Results

PQ Group Holdings Inc.

10/31/2019 | Press release | Distributed by Public on 10/31/2019 04:25

PQ Group Reports Strong Third Quarter 2019 Results 88% Higher Net Income and 17% Growth in Adjusted EBITDA Driven by Catalysts Performance

  • Sales of $423.8 million declined 0.8%; increased 0.4% on constant currency basis;
  • Net income of $26.7 million with diluted EPS of $0.20; Adjusted net income of $48.3 million with Adjusted diluted EPS of $0.36;
  • Adjusted EBITDA of $137.7 million increased 16.6%, or 17.7% on a constant currency basis;
  • Adjusted EBITDA margin expanded in three of four business segments, delivering a second consecutive quarter above 28%;
  • Net cash provided by operating activities of $121.9 million and adjusted free cash flow of $99.6 million in the quarter; on track to meet or exceed deleveraging target;
  • Entered into an agreement with INEOS to expand the Polyolefin Catalyst portfolio offering

MALVERN, Pa.--(BUSINESS WIRE)-- PQ Group Holdings Inc. (NYSE:PQG) ('PQ' or the 'Company') reported results for the third quarter ended September 30, 2019. Sales of $423.8 million were down 0.8% versus the same period in 2018, but increased 0.4% on a constant currency basis, as strong results in Catalysts and higher average pricing across all business segments more than offset lower sales volume and the pass-through of lower sulfur costs. Net income was $26.7 million with $0.20 diluted EPS and Adjusted net income was $48.3 million with $0.36 Adjusted diluted EPS. Adjusted EBITDA was $137.7 million, up 16.6%, or 17.7% on a constant currency basis, led by the Catalysts business coupled with solid results in Performance Materials and Refining Services. Adjusted EBITDA margin rose by 310 basis points to 28.8%.

'We are pleased to have delivered another quarter of strong financial results with solid margin improvement as the team successfully implemented pricing actions and operational efficiency plans,' commented Belgacem Chariag, PQ President and Chief Executive Officer. 'We are focused on multiple opportunities to optimize and broaden our product portfolio, and we are excited to partner with INEOS to expand our polyethylene catalyst offerings to existing and new customers.'

The financial results and outlook include non-GAAP financial measures.These non-GAAP measures are more fully described and are reconciled from the respective measures determined under GAAP in 'Presentation of Non-GAAP Financial Measures' and the attached appendix tables.

Review of Segment Results

Refining Services

Sales of $118.3 million decreased 4.1% versus the same period in 2018 largely on the pass-through of lower sulfur costs. Adjusted EBITDA of $51.2 million was up 3.2% from improved customer and product sales mix.

Catalysts

Silica Catalyst sales of $25.6 million increased 57.1%, or 58.3% on a constant currency basis, versus the same period in 2018, largely driven by higher sales across the portfolio. Zeolyst JV sales rose 68.4% led by the strongest quarter in 2019 for hydrocracking catalysts coupled with accelerated orders for specialty catalysts. Adjusted EBITDA of $31.6 million increased 101.3%, or 102.5% on a constant currency basis, on strong sales and demand for higher margin products in both Silica Catalysts and the Zeolyst JV.

Performance Materials

Sales of $115.1 million decreased 0.3%, up 1.6% on a constant currency basis, and Adjusted EBITDA of $25.8 million increased 21.1%, or 22.5% on a constant currency basis versus the same period in 2018, due to continued higher pricing and favorable sales mix.

Performance Chemicals

Sales of $167.9 million decreased 3.9%, or 2.1% on a constant currency basis versus the same period in 2018 on softening demand for sodium silicate. Adjusted EBITDA of $36.8 million declined $5.0 million (12.0%), and $4.2 million (10.0%) on a constant currency basis, from the continued impact of lower sales volumes along with higher maintenance and logistics costs.

Cash Flows and Balance Sheet

For the nine months ended September 30, 2019, cash flows from operating activities increased to $181.9 million, as compared to $166.0 million for the same period in 2018. This increase was primarily driven by an increase in net income and favorable changes in working capital.

At September 30, 2019, the Company had cash and cash equivalents of $78.5 million and total debt outstanding of $2,043.3 million. During the quarter, the Company repaid $100 million of debt which reduced the net debt to Adjusted EBITDA ratio to 4.1x as of September 30, 2019. In October, the Company restructured its cross-currency swap portfolio, which generated $38 million in cash that will be used for additional debt repayment.

