ECOVYST INC. Unless the context requires otherwise, references in this report to "Ecovyst ," "the company," "we," "us" or "our" refer toEcovyst Inc. and its consolidated subsidiaries. Forward-looking Statements This periodic report on Form 10-Q ("Form 10-Q") includes "forward-looking statements" that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "should" and similar expressions are intended to identify these 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, statements we make regarding demand trends, and/orRussia's invasion ofUkraine and related economic effects on our operations and financial results and our liquidity, and our belief that our current level of operations, cash and cash equivalents, cash flow from operations and borrowings under our credit facilities and other lines of credit will provide us adequate cash to fund the working capital, capital expenditure, debt service and other requirements for our business for at least the next twelve 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 the following risks related to our business:
•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 theU.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 substantial level of indebtedness could adversely affect our financial condition;
•if we are unable to manage the current and future inflationary environment and to pass on increases in raw material prices, including natural gas, or labor costs 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
•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;
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•we are subject to extensive environmental, health and safety regulations and face various risks associated with potential non-compliance or releases of hazardous materials;
•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, including as a result of supply chain constraints, 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;
•disruption, failure or cyber security breaches affecting or targeting computers and infrastructure used by us or our business partners may adversely impact our business and operations
•the impact of the COVID-19 pandemic on the global economy and financial markets, as well as on our business and our suppliers, and the response of governments and of our company to the outbreak, including variants of the virus and associated containment, remediation and vaccination efforts; and
•other factors set forth in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , as supplemented in "Item 1A, Risk Factors" in our quarterly report on Form 10-Q for the quarter endedMarch 31, 2023 . 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.
We conduct operations through two reporting segments: (1)
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 help produce renewable fuels, remove nitrogen oxides from diesel engine emissions as well as sulfur from fuels during the refining process.
Impact of
We are continuing to monitor the developments inRussia andUkraine , as well as the related economic sanctions and export controls imposed on certain industry sectors. Although the current conflict has created global economic and political uncertainties and affected certain supply chain disruptions, we do not believe we have significant exposure in those countries. We have no operations inRussia orUkraine . We had no sales to customers inUkraine or inRussia for the three months endedMarch 31, 2023 . Sales to a customer inRussia were immaterial for the three months endedMarch 31, 2022 . We also did not make any purchases from suppliers inRussia orUkraine . AsRussia's invasion ofUkraine continues to unfold, we will continue to monitor compliance with sanctions imposed by theU.S. government and other countries. 26
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Impact of Winter Storm Elliott
Late in the fourth quarter of 2022, ourEcoservices business was adversely impacted by Winter Storm Elliott. The storm disrupted operations at a number of our facilities, impacting production and resulting in unplanned repair and maintenance costs and lower virgin sulfuric acid sales volume. While the storm had a modest impact on fourth quarter 2022 financial results, the production outages arising from Winter Storm Elliott limited our ability to produce inventory in advance of significant planned turnaround activity and to meet customer demand, resulting in constrained availability and lower sales of virgin sulfuric acid in the first quarter of 2023.
Stock Repurchase Program
OnApril 27, 2022 , the Board approved a stock repurchase program that permits the Company to purchase up to$450,000 of the Company's common stock over the four-year period from the date of approval. For the three months endedMarch 31, 2023 , in connection with a secondary offering of the Company's common stock inMarch 2023 , the Company repurchased 3,000,000 shares of its common stock sold in the offering from the underwriter at an average price of$9.95 per share concurrently with the closing of the offering, for a total of$29.9 million .
As of
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 inthe 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 toEcovyst Inc. 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. 27
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Key Factors and Trends Affecting Operating Results and Financial Condition
Sales
Overall, ourEcoservices and Catalyst Technologies segments continued to benefit from positive demand trends for our products and services in the industries we serve. Strong domestic and export demand for refined products continued to support high refinery utilization rates, while more stringent gasoline standards and growing demand for premium gasoline to power higher-compression and turbocharged engines continued to drive demand for alkylate and for our regeneration services. Global polyethylene demand remained positive, driven by the long-term growth in consumer demand for films and packaging, supporting sales of our silica-based catalysts, while increasing demand for renewable fuels and more stringent regulation is renewable fuels and polyethylene, and in emission control applications.
