S-1/A 1 d382954ds1a.htm AMENDMENT NO.2 TO THE FORM S-1 Amendment No.2 to the Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 14, 2017

Registration No. 333-218650

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PQ GROUP HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2800   81-3406833

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

300 Lindenwood Drive

Valleybrooke Corporate Center

Malvern, Pennsylvania 19355

(610) 651-4400

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

James F. Gentilcore

President and Chief Executive Officer

PQ Group Holdings Inc.

300 Lindenwood Drive

Valleybrooke Corporate Center

Malvern, Pennsylvania 19355

(Name, address, including zip code, and telephone number, including

area code, of agent for service)

 

 

Copies to:

 

Craig E. Marcus

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

Jason M. Licht

Latham & Watkins LLP

555 Eleventh Street, NW

Washington, DC 20004

(202) 637-2200

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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     (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 to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(1)(3)

Common stock, par value $0.01 per share

  $100,000,000   $11,590

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended, based upon an estimate of the maximum offering price.
(2) Includes the offering price of additional shares of common stock that may be purchased by the underwriters.
(3) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated August 14, 2017

PROSPECTUS

             Shares

LOGO

PQ Group Holdings Inc.

Common Stock

 

 

This is the initial public offering of the common stock of PQ Group Holdings Inc., a Delaware corporation. PQ Group Holdings Inc. is offering                  shares of common stock to be sold in the offering.

 

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $         and $         per share. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “PQG.”

 

 

See “Risk Factors” beginning on page 27 to read about factors you should consider before buying shares of our common stock.

 

 

 

      

Per Share

      

Total

 

Initial public offering price

       $                        $                

Underwriting discounts and commissions (1)

       $                        $                

Proceeds, before expenses, to us

       $                        $                

 

(1) See “Underwriters” for additional information regarding underwriter compensation.

To the extent that the underwriters sell more than                  shares of our common stock, the underwriters have the option for a period of 30 days from the date of this prospectus to purchase up to an additional                  shares of our common stock from us at the initial public offering price less the underwriting discount.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our common stock on or about                 , 2017.

 

 

 

Morgan Stanley     Goldman Sachs & Co. LLC     Citigroup   Credit Suisse
J.P. Morgan        Jefferies       Deutsche Bank Securities   KeyBanc Capital Markets
Evercore ISI   Nomura

                , 2017


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LOGO

 


Table of Contents

TABLE OF CONTENTS

 

 

 

 

We have not authorized any person to provide you with any information or represent anything about us or this offering that is not contained in this prospectus or in any free writing prospectus we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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SUPPLY SHARE AND INDUSTRY INFORMATION

Certain statistical information used throughout this prospectus is based on independent industry publications, reports by research firms or other published independent sources. Some statistical information is also based on our good faith estimates, which are derived from management’s knowledge of our industry and such independent sources referred to above. Certain supply share statistics, ranking and industry information included in this prospectus, including the size of certain markets and our estimated supply share position and the supply share positions of our competitors, are based on management estimates. These estimates have been derived from our management’s knowledge and experience in the industry and end uses into which we sell our products, as well as information obtained from surveys, reports by research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the industries into which we sell our products. We believe these data to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because this information cannot always be verified with complete certainty due to the limitations on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. Unless otherwise noted, all of our supply share position information presented in this prospectus is an approximation based on management’s knowledge and is based on our, or, in the case of our zeolite catalysts product group, our Zeolite Joint Venture’s, sales volumes relative to the estimated sales volumes for the year ended December 31, 2016 in relevant products or end uses into which we sell our products. In the case of our refining services product group, including the products and services thereof, such supply share position information excludes volume attributable to manufacturers who produce primarily for their own consumption. References to our being a leader in a supply share position or product group refer to our belief that we have one of the leading supply share positions, unless otherwise indicated or the context otherwise requires. In addition, references to various end uses into which we sell our products are based on how we define the end uses for our products.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them. In addition, we round certain percentages presented in this prospectus to the nearest whole number. As a result, figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

TRADEMARKS AND TRADENAMES

We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business. In addition, our name, logo and website name and address are our service marks or trademarks. Each trademark, trade name or service mark by any other company appearing in this prospectus belongs to its holder. Some of the more important trade names and trademarks that we use include Potters, PQ, Zeolyst, Zeolyst International and EcoServices. We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this prospectus are listed without the ™, SM, ® and © symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, service marks, trade names and copyrights.

THE BUSINESS COMBINATION

On May 4, 2016, we consummated a series of transactions (the “Business Combination”) to reorganize and combine the businesses of PQ Holdings Inc. (“PQ Holdings”) and Eco Services Operations LLC (“Eco”) under a new holding company, PQ Group Holdings Inc. (“PQ Group Holdings” or the “company”), pursuant to a reorganization and transaction agreement, dated August 17, 2015, as amended, by and among PQ Group Holdings, PQ Holdings, PQ Corporation, Eco, Eco Services Holdings LLC, Eco Services Group Holdings LLC and certain investment funds affiliated with CCMP Capital Advisors, LLC (now known as CCMP Capital Advisors, LP; “CCMP”). We refer to the business of PQ Holdings prior to the Business Combination as “legacy PQ” and the business of Eco prior to the Business Combination as “legacy Eco.”

 

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BASIS OF FINANCIAL PRESENTATION

Legacy Eco operated as a business unit of Solvay USA Inc. (“Solvay”) until the acquisition of substantially all of the assets of Solvay’s Eco Services business unit by Eco on December 1, 2014 (the “2014 Acquisition”). References in this prospectus to “Predecessor” include each of the periods from January 1, 2012 to November 30, 2014. For 2014, the results include 11 months of legacy Eco operating activity (January 1, 2014 to November 30, 2014) and include amounts that have been “carved out” from Solvay’s financial statements using assumptions and allocations made by Solvay to reflect Solvay’s Eco Services business unit on a stand-alone basis. References in this prospectus to “Successor” refer to the period from inception of Eco (July 30, 2014) to December 31, 2014, but only include one month of legacy Eco operating activity (December 1, 2014 to December 31, 2014), because there was no operating activity for the period from inception (July 30, 2014) to November 30, 2014, and reflect legacy Eco on a stand-alone basis.

On May 4, 2016, we consummated the Business Combination to reorganize and combine the businesses of PQ Holdings and Eco under a new holding company. In accordance with United States generally accepted accounting principles (“GAAP”), legacy Eco was the accounting acquirer in the Business Combination and, as such, legacy Eco is treated as our predecessor and therefore the financial information through May 3, 2016 only includes the results of legacy Eco. The financial information presented in this prospectus subsequent to May 3, 2016 is of PQ Group Holdings, which includes the operating results of legacy Eco and legacy PQ.

The following table summarizes, for each of the periods specified below and for which financial information is included for the issuer, PQ Group Holdings, in this prospectus, the portion, if any, of the financial results of legacy PQ and legacy Eco that is included in the financial results for such periods presented in accordance with GAAP.

 

                                                                    Successor            Predecessor  
           Six months ended
June 30,
          Pro forma
year ended
December 31,
2016
          Years ended
December 31,
          Period from
inception

(July 30, 2014)
to December 31,
2014
          Period from
January 1, 2014
to November 30,
2014
 
           2017     2016                   2016     2015                  
                                                                                                 

Operations of legacy Eco

         

 

Included

 

 

 

Included

 

         

 

Included

 

         

 

Included

 

 

 

Included

 

         

 

Partially included
(December 1 to
December 31)

 
 
 

         

 

Included
(January 1 to
November 30)

 
 
 

             

Operations of legacy PQ

         

 

Included

 

 

 

Partially included
(May 4 to
June 30)

 
 
 

         

 

Included

 

         

 

Partially included
(May 4 to
December 31)

 
 
 

 

 

Not included

 

         

 

Not included

 

         

 

Not included

 

The financial statements of our accounting predecessor contained in this prospectus for periods prior to the 2014 Acquisition are not necessarily indicative of what legacy Eco’s financial position, results of operations and cash flows would have been had legacy Eco operated as a separate, standalone entity independent of Solvay.

Additional information regarding our financial performance and non-GAAP measures, including reconciliations of non-GAAP measures to their most directly comparable GAAP measure, is included in “Summary Historical and Unaudited Pro Forma Financial and Other Data.” In addition, such financial information should be read in conjunction with the disclosures set forth under “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

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THE RECLASSIFICATION

In connection with this offering, on                     , 2017, we reclassified our Class A common stock into common stock and then effected a             -for-1 split of our common stock. Immediately prior to this offering, we will convert each outstanding share of our Class B common stock into approximately              shares of our common stock plus an additional number of shares determined by dividing the unreturned paid-in capital amount of such share of Class B common stock, or $         per share, by the initial public offering price of a share of our common stock in this offering, rounded to the nearest whole share. Holders of our Class B common stock will not receive any cash payments from us in connection with the conversion of the Class B common stock. References to the “Reclassification” throughout this prospectus refer to the reclassification of our Class A common stock into our common stock, the             -for-1 split of our common stock and the conversion of our Class B common stock into our common stock. Unless otherwise indicated, all share data gives effect to the Reclassification, including the conversion of all shares of our Class B common stock into shares of our common stock, based upon an estimated Class B conversion factor determined by reference to an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus. Such share data is subject to change based on the actual number of shares of our common stock issued in connection with the conversion of our Class B common stock into our common stock. See “The Reclassification.”

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the historical financial statements and related notes and the pro forma condensed combined financial information and related notes included elsewhere in this prospectus and the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” before deciding whether to invest in our common stock. Unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” “PQ Group Holdings,” or the “company” refer to PQ Group Holdings Inc. and its consolidated subsidiaries, including PQ Holdings Inc., Eco Services Operations Corp. and PQ Corporation, our primary operating company. We refer to the business of PQ Holdings Inc. prior to the Business Combination as “legacy PQ” and we refer to the business of Eco Services Operations LLC prior to the Business Combination as “legacy Eco.” See “Basis of Financial Presentation.” All information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares, unless otherwise noted.

Our Company

We are a leading global provider of catalysts, specialty materials and chemicals, and services that enable environmental improvements, enhance consumer products, and increase personal safety. Our products and solutions help companies produce vehicles with improved fuel efficiency and cleaner emissions. Our materials are critical ingredients in consumer products that make teeth brighter, skin softer, and wounds heal faster. We produce highly engineered materials that make highways and airports safer for drivers and pilots. Because our products are predominantly inorganic and carbon-free, we believe we contribute to improving the sustainability of our planet.

We believe our products deliver significant value to our customers, as demonstrated by our profit margins. Our products, which are mostly additives, catalysts, and services, typically constitute a small portion of our customers’ overall end-product costs yet are critical to product performance. For example, our catalysts are highly technical, customized products that require customer collaboration and significant lead time, resources, and intellectual property to develop. Through this collaborative innovation process, we have developed zeolite-based catalysts that are an effective and efficient method to reduce pollutants in diesel engines and enable our customers to meet increasingly stringent vehicle emission standards worldwide. In personal care applications, we have collaborated with leading consumer products companies over a number of years to develop a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes. These collaborative efforts with our customers continue to drive our product innovation process.

Our value-added products seek to address global issues that are often either the subject of significant regulations or are driven by consumer preferences, which we believe positions us to grow in excess of gross domestic product growth rates. Consumer preferences and global regulations requiring environmentally friendlier products are at the core of many of our value-added products and, we believe, provide us with high-margin growth opportunities. For example, our products and services facilitate improvement in vehicle fuel efficiency and emissions, enable vehicles to be lighter, and allow tires to roll and engines to run with less friction. The production of higher octane gasoline, which is needed for certain smaller turbocharged engines, has generated additional demand for the alkylation units that use our refinery services.

For the year ended December 31, 2016, we generated sales of $1,064.2 million and pro forma sales of $1,403.0 million, a net loss of $(79.7) million and a pro forma net loss of $(57.7) million, and pro forma Adjusted EBITDA of $420.8 million, which represented a pro forma Adjusted EBITDA margin of approximately 30%. In addition, our zeolite catalysts product group operates through Zeolyst International and Zeolyst C.V. (our 50% owned joint ventures that we refer to collectively as our “Zeolyst Joint Venture”). For the year ended December 31, 2016, 50% of the total net sales of our Zeolyst Joint Venture totaled $131.3 million. Additional information regarding our financial performance and non-GAAP measures, including pro forma Adjusted EBITDA, together with a reconciliation of non-GAAP measures to their most directly comparable GAAP measure, is included in “Summary Historical and Unaudited Pro Forma Financial and Other Data.” See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

 



 

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We have two reporting segments: environmental catalysts and services and performance materials and chemicals. In our environmental catalysts and services segment, we have three product groups: silica catalysts, zeolite catalysts, and refining services. In our performance materials and chemicals segment, we have two product groups: performance materials and performance chemicals.

In 2016, we served over 4,000 customers globally across many end uses and, as of June 30, 2017, operated out of 72 manufacturing facilities, which are strategically located across six continents. We believe we are a leader in each of our product groups, holding what we estimate to be a number one or number two supply share position for products that generated more than 90% of our 2016 pro forma sales. We believe that our global footprint and efficient network of strategically located manufacturing facilities provide us with a strong competitive advantage in serving our customers. We serve these customers both regionally as well as globally. We believe that we hold our leading supply share positions in the key regions that we serve while also benefiting from leading global presence and capabilities. Within our performance chemicals product group, we estimate that we had approximately three times the sodium silicate supply share of our closest competitor based on 2016 sales volume. This product group, which is the backbone across our additives and catalyst platform, is highly regionalized because of the expense of shipping sodium silicates extended distances due to their water content. Our refining services product group is also a highly regionalized business due to shipping costs and customer integration requirements, and in 2016 we estimate that we had a regenerated sulfuric acid supply share in excess of 50% in the United States, which we believe is substantially larger than our closest competitor. We recently reorganized our business to be market-based rather than product-based in order to better align our product groups with similar end uses to meet our customers’ needs.

We are highly diversified by business, geography, and end use, and in 2016 the majority of our pro forma sales were into applications that have historically had relatively predictable, consistent demand patterns driven by consumption or frequent replacement cycles.