2019 Financial Outlook

The Company is updating its 2019 guidance to reflect continued weak demand for Performance Chemicals in the United States and Europe, primarily for sodium silicate, that is only partially offset by improved results in the rest of the portfolio:

  • Sales of $1,560 million to $1,580 million, updated from $1,580 million to $1,600 million
  • Adjusted EBITDA at the bottom end or slightly below the $470 million to $485 million range, unchanged
  • Adjusted diluted EPS of approximately $0.84 to $0.87, updated from $0.77 to $0.93
  • Adjusted free cash flow in the range of $125 million to $145 million, unchanged (1)

We have reduced our capital expenditures range to $130 million to $135 million, down from $140 million to $150 million. We are also raising our debt repayment target to $170 million to $190 million, which includes the benefit from the cross-currency swap proceeds. This is expected to reduce the net debt to Adjusted EBITDA ratio to nearly 4x by year-end.

(1)

Excludes $28 million of proceeds from the non-core product line sale in 2Q 2019 and $38 million swap restructuring in 4Q 2019.

Conference Call and Webcast Details

On Thursday, October 31, 2019, PQ management will review the results during a conference call and audio-only webcast scheduled for 11:00 a.m. Eastern Time.

Conference Call: Investors may listen to the conference call live via telephone by dialing 1 (877) 883-0383 (domestic) or 1 (412) 902-6506 (international) and use the participant code 8724962.

Webcast: An audio-only live webcast of the conference call and presentation materials can be accessed at http://investor.pqcorp.com.

A replay of the conference call/webcast will be made available at http://investor.pqcorp.com/events-presentations.

Investor Contact:
Nahla A. Azmy
(610) 651-4561
[email protected]

About PQ Group Holdings Inc.

PQ Group Holdings Inc. and subsidiaries is a leading integrated and innovative global provider of specialty catalysts, materials, chemicals and services. We support customers globally through our strategically located network of manufacturing facilities. We believe that our products, which are predominantly inorganic, and services contribute to improving the sustainability of the environment.

We have four uniquely positioned specialty businesses: Refining Services provides sulfuric acid recycling to the North American refining industry; Catalysts serves the packaging and engineering plastics and the global refining, petrochemical and emissions control industries; Performance Materials produces transportation reflective safety markings for roads and airports; and Performance Chemicals supplies diverse product end uses, including personal and industrial cleaning products, fuel-efficient tires, surface coatings, and food and beverage products.

We serve over 4,000 customers globally across many end uses and operate over 70 manufacturing facilities which are strategically located across six continents. For more information, see our website at https://www.pqcorp.com.

Presentation of Non-GAAP Financial Measures

In addition to the results provided in accordance with U.S. generally accepted accounting principles ('GAAP') throughout this press release, the Company has provided non-GAAP financial measures-Adjusted EBITDA, Adjusted EBITDA margin, Adjusted free cash flow, Adjusted net income, Adjusted EPS, Adjusted diluted EPS, constant currency sales and constant currency Adjusted EBITDA-which present results on a basis adjusted for certain items. The Company uses these non-GAAP financial measures for business planning purposes and in measuring its performance relative to that of its competitors. The Company believes that these non-GAAP financial measures are useful financial metrics to assess its operating performance from period-to-period by excluding certain items that the Company believes are not representative of its core business. These non-GAAP financial measures are not intended to replace, and should not be considered superior to, the presentation of the Company's financial results in accordance with GAAP. The use of the terms Adjusted EBITDA, Adjusted EBITDA margin, Adjusted free cash flow, Adjusted net income, Adjusted EPS, Adjusted diluted EPS, constant currency sales and constant currency Adjusted EBITDA may differ from similar measures reported by other companies and may not be comparable to other similarly titled measures. Adjusted EBITDA, Adjusted free cash flow, Adjusted net income, Adjusted EPS, Adjusted diluted EPS, constant currency sales and constant currency Adjusted EBITDA are reconciled from the respective measures under GAAP in the appendix below.

In discussing our operating results, the term currency exchange rates refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. dollar. We calculate constant currency sales and constant currency Adjusted EBITDA by translating current period results at the prior period's currency exchange rates. When we refer to constant currency sales and constant currency Adjusted EBITDA, this means sales and Adjusted EBITDA without the impact of the currency exchange rate fluctuations from period-to period.

The Company is not able to provide a reconciliation of the Company's non-GAAP financial guidance to the corresponding GAAP measures without unreasonable effort because of the inherent difficulty in forecasting and quantifying certain amounts necessary for such a reconciliation such as certain non-cash, nonrecurring or other items that are included in net income and EBITDA as well as the related tax impacts of these items and asset dispositions / acquisitions and changes in foreign currency exchange rates that are included in cash flow, due to the uncertainty and variability of the nature and amount of these future charges and costs.

