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

Annual report pursuant to Section 13 and 15(d)

Benefit Plans

Benefit Plans

12 Months Ended

Dec. 31, 2017

19. Benefit Plans:

The Company sponsors defined benefit pension plans covering employees in the United States and certain employees at its foreign subsidiaries. Benefits for a majority of the plans are based on average final pay and years of service. The Company’s funding policy is to fund the minimum required contribution under local statutory requirements.

The Company sponsors unfunded plans to provide certain health care benefits to retired employees in the United States and Canada. The plans pay a stated percentage of medical expenses reduced by deductibles and other coverage. The plans are unfunded and obligations are paid out of the Company’s operations.

The Company also has defined benefit supplementary retirement plans which provide benefits for certain U.S. employees in excess of qualified plan limitations. The obligations are paid out of the Company’s general assets, including assets held in a Rabbi trust, or restoration plan assets.

The Company uses a December 31 measurement date for all of its defined benefit pension, postretirement medical and supplementary retirement plans. The following discussion includes information for the Eco Services benefit plans for all periods presented, and the acquired PQ Holdings benefit plans beginning on the date of the Business Combination.

The Eco Services benefit plans include two defined benefit pension plans and one retiree health plan, all based in the U.S. The PQ Holdings benefit plans include a U.S. defined benefit pension plan as well as the defined benefit pension plans for all of the Company’s foreign subsidiaries, two retiree health plans (one each in the U.S and Canada), and the Company’s defined benefit supplementary retirement plans.

Of the Company’s three defined benefit pension plans covering employees in the U.S., only the Eco Services Hourly Pension Plan continues to accrue benefits subsequent to December 31, 2016. All future accruals were frozen for the PQ Corporation Retirement Plan as of December 31, 2006 and for the Eco Services Pension Equity Plan as of December 31, 2016. With respect to the Company’s three retiree health plans, the PQ Holdings plans in the U.S. and Canada were closed to new retirees as of December 31, 2006. The Eco Services Postretirement Life and Dental Plan was closed to new retirees effective July 1, 2017. The Company’s defined benefit supplementary retirement plans were frozen to future accruals as of December 31, 2006.

Defined Benefit Pension Plans

The following tables summarize changes in the benefit obligation, plan assets and funded status of the Company’s significant defined benefit pension plans as well as the components of net periodic benefit cost, including key assumptions:



	U.S.						Foreign
	December 31,						December 31,
	2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation at beginning of period	$	247,418		$	71,605		$	106,025		$	—
Service cost	1,219			2,130			3,686			2,106
Interest cost	10,115			7,680			3,271			2,224
Participant contributions	—			—			493			300
Plan curtailments	—			(1,325		)	—			(1,204		)
Plan settlements	(2,264		)	(4,772		)	—			—
Benefits paid	(9,591		)	(5,390		)	(2,967		)	(1,305		)
Expenses paid	—			—			(319		)	(66		)
Net transfer in⁽¹⁾	—			192,120			—			99,025
Actuarial (gains) losses	14,205			(14,630		)	(2,169		)	9,804
Translation adjustment	—			—			11,690			(4,859		)
Benefit obligation at end of the period	$	261,102		$	247,418		$	119,710		$	106,025

Change in plan assets:
Fair value of plan assets at beginning of period	$	198,915		$	52,678		$	86,145		$	—
Actual return on plan assets	27,554			6,897			217			8,274
Employer contributions	3,760			1,425			3,781			921
Employee contributions	—			—			493			300
Plan settlements	(2,264		)	(4,772		)	—			—
Benefits paid	(9,591		)	(5,390		)	(2,967		)	(1,305		)
Expenses paid	—			—			(319		)	(66		)
Acquisitions⁽¹⁾	—			148,077			—			81,974
Translation adjustment	—			—			9,168			(3,953		)
Fair value of plan assets at end of the period	$	218,374		$	198,915		$	96,518		$	86,145

Funded status of the plans (underfunded)	$	(42,728	)	$	(48,503	)	$	(23,192	)	$	(19,880	)


⁽¹⁾	Relates to the PQ Holdings defined benefit pension plans assumed as part of the Business Combination.

