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EX-32.2 - EXHIBIT 32.2 - PQ Group Holdings Inc.ex322-sec906cfocertx63018.htm
EX-32.1 - EXHIBIT 32.1 - PQ Group Holdings Inc.ex321-sec906ceocertx63018.htm
EX-31.2 - EXHIBIT 31.2 - PQ Group Holdings Inc.ex312-sec302cfocertx63018.htm
EX-31.1 - EXHIBIT 31.1 - PQ Group Holdings Inc.ex311-sec302ceocertx63018.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38221
 
PQ Group Holdings Inc.
 
Delaware
 
81-3406833
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
300 Lindenwood Drive
Valleybrooke Corporate Center
Malvern, Pennsylvania
 
19355
(Address of principal executive offices)
 
(Zip Code)
 
(610) 651-4400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
ý (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of common stock outstanding as of August 6, 2018 was 135,204,637.
 
 
 
 
 



PQ GROUP HOLDINGS INC.

INDEX—FORM 10-Q
June 30, 2018


2


PART IFINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED).

PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2018
 
2017
 
2018
 
2017
Sales
$
434,713

 
$
389,267

 
$
800,910

 
$
722,198

Cost of goods sold
326,309

 
281,853

 
614,385

 
532,072

Gross profit
108,404

 
107,414

 
186,525

 
190,126

Selling, general and administrative expenses
43,477

 
35,358

 
84,095

 
70,070

Other operating expense, net
15,873

 
16,976

 
25,187

 
27,324

Operating income
49,054

 
55,080

 
77,243

 
92,732

Equity in net (income) from affiliated companies
(13,666
)
 
(8,745
)
 
(25,518
)
 
(14,622
)
Interest expense, net
27,221

 
48,176

 
56,384

 
94,961

Debt extinguishment costs

 

 
5,879

 

Other expense, net
5,691

 
14,312

 
10,663

 
16,281

Income (loss) before income taxes and noncontrolling interest
29,808

 
1,337

 
29,835

 
(3,888
)
Provision for income taxes
13,649

 
3,007

 
13,120

 
97

Net income (loss)
16,159

 
(1,670
)
 
16,715

 
(3,985
)
Less: Net income (loss) attributable to the noncontrolling interest
377

 
(61
)
 
719

 
78

Net income (loss) attributable to PQ Group Holdings Inc.
$
15,782

 
$
(1,609
)
 
$
15,996

 
$
(4,063
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.12

 
$
(0.02
)
 
$
0.12

 
$
(0.04
)
Diluted income (loss) per share
$
0.12

 
$
(0.02
)
 
$
0.12

 
$
(0.04
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
133,222,463

 
104,015,815

 
133,188,303

 
103,981,851

Diluted
134,209,740

 
104,015,815

 
134,047,362

 
103,981,851

See accompanying notes to condensed consolidated financial statements.


3


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
16,159

 
$
(1,670
)
 
$
16,715

 
$
(3,985
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Pension and postretirement benefits
1,375

 
(22
)
 
1,357

 
(203
)
Net gain (loss) from hedging activities
553

 
(1,256
)
 
2,736

 
(3,025
)
Foreign currency translation
(29,493
)
 
26,305

 
(20,822
)
 
41,642

Total other comprehensive income (loss)
(27,565
)
 
25,027

 
(16,729
)
 
38,414

Comprehensive income (loss)
(11,406
)
 
23,357

 
(14
)
 
34,429

Less: Comprehensive income (loss) attributable to noncontrolling interests
(1,167
)
 
1,024

 
479

 
579

Comprehensive income (loss) attributable to PQ Group Holdings Inc.
$
(10,239
)
 
$
22,333

 
$
(493
)
 
$
33,850

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


4


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

 
June 30,
2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
52,553

 
$
66,195

Receivables, net
242,014

 
193,456

Inventories
268,413

 
262,388

Prepaid and other current assets
39,036

 
26,929

Total current assets
602,016

 
548,968

Investments in affiliated companies
477,345

 
469,276

Property, plant and equipment, net
1,217,002

 
1,230,384

Goodwill
1,260,286

 
1,305,956

Other intangible assets, net
759,637

 
786,144

Other long-term assets
98,219

 
74,727

Total assets
$
4,414,505

 
$
4,415,455

LIABILITIES
 
 
 
Notes payable and current maturities of long-term debt
$
54,071

 
$
45,166

Accounts payable
139,731

 
149,326

Accrued liabilities
76,356

 
93,917

Total current liabilities
270,158

 
288,409

Long-term debt, excluding current portion
2,193,769

 
2,185,320

Deferred income taxes
197,697

 
189,336

Other long-term liabilities
113,553

 
120,471

Total liabilities
2,775,177

 
2,783,536

Commitments and contingencies (Note 16)

 

EQUITY
 
 
 
Common stock ($0.01 par); authorized shares 450,000,000; issued shares 135,143,229 and 135,244,379 on June 30, 2018 and December 31, 2017, respectively; outstanding shares 135,139,716 and 135,244,379 on June 30, 2018 and December 31, 2017, respectively
1,352

 
1,352

Preferred stock ($0.01 par); authorized shares 50,000,000; no shares issued or outstanding on June 30, 2018 and December 31, 2017

 

Additional paid-in capital
1,662,748

 
1,655,114

Accumulated deficit
(16,781
)
 
(32,777
)
Treasury stock, at cost; shares 3,513 and 0 on June 30, 2018 and December 31, 2017, respectively
(58
)
 

Accumulated other comprehensive income (loss)
(12,178
)
 
4,311

Total PQ Group Holdings Inc. equity
1,635,083

 
1,628,000

Noncontrolling interest
4,245

 
3,919

Total equity
1,639,328

 
1,631,919

Total liabilities and equity
$
4,414,505

 
$
4,415,455

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated deficit
 
Treasury
stock, at
cost 
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
Balance, December 31, 2017
 
$
1,352

 
$
1,655,114

 
$
(32,777
)
 
$

 
$
4,311

 
$
3,919

 
$
1,631,919

Net income
 

 

 
15,996

 

 

 
719

 
16,715

Other comprehensive loss
 

 

 

 

 
(16,489
)
 
(240
)
 
(16,729
)
Repurchase of common shares
 

 

 

 
(58
)
 

 

 
(58
)
Distributions to noncontrolling interests
 

 

 

 

 

 
(153
)
 
(153
)
Stock compensation expense
 

 
7,627

 

 

 

 

 
7,627

Shares issued under equity incentive plan
 

 
7

 

 

 

 

 
7

Balance, June 30, 2018
 
$
1,352

 
$
1,662,748

 
$
(16,781
)
 
$
(58
)
 
$
(12,178
)
 
