UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38221
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Delaware | | 81-3406833 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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300 Lindenwood Drive Valleybrooke Corporate Center Malvern, Pennsylvania | | 19355 |
(Address of principal executive offices) | | (Zip Code) |
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| (610) 651-4400 (Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨ | | Accelerated filer | | ¨
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Non-accelerated filer | | ý (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of common stock outstanding as of November 10, 2017 was 135,240,826.
PQ GROUP HOLDINGS INC.
INDEX - FORM 10-Q
PART I—FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED). |
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Cash and cash equivalents | $ | 68,838 |
| | $ | 70,742 |
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Receivables, net | 212,018 |
| | 160,581 |
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Inventories | 235,921 |
| | 227,048 |
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Prepaid and other current assets | 29,010 |
| | 34,307 |
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Total current assets | 545,787 |
| | 492,678 |
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Investments in affiliated companies | 479,366 |
| | 459,406 |
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Property, plant and equipment, net | 1,209,047 |
| | 1,181,388 |
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Goodwill | 1,306,547 |
| | 1,241,429 |
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Other intangible assets, net | 800,423 |
| | 816,573 |
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Other long-term assets | 74,433 |
| | 68,197 |
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Total assets | $ | 4,415,603 |
| | $ | 4,259,671 |
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LIABILITIES | | | |
Notes payable and current maturities of long-term debt | $ | 54,255 |
| | $ | 14,481 |
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Accounts payable | 129,793 |
| | 128,478 |
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Accrued liabilities | 112,788 |
| | 99,433 |
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Total current liabilities | 296,836 |
| | 242,392 |
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Long-term debt | 2,597,481 |
| | 2,547,717 |
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Deferred income taxes | 319,738 |
| | 318,463 |
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Other long-term liabilities | 120,578 |
| | 123,155 |
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Total liabilities | 3,334,633 |
| | 3,231,727 |
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Commitments and contingencies (Note 16) |
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EQUITY | | | |
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 106,219,759 and 106,452,330 on September 30, 2017 and December 31, 2016, respectively; outstanding shares 104,109,932 and 103,947,887 on September 30, 2017 and December 31, 2016, respectively | 1,062 |
| | 73 |
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Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on September 30, 2017 and December 31, 2016 | — |
| | — |
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Additional paid-in capital | 1,169,778 |
| | 1,167,137 |
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Accumulated deficit | (97,788 | ) | | (90,380 | ) |
Treasury stock, at cost; shares 21,519 on December 31, 2016 | — |
| | (239 | ) |
Accumulated other comprehensive income (loss) | 2,978 |
| | (53,711 | ) |
Total PQ Group Holdings Inc. equity | 1,076,030 |
| | 1,022,880 |
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Noncontrolling interest | 4,940 |
| | 5,064 |
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Total equity | 1,080,970 |
| | 1,027,944 |
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Total liabilities and equity | $ | 4,415,603 |
| | $ | 4,259,671 |
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See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Sales | $ | 391,829 |
| | $ | 369,979 |
| | $ | 1,114,027 |
| | $ | 741,446 |
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Cost of goods sold | 289,270 |
| | 274,680 |
| | 821,342 |
| | 557,748 |
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Gross profit | 102,559 |
| | 95,299 |
| | 292,685 |
| | 183,698 |
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Selling, general and administrative expenses | 36,169 |
| | 36,003 |
| | 105,907 |
| | 74,017 |
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Other operating expense, net | 19,833 |
| | 15,042 |
| | 47,156 |
| | 40,630 |
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Operating income | 46,557 |
| | 44,254 |
| | 139,622 |
| | 69,051 |
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Equity in net (income) loss from affiliated companies | (10,257 | ) | | 4,616 |
| | (24,879 | ) | | 9,309 |
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Interest expense | 49,079 |
| | 48,610 |
| | 144,041 |
| | 94,362 |
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Debt extinguishment costs | 453 |
| | — |
| | 453 |
| | 11,858 |
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Other expense, net | 5,126 |
| | 4,170 |
| | 21,739 |
| | 7,194 |
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Income (loss) before income taxes and noncontrolling interest | 2,156 |
| | (13,142 | ) | | (1,732 | ) | | (53,672 | ) |
Provision for (benefit from) income taxes | 5,172 |
| | (3,536 | ) | | 5,269 |
| | 36,013 |
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Net loss | (3,016 | ) | | (9,606 | ) | | (7,001 | ) | | (89,685 | ) |
Less: Net income attributable to the noncontrolling interest | 329 |
| | 411 |
| | 407 |
| | 725 |
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Net loss attributable to PQ Group Holdings Inc. | $ | (3,345 | ) | | $ | (10,017 | ) | | $ | (7,408 | ) | | $ | (90,410 | ) |
| | | | | | | |
Net loss per common share: | | | | | | | |
Basic loss per share | $ | (0.03 | ) | | $ | (0.10 | ) | | $ | (0.07 | ) | | $ | (1.10 | ) |
Diluted loss per share | $ | (0.03 | ) | | $ | (0.10 | ) | | $ | (0.07 | ) | | $ | (1.10 | ) |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 104,096,837 |
| | 103,783,719 |
| | 104,020,180 |
| | 81,986,221 |
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Diluted | 104,096,837 |
| | 103,783,719 |
| | 104,020,180 |
| | 81,986,221 |
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See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net loss | $ | (3,016 | ) | | $ | (9,606 | ) | | $ | (7,001 | ) | | $ | (89,685 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Pension and postretirement benefits | (20 | ) | | 162 |
| | (223 | ) | | 486 |
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Net (loss) gain from hedging activities | (301 | ) | | 201 |
| | (3,326 | ) | | 1,302 |
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Foreign currency translation | 18,850 |
| | 1,286 |
| | 60,492 |
| | (7,919 | ) |
Total other comprehensive income (loss) | 18,529 |
| | 1,649 |
| | 56,943 |
| | (6,131 | ) |
Comprehensive income (loss) | 15,513 |
| | (7,957 | ) | | 49,942 |
| | (95,816 | ) |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 82 |
| | (165 | ) | | 661 |
| | (165 | ) |
Comprehensive income (loss) attributable to PQ Group Holdings Inc. | $ | 15,431 |
| | $ | (7,792 | ) | | $ | 49,281 |
| | $ | (95,651 | ) |
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Accumulated deficit | | Treasury stock, at cost | | Accumulated other comprehensive income (loss) | | Non-controlling interest | | Total |
Balance, December 31, 2016 | $ | 73 |
| | $ | 1,167,137 |
| | $ | (90,380 | ) | | $ | (239 | ) | | $ | (53,711 | ) | | $ | 5,064 |
| | $ | 1,027,944 |
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Net income (loss) | — |
| | — |
| | (7,408 | ) | | — |
| | — |
| | 407 |
| | (7,001 | ) |
Stock split and conversion | 989 |
| | (1,228 | ) | | — |
| | 239 |
| | — |
| | — |
| | — |
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Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 56,689 |
| | 254 |
| | 56,943 |
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Dividend distribution | — |
| | — |
| | — |
| | — |
| | — |
| | (785 | ) | | (785 | ) |
Stock compensation expense | — |
| | 3,869 |
| | — |
| | — |
| | — |
| | — |
| | 3,869 |
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Balance, September 30, 2017 | $ | 1,062 |
| | $ | 1,169,778 |
| | $ | (97,788 | ) | | $ | — |
| | $ | 2,978 |
| | $ | 4,940 |
| | $ | 1,080,970 |
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| | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Accumulated deficit | | Treasury stock, at cost | | Accumulated other comprehensive income (loss) | | Non-controlling interest | | Total |