Zeolyst Joint Venture

The Company's zeolite catalysts product group operates through its Zeolyst Joint Venture, which is accounted for as an equity method investment in accordance with GAAP. The presentation of the Zeolyst Joint Venture's sales represents 50% of the sales of the Zeolyst Joint Venture. The Company does not record sales by the Zeolyst Joint Venture as revenue and such sales are not consolidated within the Company's results of operations. However, the Company's Adjusted EBITDA reflects the share of earnings of the Zeolyst Joint Venture that have been recorded as equity in net income from affiliated companies in the Company's consolidated statements of income for such periods and includes Zeolyst Joint Venture adjustments on a proportionate basis based on the Company's 50% ownership interest. Accordingly, the Company's Adjusted EBITDA margins are calculated including 50% of the sales of the Zeolyst Joint Venture for the relevant periods in the denominator.

Note on Forward-Looking Statements

Some of the information contained in this press release constitutes 'forward-looking statements.' Forward-looking statements can be identified by words such as 'anticipates,' 'intends,' 'plans,' 'seeks,' 'believes,' 'estimates,' 'expects,' 'projects' and similar references to future periods. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Examples of forward-looking statements include, but are not limited to, statements regarding our future results of operations, financial condition, liquidity, prospects, growth, strategies, product and service offerings and 2019 outlook. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, regional, national or global political, economic, business, competitive, market and regulatory conditions, including tariffs and trade disputes, currency exchange rates and other factors, including those described in the sections titled 'Risk Factors' and 'Management Discussion & Analysis of Financial Condition and Results of Operations' in our filings with the SEC, which are available on the SEC's website at www.sec.gov. These forward-looking statements speak only as of the date of this release. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable law.

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three months ended
September 30,

Nine months ended
September 30,

2019

2018

% Change

2019

2018

% Change

(in millions, except percentages, share and per share amounts)

Sales

$

423.8

$

427.2

(0.8

)%

$

1,214.7

$

1,228.1

(1.1

)%

Cost of goods sold

310.9

319.7

(2.8

)%

905.4

934.1

(3.1

)%

Gross profit

112.9

107.5

5.0

%

309.3

294.0

5.2

%

Selling, general and administrative expenses

39.5

42.1

(6.2

)%

123.6

126.2

(2.1

)%

Other operating expense, net

15.7

16.5

(4.8

)%

28.4

41.7

(31.9

)%

Operating income

57.6

48.9

17.8

%

157.3

126.1

24.7

%

Equity in net (income) from affiliated companies

(17.3

)

(5.6

)

208.9

%

(31.6

)

(31.1

)

1.6

%

Interest expense, net

27.7

28.2

(1.8

)%

84.9

84.6

0.4

%

Debt extinguishment costs

1.8

0.9

100.0

%

1.8

6.7

(73.1

)%

Other expense, net

1.9

2.5

(24.0

)%

1.8

13.1

(86.3

)%

Income before income taxes and noncontrolling interest

43.5

22.9

90.0

%

100.4

52.8

90.2

%

Provision for income taxes(1)

16.7

8.5

96.5

%

39.5

21.6

82.9

%

Effective tax rate

38.4

%

37.0

%

39.3

%

40.9

%

Net income

26.8

14.4

86.1

%

60.9

31.2

95.2

%

Less: Net income attributable to the noncontrolling interest

0.1

0.2

(50.0

)%

0.5

1.0

(50.0

)%

Net income attributable to PQ Group Holdings Inc.

$

26.7

$

14.2

88.0

%

$

60.4

$

30.2

100.0

%

Earnings per share:

Basic earnings per share

$

0.20

$

0.11

$

0.45

$

0.23

Diluted earnings per share

$

0.20

$

0.11

$

0.45

$

0.22

Weighted average shares outstanding:

Basic

134,511,819

133,336,352

134,213,571

133,237,653

Diluted

135,649,710

134,576,162

135,305,370

134,223,628

(1)

Net of a $6.2 million and $13.9 million provision for Global Intangible Low-Taxed Income ('GILTI') for the three and nine months ended September 30, 2019, respectively. Net of a $6.2 million and $9.8 million provision for GILTI for the three and nine months ended September 30, 2018, respectively, and a $2.5 million and $1.4 million provisional adjustment for the impact of the U.S. Tax Cuts and Jobs Act of 2017 for the three and nine months ended September 30, 2018.