$
4,245

 
$
1,639,328

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
Additional paid-in
capital
 
Accumulated deficit
 
Treasury
stock, at
cost 
 
Accumulated other comprehensive income (loss)
 
Non-
controlling
interest 
 
Total 
Balance, December 31, 2016
 
$
73

 
$
1,167,137

 
$
(90,380
)
 
$
(239
)
 
$
(53,711
)
 
$
5,064

 
$
1,027,944

Net income (loss)
 

 

 
(4,063
)
 

 

 
78

 
(3,985
)
Other comprehensive income
 

 

 

 

 
37,913

 
501

 
38,414

Distributions to noncontrolling interests
 

 

 

 

 

 
(785
)
 
(785
)
Stock compensation expense
 

 
2,828

 

 

 

 

 
2,828

Balance, June 30, 2017
 
$
73

 
$
1,169,965

 
$
(94,443
)
 
$
(239
)
 
$
(15,798
)
 
$
4,858

 
$
1,064,416

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


6


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
 
Six months ended
June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
16,715

 
$
(3,985
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation
 
68,865

 
58,030

Amortization
 
26,606

 
25,176

Acquisition accounting valuation adjustments on inventory sold
 
1,603

 
871

Amortization of deferred financing costs and original issue discount
 
3,079

 
4,348

Debt extinguishment costs
 
3,755

 

Foreign currency exchange loss
 
11,820

 
16,356

Pension and postretirement healthcare benefit expense
 
599

 
2,090

Pension and postretirement healthcare benefit funding
 
(4,040
)
 
(3,605
)
Deferred income tax provision (benefit)
 
3,128

 
(5,270
)
Net loss on asset disposals
 
5,904

 
2,925

Stock compensation
 
7,627

 
2,828

Equity in net (income) from affiliated companies
 
(25,518
)
 
(14,622
)
Dividends received from affiliated companies
 
15,890

 
15,071

Other, net
 
(3,924
)
 
(1,771
)
Working capital changes that provided (used) cash, excluding the effect of business combinations:
 
 
 
 
Receivables
 
(54,324
)
 
(44,046
)
Inventories
 
(9,853
)
 
2,015

Prepaids and other current assets
 
(3,612
)
 
(1,440
)
Accounts payable
 
960

 
(7,408
)
Accrued liabilities
 
(15,142
)
 
(25,812
)
Net cash provided by operating activities
 
50,138

 
21,751

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(66,066
)
 
(60,613
)
Investment in affiliated companies
 

 
(5,000
)
Loan receivable under the New Markets Tax Credit Arrangement
 

 
(6,221
)
Business combinations, net of cash acquired
 
(1,006
)
 
(41,572
)
Other, net
 
805

 
491

Net cash used in investing activities
 
(66,267
)
 
(112,915
)
Cash flows from financing activities:
 
 
 
 
Draw down of revolver
 
123,864

 
250,000

Repayments of revolver
 
(114,813
)
 
(185,000
)
Issuance of long-term debt
 
1,267,000

 
8,820

Debt issuance costs
 
(6,395
)
 

Repayments of long-term debt
 
(1,264,791
)
 
(6,216
)
Distributions to noncontrolling interests
 
(153
)
 
(785
)
Repurchase of common shares
 
(58
)
 

Net cash provided by financing activities
 
4,654

 
66,819

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(1,883
)
 
(5,299
)
Net change in cash, cash equivalents and restricted cash
 
(13,358
)
 
(29,644
)
Cash, cash equivalents and restricted cash at beginning of period
 
67,243

 
85,077

Cash, cash equivalents and restricted cash at end of period
 
$
53,885

 
$
55,433

 
 
 
 
 

For supplemental cash flow disclosures, see Note 20.
See accompanying notes to condensed consolidated financial statements.

7


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)



1. Background and Basis of Presentation:
Description of Business
PQ Group Holdings Inc. and subsidiaries (the “Company” or “PQ Group Holdings”) conducts operations through two reporting segments: (1) Environmental Catalysts & Services (“EC&S”): a leading global innovator and producer of silica catalysts used in the production of high-density polyethylene (“HDPE”), methyl methacrylate (“MMA”), specialty zeolite-based catalysts sold to the emissions control industry, the petrochemical industry and other areas of the broader chemicals industry and a merchant sulfuric acid producer operating a network of plants serving a variety of end uses, including the oil refining, nylon, mining, general industrial and chemical industries; and (2) Performance Materials & Chemicals (“PM&C”): a fully integrated, global leader in silicate technology, producing sodium silicate, specialty silicas, zeolites, spray dry silicates, magnesium silicate, and other high performance chemical products used in a variety of end uses such as adsorbents for surface coatings, clarifying agents for beverages, cleaning and personal care products and engineered glass products for use in highway safety, polymer additives, metal finishing and electronics end uses.
Seasonal changes and weather conditions typically affect the Company’s performance materials and refining services product groups. In particular, the Company’s performance materials product group generally experiences lower sales and profit in the first and fourth quarters of the year because highway striping projects typically occur during warmer weather months. Additionally, the Company’s refining services product group typically experiences similar seasonal fluctuations as a result of higher demand for gasoline products in the summer months. As a result, working capital requirements tend to be higher in the first and fourth quarters of the year, which can adversely affect the Company’s liquidity and cash flows. Because of this seasonality associated with certain of the Company’s product groups, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full year.
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations for interim reporting. In the opinion of management, all adjustments of a normal and recurring nature necessary to state fairly the financial position and results of operations have been included. The results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Other than the update to our accounting policies described in Note 3, the Company has continued to follow the accounting policies set forth in those consolidated financial statements.
2. New Accounting Standards:
Recently Adopted Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued amendments intended to better align hedge accounting with an entity’s risk management activities. The amendments expand hedge accounting for non-financial and financial risk components and revise the measurement methodologies to better align with an entity’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The new guidance is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, and the guidance should be applied prospectively for the amended presentation and disclosure requirements, and through a cumulative-effect adjustment to beginning retained earnings for any cash flow and net investment hedges existing at the date of adoption. The Company early adopted the guidance effective January 1, 2018. The Company’s cash flow hedges in place at the date of adoption yielded an immaterial amount of ineffectiveness; therefore, the Company did not reflect an adjustment to beginning retained earnings upon adoption. The amended presentation and disclosure requirements are reflected under the new guidance in Note 13 to these condensed consolidated financial statements.