 

2016 Pro Forma Sales and Zeolyst Joint Venture

Total Net Sales by End Use (1)(2)

  

2016 Pro Forma Sales and Zeolyst Joint Venture

Total Net Sales by Geography (1)(2)(3)

LOGO    LOGO

 

(1) Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.
(2) Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.
(3) Based on the delivery destination for products sold in 2016.

 



 

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Our Industry

We compete in the specialty chemicals and materials industry. Our industry is characterized by constant development of new products and the need to support customers with new product innovation and technical services to meet their challenges. In addition, customers demand consistent product quality and a reliable source of supply. Products sold to our customers can be highly value-added even when they represent only a small portion of the overall end product costs, and success can be achieved by helping customers improve their product performance, value, and quality. As a result, operating margins in this sector have historically been high and generally stable through economic cycles. In addition, many products in the specialty chemicals and materials industry benefit from economics that favor incumbent producers because the capital cost to expand existing capacity is typically significantly less than the capital cost necessary to build a new plant. The combination of attractive operating margins and moderate and generally predictable maintenance capital expenditure requirements can produce attractive cash flows. Our industry is also characterized by the need to produce consistent quality in a safe and environmentally sustainable manner.

The table below summarizes our key end use applications and products as well as the significant growth drivers in those applications.

 

Key End Uses  

2016
Pro

Forma

Sales
and
Zeolyst
Joint
Venture
Total
Net
Sales(1)(2)

    Significant Growth Drivers   Key PQ Products

Fuels & Emissions Controls

    20  

•  Global regulatory requirements to:

 

•  Remove nitrogen oxides from emissions

 

•  Remove sulfur from diesel and gasoline

 

•  Increase gasoline octane in order to improve fuel efficiency while lowering vapor pressure to regulated levels for premium fuels

 

•  Improve lubricant characteristics to improve fuel efficiencies

 

•  Refinery catalysts

 

•  Emissions control catalysts

 

•  Catalyst recycling services

       

Consumer Products

    18  

•  Substitution of silicate materials for less environmentally friendly chemical additives in detergent and cleaning end uses

 

•  Demand for improved quality and shelf life of beverages

 

•  Demand for improved oral hygiene and appearance

 

•  Silica gels for edible oil and beer clarification

 

•  Precipitated silicas and zeolites for the surface coating, dentifrice, and dishwasher and laundry detergent applications

             

Highway Safety & Construction

 

 

16

 

•  Demand for enhanced “dry and wet” visibility of road and airport markings to improve safety

 

•  Drive for weight reduction in cements

 

•  Reflective markings for roadways and airports

 

•  Hollow glass beads, or microspheres, for cement additives

                 

 



 

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Key End Uses  

2016
Pro

Forma

Sales
and
Zeolyst
Joint
Venture
Total
Net
Sales(1)(2)

    Significant Growth Drivers   Key PQ Products

Packaging & Engineered Plastics

 

 

 

17

 

 

 

•  Demand for increased process efficiency and reduction of by-products in production of chemicals

 

•  Demand for high-density polyethylene lightweighting of automotive components

 

•  Enhanced properties in plastic composites for the automotive and electronics industries

 

•  Catalysts for high-density polyethylene and chemicals syntheses

 

•  Antiblocks for film packaging

 

•  Solid and hollow microspheres for composite plastics

       

Industrial & Process Chemicals

    21  

•  Demand in the tire industry for reduced rolling resistance

 

•  Usage of silicate in municipal water treatment to inhibit corrosion in aging pipelines

 

•  Growth in manufacturing in North America driving demand for metal finishing

 

•  Silicate precursors for the tire industry

 

•  Silicate for water treatment

 

•  Glass beads, or microspheres, for metal finishing end uses

             

Natural Resources

    8  

•  More environmentally friendly drilling fluids for oil and gas production

 

•  Recovery in global oil drilling / U.S. copper production

 

•  Growing demand for lighter weight cements in oil and natural gas wells

 

•  Silicates for drilling muds

 

•  Hollow glass beads, or microspheres, for oil well cements

 

•  Sulfur derivatives for copper mining

 

•  Bleaching aids for paper

 

(1) Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.
(2) Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

 



 

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Our Business

The table below summarizes certain information regarding our two reporting segments and our five product groups for the year ended December 31, 2016.

 

    Year ended December 31, 2016        

(Dollars in millions)

Segments and Product
Groups

  Sales     % of
Total
Sales
    Pro
Forma
Sales(1)
    Zeolyst
Joint
Venture
Total
Net
Sales(2)
    % of
Total Pro
Forma
Sales and
Zeolyst
Joint
Venture
Total Net
Sales(1)(2)(3)
    Net
Loss
    Pro Forma
Adjusted
EBITDA(1)(2)
    % of Total
Pro Forma
Adjusted
EBITDA(1)(2)(4)
    Estimated Supply
Share Position(5)
 

Environmental Catalysts and Services:

                 

Silica Catalysts

  $ 53.0       5.0   $ 84.2     $       5.5           #2  

Zeolite Catalysts

                      131.3       8.5           Primarily #1 or #2  

Refining Services

    373.7       35.0     373.7             24.3           #1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

Subtotal

  $ 426.7       40.0   $ 457.9     $ 131.3       38.3     $ 221.8       48.9  

Performance Materials and Chemicals:

                 

Performance Chemicals

  $ 437.5       41.0   $ 663.9     $       43.2           Primarily #1(6)  

Performance Materials

    206.5       19.4     291.3             19.0           Primarily #1(7)  

Sales Eliminations

    (5.0     (0.4 %)      (8.0           (0.5 %)         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

Subtotal

  $ 639.0       60.0   $ 947.2     $       61.7     $ 231.8       51.1  

Eliminations / Corporate

    (1.5       (2.1               (32.8    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $ 1,064.2       100.0   $ 1,403.0     $ 131.3       100.0   $ (79.7   $ 420.8       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Pro forma information gives effect to the consummation of the Business Combination and the related financing transactions as if they occurred on January 1, 2015.
(2) Percentage calculations include $131.3 million of total net sales attributable to our Zeolyst Joint Venture, which represents 50% of its total net sales for the year ended December 31, 2016. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.
(3) Percentage calculations exclude $2.1 million in intersegment sales eliminations.
(4) Percentage calculations exclude $32.8 million in corporate expenses.
(5) Estimated supply share positions are based on management’s estimates based on 2016 sales volume and represent our estimated global supply share positions for each of our product groups, except that the estimated supply share position for our refining services product group reflects our estimate of only our supply share position in the United States and excludes volume attributable to manufacturers who produce primarily for their own consumption.
(6) We believe we hold #1 supply share positions with respect to products that accounted for approximately 73% of our performance chemicals product group’s 2016 pro forma sales, and that we hold #2 supply share positions with respect to products that accounted for the remaining approximately 27% of our performance chemicals product group’s 2016 pro forma sales.
(7) We believe we hold #1 supply share positions with respect to products that accounted for approximately 89% of our performance materials product group’s 2016 pro forma sales, and that we hold #2 supply share positions with respect to products that accounted for the remaining approximately 11% of our performance materials product group’s 2016 pro forma sales.

We are an integrated, global provider of catalysts, specialty materials and chemicals, and services that share common end uses, manufacturing techniques, and process technology. For example, all of our product groups address challenges faced by global automotive companies to meet increasingly strict fuel efficiency standards. Our manufacturing platform is based on furnace technology and proprietary knowledge developed from almost

 



 

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two centuries of combined experience at legacy PQ and legacy Eco applying silicates chemistry production and the development of applications across a broadening set of end uses. All of our product groups produce materials through our furnace process, other than our silica catalysts and zeolite catalysts product groups, which are derivatives of our performance chemicals product group. We believe we have a differentiated capability around furnace operations that enables us to operate more efficiently than most of our competitors.

Environmental Catalysts and Services

Our environmental catalysts and services business is a leading global innovator and producer of catalysts for the refinery, emissions control, and petrochemical industries and is also a leading provider of catalyst recycling services to the North American refining industry. We believe our products are mission critical for our customers in these growing applications and impart essential functionality in chemical and refining production processes and in emissions control for engines. Our catalysts are highly technical and customized for our customers and can require up to ten years of development and collaboration with customers in order to commercialize. Catalyst specifications are constantly evolving in order to address changing customer demands and requirements for lower cost and improved quality. As a result, we must continuously collaborate with our customers to create new and more efficient pathways for the production of chemicals and fuels. Our environmental catalysts and services business consists of three product groups: silica catalysts, zeolite catalysts, and refining services.

Silica Catalysts. In our silica catalysts product group, we sell both the finished catalyst and catalyst supports, which are critical catalyst components, for the production of high-density polyethylene (“HDPE”), a high strength and high stiffness plastic used in packaging films, bottles and containers, and other molded applications. We also produce a catalyst that is used globally for the production of methyl methacrylate, the monomer for acrylic engineering resins, a clear scratch-resistant plastic used in sheet or molded form to replace glass and as a durable surface coating.

Zeolite Catalysts. Our zeolite catalysts product group is a leading global supplier of emissions control catalysts as well as a supplier of specialty catalysts, precursors, and formulations to refineries and downstream petrochemicals and chemical companies. We operate through our Zeolyst Joint Venture with CRI Zeolites Inc., which is an affiliate of Royal Dutch Shell (“CRI”). Our Zeolyst Joint Venture is a long-standing partnership dating back to 1988, which combines our expertise in zeolites supply and technology and our partner’s expertise in global refinery catalyst sales and technology. These specialty zeolite-based catalysts are sold to the emissions control industry for use in diesel emission control units in both on-road and non-road diesel engines. In addition, our zeolite catalysts product group is a leading supplier of hydrocracking catalysts as a direct seller and supplier to other catalyst suppliers. This product group also produces other specialty catalysts, including aromatic catalysts that upgrade aromatic by-product streams, dewaxing catalysts that improve lube oil performance and diesel cold flow performance, and paraffin isomerization catalysts that upgrade olefins to high octane gasoline blending components, for refinery and petrochemical customers. From 2015 to 2020, global heavy- and light-duty diesel vehicle production is expected to grow at a compound annual growth rate of 4.1% and 2.8%, respectively. We believe that this estimated vehicle production growth combined with the continuing evolution of governmental regulation and product innovation involving emissions control will afford us with opportunities for growth in our zeolite catalysts product group.

Refining Services. Sulfuric acid is the primary catalyst used in the production of alkylates for gasoline production at refineries. Alkylates are a critical additive that increase octane in gasoline at low vapor pressure, and currently are used in most gasoline in the United States. Alkylate demand is expected to grow because its benefits are needed in certain smaller turbocharged engines to meet increasingly stringent fuel efficiency standards. The number of these turbocharged light-duty vehicles in the United States is expected to make up approximately 83% of all light-duty vehicles by 2025, a significant increase from approximately 18% in 2014, which we believe will increase the demand for higher-octane gasoline. Premium gasoline production grew at a

 



 

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compound annual growth rate of 6.1% between 2011 and 2016 according to the United States Energy Information Administration. Our refining services product group provides recycling and end-to-end logistics for refiners who use sulfuric acid in their alkylation units. These recycling units also produce virgin sulfuric acid and sodium bisulfate, which we sell into the water treatment, mining, and general industrial and chemicals industries.

We estimate that we hold the number one supply share position in the United States for these sulfuric acid recycling services based upon our 2016 sales volume. Our refining services product group is highly regionalized due to shipping costs and customer integration requirements. Our facilities are located near or, in some cases, within our customers’ refineries and our products are often supplied directly to our customers by pipeline. In addition, product can be shipped by barge, rail, and truck. As a result, we believe that our integrated and strategically located network of facilities and end-to-end logistics assets in the United States provides us with a significant competitive advantage and would be costly for our competitors to replicate.

Performance Materials and Chemicals

Our performance materials and chemicals business is a silicates and specialty materials producer with leading supply positions for the majority of our products sold in North America, Europe, South America, Australia and Asia (excluding China) serving diverse and growing end uses such as personal and industrial cleaning products, fuel efficient tires (“green tires”), surface coatings, and food and beverage products. Our products are essential additives, ingredients, and precursors that are critical to the performance characteristics of our customers’ products, yet typically represent only a small portion of our customers’ overall end-product costs. We believe that our global footprint enables us to compete more effectively on a global basis due to the costs associated with shipping these products over extended distances and that our network of strategically located manufacturing facilities allows us to serve our customers at a lower cost than our competitors and with quicker delivery times for our products. Our performance materials are also being used in some cases as a substitute for less environmentally friendly materials. For example, specialty silicates are displacing phosphates in dish detergents, precipitated silicas are displacing carbon black in tires, and hollow and solid microspheres are displacing plastic volumes in transportation lightweighting applications. Our performance materials and chemicals business consists of two product groups: performance chemicals and performance materials.

Performance Chemicals. Our performance chemicals product group includes silicate products and derivatives, which are used in a variety of applications such as adsorbents for surface coatings, clarifying agents for edible oils and beverages, precursors for green tires, and additives for cleaning and personal care products. Silicates are a family of products manufactured primarily from readily available materials, such as industrial sand and soda ash. These raw materials are typically fused in a furnace and then dissolved in water under pressure to form water-soluble silicates for use in our downstream products, such as precipitated silica and silica gels. We sell our performance chemicals products to customers who use silicates as precursors, such as sodium silicates that are used in the growing precipitated silica applications, as well as for downstream derivative products, such as silicas used as additives in toothpaste formulation and silica gels that are used as adsorbents in food and beverage manufacturing. Our network of regional silicate plants is strategically located to support the customers that we serve. In addition, we maintain a few larger dedicated facilities to service our derivative products. Our performance chemicals product technology requires significant know-how and scale in order to be able to operate in a cost effective manner. We believe that we are the only global silicates producer who can supply all of the major regions, and we estimate that we have three times the sodium silicates supply share as our nearest competitor based on 2016 sales volume. Key end uses for our performance chemicals products include catalyst precursors, food and beverage, personal care, cleaning products, coatings, tires, soil stabilization, paper de-inking, and sequestration. According to Notch Consulting, global demand for precipitated silica is estimated to grow at a compound annual growth rate of 5.8% between 2015 and 2020, driven primarily by expected increases in demand from tires, footwear and other rubber applications.

