are also a global leader in specialty catalysts, such as catalysts for methyl methacrylate and for lube oil and diesel fuel dewaxing. In these applications, we primarily compete with other global producers such as W.R. Grace, BASF, UOP, and Albemarle, as well as other niche competitors such as Tosoh, Axens, and Haldor Topsoe.

In our refining services product group, we compete in a number of regions where our facilities are required to be close to our refinery customers, and in some cases located within the refinery with a direct pipeline to deliver our product. We estimate that our refining services product group holds the number one supply share position in the United States in sulfuric acid regeneration based on 2016 sales volume with an estimated 53% supply share. We also estimate that we had a 64% supply share in each of the West Coast and Gulf Coast areas based on 2016 sales volume, which we believe was greater than three times the supply share of our largest competitor. In our performance chemicals product group, where we also compete primarily on a regional basis due to the costs associated with shipping sodium silicates, we estimate that we had approximately three times the sodium silicates supply share of our nearest competitor based on 2016 sales volume. We believe that we are the only global silicates producer with operations in North America, Europe, and Australia. We believe that we have technical, cost, and proximity advantages in all of these regions as compared to our competitors as a result of the scale and breadth of our product offerings and operations.

These leadership positions serve industries that are attractive due to the need for customized and innovative products, stability of demand, and growth potential driven by the regulatory environment and consumer preferences. Our products generally require close customer collaboration to address end use challenges that are constantly evolving. We produce value-added products that are critical to the performance characteristics of our customers’ products. In addition, in 2016, a majority of our pro forma sales were to end uses such as fuels and emission controls, consumer products, and highway safety and construction that generally do not exhibit as pronounced cyclicality as other applications. Further, many of these end uses are growing due to increased global regulations, such as regulations regarding sulfur content in transportation fuel and particulate matter and nitrogen

 

oxides emissions from on-road and non-road diesel engines. Increasingly stringent automotive fuel efficiency standards are also expected to lead to an increase in the demand for higher-octane gasoline. While we believe increasing regulatory standards provide attractive growth opportunities, we may be required to develop new products in response to such regulations in order to fully capture such opportunities. In addition, our products are ingredients in consumer products, which includes personal care and consumer cleaning products, where customers are seeking more environmentally friendly products without loss of effectiveness or performance. We believe that our products have the environmental and safety profile to address these evolving customer demands.

Long-Term, High-Quality Customer Relationships and Innovation Track Record

Many of our products require close customer collaboration to address application challenges that are constantly evolving. As a result, we work with our customers over many years in order to develop products to meet customized specifications and performance characteristics while also maintaining strict quality standards. While we are unable to predict future shifts in customer demand, the long lead-time required for product development and commercialization, which can be up to ten years in our environmental catalysts and services business, provides the opportunity for us to build long-term relationships with customers.

We collaborate with leading multinational companies that often seek global solutions. Our customers include large industrial companies such as BASF, Honeywell, and 3M, and global catalyst producers such as Albemarle and W.R. Grace. We also supply catalysts to leading chemical and petrochemical producers such as BASF, Dow Chemical, Lucite, LyondellBasell, and Shell. We supply personal care ingredients and additives to leading consumer products companies such as Unilever and Colgate-Palmolive. We have long-term relationships with our top ten customers, based on 2016 pro forma sales, that average more than 50 years. In addition, our customer base is diversified, with our top ten customers in 2016 representing approximately 24% of our pro forma sales for the year ended December 31, 2016 and no customer representing more than 4% of our pro forma sales during this period. However, the percentage of our sales generated by our top customers may increase in the future as a result of changes in industry dynamics, shifts in customer demands and contracts or other factors.

These long-term relationships have allowed us to innovate together with our customers to meet evolving demands. For example, we have developed zeolite-based catalysts that are an effective and efficient method to reduce pollutants from heavy- and light-duty diesel engines and enable our customers to meet increasingly stringent vehicle emission standards worldwide. In personal care applications, we have collaborated with leading consumer products companies over a number of years to develop a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes. In addition, our proprietary silica catalyst has enabled development of a high strength HDPE resin that is used for making lightweight plastic gasoline tanks for automobiles. While we believe we are well positioned to capitalize on future innovation opportunities, the constantly evolving needs of our customers make it difficult to predict the pace or scope of future innovation opportunities.

 

Attractive and Stable Margins and Cash Flow

We have demonstrated the ability to maintain stable margins while continuing to grow our business in different macroeconomic environments. Our Adjusted EBITDA margins have averaged approximately 28% between 2012 and 2016. We believe that the stability of our margins and cash flows during this period is because our value-added products, which are critical to the performance of our customers’ products, typically represent only a small portion of our customers’ overall end-product costs.

 

Adjusted EBITDA Margin (1)

 

(1)

Legacy Eco Adjusted EBITDA margin is presented for 2012 through 2014, pro forma Adjusted EBITDA margin is presented for 2015 and 2016 and Adjusted EBITDA margin is presented for the first half of 2017. As a result, Adjusted EBITDA margin for 2012 through 2014 consists only of the results of our accounting predecessor and may not be representative of margins for our entire business for such periods. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

Our products are predominantly inorganic and carbon-free, and are produced from readily available raw materials such as industrial sand and soda ash, which prices have historically been less volatile than oil. We also use natural gas in our furnaces where our North American facilities have benefited from the plentiful supplies of shale gas. In addition, we have long-term supply contracts with many of our key raw materials suppliers across our product groups. We have also been able to mitigate the impact of raw material or energy price volatility using a variety of mechanisms, including hedging and raw material cost pass-through clauses in our sales contracts and other adjustment provisions. For the year ended December 31, 2016, approximately 45% of our North American silicate pro forma sales, which is a significant portion of our performance chemicals product group sales, and approximately 94% of our refining services product group pro forma sales were sold under contracts that included raw material pass-through clauses.

