Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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 ☒ 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	☐	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 ☒

The number of shares of common stock outstanding as of October 31, 2019 was 136,474,348.

Table of Contents

PQ GROUP HOLDINGS INC.

INDEX—FORM 10-Q

September 30, 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	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 6.	Exhibits	58

	SIGNATURES	59

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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 September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Sales	$	423,801		$	427,203		$	1,214,697		$	1,228,113
Cost of goods sold	310,904			319,703			905,395			934,088
Gross profit	112,897			107,500			309,302			294,025
Selling, general and administrative expenses	39,528			42,145			123,611			126,240
Other operating expense, net	15,795			16,501			28,353			41,688
Operating income	57,574			48,854			157,338			126,097
Equity in net (income) from affiliated companies	(17,261		)	(5,605		)	(31,625		)	(31,123		)
Interest expense, net	27,697			28,238			84,855			84,622
Debt extinguishment costs	1,767			864			1,767			6,743
Other expense, net	1,834			2,451			1,890			13,114
Income before income taxes and noncontrolling interest	43,537			22,906			100,451			52,741
Provision for income taxes	16,718			8,470			39,472			21,590
Net income	26,819			14,436			60,979			31,151
Less: Net income attributable to the noncontrolling interest	106			251			541			970
Net income attributable to PQ Group Holdings Inc.	$	26,713		$	14,185		$	60,438		$	30,181

Net income per share:
Basic income per share	$	0.20		$	0.11		$	0.45		$	0.23
Diluted income per share	$	0.20		$	0.11		$	0.45		$	0.22

Weighted average shares outstanding:
Basic	134,511,819			133,336,352			134,213,571			133,237,653
Diluted	135,649,710			134,576,162			135,305,370			134,223,628

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 September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net income	$	26,819		$	14,436		$	60,979		$	31,151
Other comprehensive income (loss), net of tax:
Pension and postretirement benefits	(59		)	(52		)	(120		)	1,305
Net (loss) gain from hedging activities	35			370			(2,684		)	3,106
Foreign currency translation	(13,872		)	5,186			(620		)	(15,636		)
Total other comprehensive income (loss)	(13,896		)	5,504			(3,424		)	(11,225		)
Comprehensive income	12,923			19,940			57,555			19,926
Less: Comprehensive income (loss) attributable to noncontrolling interests	(304		)	1,218			586			1,697
Comprehensive income attributable to PQ Group Holdings Inc.	$	13,227		$	18,722		$	56,969		$	18,229

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)



	September 30, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	78,510		$	57,854
Accounts receivable, net	214,626			196,770
Inventories, net	259,766			264,748
Prepaid and other current assets	39,055			39,244
Total current assets	591,957			558,616
Investments in affiliated companies	477,144			468,211
Property, plant and equipment, net	1,178,479			1,208,979
Goodwill	1,251,296			1,254,929
Other intangible assets, net	683,296			728,436
Right-of-use lease assets	54,238			—
Other long-term assets	129,069			108,254
Total assets	$	4,365,479		$	4,327,425
LIABILITIES
Notes payable and current maturities of long-term debt	$	8,210		$	7,237
Accounts payable	132,096			148,365
Operating lease liabilities—current	14,095			—
Accrued liabilities	108,365			100,009
Total current liabilities	262,766			255,611
Long-term debt, excluding current portion	2,006,717			2,106,720
Deferred income taxes	214,935			196,124
Operating lease liabilities—noncurrent	38,473			—
Other long-term liabilities	105,927			104,825
Total liabilities	2,628,818			2,663,280
Commitments and contingencies (Note 17)
EQUITY
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 136,469,863 and 135,758,269 on September 30, 2019 and December 31, 2018, respectively; outstanding shares 136,157,186 and 135,592,045 on September 30, 2019 and December 31, 2018, respectively	1,365			1,358
Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on September 30, 2019 and December 31, 2018	—			—
Additional paid-in capital	1,692,223			1,674,703
Retained earnings	83,912			25,523
Treasury stock, at cost; shares 312,677 and 166,224 on September 30, 2019 and December 31, 2018, respectively	(5,155		)	(2,920		)
Accumulated other comprehensive loss	(40,699		)	(39,104		)
Total PQ Group Holdings Inc. equity	1,731,646			1,659,560
Noncontrolling interest	5,015			4,585
Total equity	1,736,661			1,664,145
Total liabilities and equity	$	4,365,479		$	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
Net income	—		—		30,574			—			—			145			30,719
Other comprehensive income	—		—		—			—			4,747			140			4,887
Distributions to noncontrolling interests	—		—		—			—			—			(156		)	(156		)
Stock compensation expense	—		5,370		—			—			—			—			5,370
Shares issued under equity incentive plan, net of forfeitures	4		3,256		—			—			—			—			3,260
Balance, June 30, 2019	$	1,364	$	1,686,942	$	57,199		$	(4,259	)	$	(27,213	)	$	5,319		$	1,719,352
Net income	—		—		26,713			—			—			106			26,819
Other comprehensive income (loss)	—		—		—			—			(13,486		)	(410		)	(13,896		)
Repurchases of common shares	—		—		—			(896		)	—			—			(896		)
Stock compensation expense	—		4,806		—			—			—			—			4,806
Shares issued under equity incentive plan, net of forfeitures	1		475		—			—			—			—			476
Balance, September 30, 2019	$	1,365	$	1,692,223	$	83,912		$	(5,155	)	$	(40,699	)	$	5,015		$	1,736,661

