Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Unless the context requires otherwise, references in this report to “Ecovyst,” “the company,” “we,” “us” or “our” refer to Ecovyst Inc. and its consolidated subsidiaries.
Forward-looking Statements
This periodic report on Form 10-Q (“Form 10-Q”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements”. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short- and long-term business operations and objectives, and financial needs. Examples of forward-looking statements include, but are not limited to, our financial results and our liquidity, including our belief that our existing cash, cash equivalents and cash flow from operations, combined with availability under our asset based lending revolving credit facility will be sufficient to meet our presently anticipated future cash needs for at least the next 12 months. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include risks related to the following:
• the impact of the ongoing COVID-19 pandemic on the global economy and financial markets, as well as on our business and our suppliers, and the response of our company and governments to the outbreak, including associated containment, remediation and vaccination efforts;
• as a global business, we are exposed to local business risks in different countries;
• we are affected by general economic conditions and economic downturns;
• exchange rate fluctuations could adversely affect our financial condition, results of operations and cash flows;
• our international operations require us to comply with anti-corruption laws, trade and export controls and regulations of the U.S. government and various international jurisdictions in which we do business;
• alternative technology or other changes in our customers’ products may reduce or eliminate the need for certain of our products;
• our new product development and research and development efforts may not succeed and our competitors may develop more effective or successful products;
• our elevated level of indebtedness could adversely affect our financial condition;
• if we are unable to pass on increases in raw material prices, including natural gas, to our customers or to retain or replace our key suppliers, our results of operations and cash flows may be negatively affected;
• we face substantial competition in the industries in which we operate;
• we are subject to the risk of loss resulting from non-payment or non-performance by our customers;
• we rely on a limited number of customers for a meaningful portion of our business;
• multi-year customer contracts in our Ecoservices segment are subject to potential early termination and such contracts may not be renewed at the end of their respective terms;
• our quarterly results of operations are subject to fluctuations because demand for some of our products is seasonal;
• our growth projects may result in significant expenditures before generating revenues, if any, which may materially and adversely affect our ability to implement our business strategy;
• we may be liable to damages based on product liability claims brought against us or our customers for costs associated with recalls of our or our customers’ products;
• we are subject to extensive environmental, health and safety regulations and face various risks associated with potential non-compliance or releases of hazardous materials;
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• existing and proposed regulations to address climate change by limiting greenhouse gas emissions may cause us to incur significant additional operating and capital expenses and may impact our business and results of operations;
• production and distribution of our products could be disrupted for a variety of reasons, and such disruptions could expose us to significant losses or liabilities;
• the insurance that we maintain may not fully cover all potential exposures;
• we could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications;
• our failure to protect our intellectual property and infringement on the intellectual property rights of third parties;
• losses and damages in connection with information technology risks could adversely affect our operations; and
• other factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
The forward-looking statements included herein are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.
Overview
We are a leading integrated and innovative global provider of specialty catalysts and services. We believe that our products, which are predominantly inorganic, and services contribute to improving the sustainability of the environment.
In connection with the closing of the sale of the Performance Chemicals business, we changed our name from “PQ Group Holdings Inc.” to “ Ecovyst Inc.”, changed the ticker symbol of our common stock listed on the New York Stock Exchange from “PQG” to “ECVT” and rebranded our former segments from “Refining Services” to “Ecoservices” and “Catalysts” to “Catalyst Technologies.” We conduct operations through these two reporting segments:
Ecoservices: We are a leading provider of sulfuric acid recycling services to North American refineries for the production of alkylate, an essential gasoline component for lowering vapor pressure and increasing octane to meet stringent gasoline specifications and fuel efficiency standards. We are also a leading North American producer of on-purpose virgin sulfuric acid for water treatment, mining, and industrial applications.
Catalyst Technologies: We are a global supplier of finished silica catalysts and catalyst supports necessary to produce high strength and high stiffness plastics used in packaging films, bottles, containers, and other molded applications. This segment includes our 50% interest in the Zeolyst Joint Venture, where we are a leading global supplier of zeolites used for catalysts that remove nitric oxide from diesel engine emissions as well as sulfur from fuels during the refining process.
Recent Divestitures
On December 14, 2020, we completed the sale of our Performance Materials business for $650.0 million, which was subject to certain adjustments for indebtedness, working capital and cash at the closing of the transaction. The results of operations, financial condition, and cash flows for the Performance Materials business are presented herein as discontinued operations. Except where noted, any tables, percentages or metrics included within this filing exclude the results of our former Performance Materials business. Refer to Note 3 to our condensed consolidated financial statements for additional information.
On August 1, 2021, we completed the sale of our Performance Chemicals business for $1.1 billion, subject to certain adjustments set forth in the agreement. We used a portion of the net cash proceeds to repay the entire outstanding principal balance of $231.4 million on the Senior Secured Term Loan Facility due February 2027 and the entire outstanding principal balance of $295.0 million on the 5.750% Senior Notes due 2025 (the “Senior Notes”). The Senior Notes were redeemed at a redemption price equal to the sum of 102.875% of the principal amount of the Senior Notes plus accrued and unpaid interest to, but excluding, August 2, 2021. Additionally, our Board of Directors (the “Board”) declared a special cash dividend of $3.20 per share, paid on August 23, 2021, to stockholders of record as of the close of business on August 12, 2021. The results of operations, financial condition, and cash flows for the Performance Chemicals business are presented herein as discontinued operations. Except where noted, any tables, percentages or metrics included within this filing exclude the results of our Performance Chemicals business. Refer to Note 3 to our condensed consolidated financial statements for additional information.
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Key Performance Indicators
Adjusted EBITDA and Adjusted Net Income
Adjusted EBITDA and adjusted net income are financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and that we use to evaluate our operating performance, for business planning purposes and to measure our performance relative to that of our competitors. Adjusted EBITDA and adjusted net income are presented as key performance indicators as we believe these financial measures will enhance a prospective investor’s understanding of our results of operations and financial condition. EBITDA consists of net income (loss) attributable to continuing operations before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) depreciation, amortization and interest of our 50% share of the Zeolyst Joint Venture. Adjusted net income consists of net income (loss) attributable to continuing operations adjusted for (i) non-operating income or expense and (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance. We believe that these non-GAAP financial measures provide investors with useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business.
You should not consider adjusted EBITDA or adjusted net income in isolation or as alternatives to the presentation of our financial results in accordance with GAAP. The presentation of adjusted EBITDA and adjusted net income financial measures may differ from similar measures reported by other companies and may not be comparable to other similarly titled measures. In evaluating adjusted EBITDA and adjusted net income, you should be aware that we are likely to incur expenses similar to those eliminated in this presentation in the future and that certain of these items could be considered recurring in nature. Our presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Reconciliations of adjusted EBITDA and adjusted net income to GAAP net income (loss) are included in the results of operations discussion that follows for each of the respective periods.