8


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


In May 2017, the FASB issued guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, an entity should account for the effects of a change in a share-based payment award using modification accounting unless the fair value, vesting conditions and classification as either a liability or equity are all the same with respect to the award immediately prior to modification and the modified award itself. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those years, and the new guidance should be applied prospectively to awards modified on or after the adoption date. The Company adopted the new guidance on January 1, 2018 as required, with no impact on the Company’s condensed consolidated financial statements upon adoption.
In March 2017, the FASB issued guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost (collectively, “pension costs”). Under current GAAP, there are several components of pension costs which are presented net to arrive at pension costs as included in the income statement and disclosed in the notes. As part of this amendment to the existing guidance, the service cost component of pension costs will be bifurcated from the other components and included in the same line items of the income statement as compensation costs are reported. The remaining components will be reported together below operating income on the income statement, either as a separate line item or combined with another line item on the income statement and disclosed. Additionally, with respect to capitalization to inventory, fixed assets, etc., only the service cost component will be eligible for capitalization upon adoption of the guidance. The new guidance is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those years. The amendments should be applied retrospectively upon adoption with respect to the presentation of the service and other cost components of pension costs in the income statement, and prospectively for the capitalization of the service cost component in assets.
The Company adopted the new guidance on January 1, 2018 as required. Prior to the adoption of the guidance, the Company reflected its pension costs within cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations, depending on whether the costs were associated with employees involved in manufacturing or back office support functions. Under the new guidance, the service cost component of the Company’s pension costs remained in the same line items of the condensed consolidated statements of operations, but the remaining components are now reported as part of nonoperating income in the other (income) expense, net line item of the condensed consolidated statements of operations. Although the guidance requires retrospective application upon adoption, a practical expedient permits the Company to use the amounts disclosed in its pension and other post-retirement benefit plan note as its basis of estimation for the prior comparative periods. The Company utilized the practical expedient, and $69 and $332 of a net pension benefit for the three and six months ended June 30, 2017, respectively, was reclassified to other (income) expense, net. For the three and six months ended June 30, 2018, the amount of pension costs included in other (income) expense, net was a net benefit of $1,285 and $1,770, respectively.
In January 2017, the FASB issued guidance that clarifies the definition of a business and provides revised criteria and a framework to determine whether an integrated set of assets and activities is a business. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted the new guidance on January 1, 2018 as required, with no impact on the Company’s condensed consolidated financial statements upon adoption.
In November 2016, the FASB issued guidance which clarifies the classification and presentation of changes in restricted cash on the statement of cash flows. The updates in the guidance require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash when reconciling the beginning-of-period and end-of-period total amounts. The updates also require a reconciliation between cash, cash equivalents and restricted cash presented on the balance sheet to the total of the same amounts presented on the statement of cash flows. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and the new guidance should be applied retrospectively to each period presented.
The Company adopted the new guidance on January 1, 2018 as required. As of June 30, 2018 and 2017, the Company had $1,332 and $4,976, respectively, of restricted cash included in prepaid and other current assets on its condensed consolidated balance sheets related to its New Market Tax Credit financing arrangements as well as other small restricted cash balances. Changes in the Company’s restricted cash balances prior to the adoption of the new guidance were reflected within cash flows from investing activities in the Company’s condensed consolidated statements of cash flows. The prior comparative period in the Company’s condensed consolidated statement of cash flows has been updated to conform to the new guidance. See Note 20 to these condensed consolidated financial statements for supplemental cash flow disclosures.

9


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


In August 2016, the FASB issued guidance which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs and distributions from certain equity method investees. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and the new guidance should be applied retrospectively to each period presented. The Company adopted the new guidance on January 1, 2018 as required. There was no impact to the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2017. The Company applied the new guidance to the term loan refinancing that occurred during the six months ended June 30, 2018; see Note 12 to these condensed consolidated financial statements for further information on the debt refinancing transaction. There were no other items in the new guidance which necessitated a change in the Company’s reporting in its condensed consolidated statements of cash flows for the six months ended June 30, 2018 or 2017.
In May 2014, the FASB issued accounting guidance (with subsequent targeted amendments) to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that revenue recognized from a transaction or event that arises from a contract with a customer should reflect the consideration to which an entity expects to be entitled in exchange for goods or services provided. To achieve that core principle, the new guidance sets forth a five-step revenue recognition model that will need to be applied consistently to all contracts with customers, except those that are within the scope of other topics in the Accounting Standards Codification (“ASC”). Also required are enhanced disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. The enhanced disclosures include qualitative and quantitative information about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized related to the costs to obtain or fulfill a contract. For public companies, the new requirements are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company reviewed its key revenue streams and assessed the underlying customer contracts within the framework of the new guidance. The Company evaluated the key aspects of its revenue streams for impact under the new guidance and performed a detailed analysis of its customer agreements to quantify the changes under the guidance. The Company concluded that the guidance did not have a material impact on its existing revenue recognition practices upon adoption on January 1, 2018. The Company implemented the guidance under the modified retrospective transition method of adoption. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact of adoption of the new revenue recognition guidance was immaterial for the six months ended June 30, 2018, and there was no transition adjustment required upon adoption. See Note 3 to these condensed consolidated financial statements for additional disclosures required by the new guidance.
Accounting Standards Not Yet Adopted
In June 2018, the FASB issued guidance which conforms the accounting for the issuance of all share-based payments using the same accounting model. Previously, the accounting for share-based payments to non-employees was covered under a different framework than those made to employees. Under the new guidance, awards to both employees and non-employees will essentially follow the same model, with small variations related to determining the term assumption when valuing a non-employee award as well as a different expense attribution model for non-employee awards. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the effect that the new guidance would have on its consolidated financial statements.
In February 2018, the FASB issued guidance which will permit entities to make an election to reclassify income tax effects stranded in accumulated other comprehensive income (“AOCI”) to retained earnings as a result of tax reform legislation enacted by the U.S. government on December 22, 2017. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted in any interim period for which the financial statements have not yet been issued. Prior to the enactment of the tax reform legislation on December 22, 2017, the Company had amounts recorded in AOCI related to its domestic pension, postretirement and supplementary benefit plans and cash flow hedging relationships that were based on pre-enactment tax rates. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements. If the Company makes the election to reclassify the stranded income tax effects from AOCI, it may do so using one of two transition methods: restrospectively, or at the beginning of the period of adoption.
In January 2017, the FASB issued guidance which eliminates the second step from the traditional two-step goodwill impairment test. Under current guidance, an entity performed the first step of the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount; if an impairment loss was indicated, the entity computed the implied fair value of goodwill to determine whether an impairment loss existed, and if so, the amount to recognize. Under the new guidance, an impairment loss is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value (the Step 1 test), with no further testing required. Any impairment loss recognized is limited to the amount of goodwill allocated to the reporting unit. The new guidance is effective for public companies that are Securities and Exchange Commission (“SEC”) registrants for fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company will apply the guidance prospectively to goodwill impairment tests subsequent to the adoption date.

