Document

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, 2019



¨	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 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 every Interactive Data File required to be submitted 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 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	ý	Accelerated filer	¨

Non-accelerated filer	¨	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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, par value $0.01 per share	PQG	New York Stock Exchange

The number of shares of common stock outstanding as of May 6, 2019 was 135,732,810.

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PQ GROUP HOLDINGS INC.

INDEX—FORM 10-Q

March 31, 2019



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	45

	SIGNATURES	46

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PART I—FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED).

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

(unaudited)



	Three months ended March 31,
	2019			2018
Sales	$	359,221		$	366,197
Cost of goods sold	278,311			288,076
Gross profit	80,910			78,121
Selling, general and administrative expenses	40,708			40,618
Other operating expense, net	10,739			9,314
Operating income	29,463			28,189
Equity in net (income) from affiliated companies	(2,064		)	(11,852		)
Interest expense, net	28,618			29,163
Debt extinguishment costs	—			5,879
Other (income) expense, net	(2,979		)	4,972
Income before income taxes and noncontrolling interest	5,888			27
Provision (benefit) for income taxes	2,447			(529		)
Net income	3,441			556
Less: Net income attributable to the noncontrolling interest	290			342
Net income attributable to PQ Group Holdings Inc.	$	3,151		$	214

Net income per share:
Basic income per share	$	0.02		$	—
Diluted income per share	$	0.02		$	—

Weighted average shares outstanding:
Basic	133,946,308			133,154,144
Diluted	134,894,354			133,884,983

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,
	2019			2018
Net income	$	3,441		$	556
Other comprehensive income (loss), net of tax:
Pension and postretirement benefits	(30		)	(18		)
Net (loss) gain from hedging activities	(1,552		)	2,183
Foreign currency translation	7,167			8,671
Total other comprehensive income	5,585			10,836
Comprehensive income	9,026			11,392
Less: Comprehensive income attributable to noncontrolling interests	605			1,646
Comprehensive income attributable to PQ Group Holdings Inc.	$	8,421		$	9,746

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, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	52,341		$	57,854
Receivables, net	195,662			196,770
Inventories	283,549			264,748
Prepaid and other current assets	38,780			39,244
Total current assets	570,332			558,616
Investments in affiliated companies	464,128			468,211
Property, plant and equipment, net	1,201,962			1,208,979
Goodwill	1,257,034			1,254,929
Other intangible assets, net	714,113			728,436
Right-of-use lease asset	57,173			—
Other long-term assets	117,534			108,254
Total assets	$	4,382,276		$	4,327,425
LIABILITIES
Notes payable and current maturities of long-term debt	$	10,712		$	7,237
Accounts payable	136,356			148,365
Operating lease liabilities—current	14,482			—
Accrued liabilities	101,259			100,009
Total current liabilities	262,809			255,611
Long-term debt, excluding current portion	2,103,070			2,106,720
Deferred income taxes	197,552			196,124
Operating lease liabilities—noncurrent	40,971			—
Other long-term liabilities	102,602			104,825
Total liabilities	2,707,004			2,663,280
Commitments and contingencies (Note 16)
EQUITY
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 135,982,601 and 135,758,269 on March 31, 2019 and December 31, 2018, respectively; outstanding shares 135,727,810 and 135,592,045 on March 31, 2019 and December 31, 2018, respectively	1,360			1,358
Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on March 31, 2019 and December 31, 2018	—			—
Additional paid-in capital	1,678,316			1,674,703
Retained earnings	26,625			25,523
Treasury stock, at cost; shares 254,791 and 166,224 on March 31, 2019 and December 31, 2018, respectively	(4,259		)	(2,920		)
Accumulated other comprehensive loss	(31,960		)	(39,104		)
Total PQ Group Holdings Inc. equity	1,670,082			1,659,560
Noncontrolling interest	5,190			4,585
Total equity	1,675,272			1,664,145
Total liabilities and equity	$	4,382,276		$	4,327,425