 



 

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Performance Materials. Our performance materials product group includes specialty glass products, such as highly engineered microspheres made from either recycled glass or fresh batch material using our proprietary furnace operations. We believe that we are an industry leader in North America, Europe, South America, and Asia (excluding China) in microspheres. These products are used in the reflective markings used on roads and runways to enhance visibility at night and in poor weather to improve safety. Our microspheres, which can be solid or hollow, are also used as additives in plastics for lightweighting and as abrasive media, where they are used to clean, peen, and debur metal surfaces, such as for turbine blades used in aerospace and power generation industries.

Our Competitive Strengths

Leading Global and Regional Positions in Attractive End Uses

We believe that we maintain a leading supply position in each of our major product groups, holding what we estimate to be the number one or two supply share position in 2016 for products that generated more than 90% of our pro forma sales. We believe that our global footprint and efficient network of strategically located manufacturing facilities provides us with a strong competitive advantage in serving our customers both globally and regionally, and that it would be costly for our competitors to replicate our network.

In our environmental catalysts and services business, we primarily compete on a global basis, with the exception of our refining services product group, where we compete on a more regional basis due to the costs associated with shipping these products over extended distances. We are a leading supplier of refinery hydrocracking catalysts and emissions control catalysts that are used in the heavy- and light-duty diesel industries to reduce nitrogen oxides emissions. We are also a global leader in specialty catalysts, such as catalysts for methyl methacrylate and for lube oil and diesel fuel dewaxing. In these applications, we primarily compete with other global producers such as W.R. Grace, BASF, UOP, and Albemarle, as well as other niche competitors such as Tosoh, Axens, and Haldor Topsoe.

In our refining services product group, we compete in a number of regions where our facilities are required to be close to our refinery customers, and in some cases located within the refinery with a direct pipeline to deliver our product. We estimate that our refining services product group holds the number one supply share position in the United States in sulfuric acid regeneration based on 2016 sales volume with an estimated 53% supply share. We also estimate that we had a 64% supply share in each of the West Coast and Gulf Coast areas based on 2016 sales volume, which we believe was greater than three times the supply share of our largest competitor. In our performance chemicals product group, where we also compete primarily on a regional basis due to the costs associated with shipping sodium silicates, we estimate that we had approximately three times the sodium silicates supply share of our nearest competitor based on 2016 sales volume. We believe that we are the only global silicates producer with operations in North America, Europe, and Australia. We believe that we have technical, cost, and proximity advantages in all of these regions as compared to our competitors as a result of the scale and breadth of our product offerings and operations.

These leadership positions serve industries that are attractive due to the need for customized and innovative products, stability of demand, and growth potential driven by the regulatory environment and consumer preferences. Our products generally require close customer collaboration to address end use challenges that are constantly evolving. We produce value-added products that are critical to the performance characteristics of our customers’ products. In addition, in 2016, a majority of our pro forma sales were to end uses such as fuels and emission controls, consumer products, and highway safety and construction that generally do not exhibit as pronounced cyclicality as other applications. Further, many of these end uses are growing due to increased global regulations, such as regulations regarding sulfur content in transportation fuel and particulate matter and nitrogen

 



 

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oxides emissions from on-road and non-road diesel engines. Increasingly stringent automotive fuel efficiency standards are also expected to lead to an increase in the demand for higher-octane gasoline. While we believe increasing regulatory standards provide attractive growth opportunities, we may be required to develop new products in response to such regulations in order to fully capture such opportunities. In addition, our products are ingredients in consumer products, which includes personal care and consumer cleaning products, where customers are seeking more environmentally friendly products without loss of effectiveness or performance. We believe that our products have the environmental and safety profile to address these evolving customer demands.

Long-Term, High-Quality Customer Relationships and Innovation Track Record

Many of our products require close customer collaboration to address application challenges that are constantly evolving. As a result, we work with our customers over many years in order to develop products to meet customized specifications and performance characteristics while also maintaining strict quality standards. While we are unable to predict future shifts in customer demand, the long lead-time required for product development and commercialization, which can be up to ten years in our environmental catalysts and services business, provides the opportunity for us to build long-term relationships with customers.

We collaborate with leading multinational companies that often seek global solutions. Our customers include large industrial companies such as BASF, Honeywell, and 3M, and global catalyst producers such as Albemarle and W.R. Grace. We also supply catalysts to leading chemical and petrochemical producers such as BASF, Dow Chemical, Lucite, LyondellBasell, and Shell. We supply personal care ingredients and additives to leading consumer products companies such as Unilever and Colgate-Palmolive. We have long-term relationships with our top ten customers, based on 2016 pro forma sales, that average more than 50 years. In addition, our customer base is diversified, with our top ten customers in 2016 representing approximately 24% of our pro forma sales for the year ended December 31, 2016 and no customer representing more than 4% of our pro forma sales during this period. However, the percentage of our sales generated by our top customers may increase in the future as a result of changes in industry dynamics, shifts in customer demands and contracts or other factors.

These long-term relationships have allowed us to innovate together with our customers to meet evolving demands. For example, we have developed zeolite-based catalysts that are an effective and efficient method to reduce pollutants from heavy- and light-duty diesel engines and enable our customers to meet increasingly stringent vehicle emission standards worldwide. In personal care applications, we have collaborated with leading consumer products companies over a number of years to develop a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes. In addition, our proprietary silica catalyst has enabled development of a high strength HDPE resin that is used for making lightweight plastic gasoline tanks for automobiles. While we believe we are well positioned to capitalize on future innovation opportunities, the constantly evolving needs of our customers make it difficult to predict the pace or scope of future innovation opportunities.

Attractive and Stable Margins and Cash Flow

We have demonstrated the ability to maintain stable margins while continuing to grow our business in different macroeconomic environments. Our Adjusted EBITDA margins have averaged approximately 28% between 2012 and 2016. We believe that the stability of our margins and cash flows during this period is because our value-added products, which are critical to the performance of our customers’ products, typically represent only a small portion of our customers’ overall end-product costs.

 



 

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Adjusted EBITDA Margin (1)
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(1) Legacy Eco Adjusted EBITDA margin is presented for 2012 through 2014, pro forma Adjusted EBITDA margin is presented for 2015 and 2016 and Adjusted EBITDA margin is presented for the first half of 2017. As a result, Adjusted EBITDA margin for 2012 through 2014 consists only of the results of our accounting predecessor and may not be representative of margins for our entire business for such periods. See footnote (4) to “Summary Historical and Unaudited Pro Forma Financial and Other Data” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.

Our products are predominantly inorganic and carbon-free, and are produced from readily available raw materials such as industrial sand and soda ash, which prices have historically been less volatile than oil. We also use natural gas in our furnaces where our North American facilities have benefited from the plentiful supplies of shale gas. In addition, we have long-term supply contracts with many of our key raw materials suppliers across our product groups. We have also been able to mitigate the impact of raw material or energy price volatility using a variety of mechanisms, including hedging and raw material cost pass-through clauses in our sales contracts and other adjustment provisions. For the year ended December 31, 2016, approximately 45% of our North American silicate pro forma sales, which is a significant portion of our performance chemicals product group sales, and approximately 94% of our refining services product group pro forma sales were sold under contracts that included raw material pass-through clauses.

Our cash flow generation is driven, in part, by our disciplined capital investment and tax attributes that may provide cash flow benefits in the future. We have invested in our infrastructure and growth over the last three years and we expect to realize returns on these investments in the future with limited additional investment requirements, although there is no assurance that we will be able to realize any returns on these investments or that significant additional investments will not be required. As of December 31, 2016, we had $383.2 million of net operating losses for U.S. federal income tax purposes, along with related net operating losses for state tax purposes, and $671.4 million of identified intangibles and goodwill from the Business Combination transaction, both of which may provide us with additional cash tax savings in future years in which we generate taxable income.

Strong Growth Potential Across the Portfolio

We focus on serving end use applications where we believe significant future growth potential exists. Our products address our customers’ needs, which are typically driven either by regulatory regimes or consumer preferences, on a global basis. In addition, our product sales and development efforts are driven by regional infrastructure and development trends. In vehicles, we address regulated heavy- and light-duty diesel emission standards and sulfur content and vapor pressure requirements in gasoline. We expect that these regulations will create growth opportunities in excess of gross domestic product growth rates due to the constantly evolving standards that our customers need to address with new and improved products.

Light- and heavy-duty diesel engines are subject to a broad set of regulatory requirements, and we expect that these increasingly stringent standards will offer opportunities for our Zeolyst Joint Venture to develop

 



 

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products to assist our customers in meeting these standards. Countries typically adopt a set of standards that limit the amount of nitrogen oxides, carbon dioxide, and other emissions allowed for diesel engines. In many cases countries have established regulations that generally follow United States Environmental Protection Agency or European Union standards, but typically on a later implementation timeline. In addition, even more restrictive regulations are expected to be adopted in the future in many jurisdictions, such as EU VII, which would further reduce permitted emissions levels in the European Union. We believe that compliance with existing regulations as well as any future regulations provides us with opportunities to grow our sales of emissions control catalysts.

The following chart identifies the regulatory requirements for certain countries and regions in relation to the most comparable European Union standard for ease of comparability. See “Industry—Fuels & Emissions Controls” for more information regarding the European Union standards referred to in the chart below.

 

LOGO

Source: The International Council on Clean Transportation

Given the fuel efficiency standards that are driving the design of new engines and the resulting higher-octane gasoline requirements that can be achieved through alkylate blending, we believe that our refining services product group is well positioned to benefit from any related growth in demand for alkylates.

We produce catalysts for HDPE and methyl methacrylate production in the packaging and engineered plastics applications. According to an industry source, North American HDPE capacity is expected to grow at a compound annual growth rate of approximately 5.1% between 2016 and 2020, driven by North America’s global cost position in petrochemicals and increased use of these plastics as a substitute for heavier and less versatile materials such as glass and metal. Methyl methacrylate is the monomer for acrylic engineering resins, a clear scratch-resistant plastic used in sheet form to replace glass and as a surface coating. We believe that we have an opportunity to grow our methyl methacrylate catalysts sales in the future as methyl methacrylate production increases as a result of, in part, increased production efficiencies enabled by our catalysts.

We believe that additional demand for retroreflectivity (or visibility) for roadway and aviation markings could provide us with significant growth opportunities. We benefit from increased use and density per mile of

 



 

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road markings that include our products. The most recent innovation from our performance materials product group is our ThermoDrop product, which simplifies the road striping operations for our customers by using a new durable thermal plastic road marking material. We have also introduced a new faster-drying road marking system, Visilok, which can reduce traffic disruption during striping operations and improve road worker safety by reducing the amount of time needed to complete the road marking process.

We also expect to benefit from trends towards the use of more environmentally friendly products where we believe we have opportunities to displace other less environmentally friendly materials. While there is no assurance that such trends will continue in the future, we believe our product offerings position us to capitalize on this growth opportunity. For example, our Ambosol magnesium silicate is used to eliminate color and odors in polyols, which are used in the production of polyurethane for, among other things, household products such as scratch-resistant coatings and foam insulation. In addition, our specialty silicates are displacing phosphates in dish detergents, precipitated silicas are displacing carbon black in tires, and solid and hollow microspheres are displacing plastic volumes in lightweighting applications. Most of our products are manufactured from commonly found materials such as industrial sand and soda ash, which are more environmentally friendly than carbon-based products. We have also developed a family of gentle silica-based dentifrice abrasives that produce more effective cleaning toothpastes and we have developed a product family, Britesil silicates, which improves convenience while eliminating phosphates in automatic dishwashing applications.

Experienced Management Team

Our senior management team has substantial industry experience and a proven track record. They average over 30 years of experience in our product groups, and their cumulative industry experience extends to a broad range of execution capabilities, including acquisition integration, strategic management, operations, sales and marketing, and new product and application development. In 2016, our management team integrated legacy Eco into our environmental catalysts and services business while also growing the business and successfully implementing cost initiatives. Our senior management team has also reorganized our company from a products-based business to a markets-based business to better align our offerings with the needs of our customers. There is a renewed focus on serving our customers by developing solutions through technical sales, services, and product development, and we have added additional management personnel experienced in innovation and market driven organizations. Our management owns approximately 11% of our outstanding common stock immediately prior to this offering, which we believe creates an alignment of interest with our shareholders.

Our Business Strategy

Our business strategy is to capitalize on our strong foundation, market-based approach, and management team to grow sales profitably, deploy capital efficiently, and generate free cash flow in order to create shareholder value. We believe that our history of operational excellence, technology leadership, and strong business execution developed from our almost two centuries of combined industry experience at legacy PQ and legacy Eco positions us well to execute on our business strategy. In the last two years, we have added senior executives to our management team, including our chief executive officer, Jim Gentilcore, and chief financial officer, Mike Crews, who bring significant public company leadership experience and a track record of customer-focused innovation and disciplined capital allocation to our business. We believe that Mr. Gentilcore’s experience in the electronics industry is particularly relevant to our innovation efforts as we pursue new product innovation across our product groups. In addition, we believe that our recent reorganization better aligns our management structure with our customer needs to enable us to make more focused sales and product innovation

 



 

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investments. We believe there are significant opportunities to profitably grow our business, generate free cash flow and deliver shareholder value by executing on the following strategies:

Shift from a Products-based to a Markets-based Company

Our reorganization from a products-based to a markets-based company is fundamental to our growth strategy. Following the consummation of the Business Combination in May 2016, we have further realigned our product groups around critical markets that we serve. The combination of the legacy Eco and legacy PQ businesses expanded our presence in the refinery industry and provided us with valuable insight into key success factors for serving our refining and petrochemical customers. We have undertaken a similar approach in other important end uses that we serve such as personal care, highway safety, oil and gas, surface coatings, and electronics.

Our solution-oriented process starts with our customer’s specific needs, which are then identified as a product or service opportunity that is defined, sized, and evaluated to determine if it is within the core strength of our global development team. If not within our core capabilities, but determined to be a strategically important opportunity, we initiate a search for outside technology, partnerships, or acquisition targets that can deliver a cost-effective and profitable solution. This approach is in contrast to our prior approach developing products or new formulations first and then seeking to identify applications into which to sell that product or new formulation. We believe that our markets-based approach will result in product innovation that better meets our customers’ needs and supports our profitable growth.