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)

September 30,
2019

December 31,
2018

ASSETS

Cash and cash equivalents

$

78.5

$

57.9

Accounts receivable, net

214.6

196.8

Inventories, net

259.8

264.7

Prepaid and other current assets

39.1

39.2

Total current assets

592.0

558.6

Investments in affiliated companies

477.1

468.2

Property, plant and equipment, net

1,178.5

1,209.0

Goodwill

1,251.3

1,254.9

Other intangible assets, net

683.3

728.4

Right-of-use lease assets

54.2

-

Other long-term assets

129.1

108.3

Total assets

$

4,365.5

$

4,327.4

LIABILITIES

Notes payable and current maturities of long-term debt

$

8.2

$

7.2

Accounts payable

132.1

148.4

Operating lease liabilities-current

14.1

-

Accrued liabilities

108.4

100.0

Total current liabilities

262.8

255.6

Long-term debt, excluding current portion

2,006.7

2,106.7

Deferred income taxes

214.9

196.1

Operating lease liabilities-noncurrent

38.5

-

Other long-term liabilities

106.0

104.8

Total liabilities

2,628.9

2,663.2

Commitments and contingencies

EQUITY

Common stock ($0.01 par); authorized shares 450,000,000; issued shares 136,469,863 and 135,758,269
on September 30, 2019 and December 31, 2018, respectively; outstanding shares 136,157,186 and
135,592,045 on September 30, 2019 and December 31, 2018, respectively

1.4

1.4

Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on September
30, 2019 and December 31, 2018

-

-

Additional paid-in capital

1,692.2

1,674.7

Retained earnings

83.9

25.5

Treasury stock, at cost; shares 312,677 and 166,224 on September 30, 2019 and December 31, 2018, respectively

(5.2

)

(2.9

)

Accumulated other comprehensive loss

(40.7

)

(39.1

)

Total PQ Group Holdings Inc. equity

1,731.6

1,659.6

Noncontrolling interest

5.0

4.6

Total equity

1,736.6

1,664.2

Total liabilities and equity

$

4,365.5

$

4,327.4

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended
September 30,

2019

2018

Cash flows from operating activities:

(in millions)

Net income

$

60.9

$

31.2

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

97.1

99.5

Amortization

38.1

39.8

Amortization of inventory step-up

-

1.6

Amortization of deferred financing costs and original issue discount

4.5

4.6

Debt extinguishment costs

1.8

4.6

Foreign currency exchange loss

5.4

15.3

Deferred income tax provision

16.8

1.5

Net (gain) loss on asset disposals

(7.7

)

11.1

Stock compensation

13.6

11.9

Equity in net (income) from affiliated companies

(31.6

)

(31.1

)

Dividends received from affiliated companies

20.1

35.9

Net interest income on swaps designated as net investment hedges

(8.4

)

(4.3

)

Other, net

(7.2

)

(12.5

)

Working capital changes that provided (used) cash, excluding the effect of acquisitions and dispositions:

Receivables

(22.5

)

(43.1

)

Inventories

(1.8

)

8.8

Prepaids and other current assets

0.3

(1.6

)

Accounts payable

(4.1

)

(7.6

)

Accrued liabilities

6.6

0.4

Net cash provided by operating activities

181.9

166.0

Cash flows from investing activities:

Purchases of property, plant and equipment

(91.7

)

(95.3

)

Investment in affiliated companies

-

(5.0

)

Business combinations, net of cash acquired

-

(1.0

)

Proceeds from sale of product line

28.0

-

Net interest proceeds on swaps designated as net investment hedges

8.4

4.3

Other, net

0.6

1.2

Net cash used in investing activities

(54.7

)

(95.8

)

Cash flows from financing activities:

Draw down of revolving credit facilities

161.6

139.6

Repayments of revolving credit facilities

(160.3

)

(163.1

)

Issuance of long-term debt

-

1,267.0

Debt issuance costs

-

(6.2

)

Repayments of long-term debt

(105.8

)

(1,313.8

)

Stock repurchases

(2.2

)

(0.8

)

Proceeds from stock options exercised

4.0

-

Other, net

(0.5

)

(0.5

)

Net cash used in financing activities

(103.2

)

(77.8

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(3.4

)

(1.6

)

Net change in cash, cash equivalents and restricted cash

20.6

(9.2

)

Cash, cash equivalents and restricted cash at beginning of period

59.7

67.2

Cash, cash equivalents and restricted cash at end of period

$

80.3

$

58.0

Appendix Table A-1: Reconciliation of Net Income to Segment Adjusted EBITDA

Three months ended
September 30,

Nine months ended
September 30,

2019

2018

2019

2018

(in millions)

Reconciliation of net income attributable to PQ Group Holdings Inc.
to Segment Adjusted EBITDA

Net income attributable to PQ Group Holdings Inc.

