Ecovyst, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Reportable Segments

Reportable Segments

12 Months Ended

Dec. 31, 2019

14. Reportable Segments:

The Company has organized its business around four operating segments based on the review of discrete financial results for each of the operating segments by the Company’s chief operating decision maker (the Company’s President and Chief Executive Officer), or CODM, for performance assessment and resource allocation purposes. Each of the Company’s operating segments represents a reportable segment under GAAP. The Company’s reportable segments are organized based on the nature and economic characteristics of the Company’s products. The Company’s four reportable segments are as follows: (1) Refining Services provides sulfuric acid recycling to the North American refining industry; (2) Catalysts serves the packaging and engineered plastics and the global refining, petrochemical and emissions control industries; (3) Performance Materials produces transportation reflective safety markings for roads and airports; and (4) Performance Chemicals supplies diverse product end uses, including personal and industrial cleaning products, fuel-efficient tires, surface coatings, and food and beverage products.

The Catalysts segment includes equity in net income from Zeolyst International and Zeolyst C.V. (collectively, the “Zeolyst Joint Venture”), each of which are 50/50 joint ventures with CRI Zeolites Inc. (a wholly-owned subsidiary of Royal Dutch Shell). The Zeolyst Joint Venture is accounted for using the equity method in the Company’s consolidated financial statements (see Note 11 to these consolidated financial statements for further information). Company management evaluates the Catalysts segment’s performance, including the Zeolyst Joint Venture, on a proportionate consolidation basis. Accordingly, the revenues and expenses used to compute the Catalysts segment’s adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) include the Zeolyst Joint Venture’s results of operations on a proportionate basis based on the Company’s 50% ownership level. Since the Company uses the equity method of accounting for the Zeolyst Joint Venture, these items are eliminated when reconciling to the Company’s consolidated results of operations.

The Company’s management evaluates the operating results of each reportable segment based upon Adjusted EBITDA. Adjusted EBITDA consists of EBITDA, which is a measure defined as net income before interest, income taxes, depreciation and amortization (each of which is included in the Company’s consolidated statements of income), and adjusted for certain items as discussed below.

Summarized financial information for the Company’s reportable segments is shown in the following table:



	Years ended December 31,
	2019			2018			2017
Sales:
Refining Services	$	447,081		$	455,562		$	398,342
Catalysts⁽¹⁾	85,667			72,099			75,333
Performance Materials	362,965			378,279			324,225
Performance Chemicals	685,137			717,335			687,645
Eliminations⁽²⁾	(13,778		)	(15,121		)	(13,444		)
Total	$	1,567,072		$	1,608,154		$	1,472,101

Segment Adjusted EBITDA:⁽³⁾
Refining Services	$	175,640		$	176,499		$	154,191
Catalysts⁽⁴⁾	107,808			81,067			89,396
Performance Materials	76,712			72,471			69,661
Performance Chemicals	154,264			170,886			170,467
Total Segment Adjusted EBITDA⁽⁵⁾	$	514,424		$	500,923		$	483,715


⁽¹⁾	Excludes the Company’s proportionate share of sales from the Zeolyst Joint Venture accounted for using the equity method. The proportionate share of sales is $170,338, $156,687 and $143,774 for the years ended December 31, 2019, 2018 and 2017, respectively.


⁽²⁾	The Company eliminates intersegment sales when reconciling to the Company’s consolidated statements of income.

⁽³⁾

The Company defines Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBITDA. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of the Company’s operating performance. Adjusted EBITDA as defined by the Company may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies.


⁽⁴⁾	The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalysts segment is $68,138 for the year ended December 31, 2019, which includes $45,899 of equity in net income plus $7,534 of amortization of investment in affiliate step-up plus $14,705 of joint venture depreciation, amortization and interest.

The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalysts segment is $56,663 for the year ended December 31, 2018, which includes $37,437 of equity in net income plus $6,634 of amortization of investment in affiliate step-up plus $12,592 of joint venture depreciation, amortization and interest.

The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalysts segment is $58,156 for the year ended December 31, 2017, which includes $38,486 of equity in net income plus $8,600 of amortization of investment in affiliate step-up plus $11,070 of joint venture depreciation, amortization and interest.


⁽⁵⁾	Total Segment Adjusted EBITDA differs from the Company’s consolidated Adjusted EBITDA due to unallocated corporate expenses.