Balance, December 31, 2015 | $ | — |
| | $ | 245,279 |
| | $ | (10,634 | ) | | $ | — |
| | $ | 648 |
| | $ | — |
| | $ | 235,293 |
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Business Combination | 73 |
| | 912,127 |
| | — |
| | — |
| | — |
| | 6,569 |
| | 918,769 |
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Net income (loss) | — |
| | — |
| | (90,410 | ) | | — |
| | — |
| | 725 |
| | (89,685 | ) |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (5,518 | ) | | (613 | ) | | (6,131 | ) |
Stock repurchase | — |
| | — |
| | — |
| | (2,540 | ) | | — |
| | — |
| | (2,540 | ) |
Equity contribution | — |
| | 6,486 |
| | — |
| | 114 |
| | — |
| | — |
| | 6,600 |
|
Dividend distribution | — |
| | — |
| | — |
| | — |
| | — |
| | (476 | ) | | (476 | ) |
Stock compensation expense | — |
| | 2,666 |
| | — |
| | 2,237 |
| | — |
| | — |
| | 4,903 |
|
Balance, September 30, 2016 | $ | 73 |
| | $ | 1,166,558 |
| | $ | (101,044 | ) | | $ | (189 | ) | | $ | (4,870 | ) | | $ | 6,205 |
| | $ | 1,066,733 |
|
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (7,001 | ) | | $ | (89,685 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation | | 89,987 |
| | 60,173 |
|
Amortization | | 39,148 |
| | 25,429 |
|
Acquisition accounting valuation adjustments on inventory sold | | 871 |
| | 23,518 |
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Amortization of deferred financing costs and original issue discount | | 6,626 |
| | 4,443 |
|
Debt extinguishment costs | | 253 |
| | 7,182 |
|
Debt modification creditor fees capitalized | | — |
| | (1,932 | ) |
Foreign currency exchange loss | | 21,612 |
| | 6,240 |
|
Pension and postretirement healthcare benefit expense | | 2,642 |
| | 2,741 |
|
Pension and postretirement healthcare benefit funding | | (7,525 | ) | | (2,258 | ) |
Deferred income tax (benefit) expense | | (12,447 | ) | | 18,741 |
|
Net loss on asset disposals | | 6,419 |
| | 2,288 |
|
Supplemental pension plan mark-to-market gain | | (708 | ) | | (393 | ) |
Stock compensation | | 3,869 |
| | 4,904 |
|
Equity in net (income) loss from affiliated companies | | (24,879 | ) | | 9,309 |
|
Dividends received from affiliated companies | | 19,071 |
| | 136 |
|
Working capital changes that provided (used) cash, excluding the effect of business combinations: | | | | |
Receivables | | (28,900 | ) | | 3,483 |
|
Inventories | | 4,897 |
| | 13,832 |
|
Prepaids and other current assets | | (6,000 | ) | | (824 | ) |
Accounts payable | | (9,044 | ) | | (7,332 | ) |
Accrued liabilities | | 13,460 |
| | 10,125 |
|
Other, net | | (2,535 | ) | | (812 | ) |
Net cash provided by operating activities | | 109,816 |
| | 89,308 |
|
Cash flows from investing activities: | | | | |
Purchases of property, plant and equipment | | (90,229 | ) | | (69,798 | ) |
Investment in affiliated companies | | (9,000 | ) | | — |
|
Change in restricted cash, net | | 12,135 |
| | (6,199 | ) |
Loan receivable under the New Markets Tax Credit Arrangement | | (6,221 | ) | | (7,823 | ) |
Business combinations, net of cash acquired | | (41,572 | ) | | (1,777,740 | ) |
Other, net | | 391 |
| | — |
|
Net cash used in investing activities | | (134,496 | ) | | (1,861,560 | ) |
Cash flows from financing activities: | | | | |
Draw down of revolver | | 302,725 |
| | 118,000 |
|
Repayments of revolver | | (270,088 | ) | | (125,000 | ) |
Issuance of long-term debt under the New Market Tax Credit arrangement | | 8,820 |
| | 11,000 |
|
Issuance of long-term debt, net of original issue discount and financing fees | | — |
| | 1,172,980 |
|
Issuance of long-term notes, net of original issue discount and financing fees | | — |
| | 1,123,777 |
|
Debt issuance costs | | (1,205 | ) | | (5,397 | ) |
Repayments of long-term debt | | (10,289 | ) | | (475,998 | ) |
Interest hedge premium | | — |
| | (1,551 | ) |
Equity contribution | | — |
| | 6,600 |
|
Stock repurchase | | — |
| | (2,540 | ) |
Distributions to noncontrolling interests | | (785 | ) | | (476 | ) |
Net cash provided by financing activities | | 29,178 |
| | 1,821,395 |
|
Effect of exchange rate changes on cash and cash equivalents | | (6,402 | ) | | (2,375 | ) |
Net change in cash and cash equivalents | | (1,904 | ) | | 46,768 |
|
Cash and cash equivalents at beginning of period | | 70,742 |
| | 25,155 |
|
Cash and cash equivalents at end of period | | $ | 68,838 |
| | $ | 71,923 |
|
Supplemental cash flow information: | | | | |
Cash paid for taxes | | $ | 21,005 |
| | $ | 10,740 |
|
Cash paid for interest | | $ | 118,793 |
| | $ | 56,932 |
|
Non-cash investing activity: | | | | |
Capital expenditures acquired on account but unpaid as of the period end | | $ | 12,924 |
| | $ | 14,875 |
|
Non-cash financing activity: | | | | |
Equity consideration for the Business Combination | | $ | — |
| | $ | 910,800 |
|
Debt assumed in the Business Combination | | $ | — |
| | $ | 22,911 |
|
Debt assumed in the Acquisition | | $ | 16,609 |
| | $ | — |
|
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
1. Background and Basis of Presentation:
Description of Business
PQ Group Holdings Inc. and subsidiaries (the “Company” or “PQ Group Holdings”) conducts operations through two principal segments: (1) Performance Materials & Chemicals: a fully integrated, global leader in silicate technology, producing sodium silicate, specialty silicas, zeolites, spray dry silicates, magnesium silicate, and other high performance chemical products used in a variety of end-uses such as adsorbents for surface coatings, clarifying agents for beverages, cleaning and personal care products and engineered glass products for use in highway safety, polymer additives, metal finishing and electronics end uses; and (2) Environmental Catalysts & Services: a leading global innovator and producer of silica catalysts used in the production of high-density polyethylene (“HDPE”), methyl methacrylate (“MMA”), specialty zeolite-based catalysts sold to the emissions control industry, the petrochemical industry and other areas of the broader chemicals industry and a merchant sulfuric acid producer operating a network of plants serving a variety of end uses, including the oil refining, nylon, mining, general industrial and chemical industries.
The Company experiences some seasonality, primarily with respect to the performance materials and refining services product groups. With respect to the performance materials product group, sales and earnings are generally higher during the second and third quarters of the year as highway striping projects typically occur during warmer weather months. Additionally, the refining services product group typically experiences similar seasonal fluctuations as a result of higher demand for gasoline products in the summer months. As a result, working capital requirements tend to be higher in the first and fourth quarters of the year, while higher cash generation occurs in the second and third quarters of the year.
Basis of Presentation
On August 17, 2015, the Company, PQ Holdings Inc. (“PQ Holdings”), Eco Services Operations LLC (“Eco Services”), certain investment funds affiliated with CCMP Capital Advisors, LLC (now known as CCMP Capital Advisors, LP; “CCMP”), and stockholders of PQ Holdings and Eco Services entered into a reorganization and transaction agreement pursuant to which the companies consummated a series of transactions to reorganize and combine the businesses of PQ Holdings and Eco Services (the “Business Combination”), under a new holding company, PQ Group Holdings Inc. The Business Combination was consummated on May 4, 2016.
In accordance with accounting principles generally accepted in the United States (“GAAP”), Eco Services is the accounting predecessor to PQ Group Holdings. Certain investment funds affiliated with CCMP held a controlling interest position in Eco Services prior to the Business Combination. In addition, certain investment funds affiliated with CCMP owned a non-controlling interest in PQ Holdings prior to the Business Combination and the merger with Eco Services constituted a change in control under the PQ Holdings credit agreements and bond indenture that were in place at the time of the Business Combination. Therefore, Eco Services is deemed to be the accounting acquirer. These condensed consolidated financial statements are the continuation of Eco Services’ business prior to the Business Combination.
The condensed consolidated financial statements included herein are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations for interim reporting. In the opinion of management, all adjustments of a normal and recurring nature necessary to state fairly the financial position and results of operations have been included. The results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s prospectus dated September 28, 2017, as filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The Company has continued to follow the accounting policies set forth in those consolidated financial statements.