$

26.7

$

14.2

$

60.4

$

30.2

Provision for income taxes

16.7

8.5

39.5

21.6

Interest expense, net

27.7

28.2

84.9

84.6

Depreciation and amortization

44.2

43.8

135.2

139.3

EBITDA

115.3

94.7

320.0

275.7

Joint venture depreciation, amortization and interest(a)

3.7

3.3

11.2

9.2

Amortization of investment in affiliate step-up(b)

1.7

1.7

5.9

5.0

Amortization of inventory step-up(c)

-

-

-

1.6

Debt extinguishment costs

1.8

0.9

1.8

6.7

Net (gain) loss on asset disposals(d)

1.1

5.2

(7.7

)

11.1

Foreign currency exchange loss(e)

4.5

3.5

5.4

15.3

LIFO expense(f)

0.5

0.9

10.8

5.9

Transaction and other related costs(g)

0.7

0.2

1.7

0.9

Equity-based compensation

4.8

4.3

13.6

11.9

Restructuring, integration and business optimization expenses(h)

0.7

2.2

1.4

5.7

Defined benefit pension plan cost (i)

0.8

0.1

2.4

0.3

Other(j)

2.1

1.1

4.7

5.6

Adjusted EBITDA

137.7

118.1

371.2

354.9

Unallocated corporate expenses

7.7

10.3

28.0

27.3

Segment Adjusted EBITDA

$

145.4

$

128.4

$

399.2

$

382.2

Descriptions to PQ Non-GAAP Reconciliations

(a)

We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our Catalysts segment includes our 50% interest in our Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of our Zeolyst Joint Venture.

(b)

Represents the amortization of the fair value adjustments associated with the equity affiliate investment in our Zeolyst Joint Venture as a result of the combination of the businesses of PQ Holdings Inc. and Eco Services Operations LLC in May 2016 (the 'Business Combination'). We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of our Zeolyst Joint Venture. Amortization is primarily related to the fair value adjustments associated with fixed assets and intangible assets, including customer relationships and technical know-how.

(c)

As a result of the Sovitec acquisition there was a step-up in the fair value of inventory, which is amortized through cost of goods sold in the statements of income.

(d)

When asset disposals occur, we remove the impact of net gain/loss of the disposed asset because such impact primarily reflects the non-cash write-off of long-lived assets no longer in use. During the nine months ended September 30, 2019, net (gain) loss on asset disposals reflects the gain related to the sale of a non-core product line.

(e)

Reflects the exclusion of the foreign currency transaction gains and losses in the statements of income primarily related to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars during 2019 and primarily related to the Euro denominated term loan (which was settled as part of the February 2018 term loan refinancing) and the non-permanent intercompany debt denominated in local currency translated to U.S. dollars during 2018.

(f)

Represents non-cash adjustments to the Company's LIFO reserves for certain inventories in the U.S. that are valued using the LIFO method, which we believe provides a means of comparison to other companies that may not use the same basis of accounting for inventories.

(g)

Relates to certain transaction costs, including debt financing, due diligence and other costs related to transactions that are completed, pending or abandoned, that we believe are not representative of our ongoing business operations.

(h)

Includes the impact of restructuring, integration and business optimization expenses which are incremental costs that are not representative of our ongoing business operations.

(i)

Represents adjustments for defined benefit pension plan costs in our statements of income. More than two-thirds of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen, and the remaining obligations primarily relate to plans operated in certain of our non-U.S. locations that, pursuant to jurisdictional requirements, cannot be frozen. As such, we do not view such expenses as core to our ongoing business operations.

(j)

Other costs consist of certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs associated with the legacy operations of our business prior to the Business Combination, capital and franchise taxes, non-cash asset retirement obligation accretion and the initial implementation of procedures to comply with Section 404 of the Sarbanes-Oxley Act. Included in this line-item are rounding discrepancies that may arise from rounding from dollars (in thousands) to dollars (in millions).

Appendix Table A-2: Reconciliation of Net Income to Adjusted Net Income(1)

Three months ended September 30,

2019

2018

Pre-tax

Tax expense
(benefit)

After-tax

Pre-tax

Tax expense
(benefit)

After-tax

(in millions)

Net income before non-controlling interest

$

43.5

$

16.7

$

26.8

$

22.9

$

8.5

$

14.4

Less: Net income attributable to non-controlling interest

0.1

-

0.1

0.2

-

0.2

Net income attributable to PQ Group Holdings Inc.