Amounts recognized in the consolidated balance sheets consist of:



	U.S.						Foreign
	December 31,						December 31,
	2017			2016			2017			2016
Noncurrent asset	$	—		$	—		$	3,503		$	3,391
Current liability	—			—			(673		)	(331		)
Noncurrent liability	(42,728		)	(48,503		)	(26,022		)	(22,940		)
Accumulated other comprehensive income (loss)	10,499			8,190			(2,871		)	(2,085		)
Net amount recognized	$	(32,229	)	$	(40,313	)	$	(26,063	)	$	(21,965	)

Amounts recognized in accumulated other comprehensive income (loss) consist of:



	U.S.						Foreign
	December 31,						December 31,
	2017			2016			2017			2016
Prior service credit	$	—		$	—		$	—		$	—
Net gain (loss)	13,943			12,920			(3,923		)	(2,686		)
Gross amount recognized	13,943			12,920			(3,923		)	(2,686		)
Deferred income taxes	(3,444		)	(4,730		)	1,052			601
Net amount recognized	$	10,499		$	8,190		$	(2,871	)	$	(2,085	)

Components of net periodic benefit cost consist of:



	U.S.									Foreign
	Years ended December 31,									Years ended December 31,
	2017			2016			2015			2017			2016			2015
Service cost	$	1,219		$	2,130		$	2,778		$	3,686		$	2,106		$	—
Interest cost	10,115			7,680			2,913			3,271			2,224			—
Expected return on plan assets	(12,277		)	(9,293		)	(2,885		)	(3,208		)	(2,038		)	—
Amortization of net gain	—			—			—			(9		)	(10		)	—
Curtailment gain recognized	—			(1,311		)	—			—			(517		)	—
Settlement (gain) loss recognized	(48		)	152			(2		)	—			—			—
Net periodic expense (benefit)	$	(991	)	$	(642	)	$	2,804		$	3,740		$	1,765		$	—

There are $50 of estimated net actuarial losses and no prior service credits for the Company’s defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2018.

The total accumulated benefit obligation as of December 31, 2017 and 2016 for the Company’s U.S. pension plans was $257,882 and $244,003, respectively. The total accumulated benefit obligation as of December 31, 2017 and 2016 for the Company’s foreign pension plans was $114,095 and $100,473, respectively.

The following table presents selected information about the Company’s pension plans with accumulated benefit obligations in excess of plan assets:



	U.S.				Foreign
	December 31,				December 31,
	2017		2016		2017		2016
Projected benefit obligation	$	261,102	$	247,418	$	67,750	58,837
Accumulated benefit obligation	257,882		244,003		64,526		55,981
Fair value of plan assets	218,374		198,915		42,632		36,771

Significant weighted average assumptions used in determining the pension obligations include the following:



	U.S.				Foreign
	December 31,				December 31,
	2017		2016		2017		2016
Discount rate	3.74	%	4.24	%	2.91	%	2.99	%
Rate of compensation increase⁽²⁾	3.00	%	3.00	%	2.57	%	2.97	%

⁽²⁾

With respect to the U.S. plans, the weighted average rate of compensation increase as of December 31, 2017 reflects only the Eco Services Hourly Pension Plan assumption of 3.00%, as both the Eco Services Pension Equity Plan and the PQ Corporation Retirement Plan were frozen to new accruals as of December 31, 2017 (and were included in the average at zero). With respect to the U.S. plans, the weighted average rate of compensation increase as of December 31, 2016 reflects only the Eco Services Hourly Pension Plan assumption of 3.00%, as both the Eco Services Pension Equity Plan and the PQ Corporation Retirement Plan were frozen to new accruals as of December 31, 2016 (and were included in the average at zero).