Key Factors and Trends Affecting Operating Results and Financial Condition
Sales
Overall economic demand has significantly rebounded since the 2020 lows that resulted from the impact of COVID-19. Refineries have seen demand return with increasing miles driven, recovery from winter storm Uri and a general increase in economic activity. Polyethlene demand remains strong driven by the growing consumer demand for films and packaging. Higher refinery utilization rates are increasing catalyst demand for both traditional and renewable fuels on the continued recovery in vehicle miles driven.
In February 2021, the Gulf Coast of the United States experienced significant and unexpectedly severe weather from winter storm Uri. Extended freezing temperatures led to slowdowns or shutdowns at nearly all refineries and caused extensive damage due to frozen piping. Some refineries and facilities remained down for nearly a month. Our Ecoservices facilities located in the Gulf experienced damage, which required additional maintenance and some plant shutdowns.
Our Silica Catalysts product group, which is a part of our Catalyst Technologies segment, experiences demand fluctuations based upon the timing of our customer’s fixed bed catalyst replacements.
Sales in our Ecoservices and Catalyst Technologies segments are made on both a purchase order basis and pursuant to long-term contracts.
Cost of Goods Sold
Cost of goods sold consists of variable product costs, fixed manufacturing expenses, depreciation expense and freight expenses. Variable product costs include all raw materials, energy and packaging costs that are directly related to the manufacturing process. Fixed manufacturing expenses include plant employment costs, manufacturing overhead and maintenance costs.
The primary raw materials for our Ecoservices segment include spent sulfuric acid, sulfur, acids, bases (including sodium hydroxide, or “caustic soda”), and certain metals. Spent sulfuric acid for our Ecoservices segment is supplied by customers for a nominal charge as part of their contracts. The primary raw materials used in the manufacture of products in our Catalyst Technologies segments include sodium silicate and cesium hydroxide.
Most of our Ecoservices contracts feature take-or-pay volume protection and/or quarterly price adjustments for commodity inputs, labor, the Chemical Engineering Index (U.S. chemical plant construction cost index) and natural gas. Over 80% of our Ecoservices segment sales for the year ended December 31, 2020 were under contracts featuring quarterly price adjustments. The price adjustments generally reflect actual costs for producing sulfuric acid and tend to protect us from volatility in labor, fixed costs and raw material pricing. The take-or-pay volume protection allows us to cover fixed costs through intermittent, temporary production issues at customer refineries.
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While natural gas is not a direct feedstock for any product, natural gas powered machinery and equipment are used to heat raw materials and create the chemical reactions necessary to produce end-products. We maintain multiple suppliers wherever possible and structure our customer contracts when possible to allow for the pass-through of raw material, labor and natural gas costs.
Joint Ventures
We account for our investments in our equity joint ventures under the equity method. Our largest joint venture, the Zeolyst Joint Venture, manufactures high performance, specialty, zeolite-based catalysts for use in the packaging and engineered plastics, emission control, refining and petrochemical industries and other areas of the broader chemicals industry. Demand for the Zeolyst Joint Venture products fluctuates based upon the timing of our customer’s fixed bed catalyst replacements. We share proportionally in the management of our joint ventures with the other parties to each such joint venture.
Seasonality
Our regeneration services product group, which is a part of our 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 quarter.
Foreign Currency
As a global business, we are subject to the impact of gains and losses on currency translations, which occur when the financial statements of foreign operations are translated into U.S. dollars. We operate in various geographies with approximately 10% of our sales for the nine months ended September 30, 2021 and the year ended December 31, 2020 in currencies other than the U.S. dollar. Because our consolidated financial results are reported in U.S. dollars, sales or earnings generated in currencies other than the U.S. dollar can result in a significant increase or decrease in the amount of those sales and earnings when translated to U.S. dollars. The foreign currency to which we have the most significant exchange rate exposure is the British pound.
Results of Operations
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Highlights
The following is a summary of our financial performance for the three months ended September 30, 2021 compared with the three months ended September 30, 2020.
Sales
• Sales increased $36.7 million to $167.4 million. The increase in sales was primarily due to the impact of the pass-through of higher sulfur costs and an increase in demand for our polyethylene and chemical catalysts.
Gross Profit
• Gro ss profit increased $12.8 million to $53.6 million. The increase in gross profit was primarily due to higher sales volumes and favorable product mix, which was partially offset by higher production and maintenance costs.
Operating Income
• Operating income increased by $3.7 million to $22.5 million. The increase in operating income was due to an increase in gross profit, which was partly offset by higher other operating expenses.
Equity in Net Income of Affiliated Companies
• Equity in net income of affiliated companies for the three months ended September 30, 2021 was $8.8 million, compared to $0.1 million for the three months ended September 30, 2020. The increase of $8.7 million was due to higher earnings generated by the Zeolyst Joint Venture for the three months ended September 30, 2021.
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The following is our unaudited condensed consolidated statements of income and a summary of financial results for the three months ended September 30, 2021 and 2020:
Three months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Sales $ 167.4 $ 130.7 $ 36.7 28.1 %
Cost of goods sold 113.8 89.9 23.9 26.6 %
Gross profit 53.6 40.8 12.8 31.4 %
Gross profit margin 32.0 % 31.2 %
Selling, general and administrative expenses 24.8 18.7 6.1 32.6 %
Other operating expense, net 6.3 3.3 3.0 90.9 %
Operating income 22.5 18.8 3.7 19.7 %
Operating income margin 13.4 % 14.4 %
Equity in net (income) from affiliated companies (8.8) (0.1) (8.7) NM
Interest expense, net 9.0 10.4 (1.4) (13.5) %
Debt extinguishment costs 15.2 14.0 1.2 8.6 %
Other income, net (0.2) (4.1) 3.9 (95.1) %
Income (loss) before income taxes and noncontrolling interest 7.3 (1.4) 8.7 (621.4) %
Provision for income taxes 2.6 21.3 (18.7) (87.8) %
Effective tax rate 35.6 % (1,579.7) %
Net income (loss) from continuing operations 4.7 (22.7) 27.4 (120.7) %
Net (loss) income from discontinued operations, net of tax (75.9) 30.5 (106.4) (348.9) %
Net (loss) income (71.2) 7.8 (79.0) NM
Less: Net income attributable to the noncontrolling interest - discontinued operations 0.1 0.3 (0.2) (66.7) %
Net (loss) income attributable to Ecovyst Inc. $ (71.3) $ 7.5 $ (78.8) NM
Sales
Three months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Sales:
Ecoservices $ 137.5 $ 107.6 $ 29.9 27.8 %
Catalyst Technologies 29.9 23.1 6.8 29.4 %
Total sales $ 167.4 $ 130.7 $ 36.7 28.1 %
Ecoservices: Sales in Ecoservices for the three months ended September 30, 2021 were $137.5 million, an increase of $29.9 million, or 27.8%, compared to sales of $107.6 million for the three months ended September 30, 2020. The increase in sales was due to higher average selling prices of $25.3 million and an increase in volumes of $4.6 million.
Higher average selling prices were primarily a result of the pass-through of higher sulfur costs of $15.3 million within our virgin sulfuric acid product group and the pass-through of other raw material costs within our regenerations services product group. The increase in volumes was primarily driven by sales from the Chem32 acquisition as well as increased sales of regeneration services.
