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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, 2020
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 | | | |
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 29, 2020 was 136,338,043. |
| | | | |
PQ GROUP HOLDINGS INC.
INDEX—FORM 10-Q
September 30, 2020
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, |
| 2020 | | 2019 | | 2020 | | 2019 |
Sales | $ | 380,319 | | | $ | 423,801 | | | $ | 1,101,442 | | | $ | 1,214,697 | |
Cost of goods sold | 283,818 | | | 310,904 | | | 823,503 | | | 905,395 | |
Gross profit | 96,501 | | | 112,897 | | | 277,939 | | | 309,302 | |
Selling, general and administrative expenses | 37,070 | | | 39,528 | | | 119,294 | | | 123,611 | |
Other operating expense, net | 12,382 | | | 15,795 | | | 47,059 | | | 28,353 | |
Operating income | 47,049 | | | 57,574 | | | 111,586 | | | 157,338 | |
Equity in net (income) from affiliated companies | (183) | | | (17,261) | | | (20,025) | | | (31,625) | |
Interest expense, net | 18,642 | | | 27,697 | | | 65,372 | | | 84,855 | |
Debt extinguishment costs | 14,004 | | | 1,767 | | | 16,517 | | | 1,767 | |
Other (income) expense, net | (4,988) | | | 1,834 | | | (4,297) | | | 1,890 | |
Income before income taxes and noncontrolling interest | 19,574 | | | 43,537 | | | 54,019 | | | 100,451 | |
Provision for income taxes | 11,764 | | | 16,718 | | | 29,453 | | | 39,472 | |
Net income | 7,810 | | | 26,819 | | | 24,566 | | | 60,979 | |
Less: Net income attributable to the noncontrolling interest | 298 | | | 106 | | | 904 | | | 541 | |
Net income attributable to PQ Group Holdings Inc. | $ | 7,512 | | | $ | 26,713 | | | $ | 23,662 | | | $ | 60,438 | |
| | | | | | | |
Net income per share: | | | | | | | |
Basic income per share | $ | 0.06 | | | $ | 0.20 | | | $ | 0.17 | | | $ | 0.45 | |
Diluted income per share | $ | 0.06 | | | $ | 0.20 | | | $ | 0.17 | | | $ | 0.45 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 135,106,969 | | | 134,511,819 | | | 135,292,163 | | | 134,213,571 | |
Diluted | 135,979,118 | | | 135,649,710 | | | 136,188,033 | | | 135,305,370 | |
See accompanying notes to condensed consolidated financial statements.
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, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 7,810 | | | $ | 26,819 | | | $ | 24,566 | | | $ | 60,979 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Pension and postretirement benefits | (20) | | | (59) | | | (48) | | | (120) | |
Net (loss) gain from hedging activities | 945 | | | 35 | | | 911 | | | (2,684) | |
Foreign currency translation | 13,572 | | | (13,872) | | | (20,844) | | | (620) | |
Total other comprehensive income (loss) | 14,497 | | | (13,896) | | | (19,981) | | | (3,424) | |
Comprehensive income | 22,307 | | | 12,923 | | | 4,585 | | | 57,555 | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 607 | | | (304) | | | (1,899) | | | 586 | |
Comprehensive income attributable to PQ Group Holdings Inc. | $ | 21,700 | | | $ | 13,227 | | | $ | 6,484 | | | $ | 56,969 | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
ASSETS | | | |
Cash and cash equivalents | $ | 164,348 | | | $ | 72,284 | |
Accounts receivable, net | 196,082 | | | 179,632 | |
Inventories, net | 249,662 | | | 280,945 | |
Prepaid and other current assets | 37,409 | | | 35,730 | |
Total current assets | 647,501 | | | 568,591 | |
Investments in affiliated companies | 479,454 | | | 472,929 | |
Property, plant and equipment, net | 1,135,757 | | | 1,186,770 | |
Goodwill | 1,263,853 | | | 1,259,805 | |
Other intangible assets, net | 638,772 | | | 676,385 | |
Right-of-use lease assets | 56,232 | | | 57,295 | |
Other long-term assets | 102,873 | | | 99,070 | |