A reconciliation of net income attributable to PQ Group Holdings to Segment Adjusted EBITDA is as follows:



	Years ended December 31,
	2019			2018			2017
Reconciliation of net income attributable to PQ Group Holdings Inc. to Segment Adjusted EBITDA
Net income attributable to PQ Group Holdings Inc.	$	79,539		$	58,300		$	57,603
Provision for (benefit from) income taxes	40,699			28,995			(119,197		)
Interest expense, net	111,525			113,723			179,044
Depreciation and amortization	182,090			185,234			177,140
Segment EBITDA	413,853			386,252			294,590
Unallocated corporate expenses	40,070			36,970			30,422
Joint venture depreciation, amortization and interest	14,705			12,592			11,070
Amortization of investment in affiliate step-up	7,534			6,634			8,600
Amortization of inventory step-up	—			1,603			871
Impairment of fixed assets, intangibles and goodwill	1,600			—			—
Debt extinguishment costs	3,400			7,751			61,886
Net (gain) loss on asset disposals	(13,068		)	6,574			5,793
Foreign currency exchange loss	2,787			13,810			25,786
LIFO expense	11,099			8,366			3,708
Management advisory fees	—			—			3,777
Transaction and other related costs	3,642			893			7,425
Equity-based compensation	18,225			19,464			8,799
Restructuring, integration and business optimization expenses	4,076			14,019			13,174
Defined benefit pension plan cost	3,126			(796		)	2,940
Gain on contract termination⁽¹⁾	—			(20,612		)	—
Other	3,375			7,403			4,874
Segment Adjusted EBITDA	$	514,424		$	500,923		$	483,715


⁽¹⁾	Includes the non-cash write-off of a long-term supply contract obligation (see Note 26), which was recorded as a reduction in other operating expense, net in the consolidated statement of income for the year ended December 31, 2018.

The Company’s consolidated results include equity in net income from affiliated companies of $46,034, $37,611 and $38,772 for the years ended December 31, 2019, 2018, and 2017, respectively. This is primarily comprised of equity in net income of $45,899, $37,437 and $38,486 in the Catalysts segment from the Zeolyst Joint Venture for the years ended December 31, 2019, 2018 and 2017, respectively. The remaining equity in net income for the Company is included in the Performance Chemicals and Performance Materials segments, which was attributed to smaller investments and was not material. The Company’s equity in net income from affiliated companies in the consolidated results includes amortization expense related to purchase accounting fair value adjustments associated with the Zeolyst Joint Venture as a result of a prior business combination.

Capital expenditures for the Company’s reportable segments are shown in the following table:



	Years ended December 31,
	2019		2018		2017
Capital expenditures:
Refining Services	$	42,310	$	46,617	$	42,876
Catalysts⁽¹⁾	8,984		8,390		10,269
Performance Materials	16,074		18,001		20,394
Performance Chemicals	54,683		57,475		64,389
Corporate⁽²⁾	5,591		1,205		2,554
Capital expenditures per the consolidated statements of cash flows	$	127,642	$	131,688	$	140,482


⁽¹⁾	Excludes the Company’s proportionate share of capital expenditures from the Zeolyst Joint Venture.


⁽²⁾	Includes corporate capital expenditures, the cash impact from changes in capital expenditures in accounts payable and capitalized interest.

Total assets by segment are not disclosed by the Company because the information is not prepared or used by the CODM to assess performance and to allocate resources.

Sales and long-lived assets by geographic area are presented in the following tables. Sales are attributed to countries based upon location of products shipped.



	Years ended December 31,
	2019		2018		2017
Sales⁽¹⁾:
United States	$	953,511	$	963,722	$	874,764
Netherlands	117,211		127,803		118,567
United Kingdom	118,626		119,586		116,410
Other foreign countries	377,724		397,043		362,360
Total	$	1,567,072	$	1,608,154	$	1,472,101


⁽¹⁾	Except for the United States, no sales in an individual country exceeded 10% of the Company’s total sales.



	December 31,
	2019		2018
Long-lived assets⁽¹⁾:
United States	$	834,229	$	865,799
Netherlands	49,559		52,461
United Kingdom	97,426		90,095
Other foreign countries	205,556		200,624
Total	$	1,186,770	$	1,208,979

⁽¹⁾

Long-lived assets include property, plant and equipment, net.