Our cash flow generation is driven, in part, by our disciplined capital investment and tax attributes that may provide cash flow benefits in the future. We have invested in our infrastructure and growth over the last three years and we expect to realize returns on these investments in the future with limited additional investment requirements, although there is no assurance that we will be able to realize any returns on these investments or that significant additional investments will not be required. As of December 31, 2016, we had $383.2 million of net operating losses for U.S. federal income tax purposes, along with related net operating losses for state tax purposes, and $671.4 million of identified intangibles and goodwill from the Business Combination transaction, both of which may provide us with additional cash tax savings in future years in which we generate taxable income.

Strong Growth Potential Across the Portfolio

We focus on serving end use applications where we believe significant future growth potential exists. Our products address our customers’ needs, which are typically driven either by regulatory regimes or consumer

 

preferences, on a global basis. In addition, our product sales and development efforts are driven by regional infrastructure and development trends. In vehicles, we address regulated heavy- and light-duty diesel emission standards and sulfur content and vapor pressure requirements in gasoline, with a majority of the 2016 total net sales of emissions control catalysts products in our zeolite catalysts product group addressing heavy-duty diesel engines. We expect that these regulations will create growth opportunities in excess of gross domestic product growth rates due to the constantly evolving standards that our customers need to address with new and improved products.

Light- and heavy-duty diesel engines are subject to a broad set of regulatory requirements, and we expect that these increasingly stringent standards will offer opportunities for our Zeolyst Joint Venture to develop products to assist our customers in meeting these standards. Countries typically adopt a set of standards that limit the amount of nitrogen oxides, carbon dioxide, and other emissions allowed for diesel engines. In many cases countries have established regulations that generally follow United States Environmental Protection Agency or European Union standards, but typically on a later implementation timeline. In addition, even more restrictive regulations are expected to be adopted in the future in many jurisdictions, such as EU VII, which would further reduce permitted emissions levels in the European Union. We believe that compliance with existing regulations as well as any future regulations provides us with opportunities to grow our sales of emissions control catalysts.

The following chart identifies the regulatory requirements for certain countries and regions in relation to the most comparable European Union standard for ease of comparability. See “Industry—Fuels & Emissions Controls” for more information regarding the European Union standards referred to in the chart below.

 

Source: The International Council on Clean Transportation

Given the fuel efficiency standards that are driving the design of new engines and the resulting higher-octane gasoline requirements that can be achieved through alkylate blending, we believe that our refining services product group is well positioned to benefit from any related growth in demand for alkylates.

We produce catalysts for HDPE and methyl methacrylate production in the packaging and engineered plastics applications. According to an industry source, North American HDPE capacity is expected to grow at a

 

compound annual growth rate of approximately 5.1% between 2016 and 2020, driven by North America’s global cost position in petrochemicals and increased use of these plastics as a substitute for heavier and less versatile materials such as glass and metal. Methyl methacrylate is the monomer for acrylic engineering resins, a clear scratch-resistant plastic used in sheet form to replace glass and as a surface coating. We believe that we have an opportunity to grow our methyl methacrylate catalysts sales in the future as methyl methacrylate production increases as a result of, in part, increased production efficiencies enabled by our catalysts.

We believe that additional demand for retroreflectivity (or visibility) for roadway and aviation markings could provide us with significant growth opportunities. We benefit from increased use and density per mile of road markings that include our products. The most recent innovation from our performance materials product group is our ThermoDrop product, which simplifies the road striping operations for our customers by using a new durable thermal plastic road marking material. We have also introduced a new faster-drying road marking system, Visilok, which can reduce traffic disruption during striping operations and improve road worker safety by reducing the amount of time needed to complete the road marking process.

We also expect to benefit from trends towards the use of more environmentally friendly products where we believe we have opportunities to displace other less environmentally friendly materials. While there is no assurance that such trends will continue in the future, we believe our product offerings position us to capitalize on this growth opportunity. For example, our Ambosol magnesium silicate is used to eliminate color and odors in polyols, which are used in the production of polyurethane for, among other things, household products such as scratch-resistant coatings and foam insulation. In addition, our specialty silicates are displacing phosphates in dish detergents, precipitated silicas are displacing carbon black in tires, and solid and hollow microspheres are displacing plastic volumes in lightweighting applications. Most of our products are manufactured from commonly found materials such as industrial sand and soda ash, which are more environmentally friendly than carbon-based products. We have also developed a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes and we have developed a product family, Britesil silicates, which improves convenience while eliminating phosphates in automatic dishwashing applications.

Experienced Management Team

Our senior management team has substantial industry experience and a proven track record. They average over 30 years of experience in our product groups, and their cumulative industry experience extends to a broad range of execution capabilities, including acquisition integration, strategic management, operations, sales and marketing, and new product and application development. In 2016, our management team integrated legacy Eco into our environmental catalysts and services business while also growing the business and successfully implementing cost initiatives. Our senior management team has also reorganized our company from a products-based business to a markets-based business to better align our offerings with the needs of our customers. There is a renewed focus on serving our customers by developing solutions through technical sales, services, and product development, and we have added additional management personnel experienced in innovation and market driven organizations. Our management owns approximately 11% of our outstanding common stock immediately prior to this offering, which we believe creates an alignment of interest with our shareholders.