Prior to September 22, 2017, the Company had two classes of common stock designated as Class A and Class B common stock. On September 22, 2017, the Company reclassified its Class A common stock into common stock and then effected a 8.8275-for-1 split of its common stock. On September 28, 2017, the Company converted each outstanding share of Class B common stock into 8.8275 shares of common stock plus an additional number of shares determined by dividing the unreturned paid-in capital amount of such Class B common stock, or $113.74 per share, by $17.50, the initial public offering price of a share of our common stock in the Company’s initial public offering (“IPO”), rounded to the nearest whole share. Holders of Class B common stock did not receive any cash payments from the Company in connection with the conversion of the Class B common stock.
On October 3, 2017, the Company completed its IPO whereby it issued 29,000,000 shares of its common stock at an initial public offering price of $17.50 per share. The shares began trading on the New York Stock Exchange on September 29, 2017. The aggregate
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
proceeds received by the Company from the offering were approximately $480,525, net of underwriting discounts, commissions and estimated offering expenses. The net proceeds were used to repay existing indebtedness as further described in Note 20.
2. New Accounting Standards:
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which eliminates the deferral of the tax effects of intra-entity transfers of an asset other than inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party which has resulted in diversity in practice and increased complexity within financial reporting. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted the guidance effective January 1, 2017. The guidance did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued guidance that includes targeted improvements to the accounting for employee stock-based compensation. The updates in the guidance include changes in the income tax consequences, balance sheet classification and cash flow statement reporting of stock-based payment transactions. The guidance also includes certain modifications applicable only to nonpublic entities. For public companies, the new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those years. The Company adopted this new guidance as required on January 1, 2017, with no material impact upon adoption to the Company’s consolidated financial statements. On a prospective basis from the adoption date, the Company will record all tax effects related to stock-based compensation through the statement of operations, and all tax-related cash flows resulting from stock-based award payments will be reported as operating activities in the statement of cash flows. The Company made an accounting policy election under the new guidance to account for forfeitures of stock-based compensation awards as they occur.
In July 2015, the FASB issued new guidance that changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. The amendments in this guidance do not apply to inventory that is measured using LIFO or the retail inventory method; rather, the amendments apply to all other inventory, which includes inventory that is measured using FIFO or average cost. Within the scope of this new guidance, an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation, which is consistent with existing GAAP. The Company adopted the new guidance on January 1, 2017 as required. The guidance did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In August 2017, the FASB issued amendments intended to better align hedge accounting with an entities risk management activities. The amendments expand hedge accounting for non-financial and financial risk components and revise the measurement methodologies to better align with an entities risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The new guidance is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, and the new guidance should be applied prospectively to the presentation and disclosure guidance. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements.
In May 2017, the FASB issued guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, an entity should not account for the effects of a change in a share-based payment award using modification accounting unless the fair value, vesting conditions and classification as either a liability or equity are all the same with respect to the award immediately prior to modification and the modified award itself. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, and the new guidance should be applied prospectively to awards modified on or after the adoption date. Based on the Company’s existing policies regarding the application of modification accounting to its share-based payment awards, the Company does not believe that the new guidance will have a material impact on its consolidated financial statements.
In March 2017, the FASB issued guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, “pension costs”). Under current GAAP, there are several components of pension costs which are presented net to arrive at pension costs as included in the income statement and disclosed in the notes. As part of this amendment to the existing guidance, the service cost component of pension costs will be bifurcated from the other components and included in the same line item of the income statement as compensation costs are reported. The remaining components will be reported together below operating income on the income
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
statement, either as a separate line item or combined with another line item on the income statement and disclosed. Additionally, with respect to capitalization to inventory, fixed assets, etc., only the service cost component will be eligible for capitalization upon adoption of the guidance. The new guidance is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The amendments should be applied retrospectively upon adoption with respect to the presentation of the service and other cost components of pension costs in the income statement, and prospectively for the capitalization of the service cost component in assets. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements.
In January 2017, the FASB issued guidance which eliminates the second step from the traditional two-step goodwill impairment test. Under current guidance, an entity performed the first step of the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount; if an impairment loss was indicated, the entity computed the implied fair value of goodwill to determine whether an impairment loss existed, and if so, the amount to recognize. Under the new guidance, an impairment loss is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value (the Step 1 test), with no further testing required. Any impairment loss recognized is limited to the amount of goodwill allocated to the reporting unit. The new guidance is effective for public companies that are SEC registrants for fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. All entities are required to apply the guidance prospectively to goodwill impairment tests subsequent to adoption of the standard. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements.
In January 2017, the FASB issued guidance which clarifies the definition of a business and provides revised criteria and a framework to determine whether an integrated set of assets and activities is a business. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements.
In November 2016, the FASB issued guidance which clarifies the classification and presentation of changes in restricted cash on the statement of cash flows. The updates in the guidance require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash when reconciling the beginning-of-period and end-of-period total amounts. The updates also require a reconciliation between cash, cash equivalents and restricted cash presented on the balance sheet to the total of the same amounts presented on the statement of cash flows. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, and the new guidance should be applied retrospectively to each period presented. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements. As of September 30, 2017, the Company had $1,645 of restricted cash included in prepaid and other current assets on its balance sheet related to its New Market Tax Credit financing arrangements as well as other small restricted cash balances.
In August 2016, the FASB issued guidance which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs and distributions from certain equity method investees. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the new guidance should be applied retrospectively to each period presented. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements.
In February 2016, the FASB issued guidance that amends the accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases (including those classified under existing GAAP as operating leases, which based on current standards are not reflected on the balance sheet), but will recognize expenses similar to current lease accounting. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements. The Company has operating lease agreements for which it expects to recognize right of use assets and corresponding liabilities on its balance sheet upon adoption of the new guidance. A complete discussion of these leases is included in the Company’s audited consolidated financial statements for the year ended December 31, 2016 in Note 20, Commitments and Contingent Liabilities.
In May 2014, the FASB issued accounting guidance (with subsequent targeted amendments) that will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that revenue recognized from a transaction or event that arises from a contract with a customer should reflect the consideration to which an entity expects to be entitled in exchange for goods or services provided. To achieve that core principle, the new guidance sets forth a five-step revenue recognition model that will need to be applied consistently to all contracts with customers, except those that are within the scope of other topics in the Accounting Standards Codification (“ASC”). Also required are enhanced disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. The enhanced disclosures include qualitative and quantitative information about contracts with customers, significant
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
judgments made in applying the revenue guidance, and assets recognized related to the costs to obtain or fulfill a contract. For public companies, the new requirements are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company is reviewing its key revenue streams and assessing the underlying customer contracts within the framework of the new guidance. The Company has evaluated the key aspects of its revenue streams for impact under the new guidance and is currently performing a detailed analysis of its customer agreements to quantify the potential changes under the guidance. The Company believes that the guidance will not have a material impact on its existing revenue recognition practices, but there are new robust disclosure requirements that will have an impact on the Company’s reporting. The Company anticipates adopting the new guidance in the first quarter of 2018 as required, and expects to implement the guidance under the modified retrospective transition method of adoption.
3. Fair Value Measurements:
Fair values are based on quoted market prices when available. When market prices are not available, fair values are generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality. In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair values using methods, models and assumptions that management believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of management estimation and judgment that becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or input used.
The Company’s financial assets and liabilities carried at fair value have been classified based upon a fair value hierarchy. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). The classification of an asset or a liability is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
| |
• | Level 1—Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets. |
| |
• | Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves. |
| |
• | Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date. |
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
|
| | | | | | | | | | | | | | | |
| As of September 30, 2017 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Derivative contracts | $ | 1,098 |
| | $ | — |
| | $ | 1,098 |
| | $ | — |
|
Restoration plan assets | 5,566 |
| | 5,566 |
| | — |
| | — |
|
Total | $ | 6,664 |
| | $ | 5,566 |
| | $ | 1,098 |
| | $ | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Derivative contracts | $ | 58 |
| | $ | — |
| | $ | 58 |
| | $ | — |
|
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
|
| | | | | | | | | | | | | | | |
| As of December 31, 2016 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Derivative contracts | $ | 6,434 |
| | $ | — |
| | $ | 6,434 |
| | $ | — |
|
Restoration plan assets | 5,594 |
| | 5,594 |
| | — |
| | — |
|
Total | $ | 12,028 |
| | $ | 5,594 |
| | $ | 6,434 |
| | $ | — |
|
Restoration plan assets
The fair values of the Company’s restoration plan assets are determined through quoted prices in active markets. Restoration plan assets are assets held in a Rabbi trust to fund the obligations of the Company’s defined benefit supplementary retirement plans and include various stock and fixed income mutual funds. See Note 15 to these condensed consolidated financial statements regarding defined supplementary retirement plans.