Our sales and marketing organization has a broad base of customer and marketing experience. Since our business reorganization, we believe each of our operating segments has simplified its customer contact points and increased knowledge about the industries we serve. We have been able to eliminate duplicate sales calls that would occur among our previous business divisions and can prioritize our efforts around our most influential customer contacts. We have also removed the silos that previously impeded our ability to share important customer information within our organization. This integrated marketing effort allows for more rapid analysis and decision-making for our major strategic customers who are often served by multiple product groups. We believe these operational improvements will enable us to reduce product commercialization time and increase our return on marketing investment.

Prioritize Investment and Development to Innovate and Profitably Grow Sales

We have been able to successfully grow our sales into new applications through our innovation and development of new products to address evolving customer needs. For example, our zeolite catalysts product group developed new products to address new regulatory standards regarding vehicle emissions, and our performance chemicals product group collaborated with our customers to develop precipitated silica products to address their demands for more green tires. We will continue to focus on collaboration with our customers through our technical sales and research and development teams to better understand and address our customers’ evolving needs and invest in our growth by prioritizing innovation driven by these identified needs.

Within our innovation and product development process, our technology teams work closely with our customer facing teams to identify compelling customer needs that can be addressed through innovation or new product development. We seek to assess technology and commercialization hurdles early on in the development process so that we can quickly and efficiently evaluate our opportunity and, where appropriate, deprioritize, or abandon projects before expending significant resources. We are improving the way our research and development team shares information by removing silos and holding regular senior-level project reviews to ensure best practices are shared and consistent metrics are used to determine a project’s merit and the size of the potential opportunity. We have already begun to see the benefits of our new processes with the successful

 



 

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commercialization of ThermoDrop, which we launched in February 2017. We collaborated with key customers to develop the ThermoDrop technology, which uses our highway safety microspheres and a proprietary striping application technology to enable our customers to more efficiently stripe highways. This technology has received strong customer acceptance since launch, and we are increasing our production to meet anticipated demand.

We will also selectively consider acquisitions as part of our growth strategy. We believe that our integration of legacy Eco demonstrates our ability to successfully execute on acquisitions and realize available synergies and other benefits. We have identified a number of potential acquisition targets with complementary fits across both of our operating segments and, consistent with our markets-based focus, these targets also include downstream-focused businesses. We will seek to use acquisitions to increase our geographic presence, diversify our product offerings, and further secure our leadership positions with our customer base. We intend to focus our acquisition efforts on opportunities in our higher value-added solutions within or adjacent to our current product offerings. We intend to pursue these transactions in a disciplined manner by rigorously evaluating return on capital against our cost of capital in addition to the potential strategic benefits. However, as of June 30, 2017, we had cash and cash equivalents of $50.5 million and total outstanding indebtedness of approximately $2,728.4 million, which may limit our ability to pursue acquisition transactions or other aspects of our growth strategy.

Maintain Strong Margins and Cash Flow with Continuous Improvement Initiatives

Our margins historically have been stable due to our strong and long-standing value proposition to our customers and our strong technological, operational, and product capabilities. We intend to maintain and improve upon these margins by leveraging our operational excellence and continuing our approach to raw material cost pass-through and other appropriate cost sharing arrangements with our customers. We believe that our new organizational structure will allow us to better leverage distribution channels across our products in order to address end uses such as paints and coatings, personal care, and oil and gas, and we have also integrated our continuous improvement teams across our operating segments. For example, we have established a new global furnace operations team, a global engineering team, and a global sales and operations planning team to share best practices across all of our product groups. We have also formalized our sharing of best practices across many functional disciplines, such as supply chain, technology, working capital, and capital expenditure management. From these efforts, we expect to be able to reduce costs in our operations in order to increase our cash flow.

Recent Developments

On August 7, 2017, PQ Corporation repriced its existing senior secured term loan facility, which consists of a $927.8 million U.S. dollar-denominated tranche and a €283.3 million Euro-denominated tranche, to reduce the applicable interest rates. The repriced term loan facility has substantially identical terms to the prior facility, except that (a) U.S. dollar-denominated borrowings bear interest at the rate equal to, at our option (1) a margin of 2.25% plus a base rate or (2) a margin of 3.25% plus a LIBOR rate (subject to a floor of 0%) determined by reference to the cost of funds for U.S. dollar deposits, subject to certain adjustments and other events, and (b) Euro-denominated borrowings bear interest at a rate equal to, at our option (1) a margin of 2.25% plus a base rate or (2) a margin of 3.25% plus a EURIBOR rate (subject to a floor of 0.75%) determined by reference to the cost of funds for Euro deposits, subject to certain adjustments and other events. The repriced term loan facility is expected to reduce our annual interest expense by approximately $12.5 million. See “Description of Certain Indebtedness—Senior Secured Credit Facilities” for additional information regarding the senior secured term loan facility.

Risk Factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute on our business strategy. You should carefully consider all of

 



 

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the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

    as a global business, we are exposed to local business risks in different countries, which could have a material adverse effect on our financial condition, results of operations and cash flows;

 

    as of June 30, 2017, we had total outstanding indebtedness of approximately $2,728.4 million and our substantial debt could adversely affect our liquidity and ability to raise additional capital to fund our operations and limit our ability to pursue our growth strategy or react to changes in the economy or our industry;

 

    we are affected by general economic conditions and an economic downturn could adversely affect our operations and financial results;

 

    alternative technology or other changes in our customers’ products may reduce or eliminate the need for certain of our products and limit our ability to capitalize on our long-term customer relationships;

 

    if we are unable to pass on increases in raw material prices, including natural gas, to our customers or to retain or replace key suppliers, our business strategy to maintain and improve upon our margins as well as our results of operations and cash flows may be negatively affected;

 

    certain of our product groups are subject to government regulation and future government regulation could limit our growth potential; and

 

    upon completion of this offering, CCMP and INEOS will continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our Corporate Structure

The following chart illustrates our ownership structure as of June 30, 2017 after giving effect to this offering:

 

 

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(1) Our zeolite catalysts product group within our environmental catalysts and services reporting segment operates through our Zeolyst Joint Venture.

 



 

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Our Principal Stockholders

Investment funds affiliated with CCMP, INEOS Investments Partnership (“INEOS”) and members of management and our board of directors acquired their respective ownership of PQ Group Holdings as a result of the following series of transactions:

 

    In December 2014, investment funds affiliated with CCMP acquired an approximate 49% equity interest in PQ Holdings. INEOS and members of management owned the remaining approximate 51% equity interest in PQ Holdings.

 

    Also in December 2014, investment funds affiliated with CCMP acquired an approximate 95% equity interest in Eco Services Group Holdings LLC, the indirect parent of Eco. Members of Eco’s management owned the remaining approximate 5% equity interest in Eco Services Group Holdings LLC.

 

    In May 2016, we completed the Business Combination, in which the equity interests of PQ Holdings and Eco Services Group Holdings LLC were converted into equity interests in PQ Group Holdings.

As of June 30, 2017, and prior to giving effect to this offering and the Reclassification, investment funds affiliated with CCMP, INEOS, and members of management and our board of directors owned equity securities representing approximately 58%, 31%, and 11%, respectively, of our voting power. Investment funds affiliated with CCMP and INEOS will continue to have significant influence over us and decisions made by our stockholders upon completion of this offering and may have interests that differ from yours. See “Risk Factors—Risks Related to this Offering and to our Common Stock.”

CCMP is a leading global private equity firm specializing in buyouts and growth equity investments in companies ranging from $250 million to more than $3 billion in assets. CCMP’s founders have invested over $16 billion since 1984, which includes their activities at J.P. Morgan Partners, LLC (a private equity division of JPMorgan Chase & Co.) and its predecessor firms. CCMP was formed in August 2006 when the buyout and growth equity investment professionals of J.P. Morgan Partners, LLC separated from JPMorgan Chase & Co. to commence operations as an independent firm. The foundation of CCMP’s investment approach is to leverage the combined strengths of its deep industry expertise and proprietary operating resources to create value by investing in three targeted industries—Industrial, Consumer and Healthcare.

INEOS is a leading manufacturer of petrochemicals, specialty chemicals and oil products. Comprising 18 businesses, with a production network spanning 105 manufacturing facilities in 22 countries, it produces more than 60 million tonnes of petrochemicals, 20 million tons per annum of crude oil refined products (fuels) and in 2016 it had sales of approximately $40 billion. Worldwide, INEOS employs 18,500 people. Its management philosophy is to operate a simple and decentralized organizational structure.

Additional Information

PQ Group Holdings Inc. was incorporated in Delaware on August 7, 2015. PQ Holdings Inc., a manufacturer of catalysts, specialty materials and chemicals, was incorporated in Delaware on June 22, 2007. Eco Services Operations LLC, which acquired substantially all of the assets of Solvay USA Inc.’s sulfuric acid refining services business unit on December 1, 2014, was incorporated in Delaware on July 30, 2014. On May 4, 2016, we consummated the Business Combination to reorganize and combine the businesses of PQ Holdings Inc. and Eco Services Operations LLC under a new holding company, PQ Group Holdings Inc. We refer to the business of PQ Holdings Inc. prior to the Business Combination as “legacy PQ” and we refer to the business of Eco Services Operations LLC prior to the Business Combination as “legacy Eco.”

Our principal executive offices are located at 300 Lindenwood Drive, Valleybrooke Corporate Center, Malvern, Pennsylvania 19355, and our telephone number is (610) 651-4400. Our website address is www.pqcorp.com. The information that appears on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus, and you should not rely on any such information in making the decision whether to purchase our common stock.

 



 

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The Offering

 

Common stock offered by us

  

                 shares (or                  shares if the underwriters exercise their option to purchase additional shares in full).

Underwriters’ option to purchase additional shares

  

We have granted the underwriters a 30-day option from the date of this prospectus to purchase up to an additional                  shares.

Common stock to be outstanding after this offering

  

                 shares (or                  shares if the underwriters exercise the option to purchase additional shares in full). See “Description of Capital Stock.” For additional information regarding the impact of a change in the initial public offering price on the number of shares outstanding after completion of this offering related to the conversion of our Class B common stock, see “The Reclassification.”

Use of proceeds

  

We expect to receive net proceeds, after deducting underwriting discounts and commissions and estimated expenses payable by us, of approximately $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus.

 

We intend to use the net proceeds from the sale of our common stock in this offering to redeem approximately $         million in aggregate principal amount of PQ Corporation’s Floating Rate Senior Unsecured Notes due 2022, including accrued and unpaid interest, and applicable redemption premiums, and the remaining net proceeds, if any, for general corporate purposes. See “Use of Proceeds.”

Dividend policy

  

Our board of directors does not currently intend to pay dividends on our common stock. See “Dividend Policy.”

Risk factors

  

Investing in our common stock involves a high degree of risk. You should read carefully the “Risk Factors” section of this prospectus, beginning on page 27, for a discussion of factors that you should consider before deciding to invest in our common stock.

Proposed stock exchange symbol

  

“PQG.”

 



 

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Except as otherwise indicated, the number of shares of our common stock to be outstanding after this offering is based on                  shares outstanding as of                 , 2017 after giving effect to the Reclassification, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus. Because the number of shares of our common stock into which a share of our Class B common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price would have a corresponding impact on the number of outstanding shares of our common stock presented in this prospectus after giving effect to this offering. See “The Reclassification.” Except as otherwise indicated, the number of shares of our common stock to be outstanding after this offering excludes:

 

                     shares of our common stock issuable upon exercise of stock options issued and outstanding as of June 30, 2017 under the PQ Group Holdings Inc. Stock Incentive Plan at a weighted average exercise price of $         per share; and

 

                     shares of our common stock reserved for issuance under our 2017 Omnibus Incentive Plan (the “2017 Plan”).

 



 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA

FINANCIAL AND OTHER DATA

The following tables set forth our summary historical and unaudited pro forma financial and other data as of the dates and for the periods indicated. The statement of operations data and cash flows data for the six month periods ended June 30, 2017 and 2016 and the historical balance sheet data as of June 30, 2017 presented below have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The statement of operations data and cash flows data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2016 and 2015 presented below have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data and cash flows data for the period from inception (July 30, 2014) to December 31, 2014 have been derived from our Successor period financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 2014 has been derived from our Successor period financial statements not included in this prospectus. The statement of operations data and cash flows data for the period from January 1, 2014 to November 30, 2014 have been derived from our Predecessor period financial statements included elsewhere in this prospectus. The historical financial data of legacy PQ for the years ended December 31, 2015, 2014 and 2013 has been derived from legacy PQ’s audited consolidated financial statements included elsewhere in this prospectus. The historical financial data of legacy PQ for the period from January 1, 2016 through May 3, 2016 and for the year ended December 31, 2012 has been derived from legacy PQ’s consolidated financial statements not included in this prospectus. See “Basis of Financial Presentation.”

The unaudited pro forma statement of operations data for the years ended December 31, 2016 and 2015 gives effect to the Business Combination and the related financing transactions as if they occurred on January 1, 2015 and is derived from our historical consolidated financial statements and legacy PQ consolidated financial statements included elsewhere in this prospectus. Unaudited pro forma balance sheet data as of June 30, 2017 and statement of operations data for the six months ended June 30, 2017 is not presented because the Business Combination and related financing transactions are included in our consolidated financial results as of such date and for such periods. The unaudited pro forma statement of operations data is illustrative and not intended to represent what our results of operations would have been had the Business Combination and related financing transactions occurred on January 1, 2015 or to project our results of operations for any future period. The unaudited pro forma statement of operations data may not be comparable to, or indicative of, future performance.