Catalyst Technologies: S ales in Catalyst Technologies for the three months ended September 30, 2021 were $29.9 million, an increase of $6.8 million, or 29.4%, compared to sales of $23.1 million for the three months ended September 30, 2020. The increase in sales was due to an increase in volumes of $11.6 million partially offset by lower average selling prices of $5.2 million. Demand for our polyethylene and chemical catalysts drove the increase in sales, with higher volumes more than offsetting lower customer price mix.
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Gross Profit
Gross profit for the three months ended September 30, 2021 was $53.6 million, an increase of $12.8 million, or 31.4%, compared with $40.8 million for the thre e months ended September 30, 2020. The increase in gross profit was due to higher sales volumes of $5.0 million, favorable customer pricing of $4.8 million, and favorable product mix of $4.2 million, which was partially offset by unfavorable manufacturing and maintenance costs of $1.0 million.
The favorable change in volumes and product mix was a result of increased demand for our high-margin polyethylene catalysts and the impact of our recent Chem32 acquisition. Favorable customer pricing was driven by the pass-through of labor index and energy costs within our regeneration services product group. The increase in manufacturing costs was a result of the timing of plant “turnaround” maintenance projects, which was offset by the pass-through of $15.3 million in higher sulfur costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2021 were $24.8 million, an increase of $6.1 million compared with $18.7 million for the three months ended September 30, 2020. The increase in selling, general and administrative expenses was due to an increase in compensation-related expenses.
Other Operating Expense, Net
Other operating expense, net was comparable between both periods. Other operating expense, net for the three months ended September 30, 2021 was $6.3 million, an increase of $3.0 million, compared with $3.3 million for the three months ended September 30, 2020. The increase in other operating expense, net, was due to an increase in asset disposals related to plant “turnaround” maintenance projects.
Equity in Net Income of Affiliated Companies
Equity in net income of affiliated comp anies for the three months ended September 30, 2021 was $8.8 million, compared to $0.1 million for the three months ended September 30, 2020. The increase was primarily due to $8.7 million of higher earnings from the Zeolyst Joint Venture during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase in earnings from the Zeolyst Joint Venture was due to increased demand for our catalysts used in renewable fuels and the demand recovery for emission control catalysts.
Interest Expense, Net
Interest expense, net for the three month s ended September 30, 2021 was $9.0 million, a decrease of $1.4 million, as compared with $10.4 million for the three months ended September 30, 2020. The decrease in interest expense, net was primarily due lower average debt balances and a favorable increase in variable versus fixed-rate debt during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.
Debt Extinguishment Costs
Debt extinguishment costs for the three months ended September 30, 2021 and 2020 were $15.2 million and $14.0 million, respectively.
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Concurrent with, and using a portion of the net cash proceeds from, the divestiture of the Performance Chemicals business in August 2021, we repaid the remaining balance on our 2016 Term Loan Facility and redeemed the Senior Notes. In connection with the redemption of the Senior Notes, we paid a redemption premium of $8.5 million, which was recorded as debt extinguishment costs during the three months ended September 30, 2021. We wrote off $0.8 million of unamortized deferred financing costs and $2.4 million of original issue discount related to the 2016 Term Loan Facility and $2.3 million of unamortized deferred financing costs and $1.2 million of original issue discount related to the Senior Notes as debt extinguishment costs during the three months ended September 30, 2021.
On July 22, 2020, we entered into an agreement for a new senior secured term loan facility in an aggregate principal amount of $650.0 million, the proceeds of which were used to repay the remaining outstanding balance of $625.0 million on the 6.75% Senior Secured Notes due 2022. In conjunction with the issuance of such senior secured term loan facility, we paid $10.6 million in prepayment premiums and recorded $0.1 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $2.1 million and original issue discount of $1.2 million associated with the 6.75% Senior Secured Notes due 2022 were written off as debt extinguishment costs.
Other Income, Net
Other income, net for the three months ended September 30, 2021 was income of $0.2 million, a decrease of $3.9 million, as compared with income of $4.1 million for the three months ended September 30, 2020. The change in other expense, net primarily consisted of a decrease in foreign currency gains related to the non-permanent intercompany debt denominated in local currency and translated to the U.S. dollar.
Provision for Income Taxes
The provision for income taxes for the three months ended September 30, 2021 was $2.6 million compared to a $21.3 million provision for the three m onths ended September 30, 2020. The effective income tax rate for the three months ended September 30, 2021 was 35.6% compared to (1,579.7)% for the three months ended September 30, 2020.
The Company’s effective income tax rate fluctuates based primarily on changes in income mix, the impacts of the Global Intangible Low Taxed Income (“GILTI”) tax rules, tax rate changes and changes in foreign exchange gains and losses, which create permanent differences in certain jurisdictions.
The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for the three months ended September 30, 2021 was mainly due to the tax effect of permanent differences related to foreign currency exchange gain or loss, the inclusion of foreign earnings in U.S. taxable income, the discrete impact of the product line and asset sales, foreign tax rate changes, pre-tax losses with no associated tax benefit and state taxes.
Net (Loss) Income Attributable to Ecovyst
For the foregoing reasons and after the effect of the non-controlling interest in earnings of subsidiaries for each period presented, net loss attributable to Ecovyst was $71.3 million for the three months ended September 30, 2021 compared with net income of $7.5 million for the three months ended September 30, 2020.
Adjusted EBITDA
Summarized Segment Adjusted EBITDA information is shown below in the following table:
Three months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Segment Adjusted EBITDA: (1)
Ecoservices $ 51.9 $ 44.3 $ 7.6 17.2 %
Catalyst Technologies (2)
25.5 11.8 13.7 116.1 %
Total Segment Adjusted EBITDA (3)
77.4 56.1 21.3 38.0 %
Unallocated corporate expenses
(8.0) (8.0) — — %
Total Adjusted EBITDA $ 69.4 $ 48.1 $ 21.3 44.3 %
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(1) We define Segment Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Our management evaluates the performance of our segments and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA does not represent cash flow for periods presented and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a source of liquidity. Segment Adjusted EBITDA may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies.
(2) The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment was $14.5 million for the three months ended September 30, 2021, which includes $8.8 million of equity in net income, excluding $1.6 million of amortization of investment in affiliate step-up plus $4.1 million of joint venture depreciation, amortization and interest. The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment was $5.3 million for the three months ended September 30, 2020, which includes $0.1 million of equity in net income, excluding $1.7 million of amortization of investment in affiliate step-up plus $3.6 million of joint venture depreciation, amortization and interest.
(3) Our total Segment Adjusted EBITDA differs from our total consolidated Adjusted EBITDA due to unallocated corporate expenses.
Ecoservices: Adjusted EBITDA for the three months ended September 30, 2021 was $51.9 million, an increase of $7.6 million, or 17.2%, compared with $44.3 million for the three months ended September 30, 2020. The increase in Adjusted EBITDA was a result of higher regeneration services volumes, favorable virgin sulfuric acid pricing and the impact of our recent Chem32 acquisition.