43.4

16.7

26.7

22.7

8.5

14.2

Earnings per share:

Basic earnings per share

$

0.20

$

0.11

Diluted earnings per share

$

0.20

$

0.11

Net income attributable to PQ Group Holdings Inc.

$

43.4

$

16.7

$

26.7

$

22.7

$

8.5

$

14.2

Amortization of investment in affiliate step-up(b)

1.7

0.6

1.1

1.7

0.8

0.9

Debt extinguishment costs

1.8

0.6

1.2

0.9

0.7

0.2

Net loss on asset disposals(d)

1.1

0.3

0.8

5.2

2.3

2.9

Foreign currency exchange loss(e)

4.5

0.6

3.9

3.5

(0.5

)

4.0

LIFO expense(f)

0.5

0.1

0.4

0.9

0.6

0.3

Transaction and other related costs(g)

0.7

0.3

0.4

0.2

0.1

0.1

Equity-based compensation

4.8

1.6

3.2

4.3

2.1

2.2

Restructuring, integration and business optimization expenses(h)

0.7

0.2

0.5

2.2

1.0

1.2

Defined benefit plan pension cost (benefit) (i)

0.8

0.3

0.5

0.1

-

0.1

Other(j)

2.1

0.7

1.4

1.1

0.7

0.4

Adjusted Net Income, including non-cash GILTI tax

62.1

22.0

40.1

42.8

16.3

26.5

Impact of non-cash GILTI tax(2)

-

(8.2

)

8.2

-

(11.4

)

11.4

Impact of tax reform(3)

-

-

-

-

(2.5

)

(2.5

)

Adjusted Net Income(1)

$

62.1

$

13.8

$

48.3

$

42.8

$

2.4

$

35.4

Adjusted earnings per share:

Adjusted basic earnings per share

$

0.36

$

0.27

Adjusted diluted earnings per share

$

0.36

$

0.26

Weighted average shares outstanding:

Basic

134,511,819

133,336,352

Diluted

135,649,710

134,576,162

Nine months ended September 30,

2019

2018

Pre-tax

Tax expense
(benefit)

After-tax

Pre-tax

Tax expense
(benefit)

After-tax

(in millions)

Net income before non-controlling interest

$

100.4

$

39.5

$

60.9

$

52.8

$

21.6

$

31.2

Less: Net income attributable to non-controlling interest

0.5

-

0.5

1.0

-

1.0

Net income attributable to PQ Group Holdings Inc.

99.9

39.5

60.4

51.8

21.6

30.2

Earnings per share:

Basic earnings per share

$

0.45

$

0.23

Diluted earnings per share

$

0.45

$

0.22

Net income attributable to PQ Group Holdings Inc.

$

99.9

$

39.5

$

60.4

$

51.8

$

21.6

$

30.2

Amortization of investment in affiliate step-up(b)

5.9

2.1

3.8

5.0

1.9

3.1

Amortization of inventory step-up(c)

-

-

-

1.6

0.6

1.0

Debt extinguishment costs

1.8

0.6

1.2

6.7

2.4

4.3

Net (gain) loss on asset disposals(d)

(7.7

)

(1.6

)

(6.1

)

11.1

4.2

6.9

Foreign currency exchange loss(e)

5.4

(0.6

)

6.0

15.3

3.3

12.0

LIFO expense(f)

10.8

3.8

7.0

5.9

2.3

3.6

Transaction and other related costs(g)

1.7

0.6

1.1

0.9

0.3

0.6

Equity-based compensation

13.6

4.8

8.8

11.9

4.6

7.3

Restructuring, integration and business optimization expenses(h)

1.4

0.5

0.9

5.7

2.2

3.5

Defined benefit plan pension cost(i)

2.4

0.8

1.6

0.3

0.1

0.2

Other(j)

4.7

1.5

3.2

5.6

2.3

3.3

Adjusted Net Income, including non-cash GILTI tax

139.9

52.0

87.9

121.8

45.8

76.0

Impact of non-cash GILTI tax(2)

-

(19.3

)

19.3

-

(19.0

)

19.0

Impact of tax reform(3)

-

-

-

-

(1.5

)

(1.5

)

Adjusted Net Income(1)

$

139.9

$

32.7

$

107.2

$

121.8

$

25.3

$

93.5

Adjusted earnings per share:

Adjusted basic earnings per share

$

0.80

$

0.70

Adjusted diluted earnings per share

$

0.79

$

0.70

Weighted average shares outstanding:

Basic

134,213,571

133,237,653

Diluted

135,305,370

134,223,628

See Appendix Table A-1 for Descriptions to PQ Non-GAAP Reconciliations in the table above.