Our Business Strategy

Our business strategy is to capitalize on our strong foundation, market-based approach, and management team to grow sales profitably, deploy capital efficiently, and generate free cash flow in order to create shareholder value. We believe that our history of operational excellence, technology leadership, and strong business execution developed from our almost two centuries of combined industry experience at legacy PQ and legacy Eco positions us well to execute on our business strategy. In the last two years, we have added senior

 

executives to our management team, including our chief executive officer, Jim Gentilcore, and chief financial officer, Mike Crews, who bring significant public company leadership experience and a track record of customer-focused innovation and disciplined capital allocation to our business. We believe that Mr. Gentilcore’s experience in the electronics industry is particularly relevant to our innovation efforts as we pursue new product innovation across our product groups. In addition, we believe that our recent reorganization better aligns our management structure with our customer needs to enable us to make more focused sales and product innovation investments. We believe there are significant opportunities to profitably grow our business, generate free cash flow and deliver shareholder value by executing on the following strategies:

Shift from a Products-based to a Markets-based Company

Our reorganization from a products-based to a markets-based company is fundamental to our growth strategy. Following the consummation of the Business Combination in May 2016, we have further realigned our product groups around critical markets that we serve. The combination of the legacy Eco and legacy PQ businesses expanded our presence in the refinery industry and provided us with valuable insight into key success factors for serving our refining and petrochemical customers. We have undertaken a similar approach in other important end uses that we serve such as personal care, highway safety, oil and gas, surface coatings, and electronics.

Our solution-oriented process starts with our customer’s specific needs, which are then identified as a product or service opportunity that is defined, sized, and evaluated to determine if it is within the core strength of our global development team. If not within our core capabilities, but determined to be a strategically important opportunity, we initiate a search for outside technology, partnerships, or acquisition targets that can deliver a cost-effective and profitable solution. This approach is in contrast to our prior approach developing products or new formulations first and then seeking to identify applications into which to sell that product or new formulation. We believe that our markets-based approach will result in product innovation that better meets our customers’ needs and supports our profitable growth.

Our sales and marketing organization has a broad base of customer and marketing experience. Since our business reorganization, we believe each of our operating segments has simplified its customer contact points and increased knowledge about the industries we serve. We have been able to eliminate duplicate sales calls that would occur among our previous business divisions and can prioritize our efforts around our most influential customer contacts. We have also removed the silos that previously impeded our ability to share important customer information within our organization. This integrated marketing effort allows for more rapid analysis and decision-making for our major strategic customers who are often served by multiple product groups. We believe these operational improvements will enable us to reduce product commercialization time and increase our return on marketing investment.

Prioritize Investment and Development to Innovate and Profitably Grow Sales

We have been able to successfully grow our sales into new applications through our innovation and development of new products to address evolving customer needs. For example, our zeolite catalysts product group developed new products to address new regulatory standards regarding vehicle emissions, and our performance chemicals product group collaborated with our customers to develop precipitated silica products to address their demands for more green tires. We will continue to focus on collaboration with our customers through our technical sales and research and development teams to better understand and address our customers’ evolving needs and invest in our growth by prioritizing innovation driven by these identified needs.

Within our innovation and product development process, our technology teams work closely with our customer facing teams to identify compelling customer needs that can be addressed through innovation or new

 

product development. We seek to assess technology and commercialization hurdles early on in the development process so that we can quickly and efficiently evaluate our opportunity and, where appropriate, deprioritize, or abandon projects before expending significant resources. We are improving the way our research and development team shares information by removing silos and holding regular senior-level project reviews to ensure best practices are shared and consistent metrics are used to determine a project’s merit and the size of the potential opportunity. We have already begun to see the benefits of our new processes with the successful commercialization of ThermoDrop, which we launched in February 2017. We collaborated with key customers to develop the ThermoDrop technology, which uses our highway safety microspheres and a proprietary striping application technology to enable our customers to more efficiently stripe highways. This technology has received strong customer acceptance since launch, and we are increasing our production to meet anticipated demand.

We will also selectively consider acquisitions as part of our growth strategy. We believe that our integration of legacy Eco demonstrates our ability to successfully execute on acquisitions and realize available synergies and other benefits. We have identified a number of potential acquisition targets with complementary fits across both of our operating segments and, consistent with our markets-based focus, these targets also include downstream-focused businesses. We will seek to use acquisitions to increase our geographic presence, diversify our product offerings, and further secure our leadership positions with our customer base. We intend to focus our acquisition efforts on opportunities in our higher value-added solutions within or adjacent to our current product offerings. We intend to pursue these transactions in a disciplined manner by rigorously evaluating return on capital against our cost of capital in addition to the potential strategic benefits. However, as of June 30, 2017, we had cash and cash equivalents of $50.5 million and total outstanding indebtedness of approximately $2,728.4 million, which may limit our ability to pursue acquisition transactions or other aspects of our growth strategy.

Maintain Strong Margins and Cash Flow with Continuous Improvement Initiatives

Our margins historically have been stable due to our strong and long-standing value proposition to our customers and our strong technological, operational, and product capabilities. We intend to maintain and improve upon these margins by leveraging our operational excellence and continuing our approach to raw material cost pass-through and other appropriate cost sharing arrangements with our customers. We believe that our new organizational structure will allow us to better leverage distribution channels across our products in order to address end uses such as paints and coatings, personal care, and oil and gas, and we have also integrated our continuous improvement teams across our operating segments. For example, we have established a new global furnace operations team, a global engineering team, and a global sales and operations planning team to share best practices across all of our product groups. We have also formalized our sharing of best practices across many functional disciplines, such as supply chain, technology, working capital, and capital expenditure management. From these efforts, we expect to be able to reduce costs in our operations in order to increase our cash flow.