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		Retained earnings			Treasury stock, at cost			Accumulated other comprehensive income (loss)			Non- controlling interest		Total
Balance, December 31, 2018, as previously reported	$	1,358	$	1,674,703	$	25,523		$	(2,920	)	$	(39,104	)	$	4,585	$	1,664,145
Cumulative effect adjustment from adoption of new accounting standards	—		—		(2,049		)	—			1,874			—		(175		)
Balance, December 31, 2018, as adjusted	1,358		1,674,703		23,474			(2,920		)	(37,230		)	4,585		1,663,970
Net income	—		—		3,151			—			—			290		3,441
Other comprehensive income	—		—		—			—			5,270			315		5,585
Repurchases of common shares	—		—		—			(1,339		)	—			—		(1,339		)
Stock compensation expense	—		3,400		—			—			—			—		3,400
Shares issued under equity incentive plan, net of forfeitures	2		213		—			—			—			—		215
Balance, March 31, 2019	$	1,360	$	1,678,316	$	26,625		$	(4,259	)	$	(31,960	)	$	5,190	$	1,675,272

	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
Repurchases 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

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,
	2019			2018
Cash flows from operating activities:
Net income	$	3,441		$	556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	33,154			34,903
Amortization	12,740			13,585
Amortization of inventory step-up	—			1,603
Amortization of deferred financing costs and original issue discount	1,401			1,559
Debt extinguishment costs	—			3,755
Foreign currency exchange (gain) loss	(2,689		)	5,063
Pension and postretirement healthcare benefit expense	1,176			816
Pension and postretirement healthcare benefit funding	(3,372		)	(3,406		)
Deferred income tax provision (benefit)	1,181			(2,607		)
Net loss on asset disposals	820			1,152
Stock compensation	3,400			3,831
Equity in net (income) from affiliated companies	(2,064		)	(11,852		)
Dividends received from affiliated companies	5,000			10,819
Net interest income on swaps designated as net investment hedges	(3,890		)	—
Other, net	(3,644		)	(2,928		)
Working capital changes that provided (used) cash:
Receivables	1,121			(11,065		)
Inventories	(19,152		)	(19,539		)
Prepaids and other current assets	2,890			(4,712		)
Accounts payable	(3,898		)	(7,044		)
Accrued liabilities	(777		)	7,546
Net cash provided by operating activities	26,838			22,035
Cash flows from investing activities:
Purchases of property, plant and equipment	(33,627		)	(33,344		)
Net interest proceeds on swaps designated as net investment hedges	3,890			—
Other, net	470			209
Net cash used in investing activities	(29,267		)	(33,135		)
Cash flows from financing activities:
Draw down of revolving credit facilities	32,381			38,570
Repayments of revolving credit facilities	(28,888		)	(32,109		)
Issuance of long-term debt	—			1,267,000
Debt issuance costs	—			(6,395		)
Repayments of long-term debt	(5,000		)	(1,261,624		)
Stock repurchases	(1,339		)	(58		)
Other, net	294			—
Net cash (used in) provided by financing activities	(2,552		)	5,384
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(660		)	(1,511		)
Net change in cash, cash equivalents and restricted cash	(5,641		)	(7,227		)
Cash, cash equivalents and restricted cash at beginning of period	59,726			67,243
Cash, cash equivalents and restricted cash at end of period	$	54,085		$	60,016

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”) is a leading integrated and innovative global provider of specialty catalysts, materials and chemicals, and services. The Company supports customers globally through its strategically located network of manufacturing facilities. The Company believes that its products, which are predominantly inorganic, and services contribute to improving the sustainability of the environment.

The Company has four uniquely positioned specialty businesses: Refining Services provides sulfuric acid recycling to the North American refining industry; Catalysts serves the global refining, petrochemical and emissions control industries; Performance Materials produces transportation reflective safety markings for roads and airports; and Performance Chemicals supplies diverse product end uses, including personal and industrial cleaning products, fuel-efficient tires, surface coatings, and food and beverage products.