Significant weighted average assumptions used in determining net periodic benefit cost include the following:



	U.S.						Foreign
	Years ended December 31,						Years ended December 31,
	2017		2016		2015		2017		2016		2015
Discount rate	4.24	%	4.02	%	4.09	%	2.99	%	5.16	%	—
Rate of compensation increase⁽³⁾	3.00	%	3.10	%	Age-based / 3.00%		2.97	%	3.95	%	—
Expected return on assets	6.37	%	6.34	%	None assumed		3.58	%	5.62	%	—


⁽³⁾	The weighted average rate of compensation increase for the year ended December 31, 2015 for the U.S. plans was 3.00% for the Eco Services Hourly Pension Plan and an age-based assumption for the Eco Services Pension Equity Plan.

The discount rate for each of the U.S. plans was determined by utilizing a yield curve model. The model develops a spot rate curve based on the yields available from a broad-based universe of high quality corporate bonds. The discount rate is then set as the weighted average spot rate, using the respective plan’s expected benefit cash flows as the weights.

In determining the expected return on U.S. plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and expected future performance. In addition, the Company may consult with and consider the opinions of our external advisors in developing appropriate return benchmarks.

The investment objective for the U.S. plans is to generate returns sufficient to meet future obligations. The strategy to meet the objective includes generating attractive returns using higher returning assets such as equity securities and balancing risk using less volatile assets such as fixed income securities. The U.S. plans invest in an allocation of assets across the two broadly-defined financial asset categories of equity and fixed income securities. The target allocations for the plan assets across the three U.S. plans are as follows: 45% equity securities and 55% fixed income investments for the PQ Corporation Retirement Plan; 50% equity securities and 50% fixed income investments for the Eco Services Pension Equity Plan; and 48% equity securities and 52% fixed income investments for the Eco Services Hourly Pension Plan.

Similar considerations are applied to the investment objectives of the non-U.S. plans as well as the asset classes available in each location and any legal restrictions on plan investments.

The Company classifies plan assets based upon a fair value hierarchy (see Note 4 to these consolidated financial statements for further information). The classification of each asset within the hierarchy is based on the lowest level input that is significant to its measurement. The fair value hierarchy consists of three levels 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 1 assets primarily include investments in publicly traded equity securities and mutual funds. These securities (or the underlying investments of the funds) are actively traded and valued using quoted prices for identical securities from the market exchanges.

•

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 2 assets primarily consist of fixed-income securities and comingled funds that are not actively traded or whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally determined using valuation models that use observable inputs such as interest rates, bond yields, low-volume market quotes and quoted prices for similar assets. Plan assets that are invested in comingled funds are valued using a unit price or net asset value (“NAV”) that is based on the underlying investments of the fund.

•

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. Level 3 assets include investments covered by insurance policies and real estate funds valued using significant unobservable inputs.

The following tables set forth by level, within the fair value hierarchy, plan assets at fair value:



	December 31, 2017
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	1,072	$	934	$	138	$	—
Equity securities:
U.S. investment funds	56,309		43,625		12,684		—
International investment funds	70,308		28,827		41,481		—
Fixed income securities:
Government securities	11,433		—		11,433		—
Corporate bonds	82,585		77,685		4,900		—
Investment fund bonds	54,263		7,719		46,544		—
Other:
Insurance policies	38,922		—		34,772		4,150
Total	$	314,892	$	158,790	$	151,952	$	4,150

	December 31, 2016
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	1,979	$	1,863	$	116	$	—
Equity securities:
U.S. investment funds	60,179		41,529		18,650		—
International investment funds	58,457		26,119		32,338		—
Fixed income securities:
Government securities	25,437		—		25,437		—
Corporate bonds	4,981		—		4,981		—
Investment fund bonds	113,460		$	77,938	$	35,522	$	—
Other:
Insurance policies	20,567		$	—	$	17,281	$	3,286
Total	$	285,060	$	147,449	$	134,325	$	3,286

