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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
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
 
PQ Group Holdings Inc.
 
Delaware
 
81-3406833
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
300 Lindenwood Drive
Valleybrooke Corporate Center
Malvern, Pennsylvania
 
19355
(Address of principal executive offices)
 
(Zip Code)
 
(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  ý    No  ¨
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, a smaller reporting company or an emerging growth 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.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
ý (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
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 May 7, 2018 was 135,240,866.
 
 
 
 
 


Table of Contents

PQ GROUP HOLDINGS INC.

INDEX—FORM 10-Q
March 31, 2018
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART IFINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED).

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
 
Three months ended
March 31,
 
2018
 
2017
Sales
$
366,197

 
$
332,931

Cost of goods sold
288,076

 
250,219

Gross profit
78,121

 
82,712

Selling, general and administrative expenses
40,618

 
34,712

Other operating expense, net
9,314

 
10,348

Operating income
28,189

 
37,652

Equity in net (income) from affiliated companies
(11,852
)
 
(5,877
)
Interest expense, net
29,163

 
46,785

Debt extinguishment costs
5,879

 

Other expense, net
4,972

 
1,969

Income (loss) before income taxes and noncontrolling interest
27

 
(5,225
)
Benefit from income taxes
(529
)
 
(2,910
)
Net income (loss)
556

 
(2,315
)
Less: Net income attributable to the noncontrolling interest
342

 
139

Net income (loss) attributable to PQ Group Holdings Inc.
$
214

 
$
(2,454
)
 
 
 
 
Net income (loss) per share:
 
 
 
Basic income (loss) per share
$
0.00

 
$
(0.02
)
Diluted income (loss) per share
$
0.00

 
$
(0.02
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
133,154,144

 
103,947,888

Diluted
133,884,983

 
103,947,888

See accompanying notes to condensed consolidated financial statements.


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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended
March 31,
 
2018
 
2017
Net income (loss)
$
556

 
$
(2,315
)
Other comprehensive income (loss), net of tax:
 
 
 
Pension and postretirement benefits
(18
)
 
(181
)
Net gain (loss) from hedging activities
2,183

 
(1,769
)
Foreign currency translation
8,671

 
15,337

Total other comprehensive income
10,836

 
13,387

Comprehensive income
11,392

 
11,072

Less: Comprehensive income (loss) attributable to noncontrolling interests
1,646

 
(445
)
Comprehensive income attributable to PQ Group Holdings Inc.
$
9,746

 
$
11,517

 
 
 
 
See accompanying notes to condensed consolidated financial statements.


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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
58,834

 
$
66,195

Receivables, net
207,368

 
193,456

Inventories
283,790

 
262,388

Prepaid and other current assets
39,651

 
26,929

Total current assets
589,643

 
548,968

Investments in affiliated companies
471,836

 
469,276

Property, plant and equipment, net
1,245,672

 
1,230,384

Goodwill
1,273,589

 
1,305,956

Other intangible assets, net
785,034

 
786,144

Other long-term assets
96,903

 
74,727

Total assets
$
4,462,677

 
$
4,415,455

LIABILITIES
 
 
 
Notes payable and current maturities of long-term debt
$
51,922

 
$
45,166

Accounts payable
136,033

 
149,326

Accrued liabilities
102,715

 
93,917

Total current liabilities
290,670

 
288,409

Long-term debt
2,195,897

 
2,185,320

Deferred income taxes
194,853

 
189,336

Other long-term liabilities
134,173

 
120,471

Total liabilities
2,815,593

 
2,783,536

Commitments and contingencies (Note 16)

 

EQUITY
 
 
 
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 135,244,379 on March 31, 2018 and December 31, 2017; outstanding shares 135,240,866 and 135,244,379 on March 31, 2018 and December 31, 2017, respectively
1,352

 
1,352

Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on March 31, 2018 and December 31, 2017

 

Additional paid-in capital
1,658,945

 
1,655,114

Accumulated deficit
(32,563
)
 
(32,777
)
Treasury stock, at cost; shares 3,513 on March 31, 2018
(58
)
 

Accumulated other comprehensive income
13,843

 
4,311

Total PQ Group Holdings Inc. equity
1,641,519

 
1,628,000

Noncontrolling interest
5,565

 
3,919

Total equity
1,647,084

 
1,631,919

Total liabilities and equity
$
4,462,677

 
$
4,415,455

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common
stock
 
Additional
paid-in
capital
 
 
Accumulated deficit
 
Treasury
stock, at
cost
 
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
Balance, December 31, 2017
$
1,352

 
$
1,655,114

 
$
(32,777
)
 
$

 
$
4,311

 
$
3,919

 
$
1,631,919

Net income

 

 
214

 

 

 
342

 
556

Other comprehensive income

 

 

 

 
9,532

 
1,304

 
10,836

Repurchase of common shares

 

 

 
(58
)
 

 

 
(58
)
Stock compensation expense

 
3,831

 

 

 

 

 
3,831

Balance, March 31, 2018
$
1,352

 
$
1,658,945

 
$
(32,563
)
 
$
(58
)
 
$
13,843

 
$
5,565

 
$
1,647,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Net income (loss)

 

 
(2,454
)
 

 

 
139

 
(2,315
)
Other comprehensive income (loss)

 

 

 

 
13,971

 
(584
)
 
13,387

Stock compensation expense

 
1,652

 

 

 

 

 
1,652

Balance, March 31, 2017
$
73

 
$
1,168,789

 
$
(92,834
)
 
$
(239
)
 
$
(39,740
)
 
$
4,619

 
$
1,040,668

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
 
Three months ended
March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
556

 
$
(2,315
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation
 
34,903

 
28,189

Amortization
 
13,585

 
12,397

Acquisition accounting valuation adjustments on inventory sold
 
1,603

 
871

Amortization of deferred financing costs and original issue discount
 
1,559

 
2,668

Debt extinguishment costs
 
3,755

 

Foreign currency exchange loss
 
5,063

 
1,986

Pension and postretirement healthcare benefit expense
 
816

 
902

Pension and postretirement healthcare benefit funding
 
(3,406
)
 