Effective March 1, 2019, the Company changed the structure of its internal organization to create the four independent businesses described above in order to promote increased visibility to business unit performance, optimize the Company’s product portfolio and create efficiencies. Previously, the Company had two reportable segments, namely the Environmental Catalysts and Services segment and the Performance Materials and Chemicals segment. Beginning with the quarter ended March 31, 2019, the segment results and disclosures included in the Company’s consolidated financial statements reflect the new segment structure for all periods presented. The changes to the Company’s segment structure affect only the manner in which the results of the Company’s reportable segments were previously reported; there are no changes to the Company’s consolidated balance sheet, statement of income or cash flows for the prior periods. For the purposes of the Company’s goodwill impairment testing, the four new operating segments align with the Company’s reporting units at which level goodwill has been assigned and historically tested for impairment.

Seasonal changes and weather conditions typically affect the Company’s Performance Materials and Refining Services segments. In particular, the Company’s Performance Materials segment 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 segment 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 second 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 segments, 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, 2018. Other than the update to our lease accounting policies described in Note 11, 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance (with subsequent targeted amendments) that modifies the accounting for leases. Under the new guidance, a lessee will recognize right-of-use lease assets and lease liabilities for most leases (including those classified under existing GAAP as operating leases, which based on previous standards are not reflected on the balance sheet), but will recognize expenses in a manner that is generally consistent with existing practices. The new guidance also requires companies to provide expanded disclosures regarding leasing arrangements. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The new guidance must be adopted using a modified retrospective transition method.

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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 adopted the new lease guidance effective January 1, 2019 as required using the modified retrospective transition method and applied the provisions of the guidance at the effective date with a cumulative-effect adjustment to the opening balance of retained earnings without adjusting the comparative periods presented. The new guidance provides practical expedients and allows for certain policy elections with regard to the Company’s lease population. The Company has elected the short term lease accounting policy and will not record right-of-use lease assets or lease liabilities for leases with an initial term of twelve months or less. Additionally, the Company has elected to utilize the portfolio approach to apply incremental borrowing rates to its leases. The Company has elected the package of practical expedients which provides the Company with the ability to bypass reassessment of the following for leases existing at the date of adoption: (1) whether any existing contracts are, or contain, leases; (2) the lease classification for any existing leases; and (3) initial direct costs for any existing leases. The Company also elected the land easement practical expedient to carry forward existing accounting treatment on existing land easements.

Adoption of the new lease guidance resulted in the recognition of right-of-use lease assets of $60,726, which included $57,832 of right-of-use lease assets related to lease commitments and $2,895 related to the reclassification of favorable lease contracts, and lease liabilities of $58,929. The new guidance had no impact on the Company’s operating results or liquidity upon adoption. Disclosures related to the Company’s leases are included in Note 11 to these condensed consolidated financial statements.

In February 2018, the FASB issued guidance which permits entities to make a one-time election to reclassify the residual (“stranded”) income tax effects included in accumulated other comprehensive income (“AOCI”) to beginning 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. Prior to the enactment of the tax reform legislation on December 22, 2017, the Company had amounts recorded in AOCI related to its domestic pension, postretirement and supplementary benefit plans and cash flow hedging relationships that were based on pre-enactment tax rates, which were included in AOCI at the adoption date of the new guidance. The Company adopted the new guidance effective January 1, 2019 as required, and reclassified the income tax effects stranded in AOCI of $1,874 from AOCI to beginning retained earnings.

In June 2018, the FASB issued guidance which conforms the accounting for the issuance of all share-based payments using the same accounting model. Previously, the accounting for share-based payments to non-employees was covered under a different framework than those made to employees. Under the new guidance, awards to both employees and non-employees will essentially follow the same model, with small variations related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted the new guidance on January 1, 2019 as required, with no material impact on its consolidated financial statements upon adoption.

