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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 March 31, 2022
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
ECOVYST 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) |
| | | | |
(484) | 617-1200 |
(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 | | ECVT | | 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 April 29, 2022 was 138,696,941. |
| | | | |
ECOVYST INC.
INDEX—FORM 10-Q
March 31, 2022
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ECOVYST INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Sales | | | | | $ | 179,714 | | | $ | 126,624 | |
Cost of goods sold | | | | | 131,979 | | | 96,505 | |
Gross profit | | | | | 47,735 | | | 30,119 | |
Selling, general and administrative expenses | | | | | 23,536 | | | 22,130 | |
Other operating expense, net | | | | | 7,763 | | | 5,507 | |
Operating income | | | | | 16,436 | | | 2,482 | |
Equity in net (income) from affiliated companies | | | | | (5,749) | | | (5,210) | |
Interest expense, net | | | | | 8,450 | | | 10,456 | |
| | | | | | | |
Other expense, net | | | | | 140 | | | 5,174 | |
Income (loss) from continuing operations before income taxes and noncontrolling interest | | | | | 13,595 | | | (7,938) | |
Provision (benefit) for income taxes | | | | | 5,720 | | | (5,190) | |
Net income (loss) from continuing operations | | | | | 7,875 | | | (2,748) | |
Net loss from discontinued operations, net of tax | | | | | — | | | (89,770) | |
Net income (loss) | | | | | 7,875 | | | (92,518) | |
| | | | | | | |
Less: Net income attributable to the noncontrolling interest—discontinued operations | | | | | — | | | 117 | |
Net income (loss) attributable to Ecovyst Inc. | | | | | $ | 7,875 | | | $ | (92,635) | |
| | | | | | | |
Income (loss) from continuing operations attributable to Ecovyst Inc. | | | | | $ | 7,875 | | | $ | (2,748) | |
Loss from discontinued operations attributable to Ecovyst Inc. | | | | | — | | | (89,887) | |
Net income (loss) attributable to Ecovyst Inc. | | | | | $ | 7,875 | | | $ | (92,635) | |
| | | | | | | |
Net income (loss) per share: | | | | | | | |
Basic income (loss) per share—continuing operations | | | | | $ | 0.06 | | | $ | (0.02) | |
Diluted income (loss) per share—continuing operations | | | | | $ | 0.06 | | | $ | (0.02) | |
Basic loss per share—discontinued operations | | | | | $ | — | | | $ | (0.66) | |
Diluted loss per share—discontinued operations | | | | | $ | — | | | $ | (0.66) | |
Basic income (loss) per share | | | | | $ | 0.06 | | | $ | (0.68) | |
Diluted income (loss) per share | | | | | $ | 0.06 | | | $ | (0.68) | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | | | | 137,684,773 | | | 136,006,082 | |
Diluted | | | | | 138,749,065 | | | 136,006,082 | |
See accompanying notes to condensed consolidated financial statements.
ECOVYST INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Net income (loss) | | | | | $ | 7,875 | | | $ | (92,518) | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Pension and postretirement benefits | | | | | (39) | | | (43) | |
Net gain from hedging activities | | | | | 13,722 | | | 765 | |
Foreign currency translation | | | | | (2,305) | | | (3,861) | |
Total other comprehensive income (loss) | | | | | 11,378 | | | (3,139) | |
Comprehensive income (loss) | | | | | 19,253 | | | (95,657) | |
Less: Comprehensive loss attributable to noncontrolling interests | | | | | — | | | (277) | |
Comprehensive income (loss) attributable to Ecovyst Inc. | | | | | $ | 19,253 | | | $ | (95,380) | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
ECOVYST INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 129,748 | | | $ | 140,889 | |
Accounts receivable, net | 91,106 | | | 80,802 | |
Inventories, net | 54,748 | | | 53,813 | |
Prepaid and other current assets | 26,696 | | | 16,165 | |
| | | |
Total current assets | 302,298 | | | 291,669 | |
Investments in affiliated companies | 436,074 | | | 446,074 | |
Property, plant and equipment, net | 588,733 | | | 596,231 | |
Goodwill | 405,304 | | | 406,139 | |
Other intangible assets, net | 141,654 | | | 145,617 | |
Right-of-use lease assets | 30,948 | | | 30,115 | |