Sales in our
Our Catalyst Technologies segment may experience demand fluctuations based upon the timing of some of our customer's fixed bed catalyst replacements.
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 all plant employment costs, manufacturing overhead and periodic maintenance costs. The primary raw materials for ourEcoservices segment include spent sulfuric acid, sulfur, acids, bases (including sodium hydroxide, or "caustic soda"), and certain metals. Spent sulfuric acid for ourEcoservices segment is supplied by customers. The primary raw materials used in the manufacture of products in our Catalyst Technologies segments include sodium silicate and cesium hydroxide. Most of ourEcoservices 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 ourEcoservices segment sales for the year endedDecember 31, 2022 were under contracts featuring quarterly price adjustments. The price adjustments generally reflect actual costs for producing 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. 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 Venture
We account for our investments in our equity joint ventures under the equity method. Our joint venture, the Zeolyst Joint Venture, manufactures high performance, specialty, zeolite-based catalysts, 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 venture with the other parties to such joint venture.
Seasonality
Our regeneration services product group, which is a part of ourEcoservices 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 intoU.S. dollars. We operate in various geographies with approximately 6% of our sales for the three months endedMarch 31, 2023 and for the year endedDecember 31, 2022 in currencies other than theU.S. dollar. Because our consolidated financial results are reported inU.S. dollars, sales or earnings generated in currencies other than theU.S. dollar can result in a significant increase or decrease in the amount of those sales and earnings when translated toU.S. dollars. The foreign currency to which we have the most significant exchange rate exposure is the British pound. 28
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Results of Operations
Three Months Ended
Highlights
The following is a summary of our financial performance for the three months
ended
Sales
•Sales decreased
Gross Profit
•Gross profit decreased
Operating Income
•Operating income decreased by
Equity in Net Income of Affiliated Companies
•Equity in net income of affiliated companies for the three months endedMarch 31, 2023 was$0.2 million , compared with$5.7 million for the three months endedMarch 31, 2022 . The decrease of$5.5 million was due to lower sales volume driven by timing of customer orders from the Zeolyst Joint Venture during the three months endedMarch 31, 2023 . The following is our unaudited condensed consolidated statements of income and a summary of financial results for the three months endedMarch 31, 2023 and 2022: Three months ended March 31, Change 2023 2022 $ % (in millions, except percentages) Sales$ 160.9 $ 179.7 $ (18.8) (10.5) % Cost of goods sold 124.4 132.0 (7.6) (5.8) % Gross profit 36.5 47.7 (11.2) (23.5) % Gross profit margin 22.7 % 26.6 %
Selling, general and administrative
expenses 21.1 23.5 (2.4) (10.2) % Other operating expense, net 6.7 7.7 (1.0) (13.0) % Operating income 8.7 16.5 (7.8) (47.3) % Operating income margin 5.4 % 9.1 %
Equity in net (income) from affiliated
companies (0.2)
(5.7) 5.5 (96.5) %
Interest expense, net 9.9 8.5 1.4 16.5 % Other (income) expense, net (0.4) 0.1 (0.5) (500.0) %
(Loss) income before income taxes and
noncontrolling interest (0.6) 13.6 (14.2) (104.4) % Provision for income taxes 0.9 5.7 (4.8) (84.2) % Effective tax rate (180.7) % 42.1 %
Net (loss) income attributable to
Ecovyst Inc$ (1.5) $ 7.9 $ (9.4) (119.0) % 29
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Sales
Three months ended
March 31, Change
2023 2022 $ %
Sales: (in millions, except percentages)
Ecoservices $ 137.8 $ 154.0 $ (16.2) (10.5) %
Catalyst Technologies 23.1 25.7 (2.6) (10.1) %
Total sales $ 160.9 $ 179.7 $ (18.8) (10.5) %
Ecoservices : Sales in Ecoservices for the three months ended March 31, 2023 were
$137.8 million , a decrease of $16.2 million , or 10.5%, compared to sales of
$154.0 million for the three months ended March 31, 2022 . The decrease in sales
reflects lower sales volume of $26.4 million , partially offset by higher average
selling pricing of $10.2 million after the pass-through of sulfur costs of
approximately $5.2 million .