Accounting Standards Not Yet Adopted

In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance eliminates certain disclosure requirements, including the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage point change in assumed health care cost trend rates. The guidance also requires additional disclosure of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The guidance is effective for fiscal years ending after December 15, 2020 with early adoption permitted, and is required to be applied on a retrospective basis to all periods presented. The Company will modify its benefit plan disclosures in accordance with the new guidance upon adoption, and the guidance will not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued guidance which modifies certain disclosure requirements over fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019, including all interim periods within that fiscal year. The Company believes that the new guidance will not have a material impact 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. The Company will apply the guidance prospectively to goodwill impairment tests subsequent to the adoption 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)

In June 2016, the FASB issued guidance that affects loans, trade receivables and any other financial assets that have the contractual right to receive cash. Under the new guidance, an entity is required to recognize expected credit losses rather than incurred losses for financial assets. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes that the new guidance will not have a material impact on its consolidated financial statements.

3. Revenue from Contracts with Customers:

Disaggregated Revenue

The Company’s primary means of disaggregating revenues is by reportable segments, 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.



Key End Uses	Key Products
Industrial & process chemicals	• Silicate precursors for the tire industry
	• Glass beads, or microspheres, for metal finishing end uses
Fuels & emission control	• Refinery catalysts
	• Emission control catalysts
	• Catalyst recycling services
	• Silicate for catalyst manufacturing
Packaging & engineered plastics	• Catalysts for high-density polyethlene and chemicals syntheses
	• Antiblocks for film packaging
	• Solid and hollow microspheres for composite plastics
	• Sulfur derivatives for nylon production
Highway safety & construction	• Reflective markings for roadways and airports
	• Silica gels for surface coatings
Consumer products	• Silica gels for edible oil and beer clarification
	• Precipitated silicas, silicates and zeolites for the dentifrice and
	dishwasher and laundry detergent applications
Natural resources	• Silicates for drilling muds
	• Hollow glass beads, or microspheres, for oil well cements
	• Silicates and alum for water treatment mining
	• Bleaching aids for paper

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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 tables disaggregate the Company’s sales, by segment and end use, for the three months ended March 31, 2019 and 2018:



	Three months ended March 31, 2019
	Refining Services			Catalysts			Performance Materials			Performance Chemicals			Total
Industrial & process chemicals	$	18,402		$	276		$	13,028		$	59,652		$	91,358
Fuels & emission control ⁽¹⁾	57,690			—			—			—			57,690
Packaging & engineered plastics	12,689			15,590			17,382			14,730			60,391
Highway safety & construction ⁽¹⁾	—			—			27,360			21,938			49,298
Consumer products	—			—			—			68,509			68,509
Natural resources	17,063			—			3,319			15,633			36,015
Total segment sales	105,844			15,866			61,089			180,462			363,261
Eliminations	(887		)	(276		)	(48		)	(2,829		)	(4,040		)
Total	$	104,957		$	15,590		$	61,041		$	177,633		$	359,221

	Three months ended March 31, 2018
	Refining Services			Catalysts			Performance Materials			Performance Chemicals			Total
Industrial & process chemicals	$	17,039		$	—		$	12,518		$	65,636		$	95,193
Fuels & emission control ⁽¹⁾	55,997			—			—			—			55,997
Packaging & engineered plastics	11,770			16,473			19,892			11,916			60,051
Highway safety & construction ⁽¹⁾	—			—			26,659			20,486			47,145
Consumer products	—			—			—			76,730			76,730
Natural resources	15,908			—			3,673			15,195			34,776
Total segment sales	100,714			16,473			62,742			189,963			369,892
Eliminations	(812		)	—			(72		)	(2,811		)	(3,695		)
Total	$	99,902		$	16,473		$	62,670		$	187,152		$	366,197


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

Contract Assets and 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, 2019 and December 31, 2018.

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, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.



	March 31, 2019		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivative contracts (Note 13)	$	27,994	$	—	$	27,994	$	—
Restoration plan assets	4,422		4,422		—		—
Total	$	32,416	$	4,422	$	27,994	$	—

Liabilities:
Derivative contracts (Note 13)	$	2,892	$	—	$	2,892	$	—



	December 31, 2018		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivative contracts (Note 13)	$	20,768	$	—	$	20,768	$	—
Restoration plan assets	4,244		4,244		—		—
Total	$	25,012	$	4,244	$	20,768	$	—

Liabilities:
Derivative contracts (Note 13)	$	2,026	$	—	$	2,026	$	—

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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)

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. The Company’s restoration plan assets are included in other long-term assets on its condensed consolidated balance sheets. Gains and losses related to these investments are included in other expense, net in the Company’s condensed consolidated statements of income. Unrealized gains and losses associated with the underlying stock and fixed income mutual funds were immaterial as of March 31, 2019 and December 31, 2018, respectively.