10


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


In June 2016, the FASB issued guidance that affects loans, trade receivables and any other financial assets that have the contractual right to receive cash. Under the new guidance, an entity is required to recognize expected credit losses rather than incurred losses for financial assets. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes that the new guidance will not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued guidance (with subsequent targeted amendments) that modifies the accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases (including those classified under existing GAAP as operating leases, which based on current standards are not reflected on the balance sheet), but will recognize expenses similar to current lease accounting. For public companies, the new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The new guidance must be adopted using either a (1) modified retrospective transition method, in which all periods presented in the financial statements reflect the impact of the new guidance, or (2) prospective method at the date of adoption, with a cumulative-effect adjustment to the opening balance of retained earnings. The Company has operating lease agreements for which it expects to recognize right of use assets and corresponding liabilities on its balance sheet upon adoption of the new guidance. The Company has prepared a detailed plan to implement the new guidance, gathered the information related to its current lease population, and is assessing its leases in the context of the new framework. The Company is working with a vendor to implement a lease management system which will assist in delivering the required accounting changes. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements, business processes, systems and control environment. The Company does not plan to implement the guidance prior to the required adoption date of January 1, 2019, and the Company plans to use the prospective method at the date of adoption.

3. Revenue from Contracts with Customers:
Revenue Recognition Model
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the contract with the customer; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company identifies a contract when an agreement with a customer creates legally enforceable rights and obligations, which occurs when a contract has been approved by both parties, the parties are committed to perform their respective obligations, each party’s rights and payment terms are clearly identified, commercial substance exists and it is probable that the Company will collect the consideration to which it is entitled. The Company and its customers typically enter into master service agreements (“MSA”), which establish the terms, including prices, under which orders to purchase goods may be placed. In these instances, the Company’s contract with a customer is the purchase order issued under the MSA. Certain of the Company’s MSAs contain provisions regarding the purchase of a minimum quantity of goods. Under these circumstances, the Company considers the MSA to be a legally enforceable contract.
The Company identifies a performance obligation in a contract for each promised good that is separately identifiable from other promises in the contract and for which the customer can benefit from the good. The majority of the Company’s contracts have a single performance obligation, which is the promise to transfer individual goods to the customer. The Company has certain contracts that include multiple performance obligations under which the purchase price for each distinct performance obligation is defined in the contract. These distinct performance obligations may include stand-ready provisions, which are arrangements to provide a customer assurance that they will have access to output from the Company’s manufacturing facilities, or monthly reservations of capacity fees. The Company considers stand-ready provisions and reservation of capacity fees to be performance obligations satisfied over time. Revenues related to stand-ready provisions and reservation of capacity fees are recognized throughout the contract term.
As described above, the Company’s MSAs with its customers outline prices for individual products or contract provisions. MSAs in the Company’s performance chemicals and refining services product groups may contain provisions whereby raw materials costs are passed-through to the customer per the terms of their contract. The Company’s exposure to fluctuations in raw materials prices is limited, as the majority of pass-through contract provisions reset based on fluctuations in the underlying raw material price. MSAs in the Company’s refining services product group also contain take-or-pay arrangements, whereby the customer would incur a penalty in the form of a shortfall volume fee. Currently there is no history in which customers fail to meet the contractual minimum. Revenue from product sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns or other allowances that are offered within contracts between the Company and its customers.
The Company recognizes revenues when performance obligations under the terms of a contract with its customer are satisfied, which generally occurs at a point in time by transferring control of a product to the customer. The Company determines the point in time when a customer obtains control of a product and the Company satisfies the performance obligation by considering factors including

11


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


when the Company has a right to payment for the product, the customer has legal title to the product, the Company has transferred possession of the product, the customer has assumed the risks and rewards of ownership of the product and the customer has accepted the product. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The Company does not have any significant payment terms as payment is received at, or shortly after, the point of sale.
Contract Assets and Liabilities
A contract asset is a right to consideration in exchange for goods that the Company has transferred to a customer when that right is conditional on something other than the passage of time. A contract liability exists when the Company receives consideration in advance of performance obligations. Other than trade accounts receivable and customer return accruals, the Company has not recorded any additional contract assets or contract liabilities on its condensed consolidated balance sheets as of June 30, 2018.
Practical Expedients and Accounting Policy Elections
The Company has elected to use certain practical expedients and has made certain accounting policy elections as permitted under the new revenue recognition guidance. Certain of the Company’s contracts with customers are based on an individual purchase order; thus, the duration of these contracts are for one year or less. The Company has made an accounting policy election to omit certain disclosures related to remaining performance obligations for contracts which have an initial term of one year or less.
When the Company performs shipping and handling activities after the transfer of control to the customer (e.g. when control transfers prior to delivery), they are considered fulfillment activities as opposed to separate performance obligations, and the Company recognizes revenue upon the transfer of control to the customer. Accordingly, the costs associated with these shipping and handling activities are accrued when the related revenue is recognized under the Company’s policy election. The Company expenses incremental costs of obtaining a contract as incurred if the expected amortization period of the asset that the Company would have recognized is one year or less. Sales, value added and other taxes the Company collects concurrent with revenue producing activities are excluded from revenues.
Disaggregated Revenue
The Company’s primary means of disaggregating revenues is by product group, which can be found in Note 17 to these condensed consolidated financial statements.
The Company’s portfolio of products are integrated into a variety of end uses, which are described in the table below.
Key End Uses
Key Products
Industrial & process chemicals
• Silicate precursors for the tire industry
 
• Glass beads, or microspheres, for metal finishing end uses
Fuels & emission control
• Refinery catalysts
 
• Emission control catalysts
 
• Catalyst recycling services
 
• Silicate for catalyst manufacturing
Packaging & engineered plastics
• Catalysts for high-density polyethlene and chemicals syntheses
 
• Antiblocks for film packaging
 
• Solid and hollow microspheres for composite plastics
 
• Sulfur derivatives for nylon production
Highway safety & construction
• Reflective markings for roadways and airports
 
• Silica gels for surface coatings
Consumer products
• Silica gels for edible oil and beer clarification
 
• Precipitated silicas, silicates and zeolites for the dentifrice and
 
  dishwasher and laundry detergent applications
Natural resources
• Silicates for drilling muds
 
• Hollow glass beads, or microspheres, for oil well cements
 
• Silicates and alum for water treatment mining
 
• Bleaching aids for paper
 
 

12


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The following tables disaggregate the Company’s sales, by segment and end use, for the three and six months months ended June 30, 2018:
 
 
Three months ended June 30, 2018
 
 
Environmental Catalysts & Services
 
Performance Materials & Chemicals
 
Total
Industrial & process chemicals
 
$
17,335

 
$
75,811

 
$
93,146

Fuels & emission control (1)
 
60,212

 