 



 

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This summary historical and unaudited pro forma financial and other data should be read in conjunction with the disclosures set forth under “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

                                        Successor     Predecessor        
    Six months
ended
June 30,
    Pro forma
years ended
December 31,
    Years ended
December 31,
    Period from
inception
(July 30, 2014)
to December 31,
2014
    Period from
January 1, 2014
to November 30,
2014
    Legacy PQ
year ended
December 31,
 
    2017     2016     2016     2015     2016     2015         2014  
    Unaudited    

Unaudited

                         

(Dollars in thousands)

     

Statement of operations data:

                 

Sales

  $ 722,198     $ 371,467     $ 1,403,041     $ 1,413,201     $ 1,064,177     $ 388,875     $ 35,539     $ 361,823     $ 1,114,904  

Cost of goods sold

    532,072       283,068       1,037,109       1,048,739       810,085       278,791       30,160       265,829       818,483  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    190,126       88,399       365,932       364,462       254,092       110,084       5,379       95,994       296,421  

Selling, general and administrative expenses

    69,378       38,014       145,041       140,891       107,601       34,613       2,623       45,168       110,886  

Other operating expense, net

    27,324       25,588       74,972       67,666       62,301       19,696       16,347       5,593       71,148  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    93,064       24,797       145,919       155,905       84,190       55,775       (13,591     45,233       114,387  

Equity in net (income) loss from affiliated companies

    (14,622     4,693       (35,210     (41,078     2,612                         29,359  

Interest expense, net

    94,961       45,752       187,945       199,614       140,315       44,348       8,470       86       111,553  

Debt extinguishment costs

          11,858       1,793             13,782                         2,476  

Other (income) expense, net

    16,613       3,024       (8,869     21,383       (3,402                       23,886  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and noncontrolling interest

    (3,888     (40,530     260       (24,014     (69,117     11,427       (22,061     45,147       5,831  

(Benefit) provision for income taxes

    97       39,549       57,967       1,157       10,041                   14,602       7,548  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (3,985     (80,079     (57,707     (25,171     (79,158     11,427       (22,061     30,545       (1,717

Less: Net income attributable to the noncontrolling interest

    78       314       1,225       1,771       588                         1,894  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to PQ Group Holdings Inc.

  $ (4,063   $ (80,393   $ (58,932   $ (26,942   $ (79,746   $ 11,427     $ (22,061   $ 30,545    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net (loss) income attributable to legacy PQ

                  $ (3,611
                 

 

 

 

 



 

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                             Successor        
     Six months ended
June 30,
    Years ended
December 31,
    Period from
inception
(July 30, 2014)
to December 31,

2014
       
     2017     2016     2016     2015      
    

Unaudited

                   
              

Earnings (loss) per share:

            

Basic

            

Class B shares

   $     $     $     $ 7.58     $ (14.78  

Class A shares

     (9.45     (186.90     (185.43              

Diluted

            

Class B shares

   $     $     $     $ 7.58     $ (14.78  

Class A shares

     (9.45     (186.90     (185.43              

Pro Forma

            

Class B shares

   $     $     $     $     $    

Class A shares

                 (137.03              

Weighted average shares outstanding:

            

Basic

            

Class B shares

     6,679,077       3,224,645       4,947,982       1,507,719       1,492,682    

Class A shares

     429,985       430,136       430,051                

Diluted

            

Class B shares

     6,679,077       3,224,645       4,947,982       1,507,719       1,492,682    

Class A shares

     429,985       430,136       430,051                

Pro Forma

            

Class B shares

                 4,947,982                

Class A shares

                 430,051                
            
                             Successor     Predecessor  
     Six months ended
June 30,
    Years ended
December 31,
    Period from
inception
(July 30, 2014)
to December 31,

2014
    Period from
January 1, 2014
to November 30,

2014
 

(Dollars in thousands)

   2017         2016         2016     2015      
     Unaudited                          
        

Balance sheet data (at end of period):

            

Cash and cash equivalents

   $ 50,457       $ 70,742     $ 25,155     $ 22,627    

Property, plant and equipment, net

     1,203,925         1,181,388       481,073       472,156    

Total assets

     4,390,031         4,259,671       1,007,636       1,025,094    

Total debt, including current portion

     2,676,048         2,562,198       673,101       675,254    

Total stockholders’ equity

     1,064,416         1,027,944       235,293       217,824    

Cash flows data:

            

Net cash provided by (used in):

            

Operating activities

   $ 21,751     $ (4,372   $ 119,720     $ 44,715     $ (2,057   $ 57,593  

Investing activities

     (103,556     (1,831,479     (1,929,680     (38,725     (888,347     (32,852

Financing activities

     66,819       1,859,474       1,861,433       (3,462     913,031       (24,741

 



 

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                      Successor     Predecessor        
    Six months
ended
June 30,
    Pro forma
year ended
December 31,
    Year ended
December 31,
    Period from
inception
(July 30, 2014)
to December 31,
    Period from
January 1, 2014
to November 30,
    Legacy PQ
year ended
December 31,
 

(Dollars in thousands)

  2017     2016     2016     2015     2016     2015     2014     2014     2014  
    Unaudited  

Non-GAAP and other financial and operating data(1):

                 

Sales:

                 

Sales

  $ 722,198     $ 371,467     $ 1,403,041     $ 1,413,201     $ 1,064,177     $ 388,875     $ 35,539     $ 361,823     $ 1,114,904  

Constant currency sales(2)

    722,198       367,517       1,392,655       1,375,230       1,057,714       388,875       35,539       361,823       973,943  

Adjusted EBITDA(3):

                 

Adjusted EBITDA

  $ 223,945     $ 118,653     $ 420,746     $ 413,145     $ 331,533     $ 117,704     $ 9,122     $ 98,075     $ 288,101  

Constant currency Adjusted EBITDA

    223,945       117,666       417,762       404,728       329,694       117,704       9,122       98,075       258,522  

 

     Six months
ended
June 30,
     Year ended
December 31,
 

(Dollars in thousands)

   2017      2016      2016      2015      2014  
            Unaudited                

Zeolyst Joint Venture operating data:

              

Total net sales(4)

   $ 63,369      $ 20,276      $ 131,265      $ 159,818      $ 106,734  

 

(1) To supplement our financial information presented in accordance with GAAP, we use the following non-GAAP financial measures to clarify and enhance an understanding of the historical results of our entire business: constant currency sales, Adjusted EBITDA, pro forma Adjusted EBITDA, constant currency Adjusted EBITDA, constant currency pro forma Adjusted EBITDA, Adjusted EBITDA margin and pro forma Adjusted EBITDA margin (collectively, the “Non-GAAP Financial Measures”). We believe that the presentation of these Non-GAAP Financial Measures enhances an investor’s understanding of our financial performance. We further believe that these Non-GAAP Financial Measures are 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. We also believe that these financial measures provide investors with a useful tool for assessing the comparability between periods as a result of the 2014 Acquisition and the Business Combination. We use these Non-GAAP Financial Measures for business planning purposes and in measuring our performance relative to that of our competitors. Each of the Adjusted EBITDA Non-GAAP Financial Measures presented in this prospectus includes an adjustment for depreciation, amortization and interest of our 50% share of our Zeolyst Joint Venture, which is accounted for under the equity method of accounting.

We believe these Non-GAAP Financial Measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of such Non-GAAP Financial Measures may vary from that of others in our industry. These Non-GAAP Financial Measures should not be considered as alternatives to sales, operating income (loss), net income (loss), earnings per share, cash flows data or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity.

EBITDA consists of net (loss) income attributable to us 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 that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) depreciation, amortization and interest of our Zeolyst Joint Venture as described above. In the case of Adjusted EBITDA, we believe that making such adjustments provides investors meaningful information to understand our operating results and analyze financial and business trends on a period-to-period basis.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

    EBITDA and Adjusted EBITDA:

 

  ¡    do not reflect the significant interest expense on our debt;

 

  ¡    exclude impairments and adjustments for step-up amortization; and

 

  ¡    do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

    other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

 



 

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Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these Non-GAAP Financial Measures only supplementally.

In calculating EBITDA and Adjusted EBITDA, we add back certain non-cash, nonrecurring and other items and make certain adjustments that are based on assumptions and estimates. In addition, in evaluating these Non-GAAP Financial Measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

Constant currency information reflects comparative local currency financial information at the average foreign exchange rates for the six months ended June 30, 2017 for all historical periods. This measure provides information on sales and Adjusted EBITDA assuming that foreign currency exchange rates had not changed between current and historical periods. The company believes such Non-GAAP Financial Measures, when used in conjunction with the GAAP measures of sales and net income (loss) at actual currency rates, provides additional insight into the company’s operations, particularly in evaluating performance from one period to another without the impact of foreign currency changes.

 

(2) The following table reconciles sales to constant currency sales for the periods presented.

 

                                        Successor     Predecessor        
    Six months
ended
June 30,
    Pro forma
year ended
December 31,
    Year ended
December 31,
    Period from
inception
(July 30, 2014)
to

December 31,
    Period from
January 1, 2014
to

November 30,
    Legacy PQ
year ended
December 31,
 

(Dollars in thousands)

  2017     2016     2016     2015     2016     2015     2014     2014     2014  
    Unaudited  

Sales:

                 

Sales

  $ 722,198     $ 371,467     $ 1,403,041     $ 1,413,201     $ 1,064,177     $ 388,875     $ 35,539     $ 361,823     $ 1,114,904  

Foreign currency impact(a)

          (3,950     (10,386     (37,971     (6,463                   (140,961
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant currency sales

  $ 722,198     $ 367,517     $ 1,392,655     $ 1,375,230     $ 1,057,714     $ 388,875     $ 35,539     $ 361,823     $ 973,943  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Represents the foreign currency impact on sales applying the average exchange rates in effect for the six months ended June 30, 2017. The foreign currency impact attributable to our environmental catalysts and services segment was $(357) for the six months ended June 30, 2016, $(1,256) and $(3,943) for the pro forma years ended December 31, 2016 and 2015, respectively, $(530) for the year ended December 31, 2016 and $(6,732) for legacy PQ’s year ended December 31, 2014. The foreign currency impact attributable to our performance materials and chemicals segment was $(3,593) for the six months ended June 30, 2016, $(9,130) and $(34,028) for the pro forma years ended December 31, 2016 and 2015, respectively, $(5,933) for the year ended December 31, 2016 and $(134,229) for legacy PQ’s year ended December 31, 2014.  

 



 

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(3) The following tables reconcile net income (loss) to EBITDA, Adjusted EBITDA and constant currency Adjusted EBITDA for the periods and for the entities presented.

 

                                        Successor     Predecessor  
    Six months
ended June 30,
    Pro forma year
ended December 31,
    Year ended
December 31,
    Period from
inception
(July 30, 2014)
to December 31,
2014
    Period from
January 1, 2014
to November 30,
2014
 
    2017     2016     2016     2015     2016     2015      
(Dollars in thousands)   Unaudited  

Reconciliation of net income (loss) attributable to PQ Group Holdings Inc. to Adjusted EBITDA

               

Net income (loss) attributable to PQ Group Holdings Inc.

  $ (4,063   $ (80,393   $ (58,932   $ (26,942   $ (79,746   $ 11,427     $ (22,061   $ 30,545  

Provision (benefit) for income taxes

    97       39,549       57,967       1,157       10,041                   14,602  

Interest expense, net

    94,961       45,752       187,945       199,614       140,315       44,348       8,470       86  

Depreciation and amortization

    83,206       41,991       165,843       152,172       128,288       38,999       2,955       42,458  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 174,201     $ 46,899     $ 352,823     $ 326,001     $ 198,898     $ 94,774     $ (10,636   $ 87,691  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Joint venture depreciation, amortization and interest(a)

    5,510       1,844       10,263       7,928       6,920                    

Amortization of investment in affiliate step-up(b)

    5,282       12,315       5,838       6,634       34,786                    

Amortization of inventory step-up(c)

    871       17,714       4,912             30,596             3,511        

Impairment of long-lived and intangible assets

                6,873       425       6,873                    

Debt extinguishment costs

          11,858       1,793             13,782                    

Net loss (gain) on asset disposals(d)

    2,925       1,661       4,805       5,459       4,216       3,911              

Foreign currency exchange loss (gain)(e)

    16,356       3,090       (8,975     21,058       (3,558                  

Non-cash revaluation of inventory, including LIFO

    2,479       446       1,343       (2,088     1,310                    

Management advisory fees(f)

    2,500       1,083       5,250       5,590       3,583       590       42        

Transaction and other related costs(g)

    4,334       4,544       2,648       13,219       4,664       4,241       15,506        

Equity-based and other non-cash compensation

    2,828       3,779       6,487       4,155       7,042       2,256             535  

Restructuring, integration and business optimization expenses(h)

    3,052       11,728       17,857       8,644       16,258       4,147       247        

Defined benefit plan pension cost(i)

    1,409       1,398       2,752       6,116       1,375       2,903              

Transition services(j)

                      4,882             4,882              

Other legacy Eco adjustments(k)

                                              9,849  

Other(l)

    2,198       294       6,077       5,122       4,788             452        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 223,945     $ 118,653     $ 420,746     $ 413,145     $ 331,533     $ 117,704     $ 9,122     $ 98,075  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency impact(m)

          (987     (2,984     (8,417     (1,839                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant currency Adjusted EBITDA

  $ 223,945     $ 117,666     $ 417,762     $ 404,728     $ 329,694     $ 117,704     $ 9,122     $ 98,075  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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     Three
months
ended
March 31,
    Period
from
January 1,
2016
through
May 3,
    Year ended December 31,  
     2016     2016     2015     2014     2013      2012  
(Dollars in thousands)    Unaudited  

Reconciliation of legacy PQ net income (loss) to legacy PQ Adjusted EBITDA

             

Net income (loss) attributable to legacy PQ.