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.

5. Accumulated Other Comprehensive Income:

The following tables present the tax effects of each component of other comprehensive income for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019									2018
	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	$	(40	)	$	10		$	(30	)	$	(24	)	$	6		$	(18	)
Benefit plans, net	(40		)	10			(30		)	(24		)	6			(18		)
Net (loss) gain from hedging activities	(2,070		)	518			(1,552		)	2,912			(729		)	2,183
Foreign currency translation	9,282			(2,115		)	7,167			10,114			(1,443		)	8,671
Other comprehensive income	$	7,172		$	(1,587	)	$	5,585		$	13,002		$	(2,166	)	$	10,836

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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, 2019 and 2018:



	Defined benefit and other postretirement plans			Net gain (loss) from hedging activities			Foreign currency translation			Total
December 31, 2018	$	(546	)	$	637		$	(39,195	)	$	(39,104	)
Other comprehensive income (loss) before reclassifications	1			(1,501		)	6,852			5,352
Amounts reclassified from accumulated other comprehensive income⁽¹⁾	(31		)	(51		)	—			(82		)
Net current period other comprehensive income (loss)	(30		)	(1,552		)	6,852			5,270
Cumulative adjustment from adoption of stranded OCI standard	1,684			190			—			1,874
March 31, 2019	$	1,108		$	(725	)	$	(32,343	)	$	(31,960	)

December 31, 2017	$	7,412		$	967		$	(4,068	)	$	4,311
Other comprehensive income (loss) before reclassifications	(4		)	2,178			7,367			9,541
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


⁽¹⁾	See the following table for details about these reclassifications. Amounts in parentheses indicate credits to profit/loss.

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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 for the three months ended March 31, 2019 and 2018:



Details about Accumulated Other Comprehensive Income (Loss) Components	Amounts Reclassified from Accumulated Other Comprehensive Income(a)						Affected Line Item in the Statements of Income
	Three months ended March 31,
	2019			2018
Defined benefit and other postretirement plans
Amortization of prior service credit	$	(33	)	$	(19	)	(b)
Amortization of net (gain) loss	(8		)	2			(b)
	(41		)	(17		)	Total before tax
	10			3			Tax expense (benefit)
	$	(31	)	$	(14	)	Net of tax

Net (gain) loss from hedging activities
Interest rate caps	$	123		$	35		Interest expense
Natural gas swaps	(191		)	(28		)	Cost of goods sold
	(68		)	7			Total before tax
	17			(2		)	Tax expense (benefit)
	$	(51	)	$	5		Net of tax

Total reclassifications for the period	$	(82	)	$	(9	)	Net of tax


^(a)	Amounts in parentheses indicate credits 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. Goodwill:

The change in the carrying amount of goodwill for the three months ended March 31, 2019 is summarized as follows:



	Refining Services		Catalysts		Performance Materials		Performance Chemicals		Total
Balance as of December 31, 2018	$	311,892	$	77,759	$	274,947	$	590,331	$	1,254,929
Foreign exchange impact	—		693		418		994		2,105
Balance as of March 31, 2019	$	311,892	$	78,452	$	275,365	$	591,325	$	1,257,034

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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)

7. Other Operating Expense, Net:

A summary of other operating expense, net is as follows:



	Three months ended March 31,
	2019		2018
Amortization expense	$	8,664	$	8,949
Net loss on asset disposals⁽¹⁾	820		1,152
Insurance recoveries⁽¹⁾	—		(1,244		)
Environmental related costs	479		89
Other, net	776		368
	$	10,739	$	9,314

⁽¹⁾

During the three months ended March 31, 2018, the Company recognized $1,500 of insurance recoveries in its condensed consolidated statement of income related to the Company’s claim for losses sustained during Hurricane Harvey in August 2017. Of this amount, $1,244 was recorded as a gain in other operating expense, net, as reimbursement of expenses, $207 was recorded as a gain in net loss on asset disposals within other operating expense, net, for the Company’s previously recognized property losses, and $49 represented recoveries in excess of the Company’s property losses which was recorded as a non-operating gain in other expense, net, in the Company’s condensed consolidated statement of income.