 
60,212

Packaging & engineered plastics
 
33,919

 
33,966

 
67,885

Highway safety & construction (1)
 

 
110,746

 
110,746

Consumer products
 

 
65,388

 
65,388

Natural resources
 
17,952

 
20,250

 
38,202

Total
 
129,418

 
306,161

 
435,579

Inter-segment sales eliminations
 
(866
)
 

 
(866
)
Total segment sales
 
$
128,552

 
$
306,161

 
$
434,713

 
 
Six months ended June 30, 2018
 
 
Environmental Catalysts & Services
 
Performance Materials & Chemicals
 
Total
Industrial & process chemicals
 
$
34,374

 
$
151,082

 
$
185,456

Fuels & emission control (1)
 
116,209

 

 
116,209

Packaging & engineered plastics
 
62,162

 
65,774

 
127,936

Highway safety & construction (1)
 

 
157,891

 
157,891

Consumer products
 

 
142,118

 
142,118

Natural resources
 
33,860

 
39,118

 
72,978

Total
 
246,605

 
555,983

 
802,588

Inter-segment sales eliminations
 
(1,678
)
 

 
(1,678
)
Total segment sales
 
$
244,927

 
$
555,983

 
$
800,910

 
 
 
 
 
 
 
 
(1)
As described in Note 1, the Company experiences seasonal sales fluctuations to customers in the fuels & emission control and highway safety & construction end uses.
4. Fair Value Measurements:
Fair values are based on quoted market prices when available. When market prices are not available, fair values are generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality. In instances where there is little or no market activity for the same or similar instruments, the Company estimates fair values using methods, models and assumptions that management believes a hypothetical market participant would use to determine a current transaction price. These valuation techniques involve some level of management estimation and judgment that becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or input used.

13


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The Company’s financial assets and liabilities carried at fair value have been classified based upon a fair value hierarchy. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). The classification of an asset or a liability is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
Level 1—Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets.
Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.
Level 3—Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value.
 
 
June 30, 2018
 
Quoted Prices in
Active Markets
(Level 1) 
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
12,010

 
$

 
$
12,010

 
$

Restoration plan assets
 
4,962

 
4,962

 

 

Total
 
$
16,972

 
$
4,962

 
$
12,010

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
196

 
$

 
$
196

 
$

Total
 
$
196

 
$

 
$
196

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Quoted Prices in
Active Markets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2) 
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
1,043

 
$

 
$
1,043

 
$

Restoration plan assets
 
5,576

 
5,576

 

 

Total
 
$
6,619

 
$
5,576

 
$
1,043

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts
 
$
448

 
$

 
$
448

 
$

Total
 
$
448

 
$

 
$
448

 
$

 
 
 
 
 
 
 
 
 
Restoration plan assets
The fair values of the Company’s restoration plan assets are determined through quoted prices in active markets. Restoration plan assets are assets held in a Rabbi trust to fund the obligations of the Company’s defined benefit supplementary retirement plans and include various stock and fixed income mutual funds. See Note 15 to these condensed consolidated financial statements regarding defined supplementary retirement plans. Unrealized gains and losses associated with the underlying stock and fixed income mutual funds were immaterial as of June 30, 2018 and December 31, 2017, respectively.

14


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


Derivative contracts
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (“OTC”). The Company generally values exchange-traded derivatives using models that calibrate to market transactions and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, forward curves, measures of volatility, and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as forward contracts, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.
The Company has interest rate caps, natural gas swaps and cross currency swaps that are fair valued using Level 2 inputs. In addition, the Company applies a credit valuation adjustment to reflect credit risk which is calculated based on credit default swaps. To the extent that the Company’s net exposure under a specific master agreement is an asset, the Company utilizes the counterparty’s default swap rate. If the net exposure under a specific master agreement is a liability, the Company utilizes a default swap rate comparable to PQ Group Holdings. The credit valuation adjustment is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume the Company’s liabilities or that a market participant would be willing to pay for the Company’s assets. As of June 30, 2018 and December 31, 2017, the credit valuation adjustment resulted in a minimal change in the fair value of the derivatives.
5. Accumulated Other Comprehensive Income:
The following tables present the tax effects of each component of other comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017:
 
 
Three months ended June 30,
 
 
2018
 
2017
 
 
Pre-tax amount
 
Tax benefit/(expense)
 
After-tax amount
 
Pre-tax amount
 
Tax benefit/(expense)
 
After-tax amount
Defined benefit and other postretirement plans:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization and unrealized losses
 
$
1,833

 
$
(458
)
 
$
1,375

 
$
(34
)
 
$
12

 
$
(22
)
Benefit plans, net
 
1,833

 
(458
)
 
1,375

 
(34
)
 
12

 
(22
)
Net gain (loss) from hedging activities
 
737

 
(184
)
 
553

 
(2,025
)
 
769

 
(1,256
)
Foreign currency translation
 
(29,947
)
 
454

 
(29,493
)
 
30,612

 
(4,307
)
 
26,305

Other comprehensive income (loss)
 
$
(27,377
)
 
$
(188
)
 
$
(27,565
)
 
$
28,553

 
$
(3,526
)
 
$
25,027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2018
 
2017
 
 
Pre-tax amount
 
Tax benefit/(expense)
 
After-tax amount
 
Pre-tax amount
 
Tax benefit/(expense)
 
After-tax amount
Defined benefit and other postretirement plans:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization and unrealized losses
 
$
1,809

 
$
(452
)
 
$
1,357

 
$
(228
)
 
$
25

 
$
(203
)
Benefit plans, net
 
1,809

 
(452
)
 
1,357

 
(228
)
 
25

 
(203
)
Net gain (loss) from hedging activities
 
3,649

 
(913
)
 
2,736

 
(4,887
)
 
1,862

 
(3,025
)
Foreign currency translation
 
(19,833
)
 
(989
)
 
(20,822
)
 
47,859

 
(6,217
)
 
41,642

Other comprehensive income (loss)
 
$
(14,375
)
 
$
(2,354
)
 
$
(16,729
)
 
$
42,744

 
$
(4,330
)
 
$
38,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 

15


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The following table presents the change in accumulated other comprehensive income, net of tax, by component for the six months ended June 30, 2018 and 2017: 
 
 
Defined benefit
and other
postretirement
plans 
 
Net gain (loss) from hedging activities
 
Foreign
currency
translation 
 
Total 
December 31, 2017
 
$
7,412

 
$
967

 
$
(4,068
)
 
$
4,311

Other comprehensive income (loss) before reclassifications
 
1,387

 
2,613

 
(20,582
)
 
(16,582
)
Amounts reclassified from accumulated other comprehensive income(1)
 
(30
)
 
123

 

 
93

Net current period other comprehensive income (loss)
 
1,357

 
2,736

 
(20,582
)
 
(16,489
)
June 30, 2018
 
$
8,769

 
$
3,703

 
$
(24,650
)
 
$
(12,178
)
 
 
 
 
 
 
 
 
 
December 31, 2016
 
$
7,513

 
$
4,557

 
$
(65,781
)
 
$
(53,711
)
Other comprehensive income (loss) before reclassifications
 
(137
)
 
(3,038
)
 
41,141

 
37,966

Amounts reclassified from accumulated other comprehensive income(1)  
 
(66
)
 
13

 

 
(53
)
Net current period other comprehensive income (loss)
 
(203
)
 
(3,025
)
 
41,141

 
37,913

June 30, 2017
 
$
7,310

 
$
1,532

 
$
(24,640
)
 
$
(15,798
)
 
 
 
 
 
 
 
 
 
 
(1) 
See the following table for details about these reclassifications. Amounts in parentheses indicate debits.