Other long-term assets | 30,237 | | | 15,374 | |
| | | |
Total assets | $ | 1,935,248 | | | $ | 1,931,219 | |
LIABILITIES | | | |
Current maturities of long-term debt | $ | 9,000 | | | $ | 9,000 | |
Accounts payable | 52,525 | | | 51,860 | |
Operating lease liabilities—current | 8,422 | | | 8,306 | |
Accrued liabilities | 43,127 | | | 75,915 | |
| | | |
Total current liabilities | 113,074 | | | 145,081 | |
Long-term debt, excluding current portion | 871,086 | | | 872,839 | |
Deferred income taxes | 140,584 | | | 126,749 | |
Operating lease liabilities—noncurrent | 22,366 | | | 21,719 | |
Other long-term liabilities | 22,507 | | | 24,094 | |
| | | |
Total liabilities | 1,169,617 | | | 1,190,482 | |
Commitments and contingencies (Note 17) | | | |
EQUITY | | | |
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 139,611,212 and 137,820,971 on March 31, 2022 and December 31, 2021, respectively; outstanding shares 138,696,941 and 136,938,758 on March 31, 2022 and December 31, 2021, respectively | 1,396 | | | 1,378 | |
Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on March 31, 2022 and December 31, 2021 | — | | | — | |
Additional paid-in capital | 1,079,364 | | | 1,073,409 | |
Accumulated deficit | (307,832) | | | (315,707) | |
Treasury stock, at cost; shares 914,271 and 882,213 on March 31, 2022 and December 31, 2021, respectively | (12,883) | | | (12,551) | |
Accumulated other comprehensive income (loss) | 5,586 | | | (5,792) | |
| | | |
| | | |
Total equity | 765,631 | | | 740,737 | |
Total liabilities and equity | $ | 1,935,248 | | | $ | 1,931,219 | |
| | | |
See accompanying notes to condensed consolidated financial statements.
ECOVYST INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common stock | | Additional paid-in capital | | (Accumulated deficit) | | | | Treasury stock, at cost | | Accumulated other comprehensive income (loss) | | Non- controlling interest | | Total |
Balance, December 31, 2021 | | | $ | 1,378 | | | $ | 1,073,409 | | | $ | (315,707) | | | | | $ | (12,551) | | | $ | (5,792) | | | $ | — | | | $ | 740,737 | |
Net income | | | — | | | — | | | 7,875 | | | | | — | | | — | | | — | | | 7,875 | |
Other comprehensive income | | | — | | | — | | | — | | | | | — | | | 11,378 | | | — | | | 11,378 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Tax withholdings on equity award vesting | | | — | | | — | | | — | | | | | (332) | | | — | | | — | | | (332) | |
Stock compensation expense | | | — | | | 5,946 | | | — | | | | | — | | | — | | | — | | | 5,946 | |
Shares issued under equity incentive plan, net of forfeitures | | | 18 | | | 9 | | | — | | | | | — | | | — | | | — | | | 27 | |
Balance, March 31, 2022 | | | $ | 1,396 | | | $ | 1,079,364 | | | $ | (307,832) | | | | | $ | (12,883) | | | $ | 5,586 | | | $ | — | | | $ | 765,631 | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | Common stock | | Additional paid-in capital | | (Accumulated deficit) | | | | Treasury stock, at cost | | Accumulated other comprehensive loss | | Non- controlling interest | | Total |
Balance, December 31, 2020 | | | $ | 1,371 | | | $ | 1,477,859 | | | $ | (175,758) | | | | | $ | (11,081) | | | $ | (15,265) | | | $ | 53 | | | $ | 1,277,179 | |
Net income (loss) | | | — | | | — | | | (92,635) | | | | | — | | | — | | | 117 | | | (92,518) | |
Other comprehensive loss | | | — | | | — | | | — | | | | | — | | | (2,745) | | | (394) | | | (3,139) | |
| | | | | | | | | | | | | | | | | |
Tax withholdings on equity award vesting | | | — | | | — | | | — | | | | | (1,470) | | | — | | | — | | | (1,470) | |
Distributions to noncontrolling interests | | | — | | | — | | | — | | | | | — | | | — | | | (516) | | | (516) | |
Stock compensation expense | | | — | | | 6,877 | | | — | | | | | — | | | — | | | — | | | 6,877 | |
Shares issued under equity incentive plan, net of forfeitures | | | 7 | | | 63 | | | — | | | | | — | | | — | | | — | | | 70 | |
Balance, March 31, 2021 | | | $ | 1,378 | | | $ | 1,484,799 | | | $ | (268,393) | | | | | $ | (12,551) | | | $ | (18,010) | | | $ | (740) | | | $ | 1,186,483 | |
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See accompanying notes to condensed consolidated financial statements.