The changes in the Level 3 pension plan assets are as follows for the years ended December 31:



	Insurance Policies
	2017			2016
Beginning balance	$	3,286		$	—
Business Combination (May 4, 2016)	—			3,226
Actual return on plan assets	(41		)	23
Benefits paid	(48		)	(27		)
Contributions	466			236
Exchange rate changes	487			(172		)
Ending balance	$	4,150		$	3,286

The Company expects to contribute $1,760 to the U.S. pension plans and $4,769 to the foreign pension plans in 2018.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



Year	U.S.		Foreign
2018	$	14,626	$	2,588
2019	15,363		3,331
2020	15,718		2,943
2021	16,371		3,197
2022	15,373		3,630
Years 2023-2027	76,506		22,716

Certain of the Company’s foreign subsidiaries maintain other defined benefit plans that are consistent with statutory practices. These plans are not included in the disclosures above as they are not significant to the Company’s consolidated financial statements.

Supplemental Retirement Plans

The following tables summarize changes in the benefit obligation, plan assets and funded status of the Company’s defined benefit supplementary retirement plans, as well as the components of net periodic benefit cost, including key assumptions:



	December 31,
	2017			2016
Change in benefit obligation:
Benefit obligation at beginning of period	$	13,225		$	—
Interest cost	489			328
Net transfer in⁽⁴⁾	—			14,671
Benefits paid	(1,179		)	(767		)
Actuarial (gains) losses	246			(1,007		)
Benefit obligation at end of period	$	12,781		$	13,225

Change in plan assets:
Fair value of plan assets at beginning of period	$	—		$	—
Employer contributions	1,179			767
Benefits paid	(1,179		)	(767		)
Fair value of plan assets at end of period	$	—		$	—

Funded status of the plans (underfunded)	$	(12,781	)	$	(13,225	)


⁽⁴⁾	Relates to the PQ Holdings defined benefit supplementary retirement plans assumed as part of the Business Combination.

Amounts recognized in the consolidated balance sheets consist of:



	December 31,
	2017			2016
Current liability	$	(1,115	)	$	(1,170	)
Noncurrent liability	(11,667		)	(12,055		)
Accumulated other comprehensive income	573			623
Net amount recognized	$	(12,209	)	$	(12,602	)

Amounts recognized in accumulated other comprehensive income consist of:



	December 31,
	2017			2016
Net gain	$	761		$	1,007
Gross amount recognized	761			1,007
Deferred income taxes	(188		)	(384		)
Net amount recognized	$	573		$	623

Components of net periodic benefit cost consist of:



	Years ended December 31,
	2017		2016		2015
Interest cost	$	489	$	328	$	—
Net periodic expense	$	489	$	328	$	—

There are no estimated net actuarial gains for the Company’s defined benefit supplementary retirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2018.

The accumulated benefit obligation of the Company’s defined benefit supplemental retirement plans as of December 31, 2017 and 2016 was $12,781 and $13,225, respectively.

The discount rate used in determining the defined benefit supplemental retirement plan obligation was 3.60% and 3.90% as of December 31, 2017 and 2016, respectively.

The discount rate used in determining net periodic benefit cost was 3.90% and 3.40% for the years ended December 31, 2017 and 2016, respectively. The rate of compensation increase for the years ended December 31, 2017 and 2016 was zero, as all future accruals were frozen for the defined benefit supplementary retirement plans as of December 31, 2006.