Recent Developments

On August 7, 2017, PQ Corporation repriced its existing senior secured term loan facility, which consists of a $927.8 million U.S. dollar-denominated tranche and a €283.3 million Euro-denominated tranche, to reduce the applicable interest rates. The repriced term loan facility has substantially identical terms to the prior facility, except that (a) U.S. dollar-denominated borrowings bear interest at the rate equal to, at our option (1) a margin of 2.25% plus a base rate or (2) a margin of 3.25% plus a LIBOR rate (subject to a floor of 0%) determined by reference to the cost of funds for U.S. dollar deposits, subject to certain adjustments and other events, and (b) Euro-denominated borrowings bear interest at a rate equal to, at our option (1) a margin of 2.25% plus a base rate or (2) a margin of 3.25% plus a EURIBOR rate (subject to a floor of 0.75%) determined by reference to the cost of funds for Euro deposits, subject to certain adjustments and other events. The repriced term loan facility is expected to reduce our annual interest expense by approximately $12.5 million. See “Description of Certain Indebtedness—Senior Secured Credit Facilities” for additional information regarding the senior secured term loan facility.

 

Risk Factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute on our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

•

as a global business, we are exposed to local business risks in different countries, which could have a material adverse effect on our financial condition, results of operations and cash flows;

 

•

as of June 30, 2017, we had total outstanding indebtedness of approximately $2,728.4 million and our substantial debt could adversely affect our liquidity and ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or react to changes in the economy or our industry;

 

•

we are affected by general economic conditions and an economic downturn could adversely affect our operations and financial results;

 

•

alternative technology or other changes in our customers’ products may reduce or eliminate the need for certain of our products and limit our ability to capitalize on our long-term customer relationships;

 

•

if we are unable to pass on increases in raw material prices, including natural gas, to our customers or to retain or replace key suppliers, our business strategy to maintain and improve upon our margins as well as our results of operations and cash flows may be negatively affected;

 

•

certain of our product groups are subject to government regulation and future government regulation could limit our growth potential; and

 

•

upon completion of this offering, CCMP and INEOS will continue to have significant influence over us and will be able to strongly influence or effectively control our business and affairs, including the election of all of the members of our board of directors, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our Corporate Structure

The following chart illustrates our ownership structure as of September 1, 2017 after giving effect to this offering and the application of the net proceeds therefrom:

 

 

 

(1)	Our zeolite catalysts product group within our environmental catalysts and services reporting segment operates through our Zeolyst Joint Venture.

Our Principal Stockholders

Investment funds affiliated with CCMP, INEOS Investments Partnership (“INEOS”) and members of management and our board of directors acquired their respective ownership of PQ Group Holdings as a result of the following series of transactions:

 

•

In December 2014, investment funds affiliated with CCMP acquired an approximate 49% equity interest in PQ Holdings. INEOS and members of management owned the remaining approximate 51% equity interest in PQ Holdings.

 

•

Also in December 2014, investment funds affiliated with CCMP acquired an approximate 95% equity interest in Eco Services Group Holdings LLC, the indirect parent of Eco. Members of Eco’s management owned the remaining approximate 5% equity interest in Eco Services Group Holdings LLC.

 

•

In May 2016, we completed the Business Combination, in which the equity interests of PQ Holdings and Eco Services Group Holdings LLC were converted into equity interests in PQ Group Holdings.

As of June 30, 2017, and prior to giving effect to this offering and the Reclassification, investment funds affiliated with CCMP, INEOS, and current and former members of management and our board of directors and other investors owned equity securities representing approximately 58%, 31%, and 11%, respectively, of our voting power. Investment funds affiliated with CCMP and INEOS will continue to have significant influence over us and decisions made by our stockholders upon completion of this offering and may have interests that differ from yours. See “Risk Factors—Risks Related to this Offering and to our Common Stock.” Following the completion of this offering, we will not be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange and will therefore not be able to rely on exemptions from certain corporate governance requirements available to controlled companies.

 

CCMP is a leading global private equity firm specializing in buyouts and growth equity investments in companies ranging from $250 million to more than $3 billion in assets. CCMP’s founders have invested over $16 billion since 1984, which includes their activities at J.P. Morgan Partners, LLC (a private equity division of JPMorgan Chase & Co.) and its predecessor firms. CCMP was formed in August 2006 when the buyout and growth equity investment professionals of J.P. Morgan Partners, LLC separated from JPMorgan Chase & Co. to commence operations as an independent firm. The foundation of CCMP’s investment approach is to leverage the combined strengths of its deep industry expertise and proprietary operating resources to create value by investing in three targeted industries—Industrial, Consumer and Healthcare.

INEOS is a leading manufacturer of petrochemicals, specialty chemicals and oil products. Comprising 18 businesses, with a production network spanning 105 manufacturing facilities in 22 countries, it produces more than 60 million tonnes of petrochemicals, 20 million tons per annum of crude oil refined products (fuels) and in 2016 it had sales of approximately $40 billion. Worldwide, INEOS employs 18,500 people. Its management philosophy is to operate a simple and decentralized organizational structure.

Additional Information

PQ Group Holdings Inc. was incorporated in Delaware on August 7, 2015. PQ Holdings Inc., a manufacturer of catalysts, specialty materials and chemicals, was incorporated in Delaware on June 22, 2007. Eco Services Operations LLC, which acquired substantially all of the assets of Solvay USA Inc.’s sulfuric acid refining services business unit on December 1, 2014, was incorporated in Delaware on July 30, 2014. On May 4, 2016, we consummated the Business Combination to reorganize and combine the businesses of PQ Holdings Inc. and Eco Services Operations LLC under a new holding company, PQ Group Holdings Inc. We refer to the business of PQ Holdings Inc. prior to the Business Combination as “legacy PQ” and we refer to the business of Eco Services Operations LLC prior to the Business Combination as “legacy Eco.”

Our principal executive offices are located at 300 Lindenwood Drive, Valleybrooke Corporate Center, Malvern, Pennsylvania 19355, and our telephone number is (610) 651-4400. Our website address is www.pqcorp.com. The information that appears on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus, and you should not rely on any such information in making the decision whether to purchase our common stock.