ECOVYST INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 7,875 | | | $ | (92,518) | |
Net loss from discontinued operations | | — | | | 89,770 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation | | 16,011 | | | 16,526 | |
Amortization | | 3,535 | | | 2,974 | |
| | | | |
Amortization of deferred financing costs and original issue discount | | 497 | | | 532 | |
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| | | | |
Foreign currency exchange loss | | 647 | | | 5,101 | |
Pension and postretirement healthcare benefit | | (553) | | | (595) | |
| | | | |
Deferred income tax provision | | 9,341 | | | (4,344) | |
Net loss on asset disposals | | 133 | | | 778 | |
| | | | |
Stock compensation | | 7,294 | | | 6,305 | |
Equity in net income from affiliated companies | | (5,749) | | | (5,210) | |
Dividends received from affiliated companies | | 15,000 | | | 5,000 | |
| | | | |
Other, net | | (6,841) | | | (3,395) | |
Working capital changes that provided (used) cash, excluding the effect of acquisitions and dispositions: | | | | |
Receivables | | (10,386) | | | (9,404) | |
Inventories | | (1,034) | | | 4,564 | |
Prepaids and other current assets | | (3,590) | | | (2,232) | |
Accounts payable | | 2,154 | | | 4,652 | |
Accrued liabilities | | (27,911) | | | (1,958) | |
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Net cash provided by operating activities, continuing operations | | 6,423 | | | 16,546 | |
Net cash provided by operating activities, discontinued operations | | — | | | 877 | |
Net cash provided by operating activities | | 6,423 | | | 17,423 | |
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Cash flows from investing activities: | | | | |
Purchases of property, plant and equipment | | (10,750) | | | (12,563) | |
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Payments for business divestiture | | (3,744) | | | — | |
Business combinations, net of cash acquired | | — | | | (41,994) | |
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Other, net | | 81 | | | — | |
Net cash used in investing activities, continuing operations | | (14,413) | | | (54,557) | |
Net cash used in investing activities, discontinued operations | | — | | | (22,012) | |
Net cash used in investing activities | | (14,413) | | | (76,569) | |
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Cash flows from financing activities: | | | | |
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Repayments of long-term debt | | (2,250) | | | — | |
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Tax withholdings on equity award vesting | | (332) | | | (1,470) | |
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Other, net | | 27 | | | 12 | |
Net cash used in financing activities, continuing operations | | (2,555) | | | (1,458) | |
Net cash used in financing activities, discontinued operations | | — | | | (520) | |
Net cash used in financing activities | | (2,555) | | | (1,978) | |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (596) | | | (2,708) | |
Net change in cash, cash equivalents and restricted cash | | (11,141) | | | (63,832) | |
Cash, cash equivalents and restricted cash at beginning of period | | 140,889 | | | 137,219 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 129,748 | | | $ | 73,387 | |
Less: cash, cash equivalents, and restricted cash of discontinued operations | | — | | | (16,625) | |
Cash, cash equivalents and restricted cash at end of period of continuing operations | | $ | 129,748 | | | $ | 56,762 | |
For supplemental cash flow disclosures, see Note 21.
See accompanying notes to condensed consolidated financial statements.
ECOVYST 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
Ecovyst Inc. and subsidiaries (the “Company” or “Ecovyst”) is a leading integrated and innovative global provider of specialty catalysts 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.
On December 14, 2020, the Company completed the sale of its Performance Materials business for $650,000, and the financial results of this business were presented as discontinued operations in the condensed consolidated financial statements.
On August 1, 2021, the Company completed the sale of its Performance Chemicals business, and the financial results of this business are presented as discontinued operations in the condensed consolidated financial statements for the 2021 period presented. See Note 3 for more information on the transaction.