Catalyst Technologies: Adjusted EBITDA for th e three months ended September 30, 2021 was $25.5 million, an increase of $13.7 million, or 116.1%, compared with $11.8 million for the three months ended September 30, 2020. The increase in Adjusted EBITDA was primarily a result of higher demand for our polyethylene and pressure product catalysts and improved manufacturing network efficiencies.
A reconciliation of net income (loss) from continuing operations to Segment Adjusted EBITDA is as follows:
Three months ended
September 30,
2021 2020
(in millions)
Reconciliation of net income (loss) from continuing operations to Segment Adjusted EBITDA
Net income (loss) from continuing operations $ 4.7 $ (22.7)
Provision for income taxes 2.6 21.3
Interest expense, net 9.0 10.4
Depreciation and amortization 20.6 19.2
EBITDA 36.9 28.2
Joint venture depreciation, amortization and interest (a)
4.1 3.6
Amortization of investment in affiliate step-up (b)
1.6 1.7
Debt extinguishment costs 15.2 14.0
Net loss on asset disposals (c)
2.2 0.6
Foreign currency exchange loss (gain) (d)
0.9 (4.3)
LIFO benefit (e)
(1.3) (1.3)
Transaction and other related costs (f)
0.5 0.2
Equity-based compensation 10.2 4.4
Restructuring, integration and business optimization expenses (g)
0.1 0.3
Defined benefit pension benefit (h)
(1.0) (0.2)
Other (i)
— 0.9
Adjusted EBITDA 69.4 48.1
Unallocated corporate expenses 8.0 8.0
Segment Adjusted EBITDA $ 77.4 $ 56.1
(a) We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our Catalyst Technologies segment includes our 50% interest in the Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of the Zeolyst Joint Venture.
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(b) Represents the amortization of the fair value adjustments associated with the equity affiliate investment in the 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 the 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) 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.
(d) Reflects the exclusion of the foreign currency transaction gains and losses in the statements of income, which primarily relates to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars.
(e) 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.
(f) 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.
(g) Includes the impact of restructuring, integration and business optimization expenses which are incremental costs that are not representative of our ongoing business operations.
(h) Represents adjustments for defined benefit pension plan (benefit) costs in our statements of income. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. As such, we do not view such income or expenses as core to our ongoing business operations.
(i) Other costs consist of certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. Included in this line-item are rounding discrepancies that may arise from rounding from dollars (in thousands) to dollars (in millions).
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Adjusted Net Income
Summarized adjusted net income (loss) information is shown below in the following table:
Three months ended September 30,
2021 2020
Pre-tax Tax expense (benefit) After-tax Pre-tax Tax expense (benefit) After-tax
(in millions)
Reconciliation of net income (loss) from continuing operations to Adjusted Net Income (1)(2)
Net income (loss) attributable to Ecovyst Inc.
$ 7.3 $ 2.6 $ 4.7 $ (1.4) $ 21.3 $ (22.7)
Amortization of investment in affiliate step-up (b)
1.6 0.5 1.1 1.7 0.6 1.1
Debt extinguishment costs 15.2 4.4 10.8 14.0 5.1 8.9
Net loss on asset disposals (c)
2.2 0.5 1.7 0.6 0.4 0.2
Foreign currency exchange loss (gain) (d)
0.9 0.2 0.7 (4.3) (1.6) (2.7)
LIFO benefit (e)
(1.3) (0.4) (0.9) (1.3) (0.5) (0.8)
Transaction and other related costs (f)
0.5 0.2 0.3 0.2 0.1 0.1
Equity-based compensation 10.2 2.9 7.3 4.4 1.6 2.8
Restructuring, integration and business optimization expenses (g)
0.1 0.1 — 0.3 0.1 0.2
Defined benefit pension plan benefit (h)
(1.0) (0.3) (0.7) (0.2) (0.1) (0.1)
Other (i)
— — — 0.9 0.1 0.8
Adjusted Net Income, including non-cash GILTI tax $ 35.7 $ 10.7 $ 25.0 $ 14.9 $ 27.1 $ (12.2)
Intraperiod allocation for restating discontinued operations (3)
— (0.5) 0.5 — (21.7) 21.7
Adjusted Net Income $ 35.7 $ 10.2 $ 25.5 $ 14.9 $ 5.4 $ 9.5
(1) We define adjusted net income as net income attributable to Ecovyst 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) Refer to the Adjusted EBITDA notes above for more information with respect to each adjustment.
(3) Due to the sale of the Performance Chemicals business, the tax rates used to value deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) needs to be adjusted. Given it is a direct result of the sale of discontinued operations and the need to adjust the tax rates arose because of discontinued operations, the impact of revaluing the reporting entity’s DTAs and DTLs are reflected in continuing operations.
The adjustments to net income attributable to Ecovyst Inc. are shown net of applicable tax rates as determined by the calculation of our quarterly tax provision under interim financial reporting for the three months ended September 30, 2021 and September 30, 2020, except for the foreign currency exchange loss, impacts of tax rate changes and the effects of the sale of assets for which the taxes are calculated as discrete items using the applicable statutory income tax rates.
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Results of Operations
Nine months ended September 30, 2021 Compared to the Nine months ended September 30, 2020
Highlights
The following is a summary of our financial performance for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.
Sales
• Sales increased $69.2 million to $441.0 million. The increase in sales was primarily due to favorable cost pass-through pricing, a rebound in volumes in our Ecoservices segment and higher demand for our polyethylene catalysts.
Gross Profit
• Gross profit increased $8.8 million to $122.2 million. The increase in gross profit was primarily due to higher sales volumes, favorable cost pass-through pricing and favorable product mix, which was partially offset by an increase in manufacturing costs.
Operating Income
• Operating income decreased by $4.0 million to $36.6 million. The increase in operating income was due to an increase in gross profit, partially offset by increased selling, general and maintenance costs and other operating expenses.
Equity in Net Income of Affiliated Companies
• Equity in net income of affiliated companies for the nine months ended September 30, 2021 was $20.7 million, compared with $19.9 million for the nine months ended September 30, 2020. The increase of $0.8 million was due to an increase in sales volume in the Zeolyst Joint Venture for the nine months ended September 30, 2021.