Total assets | $ | 4,324,442 | | | $ | 4,320,845 | |
LIABILITIES | | | |
Notes payable and current maturities of long-term debt | $ | 14,538 | | | $ | 7,766 | |
Accounts payable | 116,797 | | | 144,365 | |
Operating lease liabilities—current | 16,774 | | | 15,183 | |
Accrued liabilities | 86,117 | | | 102,154 | |
Total current liabilities | 234,226 | | | 269,468 | |
Long-term debt, excluding current portion | 1,905,007 | | | 1,899,196 | |
Deferred income taxes | 224,457 | | | 218,037 | |
Operating lease liabilities—noncurrent | 38,341 | | | 40,156 | |
Other long-term liabilities | 118,225 | | | 108,670 | |
Total liabilities | 2,520,256 | | | 2,535,527 | |
Commitments and contingencies (Note 17) | | | |
EQUITY | | | |
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 136,787,670 and 136,861,382 on September 30, 2020 and December 31, 2019, respectively; outstanding shares 136,056,817 and 136,464,961 on September 30, 2020 and December 31, 2019, respectively | 1,368 | | | 1,369 | |
Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on September 30, 2020 and December 31, 2019 | — | | | — | |
Additional paid-in capital | 1,715,504 | | | 1,696,899 | |
Retained earnings | 126,675 | | | 103,013 | |
Treasury stock, at cost; shares 730,853 and 396,421 on September 30, 2020 and December 31, 2019, respectively | (10,534) | | | (6,483) | |
Accumulated other comprehensive loss | (32,526) | | | (15,348) | |
Total PQ Group Holdings Inc. equity | 1,800,487 | | | 1,779,450 | |
Noncontrolling interest | 3,699 | | | 5,868 | |
Total equity | 1,804,186 | | | 1,785,318 | |
Total liabilities and equity | $ | 4,324,442 | | | $ | 4,320,845 | |
| | | |
See accompanying notes to condensed consolidated financial statements.
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, 2019 | | | $ | 1,369 | | | $ | 1,696,899 | | | $ | 103,013 | | | | | $ | (6,483) | | | $ | (15,348) | | | $ | 5,868 | | | $ | 1,785,318 | |
Net income | | | — | | | — | | | 224 | | | | | — | | | — | | | 285 | | | 509 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive income | | | — | | | — | | | — | | | | | — | | | (43,411) | | | (3,488) | | | (46,899) | |
| | | | | | | | | | | | | | | | | |
Repurchases of common shares | | | — | | | — | | | — | | | | | (3,889) | | | — | | | — | | | (3,889) | |
| | | | | | | | | | | | | | | | | |
Stock compensation expense | | | — | | | 5,920 | | | — | | | | | — | | | — | | | — | | | 5,920 | |
Shares issued under equity incentive plan, net of forfeitures | | | 4 | | | 177 | | | — | | | | | — | | | — | | | — | | | 181 | |
Balance, March 31, 2020 | | | $ | 1,373 | | | $ | 1,702,996 | | | $ | 103,237 | | | | | $ | (10,372) | | | $ | (58,759) | | | $ | 2,665 | | | $ | 1,741,140 | |
Net income | | | — | | | — | | | 15,926 | | | | | — | | | — | | | 321 | | | 16,247 | |
Other comprehensive income | | | — | | | — | | | — | | | | | — | | | 12,045 | | | 376 | | | 12,421 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock compensation expense | | | — | | | 6,366 | | | — | | | | | — | | | — | | | — | | | 6,366 | |
Shares issued under equity incentive plan, net of forfeitures | | | (5) | | | 5 | | | — | | | | | — | | | — | | | — | | | — | |
Balance, June 30, 2020 | | | $ | 1,368 | | | $ | 1,709,367 | | | $ | 119,163 | | | | | $ | (10,372) | | | $ | (46,714) | | | $ | 3,362 | | | $ | 1,776,174 | |
Net income | | | — | | | — | | | 7,512 | | | | | — | | | — | | | 298 | | | 7,810 | |
Other comprehensive income (loss) | | | — | | | — | | | — | | | | | — | | | 14,188 | | | 309 | | | 14,497 | |
Repurchases of common shares | | | — | | | — | | | — | | | | | (162) | | | — | | | — | | | (162) | |
Distributions to noncontrolling interests | | | — | | | — | | | — | | | | | — | | | — | | | (270) | | | (270) | |