16


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The following table presents the reclassifications out of accumulated other comprehensive income for the three and six months ended June 30, 2018 and 2017.
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income(a)
 
Affected Line Item in the Statements of Operations
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
Defined benefit and other postretirement plans
 
 
 
 
 
 
 
 
 
 
Amortization of prior service credit
 
$
(20
)
 
$
(20
)
 
$
(39
)
 
$
(39
)
 
(b)
Amortization of net (gain) loss
 
1

 
(19
)
 
3

 
(38
)
 
(b)
 
 
(19
)
 
(39
)
 
(36
)
 
(77
)
 
Total before tax
 
 
3

 
6

 
6

 
11

 
Tax expense (benefit)
 
 
$
(16
)
 
$
(33
)
 
$
(30
)
 
$
(66
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Net (gain) loss from hedging activities
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$
58

 
$
9

 
$
93

 
$
11

 
Interest expense
Natural gas swaps
 
99

 
28

 
71

 
10

 
Cost of goods sold
 
 
157

 
37

 
164

 
21

 
Total before tax
 
 
(39
)
 
(8
)
 
(41
)
 
(8
)
 
Tax expense (benefit)
 
 
$
118

 
$
29

 
$
123

 
$
13

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
102

 
$
(4
)
 
$
93

 
$
(53
)
 
Net of tax
 
(a) 
Amounts in parentheses indicate credits to profit/loss.
(b) 
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and other postretirement cost (see Note 15 to these condensed consolidated financial statements for additional details).
6. Acquisition:
Acquisitions are accounted for using the acquisition method of accounting. Under the acquisition method, the purchase price is allocated to the identifiable net assets acquired based on the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. The excess of the purchase price over the fair values of the identifiable net assets acquired is recorded as goodwill.
On June 12, 2017 (the “Acquisition Date”), the Company acquired the facilities of Sovitec Mondial S.A. (“Sovitec”) located in Belgium, Spain, Argentina and France as part of a stock transaction (the “Acquisition”) for $41,572 in cash, excluding assumed debt. Based in Fleurus, Belgium, Sovitec is a high quality producer of engineered glass products used in transportation safety, metal finishing and polymer additives. The results of operations of Sovitec have been included in the Company’s consolidated financial statements since the Acquisition Date.


17


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The following table sets forth the calculation and allocation of the purchase price to the identifiable net assets acquired with respect to the Acquisition, which was complete as of March 31, 2018.
 
 
Provisional Purchase
Price Allocation
 
Adjustments
 
Purchase
Price Allocation
Total consideration, net of cash acquired
 
$
41,572

 
$

 
$
41,572

 
 
 

 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 

 
 
 
 
Receivables
 
$
14,305

 
$

 
$
14,305

Inventories
 
7,645

 
1,603

 
9,248

Prepaid and other current assets
 
400

 

 
400

Property, plant and equipment
 
9,020

 
15,960

 
24,980

Other intangible assets
 

 
5,753

 
5,753

Other long-term assets
 
129

 
15,921

 
16,050

 
 
 

 
 
 
 
Fair value of assets acquired
 
31,499

 
39,237

 
70,736

Current debt
 
(6,420
)
 

 
(6,420
)
Accounts payable
 
(10,748
)
 

 
(10,748
)
Long-term debt
 
(10,189
)
 

 
(10,189
)
Deferred income taxes
 

 
(4,426
)
 
(4,426
)
Other long-term liabilities
 
(154
)
 

 
(154
)
 
 
 

 
 
 
 
Fair value of net assets acquired
 
3,988

 
34,811

 
38,799

Goodwill
 
37,584

 
(34,811
)
 
2,773

 
 
$
41,572

 
$

 
$
41,572

 
 
 
 
 
 
 
As of the Acquisition Date, the fair value of accounts receivable approximated historical cost. The gross contractual amount of accounts receivable at the Acquisition Date was $14,607, of which $302 was deemed uncollectible. The fair value of inventory is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity, which was $1,603 higher than the historical cost.
The Company’s cost of goods sold for the six months ended June 30, 2018 includes a pre-tax charge of $1,603 relating to the step-up on inventory, $108 of additional amortization expense related to identified intangible assets and $421 of additional depreciation expense, which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s other expense, net for the six months ended June 30, 2018 includes additional amortization expense related to identified intangible assets of $101 which would have been recorded during the year ended December 31, 2017 if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. The Company’s provision for income taxes for the six months ended June 30, 2018 includes an additional $990 tax benefit associated with the year ended December 31, 2017, to reflect impacts as if the adjustments to the provisional amounts had been recognized as of the Acquisition Date. This amount is primarily a result of opening balance sheet adjustments recorded during the six months ended June 30, 2018, which needed to be re-measured through the income statement because of income tax rate changes that occurred subsequent to the Acquisition Date.
The Company believes that the Acquisition will enable it to offer a more comprehensive, cost-effective and high-quality portfolio of products and services to its customers worldwide when, combined with anticipated synergies within its existing business, contributed to a total purchase price that resulted in the recognition of goodwill. All of the goodwill was assigned to the Company’s PM&C reporting segment. The goodwill associated with the Acquisition is not deductible for tax purposes.