8. Inventories:

Inventories are classified and valued as follows:



	March 31, 2019		December 31, 2018
Finished products and work in process	$	228,874	$	206,188
Raw materials	54,675		58,560
	$	283,549	$	264,748

Valued at lower of cost or market:
LIFO basis	$	171,967	$	160,863
Valued at lower of cost and net realizable value:
FIFO or average cost basis	111,582		103,885
	$	283,549	$	264,748

9. 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, 2019 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%
Asociacion para el Estudio de las Tecnologias de Equipamiento de Carreteras, S.A. (“Aetec”)	Spain	20%

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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)

Following is summarized information of the combined investments⁽¹⁾:



	Three months ended March 31,
	2019		2018
Sales	$	68,094	$	88,576
Gross profit	19,414		35,522
Operating income	9,207		26,041
Net income	9,240		27,022


⁽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, 2019 and December 31, 2018 includes net purchase accounting fair value adjustments of 255,508 and $258,066, respectively, related to the series of transactions consummated on May 4, 2016 to reorganize and combine the businesses of PQ Holdings Inc. and Eco Services Operations LLC, 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 $2,558 and $1,658 of amortization expense related to purchase accounting fair value adjustments for the three months ended March 31, 2019 and 2018, respectively.

10. Property, Plant and Equipment:

A summary of property, plant and equipment, at cost, and related accumulated depreciation is as follows:



	March 31, 2019			December 31, 2018
Land	$	190,948		$	190,772
Buildings	213,810			212,284
Machinery and equipment	1,140,732			1,125,117
Construction in progress	105,830			102,185
	1,651,320			1,630,358
Less: accumulated depreciation	(449,358		)	(421,379		)
	$	1,201,962		$	1,208,979

Depreciation expense was $33,154 and $34,903 for the three months ended March 31, 2019 and 2018, respectively.

11. Leases:

The Company has operating and finance lease agreements with remaining lease terms as of March 31, 2019 up to 28 years, including leases of land, buildings, railcars, vehicles, manufacturing equipment and general office equipment. Some leases include options to terminate or extend for one or more years. These options are incorporated in the Company’s lease term when it is reasonably certain that the option will be exercised. Some leases include options to purchase, which the Company assesses under the guidance to determine if these leases should be classified as finance lease agreements.

When the Company enters into an arrangement, at inception, the Company determines if the arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance). The Company accounts for the lease and non-lease components based on the estimated standalone price of each component. Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate and these are initially measured using the index or rate in effect at the commencement date. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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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 recognizes a right-of-use lease asset and lease liability at the lease commencement date based on the present value of the remaining lease payments over the lease term using the Company’s incremental borrowing rate. The Company is required to use the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When the Company is unable to readily determine the discount rate implicit in the lease agreement, the Company utilizes its incremental borrowing rate over the relevant lease term. Short-term leases, which have an initial term of twelve months or less, are not recorded on the Company’s balance sheet.

Lease expense for operating leases and financing leases is recognized on a straight-line basis over the lease term and is included in cost of goods sold or selling, general, and administrative expense on the condensed consolidated statements of income.