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The following is our unaudited condensed consolidated statements of income and a summary of financial results for the nine months ended September 30, 2021 and 2020:
Nine months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Sales $ 441.0 $ 371.8 $ 69.2 18.6 %
Cost of goods sold 318.8 258.6 60.2 23.3 %
Gross profit 122.2 113.4 8.8 7.8 %
Gross profit margin 27.7 % 30.5 %
Selling, general and administrative expenses 68.8 61.5 7.3 11.9 %
Other operating expense, net 16.8 11.3 5.5 48.7 %
Operating income 36.6 40.6 (4.0) (9.9) %
Operating income margin 8.3 % 10.9 %
Equity in net (income) from affiliated companies (20.7) (19.9) (0.8) 4.0 %
Interest expense, net 28.2 40.9 (12.7) (31.1) %
Debt extinguishment costs 26.9 16.5 10.4 63.0 %
Other expense (income), net 3.1 (0.2) 3.3 NM
Income before income taxes and noncontrolling interest (0.9) 3.3 (4.2) (127.3) %
Provision (benefit) for income taxes 5.1 (5.0) 10.1 (202.0) %
Effective tax rate (610.9) % (149.9) %
Net income from continuing operations (6.0) 8.3 (14.3) (172.3) %
Net (loss) income from discontinued operations, net of tax (159.1) 16.3 (175.4) NM
Net (loss) income (165.1) 24.6 (189.7) (771.1) %
Less: Net income attributable to the noncontrolling interest - discontinued operations 0.3 0.9 (0.6) (66.7) %
Net (loss) income attributable to Ecovyst Inc. $ (165.4) $ 23.7 $ (189.1) (797.9) %
Sales
Nine months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Sales:
Ecoservices $ 358.5 $ 298.7 $ 59.8 20.0 %
Catalyst Technologies 82.5 73.1 9.4 12.9 %
Total sales $ 441.0 $ 371.8 $ 69.2 18.6 %
Ecoservices : Sales in Ecoservices for the nine months ended September 30, 2021 were $358.5 million, an increase of $59.8 million, or 20.0%, compared to sales of $298.7 million for the nine months ended September 30, 2020. The increase in sales was due to higher average selling prices of $40.5 million and an increase in sales volumes of $19.3 million. Higher average selling prices benefited from the pass-through of higher sulfur costs of $27.8 million. Sales volumes increased as result of a rebound in refinery utilization compared to the prior year period that was depressed by the COVID-19 pandemic as well as the impact of our recent Chem32 acquisition.
Catalyst Technologies : Sales in Catalyst Technologies for the nine months ended September 30, 2021 were $82.5 million, an increase of $9.4 million, or 12.9%, compared to sales of $73.1 million for the nine months ended September 30, 2020. The increase in sales was due to an increase in volumes of $10.5 million partially offset by lower average selling prices of $2.7 million. Demand for our polyethylene catalysts drove the increase in sales, with higher volumes more than offsetting lower customer price mix.
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Gross Profit
Gross profit for the nine months ended September 30, 2021 was $122.2 million, an increase of $8.8 million, or 7.8%, compared with $113.4 million for the nine mon ths ended September 30, 2020. The increase in gross profit was due to favorable volumes in Ecoservices of $12.5 million, higher pricing of $10.0 million and favorable product mix in Silica Catalysts of $9.3 million, which was partially offset by higher manufacturing costs of $18.7 million.
The impact of favorable volumes on our gross profit was a result of a rebound in refinery utilization compared to the prior year period that was burdened by the COVID-19 pandemic as well as the impact of our recent Chem32 acquisition. Take or pay provisions within our contracts drove a favorable pricing benefit. The favorable product mix in Silica Catalysts was due to increased demand for our higher-margin polyethylene catalysts. One-time repair costs related to winter storms in the Gulf region, timing of plant “turnaround” maintenance expenditures and higher inventory absorption costs drove the unfavorable change in manufacturing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2021 was $68.8 million, an increase of $7.3 million as compa red to $61.5 million for the nine months ended September 30, 2020. The increase in selling, general and administrative expenses was due to increased compensation-related expenses, partially offset by income generated from the transition service agreement entered into as part of the sale of the Performance Materials business.
Other Operating Expense, Net
Other operating expense, net for the nine months e nded September 30, 2021 was $16.8 million, an increase of $5.5 million, compared with $11.3 million for the nine months ended September 30, 2020. The increase in other operating expense, net was a result of asset disposals related to plant “turnaround” maintenance projects and severance charges incurred in the current year period.
Equity in Net Income of Affiliated Companies
Equity in net income of affiliated companies for the nine months ended September 30, 2021 was $20.7 million, compared to $19.9 million for the nine months ended September 30, 2020. The increase was primarily due to $0.9 million of lower earnings from the Zeolyst Joint Ventur e during the nine months ended September 30, 2021.
Interest Expense, Net
Interest expense, net for the nine months ended September 30, 2021 was $28.2 million, a decrease of $12.7 million, as compared with $40.9 million for the nine months ended September 30, 2020. The decrease in interest expense was primarily due to lower interest rates on our variable-rate debt and lower average debt balances.
Debt Extinguishment Costs
Debt extinguishment costs were $26.9 million and $16.5 million for the nine months ended September 30, 2021 and 2020 , respectively.
Concurrent with, and using a portion of the net cash proceeds from, the divestiture of the Performance Chemicals business in August 2021, we repaid the remaining balance on our 2016 Term Loan Facility and redeemed the Senior Notes. In connection with the redemption of the Senior Notes, we paid a redemption premium of $8.5 million, which was recorded as debt extinguishment costs during the nine months ended September 30, 2021. We wrote off $0.8 million of unamortized deferred financing costs and $2.4 million of original issue discount related to the 2016 Term Loan Facility and $2.3 million of unamortized deferred financing costs and $1.2 million of original issue discount related to the Senior Notes as debt extinguishment costs during the nine months ended September 30, 2021.
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In June 2021, we entered into an agreement for a new senior secured term loan facility and used the proceeds to repay a portion of our existing term loan facilities. As a result of this transaction, we recorded $5.7 million of new creditor and third-party financing costs as debt extinguishment costs during the three months ended September 30, 2021. In addition, previous unamortized deferred financing costs of $1.7 million and original issue discount of $3.7 million associated with the previously outstanding debt were written off as debt extinguishment costs.
In June 2021, we amended our ABL Credit Agreement to decrease the aggregate amount of revolving loan commitments and extend the maturity date. As a result of the amendment, we wrote off $0.5 million of unamortized deferred financing costs as debt extinguishment costs.
On July 22, 2020, we entered into an agreement for a new senior secured term loan facility in an aggregate principal amount of $650.0 million, the proceeds of which were used to repay the remaining outstanding balance of $625.0 million on the 6.75% Senior Secured Notes due 2022. In conjunction with the issuance of such senior secured term loan facility, we paid $10.6 million in prepayment premiums and recorded $0.1 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $2.1 million and original issue discount of $1.2 million associated with the 6.75% Senior Secured Notes due 2022 were written off as debt extinguishment costs.
On February 7, 2020, we amended our existing senior secured term loan facility to reduce the applicable interest rates and extend the maturity of the facility to February 2027. We recorded $2.2 million of new creditor and third-party financing fees as debt extinguishment costs for the nine months ended September 30, 2020 . In addition, previously unamortized deferred financing costs of $0.1 million and original issue discount of $0.2 million associated with the existing senior secured term loan facility were written off as debt extinguishment costs for the nine months ended September 30, 2020 .
Other Expense (Income), Net
Other (income) expense, net for the nine months ended September 30, 2021 was expense of $3.1 million, a decrease of $3.3 million, as compared with income of $0.2 million for the nine months ended September 30, 2020. The decrease in other (income) expense, net primarily consisted of foreign currency losses in the current year as compared to gains in the prior year related to the non-permanent intercompany debt denominated in local currency and translated to the U.S. dollar.