(2,810
)
Deferred income tax benefit
 
(2,607
)
 
(1,967
)
Net loss on asset disposals
 
1,152

 
348

Stock compensation
 
3,831

 
1,652

Equity in net (income) from affiliated companies
 
(11,852
)
 
(5,877
)
Dividends received from affiliated companies
 
10,819

 

Other, net
 
(2,928
)
 
(508
)
Working capital changes that provided (used) cash:
 
 
 
 
Receivables
 
(11,065
)
 
(16,518
)
Inventories
 
(19,539
)
 
(5,023
)
Prepaids and other current assets
 
(4,712
)
 
(3,398
)
Accounts payable
 
(7,044
)
 
(16,439
)
Accrued liabilities
 
7,546

 
12,538

Net cash provided by operating activities
 
22,035

 
6,696

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(33,344
)
 
(32,449
)
Other, net
 
209

 
5

Net cash used in investing activities
 
(33,135
)
 
(32,444
)
Cash flows from financing activities:
 
 
 
 
Draw down of revolver
 
38,570

 
37,000

Repayments of revolver
 
(32,109
)
 
(27,000
)
Issuance of long-term debt
 
1,267,000

 

Debt issuance costs
 
(6,395
)
 

Repayments of long-term debt
 
(1,261,624
)
 
(3,085
)
Other, net
 
(58
)
 

Net cash provided by financing activities
 
5,384

 
6,915

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(1,511
)
 
(3,133
)
Net change in cash, cash equivalents and restricted cash
 
(7,227
)
 
(21,966
)
Cash, cash equivalents and restricted cash at beginning of period
 
67,243

 
85,077

Cash, cash equivalents and restricted cash at end of period
 
$
60,016

 
$
63,111

 
 
 
 
 

For supplemental cash flow disclosures, see Note 20.
See accompanying notes to condensed consolidated financial statements.

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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 reporting segments: (1) Environmental Catalysts & Services (“EC&S”): 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; and (2) Performance Materials & Chemicals (“PM&C”): 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.
Seasonal changes and weather conditions typically affect the Company’s performance materials and refining services product groups. In particular, the Company’s performance materials product group generally experiences lower sales and profit in the first and fourth quarters of the year because highway striping projects typically occur during warmer weather months. Additionally, the Company’s 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, which can adversely affect the Company’s liquidity and cash flows. Because of this seasonality associated with certain of the Company’s product groups, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full year.
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“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 Annual Report on Form 10-K for the year ended December 31, 2017. Other than the update to our accounting policies described in Note 3, the Company has continued to follow the accounting policies set forth in those consolidated financial statements.
2. New Accounting Standards:
Recently Adopted Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued amendments intended to better align hedge accounting with an entity’s 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 entity’s 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 guidance should be applied prospectively for the amended presentation and disclosure requirements, and through a cumulative-effect adjustment to beginning retained earnings for any cash flow and net investment hedges existing at the date of adoption. The Company early adopted the guidance effective January 1, 2018. The Company’s cash flow hedges in place at the date of adoption yielded an immaterial amount of ineffectiveness; therefore, the Company did not reflect an adjustment to beginning retained earnings upon adoption. The amended presentation and disclosure requirements are reflected under the new guidance in Note 13 to these condensed 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 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

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


for annual periods beginning after December 15, 2017, including interim periods within those years, and the new guidance should be applied prospectively to awards modified on or after the adoption date. The Company adopted the new guidance on January 1, 2018 as required, with no impact on the Company’s condensed consolidated financial statements upon adoption.
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 items of the income statement as compensation costs are reported. The remaining components will be reported together below operating income on the income 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. 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 adopted the new guidance on January 1, 2018 as required. Prior to the adoption of the guidance, the Company reflected its pension costs within cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations, depending on whether the costs were associated with employees involved in manufacturing or back office support functions. Under the new guidance, the service cost component of the Company’s pension costs remained in the same line items of the condensed consolidated statements of operations, but the remaining components are now reported as part of nonoperating income in the other (income) expense, net line item of the condensed consolidated statements of operations. Although the guidance requires retrospective application upon adoption, a practical expedient permits the Company to use the amounts disclosed in its pension and other post-retirement benefit plan note as its basis of estimation for the prior comparative periods. The Company utilized the practical expedient, and $263 of a net pension benefit for the three months ended March 31, 2017 was reclassified to other (income) expense, net. For the three months ended March 31, 2018, the amount of pension costs included in other (income) expense, net was a net benefit of $485.
In January 2017, the FASB issued guidance that 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. The Company adopted the new guidance on January 1, 2018 as required, with no impact on the Company’s condensed consolidated financial statements upon adoption.
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, and the new guidance should be applied retrospectively to each period presented.
The Company adopted the new guidance on January 1, 2018 as required. As of March 31, 2018 and 2017, the Company had $1,182 and $8,985, respectively, of restricted cash included in prepaid and other current assets on its condensed consolidated balance sheets related to its New Market Tax Credit financing arrangements as well as other small restricted cash balances. Changes in the Company’s restricted cash balances prior to the adoption of the new guidance were reflected within cash flows from investing activities in the Company’s condensed consolidated statements of cash flows. The prior comparative period in the Company’s condensed consolidated statement of cash flows has been updated to conform to the new guidance. See Note 20 to these condensed consolidated financial statements for supplemental cash flow disclosures.
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, and the new guidance should be applied retrospectively to each period presented. The Company adopted the new guidance on January 1, 2018 as required. There was no impact to the Company’s condensed consolidated statement of cash flows for the three months ended March 31, 2017. The Company applied the new guidance to the term loan refinancing that occurred during the three months ended March 31, 2018; see Note 12 to these condensed consolidated financial statements for further information on the debt refinancing transaction. There were no other items in the new guidance which necessitated a change in the Company’s reporting in its condensed consolidated statements of cash flows for the three months ended March 31, 2018 or 2017.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


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 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 reviewed its key revenue streams and assessed the underlying customer contracts within the framework of the new guidance. The Company evaluated the key aspects of its revenue streams for impact under the new guidance and performed a detailed analysis of its customer agreements to quantify the changes under the guidance. The Company concluded that the guidance did not have a material impact on its existing revenue recognition practices upon adoption on January 1, 2018. The Company implemented the guidance under the modified retrospective transition method of adoption. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact of adoption of the new revenue recognition guidance was immaterial for the three months ended March 31, 2018, and there was no transition adjustment required upon adoption. See Note 3 to these condensed consolidated financial statements for additional disclosures required by the new guidance.
Accounting Standards Not Yet Adopted
In February 2018, the FASB issued guidance which will permit entities to make an election to reclassify income tax effects stranded in accumulated other comprehensive income to retained earnings as a result of tax reform legislation enacted by the U.S. government on December 22, 2017. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted in any interim period for which the financial statements have not yet been issued. 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 Securities and Exchange Commission (“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 February 2016, the FASB issued guidance (with subsequent targeted amendments) that modifies 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 method 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.