The table below presents the operating and finance right-of-use lease assets and lease liabilities recognized on the condensed consolidated balance sheet as of March 31, 2019:



	Classification	March 31, 2019
Assets
Operating lease assets	Right-of-use lease assets	$	57,173
Finance lease assets	Property, plant and equipment, net	1,632
Total leased assets		$	58,805

Liabilities
Current:
Operating lease liabilities	Operating lease liabilities - current	$	14,482
Finance lease liabilities	Accrued liabilities	162

Noncurrent:
Operating lease liabilities	Operating lease liabilities - noncurrent	40,971
Finance lease liabilities	Other long-term liabilities	474
Total lease liabilities		$	56,089

The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of March 31, 2019 are as follows:



	March 31, 2019
Weighted average remaining lease term (in years):
Operating leases	5.62
Finance leases	3.39

Weighted average discount rate:
Operating leases	5.73	%
Finance leases	4.67	%

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)

Maturities of lease liabilities as of March 31, 2019 are as follows:



	Operating Leases			Finance Leases			Total
Remainder of 2019	$	13,262		$	152		$	13,414
2020	14,492			202			14,694
2021	11,501			202			11,703
2022	8,366			124			8,490
2023	6,153			5			6,158
Thereafter	11,947			—			11,947
Total lease payments	65,721			685			66,406
Less: Interest	(10,268		)	(49		)	(10,317		)
Present value of lease liabilities	$	55,453		$	636		$	56,089

At December 31, 2018, future minimum payments under non-cancelable operating leases under previous lease guidance was as follows:



Year	Amount
2019	$	18,457
2020	14,344
2021	11,432
2022	8,354
2023	6,198
Thereafter	17,477
	$	76,262

Operating lease costs of $4,679 are included in cost of goods sold and in selling, general and administrative expenses for the three months ended March 31, 2019. Finance lease, short-term lease and variable lease costs for the three months ended March 31, 2019 were not material. Lease income is not material to the results of operations for the three months ended March 31, 2019.

The following table presents other information related to our operating and finance leases and the impact on the Company’s condensed consolidated statement of cash flows:



	Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Payments on operating leases included in operating cash flows	$	3,978
Interest payments under finance lease obligations included in operating cash flows	$	9
Principal payments under finance lease obligations included in financing cash flows	$	48

Right-of-use assets obtained in exchange for new lease liabilities (non-cash):
Operating leases	$	508
Finance leases	$	—

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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)

12. Long-term Debt:

The summary of long-term debt is as follows:



	March 31, 2019			December 31, 2018
Term Loan Facility	$	1,157,498		$	1,157,498
6.75% Senior Secured Notes due 2022	625,000			625,000
5.75% Senior Unsecured Notes due 2025	295,000			300,000
ABL Facility	2,000			—
Other	67,266			65,925
Total debt	2,146,764			2,148,423
Original issue discount	(17,915		)	(18,584		)
Deferred financing costs	(15,067		)	(15,882		)
Total debt, net of original issue discount and deferred financing costs	2,113,782			2,113,957
Less: current portion	(10,712		)	(7,237		)
Total long-term debt, excluding current portion	$	2,103,070		$	2,106,720

The fair value of a financial instrument is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. As of March 31, 2019 and December 31, 2018, the fair value of the term loan facility and senior secured and unsecured notes was $2,077,276 and $2,010,023, respectively. 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).

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 condensed consolidated statements of income in the period in which the associated inventory is sold. As of March 31, 2019, the Company’s natural gas swaps had a remaining notional quantity of 3.3 million MMBTU to mitigate commodity price volatility through December 2021.

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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)

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 condensed consolidated statements of income as the Company makes its interest payments on the hedged portion of its senior secured credit 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, 2019 is 2.50%. In November 2018, the Company entered into additional interest rate cap agreements to mitigate interest rate volatility from July 2020 through July 2022, with a cap rate of 3.50% on $500,000 of notional variable-rate debt.