(1)

We define adjusted net income as net income attributable to PQ Group Holdings adjusted for non-operating income or expense and the impact of certain non-cash or other items that are included in net income that we do not consider indicative of our ongoing operating performance. Adjusted net income is presented as a key performance indicator as we believe it will enhance a prospective investor's understanding of our results of operations and financial condition. Adjusted net income may not be comparable with net income or adjusted net income as defined by other companies.

(2)

Amount represents the impact to tax expense in net income before non-controlling interest and the related adjustments to net income associated with GILTI provisions of the Tax Cuts and Jobs Act of 2017 ('TCJA'). Beginning January 1, 2018, GILTI results in taxation of 'excess of foreign earnings,' which is defined as amounts greater than a 10% rate of return on applicable foreign tangible asset basis. The Company is required to record incremental tax provision impact with respect to GILTI as a result of having historical U.S. net operating loss ('NOL') amounts to offset the GILTI taxable income inclusion. This NOL utilization precludes us from recognizing foreign tax credits ('FTCs') which would otherwise help offset the tax impacts of GILTI. No FTCs will be recognized with respect to GILTI until our cumulative NOL balance has been exhausted. Because the GILTI provision does not impact our cash taxes (given available U.S. NOLs), and given that we expect to recognize FTCs to offset GILTI impacts once the NOLs are exhausted, we do not view this item as a component of core operations.

(3)

Represents the provisional adjustment for the impact of the TCJA and the Dutch Tax Plan 2019 recorded in net income.

Appendix Table A-3: Business Segment Sales and Adjusted EBITDA

Three months ended
September 30, 2019

Nine months ended
September 30,

2019

2018

% Change

2019

2018

% Change

Sales:

Refining Services

$

118.3

$

123.4

(4.1

)%

$

341.5

$

336.2

1.6

%

Silica Catalysts

25.6

16.3

57.1

%

62.3

50.2

24.1

%

Performance Materials

115.1

115.4

(0.3

)%

295.1

304.7

(3.2

)%

Performance Chemicals

167.9

174.7

(3.9

)%

526.2

548.4

(4.0

)%

Eliminations

(3.1

)

(2.6

)

(10.4

)

(11.4

)

Total sales

$

423.8

$

427.2

(0.8

)%

$

1,214.7

$

1,228.1

(1.1

)%

Zeolyst joint venture sales

$

54.4

$

32.3

68.4

%

$

123.0

$

120.2

2.3

%

Adjusted EBITDA:

Refining Services

$

51.2

$

49.6

3.2

%

$

133.7

$

126.4

5.8

%

Catalysts

31.6

15.7

101.3

%

79.4

62.2

27.7

%

Performance Materials

25.8

21.3

21.1

%

65.5

61.9

5.8

%

Performance Chemicals

36.8

41.8

(12.0

)%

120.6

131.7

(8.4

)%

Total Segment Adjusted EBITDA

$

145.4

$

128.4

13.2

%

$

399.2

$

382.2

4.4

%

Corporate

(7.7

)

(10.3

)

(25.2

)%

(28.0

)

(27.3

)

2.6

%

Total Adjusted EBITDA

$

137.7

$

118.1

16.6

%

$

371.2

$

354.9

4.6

%

Adjusted EBITDA Margin:

Refining Services

43.3

%

40.2

%

39.2

%

37.6

%

Catalysts(1)

39.5

%

32.3

%

42.8

%

36.5

%

Performance Materials

22.4

%

18.5

%

22.2

%

20.3

%

Performance Chemicals

21.9

%

23.9

%

22.9

%

24.0

%

Total Adjusted EBITDA Margin(1)

28.8

%

25.7

%

27.7

%

26.3

%

(1)

Adjusted EBITDA margin calculation includes proportionate 50% share of sales from the Zeolyst joint venture.

Appendix Table A-4: Constant Currency Sales and Adjusted EBITDA

The tables below reflect the calculation of constant currency sales and constant currency Adjusted EBITDA by segment for the three and nine months ended September 30, 2019.