3. Revenue from Contracts with Customers:
Revenue Recognition Model
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the contract with the customer; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company identifies a contract when an agreement with a customer creates legally enforceable rights and obligations, which occurs when a contract has been approved by both parties, both parties are committed to perform their respective obligations, each party’s

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


rights are clearly identified, payment terms are identified, commercial substance exists and it is probable that the Company will collect consideration to which it is entitled. The Company and its customers typically enter into master service agreements (“MSA”), which establish the terms, including prices, under which orders to purchase goods may be placed. In these instances, the Company’s contract with a customer is the purchase order issued under the MSA. Certain of the Company’s MSA agreements contain provisions regarding the purchase of a minimum quantity of goods. Under these circumstances, the Company considers the MSA to be a legally enforceable contract.
The Company identifies a performance obligation in a contract for each promised good that is separately identifiable from other promises in the contract and for which the customer can benefit from the good on its own or together with other resources that are available to the customer. The majority of the Company’s contracts have a single performance obligation, which is the promise to transfer individual goods to the customer. The Company has certain contracts that include multiple performance obligations to which the purchase price for each distinct performance obligation is defined in the contract. These distinct performance obligations may include stand-ready provisions, which are arrangements to provide a customer assurance that they will have access to the Company’s manufacturing facilities, or monthly reservation of capacity fees.
As described above, the Company’s MSAs with its customers outline prices for individual products or contract provisions. MSAs in the Company’s performance chemicals and refining services product groups may contain provisions whereby raw material costs may be passed-through to the customer per the terms of their contract, which constitutes a form of variable consideration. The Company’s exposure to fluctuations in raw material prices is limited, as the majority of pass-through contract provisions reset based on fluctuations in the underlying raw material price. MSAs in the Company’s refining services product group also contain take-or-pay arrangements, whereby the customer would incur a penalty in the form of a shortfall volume fee. Currently there is no history in which customers fail to meet the contractual minimum. Revenue from product sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns or other allowances that are offered within contracts between the Company and its customers.
The Company recognizes revenues when performance obligations under the terms of a contract with its customer are satisfied, which generally occurs at a point in time by transferring control of a product to the customer. The Company determines the point in time when a customer obtains control of a product and the Company satisfies the performance obligation by considering when the Company has a right to payment for the product, the customer has legal title to the product, the Company has transferred possession of the product, the customer has assumed the risks and rewards of ownership of the product or the customer has accepted the product. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The Company does not have any significant payment terms as payment is received at, or shortly after, the point of sale.
Contract Assets and Contract Liabilities
A contract asset is a right to consideration in exchange for goods that the Company has transferred to a customer when that right is conditional on something other than the passage of time. A contract liability exists when the Company receives consideration in advance of performance obligations. The Company has not recorded any contract assets or contract liabilities on its condensed consolidated balance sheets as of March 31, 2018 or December 31, 2017.
Practical Expedients and Accounting Policy Elections
The Company has elected to use certain practical expedients and has made certain accounting policy elections as permitted under the new revenue recognition guidance. Certain of the Company’s contracts with customers are based on an individual purchase order, thus the duration of most contracts are for one year or less. The Company has elected to apply certain practical expedients and omit certain disclosures related to remaining performance obligations for contracts which have an initial term of one year or less.
When the Company performs shipping and handling activities after the transfer of control to the customer (e.g. when control transfers prior to delivery), they are considered fulfillment activities and, accordingly, the costs are accrued for when the related revenue is recognized. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that the Company would have recognized is one year or less. Sales, value add and other taxes the Company collects concurrent with revenue producing activities are excluded from revenues.
Disaggregated Revenue
The Company’s primary means of disaggregating revenues is by product group, which can be found in Note 17 to these condensed consolidated financial statements.
The Company’s portfolio of products are integrated into a variety of end uses, which are described in the table below.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


Key End Uses
Key Products
Industrial & process chemicals
• Silicate precursors for the tire industry
 
• Silicate for water treatment
 
• Glass beads, or microspheres, for metal finishing end uses
Fuels & emission control
• Refinery catalysts
 
• Emission control catalysts
 
• Catalyst recycling services
Packaging & engineered plastics
• Catalysts for high-density polyethlene and chemicals syntheses
 
• Antiblocks for film packaging
 
• Solid and hollow microspheres for composite plastics
Highway safety & construction
• Reflective markings for roadways and airports
 
• Hollow glass beads, or microspheres, for cement additives
Consumer products
• Silica gels for edible oil and beer clarification
 
• Precipitated silicas and zeolites for the surface coating, dentifrice, and
 
  dishwasher and laundry detergent applications
Natural resources
• Silicates for drilling muds
 
• Hollow glass beads, or microspheres, for oil well cements
 
• Sulfur derivatives for copper mining
 
• Bleaching aids for paper
 
 
The following table disaggregates the Company’s sales, by segment and end use, for the three months months ended March 31, 2018:
 
 
Three months ended March 31, 2018
 
 
Environmental Catalysts & Services
 
Performance Materials & Chemicals
 
Total
Industrial & process chemicals
 
$
17,039

 
$
75,271

 
$
92,310

Fuels & emission control (1)
 
55,997

 

 
55,997

Packaging & engineered plastics
 
28,243

 
31,808

 
60,051

Highway safety & construction (1)
 