Provision (Benefit) for Income Taxes
The benefit for income taxes for the nine months ended September 30, 2021 was $5.1 million compared to a $5.0 million benefit for the nine months ended September 30, 2020. The effective income tax rate for the nine months ended September 30, 2021 was (610.9)% compared to (149.9)% for the nine months ended September 30, 2020.
The Company’s effective income tax rate fluctuates primarily due to income mix, the impacts of GILTI, discrete impacts of the divestiture of the Performance Chemicals business, tax rate changes and changes in foreign exchange gains and losses, which create permanent differences in certain jurisdictions.
The difference between the U.S. federal statutory income tax rate and the Company’s effective income tax rate for the nine months ended September 30, 2021 was mainly due to the impacts of GILTI, discrete tax impacts related to intraperiod allocation revaluation of deferred tax assets and liabilities as a result of the divestiture of the Performance Chemicals business, tax rate changes and the tax effect of permanent differences related to foreign currency exchange gain or loss.
Net (Loss) Income Attributable to Ecovyst
For the foregoing reasons and after the effect of the non-controlling interest in earnings of subsidiaries for each period presented, net loss attributable to Ecovyst was $165.4 million for the nine months ended September 30, 2021 compared with net income of $23.7 million for the nine months ended September 30, 2020.
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Adjusted EBITDA
Summarized Segment Adjusted EBITDA information is shown below in the following table:
Nine months ended
September 30, Change
2021 2020 $ %
(in millions, except percentages)
Segment Adjusted EBITDA: (1)
Ecoservices $ 125.4 $ 116.5 $ 8.9 7.6 %
Catalyst Technologies (2)
64.6 59.7 4.9 8.2 %
Total Segment Adjusted EBITDA (3)
190.0 176.2 13.8 7.8 %
Unallocated corporate expenses
(25.6) (29.5) 3.9 13.2 %
Total Adjusted EBITDA $ 164.4 $ 146.7 $ 17.7 12.1 %
(1) We define Segment Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Our management evaluates the performance of our segments and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA does not represent cash flow for periods presented and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a source of liquidity. Segment Adjusted EBITDA may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies.
(2) The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $37.1 million for the nine months ended September 30, 2021, which includes $20.8 million of equity in net income, excluding $4.9 million of amortization of investment in affiliate step-up plus $11.4 million of joint venture depreciation, amortization and interest. The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $35.9 million for the nine months ended September 30, 2020, which includes $19.9 million of equity in net income, excluding $5.0 million of amortization of investment in affiliate step-up plus $11.1 million of joint venture depreciation, amortization and interest.
(3) Our total Segment Adjusted EBITDA differs from our total consolidated Adjusted EBITDA due to unallocated corporate expenses. Rounding discrepancies may arise when rounding segment results from dollars (in thousands) to dollars (in millions).
Ecoservices: Adjusted EBITDA for the nine months ended September 30, 2021 was $125.4 million, an increase of $8.9 million, or 7.6%, compared with $116.5 million for the nine mo nths ended September 30, 2020. The increase in Adjusted EBITDA was due to a rebound in sales volumes partially offset by higher repair costs to our facilities and lost sales related to winter storm Uri.
Catalyst Technologies: Adjusted EBITDA for the nine months ended September 30, 2021 was $64.6 million, an increase of $4.9 million, or 8.2%, compared with $59.7 million for the nine months ended September 30, 2020. The increase in Adjusted EBITDA was a result of higher demand for polyethylene catalyst and catalyst used for renewable fuels as well as favorable inventory absorption to match anticipated future demand partially offset by lower hydrocracking and specialty catalyst sales volumes.
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A reconciliation of net income from continuing operations to Segment Adjusted EBITDA is as follows:
Nine months ended
September 30,
2021 2020
(in millions)
Reconciliation of net income from continuing operations to Segment Adjusted EBITDA
Net income from continuing operations $ (6.0) $ 8.3
Provision (benefit) for income taxes 5.1 (5.0)
Interest expense, net 28.2 40.9
Depreciation and amortization 60.1 56.5
EBITDA 87.4 100.7
Joint venture depreciation, amortization and interest (a)
11.4 11.1
Amortization of investment in affiliate step-up (b)
4.9 5.0
Debt extinguishment costs 26.9 16.5
Net loss on asset disposals (c)
4.5 1.2
Foreign currency exchange loss (gain) (d)
4.8 (0.6)
LIFO benefit (e)
(2.0) (4.9)
Transaction and other related costs (f)
1.6 1.4
Equity-based compensation 22.8 13.3
Restructuring, integration and business optimization expenses (g)
2.4 1.4
Defined benefit pension plan benefit (h)
(2.2) (0.5)
Other (i)
1.9 2.1
Adjusted EBITDA 164.4 146.7
Unallocated corporate expenses 25.6 29.5
Segment Adjusted EBITDA $ 190.0 $ 176.2
(a) We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our Catalyst Technologies segment includes our 50% interest in the Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of the Zeolyst Joint Venture.
(b) Represents the amortization of the fair value adjustments associated with the equity affiliate investment in the Zeolyst Joint Venture as a result of the combination of the businesses of PQ Holdings Inc. and Eco Services Operations LLC in May 2016. We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of the 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) 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.
(d) 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.
(e) 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.
(f) 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.
(g) Includes the impact of restructuring, integration and business optimization expenses which are incremental costs that are not representative of our ongoing business operations.
(h) Represents adjustments for defined benefit pension plan (benefit) costs in our statements of income. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. As such, we do not view such income or expenses as core to our ongoing business operations.
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(i) Other costs consist of certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. Included in this line-item are rounding discrepancies that may arise from rounding from dollars (in thousands) to dollars (in millions).
Adjusted Net Income
Summarized adjusted net income information is shown below in the following table:
Nine months ended September 30,
2021 2020
Pre-tax Tax expense (benefit) After-tax Pre-tax Tax expense (benefit) After-tax
(in millions)
Reconciliation of net income from continuing operations to Adjusted Net Income (1)(2)
Net income attributable to Ecovyst Inc.
$ (0.9) $ 5.1 $ (6.0) $ 3.3 $ (5.0) $ 8.3
Amortization of investment in affiliate step-up (b)
4.9 1.4 3.5 5.0 1.8 3.2
Debt extinguishment costs 26.9 7.5 19.4 16.5 6.0 10.5
Net loss on asset disposals (c)
4.5 1.2 3.3 1.2 0.5 0.7
Foreign currency exchange losses (gains) (d)
4.8 1.3 3.5 (0.6) (0.2) (0.4)
LIFO benefit (e)
(2.0) (0.6) (1.4) (4.9) (1.8) (3.1)
Transaction and other related costs (f)
1.6 0.5 1.1 1.4 0.5 0.9
Equity-based compensation 22.8 6.4 16.4 13.3 4.8 8.5
Restructuring, integration and business optimization expenses (g)
2.4 0.7 1.7 1.4 0.5 0.9
Defined benefit pension plan benefit (h)
(2.2) (0.6) (1.6) (0.5) (0.2) (0.3)
Other (i)
1.9 0.6 1.3 2.1 0.7 1.4
Adjusted Net Income, including Intraperiod allocation $ 64.7 $ 23.5 $ 41.2 $ 38.2 $ 7.6 $ 30.6
Intraperiod allocation for restating discontinued operations (3)
— (5.3) 5.3 — 6.1 (6.1)
Adjusted Net Income $ 64.7 $ 18.2 $ 46.5 $ 38.2 $ 13.7 $ 24.5
(1) We define adjusted net income as net income attributable to Ecovyst 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) Refer to the Adjusted EBITDA notes above for more information with respect to each adjustment.