   $ 1,102     $ (38,337   $ 7,851     $ (3,611   $ 26,730      $ 5,184  

Provision (benefit) for income taxes

     3,904       11,391       22,902       7,548       10,608        18,918  

Interest expense, net

     26,413       37,310       108,375       111,553       120,347        111,228  

Depreciation and amortization

     23,621       32,052       93,122       91,342       89,306        93,416  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

EBITDA

   $ 55,040     $ 42,416     $ 232,250     $ 206,832     $ 246,991      $ 228,746  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Joint venture depreciation, amortization and interest(a)

     2,476       3,343       7,928       6,941       6,128        3,348  

Amortization of investment in affiliate step-up(b)

     597       796       2,387       2,387       2,387        2,593  

Impairment of long-lived and intangible assets

                 425             948         

Debt extinguishment costs

           40,153             2,476       20,287        20,063  

Net loss (gain) on asset disposals(d)

     301       589       1,548       694       653        787  

Foreign currency exchange loss (gain)(e)

     (3,206     (5,247     21,059       23,387       4,414        (1,850

Non-cash revaluation of inventory, including LIFO

     714       33       (2,088     846       1,152        287  

Management advisory fees(f)

     1,250       1,667       5,000       5,000       5,000        7,500  

Transaction and other related costs(g)

     299       (221     10,742       24,405       5,594        533  

Equity-based and other non-cash compensation

     1,194       1,590       3,358             1,011         

Restructuring, integration and business optimization expenses(h)

     1,563       1,599       4,496       4,572       5,449        5,644  

Defined benefit plan pension cost(i)

     1,025       1,377       3,213       1,832       3,581        486  

Other(l)

     517       1,118       5,123       8,729       3,200        547  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Legacy PQ Adjusted EBITDA

   $ 61,770     $ 89,213     $ 295,441     $ 288,101     $ 306,795      $ 268,684  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Foreign currency impact(m)

     (574     (1,145     (8,417     (29,579     
  

 

 

   

 

 

   

 

 

   

 

 

      

Constant currency legacy PQ Adjusted EBITDA

   $ 61,196     $ 88,068     $ 287,024     $ 258,522       
  

 

 

   

 

 

   

 

 

   

 

 

      
  (a) We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our environmental catalysts and services segment includes our 50% interest in our Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of our Zeolyst Joint Venture.  
  (b) Represents the amortization of the fair value adjustments associated with the equity affiliate investment in our Zeolyst Joint Venture as a result of the Business Combination. We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of our Zeolyst Joint Venture. Amortization is primarily related to the fair value adjustments associated with inventory, fixed assets and intangible assets, such as customer relationships, formulations and product technology.  
  (c) As a result of the Business Combination, there was a step-up in the fair value of inventory at PQ Holdings, which is amortized through cost of goods sold in the income statement. Similarly, for the year ended December 31, 2014, there was a step-up in the fair value of inventory that occurred as part of the 2014 Acquisition, which was amortized through cost of goods sold in the income statement.  
  (d) We do not have a history of significant asset disposals. However, 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.  
  (e) Reflects the exclusion of the negative or positive transaction gains and losses of foreign currency in the income statement primarily related to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars.  
  (f) Reflects consulting fees paid to CCMP and affiliates of INEOS for consulting services that include certain financial advisory and management services. These payments will cease as of the effective date of our initial public offering.  
  (g) Relates to certain transaction costs described elsewhere in our consolidated financial statements included in this prospectus as well as other costs related to several transactions that are either completed, pending or abandoned and that we believe are not representative of our ongoing business operations.  
  (h) Includes the impact of restructuring, integration and business optimization expenses that are related to specific, one-time items, including severance for a reduction in force and post-merger integration costs that are not expected to recur.  
  (i) Represents adjustments for defined benefit pension plan costs in our income statement. More than two-thirds of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen and the remaining obligations primarily relate to plans operated in certain of our non-U.S. locations that, pursuant to jurisdictional requirements, cannot be frozen. As such, we do not view such expenses as core to our ongoing business operations.  
  (j) Represents costs under a transition services agreement with Solvay that provided certain transition services to legacy Eco by Solvay following the 2014 Acquisition. The transition services agreement ended in 2015.  

 



 

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  (k) Includes $12.9 million of corporate allocations and $(3.1) million of abatement revenue related to the 2014 Acquisition and resulting from legacy Eco historical financial statements being a carve-out from Solvay’s financial statements.  
  (l) Other costs consist of certain expenses that are not core to our ongoing business operations and are generally related to specific, one-time items, including environmental remediation-related costs associated with the legacy operations of our business prior to the Business Combination, capital and franchise taxes, non-cash asset retirement obligation accretion and the initial implementation of procedures to comply with Section 404 of the Sarbanes-Oxley Act.  
  (m) Represents the foreign currency impact on Adjusted EBITDA applying the average exchange rates in effect for the six months ended June 30, 2017. The foreign currency impact attributable to our environmental catalysts and services segment was $(106) for the six months ended June 30, 2016, $(366) and $(1,291) for the pro forma years ended December 31, 2016 and 2015, respectively, $(184) for the year ended December 31, 2016, $(142) for legacy PQ’s three months ended March 31, 2016, $(183) for legacy PQ’s stub period from January 1, 2016 through May 3, 2016 and $(1,291) and $(2,215) for legacy PQ’s years ended December 31, 2015 and 2014, respectively. The foreign currency impact attributable to our performance materials and chemicals segment was $(881) for the six months ended June 30, 2016, $(2,618) and $(7,126) for the pro forma years ended December 31, 2016 and 2015, respectively, $(1,655) for the year ended December 31, 2016, $(432) for legacy PQ’s three months ended March 31, 2016, $(962) for legacy PQ’s stub period from January 1, 2016 though May 3, 2016 and $(7,126) and $(27,364) for legacy PQ’s years ended December 31, 2015 and 2014, respectively.  

 

 

(4) Our zeolite catalysts product group operates through our Zeolyst Joint Venture, which we account for as an equity method investment in accordance with GAAP. Total net sales represents 50% of the total net sales of our Zeolyst Joint Venture. We do not record sales by our Zeolyst Joint Venture as revenue and such sales are not consolidated within our results of operations. However, Adjusted EBITDA for the pro forma years ended December 31, 2016 and 2015 and for the six months ended June 30, 2017 reflects our share of the earnings of our Zeolyst Joint Venture that have been recorded as equity in net income from affiliated companies in our consolidated statements of operations for such periods and includes Zeolyst Joint Venture adjustments on a proportionate basis based on our 50% ownership interest. As a result, our Adjusted EBITDA margin for the pro forma years ended December 31, 2016 and 2015 and for the six months ended June 30, 2017, which was 30.0%, 29.2% and 31.0%, respectively, benefits from our share of the equity-method earnings of our Zeolyst Joint Venture in addition to certain adjustments, but does not reflect the sales of our Zeolyst Joint Venture for the respective periods. For the pro forma years ended December 31, 2016 and 2015 and for the six months ended June 30, 2017, our Adjusted EBITDA margin, including 50% of our Zeolyst Joint Venture’s total net sales for such periods in the denominator, would have been 27.4%, 26.3% and 28.5%, respectively.

 



 

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RISK FACTORS

An investment in our common stock involves risks. You should consider carefully the following risks and all of the other information contained in this prospectus before investing in our common stock. The risks described below are those that we believe are the material risks that we face. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment in our common stock. See “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this prospectus.

Risks Related to Our Business

As a global business, we are exposed to local business risks in different countries, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We have significant operations in many countries, including manufacturing sites, research and development facilities, sales personnel and customer support operations. As of June 30, 2017, we operated 72 manufacturing facilities across six continents. For the year ended December 31, 2016, our foreign subsidiaries accounted for 39% of our pro forma sales. Our operations are affected directly and indirectly by global regulatory, economic and political conditions, including:

 

    new and different legal and regulatory requirements in local jurisdictions;

 

    export duties or import quotas;

 

    domestic and foreign customs and tariffs or other trade barriers;

 

    potential difficulties in staffing and labor disputes;

 

    potential difficulties in managing and obtaining support and distribution for local operations;

 

    increased costs of, and availability of, raw materials, transportation or shipping;

 

    credit risk and financial condition of local customers and distributors;

 

    potential difficulties in protecting intellectual property rights;

 

    risk of nationalization of private enterprises by foreign governments;

 

    potential imposition of restrictions on investments;

 

    the imposition of withholding taxes or other taxes or royalties on our income, or the adoption of other restrictions on foreign trade or investment, including currency exchange controls;

 

    capital controls;

 

    potential difficulties in obtaining and enforcing legal judgments in jurisdictions outside the United States;

 

    potential difficulties in obtaining and enforcing relief in the United States against parties located outside the United States;

 

    potential difficulties in enforcing agreements and collecting receivables;

 

    risks relating to environmental, health and safety matters; and

 

    local political, economic and social conditions, including the possibility of hyperinflationary conditions and political instability in certain countries.

We may not be successful in developing and implementing policies and strategies to address the foregoing factors in a timely and effective manner at each location where we do business. Consequently, the occurrence of one or more of the foregoing factors could have a material adverse effect on our international operations or upon our financial condition, results of operations and cash flows.

 

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We are affected by general economic conditions and an economic downturn could adversely affect our operations and financial results.

We sell performance chemicals, performance materials and catalysts that are used in manufacturing processes and as components of, or ingredients in, other products and, as a result, our sales are correlated with and affected by fluctuations in the level of industrial production and manufacturing output and by fluctuations in general economic activity, including, for example, any potential impact of the vote by the United Kingdom to exit the European Union, commonly referred to as “Brexit.” Producers of performance chemicals, in particular, are likely to reduce their output in periods of significant contraction in industrial and consumer demand, while demand for the products we manufacture often depends on trends in demand in the end uses our customers serve. Our profit margins, as well as overall demand for our products, could decline as a result of factors outside our control, including economic recessions, changes in industrial production processes or consumer preferences, changes in laws and regulations affecting our industry and the manner in which they are enforced, inflation, fluctuations in interest and currency exchange rates and changes in the fiscal or monetary policies of governments in the regions in which we operate.

General economic conditions and macroeconomic trends could affect overall demand for our products and any overall decline in such demand could significantly reduce our sales and profitability. In addition, volatility and disruption in financial markets could adversely affect our sales and results of operations by limiting our customers’ ability to obtain the financing necessary to maintain or expand their own operations.

Exchange rate fluctuations could adversely affect our financial condition, results of operations and cash flows.

As a result of our international operations, for the year ended December 31, 2016, we generated 39% of our pro forma sales and incurred a significant portion of our expenses in currencies other than U.S. dollars. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. The main currencies to which we are exposed, besides the U.S. dollar, are the Euro, the British pound, the Canadian dollar, the Mexican peso and the Brazilian real. The exchange rates between these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to do so in the future. In many cases, we sell exclusively in those jurisdictions and do not have the ability to mitigate our exposure to currency fluctuations through our operations. Accordingly, to the extent that we are unable to match sales made in such foreign currencies with costs paid in the same currency, exchange rate fluctuations could adversely affect our financial condition, results of operations and cash flows. In the past, we have experienced economic loss and a negative impact on earnings as a result of foreign currency exchange rate fluctuations and any future fluctuations may have similar or greater impacts. We expect that the amount of our sales denominated in non-dollar currencies may increase in future periods. Given the volatility of exchange rates, there can be no assurance that we will be able to effectively manage our currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on our financial condition or results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.”

Additionally, because our consolidated financial results are reported in U.S dollars, the translation of sales or earnings generated in other currencies into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings in our financial statements, which also affects the comparability of our results of operations and cash flows between financial periods. Further, currency fluctuations may negatively impact our debt service requirements, which are primarily in U.S. dollars.

Our international operations require us to comply with anti-corruption laws, trade and export controls and regulations of the U.S. government and various international jurisdictions in which we do business.

Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to successfully comply

 

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with these laws and regulations may expose us to liabilities. Such laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities.

In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act (“UKBA”). The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires us to maintain adequate record-keeping and internal accounting practices to accurately reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA and UKBA. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of our international operations, we are exposed to the risk of violating anti-corruption laws.

In addition, we are subject to applicable export controls and economic sanctions laws and regulations imposed by the U.S. government and other countries. Changes in such laws and regulations may restrict our business practices, including cessation of business activities in sanctioned countries or regions or with sanctioned entities or individuals, and may result in modifications to compliance programs. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts, loss of export privileges and other remedial measures.

We have established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and international laws and regulations. These policies and procedures are codified in our Code of Conduct and other various policies. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage, and such a violation could subject us to governmental investigations and adversely affect our reputation, business, financial condition and results of operations.

Alternative technology or other changes in our customers’ products may reduce or eliminate the need for certain of our products.

Many of the products that we sell are used in manufacturing processes and as components of or ingredients in other products and, as a result, changes in our customers’ end products or processes or alternative technology may enable our customers to reduce or eliminate consumption or use of our products. For example, over the last seven years, customers in the detergent industry have significantly reduced their use of zeolites. Additionally, shifting consumer preference could result in a significant reduction in the future use of fossil fuels, which would have a negative impact on our zeolite catalysts and refining services. If we are unable to respond appropriately to such new developments, such changes could seriously impair our ability to profitably market 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.

The industries in which we operate are subject to periodic technological changes and ongoing product improvements. In order to maintain our margins and remain competitive, we must successfully develop, manufacture and market new or improved products. As a result, we must commit substantial resources each year to new product research and development. Ongoing investments in new product research and development could result in higher costs without a proportional increase in revenues. Additionally, for any new product program, there is a risk of technical or market failure, in which case we may need to commit additional resources to the program and may not be able to develop the new products needed to maintain our competitive position. Moreover, new products may have lower margins than the products they replace or may not successfully attract end users.

 

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We also expect competition to increase as our competitors develop and introduce new and enhanced products. As such products are introduced, our products may become obsolete or our competitors’ products may be marketed more effectively. If we fail to develop new products, maintain or improve our margins with our new products or keep pace with technological developments, our business, financial condition, results of operations and cash flows will suffer.

Our substantial level of indebtedness could adversely affect our financial condition.

We have substantial indebtedness, which, as of June 30, 2017, totaled approximately $2,728.4 million. We intend to use the net proceeds from this offering primarily to repay a portion of our indebtedness. See “Use of Proceeds.” Our substantial indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences, including:

 

    requiring us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, product development and other purposes;

 

    increasing our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness;

 

    limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

 

    increasing our exposure to rising interest rates because certain of our borrowings are at variable interest rates;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; and

 

    limiting our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, product development and other corporate purposes.

Although the terms of the agreements governing our outstanding indebtedness contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of important exceptions and indebtedness incurred in compliance with such restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could increase.

If we are unable to pass on increases in raw material prices, including natural gas, to our customers or to retain or replace our key suppliers, our results of operations and cash flows may be negatively affected.