 

The Offering

 

Common stock offered by us		29,000,000 shares (or 33,350,000 shares if the underwriters exercise their option to purchase additional shares in full).
Underwriters’ option to purchase additional shares		We have granted the underwriters a 30-day option from the date of this prospectus to purchase up to an additional 4,350,000 shares.
Common stock to be outstanding after this offering		128,506,320 shares (or 132,856,320 shares if the underwriters exercise the option to purchase additional shares in full). See “Description of Capital Stock.” For additional information regarding the impact of a change in the initial public offering price on the number of shares outstanding after completion of this offering related to the conversion of our Class B common stock, see “The Reclassification.”
Use of proceeds		We expect to receive net proceeds, after deducting underwriting discounts and commissions and estimated expenses payable by us, of approximately $597.9 million (or approximately $688.3 million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $22.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus.   We intend to use the net proceeds from the sale of our common stock in this offering (i) to redeem $525 million in aggregate principal amount of PQ Corporation’s Floating Rate Senior Unsecured Notes due 2022, including accrued and unpaid interest, and applicable redemption premiums, (ii) to repay approximately $33.1 million of borrowings under PQ Corporation’s asset-based lending facility and (iii) the remaining net proceeds, if any, for general corporate purposes. See “Use of Proceeds.”
Dividend policy		Our board of directors does not currently intend to pay dividends on our common stock. See “Dividend Policy.”
Risk factors		Investing in our common stock involves a high degree of risk. You should read carefully the “Risk Factors” section of this prospectus, beginning on page 28, for a discussion of factors that you should consider before deciding to invest in our common stock.
Proposed stock exchange symbol		“PQG.”

 

Except as otherwise indicated, the number of shares of our common stock to be outstanding after this offering is based on 99,506,320 shares outstanding as of September 1, 2017 after giving effect to the Reclassification, assuming an initial public offering price of $22.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus. Because the number of shares of our common stock into which a share of our Class B common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price would have a corresponding impact on the number of outstanding shares of our common stock presented in this prospectus after giving effect to this offering. See “The Reclassification.” Except as otherwise indicated, the number of shares of our common stock to be outstanding after this offering excludes:

 

•

2,125,774 shares of our common stock issuable upon exercise of stock options issued and outstanding as of September 1, 2017 under the PQ Group Holdings Inc. Stock Incentive Plan at a weighted average exercise price of $8.16 per share, including 604,169 shares issuable upon exercise of vested stock options at a weighted average exercise price of $8.02 per share; and

 

•

7,344,000 shares of our common stock, plus any shares remaining available for grant under the PQ Group Holdings Inc. Stock Incentive Plan at the time the 2017 Omnibus Incentive Plan (the “2017 Plan”) is approved, reserved for issuance under the 2017 Plan.

 

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA

FINANCIAL AND OTHER DATA

The following tables set forth our summary historical and unaudited pro forma financial and other data as of the dates and for the periods indicated. The statement of operations data and cash flows data for the six month periods ended June 30, 2017 and 2016 and the historical balance sheet data as of June 30, 2017 presented below have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The statement of operations data and cash flows data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2016 and 2015 presented below have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data and cash flows data for the period from inception (July 30, 2014) to December 31, 2014 have been derived from our Successor period financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 2014 has been derived from our Successor period financial statements not included in this prospectus. The statement of operations data and cash flows data for the period from January 1, 2014 to November 30, 2014 have been derived from our Predecessor period financial statements included elsewhere in this prospectus. The historical financial data of legacy PQ for the years ended December 31, 2015, 2014 and 2013 has been derived from legacy PQ’s audited consolidated financial statements included elsewhere in this prospectus. The historical financial data of legacy PQ for the period from January 1, 2016 through May 3, 2016 and for the year ended December 31, 2012 has been derived from legacy PQ’s consolidated financial statements not included in this prospectus. See “Basis of Financial Presentation.”

The unaudited pro forma statement of operations data for the years ended December 31, 2016 and 2015 gives effect to the Business Combination and the related financing transactions as if they occurred on January 1, 2015 and is derived from our historical consolidated financial statements and legacy PQ consolidated financial statements included elsewhere in this prospectus. Unaudited pro forma balance sheet data as of June 30, 2017 and statement of operations data for the six months ended June 30, 2017 is not presented because the Business Combination and related financing transactions are included in our consolidated financial results as of such date and for such periods. The unaudited pro forma statement of operations data is illustrative and not intended to represent what our results of operations would have been had the Business Combination and related financing transactions occurred on January 1, 2015 or to project our results of operations for any future period. The unaudited pro forma statement of operations data may not be comparable to, or indicative of, future performance.

 

This summary historical and unaudited pro forma financial and other data should be read in conjunction with the disclosures set forth under “Capitalization,” “Unaudited Pro Forma Financial Information of PQ Group Holdings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