(3) Due to the sale of the Performance Chemicals business, the tax rates used to value deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) needs to be adjusted. Given it is a direct result of the sale of discontinued operations and the need to adjust the tax rates arose because of discontinued operations, the impact of revaluing the reporting entity’s DTAs and DTLs are reflected in continuing operations.
The adjustments to net income attributable to Ecovyst Inc. are shown net of applicable tax rates of 28.0% and 36.3% for the nine months ended September 30, 2021 and 2020, respectively, except for the foreign currency exchange loss and discrete impacts of the divestiture of the Performance Chemicals business.
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Financial Condition, Liquidity and Capital Resources
Our primary sources of liquidity consist of cash flows from operations, existing cash balances as well as funds available under our asset based lending revolving credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources of funds. Our primary liquidity requirements include funding working capital requirements (primarily inventory and accounts receivable, net of accounts payable and other accrued liabilities), debt service requirements and capital expenditures. Our capital expenditures include both maintenance of business, which include spending on maintenance and health, safety and environmental initiatives as well as growth, which includes spending to drive organic sales growth and cost savings initiatives.
We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our asset based lending revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next twelve months. We may also pursue strategic acquisition or divestiture opportunities, wh ich may impact our future cash requirements. We may, from time to time, increase borrowings under our asset based lending revolving credit facility to meet our future cash needs. As of September 30, 2021, we had cash and cash equivalents of $104.8 million and availability of $60.8 million under our asset based lending revolving credit facility, after giving effect to $17.5 million of outstanding letters of credit, for a total available liquidity of $165.6 million. We did not have any revolving credit facility borrowings as of September 30, 2021. As of September 30, 2021, we were in compliance with all covenants under our debt agreements.
We held an immaterial balance of cash and cash equivalents in foreign jurisdictions as of September 30, 2021. We continue to repatriate cash held outside of the United States from certain foreign subsidiaries in order to meet domestic liquidity needs. Depending on domestic and foreign cash balances, we have certain flexibility to repatriate funds in order to meet those needs. Specifically, we have an intercompany loan structure in place with foreign subsidiaries that allows us to repatriate foreign cash in a tax efficient manner from those subsidiaries. Repatriation of foreign cash is generally not subject to U.S. federal income taxes at the time of cash distribution. However, foreign earnings may still be taxed for state income tax purposes, as well as subject to certain foreign withholding tax obligations, when cash amounts are distributed back to the U.S.
Our liquidity requirements are significant, primarily due to debt service requirements. As reported, our cash interest paid for the nine months ended September 30, 2021 and 2020 wa s approximately $43.1 million and $75.3 million, respectively. Before any impact of hedges, a one percent change in assumed interest rates for our variable interest credit facilities would have an annual impact of approximately $9.0 million on interest expense. We hedge the interest rate fluctuations on debt obligations through interest rate cap agreements. As of September 30, 2021, we had interest rate caps on $500.0 million of notional variable-rate debt with a cap rate of 0.84% through July 2022 and $400.0 million of notional variable-rate debt with a cap rate of 1.00% through August 2023.
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Cash Flow
Nine months ended
September 30,
2021 2020
(in millions)
Continuing Operations
Net cash provided by (used in):
Operating activities $ 92.3 $ 56.4
Investing activities 892.9 (32.2)
Financing activities (963.5) (9.8)
Discontinued Operations
Net cash provided by (used in):
Operating activities (7.4) 94.2
Investing activities (40.9) (9.9)
Financing activities (1.1) (0.5)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (4.7) (6.0)
Net change in cash, cash equivalents and restricted cash (32.4) 92.2
Cash, cash equivalents and restricted cash at beginning of period 137.2 73.9
Cash, cash equivalents and restricted cash at end of period 104.8 166.1
Less: cash, cash equivalents and restricted cash of discontinued operations — (41.8)
Cash, cash equivalents and restricted cash at end of period of continuing operations $ 104.8 $ 124.5
Nine months ended
September 30,
2021 2020
(in millions)
Continuing Operations
Net income $ (6.0) $ 8.3
Non-cash and non-working capital related activities (1)
110.0 84.3
Changes in working capital (18.5) (33.7)
Other operating activities 6.8 (2.5)
Net cash provided by operating activities, continuing operations $ 92.3 $ 56.4
(1) Includes depreciation, amortization, amortization of deferred financing costs and original issue discount, foreign currency exchange gains and losses, deferred income tax provision (benefit), net (gains) losses on asset disposals, stock compensation expense and equity in net income and dividends received from affiliated companies.
Nine months ended
September 30,
2021 2020
(in millions)
Continuing Operations
Working capital changes that provided (used) cash:
Receivables $ (33.8) $ 1.7
Inventories 6.1 (4.9)
Prepaids and other current assets (8.4) (1.7)
Accounts payable 10.1 0.4
Accrued liabilities 7.5 (29.2)
$ (18.5) $ (33.7)
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Nine months ended
September 30,
2021 2020
(in millions)
Continuing Operations
Purchases of property, plant and equipment $ (44.6) $ (34.6)
Proceeds from business divestiture, net of cash 980.4 —
Business combinations, net of cash acquired (42.8) —
Proceeds from sale of assets — 2.4
Other, net (0.1) —
Net cash provided by (used in) investing activities, continuing operations $ 892.9 $ (32.2)
Nine months ended
September 30,
2021 2020
(in millions)
Continuing Operations
Net revolving credit facilities borrowings $ — $ —
Net cash borrowings (repayments) on debt obligations (532.1) (5.9)
Proceeds from failed sale-leaseback 14.1 —
Dividends paid to stockholders (435.6) —
Other financing activities (9.9) (3.9)
Net cash used in financing activities, continuing operations $ (963.5) $ (9.8)
The following discussions related to our cash flows are presented on a continuing operations basis, which excludes the cash flows from our Performance Materials and Performance Chemicals businesses accounted for as discontinued operations.
Net cash provided by operating activities was $92.3 million for the nine months ended September 30, 2021, compared to $56.4 million provided for the nine months ended September 30, 2020. Cash generated by operating activities, other than changes in working capital, was higher during the nine months ended September 30, 2021 by $20.7 million compared to the same period in the prior year. The change in working capital during the nine months ended September 30, 2021 was favorable compared to the nine months ended September 30, 2020. Cash used to fund working capital was $18.5 million and $33.7 million for the nine months ended September 30, 2021 and 2020, respectively.