The Company has two uniquely positioned specialty businesses: Ecoservices provides sulfuric acid recycling to the North American refining industry for the production of alkylate and provides on-purpose virgin sulfuric acid for water treatment, mining and industrial applications; and Catalyst Technologies provides finished silica catalysts and catalyst supports necessary to produce high strength and high stiffness plastics and, through the Zeolyst Joint Venture, supplies zeolites used for catalysts that remove nitrogen oxides from diesel engine emissions as well as sulfur from fuels during the refining process.
The Company’s regeneration services product group, which is a part of the Company’s Ecoservices segment, typically experiences seasonal fluctuations as a result of higher demand for gasoline products in the summer months and lower demand in the winter months. These demand fluctuations result in higher sales and working capital requirements in the second and third quarters.
The notes to the condensed consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.
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 expected results 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, 2021.
2. New Accounting Standards:
Recently Adopted Accounting Standards
In November 2021, the FASB issued guidance that requires entities to provide certain disclosures when they (1) have received government assistance and (2) use a grant or contribution accounting model by analogy to other accounting guidance. Previously, there was no guidance under GAAP on recognizing or measuring government grants to business entities. The new guidance does not provide any additional guidance on this topic; rather, it only provides guidance on required disclosures for business entities that receive government assistance and apply another grant or contribution accounting framework by analogy. The new guidance is effective for fiscal years beginning after December 15, 2021 with the new disclosures required on an annual basis, and can be applied either prospectively or retrospectively. The Company adopted the new guidance on January 1, 2022 and will include the disclosures as required in its annual reporting with respect to any government assistance or grants subject to the scope of the guidance to the extent material.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued guidance that requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with revenue recognition guidance. Under current GAAP, contract assets and contract liabilities acquired in a business combination are recorded by the acquirer at fair value. The new guidance creates an exception to the general recognition and measurement principles related to business combinations, and is expected to result in the acquirer recognizing contract assets and liabilities at the same amounts recorded by the acquiree. The new guidance is effective for business combinations occurring during fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the new guidance, which would only be applied prospectively to business combinations upon the adoption of the guidance.
In March 2020 and January 2021, 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 year ended December 31, 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 matches the index of the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. During the year ended December 31, 2021, the FASB extended the guidance adoption date to June 30, 2023. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
3. Divestitures:
Performance Materials Divestiture
Upon the close of the transaction on December 14, 2020, the Company entered into a Transition Services Agreement with the buyer pursuant to which the buyer received certain services to provide for the orderly transition of various functions and processes after the closing of the transaction. The services under the Transition Services Agreement included information technology, accounting, tax, financial services, human resources, facilities, and other administrative support services. These services were provided for a period of nine months, with three 30-day extensions available. The Company billed $1,571 under the Transition Services Agreement to the buyer during the three months ended March 31, 2021. Those billings were included in selling, general and administrative expenses on the condensed consolidated financial statements for the three months ended March 31, 2021.
During the three months ended March 31, 2021, the Company incurred transaction costs of $1,446 and stock-based compensation expense of $653, and an associated tax benefit of $514 related to the Performance Materials divestiture which is included in loss from discontinued operations, net of tax.
Performance Chemicals Divestiture
On February 28, 2021, the Company entered into a definitive agreement to sell its Performance Chemicals business to Sparta Aggregator L.P. (the “Buyer”), a partnership established by Koch Minerals & Trading, LLC and Cerberus Capital Management, L.P., for $1,100,000, subject to certain adjustments including indebtedness, cash, working capital and transaction expenses. The Company completed the sale of the Performance Chemicals business on August 1, 2021. During the year ended December 31, 2021, the net cash proceeds to the Company from the sale were $978,449 after certain customary adjustments for indebtedness, working capital and cash at the closing of the transaction. During the three months ended March 31, 2022, the Company made a payment to the buyer for $3,744, representing the final adjustments to the sale price. The Company classified the payment within net cash used in investing activities – continuing operations in the condensed consolidated statements of cash flows.