																										Successor				Predecessor
		Six months ended June 30,								Pro forma years ended December 31,								Years ended December 31,								Period from inception (July 30, 2014) to December 31, 2014				Period from January 1, 2014 to November 30, 2014				Legacy PQ year ended December 31,
		2017				2016				2016				2015				2016				2015												2014
		Unaudited								Unaudited
(Dollars in thousands)
Statement of operations data:
Sales		$	722,198			$	371,467			$	1,403,041			$	1,413,201			$	1,064,177			$	388,875			$	35,539			$	361,823			$	1,114,904
Cost of goods sold			532,072				283,068				1,037,109				1,048,739				810,085				278,791				30,160				265,829				818,483
Gross profit			190,126				88,399				365,932				364,462				254,092				110,084				5,379				95,994				296,421
Selling, general and administrative expenses			69,378				38,014				145,041				140,891				107,601				34,613				2,623				45,168				110,886
Other operating expense, net			27,324				25,588				74,972				67,666				62,301				19,696				16,347				5,593				71,148
Operating income (loss)			93,064				24,797				145,919				155,905				84,190				55,775				(13,591	)			45,233				114,387
Equity in net (income) loss from affiliated companies			(14,622	)			4,693				(35,210	)			(41,078	)			2,612				—				—				—				29,359
Interest expense, net			94,961				45,752				187,945				199,614				140,315				44,348				8,470				86				111,553
Debt extinguishment costs			—				11,858				1,793				—				13,782				—				—				—				2,476
Other (income) expense, net			16,613				3,024				(8,869	)			21,383				(3,402	)			—				—				—				23,886
(Loss) income before income taxes and noncontrolling interest			(3,888	)			(40,530	)			260				(24,014	)			(69,117	)			11,427				(22,061	)			45,147				5,831
(Benefit) provision for income taxes			97				39,549				57,967				1,157				10,041				—				—				14,602				7,548
Net (loss) income			(3,985	)			(80,079	)			(57,707	)			(25,171	)			(79,158	)			11,427				(22,061	)			30,545				(1,717	)
Less: Net income attributable to the noncontrolling interest			78				314				1,225				1,771				588				—				—				—				1,894
Net (loss) income attributable to PQ Group Holdings Inc.		$	(4,063	)		$	(80,393	)		$	(58,932	)		$	(26,942	)		$	(79,746	)		$	11,427			$	(22,061	)		$	30,545
Net (loss) income attributable to legacy PQ																																		$	(3,611	)

 

																		Successor
		Six months ended June 30,								Years ended December 31,								Period from inception (July 30, 2014) to December 31, 2014
		2017				2016				2016				2015
		Unaudited
Earnings (loss) per share:
Basic
Class B shares		$	—			$	—			$	—			$	7.58			$	(14.78	)
Common stock			(1.07	)			(21.17	)			(21.01	)			—				—
Diluted
Class B shares		$	—			$	—			$	—			$	7.58			$	(14.78	)
Common stock			(1.07	)			(21.17	)			(21.01	)			—				—
Pro Forma(1)
Common stock			(0.04	)			—				(1.09	)			—				—
Weighted average shares outstanding:
Basic
Class B shares			6,679,077				3,224,645				4,947,982				1,507,719				1,492,682
Common stock			3,795,693				3,797,026				3,796,275				—				—
Diluted
Class B shares			6,679,077				3,224,645				4,947,982				1,507,719				1,492,682
Common stock			3,795,693				3,797,026				3,796,275				—				—
Pro Forma(1)
Common stock			97,302,771				—				73,068,023				—				—

 

(1)

Gives effect to the assumed conversion of all outstanding shares of Class B common stock at a conversion factor of 14 (which assumes an initial public offering price of $22.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus), as if the initial public offering was completed on January 1, 2016, for the year ended December 31, 2016, and January 1, 2017, for the six months ended June 30, 2017.

 

																		Successor				Predecessor
		Six months ended June 30,								Years ended December 31,								Period from inception (July 30, 2014) to December 31, 2014				Period from January 1, 2014 to November 30, 2014
(Dollars in thousands)		2017				2016				2016				2015
		Unaudited
Balance sheet data (at end of period):
Cash and cash equivalents		$	50,457							$	70,742			$	25,155			$	22,627
Property, plant and equipment, net			1,203,925								1,181,388				481,073				472,156
Total assets			4,390,031								4,259,671				1,007,636				1,025,094
Total debt, including current portion			2,676,048								2,562,198				673,101				675,254
Total stockholders’ equity			1,064,416								1,027,944				235,293				217,824
Cash flows data:
Net cash provided by (used in):
Operating activities		$	21,751			$	(4,372	)		$	119,720			$	44,715			$	(2,057	)		$	57,593
Investing activities			(103,556	)			(1,831,479	)			(1,929,680	)			(38,725	)			(888,347	)			(32,852	)
Financing activities			66,819				1,859,474				1,861,433				(3,462	)			913,031				(24,741	)

 

																										Successor				Predecessor
		Six months ended June 30,								Pro forma year ended December 31,								Year ended December 31,								Period from inception (July 30, 2014) to December 31,				Period from January 1, 2014 to November 30,				Legacy PQ year ended December 31,
(Dollars in thousands)		2017				2016				2016				2015				2016				2015				2014				2014				2014
		Unaudited
Non-GAAP and other financial and operating data(1):
Sales:
Sales		$	722,198			$	371,467			$	1,403,041			$	1,413,201			$	1,064,177			$	388,875			$	35,539			$	361,823			$	1,114,904
Constant currency sales(2)			722,198				367,517				1,392,655				1,375,230				1,057,714				388,875				35,539				361,823				973,943
Adjusted EBITDA(3):
Adjusted EBITDA		$	223,945			$	118,653			$	420,746			$	413,145			$	331,533			$	117,704			$	9,122			$	98,075			$	288,101
Constant currency Adjusted EBITDA			223,945				117,666				417,762				404,728				329,694				117,704				9,122				98,075				258,522

 

		Six months ended June 30,								Year ended December 31,
(Dollars in thousands)		2017				2016				2016				2015				2014
						Unaudited
Zeolyst Joint Venture operating data:
Total net sales(4)		$	63,369			$	20,276			$	131,265			$	159,818			$	106,734

 

(1)

To supplement our financial information presented in accordance with GAAP, we use the following non-GAAP financial measures to clarify and enhance an understanding of the historical results of our entire business: constant currency sales, Adjusted EBITDA, pro forma Adjusted EBITDA, constant currency Adjusted EBITDA, constant currency pro forma Adjusted EBITDA, Adjusted EBITDA margin and pro forma Adjusted EBITDA margin (collectively, the “Non-GAAP Financial Measures”). We believe that the presentation of these Non-GAAP Financial Measures enhances an investor’s understanding of our financial performance. We further believe that these Non-GAAP Financial Measures are useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We also believe that these financial measures provide investors with a useful tool for assessing the comparability between periods as a result of the 2014 Acquisition and the Business Combination. We use these Non-GAAP Financial Measures for business planning purposes and in measuring our performance relative to that of our competitors. Each of the Adjusted EBITDA Non-GAAP Financial Measures presented in this prospectus includes an adjustment for depreciation, amortization and interest of our 50% share of our Zeolyst Joint Venture, which is accounted for under the equity method of accounting.