Sales volume was lower primarily due to lower virgin sulfuric acid sales
associated with the adverse impact of Winter Storm Elliott and extended
maintenance turnaround activity at one of our facilities, limit our ability to
produce inventory in advance of significant planned turnaround activity to meet
customer demand during the three months ended March 31, 2023 . Higher average
selling prices were driven by favorable pricing in regeneration services,
including the pass-through of higher freight, labor, and energy indexed costs
partially offset by lower pass-through of sulfur costs in virgin sulfuric acid
of $5.2 million .
Catalyst Technologies: Sales in Catalyst Technologies for the three months ended
March 31, 2023 were $23.1 million , a decrease of $2.6 million , or 10.1%,
compared to sales of $25.7 million for the three months ended March 31, 2022 .
The decrease in sales was due to lower sales volume of $3.6 million and the
unfavorable effects of foreign currency of $0.9 million , partially offset by
higher average selling prices of $1.9 million .
The decrease in sales volume was primarily driven by lower polyethylene
catalysts sales during the three months ended March 31, 2023 , driven in part by
the economic sanctions associated with the developments in Russia and Ukraine .
Higher average selling prices during the three months ended March 31, 2023 was
driven by implemented price increases.
Gross Profit
Gross profit for the three months endedMarch 31, 2023 was$36.5 million , a decrease of$11.2 million , or 23.5%, compared with$47.7 million for the three months endedMarch 31, 2022 . The decrease in gross profit reflects a$11.0 million contribution associated with lower sales volumes and higher manufacturing costs of$12.3 million , partially offset by higher average selling prices of$12.1 million .
The decrease in gross profit was driven by lower sales volume in the
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedMarch 31, 2023 was$21.1 million , a decrease of$2.4 million as compared to$23.5 million for the three months endedMarch 31, 2022 . The decrease in selling, general and administrative expenses was mainly due to a decrease in stock-based compensation expense of$3.2 million due to fewer awards granted, lower dividend equivalents, and lower expense for the three months endedMarch 31, 2023 .
Other Operating Expense, Net
Other operating expense, net for the three months endedMarch 31, 2023 was$6.7 million , a decrease of$1.0 million , compared with$7.7 million for the three months endedMarch 31, 2022 . The decrease in other operating expense, net was mainly driven by a decrease of$2.8 million in transactions costs, primarily associated with the sale of the Performance Chemicals business, offset by an increase in net losses on asset disposals of$1.0 million , primarily related to costs associated with Winter Storm Elliott.
Equity in Net Income of Affiliated Companies
Equity in net income of affiliated companies for the three months endedMarch 31, 2023 was$0.2 million , compared to$5.7 million for the three months endedMarch 31, 2022 . The decrease was primarily due to lower earnings from the Zeolyst Joint Venture largely due to the comparative timing of customer orders for hydrocracking and specialty catalysts sales during the three months endedMarch 31, 2023 . 30
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Interest Expense, Net
Interest expense, net for the three months endedMarch 31, 2023 was$9.9 million , an increase of$1.4 million , as compared with$8.5 million for the three months endedMarch 31, 2022 . The increase in interest expense, net was primarily due to rising interest rates, partially offset by lower debt principal outstanding and the benefits associated with our interest rate caps.