 
47,145

 
47,145

Consumer products
 

 
76,730

 
76,730

Natural resources
 
15,908

 
18,868

 
34,776

Total
 
117,187

 
249,822

 
367,009

Inter-segment sales eliminations
 
(812
)
 

 
(812
)
Total segment sales
 
$
116,375

 
$
249,822

 
$
366,197

 
 
 
 
 
 
 
 
(1)
As described in Note 1, the Company experiences seasonal sales fluctuations to customers in the fuels and emission control and highway safety and construction end uses.
4. 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.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


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 March 31, 2018 and December 31, 2017, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
 
 
March 31, 2018
 
Quoted Prices in
Active Markets
(Level 1)
 
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable Inputs
 
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
10,223

 
$

 
$
10,223

 
$

Restoration plan assets
 
5,217

 
5,217

 

 

Total
 
$
15,440

 
$
5,217

 
$
10,223

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
16,026

 
$

 
$
16,026

 
$

Total
 
$
16,026

 
$

 
$
16,026

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
Significant
Unobservable Inputs
 
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
1,043

 
$

 
$
1,043

 
$

Restoration plan assets
 
5,576

 
5,576

 

 

Total
 
$
6,619

 
$
5,576

 
$
1,043

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
448

 
$

 
$
448

 
$

Total
 
$
448

 
$

 
$
448

 
$

 
 
 
 
 
 
 
 
 
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. Unrealized gains and losses associated with the underlying stock and fixed income mutual funds were immaterial as of March 31, 2018 and December 31, 2017, respectively.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


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, natural gas swaps and cross currency 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 March 31, 2018 and December 31, 2017, the credit valuation adjustment resulted in a minimal change in the fair value of the derivatives.
5. Accumulated Other Comprehensive Income:
The following table presents the tax effects of each component of other comprehensive income (loss) for the three months ended March 31, 2018 and 2017:
 
 
Three months ended March 31,
 
 
2018
 
2017
 
 
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
 
$
(24
)
 
$
6

 
$
(18
)
 
$
(194
)
 
$
13

 
$
(181
)
Benefit plans, net
 
(24
)
 
6

 
(18
)
 
(194
)
 
13

 
(181
)
Net gain (loss) from hedging activities
 
2,912

 
(729
)
 
2,183

 
(2,862
)
 
1,093

 
(1,769
)
Foreign currency translation
 
10,114

 
(1,443
)
 
8,671

 
17,247

 
(1,910
)
 
15,337

Other comprehensive income
 
$
13,002

 
$
(2,166
)
 
$
10,836

 
$
14,191

 
$
(804
)
 
$
13,387

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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 change in accumulated other comprehensive income (loss), net of tax, by component for the three months ended March 31, 2018 and 2017: 
 
 
Defined benefit
and other
postretirement
plans
 
 
Net gain (loss) from hedging activities
 
Foreign
currency
translation
 
 
Total 
December 31, 2017
 
$
7,412

 
$
967

 
$
(4,068
)
 
$
4,311

Other comprehensive income (loss) before reclassifications
 
(32
)
 
2,188

 
7,367

 
9,523

Amounts reclassified from accumulated other comprehensive income(1)   
 
14

 
(5
)
 

 
9

Net current period other comprehensive income (loss)
 
(18
)
 
2,183

 
7,367

 
9,532

March 31, 2018
 
$
7,394

 
$
3,150

 
$
3,299

 
$
13,843

 
 
 
 
 
 
 
 
 
December 31, 2016
 
$
7,513

 
$
4,557

 
$
(65,781
)
 
$
(53,711
)
Other comprehensive income (loss) before reclassifications
 
(214
)
 
(1,785
)
 
15,921

 
13,922

Amounts reclassified from accumulated other comprehensive income (loss)(1)   
 
33

 
16

 

 
49

Net current period other comprehensive income (loss)
 
(181
)
 
(1,769
)
 
15,921

 
13,971

March 31, 2017
 
$
7,332

 
$
2,788

 
$
(49,860
)
 
$
(39,740
)
 
 
 
 
 
 
 
 
 
 
(1) 
See the following table for details about these reclassifications.

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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 months ended March 31, 2018 and 2017. Amounts in parenthesis indicate debits to profit/loss. 
Details about Accumulated Other
Comprehensive Income (Loss) Components
 
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
(a)
Affected Line Item in the Statements of Operations
 
 
Three months ended
March 31,
 
 
 
 
2018
 
2017
 
 
Defined benefit and other postretirement plans
 
 
 
 
 
 
Amortization of prior service cost
 
$
19

 
$
20

 
(b)
Amortization of net gain (loss)
 
(2
)
 
19

 
(b)
 
 
17

 
39

 
Total before tax
 
 
(3
)
 
(6
)
 
Tax (expense) benefit
 
 
$
14

 
$
33

 
Net of tax
 
 
 
 
 
 
 
Net gain (loss) from hedging activities
 
 
 
 
 
 
Interest rate caps
 
$
(35
)
 
$
(2
)
 
Interest expense
Natural gas swaps
 
28

 
18

 
Cost of goods sold
 
 
(7
)
 
16

 
Total before tax
 
 
2

 

 
Tax (expense) benefit
 
 
$
(5
)
 
$
16

 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
9

 
$
49

 
Net of tax
 
(a) 
Amounts in parentheses indicate debits to profit/loss.
(b) 
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).
6. Acquisition:
On June 12, 2017 (the “Acquisition 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 Acquisition Date. The excess of the purchase price over the fair values of the identifiable net assets acquired was recorded as goodwill. The results of operations of Sovitec have been included in the Company’s consolidated financial statements since the Acquisition Date.

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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 allocation of the purchase price to the identifiable net assets acquired with respect to the Acquisition, which was substantially complete as of March 31, 2018.
 