The Company expects to contribute $1,115 to the defined benefit supplementary retirement plans in 2018.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



Year	Amount
2018	$	1,115
2019	1,087
2020	1,056
2021	1,024
2022	987
Years 2023-2027	4,371

Other Postretirement Benefit Plans

The following tables summarize changes in the benefit obligation, plan assets and funded status of the Company’s other postretirement benefit plans as well as the components of net periodic benefit cost, including key assumptions:



	December 31,
	2017			2016
Change in benefit obligation:
Benefit obligation at beginning of period	$	4,620		$	1,296
Service cost	21			37
Interest cost	174			151
Employee contributions	251			176
Plan amendments	—			(443		)
Benefits paid	(923		)	(484		)
Medical subsidies received	—			90
Premiums paid	(3		)	(2		)
Net transfer in⁽⁵⁾	—			4,868
Actuarial (gains) losses	418			(1,057		)
Translation adjustment	54			(12		)
Benefit obligation at end of period	$	4,612		$	4,620

Change in plan assets:
Fair value of plan assets at beginning of period	—			—
Employer contributions	675			220
Employee contributions	251			176
Benefits paid	(923		)	(484		)
Medical subsidies received	—			90
Premiums paid	(3		)	(2		)
Fair value of plan assets at end of period	$	—		$	—

Funded status of the plans (underfunded)	$	(4,612	)	$	(4,620	)


⁽⁵⁾	Relates to the PQ Holdings retiree health plans assumed as part of the Business Combination.

Amounts recognized in the consolidated balance sheets consist of:



	December 31,
	2017			2016
Current liability	$	(561	)	$	(629	)
Noncurrent liability	(4,051		)	(3,991		)
Accumulated other comprehensive income	885			877
Net amount recognized	$	(3,727	)	$	(3,743	)

Amounts recognized in accumulated other comprehensive income consist of:



	December 31,
	2017			2016
Prior service credit	$	366		$	—
Net gain	719			1,163
Gross amount recognized	1,085			1,163
Deferred income taxes	(200		)	(286		)
Net amount recognized	$	885		$	877

Components of net periodic benefit cost consist of:



	Years ended December 31,
	2017			2016			2015
Service cost	$	21		$	37		$	39
Interest cost	174			151			57
Amortization of prior service credit	(78		)	—			—
Amortization of net gain	(45		)	(17		)	—
Net periodic expense	$	72		$	171		$	96

The estimated prior service credit for the Company’s retiree health plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2018 is $78. The estimated net actuarial gain for the Company’s retiree health plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2018 is $44.

Significant weighted average assumptions used in determining the net periodic benefit cost, the postretirement benefit obligations and trend rate include the following:



	December 31,
	2017	2016
Benefit obligation:
Discount rate	3.53%	3.74%
Immediate trend rate	6.20%	6.84%
Ultimate trend rate	4.50%	4.50%
Year that the rate reaches ultimate trend rate	2037	2035



	December 31,
	2017	2016	2015
Benefit cost:
Discount rate	3.74%	3.92%	4.36%
Immediate trend rate	6.84%	7.28%	N/A
Ultimate trend rate	4.50%	4.50%	N/A
Year that the rate reaches ultimate trend rate	2035	2035	N/A

Note that the Eco Services retiree health plan only includes a life insurance and dental component; thus, the trend rate assumptions for 2015 were not applicable. The trend rate assumptions for 2016 and 2017 reflect the acquired PQ Holdings retiree health plans.

A 1% change in the assumed health care cost trend would have increased (decreased) the accumulated postretirement benefit obligation as of December 31, 2017 and the periodic postretirement benefit cost for the year then ended as follows:



	1% Increase		1% Decrease
Accumulated postretirement benefit obligation	$	172	$	(152	)
Periodic postretirement benefit cost	6		(5		)

The Company expects to contribute $629 to the retiree health plans in 2018.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



Year	Amount
2018	$	629
2019	607
2020	457
2021	413
2022	273
Years 2023-2027	1,015

There are no expected Medicare subsidy receipts expected in future periods.

Certain of the Company’s foreign subsidiaries maintain other postretirement benefit plans that are consistent with statutory practices. These plans are not included in the disclosures above as they are not significant to the Company’s consolidated financial statements.

Defined Contribution Plans

The Company also has defined contribution plans covering domestic employees of the Company and certain subsidiaries. The Company recorded expenses of $13,103, $6,864 and $1,511 related to these plans for the years ended December 31, 2017, 2016 and 2015, respectively.