We believe these Non-GAAP Financial Measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of such Non-GAAP Financial Measures may vary from that of others in our industry. These Non-GAAP Financial Measures should not be considered as alternatives to sales, operating income (loss), net income (loss), earnings per share, cash flows data or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity.

EBITDA consists of net (loss) income attributable to us before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) depreciation, amortization and interest of our Zeolyst Joint Venture as described above. In the case of Adjusted EBITDA, we believe that making such adjustments provides investors meaningful information to understand our operating results and analyze financial and business trends on a period-to-period basis.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

•

EBITDA and Adjusted EBITDA:

 

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do not reflect the significant interest expense on our debt;

 

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exclude impairments and adjustments for step-up amortization; and

 

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do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

•

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

 

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these Non-GAAP Financial Measures only supplementally.

In calculating EBITDA and Adjusted EBITDA, we add back certain non-cash, nonrecurring and other items and make certain adjustments that are based on assumptions and estimates. In addition, in evaluating these Non-GAAP Financial Measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Constant currency information reflects comparative local currency financial information at the average foreign exchange rates for the six months ended June 30, 2017 for all historical periods. This measure provides information on sales and Adjusted EBITDA assuming that foreign currency exchange rates had not changed between current and historical periods. The company believes such Non-GAAP Financial Measures, when used in conjunction with the GAAP measures of sales and net income (loss) at actual currency rates, provides additional insight into the company’s operations, particularly in evaluating performance from one period to another without the impact of foreign currency changes.

 

(2)	The following table reconciles sales to constant currency sales for the periods presented.

 

																										Successor				Predecessor
		Six months ended June 30,								Pro forma year ended December 31,								Year ended December 31,								Period from inception (July 30, 2014) to December 31,				Period from January 1, 2014 to November 30,				Legacy PQ year ended December 31,
(Dollars in thousands)		2017				2016				2016				2015				2016				2015				2014				2014				2014
		Unaudited
Sales:
Sales		$	722,198			$	371,467			$	1,403,041			$	1,413,201			$	1,064,177			$	388,875			$	35,539			$	361,823			$	1,114,904
Foreign currency impact(a)			—				(3,950	)			(10,386	)			(37,971	)			(6,463	)			—				—				—				(140,961	)
Constant currency sales		$	722,198			$	367,517			$	1,392,655			$	1,375,230			$	1,057,714			$	388,875			$	35,539			$	361,823			$	973,943

 

(a)

Represents the foreign currency impact on sales applying the average exchange rates in effect for the six months ended June 30, 2017. The foreign currency impact attributable to our environmental catalysts and services segment was $(357) for the six months ended June 30, 2016, $(1,256) and $(3,943) for the pro forma years ended December 31, 2016 and 2015, respectively, $(530) for the year ended December 31, 2016 and $(6,732) and $(727) for legacy PQ’s year ended December 31, 2014 and period from January 1, 2016 through May 3, 2016, respectively. The foreign currency impact attributable to our performance materials and chemicals segment was $(3,593) for the six months ended June 30, 2016, $(9,130) and $(34,028) for the pro forma years ended December 31, 2016 and 2015, respectively, $(5,933) for the year ended December 31, 2016 and $(134,229) and $(3,197) for legacy PQ’s year ended December 31, 2014 and period from January 1, 2016 through May 3, 2016, respectively.

 

(3)	The following tables reconcile net income (loss) to EBITDA, Adjusted EBITDA and constant currency Adjusted EBITDA for the periods and for the entities presented.

 

																										Successor				Predecessor
		Six months ended June 30,								Pro forma year ended December 31,								Year ended December 31,								Period from inception (July 30, 2014) to December 31, 2014				Period from January 1, 2014 to November 30, 2014
		2017				2016				2016				2015				2016				2015
(Dollars in thousands)		Unaudited
Reconciliation of net income (loss) attributable to PQ Group Holdings Inc. to Adjusted EBITDA
Net income (loss) attributable to PQ Group Holdings Inc.		$	(4,063	)		$	(80,393	)		$	(58,932	)		$	(26,942	)		$	(79,746	)		$	11,427			$	(22,061	)		$	30,545
Provision (benefit) for income taxes			97				39,549				57,967				1,157				10,041				—				—				14,602
Interest expense, net			94,961				45,752				187,945				199,614				140,315				44,348				8,470				86
Depreciation and amortization			83,206				41,991				165,843				152,172				128,288				38,999				2,955				42,458
EBITDA		$	174,201			$	46,899			$	352,823			$	326,001			$	198,898			$	94,774			$	(10,636	)		$	87,691
Joint venture depreciation, amortization and interest(a)			5,510				1,844				10,263				7,928				6,920				—				—				—
Amortization of investment in affiliate step-up(b)			5,282				12,315				5,838				6,634				34,786				—				—				—
Amortization of inventory step-up(c)			871				17,714				4,912				—				30,596				—				3,511				—
Impairment of long-lived and intangible assets			—				—				6,873				425				6,873				—				—				—
Debt extinguishment costs			—				11,858				1,793				—				13,782				—				—				—
Net loss (gain) on asset disposals(d)			2,925				1,661				4,805				5,459				4,216				3,911				—				—
Foreign currency exchange loss (gain)(e)			16,356				3,090				(8,975	)			21,058				(3,558	)			—				—				—
Non-cash revaluation of inventory, including LIFO			2,479				446				1,343				(2,088	)			1,310				—				—				—
Management advisory fees(f)			2,500				1,083				5,250				5,590				3,583				590				42				—
Transaction and other related costs(g)			4,334				4,544				2,648				13,219				4,664				4,241				15,506				—
Equity-based and other non-cash compensation			2,828				3,779				6,487				4,155				7,042				2,256				—				535
Restructuring, integration and business optimization expenses(h)			3,052				11,728				17,857				8,644				16,258				4,147				247				—
Defined benefit plan pension cost(i)			1,409				1,398				2,752				6,116				1,375				2,903				—				—
Transition services(j)			—				—				—				4,882				—				4,882				—				—
Other legacy Eco adjustments(k)			—				—				—				—				—				—				—				9,849
Other(l)			2,198				294				6,077				5,122				4,788				—				452				—
Adjusted EBITDA		$	223,945			$	118,653			$	420,746			$	413,145			$	331,533			$	117,704			$	9,122			$	98,075
Foreign currency impact(m)			—				(987	)			(2,984	)			(8,417	)			(1,839	)			—				—				—
Constant currency Adjusted EBITDA		$	223,945			$	117,666			$	417,762			$	404,728			$	329,694			$	117,704			$	9,122			$	98,075