 
Provisional Purchase
Price Allocation
 
Adjustments
 
Purchase
Price Allocation
Total consideration, net of cash acquired
 
$
41,572

 
$

 
$
41,572

 
 
 

 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 

 
 
 
 
Receivables
 
$
14,305

 
$

 
$
14,305

Inventories
 
7,645

 
1,603

 
9,248

Prepaid and other current assets
 
400

 

 
400

Property, plant and equipment
 
9,020

 
15,960

 
24,980

Other intangible assets
 

 
5,753

 
5,753

Other long-term assets
 
129

 
15,921

 
16,050

 
 
 

 
 
 
 
Fair value of assets acquired
 
31,499

 
39,237

 
70,736

Current debt
 
(6,420
)
 

 
(6,420
)
Accounts payable
 
(10,748
)
 

 
(10,748
)
Long-term debt
 
(10,189
)
 

 
(10,189
)
Deferred income taxes
 

 
(4,426
)
 
(4,426
)
Other long-term liabilities
 
(154
)
 

 
(154
)
 
 
 

 
 
 
 
Fair value of net assets acquired
 
3,988

 
34,811

 
38,799

Goodwill
 
37,584

 
(34,811
)
 
2,773

 
 
$
41,572

 
$

 
$
41,572

 
 
 
 
 
 
 
In accordance with the requirements of the purchase method of accounting for acquisitions, accounts receivable and inventories were recorded at fair market value. As of the Acquisition Date, the fair value of accounts receivable approximated historical cost. The gross contractual amount of accounts receivable at the Acquisition Date was $14,607, of which $302 was deemed uncollectible. Fair value of inventory 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 $1,603 higher than the historical cost.
The Company’s cost of goods sold for the three months ended March 31, 2018 includes a pre-tax charge of $1,603 relating to the step-up on inventory, $108 of additional amortization expense related to identified intangible assets and $421 of additional depreciation expense, which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s other expense, net for the three months ended March 31, 2018 includes additional amortization expense related to identified intangible assets of $101 which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s benefit from income taxes for the three months ended March 31, 2018 includes an additional $990 tax benefit associated with the year ended December 31, 2017, to reflect impacts as if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. This amount is primarily a result of opening balance sheet adjustments recorded during the three months ended March 31, 2018, which needed to be re-measured through the income statement because of income tax rate changes that occurred subsequent to the Acquisition Date.
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 PM&C reporting segment. The goodwill associated with the Acquisition is not deductible for tax purposes.

17

Table of Contents

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The valuation of the intangible assets acquired and the related weighted-average amortization periods are as follows:
 
 
Amount
 
Weighted-Average
Expected Useful Life
(in years)
Intangible assets subject to amortization:
 
 
 
 
Trademarks
 
$
1,767

 
11
Technical know-how
 
1,892

 
11
Total intangible assets subject to amortization
 
3,659

 
 
Trade names, not subject to amortization
 
2,094

 
Indefinite
Total
 
$
5,753

 
 
 
 
 
 
 
Net sales and net loss generated by the Sovitec legal entities included in the Company’s condensed consolidated statement of operations totaled $10,921 and $1,771, respectively, for the three months ended March 31, 2018. Acquisition costs were immaterial for the three months ended March 31, 2018 and $874 for the three months ended March 31, 2017.
Pro Forma Financial Information
The unaudited pro forma financial information for the three months ended March 31, 2017 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.
 
Unaudited
 
Three months ended
March 31, 2017
Pro forma sales
$
341,399

Pro forma net loss
(1,796
)
Pro forma net loss attributable to PQ Group Holdings Inc.
(1,935
)
Pro forma basic and diluted net loss per share
$
(0.02
)
The results of operations for the three months ended March 31, 2018 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation included in the table above.
Certain non-recurring charges included in the Company’s results of operations for the three months ended March 31, 2017 were allocated to the respective prior year periods for pro forma purposes. For the three months ended March 31, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $499 which were excluded from pro forma net loss for the three months ended March 31, 2017. Also included in pro forma net loss for the three months ended March 31, 2017 is amortization expense of $87 and depreciation expense of $204 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively.
7. Goodwill:
The changes in the carrying amount of goodwill for the three months ended March 31, 2018 is summarized as follows:
 
 
Performance
Materials &
Chemicals
 
Environmental
Catalysts &
Services
 
Total
Balance as of December 31, 2017
 
$
914,623

 
$
391,333

 
$
1,305,956

Goodwill adjustments(1)
 
(34,811
)
 

 
(34,811
)
Foreign exchange impact
 
1,404

 
1,040

 
2,444

Balance as of March 31, 2018
 
$
881,216

 
$
392,373

 
$
1,273,589

 
 
 
 
 
 
 
 
(1) 
Represents the measurement period adjustments on the net assets acquired as part of the Acquisition (see Note 6 to these condensed consolidated financial statements for further information regarding the Acquisition).
8. Other Operating Expense, Net:
A summary of other operating expense, net is as follows:
 
 
Three months ended
March 31,
 
 
2018
 
2017
Amortization expense
 
$
8,949

 
$
5,834

Transaction and other related costs(1)
 
422

 
1,375

Restructuring and other related costs (Note 18)
 
120

 
1,196

Net loss on asset disposals
 
1,152

 
348

Management advisory fees
 

 
1,250

Insurance proceeds(2)
 
(1,244
)
 

Other, net
 
(85
)
 
345

 
 
$
9,314

 
$
10,348

 
 
 
 
 
 
(1) 
Transaction and other related costs for the three months ended March 31, 2018 and 2017 primarily include transaction costs associated with the Company’s initial public offering (exclusive of the direct costs recorded in stockholders’ equity net of the proceeds from the offering) and the Acquisition (see Note 6 to these condensed consolidated financial statements for further information).
(2) 
Represents the majority of the $1,500 insurance proceeds received during the three months ended March 31, 2018 related to a portion of the Company’s claim for losses sustained during Hurricane Harvey in August 2017.