Derivative contracts
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (“OTC”). The Company generally values exchange-traded derivatives using models that calibrate to market transactions and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, forward curves, measures of volatility, and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as forward contracts, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.
The Company has interest rate caps and natural gas caps and swaps that are fair valued using Level 2 inputs. In addition, the Company applies a credit valuation adjustment to reflect credit risk which is calculated based on credit default swaps. To the extent that the Company’s net exposure under a specific master agreement is an asset, the Company utilizes the counterparty’s default swap rate. If the net exposure under a specific master agreement is a liability, the Company utilizes a default swap rate comparable to PQ Group Holdings. The credit valuation adjustment is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume the Company’s liabilities or that a market participant would be willing to pay for the Company’s assets. As of September 30, 2017 and December 31, 2016, the credit valuation adjustment resulted in a minimal change in the fair value of the derivatives.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
4. Accumulated Other Comprehensive Income (Loss):
The following table presents the tax effects of each component of other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, |
| 2017 | | 2016 |
| Pre-tax amount | | Tax benefit / (expense) | | After-tax amount | | Pre-tax amount | | Tax benefit / (expense) | | After-tax amount |
Defined benefit and other postretirement plans | | | | | | | | | | | |
Amortization and unrealized losses | $ | (33 | ) | | $ | 13 |
| | $ | (20 | ) | | $ | 162 |
| | $ | — |
| | $ | 162 |
|
Benefit plans, net | (33 | ) | | 13 |
| | (20 | ) | | 162 |
| | — |
| | 162 |
|
Net loss (gain) from hedging activities | (486 | ) | | 185 |
| | (301 | ) | | 324 |
| | (123 | ) | | 201 |
|
Foreign currency translation | 21,343 |
| | (2,493 | ) | | 18,850 |
| | 1,930 |
| | (644 | ) | | 1,286 |
|
Other comprehensive income (loss) | $ | 20,824 |
| | $ | (2,295 | ) | | $ | 18,529 |
| | $ | 2,416 |
| | $ | (767 | ) | | $ | 1,649 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| Pre-tax amount | | Tax benefit / (expense) | | After-tax amount | | Pre-tax amount | | Tax benefit / (expense) | | After-tax amount |
Defined benefit and other postretirement plans | | | | | | | | | | | |
Amortization and unrealized losses | $ | (261 | ) | | $ | 38 |
| | $ | (223 | ) | | $ | 486 |
| | $ | — |
| | $ | 486 |
|
Benefit plans, net | (261 | ) | | 38 |
| | (223 | ) | | 486 |
| | — |
| | 486 |
|
Net loss (gain) from hedging activities | (5,373 | ) | | 2,047 |
| | (3,326 | ) | | 2,100 |
| | (798 | ) | | 1,302 |
|
Foreign currency translation | 69,202 |
| | (8,710 | ) | | 60,492 |
| | (9,605 | ) | | 1,686 |
| | (7,919 | ) |
Other comprehensive income (loss) | $ | 63,568 |
| | $ | (6,625 | ) | | $ | 56,943 |
| | $ | (7,019 | ) | | $ | 888 |
| | $ | (6,131 | ) |
The following table presents the change in accumulated other comprehensive income (loss), net of tax, by component for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| Defined benefit and other postretirement plans | | Net gain (loss) from hedging activities | | Foreign currency translation | | Total |
December 31, 2016 | $ | 7,513 |
| | $ | 4,557 |
| | $ | (65,781 | ) | | $ | (53,711 | ) |
Other comprehensive income (loss) before reclassifications | (322 | ) | | (3,404 | ) | | 60,238 |
| | 56,512 |
|
Amounts reclassified from accumulated other comprehensive income(a) | 99 |
| | 78 |
| | — |
| | 177 |
|
Net current period other comprehensive income (loss) | (223 | ) | | (3,326 | ) | | 60,238 |
| | 56,689 |
|
September 30, 2017 | $ | 7,290 |
| | $ | 1,231 |
| | $ | (5,543 | ) | | $ | 2,978 |
|
| | | | | | | |
December 31, 2015 | $ | 648 |
| | $ | — |
| | $ | — |
| | $ | 648 |
|
Other comprehensive income (loss) before reclassifications | 486 |
| | 591 |
| | (7,306 | ) | | (6,229 | ) |
Amounts reclassified from accumulated other comprehensive income(a) | — |
| | 711 |
| | — |
| | 711 |
|
Net current period other comprehensive income (loss) | 486 |
| | 1,302 |
| | (7,306 | ) | | (5,518 | ) |
September 30, 2016 | $ | 1,134 |
| | $ | 1,302 |
| | $ | (7,306 | ) | | $ | (4,870 | ) |
—————
| |
(a) | See the following table for details about these reclassifications. |
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
The following table presents the reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016. Amounts in parenthesis indicate debits to profit/loss.
|
| | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income Components | | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is Presented |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Defined benefit and other postretirement plans | | | | | | | | | |
Amortization of prior service cost | | $ | 20 |
| | $ | — |
| | $ | 60 |
| | $ | — |
| (a) |
Amortization of net gain (loss) | | 19 |
| | — |
| | 58 |
| | — |
| (a) |
| | 39 |
| | — |
| | 118 |
| | — |
| Total before tax |
| | (6 | ) | | — |
| | (19 | ) | | — |
| Tax (expense) benefit |
| | $ | 33 |
| | $ | — |
| | $ | 99 |
| | $ | — |
| Net of tax |
| | | | | | | | | |
Net gain (loss) from hedging activities | | | | | | | | | |
Interest rate caps | | $ | 13 |
| | $ | (2 | ) | | $ | 22 |
| | $ | (2 | ) | Interest expense |
Natural gas swaps | | 94 |
| | 420 |
| | 104 |
| | 1,148 |
| Cost of goods sold |
| | 107 |
| | 418 |
| | 126 |
| | 1,146 |
| Total before tax |
| | (41 | ) | | (159 | ) | | (48 | ) | | (435 | ) | Tax (expense) benefit |
| | $ | 66 |
| | $ | 259 |
| | $ | 78 |
| | $ | 711 |
| Net of tax |
| | | | | | | | | |
Total reclassifications for the period | | $ | 99 |
| | $ | 259 |
| | $ | 177 |
| | $ | 711 |
| Net of tax |
—————
| |
(a) | These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and other postretirement cost (see Note 15 to these condensed consolidated financial statements for additional details). |
5. Acquisition:
On June 12, 2017 (the “Closing Date”), the Company acquired the facilities of Sovitec Mondial S.A. (“Sovitec”) located in Belgium, Spain, Argentina and France as part of a stock transaction (the “Acquisition”) for $41,572 in cash, excluding assumed debt. Based in Fleurus, Belgium, Sovitec is a high quality producer of engineered glass products used in transportation safety, metal finishing and polymer additives.
The Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method, the purchase price was allocated to the identifiable net assets acquired based on the fair values of the identifiable assets acquired and liabilities assumed as of the Closing Date. The excess of the purchase price over the fair values of the identifiable net assets acquired was recorded to goodwill.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
The following table sets forth the calculation and preliminary allocation of the purchase price to the identifiable net assets acquired with respect to the Acquisition:
|
| | | |
Total consideration, net of cash acquired | $ | 41,572 |
|
| |
|
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
|
Receivables | $ | 14,305 |
|
Inventories | 7,645 |
|
Prepaid and other current assets | 230 |
|
Property, plant and equipment | 9,020 |
|
Other long-term assets | 129 |
|
| |
|
Fair value of assets acquired | 31,329 |
|
Current debt | (6,420 | ) |
Accounts payable | (10,748 | ) |
Long-term debt | (10,189 | ) |
Other long-term liabilities | (154 | ) |
| |
|
Fair value of net assets acquired | 3,818 |
|
Goodwill | 37,754 |
|
| $ | 41,572 |
|
| |
The valuation of the identifiable assets and liabilities included in the table above is preliminary and is subject to change, as the Company is in the process of evaluating the information required to determine the fair values of certain identifiable assets and liabilities acquired, including inventory, property, plant and equipment, and intangible assets. An increased portion of the purchase price allocated to the identifiable net assets acquired will reduce the amount recognized for goodwill and may result in increased cost of goods sold, depreciation and/or amortization expense. Adjustments to the provisional amounts during the measurement period that result in changes to depreciation, amortization or other income effects will be recognized in the reporting period(s) in which the adjustments are determined.