The increase in cash generated by operating activities, other than changes in working capital, was higher by $20.7 million as compared to the prior year period primarily due to an increase in operating profit and an increase in dividends received from affiliated companies.
The increase in cash from working capital of $15.2 million as compared to the prior year was primarily due to unfavorable changes in accounts receivable and prepaid and other current assets, which were partially offset by favorable changes in inventories, accounts payable and accrued liabilities.
The unfavorable change in accounts receivable was driven by the increase in sales volumes and higher pass-through pricing within our Ecoservices segment and the timing of sales within our Catalysts segment. The unfavorable change in prepaid and other current assets relates to the timing of receivables from related parties and the timing of insurance prepayments. The increase in cash provided by inventory was due to the increase in sales within our Catalysts segment in the current year period. The favorable change in accounts payable is due to the timing of vendor payments as well as capital spending. The favorable change in accrued liabilities relates to changes in various accruals.
Net cash provided by investing activities was $892.9 million for the nine months ended September 30, 2021, compared to cash used of $32.2 million during the same period in 2020. Cash used in investing activities consisted of utilizing $44.6 million and $34.6 million to fund capital expenditures during the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, we divested our Performance Chemicals business and received $980.4 million in net proceeds and acquired Chem32, LLC for $42.8 million. We received proceeds of $2.4 million related to the sale of non-core assets during the nine months ended September 30, 2020.
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Net cash used in financing activities was $963.5 million for the nine months ended September 30, 2021, compared to net cash used of $9.8 million during the same period in 2020. During the nine months ended September 30, 2021, we used the proceeds from the divestiture of the Performance Chemicals business to repay approximately $526.4 million of outstanding debt, pay a special dividend of $435.6 million and pay a redemption premium on our debt of $8.5 million. Net cash used in financing activities was primarily driven by $10.6 million of debt prepayment charges and $4.1 million of stock repurchases, which was partially offset by $4.7 million of net debt borrowings for the nine months ended September 30, 2020.
Debt
September 30,
2021 December 31,
2020
(in millions)
Senior Secured Term Loan Facility due February 2027 (the “2016 Term Loan Facility”) (1)
$ — $ 671.7
Senior Secured Term Loan Facility due February 2027 (the “2020 Term Loan Facility”) — 459.7
Senior Secured Term Loan Facility due June 2028 (the “2021 Term Loan Facility”) 897.8 —
5.750% Senior Notes due 2025 (the “Senior Notes”) (1)
— 295.0
ABL Facility — —
Total debt 897.8 1,426.4
Original issue discount (9.1) (15.6)
Deferred financing costs (5.1) (10.4)
Total debt, net of original issue discount and deferred financing costs 883.6 1,400.4
Less: current portion (9.0) —
Total long-term debt, excluding current portion $ 874.6 $ 1,400.4
(1) A portion of the net cash proceeds from the closing of the sale of the Performance Chemicals business was used to repay the 2016 Term Loan Facility in full and to redeem all of the Senior Notes.
As of September 30, 2021, our total debt was $897.8 million, excluding the original issue discount of $9.1 million and deferred financing fees of $5.1 million for our senior secured credit facilities and notes. Our net debt as of September 30, 2021 was $793.0 million, including cash and cash equivalents of $104.8 million. We may seek, subject to market conditions and other factors, opportunities to repurchase, refinance or otherwise reprice our debt.
In June 2021, PQ Corporation (“PQ Corp”), an indirect, wholly owned subsidiary of Ecovyst prior to the closing of the sale of the Performance Chemicals business, and Ecovyst Catalyst Technologies LLC (“Ecovyst LLC” and, following the closing of the sale of the Performance Chemicals business, the “Borrower”), an indirect, wholly owned subsidiary entered into an agreement for a new senior secured term loan facility in an aggregate principal amount of $900.0 million with an original issue discount of 0.25% and interest at a floating rate of LIBOR (with a 0.5% minimum LIBOR floor) plus 2.75% per annum (or, depending on the Borrower’s first lien net leverage ratio, 2.5%). The proceeds were used to pay in full the 2020 Term Loan Facility, partially pay the 2016 Term Loan Facility and pay the associated fees and expenses. The new senior secured term loan facility requires scheduled quarterly amortization payments, each equal to 0.25% of the original principal amount of the loans under the new senior secured term loan facility.
In June 2021, PQ Corp also entered into a third amendment agreement (the “ABL Amendment”), which amended the ABL Credit Agreement, dated as of May 4, 2016 (the “ABL Credit Agreement” and, as amended by the ABL Amendment, the “Amended ABL Credit Agreement”). The ABL Amendment amended the ABL Credit Agreement to, among other things, following the closing of the sale of the Performance Chemicals business, decrease the aggregate amount of revolving loan commitments available to the borrowers thereunder by an aggregate amount of $150.0 million to $100.0 million, consisting of $90.0 million in U.S. commitments and $10.0 million on in European commitments and extended the maturity date with respect to borrowings under the Amended ABL Credit Agreement to August 2, 2026.
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Capital Expenditures
Maintenance capital expenditures include spending on maintenance of business, health, safety and environmental initiatives. Growth capital expenditures include spending to drive organic sales growth and cost savings initiatives. These capital expenditures represent our “book” capital expenditures for which the company has recorded, but not necessarily paid for the capital expenditures.
Nine months ended
September 30,
2021 2020
(in millions)
Maintenance capital expenditures $ 29.3 $ 21.3
Growth capital expenditures 8.8 6.6
Total capital expenditures $ 38.1 $ 27.9
Capital expenditures remained at a level sufficient for required maintenance and certain expansion growth initiatives during these periods. Maintenance capital expenditures were higher in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due to higher plant maintenance costs and spending on health and safety. Growth capital expenditures were in-line in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Pension Funding
We did not pay any cash contributions into our defined benefit plans and other postretirement plans during the nine months ended September 30, 2021. We paid $3.3 million in cash contributions into our defined benefit pension plans and other post-retirement plans during the nine months ended September 30, 2020. The net periodic pension expense was $1.8 million and $0.3 million for the nine months ended September 30, 2020, respectively.
Off–Balance Sheet Arrangements
We had $17.5 million of outstanding letters of credit on our ABL Facility as of September 30, 2021.
Contractual Obligations
Information related to our contractual obligations at December 31, 2020 can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 17, 2021, which we refer to as our Annual Report on Form 10-K. During the nine months ended September 30, 2021, there have been no significant changes to our contractual obligations as disclosed in our Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in conformity with GAAP and our significant accounting policies are described in Note 2 to our audited consolidated financial statements included in our Annual Report on Form 10-K. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We base our estimates and judgments on historical experience and other relevant factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We evaluate our critical accounting estimates, assumptions and judgments on an ongoing basis.
There has been no material change in our critical accounting policies and use of estimates from those described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K.
Accounting Standards Not Yet Adopted
See Note 2 to our unaudited condensed consolidated financial statements for a discussion of recently issued accounting standards and their effect on us.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.