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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:
 
 
March 31,
2018
 
December 31,
2017
Finished products and work in process
 
$
223,019

 
$
199,919

Raw materials
 
60,771

 
62,469

 
 
$
283,790

 
$
262,388

 
 
 
 
 
Valued at lower of cost or market:
 
 
 
 
LIFO basis
 
$
177,632

 
$
162,315

Valued at lower of cost and net realizable value:
 
 
 
 
FIFO or average cost basis
 
106,158

 
100,073

 
 
$
283,790

 
$
262,388

 
 
 
 
 
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 March 31, 2018 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(1):    
 
 
Three months ended
March 31,
 
 
2018
 
2017
Net sales
 
$
88,576

 
$
73,055

Gross profit
 
35,522

 
28,925

Operating income
 
26,041

 
18,583

Net income
 
27,022

 
19,035

 
(1) 
Summarized information of the combined investments is presented at 100%; the Company’s share of the net assets and net income of affiliates is calculated based on the percent ownership specified in the table above.
The Company’s investments in affiliated companies balance as of March 31, 2018 and December 31, 2017 includes net purchase accounting fair value adjustments of $263,042 and $264,700, respectively, related to the combination of the businesses of PQ Holdings Inc. and Eco Services Operations LLC in May 2016, 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 $1,658 and $3,624 of amortization expense related to purchase accounting fair value adjustments for the three months ended March 31, 2018 and 2017, respectively.

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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:
 
 
March 31,
2018
 
December 31,
2017
Land
 
$
199,163

 
$
191,006

Buildings
 
212,173

 
200,054

Machinery and equipment
 
1,039,683

 
1,005,025

Construction in progress
 
142,793

 
145,414

 
 
1,593,812

 
1,541,499

Less: accumulated depreciation
 
(348,140
)
 
(311,115
)
 
 
$
1,245,672

 
$
1,230,384

 
 
 
 
 
Depreciation expense was $34,903 and $28,189 for the three months ended March 31, 2018 and 2017, respectively.
12. Long-term Debt:
The summary of long-term debt is as follows:
 
 
March 31,
2018
 
December 31, 2017
Term Loan Facility (U.S. dollar denominated)
 
$

 
$
916,153

Term Loan Facility (Euro denominated)
 

 
335,808

New Term Loan Facility
 
1,263,833

 

6.75% Senior Secured Notes due 2022
 
625,000

 
625,000

5.75% Senior Unsecured Notes due 2025
 
300,000

 
300,000

ABL Facility
 
30,000

 
25,000

Other
 
70,322

 
68,318

Total debt
 
2,289,155

 
2,270,279

Original issue discount
 
(22,145
)
 
(18,390
)
Deferred financing costs
 
(19,191
)
 
(21,403
)
Total debt, net of original issue discount and deferred financing costs
 
2,247,819

 
2,230,486

Less: current portion
 
(51,922
)
 
(45,166
)
Total long-term debt
 
$
2,195,897

 
$
2,185,320

 
 
 
 
 
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction. As of March 31, 2018 and December 31, 2017, the fair value of the senior secured term loans and senior secured and unsecured notes was higher than book value by $32,972 and $59,319, respectively. The fair value of the senior secured term loans and senior secured and unsecured notes was derived from published loan prices as of March 31, 2018 and December 31, 2017, as applicable. The fair value is classified as Level 2 based upon the fair value hierarchy (see Note 4 to these condensed consolidated financial statements for further information on fair value measurements).
New Term Loan Facility
On February 8, 2018 (the “Closing Date”), PQ Corporation (the “Borrower”), an indirect, wholly owned subsidiary of the Company, refinanced its existing senior secured term loan facility with a new $1,267,000 senior secured term loan facility (the “New Term Loan Facility”) by entering into a third amendment agreement (the “Amendment”), which amended and restated the Term Loan Credit Agreement dated as of May 4, 2016, among the Borrower, CPQ Midco I Corporation, Credit Suisse AG, Cayman Island Branch, as administrative agent and collateral agent, and the lenders and the other parties party thereto from time to time (as amended prior to the Amendment, the “Existing Credit Agreement” and as amended and restated by the Amendment, the “New Credit Agreement”).

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The New Term Loan Facility bears interest at a floating rate of LIBOR plus 2.50% per annum and matures in February 2025, effectively lowering the interest rate margin, eliminating the interest rate floor that existed on the Euro-denominated tranche prior to refinancing, and extending the maturity of its senior secured term loan facility. The New Term Loan Facility requires scheduled quarterly amortization payments, each equal to 0.25% of the original principal amount of the loans under the New Term Loan Facility. Voluntary prepayments of the New Term Loan Facility in connection with a Repricing Transaction, as defined in the New Credit Agreement, on or prior to six months after the Closing Date will be subject to a call premium of 1.00%. Otherwise, outstanding loans under the New Term Loan Facility may be voluntarily prepaid at any time without premium or penalty. In addition, the New Credit Agreement contains customary mandatory prepayments, affirmative and negative covenants and events of default, all of which are substantially the same as under the Existing Credit Agreement.
The Company recorded $2,124 of new creditor and third-party financing costs as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $1,403 and original issue discount of $2,352 associated with the previously outstanding debt were written off as debt extinguishment costs.
On the Closing Date, the Company also entered into multiple cross currency swap arrangements to hedge foreign currency risk. The swaps are designed to enable the Company to effectively convert a portion of its fixed-rate U.S. dollar denominated debt obligations into approximately €280,000 equivalent ($345,041 as of March 31, 2018). The swaps are expected to mature in February 2023.
13. Financial Instruments:
The Company uses (1) interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments, (2) commodity derivatives to manage its exposure to commodity price fluctuations, and (3) foreign currency related derivative instruments to manage its foreign currency exposure to its net investments in certain foreign operations. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, commodity prices and foreign currency, 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 the Company’s derivative instruments 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, in the Company’s consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the natural gas swaps are recorded in stockholders’ equity as a component of other comprehensive income (loss) (“OCI”), net of tax. Reclassifications of the gains and losses on natural gas hedges into earnings are recorded in production costs and subsequently charged to cost of goods sold in the consolidated statements of operations in the period in which the associated inventory is sold. The Company’s natural gas swaps have a remaining notional quantity of 3.4 million MMBTU to mitigate commodity price volatility through December 2020.
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. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material 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 in its consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the interest rate cap agreements are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreements into earnings are recorded as part of interest expense in the consolidated statements of operations as the Company makes its interest payments on the hedged portion of its senior secured credit