Prior to the close of the transaction, the disposal group was tested for recoverability at each of the balance sheet dates subsequent to meeting the discontinued operations criteria, and the Company recognized an estimated disposal loss of $95,594 during the three months ended March 31, 2021 which was included in net loss from discontinued operations, net of tax on the condensed consolidated statement of income.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
The following table summarizes the results of discontinued operations related to the Performance Chemicals business for the three months ended March 31, 2021:
| | | | | | | | | | | | | |
| | | | | Three months ended March 31, 2021 |
| | | | | | | |
Sales | | | | | | | $ | 164,523 | |
Cost of goods sold | | | | | | | 125,853 | |
Selling, general and administrative expenses | | | | | | | 11,716 | |
Other operating expense, net | | | | | | | 17,480 | |
Goodwill impairment charge | | | | | | | 95,594 | |
| | | | | | | |
Operating loss | | | | | | | (86,120) | |
Equity in net (income) from affiliated companies | | | | | | | (38) | |
Interest expense, net (1) | | | | | | | 3,215 | |
Other income, net | | | | | | | (5,523) | |
Loss from discontinued operations before income tax | | | | | | | (83,774) | |
Provision for income taxes | | | | | | | 4,411 | |
Loss from discontinued operations, net of tax | | | | | | | $ | (88,185) | |
(1)Upon the close of the transaction, the Company used a portion of the net proceeds to repay a portion of its outstanding debt amounting to $526,363. Prior to the Company’s debt refinancing in June 2021, the Company’s outstanding term loan facilities had mandatory repayment provisions. As a result, interest expense has been allocated to discontinued operations on the basis of the Company’s total repayment of $526,363.
Net income attributable to the noncontrolling interest related to the Performance Chemicals business, net of tax was $117 for the three months ended March 31, 2021. Net loss attributable to Ecovyst Inc., related to the Performance Chemicals business, net of tax was $88,302 for the three months ended March 31, 2021.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
4. 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 is integrated into a variety of end uses, which are described in the table below.
| | | | | |
Key End Uses | Key Products |
Industrial & process chemicals | • Sulfur derivatives for industrial production |
| • Treatment services |
Fuels & emission control | • Refining hydrocracking catalysts |
| • Emission control catalysts |
| • Catalyst recycling regeneration services |
Packaging & engineered plastics | • Catalysts for high-density polyethylene and chemicals syntheses |
| • Antiblocks for film packaging |
| • Sulfur derivatives for nylon production |
Natural resources | • Sulfur derivatives for mining |
| |
The following tables disaggregate the Company’s sales, by segment and end use, for the three months ended March 31, 2022 and 2021:
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| Three months ended March 31, 2022 |
| Ecoservices | | Catalyst Technologies | | | | | | Total |
Industrial & process chemicals | $ | 32,854 | | | $ | — | | | | | | | $ | 32,854 | |
Fuels & emission control(1) | 71,658 | | | — | | | | | | | 71,658 | |
Packaging & engineered plastics | 24,479 | | | 25,654 | | | | | | | 50,133 | |
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Natural resources | 25,069 | | | — | | | | | | | 25,069 | |
Total segment sales | $ | 154,060 | | | $ | 25,654 | | | | | | | $ | 179,714 | |
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| | Three months ended March 31, 2021 |
| | Ecoservices | | Catalyst Technologies | | | | | | Total |
Industrial & process chemicals | | $ | 16,947 | | | $ | — | | | | | | | $ | 16,947 | |
Fuels & emission control(1) | | 55,192 | | | — | | | | | | | 55,192 | |
Packaging & engineered plastics | | 10,622 | | | 26,402 | | | | | | | 37,024 | |
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Natural resources | | 17,461 | | | — | | | | | | | 17,461 | |
Total segment sales | | $ | 100,222 | | | $ | 26,402 | | | | | | | $ | 126,624 | |
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(1)As described in Note 1, the Company experiences seasonal sales fluctuations to customers in the fuels & emission control end use.
5. 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
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or input used.
The Company’s financial assets and liabilities carried at fair value have been classified based upon a fair value hierarchy. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). The classification of an asset or a liability is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
•Level 1—Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
•Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.
•Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
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| | March 31, 2022 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative assets: | | | | | | | | |
Interest rate caps (Note 14) | | $ | 18,151 | | | $ | — | | | $ | 18,151 | | | $ | — | |
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Derivative liabilities: | | | | | | | | |
Interest rate caps (Note 14) | | $ | 304 | | | $ | — | | | $ | 304 | | | $ | — | |
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| | December 31, 2021 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative assets: | | | | | | | | |
Interest rate caps (Note 14) | | $ | 1,080 | | | $ | — | | | $ | 1,080 | | | $ | — | |
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Derivative liabilities: | | | | | | | | |
Interest rate caps (Note 14) | | $ | 1,288 | | | $ | — | | | $ | 1,288 | | | $ | — | |
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.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
As of March 31, 2022, the Company had interest rate caps that were 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 Ecovyst. 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.
6. Stockholders' Equity:
Accumulated Other Comprehensive Income (Loss)
The following tables present the tax effects of each component of other comprehensive income (loss) for the three months ended March 31, 2022 and 2021:
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| | Three months ended March 31, |
| | 2022 | | 2021 |
| | 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 of net gains | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | 1 | |
Amortization of prior service cost | | (53) | | | 13 | | | (40) | | | (58) | | | 14 | | | (44) | |
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Benefit plans, net | | (52) | | | 13 | | | (39) | | | (57) | | | 14 | | | (43) | |
Net gain from hedging activities | | 18,296 | | | (4,574) | | | 13,722 | | | 1,020 | | | (255) | | | 765 | |
Foreign currency translation(1) | | (2,305) | | | — | | | (2,305) | | | (6,308) | | | 2,447 | | | (3,861) | |
Other comprehensive income (loss) | | $ | 15,939 | | | $ | (4,561) | | | $ | 11,378 | | | $ | (5,345) | | | $ | 2,206 | | | $ | (3,139) | |
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(1)The income tax benefit or expense included in other comprehensive income is attributed to the portion of foreign currency translation associated with the Company’s cross-currency interest rate swaps for the three months ended March 31, 2021, for which the tax effect is based on the applicable U.S. deferred income tax rate. See Note 14 to these condensed consolidated financial statements for information regarding the Company’s cross-currency interest rate swaps, which were settled in March 2021.
The following table presents the changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended March 31, 2022 and 2021:
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| | Defined benefit and other postretirement plans | | Net gain (loss) from hedging activities | | Foreign currency translation | | Total |
December 31, 2021 | | $ | 11,072 | | | $ | 2,254 | | | $ | (19,118) | | | $ | (5,792) | |
Other comprehensive income (loss) before reclassifications | | (78) | | | 13,208 | | | (2,305) | | | 10,825 | |
Amounts reclassified from accumulated other comprehensive income(1) | | 39 | | | 514 | | | — | | | 553 | |
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March 31, 2022 | | $ | 11,033 | | | $ | 15,976 | | | $ | (21,423) | | | $ | 5,586 | |
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December 31, 2020 | | $ | 5,278 | | | $ | (660) | | | $ | (19,883) | | | $ | (15,265) | |
Other comprehensive income (loss) before reclassifications | | (86) | | | 683 | | | (3,467) | | | (2,870) | |
Amounts reclassified from accumulated other comprehensive income(1) | | 43 | | | 82 | | | — | | | 125 | |
March 31, 2021 | | $ | 5,235 | | | $ | 105 | | | $ | (23,350) | | | $ | (18,010) | |
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(1)See the following table for details about these reclassifications. Amounts in parentheses indicate debits.
ECOVYST 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, 2022 and 2021:
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Details about Accumulated Other Comprehensive Income Components | | | | | | Amounts Reclassified from Accumulated Other Comprehensive Income(1) | | Affected Line Item where Income is Presented |
| | | | Three months ended March 31, | | |
| | | | | | 2022 | | 2021 | | |
Amortization of defined benefit and other postretirement items: | | | | | | | | | | |
Prior service (cost) credit | | | | | | $ | (53) | | | $ | (58) | | | Other income (expense)(2) |
Actuarial gains (losses) | | | | | | 1 | | | 1 | | | Other income (expense)(2) |
| | | | | | (52) | | | (57) | | | Total before tax |
| | | | | | 13 | | | 14 | | | Tax benefit (expense) |
| | | | | | $ | (39) | | | $ | (43) | | | Net of tax |
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Gains and losses on cash flow hedges: | | | | | | | | | | |
Interest rate caps | | | | | | $ | (683) | | | $ | (109) | | | Interest expense |
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| | | | | | 169 | | | 27 | | | Tax benefit |
| | | | | | $ | (514) | | | $ | (82) | | | Net of tax |
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Total reclassifications for the period | | | | | | $ | (553) | | | $ | (125) | | | Net of tax |
(1)Amounts in parentheses indicate debits to profit/loss.