 

		Three months ended March 31,				Period from January 1, 2016 through May 3,				Year ended December 31,
		2016				2016				2015				2014				2013				2012
(Dollars in thousands)		Unaudited
Reconciliation of legacy PQ net income (loss) to legacy PQ Adjusted EBITDA
Net income (loss) attributable to legacy PQ.		$	1,102			$	(38,337	)		$	7,851			$	(3,611	)		$	26,730			$	5,184
Provision (benefit) for income taxes			3,904				11,391				22,902				7,548				10,608				18,918
Interest expense, net			26,413				37,310				108,375				111,553				120,347				111,228
Depreciation and amortization			23,621				32,052				93,122				91,342				89,306				93,416
EBITDA		$	55,040			$	42,416			$	232,250			$	206,832			$	246,991			$	228,746
Joint venture depreciation, amortization and interest(a)			2,476				3,343				7,928				6,941				6,128				3,348
Amortization of investment in affiliate step-up(b)			597				796				2,387				2,387				2,387				2,593
Impairment of long-lived and intangible assets			—				—				425				—				948				—
Debt extinguishment costs			—				40,153				—				2,476				20,287				20,063
Net loss (gain) on asset disposals(d)			301				589				1,548				694				653				787
Foreign currency exchange loss (gain)(e)			(3,206	)			(5,247	)			21,059				23,387				4,414				(1,850	)
Non-cash revaluation of inventory, including LIFO			714				33				(2,088	)			846				1,152				287
Management advisory fees(f)			1,250				1,667				5,000				5,000				5,000				7,500
Transaction and other related costs(g)			299				(221	)			10,742				24,405				5,594				533
Equity-based and other non-cash compensation			1,194				1,590				3,358				—				1,011				—
Restructuring, integration and business optimization expenses(h)			1,563				1,599				4,496				4,572				5,449				5,644
Defined benefit plan pension cost(i)			1,025				1,377				3,213				1,832				3,581				486
Other(l)			517				1,118				5,123				8,729				3,200				547
Legacy PQ Adjusted EBITDA		$	61,770			$	89,213			$	295,441			$	288,101			$	306,795			$	268,684
Foreign currency impact(m)			(574	)			(1,145	)			(8,417	)			(29,579	)
Constant currency legacy PQ Adjusted EBITDA		$	61,196			$	88,068			$	287,024			$	258,522

(a)

We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our environmental catalysts and services segment includes our 50% interest in our Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of our Zeolyst Joint Venture.

(b)

Represents the amortization of the fair value adjustments associated with the equity affiliate investment in our Zeolyst Joint Venture as a result of the Business Combination. We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of our Zeolyst Joint Venture. Amortization is primarily related to the fair value adjustments associated with inventory, fixed assets and intangible assets, such as customer relationships, formulations and product technology.

(c)

As a result of the Business Combination, there was a step-up in the fair value of inventory at PQ Holdings, which is amortized through cost of goods sold in the income statement. Similarly, for the year ended December 31, 2014, there was a step-up in the fair value of inventory that occurred as part of the 2014 Acquisition, which was amortized through cost of goods sold in the income statement.

(d)

We do not have a history of significant asset disposals. However, when asset disposals occur, we remove the impact of net gain/loss of the disposed asset because such impact primarily reflects the non-cash write-off of long-lived assets no longer in use.

(e)

Reflects the exclusion of the negative or positive transaction gains and losses of foreign currency in the income statement primarily related to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars.

(f)

Reflects consulting fees paid to CCMP and affiliates of INEOS for consulting services that include certain financial advisory and management services. These payments will cease as of the effective date of our initial public offering.

(g)

Relates to certain transaction costs described elsewhere in our consolidated financial statements included in this prospectus as well as other costs related to several transactions that are either completed, pending or abandoned and that we believe are not representative of our ongoing business operations.

(h)

Includes the impact of restructuring, integration and business optimization expenses that are related to specific, one-time items, including severance for a reduction in force and post-merger integration costs that are not expected to recur.

(i)

Represents adjustments for defined benefit pension plan costs in our income statement. More than two-thirds of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen and the remaining obligations primarily relate to plans operated in certain of our non-U.S. locations that, pursuant to jurisdictional requirements, cannot be frozen. As such, we do not view such expenses as core to our ongoing business operations.

(j)

Represents costs under a transition services agreement with Solvay that provided certain transition services to legacy Eco by Solvay following the 2014 Acquisition. The transition services agreement ended in 2015.