Other (Income) Expense, Net
Other income, net for the three months endedMarch 31, 2023 was$0.4 million , a decrease of$0.5 million , as compared to other expense, net of$0.1 million for the three months endedMarch 31, 2022 . The change in other (income) expense, net primarily consisted of foreign currency exchange gains of$1.1 million related to the non-permanent intercompany debt denominated in local currency and translated to theU.S. dollar. This was offset by net periodic pension benefit of$0.6 million for the defined benefit pension and postretirement plans for the three months endedMarch 31, 2022 .
Provision for Income Taxes
The provision for income taxes for the three months endedMarch 31, 2023 was$0.9 million compared to a$5.7 million for the three months endedMarch 31, 2022 . The effective income tax rate for the three months endedMarch 31, 2023 was (180.7)% compared to 42.1% for the three months endedMarch 31, 2022 .
The Company's effective income tax rate fluctuated primarily due to the discrete impact related to a shortfall of stock compensation tax deduction which outweighed the tax benefit from the pre-tax loss during the quarter.
The difference between theU.S. federal statutory income tax rate and the Company's effective income tax rate for the three months endedMarch 31, 2023 was mainly due to state and local taxes, a discrete shortfall tax expense related to stock compensation and a discrete tax expense associated with the recording of accrued penalties and interest associated with historical uncertain tax positions.
Net (Loss) income Attributable to
For the foregoing reasons, net loss attributable toEcovyst was$1.5 million for the three months endedMarch 31, 2023 compared to net income of$7.9 million for the three months endedMarch 31, 2022 .
Adjusted EBITDA
Summarized Adjusted EBITDA information is shown below in the following table:
Three months ended
March 31, Change
2023 2022 $ %
(in millions, except percentages)
Adjusted EBITDA:(1)
Ecoservices $ 36.8 $ 49.3 $ (12.5) (25.4) %
Catalyst Technologies(2) 13.0 17.0 (4.0) (23.5) %
Unallocated corporate expenses (6.9) (7.1)
0.2 (2.8) %
Total $ 42.9 $ 59.2 $ (16.3) (27.5) %
(1)We define 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 Adjusted EBITDA. 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.
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 $5.4 million for the three months ended March 31, 2023 ,
which includes $0.2 million of equity in net income, excluding $1.6 million of
amortization of investment in affiliate step-up plus $3.6 million of joint
venture depreciation, amortization and interest.
The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst
Technologies segment is $11.5 million for the three months ended March 31, 2022 ,
which includes $5.8 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.
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Ecoservices : Adjusted EBITDA for the three months ended March 31, 2023 was $36.8
million , a decrease of $12.5 million , or 25.4%, compared with $49.3 million for
the three months ended March 31, 2022 . The decrease in Adjusted EBITDA was
primarily a result of lower virgin sulfuric acid sales volume related to Winter
Storm Elliott and the extended maintenance turnaround activity, higher unplanned
repair and maintenance costs and costs associated with planned turnaround
activity, partially offset by higher pricing for regeneration services.
Catalyst Technologies: Adjusted EBITDA for the three months ended March 31, 2023
was $13.0 million , a decrease of $4.0 million , or 23.5%, compared with $17.0
million for the three months ended March 31, 2022 . The decrease in Adjusted
EBITDA was due to lower volume on timing of customer orders, partially offset by
continued strong pricing and favorable product mix.