(2)These accumulated other comprehensive income (loss) components are components of net periodic pension and other postretirement cost (see Note 16 to these condensed consolidated financial statements for additional details).
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
Treasury Stock Repurchases
The Company records repurchases of its common stock for treasury at cost. Upon the reissuance of the Company’s common stock from treasury, differences between the proceeds from reissuance and the average cost of the treasury stock are credited or charged to capital in excess of par value to the extent of prior credits related to the reissuance of treasury stock. If no such credits exist, the differences are charged to retained earnings.
2020 Stock Repurchase Program
On March 12, 2020, the Company’s Board of Directors (the “Board”) approved a plan to purchase up to $50,000 of Ecovyst Inc. common stock under a stock repurchase program approved by the Board. Under the plan, the Company could repurchase shares from time to time for cash in open market transactions or in privately negotiated transactions in accordance with applicable federal securities laws. The Company determined the timing and the amount of any repurchases based on its evaluation of market conditions, share price and other factors. The stock repurchase program expired in March 2022, with no repurchases made during the three months ended March 31, 2022 and 2021.
2022 Stock Repurchase Program
On April 27, 2022, the Board approved a plan to purchase up to $450,000 of Ecovyst Inc. common stock over the next four years under a stock repurchase program. Under the plan, the Company can repurchase shares from time to time for cash in open market transactions or in privately negotiated transactions in accordance with applicable federal securities laws. The Company will determine the timing and the amount of any repurchases based on its evaluation of market conditions, share price and other factors. No repurchases have been made under the repurchase program since the announcement date of the program.
Tax Withholdings on Equity Award Vesting
In connection with the vesting of restricted stock awards, restricted stock units and performance stock units, shares of common stock may be delivered to the Company by employees to satisfy withholding tax obligations at the instruction of the employee award holders. These transactions when they occur are accounted for as stock repurchases by the Company, with the shares returned to treasury stock at a cost representing the payment by the Company of the tax obligations on behalf of the employees in lieu of shares for the vesting unit. The fair value of the shares withheld to cover tax payments were $332 and $1,470 for the three months ended March 31, 2022 and 2021, respectively.
7. Acquisition:
On March 1, 2021 (the “Closing Date”), the Company completed the acquisition of Chem32, LLC (“Chem32”) as part of a stock transaction (the “Acquisition”) for $44,000 in cash. Based in Orange, Texas, Chem32 is a leader in ex situ pre-sulfiding and pre-activation for hydro-processing catalysts. The net cash paid on the Closing Date by the Company was $41,994, after certain customary adjustments for indebtedness, working capital, cash and a holdback amount pursuant to the agreement. A portion of the holdback was settled in July 2021 for a payment of $645, with $1,000 of the holdback remaining as of March 31, 2022.
Chem32 is reported as part of the Ecoservices segment. The Company believes that the Acquisition enables it to offer a more robust portfolio of services within the refining industry leveraging the Company’s existing relationships, therefore contributing to a total purchase price that resulted in the recognition of $14,778 of goodwill, which was deductible for tax purposes. During the three months ended March 31, 2022, the Company recorded an immaterial adjustment between goodwill and deferred tax liabilities related to the final tax purchase price allocation. See Note 8 to these condensed consolidated financial statements for further information.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
The following table sets forth the calculation of the purchase price to the identifiable net assets acquired with respect to the Acquisition, which was complete as of December 31, 2021:
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| | | | | | Purchase Price Allocation |
Cash paid, net of cash acquired | | | | | | $ | 42,639 | |
Holdback | | | | | | 1,000 | |
Total consideration, net of cash acquired | | | | | | $ | 43,639 | |
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Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | | | |
Receivables | | | | | | $ | 1,368 | |
Inventories | | | | | | 204 | |
Prepaid and other current assets | | | | | | 351 | |
Property, plant and equipment | | | | | | 5,046 | |
Other intangible assets | | | | | | 22,100 | |
Other long-term assets | | | | | | 187 | |
Fair value of assets acquired | | | | | | 29,256 | |
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Accounts payable | | | | | | 207 | |
Accrued liabilities | | | | | | 188 | |
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Fair value of net identifiable assets acquired | | | | | | 28,861 | |
Goodwill | | | | | | 14,778 | |
| | | | | | $ | 43,639 | |
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In accordance with the requirements of the purchase method of accounting for acquisitions, accounts receivable and inventories were recorded at fair market value. As of the Closing Date, the fair value of accounts receivable approximated historical cost. The gross contractual amount of accounts receivable at the Closing Date was $1,368, of which there was no amount deemed uncollectible. Fair value of inventory is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity, which the Company determined acquired cost equaled fair value of the inventory acquired.