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 February 2018, the Company entered into multiple cross currency interest rate swap arrangements with an aggregate notional amount of €280,000 ($314,112 as of March 31, 2019) to hedge this exposure on the net investments of certain 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, 2019 and December 31, 2018 are shown below:



	Balance sheet location	March 31, 2019		December 31, 2018
Derivative assets:
Derivatives designated as cash flow hedges:
Natural gas swaps	Prepaid and other current assets	$	88	$	21
Interest rate caps	Prepaid and other current assets	442		$	1,358
Interest rate caps	Other long-term assets	68		546
		598		1,925
Derivatives designed as net investment hedges:
Cross currency swaps	Prepaid and other current assets	7,224		5,499
Cross currency swaps	Other long-term assets	20,172		13,344
		27,396		18,843
Total derivative assets		$	27,994	$	20,768

Derivative liabilities:
Derivatives designated as cash flow hedges:
Natural gas swaps	Accrued liabilities	$	—	$	36
Natural gas swaps	Other long-term liabilities	72		148
Interest rate caps	Other long-term liabilities	2,820		1,842
Total derivative liabilities		$	2,892	$	2,026

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 following table shows the effect of the Company’s derivative instruments designated as cash flow hedges on accumulated other comprehensive income (“AOCI”) for the three months ended March 31, 2019 and 2018:



		Three months ended March 31,
		2019						2018
	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	$	(2,373	)	$	(123	)	$	2,852	$	(35	)
Natural gas swaps	Cost of goods sold	371			191			53		28
		$	(2,002	)	$	68		$	2,905	$	(7	)

The following table shows the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income for the three months ended March 31, 2019 and 2018:



	Location and amount of gain (loss) recognized in income on cash flow hedging relationships
	Three months ended March 31,
	2019				2018
	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 income in which the effects of cash flow hedges are recorded	(278,311	)	(28,618	)	(288,076	)	(29,163	)

The effects of cash flow hedging:
Gain (loss) on cash flow hedging relationships:
Interest contracts:
Amount of gain (loss) reclassified from AOCI into income	—		(123	)	—		(35	)
Commodity contracts:
Amount of gain (loss) reclassified from AOCI into income	191		—		28		—

The following table shows the effect of the Company’s net investment hedges on AOCI and the condensed consolidated statements of income for the three months ended March 31, 2019 and 2018:




	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,
	2019		2018				2019		2018			2019		2018
Cross currency swaps	$	8,553	$	(9,276	)	Gain (loss) on sale of subsidiary	$	—	$	—	Interest (expense) income	$	1,446	$	1,167

The amount of unrealized losses in AOCI that are expected to be reclassified to the condensed consolidated statement of income over the next twelve months is $591 as of March 31, 2019.

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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, 2019 was 41.6% compared to (1,959.3)% for the three months ended March 31, 2018. The Company’s effective income tax rate has fluctuated primarily because of changes in income mix (including the effect of loss companies), the impact of including foreign earnings in U.S. taxable income and changes in foreign exchange gains and losses, which create permanent differences in certain jurisdictions.

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, 2019 was mainly due to the tax effect of permanent differences related to foreign currency exchange gain or 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, prior year tax refunds not previously accrued for 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, 2018 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.

The Tax Cuts and Jobs Act of 2017 (“TCJA”) enacted certain provisions that became effective 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 remains uncertain. Per guidance issued by the FASB, the Company is permitted 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 its measurement of deferred taxes. At this time, the Company is electing to treat any tax expense incurred as a result of GILTI as a current-period expense. Additionally, in regards to GILTI’s impact in assessing the ability to realize deferred tax assets, the Company has made a policy election to use the tax law ordering approach.

With respect to operating results for the three months ended March 31, 2019, the Company has continued to incorporate an estimate of the GILTI income inclusion when estimating annual effective tax rate used for U.S. GAAP purposes. The Company expects this amount to be included in its 2019 U.S. taxable income. However, the estimated 2019 GILTI income inclusion may change materially as the Company continues to evaluate future legislative or administrative guidance that is put forth, any updates to assumptions and figures used for the current estimate, or as a result of future 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.

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,
	2019			2018			2019			2018
Service cost	$	219		$	310		$	806		$	887
Interest cost	2,507			2,372			833			1,505
Expected return on plan assets	(2,757		)	(3,174		)	(603		)	(1,319		)
Amortization of net loss	—			—			—			13
Net periodic expense (benefit)	$	(31	)	$	(492	)	$	1,036		$	1,086

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)

Supplemental Retirement Plans



	Three months ended March 31,
	2019		2018
Interest cost	$	121	$	110
Net periodic expense	$	121	$	110