The Company’s condensed consolidated financial statements include Sovitec’s results of operations for the period from the Closing Date through September 30, 2017. Net sales and net income attributable to Sovitec during this period are included in the Company’s condensed consolidated statement of operations and total $13,490 and $644, respectively, for the three months ended September 30, 2017, and $17,194 and $1,148, respectively, for the nine months ended September 30, 2017. Acquisition costs of $737 and $2,065 are included in other operating expense, net in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017, respectively.
The Company believes that the Acquisition will enable it to offer a more comprehensive, cost-effective and high-quality portfolio of products and services to its customers worldwide when, combined with anticipated synergies within its existing business, contributed to a total purchase price that resulted in the recognition of goodwill. All of the goodwill was assigned to the Company’s Performance Materials and Chemicals segment. The goodwill associated with the Acquisition is not deductible for tax purposes.
Pro Forma Financial Information
The unaudited pro forma financial information for the three months ended September 30, 2016 and the nine months ended September 30, 2017 and 2016 has been derived from the Company’s historical consolidated financial statements and prepared to give effect to the Acquisition, assuming that the Acquisition occurred on January 1, 2016. The unaudited pro forma consolidated results of operations are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations had the Acquisition been made as of January 1, 2016. The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the Acquisition. The results of operations for the three months ended September 30, 2017 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation included in the table below.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2016 | | 2017 | | 2016 |
| (unaudited) |
Pro forma sales | $ | 381,065 |
| | $ | 1,130,454 |
| | $ | 772,549 |
|
Pro forma net loss | (8,289 | ) | | (6,511 | ) | | (88,300 | ) |
Certain non-recurring charges included in the Company’s results of operations for the nine months ended September 30, 2017 were allocated to the respective prior year periods for pro forma purposes. For the nine months ended September 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $2,065 which were excluded from the pro forma net loss for the nine months ended September 30, 2017.
6. Business Combination:
As described in Note 1 to these condensed consolidated financial statements, on May 4, 2016, the Company, PQ Holdings, Eco Services, certain investment funds affiliated with CCMP and certain other stockholders of PQ Holdings and Eco Services completed the Business Combination. Eco Services is the accounting predecessor to PQ Group Holdings. Certain investment funds affiliated with CCMP held a controlling interest position in Eco Services prior to the Business Combination. In addition, certain investment funds affiliated with CCMP owned a noncontrolling interest in PQ Holdings prior to the Business Combination and the merger with Eco constituted a change in control under the various PQ Holdings credit agreements and bond indenture. Therefore, Eco Services is deemed to be the accounting acquirer. These condensed consolidated financial statements are the continuation of Eco Services’ business prior to the Business Combination.
Total consideration for the Business Combination included $1,777,740 of cash, $910,800 of equity in the acquired PQ Holdings entities and $1,401 of assumed stock awards of PQ Holdings. The fair value of the equity consideration was determined based on an estimated enterprise value using a market approach as of the date of the Business Combination, reduced by borrowings to arrive at the fair value of equity. The existing PQ Holdings credit facilities were not legally assumed as part of the Business Combination and the extinguishment of the debt concurrent with the Business Combination was included as part of the consideration transferred.
The Company’s condensed consolidated financial statements include PQ Holdings results of operations from May 4, 2016 through September 30, 2016. Net sales and net loss attributable to PQ Holdings during this period are included in the Company’s condensed consolidated statement of operations and total $276,726 and $29,070 for the three months ended September 30, 2016 and $462,097 and $122,497 for the nine months ended September 30, 2016. Acquisition costs of $896 and $1,398 are included in other operating expense, net in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2016, respectively.
In accordance with the requirements of the purchase method of accounting for acquisitions, inventories were recorded at fair market value (which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which was $58,683 higher than the historical cost. The Company’s cost of goods sold includes a pre-tax charge of $5,804 and $23,518 for the three and nine months ended September 30, 2016, respectively, relating to the portion of the step-up on inventory sold during the period. A separate portion of the fair value step-up related to the domestic inventory accounted for under the LIFO method was included in inventory on the consolidated balance sheet as of December 31, 2016 as part of the new LIFO base layer on the acquired inventory.
Pro Forma Financial Information
The unaudited pro forma financial information for the nine months ended September 30, 2016 has been derived from the Company’s historical consolidated financial statements and prepared to give effect to the Business Combination, assuming that the Business Combination occurred on January 1, 2015. These pro forma adjustments primarily relate to incremental depreciation expense on the step up of fixed assets, amortization of acquired intangibles, higher cost of goods sold related to the sale of revalued inventory, incremental interest expense related to the additional debt that needed to fund the Business Combination, and the estimated impact of these adjustments on the Company’s tax provision. The unaudited pro forma consolidated results of operations are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations had the Business Combination been made as of January 1, 2015. The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the Business Combination. The results of operations for the three months ended September 30, 2016 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation included in the table below.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
|
| | | |
| Nine months ended September 30, 2016 |
| (unaudited) |
Pro forma sales | $ | 1,080,310 |
|
Pro forma net loss | (55,985 | ) |
Certain non-recurring charges included in the Company’s results of operations for the nine months ended September 30, 2016 were allocated to the respective prior year periods for pro forma purposes. For the nine months ended September 30, 2016, non-recurring charges allocated to the prior year period include a debt prepayment penalty of $26,250, refinancing charges of $4,616 and transaction fee charges of $714, all of which are excluded from the pro forma net loss for the nine months ended September 30, 2016.
7. Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 is summarized as follows:
|
| | | | | | | | | | | | |
| | Performance Materials & Chemicals | | Environmental Catalysts & Services | | Total |
Balance as of December 31, 2016 | | $ | 852,506 |
| | $ | 388,923 |
| | $ | 1,241,429 |
|
Goodwill recognized | | 37,754 |
| | — |
| | 37,754 |
|
Foreign exchange impact | | 25,189 |
| | 2,175 |
| | 27,364 |
|
Balance as of September 30, 2017 | | $ | 915,449 |
| | $ | 391,098 |
| | $ | 1,306,547 |
|
| | | | | | |
8. Other Operating Expense, Net:
A summary of other operating expense, net is as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Restructuring and other related costs (Note 18) | $ | 4,106 |
| | $ | 1,336 |
| | $ | 5,578 |
| | $ | 10,898 |
|
Amortization expense | 9,146 |
| | 8,914 |
| | 23,270 |
| | 17,029 |
|
Net loss on asset disposals | 3,494 |
| | 627 |
| | 6,419 |
| | 2,288 |
|
Transaction and other related costs (1) | 966 |
| | 1,635 |
| | 5,295 |
| | 6,063 |
|
Management advisory fees | 1,250 |
| | 1,250 |
| | 3,750 |
| | 2,333 |
|
Other, net | 871 |
| | 1,280 |
| | 2,844 |
| | 2,019 |
|
| $ | 19,833 |
| | $ | 15,042 |
| | $ | 47,156 |
| | $ | 40,630 |
|
—————
| |
(1) | Transaction and other related costs primarily include acquisition costs directly attributable to the Acquisition (see Note 5 to these condensed consolidated financial statements for further information) and the Business Combination (see Note 6 to these condensed consolidated financial statements for further information), as well as other business development costs. |
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
9. Inventories:
Inventories are classified and valued as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Finished products and work in process | $ | 178,844 |
| | $ | 175,182 |
|
Raw materials | 57,077 |
| | 51,866 |
|
| $ | 235,921 |
| | $ | 227,048 |
|
Valued at lower of cost or market: | | | |
LIFO basis | $ | 145,905 |
| | $ | 135,605 |
|
FIFO or average cost basis | 90,016 |
| | 91,443 |
|
| $ | 235,921 |
| | $ | 227,048 |
|
10. Investments in Affiliated Companies:
The Company accounts for investments in affiliated companies under the equity method. Affiliated companies accounted for on the equity basis as of September 30, 2017 are as follows:
|
| | | | |
Company | | Country | | Percent Ownership |
PQ Silicates Ltd. | | Taiwan | | 50% |
Zeolyst International | | USA | | 50% |
Zeolyst C.V. | | Netherlands | | 50% |
Quaker Holdings | | South Africa | | 49% |
Following is summarized information of the combined investments:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net sales | | $ | 83,983 |
| | $ | 63,110 |
| | $ | 225,770 |
| | $ | 107,897 |
|
Gross profit | | 33,276 |
| | 24,283 |
| | 91,862 |
| | 46,589 |
|
Operating income | | 22,713 |
| | 15,054 |
| | 60,408 |
| | 30,708 |
|
Net income | | 23,819 |
| | 15,351 |
| | 63,663 |
| | 30,994 |
|
The Company’s investments in affiliated companies balance as of September 30, 2017 and December 31, 2016 includes net purchase accounting fair value adjustments of $266,358 and $273,300, respectively, related to the Business Combination, consisting primarily of goodwill and intangible assets such as customer relationships, technical know-how and trade names. Consolidated equity in net income from affiliates is net of $1,660 and $6,942 of amortization expense related to purchase accounting fair value adjustments for the three and nine months ended September 30, 2017, respectively. Consolidated equity in net income from affiliates is net of $12,291 and $24,606 of amortization expense related to purchase accounting fair value adjustments for the three and nine months ended September 30, 2016, respectively.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
11. Property, Plant and Equipment:
A summary of property, plant and equipment, at cost, and related accumulated depreciation is as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Land | $ | 191,917 |
| | $ | 186,327 |
|
Buildings | 191,916 |
| | 157,944 |
|
Machinery and equipment | 955,779 |
| | 788,175 |
|
Construction in progress | 155,005 |
| | 204,138 |
|
| 1,494,617 |
| | 1,336,584 |
|
Less: accumulated depreciation | (285,570 | ) | | (155,196 | ) |
| $ | 1,209,047 |
| | $ | 1,181,388 |
|
Depreciation expense was $31,957 and $30,305 for the three months ended September 30, 2017 and 2016, respectively. Depreciation expense was $89,987 and $60,173 for the nine months ended September 30, 2017 and 2016, respectively.
12. Long-term Debt:
The summary of long-term debt is as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Term Loan Facility (U.S. dollar denominated) | $ | 918,473 |
| | $ | 925,430 |
|
Term Loan Facility (Euro denominated) | 331,368 |
| | 297,317 |
|
6.75% Senior Secured Notes due 2022 | 625,000 |
| | 625,000 |
|
Floating Rate Senior Unsecured Notes due 2022 | 525,000 |
| | 525,000 |
|
8.5% Senior Notes due 2022 | 200,000 |
| | 200,000 |
|
ABL Facility | 35,000 |
| | — |
|
Other | 68,207 |
| | 45,223 |
|
Total debt | 2,703,048 |
| | 2,617,970 |
|
Original issue discount | (26,470 | ) | | (28,497 | ) |
Deferred financing costs | (24,842 | ) | | (27,275 | ) |
Total debt, net of original issue discount and deferred financing costs | 2,651,736 |
| | 2,562,198 |
|
Less: current portion | (54,255 | ) | | (14,481 | ) |
Total long-term debt | $ | 2,597,481 |
| | $ | 2,547,717 |
|
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction. As of September 30, 2017 and December 31, 2016, the fair value of the senior secured term loans and senior secured and unsecured notes was higher than book value by $69,936 and $68,477, respectively. The fair value of the senior secured term loans and senior secured and unsecured notes was derived from published loan prices as of September 30, 2017 and December 31, 2016, as applicable. The fair value is classified as Level 2 based upon the fair value hierarchy (see Note 3 to these condensed consolidated financial statements for further information on fair value measurements).
New Markets Tax Credit Financing
On June 22, 2017, the Company’s subsidiary, Potters Industries, LLC (“Potters”), entered into a New Markets Tax Credit (“NMTC”) financing arrangement with U.S. Bank N.A. (“USB”), one of USB’s affiliates (“USB Investment Fund”) and Business Conduit No. 28, LLC, an affiliate of Community Reinvestment Fund, Inc. (“CRF”). USB contributed $3,054 to USB Investment Fund, and Potters Leveraged Lender LLC, an indirect subsidiary of the Company, lent USB Investment Fund $6,221. USB Investment Fund then contributed $9,000 to CRF, which in turn lent $8,820 to Potters pursuant to a credit agreement (the “June 2017 NMTC Agreement”). Potters used the $8,820 in proceeds to acquire equipment for the expansion of Potters’ manufacturing facility in Paris, Texas. The June 2017 NMTC Agreement provides the Company with certain monetary benefits as an offset to specifically identified capital expenditures. The June
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
2017 NMTC Agreement requires that certain commitments and covenants are maintained over a period of seven years in order to legally recognize the benefit. The $8,820 was outstanding as of September 30, 2017. The capital expenditures associated with the June 2017 NMTC Agreement are expected to be completed in 2017.
In connection with the June 2017 NMTC Agreement, the Company provided an indemnification related to its actions or inactions which cause either a NMTC disallowance or recapture event. In the event that the Company causes either a recapture or disallowance of the tax credits expected to be generated under this program, then the Company will be required to repay the disallowed or recaptured tax credits plus an amount sufficient to pay the taxes on such repayment to the counterparty of the agreement. This indemnification covers the Company’s actions and inactions prior to June 22, 2024. The maximum potential amount of future payments under this indemnification is approximately $3,682. The Company currently believes that the likelihood of a required payment under this indemnification is remote.
Term Loans Repricing
On August 7, 2017, the Company re-priced the existing $927,750 U.S. dollar-denominated tranche and the existing €283,338 Euro-denominated tranche of its term loans to reduce the applicable interest rates. The terms of the facilities are substantially consistent following the re-pricing, except that borrowings under the term loans bear interest at a rate equal to the LIBOR rate plus a margin of 3.25% with respect to U.S. dollar-denominated LIBOR rate loans, and the EURIBOR rate plus a margin of 3.25% with respect to Euro-denominated EURIBOR rate loans. In addition, the LIBOR rate elected under the facilities is subject to a floor of 0% and the EURIBOR rate elected under the facilities is subject to a floor of 0.75%.
Senior Unsecured Notes Partial Repayment
Subsequent to September 30, 2017 and in conjunction with the Company’s IPO, on October 3, 2017, the Company repaid $446,208, in aggregate principal of the $525,000 of PQ Corporation’s Floating Rate Senior Unsecured Notes due 2022 using the proceeds from the IPO. In connection with the repayment, the Company also paid accrued interest of $2,693 and applicable redemption premiums of $32,284.
13. Financial Instruments:
The Company uses interest rate related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments and uses commodity derivatives to manage its exposure to commodity price fluctuations. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates and commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest rate and commodity price contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Use of Derivative Financial Instruments to Manage Commodity Price Risk. The Company is exposed to risks in energy costs due to fluctuations in energy prices, particularly natural gas. The Company has a hedging program in the United States which allows the Company to mitigate exposure to natural gas volatility with natural gas swap agreements. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices of comparable contracts. The respective current and non-current liabilities are recorded in accrued liabilities and other long-term liabilities and the respective current and non-current assets are recorded in prepaid and other current assets and other long-term assets, as applicable. As the derivatives are highly effective and are designated and qualify as cash-flow hedges, the related unrealized gains or losses are recorded in stockholders’ equity as a component of other comprehensive income (loss), net of tax. Realized gains and losses on natural gas hedges are included in production cost and subsequently charged to cost of goods sold in the consolidated statements of operations in the period in which inventory is sold. The Company’s natural gas swaps have a remaining notional quantity of 690,000 MMBTU to mitigate commodity price volatility through December 2018.
Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities and senior unsecured notes. Changes in interest rates will not affect the market value of such debt but will affect the amount of our interest payments over the term of the loans. Likewise, an increase in interest rates could have a material
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities. As the derivatives are highly effective and are designated and qualify as cash-flow hedges, the related unrealized gains or losses are deferred in stockholders’ equity as a component of other comprehensive income (loss), net of tax. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.
In July 2016, the Company entered into interest rate cap agreements, paying a premium of $1,551 to mitigate interest rate volatility from July 2016 through July 2020 by employing varying cap rates, ranging from 1.50% to 3.00% on $1,000,000 of notional variable-rate debt.
The fair values of derivative instruments held as of September 30, 2017 and December 31, 2016 are shown below:
|
| | | | | | | | | |
| Balance sheet location | | September 30, 2017 | | December 31, 2016 |
Asset derivatives: | | | | | |
Derivatives designated as cash flow hedges: | | | | | |
Natural gas swaps | Current assets | | $ | — |
| | $ | 573 |
|
Interest rate caps | Current assets | | 9 |
| | — |
|
Natural gas swaps | Other long-term assets | | 7 |
| | 58 |
|
Interest rate caps | Other long-term assets | | 1,082 |
| | 5,803 |
|
Total asset derivatives | | | $ | 1,098 |
| | $ | 6,434 |
|
Liability derivatives: | | | | | |
Derivatives designated as cash flow hedges: | | | | | |
Natural gas swaps | Accrued liabilities | | $ | 58 |
| | $ | — |
|
Total liability derivatives | | | $ | 58 |
| | $ | — |
|
The following tables show the effect of the Company’s derivative instruments designated as hedges on other comprehensive income (loss) (“OCI”) and the statement of income for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, |
| | | | 2017 | | 2016 |
Derivatives designated as cash flow hedges: | | Location in Earnings | | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) | | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) |
Interest rate caps | | Interest expense | | $ | (1,842 | ) | | $ | 13 |
| | $ | 212 |
| | $ | (2 | ) |
Natural gas swaps | | Cost of goods sold | | (28) |
| | 94 |
| | (306) |
| | 420 |
|
| | | | $ | (1,870 | ) | | $ | 107 |
| | $ | (94 | ) | | $ | 418 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | Nine months ended September 30, |
| | | | 2017 | | 2016 |
Derivatives designated as cash flow hedges: | | Location in Earnings | | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) | | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) |
Interest rate caps | | Interest expense | | $ | (4,712 | ) | | $ | 22 |
| | $ | 212 |
| | $ | (2 | ) |
Natural gas swaps | | Cost of goods sold | | (787) |
| | 104 |
| | (1,723) |
| | 1,148 |
|
| | | | $ | (5,499 | ) | | $ | 126 |
| | $ | (1,511 | ) | | $ | 1,146 |
|
| | | | | | | | | | |
Amounts of unrealized losses in OCI that are expected to be reclassified to the consolidated statement of operations over the next twelve months are $241 as of September 30, 2017.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
14. Income Taxes:
The effective income tax rate for the three months ended September 30, 2017 was 239.9% compared to 26.9% for the three months ended September 30, 2016. The effective income tax rate for the nine months ended September 30, 2017 was (304.2)% compared to (67.1)% for the nine months ended September 30, 2016. The Company’s effective income tax rate fluctuates based primarily on changes in income mix, repatriation of income taxes from foreign subsidiaries and, for the comparative periods, the change in Eco Services’ tax status.
Prior to the Business Combination on May 4, 2016, Eco Services was a single member limited liability company and taxed as a partnership for federal and state income tax purposes. As such, all income tax liabilities and/or benefits of Eco Services were passed through to its members. Because Eco Services was taxed as a partnership, it did not record deferred taxes on the basis difference on its financial statements. Following the Business Combination on May 4, 2016, Eco Services had a change in tax status and is now taxed as a C-Corporation subject to federal and state corporate level income taxes at prevailing corporate rates. Minimal taxes were recorded on the book losses incurred by Eco Services during the periods preceding the Business Combination included in the nine months ended September 30, 2016, causing the fluctuation to the Company’s effective income tax rate in comparison to the taxes recorded for the nine months ended September 30, 2016.
The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for 2017 was mainly due to the tax effect of the Company’s foreign currency exchange loss recognized as a discrete item for the purpose of calculating the effective tax rate as well as the tax effect of repatriating foreign earnings back to the U.S. as dividends, partially offset by lower tax rates in foreign jurisdictions as compared to the U.S. federal tax rate, foreign withholding taxes, state taxes and non-deductible transaction costs.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
15. Benefit Plans:
The following information is provided for (1) the Company-sponsored defined benefit pension plans covering employees in the U.S. and certain employees at its foreign subsidiaries, (2) the Company-sponsored unfunded plans to provide certain health care benefits to retired employees in the U.S. and Canada, and (3) the Company’s defined benefit supplementary retirement plans which provide benefits for certain U.S. employees in excess of qualified plan limitations.
Components of net periodic expense are as follows:
Defined Benefit Pension Plans
|
| | | | | | | | | | | | | | | |
| U.S. | | Foreign |
| Three months ended September 30, | | Three months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 305 |
| | $ | 547 |
| | $ | 859 |
| | $ | 792 |
|
Interest cost | 2,536 |
| | 2,522 |
| | 1,339 |
| | 837 |
|
Expected return on plan assets | (3,061 | ) | | (3,104 | ) | | (1,111 | ) | | (769 | ) |
Net periodic expense (benefit) | $ | (220 | ) | | $ | (35 | ) | | $ | 1,087 |
| | $ | 860 |
|
|
| | | | | | | | | | | | | | | |
| U.S. | | Foreign |
| Nine months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 914 |
| | $ | 1,640 |
| | $ | 2,642 |
| | $ | 1,320 |
|
Interest cost | 7,608 |
| | 5,236 |
| | 4,024 |
| | 1,396 |
|
Expected return on plan assets | (9,183 | ) | | (6,176 | ) | | (3,329 | ) | | (1,283 | ) |
Net periodic expense (benefit) | $ | (661 | ) | | $ | 700 |
| | $ | 3,337 |
| | $ | 1,433 |
|
Supplemental Retirement Plans
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest cost | $ | 123 |
| | $ | 121 |
| | $ | 370 |
| | $ | 202 |
|
Net periodic expense | $ | 123 |
| | $ | 121 |
| | $ | 370 |
| | $ | 202 |
|
| | | | | | | |
Other Postretirement Benefit Plans
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 5 |
| | $ | 9 |
| | $ | 15 |
| | $ | 28 |
|
Interest cost | 40 |
| | 53 |
| | 122 |
| | 110 |
|
Amortization of prior service credit | (19 | ) | | — |
| | (58 | ) | | — |
|
Amortization of net gain | (19 | ) | | — |
| | (58 | ) | | — |
|
Net periodic expense | $ | 7 |
| | $ | 62 |
| | $ | 21 |
| | $ | 138 |
|
| | | | | | | |
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
16. Commitments and Contingent Liabilities:
There is a risk of environmental impact in chemical manufacturing operations. The Company’s environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental impact. The Company is also subject to various other lawsuits and claims with respect to matters such as governmental regulations, labor and other actions arising out of the normal course of business. No accrual for these matters currently exists, with the exception of those listed below, because management believes that the liabilities resulting from such lawsuits and claims are not probable or reasonably estimable.
The Company triggered the requirement of New Jersey’s Industrial Site Recovery Act (“ISRA”) statute with the PQ Holdings stock transfer/corporate merger in December 2004. As required under ISRA, a General Information Notice with respect to the Company’s two New Jersey locations was filed with the New Jersey Department of Environmental Protection (“NJDEP”) in December 2004 and again in July 2007. Based on an initial review of the facilities by the NJDEP in 2005, the Company estimated that $500 would be required for contamination assessment and removal work of one specific contaminant (polychlorinated biphenyls) that exceeded applicable NJDEP standards at these facilities, and had recorded a reserve for such amount as of December 31, 2005. During subsequent years, it was determined that additional assessment, removal and remediation work would be required and the reserve was increased to cover the estimated cost of such work. In addition, during this period, work had been performed and the reserve was reduced for actual costs incurred for the assessment and remediation work. Work at the Carlstadt facility has been completed and is closed from an ISRA standpoint, but as of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $557 and $700, respectively, for costs required for contamination assessment and removal work at Rahway. There may be additional costs related to the remediation of Rahway, but until further investigation takes place, the Company cannot reasonably estimate the amount of additional liability that may exist.