A reconciliation of net (loss) income to Ecovyst Inc. to Adjusted EBITDA is as
follows:
Three months ended
March 31,
2023 2022
(in millions)
Reconciliation of net (loss) income attributable to Ecovyst
Inc. to Adjusted EBITDA
Net (loss) income attributable to Ecovyst Inc. $ (1.5) $ 7.9
Provision for income taxes 0.9 5.7
Interest expense, net 9.9 8.5
Depreciation and amortization 20.2 19.5
EBITDA 29.5 41.6
Joint venture depreciation, amortization and interest(a) 3.6 4.1
Amortization of investment in affiliate step-up(b) 1.6 1.6
Net loss on asset disposals(c) 1.2 0.1
Foreign currency exchange (gain) loss(d) (0.7) 0.6
LIFO expense(e) 1.4 0.2
Transaction and other related costs(f) 1.4 4.3
Equity-based compensation 4.1 7.3
Restructuring, integration and business optimization
expenses(g) 1.0 0.4
Other(h) (0.2) (1.0)
Adjusted EBITDA $ 42.9 $ 59.2
(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 related to the non-permanent intercompany debt
denominated in local currency translated to
(e)Represents non-cash adjustments to the Company's LIFO reserves for certain inventories in theU.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.
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(h)Other consists of adjustments for items that are not core to our ongoing business operations. These adjustments include environmental remediation and other legal costs, expenses for capital and franchise taxes, and defined benefit pension and postretirement plan (benefits) costs, for which our obligations are under plans that are frozen. Also included in this amount are adjustments to eliminate the benefit realized in cost of goods sold of the allocation of a portion of the contract manufacturing payments under the five-year agreement with the buyer of the Performance Chemicals business to the financing obligation under the failed sale-leaseback. 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:
Three months ended March 31,
2023 2022
Pre-tax Tax expense After-tax Pre-tax Tax expense After-tax
amount (benefit) amount amount (benefit) amount
(in millions)
Reconciliation of
net (loss) income
attributable to
Ecovyst Inc. to
Adjusted Net
Income(1)(2)
Net (loss) income
attributable to
Ecovyst Inc. $ (0.6) $ 0.9 $ (1.5) $ 13.6 $ 5.7 $ 7.9
Amortization of
investment in
affiliate
step-up(b) 1.6 0.4 1.2 1.6 0.4 1.2
Net loss on asset disposals(c) 1.2 0.3 0.9 0.1 - 0.1 Foreign currency exchange (gain) loss(d) (0.7) (0.1) (0.6) 0.6 0.1 0.5 LIFO expense(e) 1.4 0.4 1.0 0.2 0.1 0.1 Transaction and other related costs(f) 1.4 0.4 1.0 4.3 1.0 3.3
Equity-based
compensation(3) 4.1 (0.1) 4.2 7.3 (0.3) 7.6 Restructuring, integration and business optimization expenses(g) 1.0 0.1 0.9 0.4 0.1 0.3 Other(h) (0.2) 0.1 (0.3) (1.0) (0.3) (0.7) Adjusted Net Income$ 9.2 $ 2.4$ 6.8 $ 27.1 $ 6.8$ 20.3 (1)We define adjusted net income as net income attributable toEcovyst 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)Includes tax adjustments for the shortfall in stock compensation.
The adjustments to net income attributable toEcovyst Inc. are shown net of applicable tax rates of 25.6% and 24.7% for the three months endedMarch 31, 2023 and 2022, respectively, except for the foreign currency exchange (gain) loss and equity-based compensation. The tax effect on equity-based compensation is derived by removing the tax effect of any equity-based compensation expense disallowed as a result of its inclusion within IRC Sec. 162m, and adding the tax effect of equity-based stock compensation shortfall recorded as a discrete item. The tax effect of the foreign currency exchange (gain) loss is derived from tax effecting the actual year to date foreign currency exchange (gain) loss by the respective local country statutory rates which is recorded as a discrete item. 33
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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 ("ABL 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, which 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
March 31, 2023 , we had cash and cash equivalents of $61.6 million and
availability of $57.3 million under our asset based lending revolving credit
facility, after giving effect to $4.1 million of outstanding letters of credit,
for a total available liquidity of $118.9 million . We did not have any revolving
credit facility borrowings as of March 31, 2023 . As of March 31, 2023 , we were
in compliance with all covenants under our debt agreements.