We purchase significant amounts of raw materials, including soda ash, cullet, industrial sand, aluminum trihydrate, sodium hydroxide (commonly known as caustic soda) and sulfur (including hydrogen sulfite), in our performance chemicals, performance materials and refining services product groups, and we purchase significant amounts of natural gas to supply the energy required in our production process. The cost of these raw materials represents a substantial portion of our operating expenses and our results of operations have been, and could in the future be, significantly affected by increases in the costs of such raw materials. In addition, we obtain a significant portion of our raw materials from certain key suppliers. If any of those suppliers is unable to meet its obligations under current supply agreements, we may be forced to pay higher prices to obtain the necessary raw materials. Furthermore, if any of the raw materials that we use become unavailable within the geographic area from which we currently source them, we may not be able to obtain suitable and cost-effective substitutes. Any interruption of supply or any price increase of raw materials could adversely affect our profitability.

While we attempt to match raw material price increases with corresponding product price increases, our ability to pass on increases in the cost of raw materials to our customers is, to a large extent, dependent upon our contractual arrangements and market conditions. There may be periods of time during which we are not able to recover increases in the cost of raw materials due to our contractual arrangements or weakness in demand for, or

 

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oversupply of, our products. Specifically, timing differences between price adjustments of raw materials, which may occur daily, and adjustments to our product prices, which in many cases are adjusted quarterly or less often, have had and may continue to have a negative effect on our profitability. Even in periods during which raw material prices decline, we may suffer decreasing profits if customers seek relief in the form of lower sales prices or if the raw material price reductions occur at a slower rate than decreases in the selling prices of our products. Furthermore, some of our performance chemicals customers may take advantage of fluctuating prices by building inventories when they expect product prices to increase and reducing inventories when they expect product prices to decrease. Such volatility can result in commercial disputes with customers and suppliers with respect to interpretations of complex contractual arrangements, the adverse resolution of which could reduce our profitability.

In the past, we have entered into long-term supply contracts for certain of our raw materials, including for certain of our North American soda ash. As these contracts expire, we may not be able to renegotiate or enter into new long-term supply contracts that will offer similar protection from price increases and other fluctuations on terms that are satisfactory to us or at all.

In addition, we have attempted to mitigate our exposure to the significant price volatility of natural gas, which has historically had a negative impact on our results of operations, by implementing a hedging program in the United States and entering into forward purchases in the United States, Canada, Europe and other parts of the world. Our hedging strategy may not be successful and if energy prices rise, our profitability could be adversely affected. With the exception of such natural gas contracts, we typically do not enter into long-term forward contracts to hedge against raw material price volatility.

We face substantial competition in the industries in which we operate.

The industries in which we operate are highly competitive and we face significant competition from large international producers and, particularly in Europe and certain Asia-Pacific regions, smaller regional competitors.

Our silica catalysts and zeolite catalysts primarily compete with other global producers in the petrochemicals and refining industries such as W.R. Grace, BASF, UOP, and Albemarle, as well as other niche competitors such as Tosoh, Axens, and Haldor Topsoe. We compete in the North American refining services industry with competitors such as Chemtrade and Veolia through our refining services product group. Additionally, our performance materials and chemicals business primarily competes with other global producers such as OxyChem, PPG and Evonik. We believe that we typically compete on the basis of performance, product consistency, quality, reliability, and ability to innovate in response to customer demands.

Our competitors may improve their competitive position in our core end use applications by successfully introducing new products, improving their manufacturing processes, expanding their capacity or manufacturing facilities or responding more effectively than us to new or emerging technologies and changes in customer requirements. Some of our competitors may be able to lower prices for our products if their costs are lower. In addition, consolidation among our competitors or customers may result in reduced demand for our products or make it more difficult for us to compete. Some of our competitors’ financial, technological and other resources may be greater than ours or they may have less debt than we do and, as a result, may be better able to withstand changes to industry conditions. The occurrence of any of these events could materially adversely affect our financial condition and results of operations.

We are subject to the risk of loss resulting from non-payment or non-performance by our customers.

Our credit procedures and policies may not be adequate to minimize or mitigate customer credit risk. Our customers may experience financial difficulties, including bankruptcies, restructurings and liquidations. These and other financial problems our customers may experience, as well as potential financial weakness in the industries in which we operate, may increase our risk in extending trade credit to customers. A significant adverse change in a customer’s financial position could cause us to limit or discontinue business with such

 

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customer, require us to assume more credit risk relating to such customer’s receivables or limit our ability to collect accounts receivable from such customer, any of which could have a material adverse effect on our business, results of operations, financial condition and liquidity.

We rely on a limited number of customers for a meaningful portion of our business. A loss of one or more of these customers could adversely impact our profitability.

A loss of any significant customer, including a pipeline customer, or a decrease in the provision of products to any significant customer could have an adverse effect on our business until alternative arrangements are secured. Any alternative arrangement to replace the loss of a customer would result in increased variable costs relating to product shipment. In addition, any new customer agreement entered into by us may not have terms as favorable as those contained in our current customer agreements, which could have a material adverse effect on our business, financial condition and results of operations. For the year ended December 31, 2016 our top 10 customers represented approximately 24% of our pro forma sales and no single customer represented more than 4% of our pro forma sales.

Refineries, which represent a sizeable subset of our environmental catalysts and services business customers, have undergone significant consolidation and additional consolidation is possible in the future. Such consolidation could further increase our reliance on a small number of customers and further increase our customers’ leverage over us, resulting in downward pressure on prices and an adverse effect on our profitability.

Multi-year customer contracts in our refining services product group are subject to potential early termination and such contracts may not be renewed at the end of their respective terms.

Many of the customer contracts in our refining services product group are multi-year agreements. Sulfuric acid regeneration customer contracts are typically on five- to ten-year terms and virgin sulfuric acid customer contracts are typically on one- to five-year terms, with larger customers typically favoring longer terms. Excluding contracts with automatic evergreen provisions, approximately 60% of our sulfuric acid volume for the year ended December 31, 2016 was under contracts expiring at the end of 2019 or beyond. In addition, our sulfuric acid regeneration contracts with major refinery customers typically allow for termination with advance notice of one to two years. We cannot provide assurance that our existing contracts will not be subjected to early terminations or that our expiring contracts will be renewed at the end of their terms. If we receive a significant number of such contract terminations or experience non-renewals from key customers in our refining services product group, our results of operations, financial condition and cash flows may be materially adversely affected.

Reductions in highway safety spending or taxes earmarked for highway safety spending could result in a decline in our sales.

Approximately 13% of our pro forma sales for the year ended December 31, 2016 were derived from products sold into highway safety applications. Sales of our performance materials products for highway safety uses are in part dependent upon federal, state, local and foreign government budgets. A decrease in, or termination of, governmental budgeting for new highway safety programs or a significant decrease in the use of our performance materials products in any new highway safety projects could have an adverse effect on our business, financial condition, results of operations or cash flows by decreasing the profitability of our performance materials product group.

Our quarterly results of operations are subject to fluctuations because the demand for some of our products is seasonal.

Seasonal changes and weather conditions typically affect our performance materials and refining services product groups. In particular, our 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

 

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weather months. Additionally, our 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, our working capital requirements tend to be higher in the first and fourth quarters of the year, which can adversely affect our liquidity and cash flows. Because of this seasonality associated with certain of our 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.

If we lose certain key personnel or are unable to hire additional qualified personnel, we may not be able to execute our business strategy and our business could be adversely affected.

Our success depends, in part, upon the continued services of our highly skilled personnel involved in management, research, production and distribution and, in particular, upon the efforts and abilities of our key officers. Although we believe that we are adequately staffed in key positions, we may not be able to retain such personnel on acceptable terms or at all, and such personnel may seek to compete with us in the future. If we lose the service of any of our key personnel, we may not be able to hire replacements with the same level of industry experience and knowledge necessary to execute our business strategy, which in turn could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our expansion 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 have made and continue to make significant investments in each of our businesses. These projects require us to commit significant capital to, among other things, implement engineering plans and obtain the necessary permits before we generate revenues related to our investments in these businesses. Such projects may take longer to complete or require additional unanticipated expenditures and may never generate profits. If we fail to recover our investment, or these projects never become profitable, our ability to implement our business strategy may be materially and adversely affected.

We may be liable for damages based on product liability claims brought against us or our customers for costs associated with recalls of our or our customers’ products.

Even though we are generally a materials and services supplier rather than a manufacturer of finished goods, the sale of our products involves the risk of product liability claims and voluntary or government-ordered product recalls. For example, certain of the products that we manufacture provide critical performance functions to our customers’ end products, are used in and around other chemical manufacturing facilities, highways, airports and other locations where personal injury or property damage may occur or are used in certain consumer goods such as beverages, personal care products and medicinal applications. While we attempt to protect ourselves from product liability claims and exposures through our adherence to standards and specifications and through contractual negotiations, there can be no assurance that our efforts will ultimately protect us from any such claims. A product liability claim or voluntary or government-ordered product recall could result in substantial and unexpected expenditures, affect consumer or customer confidence in our products and divert management’s attention from other responsibilities. A product recall or successful product liability claim or series of claims against us in excess of our insurance coverage and for which we are not otherwise indemnified could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We are required to comply with a wide variety of laws and regulations, and are subject to regulation by various federal, state and foreign agencies, and our failure to comply with existing and future regulatory requirements could adversely affect our financial condition, results of operations and cash flows.

We compete in industries in which we and our customers are subject to federal, state, local, international and transnational laws and regulations. Such laws and regulations are numerous and sometimes conflicting, and

 

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any future changes to such laws and regulations could adversely affect us. For example, our performance materials product group sells products used in highway safety applications, and such products are subject to laws and regulations that vary by state. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, any of which could have an adverse effect on our business, financial condition and results of operations.

In order to obtain regulatory approval for certain of our new products, we must, among other things, demonstrate to the relevant authority that the product is safe and effective for its intended uses and that we are capable of manufacturing the product in accordance with current regulations. The process of seeking approvals can be costly, time-consuming and subject to unanticipated and significant delays. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate sales from those products, and could have an adverse effect on our business, financial condition, results of operations or cash flows.

Our products, including the raw materials we handle, are subject to rigorous chemical registration and industrial hygiene regulations and investigation. There is risk that a key raw material, chemical or substance, or one of the end products of which our products are a part, may be recharacterized as having a toxicological or health-related impact on the environment, our customers or our employees. Industrial hygiene regulations are continually strengthened and if such recharacterization occurred, the relevant raw material, chemical or product may be banned or we may incur increased costs in order to comply with new requirements. Changes in industrial hygiene regulations also affect the marketability of certain of our products, and future regulatory changes may have a material adverse effect on our business.

New laws and regulations, and changes in existing laws and regulations, may be introduced in the future and could prevent or inhibit the development, distribution and sale of our products, including as a result of additional compliance costs, seizures, confiscation, recall or monetary fines. For example, as discussed in more detail in “Business—Environmental Regulations” and “Business—Chemical Product Regulation,” we may be materially impacted by regulatory initiatives worldwide with respect to chemical product safety such as the 2016 amendments to the U.S. Toxic Substances Control Act, the E.U. regulation “Registration, Evaluation, Authorisation and Restriction of Chemical Substances” (“REACH”), or similar regulations being enacted in other countries (e.g., China REACH; Korea REACH). Additionally, the current U.S. administration may seek to reduce current environmental standards and regulations, such as the Corporate Average Fuel Economy standards, which could have a material adverse effect on our sales into the fuels and emissions controls industries.

We are subject to extensive environmental, health and safety regulations and face various risks associated with potential non-compliance or releases of hazardous materials.

Like other chemical companies, our operations and properties are subject to extensive and stringent federal, state, local and foreign environmental laws and regulations. U.S. federal environmental laws that affects us include the Resource Conservation and Recovery Act (“RCRA”), the Clean Air Act, the Clean Water Act and the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”). These laws govern, among other things, emissions to the air, discharges or releases of hazardous substances to land, surface, subsurface strata and water, wastewater discharges and the generation, handling, storage, transportation, treatment, disposal and remediation of hazardous materials and petroleum products. We are also subject to other federal, state, local and foreign laws and regulations regarding chemical and product safety as well as employee health and safety matters, including process safety requirements. These laws and regulations may become more stringent over time and the failure to comply with such laws and regulations can result in significant fines or penalties.

We have in the past been and currently are the subject of investigations and enforcement actions pursuant to environmental laws, including the Clean Air Act. Some of these matters were resolved through the payment of significant monetary penalties and a requirement to implement corrective actions at our facilities. For instance, in

 

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November 2015, the Pennsylvania Department of Environmental Protection issued a $1.7 million fine against us for allegedly excessive emissions of carbon monoxide and nitrogen oxides from our Chester, Pennsylvania site. We have appealed the alleged violations and the associated fine. We also remain subject to a 2007 Consent Decree that resolves certain alleged Clean Air Act violations at our seven refining services operating locations involving New Source Review, Prevention of Significant Deterioration and New Source Performance Standard obligations under the U.S. federal rules for the pollutants sulfur dioxide and sulfuric acid mist. The Consent Decree required Solvay (the owner at the time) to pay a $2 million penalty and spend approximately $34 million on air pollution controls at our facilities, the majority of which was received from customers in contractual arrangements. Work under the Consent Decree has proceeded since 2007, and we believe that all of the significant capital improvements related to the Consent Decree have been completed. One of our operating locations has been released from the scope of the Consent Decree and we are seeking release of the other locations covered by the Consent Decree.

We are required by these environmental laws and regulations to obtain registrations, licenses, permits and other approvals in order to operate, to make disclosures to public authorities about our chemical handling and usage activities and to install expensive pollution control and spill containment equipment at our facilities, or to incur other capital expenditures aimed at achieving or maintaining compliance with such laws and regulations. We are preparing to implement a substantial environmentally-driven capital improvement project over the next three years and failure to complete this project or to timely identify and implement other capital projects required to achieve or maintain compliance could expose us to enforcement and penalty.

Under CERCLA and analogous statutes in local and foreign jurisdictions, current and former owners and operators of land impacted by releases of hazardous substances are strictly liable for the investigation and remediation of the contamination resulting from the release. Liability under CERCLA and analogous laws is strict, unlimited, joint, several and retroactive, may be imposed regardless of fault and may relate to historical activities or contamination not caused by the affected property’s current owner or operator. We could be held responsible for all cleanup costs at a site, whether currently or formerly owned or operated, regardless of fault, knowledge, timing or cause of the contamination. Further, under CERCLA and analogous laws, we may be jointly and severally liable for contamination at third party sites where we or our predecessors in interest have sent waste for treatment or disposal, even if we complied with applicable laws. In addition, we may face liability for personal injury, property damage and natural resource damage resulting from environmental conditions attributable to hazardous substance releases at or from facilities we currently or formerly owned or operated or to which we sent waste. As such, a product spill or emission at one of our facilities or otherwise resulting from our operations could have adverse consequences on the environment and surrounding community and could result in significant liabilities with respect to investigation and remediation.