As part of a Delaware River Basin Commission (“DRBC”) required Pollutant Minimization Plan (“PMP”), in July 2013, the Company’s Chester facility conducted limited paint sampling for polychlorinated biphenyls (“PCBs”). Also, as part of demolition, repair and maintenance projects scheduled for the Company’s Baltimore facility in 2014, the Company conducted limited paint sampling during the fall of 2013 for waste categorization purposes. Paint samples were analyzed for PCB Aroclor 1254, the specific PCB congener commonly used in the manufacture of paint until the late 1970s. The Company’s analytical results indicated that PCB Aroclor 1254 is present in paint on some structures (e.g., piping, structural steel, tanks) in excess of the fifty (50) parts per million (“ppm”) regulatory threshold. Under the Toxic Substances Control Act (“TSCA”), there is no requirement to test in use paint for PCB content. However, once PCB content is identified at concentrations at or above the regulatory threshold, absent specific approval from the U.S. Environmental Protection Agency (“EPA”), the PCB-containing paint is regulated as an unauthorized use of PCBs, and the paint must be addressed. The Company abated painted surfaces that have tested positive for PCBs at levels exceeding 50 ppm at Baltimore in 2015 and early 2016. Similar abatement of painted structures as necessary at Chester have also been substantially completed. Characterization studies to evaluate whether soils have been impacted at Baltimore have been initiated as required under the TSCA, and have yet to commence at Chester. As of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $236 and $1,048, respectively, for the remediation costs of PCB impacted soils at the Company’s facilities.
In 2011, the Company installed a Continuous Emissions Monitor (“CEM”) to measure CO, NOx and Opacity emissions from a furnace at the Company’s Chester facility in Pennsylvania, and the Company conducted Relative Accuracy Test Audits (“RATA”) as part of its efforts to certify the CEM. On May 5, 2014, the Pennsylvania Department of Environmental Protection (“PADEP”) officially notified the Company that it was certifying the CEM based on RATA test results dating back to November 2011 and instructed the Company to start entering data previously recorded by the CEM into the Agency’s on-line database. During the third and fourth quarters of 2014, the Company officially entered data recorded from the CEM up until the second quarter of 2013. In November 2015, PADEP issued an Assessment of Civil Penalty in the amount of $1,739 for alleged violations under the Pennsylvania Air Pollution Control Act during the period from August 11, 2011 through June 30, 2013. The Company appealed, and PADEP reduced the penalty assessment to $1,550. After a hearing on the appeal, a Pennsylvania Environmental Hearing Board (“EHB”) judge reduced the penalty assessment to $215 in September 2017. The PADEP filed a motion to reconsider a portion of the EHB judge’s decision and the EHB denied the PADEP’s motion in October 2017. As of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $215 and $1,500, respectively, associated with the PADEP penalty.
The Company has a manufacturing facility at Warrington, United Kingdom. Asbestos-containing building material is present at the site, and asbestos removal and insulation replacement initiatives are underway. As of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $573 and $532, respectively, for costs related to this program.
In 2008, the Company sold the property of a manufacturing facility located in the United States to the local port authority. In 2009, the port authority commissioned an environmental investigation of portions of the property. In 2010, the port authority advised the Company of alleged soil and groundwater contamination on the property and alleged the Company liable for certain conditions. The Company received and reviewed the environmental investigation documentation and determined it may have liability with respect to
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
some, but not all, of the alleged contamination. As of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $839 and $913, respectively, for costs related to this potential liability.
The Company has recorded a reserve of $1,380 and $1,776 as of September 30, 2017 and December 31, 2016, respectively, to address remaining subsurface remedial and wetlands/marsh management activities at the Company’s Martinez, CA site. Although currently a sulfuric acid regeneration plant, the site originally was operated by Mountain Copper Company (“Mococo”) as a copper smelter. Also, the site sold iron pyrite to various customers and allowed their customers to deposit waste iron pyrite cinder and slag on the site. The property is adjacent to Peyton Slough, where Mococo had a permitted discharge point from its process. In 1997, the San Francisco Bay Regional Water Quality Control Board (“RWQCB”) required characterization and remediation of Peyton Slough for Copper, Zinc and Acidic Soils. Various remediation activities were undertaken and completed, and the site has received final concurrence from the Army Corps with respect to the completed work. The RWQCB has agreed that Eco Services has achieved the goals for vegetative cover, but the current marsh condition is not sustainable without continued operation of the tide gates. The Company is continuing to work with the RWQCB on a plan to involve the County and work towards development of an alliance for operating, maintaining and funding the tide gates in the future.
As of September 30, 2017 and December 31, 2016, the Company has recorded a reserve of $1,444 and $1,755, respectively, for subsurface remediation and the Soil Vapor Extraction Project at the Company’s Dominguez, CA site. In the 1980s and 1990s, the EPA and the Los Angeles Regional Water Quality Control Board conducted investigations of the site due to historic chlorinated pesticide and chlorinated solvent use. Soil and groundwater beneath the site were impacted by chlorinated solvents and associated breakdown products, petroleum hydrocarbons, chlorinated pesticides and metals. A Corrective Measures Plan approved in October 2011 requires (1) soil vapor extraction (“SVE”) in affected areas, (2) covering of unpaved areas containing pesticide impacted soil, and (3) annual groundwater monitoring of the perched water-bearing zone. Installation of the SVE unit has been completed and startup has occurred. The California Department of Toxic Substances Control (“DTSC”) has granted conditional approval of the Company’s soil management, and monitoring and maintenance plans. Most recently, the DTSC is requiring the Company to delineate the PCE plume on the eastern boundary of the site. The Company has submitted an action plan to address this matter and is awaiting comments from the DTSC.
17. Reportable Segments:
Summarized financial information for the Company’s (1) Performance Materials & Chemicals and (2) Environmental Catalysts & Services reportable segments is shown in the following table:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net sales: | | | | | | | |
Performance Materials & Chemicals | $ | 277,072 |
| | $ | 256,219 |
| | $ | 765,781 |
| | $ | 429,867 |
|
Environmental Catalysts & Services(1) | 115,541 |
| | 114,271 |
| | 350,814 |
| | 312,490 |
|
Eliminations(2) | (784 | ) | | (511 | ) | | (2,568 | ) | | (911 | ) |
Total | $ | 391,829 |
| | $ | 369,979 |
| | $ | 1,114,027 |
| | $ | 741,446 |
|
Segment Adjusted EBITDA:(3) | | | | | | | |
Performance Materials & Chemicals | $ | 65,885 |
| | $ | 64,604 |
| | $ | 184,741 |
| | $ | 111,178 |
|
Environmental Catalysts & Services(4) | 61,900 |
| | 56,341 |
| | 182,578 |
| | 135,044 |
|
Total Segment Adjusted EBITDA(5) | $ | 127,785 |
| | $ | 120,945 |
| | $ | 367,319 |
| | $ | 246,222 |
|
| | | | | | | |
—————
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(1) | Excludes the Company’s proportionate share of sales from the Zeolyst International and Zeolyst C.V. joint ventures (collectively, the “Zeolyst Joint Venture”) accounted for using the equity method (see Note 10 to these condensed consolidated financial statements for further information). The proportionate share of sales is $37,622 and $28,184 for the three months ended September 30, 2017 and 2016, respectively. The proportionate share of sales is $100,991 and $48,461 for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(2) | The Company eliminates intersegment sales when reconciling to the Company’s consolidated statements of operations. |
| |
(3) | The Company defines Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBITDA. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of the Company’s operating |
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
performance. Adjusted EBITDA as defined by the Company may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies.
| |
(4) | The Adjusted EBITDA from the Zeolyst Joint Venture included in the environmental catalyst and services segment is $14,398 for the three months ended September 30, 2017, which includes $10,151 of equity in net income plus $1,658 of amortization of investment in affiliate step-up plus $2,563 of joint ventu |