The valuation of intangibles assets acquired and the related weighted-average amortization periods were as follows:
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| | Amount | | Weighted-Average Expected Useful Life (in years) |
Intangible assets subject to amortization: | | | | |
Customer relationships | | $ | 16,000 | | | 10 |
Technical know-how | | 3,800 | | | 10 |
Contracts | | 700 | | | 5 |
Trade names | | 1,600 | | | 10 |
Total intangible assets subject to amortization | | $ | 22,100 | | | |
Net sales and net income attributable to Chem32 during the period from the Closing Date through March 31, 2021 were immaterial. Pro forma financial information has not been presented as it is immaterial for the three months ended March 31, 2021. Acquisition and integration costs was immaterial for the three months ended March 31, 2021 and are included in other operating expense, net in the Company’s consolidated statement of income.
ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
8. Goodwill:
The change in the carrying amount of goodwill for the three months ended March 31, 2022 is summarized as follows:
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| | Ecoservices | | Catalyst Technologies | | Total |
Balance as of December 31, 2021 | | $ | 326,670 | | | $ | 79,469 | | | $ | 406,139 | |
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Goodwill adjustments(1) | | (81) | | | — | | | (81) | |
Foreign exchange impact | | — | | | (754) | | | (754) | |
Balance as of March 31, 2022 | | $ | 326,589 | | | $ | 78,715 | | | $ | 405,304 | |
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(1) During the three months ended March 31, 2022, the Company recorded an adjustment of $81 between goodwill and deferred tax liabilities related to the final tax purchase price allocation for the Chem32 acquisition.
9. Other Operating Expense, Net:
A summary of other operating expense, net is as follows:
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| | | | Three months ended March 31, |
| | | | | | 2022 | | 2021 |
Amortization expense | | | | | | $ | 2,656 | | | $ | 2,186 | |
Transaction and other related costs | | | | | | 4,281 | | | 472 | |
Restructuring, integration and business optimization costs(1) | | | | | | 352 | | | 2,259 | |
Net loss on asset disposals | | | | | | 133 | | | 778 | |
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Other, net | | | | | | 341 | | | (188) | |
| | | | | | $ | 7,763 | | | $ | 5,507 | |
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(1)During the three months ended March 31, 2021, the Company’s results were impacted by costs associated with severance charges for certain executives and employees.
10. Inventories, Net:
Inventories, net are classified and valued as follows:
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| | March 31, 2022 | | December 31, 2021 |
Finished products and work in process | | $ | 46,864 | | | $ | 46,894 | |
Raw materials | | 7,884 | | | 6,919 | |
| | $ | 54,748 | | | $ | 53,813 | |
Valued at lower of cost or market: | | | | |
LIFO basis | | $ | 33,603 | | | $ | 33,330 | |
Valued at lower of cost and net realizable value: | | | | |
FIFO or average cost basis | | 21,145 | | | 20,483 | |
| | $ | 54,748 | | | $ | 53,813 | |
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ECOVYST INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
11. 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, 2022 are as follows:
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Company | | Country | | Percent Ownership |
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Zeolyst International | | USA | | 50% |
Zeolyst C.V. | | Netherlands | | 50% |
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Following is summarized information of the combined investments(1):
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| | | | Three months ended March 31, |
| | | | | | 2022 | | 2021 |
Sales | | | | | | $ | 66,683 | | | $ | 66,205 | |
Gross profit | | | | | | |