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	Common stock		Additional paid-in capital		Accumulated deficit			Treasury stock, at cost			Accumulated other comprehensive income (loss)			Non- controlling interest			Total
Balance, December 31, 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
Net income	—		—		15,782			—			—			377			16,159
Other comprehensive income (loss)	—		—		—			—			(26,021		)	(1,544		)	(27,565		)
Distributions to noncontrolling interests	—		—		—			—			—			(153		)	(153		)
Stock compensation expense	—		3,796		—			—			—			—			3,796
Shares issued under equity incentive plan, net of forfeitures	—		7		—			—			—			—			7
Balance, June 30, 2018	$	1,352	$	1,662,748	$	(16,781	)	$	(58	)	$	(12,178	)	$	4,245		$	1,639,328
Net income	—		—		14,185			—			—			251			14,436
Other comprehensive income	—		—		—			—			4,537			967			5,504
Repurchases of common shares	—		—		—			(710		)	—			—			(710		)
Distributions to noncontrolling interests	—		—		—			—			—			(373		)	(373		)
Stock compensation expense	—		4,252		—			—			—			—			4,252
Shares issued under equity incentive plan, net of forfeitures	—		36		—			—			—			—			36
Balance, September 30, 2018	$	1,352	$	1,667,036	$	(2,596	)	$	(768	)	$	(7,641	)	$	5,090		$	1,662,473

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)



	Nine months ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	60,979		$	31,151
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	97,088			99,491
Amortization	38,142			39,807
Amortization of inventory step-up	—			1,603
Amortization of deferred financing costs and original issue discount	4,352			4,629
Debt extinguishment costs	1,767			4,619
Foreign currency exchange loss	5,380			15,347
Pension and postretirement healthcare benefit expense	2,731			347
Pension and postretirement healthcare benefit funding	(8,917		)	(6,415		)
Deferred income tax provision	16,822			1,494
Net (gain) loss on asset disposals	(7,697		)	11,106
Stock compensation	13,576			11,879
Equity in net (income) from affiliated companies	(31,625		)	(31,123		)
Dividends received from affiliated companies	20,072			35,890
Net interest income on swaps designated as net investment hedges	(8,435		)	(4,279		)
Other, net	(887		)	(6,473		)
Working capital changes that provided (used) cash, excluding the effect of acquisitions and dispositions:
Receivables	(22,472		)	(43,106		)
Inventories	(1,793		)	8,778
Prepaids and other current assets	268			(1,555		)
Accounts payable	(4,072		)	(7,594		)
Accrued liabilities	6,615			407
Net cash provided by operating activities	181,894			166,003
Cash flows from investing activities:
Purchases of property, plant and equipment	(91,653		)	(95,322		)
Investment in affiliated companies	—			(5,000		)
Business combinations, net of cash acquired	—			(1,006		)
Proceeds from sale of product line	28,000			—
Net interest proceeds on swaps designated as net investment hedges	8,435			4,279
Other, net	475			1,142
Net cash used in investing activities	(54,743		)	(95,907		)
Cash flows from financing activities:
Draw down of revolving credit facilities	161,630			139,577
Repayments of revolving credit facilities	(160,342		)	(163,103		)
Issuance of long-term debt	—			1,267,000
Debt issuance costs	—			(6,156		)
Repayments of long-term debt	(105,821		)	(1,313,832		)
Stock repurchases	(2,235		)	(768		)
Distributions to noncontrolling interests	(156		)	(526		)
Proceeds from stock options exercised	3,956			43
Other, net	(283		)	—
Net cash used in financing activities	(103,251		)	(77,765		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(3,371		)	(1,557		)
Net change in cash, cash equivalents and restricted cash	20,529			(9,226		)
Cash, cash equivalents and restricted cash at beginning of period	59,726			67,243
Cash, cash equivalents and restricted cash at end of period	$	80,255		$	58,017

For supplemental cash flow disclosures, see Note 21.

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, 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 packaging and engineered plastics and 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 12, 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 recognizes 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 recognizes 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.