Three months ended
September 30, 2019

Three
months
ended
September
30, 2018

As
Reported

FX

Constant
Currency

As
Reported

%
Change

(in millions, except percentages)

Sales:

Refining Services

$

118.3

$

-

$

118.3

$

123.4

(4.1

)%

Silica Catalysts

25.6

0.2

25.8

16.3

58.3

%

Performance Materials

115.1

2.1

117.2

115.4

1.6

%

Performance Chemicals

167.9

3.1

171.0

174.7

(2.1

)%

Eliminations

(3.1

)

(0.2

)

(3.3

)

(2.6

)

26.9

%

Total sales

$

423.8

$

5.2

$

429.0

$

427.2

0.4

%

Zeolyst joint venture sales

$

54.4

$

-

$

54.4

$

32.3

68.4

%

Adjusted EBITDA:

Refining Services

$

51.2

$

-

$

51.2

$

49.6

3.2

%

Catalysts

31.6

0.2

31.8

15.7

102.5

%

Performance Materials

25.8

0.3

26.1

21.3

22.5

%

Performance Chemicals

36.8

0.8

37.6

41.8

(10.0

)%

Total Segment Adjusted EBITDA

$

145.4

$

1.3

$

146.7

$

128.4

14.3

%

Corporate

(7.7

)

-

(7.7

)

(10.3

)

(25.2

)%

Total Adjusted EBITDA

$

137.7

$

1.3

$

139.0

$

118.1

17.7

%

Nine months ended
September 30, 2019

Nine
months
ended
September
30, 2018

As
Reported

FX

Constant
Currency

As
Reported

%
Change

(in millions, except percentages)

Sales:

Refining Services

$

341.5

$

-

$

341.5

$

336.2

1.6

%

Silica Catalysts

62.3

1.4

63.7

50.2

26.9

%

Performance Materials

295.1

8.6

303.7

304.7

(0.3

)%

Performance Chemicals

526.2

17.3

543.5

548.4

(0.9

)%

Eliminations

(10.4

)

(0.5

)

(10.9

)

(11.4

)

(4.4

)%

Total sales

$

1,214.7

$

26.8

$

1,241.5

$

1,228.1

1.1

%

Zeolyst joint venture sales

$

123.0

$

-

$

123.0

$

120.2

2.3

%

Adjusted EBITDA:

Refining Services

$

133.7

$

-

$

133.7

$

126.4

5.8

%

Catalysts

79.4

0.9

80.3

62.2

29.1

%

Performance Materials

65.5

1.1

66.6

61.9

7.6

%

Performance Chemicals

120.6

4.6

125.2

131.7

(4.9

)%

Total Segment Adjusted EBITDA

$

399.2

$

6.6

$

405.8

$

382.2

6.2

%

Corporate

(28.0

)

(0.1

)

(28.1

)

(27.3

)

2.9

%

Total Adjusted EBITDA

$

371.2

$

6.5

$

377.7

$

354.9

6.4

%

Appendix Table A-5: Adjusted Free Cash Flow

Three months ended
September 30,

Nine months ended
September 30,

2019

2018

2019

2018

(in millions)

Net cash provided by operating activities

$

121.9

$

115.9

$

181.9

$

166.0

Less:

Purchases of property, plant and equipment(1)

(26.2

)

(29.2

)

(91.7

)

(95.3

)

Free cash flow

95.7

86.7

90.2

70.7

Adjustments to free cash flow:

Net interest proceeds on currency swaps

3.9

4.3

8.4

4.3

Adjusted free cash flow(2)

$

99.6

$

91.0

$

98.6

$

75.0

Net cash used in investing activities(3)

$

(20.8

)

$

(29.5

)

$

(54.7

)

$

(95.8

)

Net cash used in financing activities

$

(102.9

)

$

(82.5

)

$

(103.2

)

$

(77.8

)

(1)

Excludes the Company's proportionate 50% share of capital expenditures from the Zeolyst joint venture.

(2)

We define adjusted free cash flow as net cash provided by operating activities less purchases of property, plant and equipment, adjusted for net interest proceeds on swaps designated as net investment hedges. Adjusted free cash flow is a non-GAAP financial measure that we believe will enhance a prospective investor's understanding of our ability to generate additional cash from operations, including the reduction in cash paid for interest related to our cross-currency interest rate swaps, and is an important financial measure for use in evaluating our financial performance. Our presentation of adjusted free cash flow is not intended to replace, and should not be considered superior to, the presentation of our net cash provided by operating activities determined in accordance with GAAP. Additionally, our definition of adjusted free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures, due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view adjusted free cash flow as a measure that provides supplemental information to our consolidated statements of cash flows.

(3)

Net cash used in investing activities includes purchases of property, plant and equipment and net interest proceeds on swaps designated as net investment hedges, which are also included in our computation of adjusted free cash flow.

View source version on businesswire.com: https://www.businesswire.com/news/home/20191031005092/en/

Investor Contact:

Nahla A. Azmy

(610) 651-4561

[email protected]

Source: PQ Group Holdings Inc.