18


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The valuation of the intangible assets acquired and the related weighted-average amortization periods are as follows:
 
 
Amount
 
Weighted-Average
Expected Useful Life
(in years)
Intangible assets subject to amortization:
 
 
 
 
Trademarks
 
$
1,767

 
11
Technical know-how
 
1,892

 
11
Total intangible assets subject to amortization
 
3,659

 
 
Trade names, not subject to amortization
 
2,094

 
Indefinite
Total
 
$
5,753

 
 
 
 
 
 
 
Net sales and net income generated by the Sovitec legal entities included in the Company’s condensed consolidated statements of operations are as follows:
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
19,326

 
$
3,704

 
$
30,247

 
$
3,704

Net income
 
2,585

 
503

 
814

 
503

Acquisition costs were immaterial for the three and six months ended June 30, 2018 and were $454 and $1,328 for the three and six months ended June 30, 2017, respectively. Acquisition costs are included in other operating expense, net in the Company’s condensed consolidated statements of operations.
Pro Forma Financial Information
The unaudited pro forma financial information for the three and six months ended June 30, 2017 has been derived from the Company’s historical consolidated financial statements and prepared to give effect to the Acquisition, assuming that the Acquisition occurred on January 1, 2016. The unaudited pro forma consolidated results of operations are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results of operations had the Acquisition been made as of January 1, 2016. The unaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the Acquisition.
 
Unaudited
 
Three months ended
June 30, 2017
Six months ended
June 30, 2017
Pro forma sales
$
397,251

$
738,625

Pro forma net loss
(2,629
)
(4,162
)
Pro forma net loss attributable to PQ Group Holdings Inc.
(2,568
)
(4,240
)
Pro forma basic and diluted net loss per share
$
(0.02
)
$
(0.04
)
The results of operations for the three and six months ended June 30, 2018 include the operating results of the combined company for the full period and therefore, there is no pro forma presentation included in the table above.
Certain non-recurring charges included in the Company’s results of operations for the three and six months ended June 30, 2017 were allocated to the respective prior year periods for pro forma purposes. For the three months ended June 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $454 which were excluded from pro forma net loss. Also included in pro forma net loss for the three months ended June 30, 2017 is amortization expense of $90 and depreciation expense of $149 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively. For the six months ended June 30, 2017, non-recurring charges allocated to the prior year period include transaction fee charges of $1,328 which were excluded from pro forma net loss. Also included in pro forma net loss for the six months ended June 30, 2017 is amortization expense of $176 and depreciation expense of $353 associated with the fair value step-up of identifiable intangible assets and property, plant and equipment, respectively.

19


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


7. Goodwill:
The changes in the carrying amount of goodwill for the six months ended June 30, 2018 is summarized as follows:
 
 
Performance
Materials &
Chemicals
 
Environmental
Catalysts &
Services
 
Total
Balance as of December 31, 2017
 
$
914,623

 
$
391,333

 
$
1,305,956

Goodwill recognized
 
629

 

 
629

Goodwill adjustments(1)
 
(34,811
)
 

 
(34,811
)
Foreign exchange impact
 
(10,851
)
 
(637
)
 
(11,488
)
Balance as of June 30, 2018
 
$
869,590

 
$
390,696

 
$
1,260,286

 
 
 
 
 
 
 
 
(1) 
Represents the measurement period adjustments on the net assets acquired as part of the Acquisition (see Note 6 to these condensed consolidated financial statements for further information regarding the Acquisition).
8. Other Operating Expense, Net:
A summary of other operating expense, net is as follows:
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Amortization expense
 
$
8,744

 
$
8,290

 
$
17,693

 
$
14,124

Transaction and other related costs(1)
 
190

 
2,954

 
612

 
4,329

Restructuring and other related costs (Note 18)
 
10

 
276

 
130

 
1,472

Net loss on asset disposals(2)
 
4,752

 
2,577

 
5,904

 
2,925

Management advisory fees
 

 
1,250

 

 
2,500

Insurance proceeds(2)
 
(313
)
 

 
(1,557
)
 

Other, net
 
2,490

 
1,629

 
2,405

 
1,974

 
 
$
15,873

 
$
16,976

 
$
25,187

 
$
27,324

 
 
 
 
 
 
 
 
 
 
(1) 
Transaction and other related costs for the three and six months ended June 30, 2018 and 2017 primarily include transaction costs associated with the Company’s initial public offering (exclusive of the direct costs recorded in stockholders’ equity net of the proceeds from the offering) and the Acquisition (see Note 6 to these condensed consolidated financial statements for further information).
(2) 
During the three and six months ended June 30, 2018, the Company recognized $1,000 and $2,500, respectively, of insurance proceeds in its condensed consolidated statement of operations related to the Company’s claim for losses sustained during Hurricane Harvey in August 2017. For the three months ended June 30, 2018, $264 was recorded as a gain in other operating expense, net, as reimbursement of expenses, while the remaining $736 represented proceeds in excess of the Company’s property losses which was recorded as a non-operating gain in other expense, net, in the Company’s consolidated statement of operations. For the six months ended June 30, 2018, $1,557 was recorded as a gain in other operating expense, net, as reimbursement of expenses, $207 was recorded as a gain in net loss on asset disposals within other operating expense, net, for the Company’s previously recognized property losses, and $736 represented proceeds in excess of the Company’s property losses which was recorded as a non-operating gain in other expense, net, in the Company’s consolidated statement of operations.

20


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


9. Inventories:
Inventories are classified and valued as follows:
 
 
June 30,
2018
 
December 31,
2017
Finished products and work in process
 
$
203,701

 
$
199,919

Raw materials
 
64,712

 
62,469

 
 
$
268,413

 
$
262,388

 
 
 
 
 
Valued at lower of cost or market:
 
 
 
 
LIFO basis
 
$
168,256

 
$
162,315

Valued at lower of cost and net realizable value:
 
 
 
 
FIFO or average cost basis
 
100,157

 
100,073

 
 
$
268,413

 
$
262,388

 
 
 
 
 
10. Investments in Affiliated Companies:
The Company accounts for investments in affiliated companies under the equity method. Affiliated companies accounted for on the equity basis as of June 30, 2018 are as follows:
Company
 
Country
 
Percent
Ownership
PQ Silicates Ltd.
 
Taiwan
 
50%
Zeolyst International
 
USA
 
50%
Zeolyst C.V.
 
Netherlands
 
50%
Quaker Holdings
 
South Africa
 
49%
Following is summarized information of the combined investments(1):    
 
 
Three months ended
June 30,
 
Six months ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
108,898

 
$
68,732

 
$
197,474

 
$
141,787

Gross profit
 
40,669

 
29,661

 
76,191

 
58,586

Operating income
 
31,622

 
19,112

 
57,663

 
37,695

Net income
 
30,638

 
20,809

 
57,660

 
39,844

 
(1) 
Summarized information of the combined investments is presented at 100%; the Company’s share of the net assets and net income of affiliates is calculated based on the percent ownership specified in the table above.
The Company’s investments in affiliated companies balance as of June 30, 2018 and December 31, 2017 includes net purchase accounting fair value adjustments of $261,384 and $264,700, respectively, related to the combination of the businesses of PQ Holdings Inc. and Eco Services Operations LLC in May 2016, consisting primarily of goodwill and intangible assets such as customer relationships, technical know-how and trade names. Consolidated equity in net income from affiliates is net of $1,658 and $3,316 of amortization expense related to purchase accounting fair value adjustments for the three and six months ended June 30, 2018, respectively. Consolidated equity in net income from affiliates is net of $1,658 and $5,282 of amortization expense related to purchase accounting fair value adjustments for the three and six months ended June 30, 2017.