Our ABL Facility has one financial covenant with two ratios to maintain. The
first ratio compares the total ABL availability against a threshold: the greater
of 10% of the line cap (which is defined as the lesser of our revolving loan
commitments and the value of our assets) or $20.0 million . The greater of this
threshold cannot be greater than the total availability of the ABL Facility. The
second ratio compares the ABL Facility availability of the U.S. revolving credit
facility against a $15.0 million threshold. As of March 31, 2023 , we were in
compliance with the financial covenant under the ABL Facility.
The 2021 Term Loan Facility and the ABL Facility contain various restrictive
covenants. Each limits the ability of the Company and its restricted
subsidiaries to incur certain indebtedness or liens, merge, consolidate or
liquidate, dispose of certain property, make investments or declare or pay
dividends, make optional payments, modify certain debt instruments, enter into
certain transactions with affiliates, enter into certain sales and leasebacks,
and certain other non-financial restrictive covenants. During such time, the
Company is required to maintain a fixed-charge coverage ratio of at least 1.0 to
1.0. The Company was in compliance with all debt covenants under the 2021 Term
Loan Facility and the ABL Facility as of March 31, 2023 .
Included in our cash and cash equivalents balance as of March 31, 2023 was $19.6
million of cash and cash equivalents in foreign jurisdictions. Depending on
foreign cash balances, we have certain flexibility to repatriate funds should
the need arise. Should the need arise, we would repatriate the funds in the most
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 include interest payments related to our debt
structure. As reported, our cash interest paid for the three months ended March
31, 2023 and 2022 was approximately $15.2 million and $8.4 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 $8.8 million on interest expense.
We hedge the interest rate fluctuations on debt obligations through interest
rate cap agreements. As of March 31, 2023 , we had a $400.0 million of notional
variable-rate debt with a cap rate of 1.00% through August 2023 , a $250.0
million of notional variable-rate debt with a cap rate of 1.00% through October
2024 , a $250.0 million of notional variable-rate debt with a cap rate of 1.00%
through October 2025 , a $150.0 million of notional variable-rate debt with a cap
rate of 1.00% through July 2026 , a $200.0 million of notional variable-rate debt
with a cap rate of 1.00% through October 2025 , and a $450.0 million of notional
variable-rate debt with a cap rate of 1.00% through October 2026 .
The Company's off-balance sheet arrangements include
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Cash Flow
Three months ended
March 31,
2023 2022
(in millions)
Net cash provided by (used in):
Operating activities $ 4.1 $ 6.4
Investing activities (18.7) (14.4)
Financing activities (33.6) (2.6)Effect of exchange rate changes on cash and cash equivalents (1.1)
(0.6)
Net change in cash and cash equivalents (49.3) (11.2)
Cash and cash equivalents at beginning of period 110.9
140.9
Cash and cash equivalents at end of period$ 61.6 $ 129.7 Three months ended March 31, 2023 2022 (in millions) Net income$ (1.5) $ 7.9 Non-cash and non-working capital related activities(1) 28.2 46.6 Changes in working capital (18.6) (40.7) Other operating activities (4.0) (7.4) Net cash provided by operating activities$ 4.1 $ 6.4 (1)Includes depreciation, amortization, amortization of deferred financing costs and original issue discount, foreign currency exchange (gain) loss, deferred income tax provision (benefit), net (gain) loss on asset disposals, stock compensation expense, equity in net income and dividends received from affiliated companies. Three months ended March 31, 2023 2022 (in millions)
Working capital changes that (used) provided cash:
Receivables $ 8.4 $ (10.4)
Inventories (1.3) (1.0)
Prepaids and other current assets (9.7) (3.6)
Accounts payable (1.9) 2.2
Accrued liabilities (14.1) (27.9)
$ (18.6) $ (40.7)
Three months ended
March 31,
2023 2022
(in millions)
Purchases of property, plant and equipment $ (18.7) $ (10.8)
Payments for business divestiture, net of cash - (3.7)
Other, net - 0.1
Net cash used in investing activities $ (18.7) $ (14.4)
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Three months ended
March 31,
2023 2022
(in millions)
Cash repayments on debt obligations $ (2.3)