Stock compensation expense | | | — | | | 6,137 | | | — | | | | | — | | | — | | | — | | | 6,137 | |
| | | | | | | | | | | | | | | | | |
Balance, September 30, 2020 | | | $ | 1,368 | | | $ | 1,715,504 | | | $ | 126,675 | | | | | $ | (10,534) | | | $ | (32,526) | | | $ | 3,699 | | | $ | 1,804,186 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 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) | |
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 | | | — | | | — | | | — | | | | | — | | | (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 | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net income | | $ | 24,566 | | | $ | 60,979 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 99,981 | | | 97,088 | |
Amortization | | 36,332 | | | 38,142 | |
| | | | |
Amortization of deferred financing costs and original issue discount | | 3,743 | | | 4,352 | |
| | | | |
Debt extinguishment costs | | 14,146 | | | 1,767 | |
| | | | |
Foreign currency exchange (gain) loss | | (2,100) | | | 5,380 | |
Pension and postretirement healthcare benefit expense | | 639 | | | 2,731 | |
Pension and postretirement healthcare benefit funding | | (8,734) | | | (8,917) | |
Deferred income tax provision | | 9,815 | | | 16,822 | |
Net (gain) loss on asset disposals | | 3,948 | | | (7,697) | |
| | | | |
Stock compensation | | 18,423 | | | 13,576 | |
Equity in net income from affiliated companies | | (20,025) | | | (31,625) | |
Dividends received from affiliated companies | | 15,098 | | | 20,072 | |
Net interest income on swaps designated as net investment hedges | | (4,622) | | | (8,435) | |
Other, net | | (1,119) | | | (887) | |
Working capital changes that provided (used) cash, excluding the effect of acquisitions and dispositions: | | | | |
Receivables | | (20,670) | | | (22,472) | |
Inventories | | 8,613 | | | (1,793) | |
Prepaids and other current assets | | (375) | | | 268 | |
Accounts payable | | (10,076) | | | (4,072) | |
Accrued liabilities | | (16,977) | | | 6,615 | |
| | | | |
Net cash provided by operating activities | | 150,606 | | | 181,894 | |
Cash flows from investing activities: | | | | |
Purchases of property, plant and equipment | | (76,764) | | | (91,653) | |
| | | | |
| | | | |
| | | | |
Proceeds from sale of product line | | 18,000 | | | 28,000 | |
Proceeds from sale of assets | | 10,330 | | | — | |
Proceeds from sale of investment | | 1,761 | | | — | |
Net interest proceeds on swaps designated as net investment hedges | | 4,622 | | | 8,435 | |
Other, net | | — | | | 475 | |
Net cash used in investing activities | | (42,051) | | | (54,743) | |
Cash flows from financing activities: | | | | |
Draw down of revolving credit facilities | | 175,445 | | | 161,630 | |
Repayments of revolving credit facilities | | (174,668) | | | (160,342) | |
| | | | |
Issuance of long-term debt, net of discount | | 640,340 | | | — | |
| | | | |
Debt issuance costs | | (8,987) | | | — | |
Repayments of long-term debt | | (627,506) | | | (105,821) | |
Debt prepayment fees | | (10,550) | | | — | |
| | | | |
Stock repurchases | | (4,051) | | | (2,235) | |
Distributions to noncontrolling interests | | (270) | | | (156) | |
Proceeds from stock options exercised | | 181 | | | 3,956 | |
| | | | |
Other, net | | (160) | | | (283) | |
Net cash used in financing activities | | (10,226) | | | (103,251) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (5,955) | | | (3,371) | |
Net change in cash, cash equivalents and restricted cash | | 92,374 | | | 20,529 | |
Cash, cash equivalents and restricted cash at beginning of period | | 73,917 | | | 59,726 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 166,291 | | | $ | 80,255 | |
| | | | |
For supplemental cash flow disclosures, see Note 21.