21


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


11. Property, Plant and Equipment:
A summary of property, plant and equipment, at cost, and related accumulated depreciation is as follows:
 
 
June 30,
2018
 
December 31,
2017
Land
 
$
192,017

 
$
191,006

Buildings
 
209,672

 
200,054

Machinery and equipment
 
1,063,438

 
1,005,025

Construction in progress
 
121,157

 
145,414

 
 
1,586,284

 
1,541,499

Less: accumulated depreciation
 
(369,282
)
 
(311,115
)
 
 
$
1,217,002

 
$
1,230,384

 
 
 
 
 
Depreciation expense was $33,962 and $29,841 for the three months ended June 30, 2018 and 2017, respectively. Depreciation expense was $68,865 and $58,030 for the six months ended June 30, 2018 and 2017, respectively.
12. Long-term Debt:
The summary of long-term debt is as follows:
 
 
June 30,
2018
 
December 31, 2017
Term Loan Facility (U.S. dollar denominated)
 
$

 
$
916,153

Term Loan Facility (Euro denominated)
 

 
335,808

New Term Loan Facility
 
1,260,665

 

6.75% Senior Secured Notes due 2022
 
625,000

 
625,000

5.75% Senior Unsecured Notes due 2025
 
300,000

 
300,000

ABL Facility
 
32,000

 
25,000

Other
 
69,990

 
68,318

Total debt
 
2,287,655

 
2,270,279

Original issue discount
 
(21,409
)
 
(18,390
)
Deferred financing costs
 
(18,406
)
 
(21,403
)
Total debt, net of original issue discount and deferred financing costs
 
2,247,840

 
2,230,486

Less: current portion
 
(54,071
)
 
(45,166
)
Total long-term debt, excluding current portion
 
$
2,193,769

 
$
2,185,320

 
 
 
 
 
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction. As of June 30, 2018 and December 31, 2017, the fair value of the senior secured term loans and senior secured and unsecured notes was higher than book value by $16,496 and $59,319, respectively. The fair value of the senior secured term loans and senior secured and unsecured notes was derived from published loan prices as of June 30, 2018 and December 31, 2017, as applicable. The fair value is classified as Level 2 based upon the fair value hierarchy (see Note 4 to these condensed consolidated financial statements for further information on fair value measurements).
New Term Loan Facility
On February 8, 2018 (the “Closing Date”), PQ Corporation (the “Borrower”), an indirect, wholly owned subsidiary of the Company, refinanced its existing senior secured term loan facility with a new $1,267,000 senior secured term loan facility (the “New Term Loan Facility”) by entering into a third amendment agreement (the “Amendment”), which amended and restated the Term Loan Credit Agreement dated as of May 4, 2016, among the Borrower, CPQ Midco I Corporation, Credit Suisse AG, Cayman Island Branch, as administrative agent and collateral agent, and the lenders and the other parties party thereto from time to time (as amended prior to the Amendment, the “Existing Credit Agreement” and as amended and restated by the Amendment, the “New Credit Agreement”).

22


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


The New Term Loan Facility bears interest at a floating rate of LIBOR plus 2.50% per annum and matures in February 2025, effectively lowering the interest rate margin, eliminating the interest rate floor that existed on the Euro-denominated tranche prior to refinancing, and extending the maturity of its senior secured term loan facility. The New Term Loan Facility requires scheduled quarterly amortization payments, each equal to 0.25% of the original principal amount of the loans under the New Term Loan Facility. Voluntary prepayments of the New Term Loan Facility in connection with a Repricing Transaction, as defined in the New Credit Agreement, on or prior to six months after the Closing Date will be subject to a call premium of 1.00%. Otherwise, outstanding loans under the New Term Loan Facility may be voluntarily prepaid at any time without premium or penalty. In addition, the New Credit Agreement contains customary mandatory prepayments, affirmative and negative covenants and events of default, all of which are substantially the same as under the Existing Credit Agreement.
The Company recorded $2,124 of new creditor and third-party financing costs as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $1,403 and original issue discount of $2,352 associated with the previously outstanding debt were written off as debt extinguishment costs.
On the Closing Date, the Company also entered into multiple cross currency swap arrangements to hedge foreign currency risk. The swaps are designed to enable the Company to effectively convert a portion of its fixed-rate U.S. dollar denominated debt obligations into approximately €280,000 equivalent ($327,102 as of June 30, 2018). The swaps are expected to mature in February 2023.
13. Financial Instruments:
The Company uses (1) interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments, (2) commodity derivatives to manage its exposure to commodity price fluctuations, and (3) foreign currency related derivative instruments to manage its foreign currency exposure to its net investments in certain foreign operations. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, commodity prices and foreign currency, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with the Company’s derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Use of Derivative Financial Instruments to Manage Commodity Price Risk. The Company is exposed to risks in energy costs due to fluctuations in energy prices, particularly natural gas. The Company has a hedging program in the United States which allows the Company to mitigate exposure to natural gas volatility with natural gas swap agreements. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices of comparable contracts. The respective current and non-current liabilities are recorded in accrued liabilities and other long-term liabilities and the respective current and non-current assets are recorded in prepaid and other current assets and other long-term assets, as applicable, in the Company’s consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the natural gas swaps are recorded in stockholders’ equity as a component of other comprehensive income (loss) (“OCI”), net of tax. Reclassifications of the gains and losses on natural gas hedges into earnings are recorded in production costs and subsequently charged to cost of goods sold in the consolidated statements of operations in the period in which the associated inventory is sold. As of June 30, 2018, the Company’s natural gas swaps had a remaining notional quantity of 2.7 million MMBTU to mitigate commodity price volatility through December 2020.

23


PQ GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)


Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the interest rate cap agreements are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreements into earnings are recorded as part of interest expense in the consolidated statements of operations as the Company makes its interest payments on the hedged portion of its senior secured credit facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.
In July 2016, the Company entered into interest rate cap agreements, paying a premium of $1,551 to mitigate interest rate volatility from July 2016 through July 2020 by employing varying cap rates, ranging from 1.50% to 3.00%, on $1,000,000 of notional variable-rate debt. The cap rate currently in effect at June 30, 2018 is 2.00%.
Use of Derivative Financial Instruments to Manage Foreign Currency Risk. The Company is exposed to risks related to its net investments in foreign operations due to fluctuations in foreign currency exchange rates, particularly between the United States dollar and the Euro. In connection with the February 2018 term loan refinancing (see