Repurchases of common shares (29.9) -
Tax withholdings on equity award vesting (0.9) (0.3)
Repayment of financing obligation (0.7) -
Other 0.2 -
Net cash used in financing activities $ (33.6) Net cash provided by operating activities was$4.1 million for the three months endedMarch 31, 2023 , compared to$6.4 million provided for the three months endedMarch 31, 2022 . Cash generated by operating activities, other than changes in working capital, was lower during the three months endedMarch 31, 2023 by$24.4 million compared to the same period in the prior year. The change in working capital during the three months endedMarch 31, 2023 was favorable compared to the three months endedMarch 31, 2022 . Cash used to fund working capital was$18.6 million and$40.7 million for the three months endedMarch 31, 2023 and 2022, respectively. The decrease in cash generated by operating activities, other than changes in working capital, was lower by$24.4 million as compared to the prior year period primarily due to an decrease in operating profit and a decrease in dividends received from affiliated companies. The increase in cash from working capital of$22.1 million as compared to the prior year was primarily due to favorable changes in accounts receivable and accrued liabilities, which was partially offset by unfavorable changes in prepaids and other current assets and accounts payable. The favorable change in accounts receivable was driven by the timing of sales as well as decreased sales volume. The favorable change in accrued liabilities mainly relates to higher income tax payments in the prior year period as compared to the current year period. The unfavorable change in prepaid and other current assets primarily relates to the timing of non-trade receivables from related parties. The unfavorable change in accounts payable is due to the timing of vendor payments and professional fees. Net cash used in investing activities was$18.7 million for the three months endedMarch 31, 2023 , compared to net cash used of$14.4 million during the same period in 2022. Cash used in investing activities consisted of$18.7 million and$10.8 million to fund capital expenditures during the three months endedMarch 31, 2023 and 2022, respectively. During the three months endedMarch 31, 2022 , we made an additional payment of$3.7 million related to our divestiture of our Performance Chemicals business representing the final adjustments to the sale price. Net cash used in financing activities was$33.6 million for the three months endedMarch 31, 2023 , compared to net cash used of$2.6 million during the same period in 2022. Net cash used in financing activities was primarily driven by the Company repurchases of common stock of$29.9 million during the three months endedMarch 31, 2023 . 36
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Debt
March 31, December 31,
2023 2022
(in millions)
Senior Secured Term Loan Facility due June 2028 $ 884.3 $ 886.5
ABL Facility - -
Total debt 884.3 886.5
Original issue discount (7.2) (7.5)
Deferred financing costs (4.0) (4.1)Total debt, net of original issue discount and deferred financing costs
873.1 874.9
Less: current portion (9.0) (9.0)
Total long-term debt, excluding current portion $ 864.1 As ofMarch 31, 2023 , our total debt was$884.3 million , excluding the original issue discount of$7.2 million and deferred financing costs of$4.0 million for our senior secured credit facilities. Our net debt as ofMarch 31, 2023 was$822.7 million , including cash and cash equivalents of$61.6 million . We may seek, subject to market conditions and other factors, opportunities to repurchase, refinance or otherwise reprice our debt.
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.
Three months ended
March 31,
2023 2022
(in millions)
Maintenance capital expenditures $ 12.8 $ 7.0
Growth capital expenditures 1.3 2.1
Total capital expenditures $ 14.1 $ 9.1
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 three months ended March 31, 2023 compared to
the three months ended March 31, 2022 due to higher turnaround expenditures and
additional expenditures incurred related to Winter Storm Elliott impacting our
manufacturing facilities. Growth capital expenditures were slightly lower in the
three months ended March 31, 2023 compared to the three months ended March 31,
2022 due to the completion of several expansion projects in 2022.
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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