See accompanying notes to condensed consolidated financial statements.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
1. Background and Basis of Presentation:
Description of Business
PQ Group Holdings Inc. and subsidiaries (the “Company” or “PQ Group Holdings”) 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 industry and, through its Zeolyst joint venture, 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.
Seasonal changes and weather conditions typically affect the Company’s Performance Materials and Refining Services segments. In particular, the 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. The 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.
On October 15, 2020, the Company entered into a definitive agreement to sell its Performance Materials business for $650,000 in cash, subject to customary purchase price adjustments as set forth in the agreement. Refer to Note 22 of these condensed consolidated financial statements for additional information related to the sale.
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, 2019.
COVID-19
In March 2020, the outbreak of a novel coronavirus (“COVID-19”) was declared a national emergency in the United States. COVID-19 continues to spread in the United States and other parts of the world and has adversely impacted economic activity and contributed to volatility in financial markets. In response to the COVID-19 pandemic, the federal government and various state, local and foreign governments have issued decrees and orders that have disrupted many businesses and implemented social distancing, travel and other restrictions. In response to these restrictions, the Company has taken a variety of actions, including an international travel ban, distribution of personal protective equipment to employees and work-at-home requirements for many of the Company’s employees who are not an integral part of its manufacturing operations. The Company has also implemented and refined its existing business continuity plans in an effort to minimize operational disruptions. The Company’s manufacturing operations, as well as the operations of its key vendors and the majority of its key customers, have continued to operate with limited interruptions. The extent and impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict due to the rapidly evolving environment and continued uncertainties created by the COVID-19 pandemic. The Company is not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of the issuance of the condensed consolidated financial statements. These estimates may change, as the pandemic continues to evolve and the duration remains uncertain, and may adversely impact the Company’s results of operations, financial condition or cash flow.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
2. New Accounting Standards:
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“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 adopted the new guidance effective January 1, 2020, with no material impact to the Company’s consolidated financial position, results of operations or cash flows.
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 adopted the new guidance effective January 1, 2020. The Company does not classify any of its derivative contracts as Level 3 assets or liabilities, nor did the Company have any transfers amongst fair value levels during the nine months ended September 30, 2020. As such, the guidance did not have an impact on the fair value measurement disclosures included in the Company’s 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 adopted the new guidance on January 1, 2020, and will apply the guidance prospectively to its goodwill impairment tests.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The new guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.
In March 2020, the FASB issued guidance to address certain accounting consequences from the anticipated transition from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The new guidance contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. During the three months ended September 30, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based on matches the index of the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
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 18 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 | • Refining catalysts |
| • Emission control catalysts |
| • Catalyst recycling services |
| • Silicate for catalyst manufacturing |
Packaging & engineered plastics | • Catalysts for high-density polyethlene and chemicals syntheses |
| • Antiblock 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 |
| |
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 and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2020 |
| Refining Services | | Catalysts | | Performance Materials | | Performance Chemicals | | Total |
Industrial & process chemicals | $ | 17,447 | | | $ | 51 | | | $ | 11,134 | | | $ | 47,786 | | | $ | 76,418 | |
Fuels & emission control(1) | 60,022 | | | — | | | — | | | 700 | | | 60,722 | |
Packaging & engineered plastics | 10,941 | | | 23,020 | | | 15,438 | | | 11,987 | | | 61,386 | |
Highway safety & construction(1) | — | | | — | | | 74,672 | | | 19,553 | | | 94,225 | |
Consumer products | — | | | — | | | — | | | 56,304 | | | 56,304 | |
Natural resources | 19,194 | | | — | | | 3,330 | | | 12,183 | | | 34,707 | |
Total segment sales | 107,604 | | | 23,071 | | | 104,574 | | | 148,513 | | | 383,762 | |
Eliminations | (764) | | | (51) | | | (57) | | | (2,571) | | | (3,443) | |
Total | $ | |