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


facilities. 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 cap rate currently in effect at March 31, 2018 is 2.00%.
Use of Derivative Financial Instruments to Manage Foreign Currency Risk. The Company is exposed to risks related to its net investments in foreign operations due to fluctuations in foreign currency exchange rates, particularly between the United States dollar and the Euro. In connection with the February 2018 term loan refinancing (see Note 12 to these condensed consolidated financial statements), the Company entered into multiple cross currency interest rate swap arrangements with an aggregate notional amount of €280,000 ($345,041) to hedge this exposure on the net investments of two of its Euro-denominated subsidiaries. The Company records these swap agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as net investment hedges, changes in the fair value of the swaps attributable to changes in the spot exchange rates are recognized in cumulative translation adjustment (“CTA”) within OCI and are held there until the hedged net investments are sold or substantially liquidated. Changes in the fair value of the swaps attributable to the cross currency basis spread are excluded from the assessment of hedge effectiveness and are recorded in current period earnings. Upon such sale or liquidation, the amount recognized in CTA is reclassified to earnings and reported in the same line item as the gain or loss on the liquidation of the net investments.
The fair values of derivative instruments held as of March 31, 2018 and December 31, 2017 are shown below:
 
Balance sheet location
 
March 31, 2018
 
December 31, 2017
Derivative assets:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Interest rate caps
Prepaid and other current assets
 
$
1,039

 
$
44

Interest rate caps
Other long-term assets
 
2,857

 
999

 
 
 
3,896

 
1,043

Derivatives designed as net investment hedges:
 
 
 
 
 
Cross currency swaps
Prepaid and other current assets
 
6,327

 

Total derivative assets
 
 
$
10,223

 
$
1,043

 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Natural gas swaps
Accrued liabilities
 
$
246

 
$
318

Natural gas swaps
Other long-term liabilities
 
177

 
130

 
 
 
423

 
448

Derivatives designated as net investment hedges:
 
 
 
 
 
Cross currency swaps
Other long-term liabilities
 
15,603

 

Total derivative liabilities
 
 
$
16,026

 
$
448

 
 
 
 
 
 

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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 shows the effect of the Company’s derivative instruments designated as cash flow hedges on accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2018 and 2017:
 
 
 
 
Three months ended March 31,
 
 
 
 
2018
 
2017
 
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
Interest rate caps
 
Interest (expense) income
 
$
2,852

 
$
(35
)
 
$
(2,311
)
 
$
(2
)
Natural gas swaps
 
Cost of goods sold
 
53

 
28

 
(535
)
 
18

 
 
 
 
2,905

 
(7
)
 
(2,846
)
 
16

 
 
 
 
 
 
 
 
 
 
 
The following table shows the effect of the Company’s cash flow hedge accounting on the consolidated statements of operations for the three months ended March 31, 2018 and 2017:
 
 
Location and amount of gain (loss) recognized in income on cash flow hedging relationships
 
 
Three months ended March 31,
 
 
2018
 
2017
 
 
Cost of goods sold
 
Interest (expense) income
 
Cost of goods sold
 
Interest (expense) income
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow hedges are recorded
 
$
(288,076
)
 
$
(29,163
)
 
$
(250,219
)
 
$
(46,785
)
 
 
 
 
 
 
 
 
 
The effects of cash flow hedging:
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 

 
(35
)
 

 
(2
)
Commodity contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
28

 

 
18

 

 
 
 
 
 
 
 
 
 
The following table shows the effect of the Company’s net investment hedges on AOCI and the consolidated statements of operations for the three months ended March 31, 2018 and 2017:
 
Amount of gain (loss) recognized in OCI on derivative
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) reclassified from AOCI into income
 
Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Three months ended March 31,
 
 
Three months ended March 31,
 
 
Three months ended March 31,
 
2018
2017
 
 
2018
2017
 
 
2018
2017
Cross currency swaps
$
(9,276
)
$

 
Gain (loss) on sale of subsidiary
 
$

$

 
Interest (expense) income
 
$
1,167

$

 
 
 
 
 
 
 
 
 
 
 
 
 
The amount of unrealized losses in AOCI that is expected to be reclassified to the consolidated statement of operations over the next twelve months is $590 as of March 31, 2018.

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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 March 31, 2018 was (1,959.3)% compared to 55.7% for the three months ended March 31, 2017. The Company’s effective income tax rate fluctuates based primarily on changes in income mix and repatriation of income taxes from foreign subsidiaries.
The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for the three months ended March 31, 2018 was mainly due to the tax effect of permanent differences related to foreign currency exchange loss, inclusion of foreign earnings in the U.S. as a result of recently enacted tax law, pre-tax losses with no associated tax benefit, foreign withholding taxes and state taxes.
The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for the three months ended March 31, 2017 was mainly due to the tax effect of repatriating foreign earnings back to the United States as dividends offset by lower tax rates in foreign jurisdictions as compared to the U.S. tax rate, foreign withholdings taxes, state taxes and non-deductible transaction costs.
On December 22, 2017, the U.S. government enacted tax reform legislation (the Tax Cuts and Jobs Act of 2017, or “TCJA”) that introduced significant changes to the taxation of multination corporations. As a result of the TCJA, at December 31, 2017 the Company recorded a provisional tax benefit of $64,343 related to the corporate rate reduction from 35% to 21%, a provisional tax expense of $43,000 related to the one-time mandatory transition tax and a provisional tax benefit of $25,196 related to undistributed foreign earnings that are no longer intended to be permanently reinvested.
Due to the complexities involved in accounting for the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 provides that where reasonable estimates can be made, provisional accounting should be employed with respect to such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect prior to the TCJA. During the three months ended March 31, 2018, there were no changes made to the provisional amounts recognized in 2017. As such, there is no impact to the March 31, 2018 effective tax rate for changes to such provisional amounts. The Company will continue to analyze the effects of the TCJA on its financial statements. Revised impacts with respect to the TCJA will be recorded as they are identified during the allowed measurement period prescribed by SAB No. 118. This measurement period extends up to one year from the enactment date.
The final impact of the TCJA may differ from the provisional amounts that have been recognized, possibly materially, due to, among other items, changes in the Company’s interpretation of the TCJA, legislative or administrative actions taken to clarify the intent of the statutory language which may differ from the Company’s current interpretation, any changes in accounting standards for income taxes made in response to the TCJA or any updates or changes to original estimates used to compute the provisional amounts. Updates to original estimates may include changes to earnings estimates as well as applicable foreign exchange rates. Additionally, the Company’s U.S. tax returns for the 2017 tax year will be filed during the fourth quarter of 2018 and any changes to the tax positions for temporary differences which differ from the provisional estimates used will result in an adjustment of the estimated tax impacts recorded as of December 31, 2017.
The TCJA enacted certain provisions that take effect on January 1, 2018. These provisions include, but are not limited to, the new Global Intangible Low-Taxed Income (“GILTI”) tax rules. Due to the complexity of the new GILTI tax, the Company is continuing to evaluate the GILTI provision of the TCJA and its impact on the financial statements, which is currently uncertain. Per recent guidance issued by the FASB, the Company will be allowed to make an accounting policy election to either (1) treat the taxes incurred as a result of the GILTI provision as a current-period expense when incurred or (2) factor such amounts into our measurement of deferred taxes. The Company’s selection of an accounting policy election will depend, in part, on analyzing its specific facts to determine the expected impact under each method. However, at this time the Company expects to treat any expense incurred as a current-period expense.
With respect to operating results for the three months ended March 31, 2018, the Company has incorporated a reasonable estimate of the GILTI income inclusion when estimating its GAAP annual effective tax rate. The Company expects this inclusion to be included in its 2018 U.S. taxable income. However, this estimated 2018 GILTI income inclusion may change materially as the Company evaluates future legislative or administrative guidance that is put forth, any updates to assumptions and figures used for the current reasonable estimate or as a result of future tax planning or changes to the Company’s current structure and business.
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.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


Components of net periodic expense (benefit) are as follows:
Defined Benefit Pension Plans
 
 
U.S. 
 
Foreign
 
 
Three months ended
March 31,
 
Three months ended
March 31,
 
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
310

 
$
305

 
$
887

 
$
842

Interest cost
 
2,372

 
2,536

 
1,505

 
1,431

Expected return on plan assets
 
(3,174
)
 
(3,061
)
 
(1,319
)
 
(1,294
)
Amortization of net loss
 

 

 
13

 

Net periodic expense (benefit)   
 
$
(492
)
 
$
(220
)
 
$
1,086

 
$
979

 
 
 
 
 
 
 
 
 
Supplemental Retirement Plans
 
 
Three months ended
March 31,
 
 
2018
 
2017
Interest cost
 
$
110

 
$
123

Net periodic expense   
 
$
110

 
$
123

 
 
 
 
 
Other Postretirement Benefit Plans
 
 
Three months ended
March 31,
 
 
2018
 
2017
Service cost
 
$
6

 
$
5

Interest cost
 
38

 
40

Amortization of prior service credit
 
(19
)
 
(19
)
Amortization of net gain
 
(11
)
 
(19
)
Net periodic expense   
 
$
14

 
$
7

 
 
 
 
 
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 March 31, 2018 and December 31, 2017, the Company has recorded a reserve of $837 and $842, 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.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


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 March 31, 2018 and December 31, 2017, the Company has recorded a reserve of $463 and $701, respectively, for the remediation costs of PCB impacted soils at the Company’s facilities.
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 some, but not all, of the alleged contamination. As of March 31, 2018 and December 31, 2017, the Company has recorded a reserve of $837 for costs related to this potential liability.
The Company has recorded a reserve of $1,183 and $1,245 as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, the Company has recorded a reserve of $1,183 and $1,220, 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.

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PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


17. Reportable Segments:
Summarized financial information for the Company’s (1) Environmental Catalysts & Services and (2) Performance Materials & Chemicals reportable segments is shown in the following table:
 
 
Three months ended
March 31,
 
 
2018
 
2017
Net sales:
 
 
 
 
Silica Catalysts
 
$
16,473

 
$
17,140

Refining Services
 
100,714

 
94,141

Environmental Catalysts & Services(1)   
 
117,187

 
111,281

 
 
 
 
 
Performance Chemicals
 
189,963

 
170,949

Performance Materials
 
62,742

 
53,773

Eliminations
 
(2,883
)
 
(2,117
)
Performance Materials & Chemicals
 
249,822

 
222,605

 
 
 
 
 
Inter-segment sales eliminations(2)   
 
(812
)
 
(955
)
 
 
 
 
 
Total
 
$
366,197

 
$
332,931

 
 
 
 
 
Segment Adjusted EBITDA:(3)
 
 
 
 
Environmental Catalysts & Services(4)   
 
$
58,421

 
$
56,367

Performance Materials & Chemicals
 
57,152

 
52,523

Total Segment Adjusted EBITDA(5)   
 
$
115,573

 
$
108,890

 
 
 
 
 
 
(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 $38,349 and $32,708 for the three months ended March 31, 2018 and 2017, 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 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 Catalysts and Services segment is $16,807 for the three months ended March 31, 2018, which includes $11,826 of equity in net income plus $1,658 of amortization of investment in affiliate step-up plus $3,323 of joint venture depreciation, amortization and interest. The Adjusted EBITDA from the Zeolyst Joint Venture included in the Environmental Catalysts and Services segment is $12,087 for the three months ended March 31, 2017, which includes $5,824 of equity in net income plus $3,624 of amortization of investment in affiliate step-up plus $2,639 of joint venture depreciation, amortization and interest.
(5) 
Total Segment Adjusted EBITDA differs from the Company’s consolidated Adjusted EBITDA due to unallocated corporate expenses.

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Table of Contents

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


A reconciliation of net income (loss) attributable to PQ Group Holdings to Segment Adjusted EBITDA is as follows:
 
 
Three months ended
March 31,
 
 
2018
 
2017
Reconciliation of net income (loss) attributable to PQ Group Holdings Inc. to Segment Adjusted EBITDA
 
 
 
 
Net income (loss) attributable to PQ Group Holdings Inc.
 
$
214

 
$
(2,454
)
Benefit from income taxes
 
(529
)
 
(2,910
)
Interest expense, net
 
29,163

 
46,785

Depreciation and amortization
 
48,488

 
40,586

Segment EBITDA
 
77,336