Our facilities have an extended history of industrial use, and soil and groundwater contamination exists at some of our sites. As of June 30, 2017, we had current investigation, remediation or monitoring obligations at several of our current or former sites, including Rahway, New Jersey; Dominguez, California; Martinez, California; and Tacoma, Washington. As of June 30, 2017, we had established reserves of approximately $5.1 million to cover anticipated expenses at these sites, all of which have reached relatively mature stages of either the investigation, remediation or monitoring process. Actual costs to complete these projects may exceed our current estimates. In addition, we have unresolved liability at several sites to which we or our predecessors allegedly arranged for the disposal or treatment of hazardous wastes. For example, at the Boyertown Sanitary Disposal site in Gilbertsville, Pennsylvania, we are participating in a group of parties who disposed of materials at the site to fund investigatory and remedial work.

As of June 30, 2017, our total reserves associated with environmental remediation and enforcement matters were $7.6 million. In addition to the ongoing remediation and monitoring activities discussed above, there is risk that the long-term industrial use at our facilities may have resulted in, or may in the future result in, contamination that has yet to be discovered, which could require additional, unplanned investigation and remediation efforts by us for which no reserves have been established, potentially without regard to whether we

 

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knew of, or caused, the release of such hazardous substances. Discovery of additional or unknown conditions at our facilities could have an adverse impact on our business by substantially increasing our capital expenditures, including compliance, investigation and remediation costs. Such environmental liabilities attached to our properties, or for properties that we are otherwise responsible for, could have a material adverse effect on our results of operations or financial condition.

Existing and proposed regulations to address climate change by limiting greenhouse gas emissions may cause us to incur significant additional operating and capital expenses.

Certain of our operations result in emissions of greenhouse gases (“GHGs”), such as carbon dioxide. Growing concern about the sources and impacts of global climate change has led to a number of domestic and foreign legislative and administrative measures, both proposed and enacted, to monitor, regulate and limit carbon dioxide and other GHG emissions. In the European Union, our emissions are regulated under the E.U. Emissions Trading System (the “E.U. ETS”), an E.U.-wide trading scheme for industrial GHG emissions. The E.U. ETS is anticipated to become progressively more stringent over time, including by reducing the number of allowances to emit GHGs that E.U. member states will allocate without charge to industrial facilities. In the United States, the EPA has promulgated federal GHG regulations under the Clean Air Act that affect certain sources. For example, the EPA has issued mandatory GHG reporting requirements, under which our Dominguez, California and Baton Rouge, Louisiana facilities currently report. Moreover, California has enacted the Global Warming Solutions Act of 2006 (“Assembly Bill 32”), a law that establishes a comprehensive program to reduce GHG emissions from all sources throughout the state and contains reporting requirements under which our Dominguez and Martinez facilities currently report. Our Dominguez facility also participates in the emissions trading market established under Assembly Bill 32. Although we believe it is likely that GHG emissions will continue to be regulated in at least some regions of the United States and in other countries (in addition to the European Union) in the future, we cannot yet predict the form such regulation will take (such as a cap-and-trade program, technology mandate, emissions tax or other regulatory mechanism) or, consequently, estimate any costs that we may be required to incur in respect of such requirements, which could, for example, require that we install emissions control equipment, purchase emissions allowances, administer and manage our GHG emissions program or address other regulatory obligations. Such requirements could also adversely affect our energy supply or the costs and types of raw materials that we use for fuel. Accordingly, regulations controlling or limiting GHG emissions could have a material adverse effect on our business, financial condition or results of operations, including by reducing demand for our products.

Production and distribution of our products could be disrupted for a variety of reasons, and such disruptions could expose us to significant losses or liabilities.

Certain of the hazards and risks associated with our manufacturing processes and the related storage and transportation of raw materials, products and wastes may disrupt production at our manufacturing facilities and the distribution of products to our customers. These potentially disruptive risks include, but are not limited to, the following:

 

    pipeline and storage tank leaks and ruptures;

 

    explosions and fires;

 

    inclement weather and natural disasters;

 

    terrorist attacks;

 

    failure of mechanical, process safety and pollution control equipment;

 

    chemical spills and other discharges or releases of toxic or hazardous substances or gases; and

 

    exposure to toxic chemicals.

These hazards could expose employees, customers, the community and others to toxic chemicals and other hazards, contaminate the environment, damage property, result in personal injury or death, lead to an interruption

 

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or suspension of operations, damage our reputation and adversely affect the productivity and profitability of a particular manufacturing facility or our business as a whole. Such hazards could also result in the need for remediation, governmental enforcement, regulatory shutdowns, the imposition of government fines and penalties and claims brought by governmental entities or third parties. Legal claims and regulatory actions could subject us to both civil and criminal penalties, which could affect our product sales, reputation and profitability.

If disruptions at our manufacturing facilities or in our distribution channels occur, alternative options with sufficient capacity or capabilities may not be available, may cost substantially more or may require significant time to start production or distribution. Any of these scenarios could negatively affect our business and financial performance. If one of our manufacturing facilities or distribution channels is unable to produce or distribute our products for an extended period of time, our sales may be reduced by the shortfall caused by the disruption and we may not be able to meet our customers’ needs, which could cause them to seek other suppliers. Furthermore, to the extent a production disruption occurs at a manufacturing facility that has been operating at or near full capacity, the resulting shortage of our product could be particularly harmful because production at the manufacturing facility may not be able to reach levels achieved prior to the disruption. Such risks are heightened in our refining services product group, which has operations and customers primarily located in the Gulf Coast, which is susceptible to a heightened risk of hurricanes, and Northern California, which is susceptible to a heightened risk of earthquakes.

The insurance that we maintain may not fully cover all potential exposures.

We maintain property, business interruption, casualty and other types of insurance, but such insurance may not cover all risks associated with the operation of our business or our manufacturing process and the related use, storage and transportation of raw materials, products and wastes in or from our manufacturing sites or distribution centers. While we have purchased what we deem to be adequate limits of coverage and broadly worded policies, our coverage is subject to exclusions and limitations, including higher self-insured retentions or deductibles and maximum limits and liabilities covered. Notwithstanding diligent efforts to successfully procure specialty coverage for environmental liability and remediation, we may incur losses beyond the limits or outside the terms of coverage of our insurance policies, including liabilities for environmental remediation. In addition, from time to time, various types of insurance for companies in the industries in which we operate have not been available on commercially acceptable terms or, in some cases, at all. We are potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able to obtain coverage at current levels, if at all, and our premiums may increase significantly on coverage that we maintain.

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 products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications, or has a shorter useful life than that which was guaranteed, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as guaranteed. A successful claim or series of claims against us could cause reputational harm and have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.

We may engage in strategic acquisitions or dispositions of certain assets or businesses that could affect our business, results of operations, financial condition and liquidity.

We may selectively pursue complementary acquisitions, such as the Business Combination, and joint ventures, such as our Zeolyst Joint Venture, each of which inherently involves a number of risks and presents financial, managerial and operational challenges, including:

 

    potential disruption of our ongoing business and distraction of management;

 

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    difficulty with integration of personnel and financial and other systems;

 

    hiring additional management and other critical personnel; and

 

    increasing the scope, geographic diversity and complexity of our operations.

In addition, we may encounter unforeseen obstacles or costs in the integration of acquired businesses. For example, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business. Our acquisition and joint venture strategy may not be received positively by customers, and we may not realize any anticipated benefits from acquisitions or joint ventures.

We may also opportunistically pursue dispositions of certain assets and businesses, which may involve material amounts of assets or lines of business, and could adversely affect our results of operations, financial condition and liquidity. If any such dispositions were to occur, under the terms of the agreements governing our outstanding indebtedness, we may be required to apply the proceeds of the sale to repay such indebtedness.

The pro forma and non-GAAP financial information included in this prospectus is presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future.

The unaudited pro forma combined financial information included in this prospectus is presented for informational purposes only and is not necessarily indicative of what our actual financial condition or results of operations would have been had the Business Combination been completed on the date indicated. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our financial condition or results of operations. Accordingly, our financial condition and results of operations in the future may not be consistent with, or evident from, such pro forma financial information. The non-GAAP financial information included in this prospectus includes information that we use to evaluate our past performance, but you should not consider such information in isolation or as an alternative to measures of our performance determined under GAAP. For further information regarding such limitations, see “Summary Historical and Unaudited Pro Forma Financial and Other Data.”

Our joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations or differences in views among our partners results in delayed decisions or failures to agree on major issues, which may adversely affect our results of operations and force us to dedicate additional resources to these joint ventures.

We currently participate in a number of joint ventures and may enter into additional joint ventures in the future. The nature of a joint venture requires us to share control with unaffiliated third parties and we sometimes have joint and several liability with our joint venture partners. If our joint venture partners do not fulfill their obligations, or if differences in views among the joint venture participants results in delayed decisions or failures to agree on major issues, the affected joint venture may not be able to operate according to its business plan. For example, our Zeolyst Joint Venture is structured as a general partnership in which we are equal partners with CRI Zeolites Inc. Accordingly, we do not control the Zeolyst Joint Venture and cannot unilaterally undertake strategies, plans, goals and operations or determine when cash distributions will be made to us. Furthermore, we are liable on a joint and several basis with CRI Zeolites Inc. for all of the partnership’s liabilities if it does not have sufficient assets to satisfy such liabilities. Such factors may adversely affect our results of operation and force us to dedicate additional and unexpected resources to our joint ventures.

Our failure to protect our intellectual property rights could adversely affect our future performance and growth.

Protection of our proprietary processes, methods, compounds and other technologies is important to our business. We depend upon our ability to develop and protect our intellectual property rights to distinguish our

 

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products from those of our competitors. Failure to protect our existing intellectual property rights may allow our competitors to copy our products and may result in the loss of valuable proprietary technologies or other intellectual property. Failure to protect our innovations and trademarks by securing intellectual property rights could also result in our having to pay other companies for infringing on their intellectual property rights. We rely on a combination of patent, trade secret, trademark and copyright law as well as regulatory and judicial enforcement to protect such technologies and trademarks. In addition, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. As of June 30, 2017, we owned 47 patented inventions in the United States, with approximately 300 patents issued in countries around the world and approximately 140 patent applications pending worldwide covering more than 25 additional inventions. Some of these patents are licensed to others. In addition, we have acquired certain rights under patents and inventions of others through licenses. Should any of these licenses granted to us by third parties terminate prior to the expiration of the licensed intellectual property, we would need to cease using the licensed intellectual property, and either develop or license alternative technologies. In such a case, there can be no assurance that alternative technologies exist or that we would be able to obtain such a license on favorable terms.

Competitors and third parties may infringe on our patents or violate our intellectual property rights. Defending and enforcing our intellectual property rights can involve litigation and can be expensive and time consuming. Such proceedings could put our patents at risk of being invalidated and confidential information may be disclosed through the discovery process; these costs and diversion of resources could harm our business.

We cannot provide any assurances that any of our pending applications will mature into issued patents, or that any patents that have issued or may issue in the future do or will include claims with a scope sufficient to provide any competitive advantage. Patents involve complex legal and factual questions and, therefore, the issuance, scope, validity and enforceability of any patent claims we have or may obtain cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. Patents may be challenged in the courts, as well as in various administrative proceedings before the United States Patent and Trademark Office or foreign patent offices. We are currently and may in the future be a party to various adversarial patent office proceedings involving our patents or the patents of third parties. Such challenges can result in some or all of the claims of the challenged patent being invalidated, deemed unenforceable, or interpreted narrowly which, in the case of challenges to our own patents, may be adverse to our interests. Accordingly, the issuance of patents is not conclusive of the validity, scope, or enforceability of such patents. Moreover, even if valid and enforceable, competitors may be able to design around our patents or use pre-existing technologies to compete with us.

We also rely upon unpatented proprietary know-how, continuing technological innovation and other trade secrets to develop and maintain our competitive position, which may not provide us with complete protection against competitors. Misappropriation or unauthorized disclosure of our proprietary know-how could harm our competitive position or have an adverse effect on our business. While it is our policy to enter into confidentiality agreements with our employees and third parties to protect our intellectual property rights and we strive to maintain the physical security of our properties and the security of our IT systems, there can be no assurances that:

 

    our confidentiality agreements will not be breached;

 

    our security measures will not be breached;

 

    such agreements will provide meaningful protection for our trade secrets or proprietary know-how; or

 

    adequate remedies will be available in the event of an unauthorized use or disclosure of such trade secrets and know-how.

In addition, there can be no assurances that others will not obtain knowledge of these trade secrets through independent development or other access by legal means.

 

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Measures taken by us to protect these assets and rights may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise and adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise. In addition, as noted above, our patents and other intellectual property rights may be challenged, invalidated, circumvented or rendered unenforceable.

Furthermore, we cannot provide assurance that any pending patent or trademark application filed by us will result in an issued patent or registered trademark or, if patents are issued to us, that those patents will provide meaningful protection against competitors or against competitive technologies. The failure of our patents or other measures to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds or trademarks and provide us with freedom to exclude competition could have an adverse effect on our business, financial condition, results of operations and cash flows. See “Business—Intellectual Property.”

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

Our industry is characterized by vigilant pursuit of intellectual property rights, particularly with respect to our silica catalysts and zeolite catalysts product groups. Like us, our competitors rely on intellectual property rights to maintain profitability and competitiveness. As the number of products and competitors has increased, the likelihood of intellectual property disputes has risen. Although it is our policy and intention not to infringe valid patents of which we are aware, our processes, apparatuses, technology, proprietary manufacturing expertise, methods, compounds and products may infringe on issued patents or infringe or misappropriate other intellectual property rights of others. Accordingly, we continually monitor third-party intellectual property to confirm our freedom to operate. Nevertheless, we may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the patents or trademarks or infringement or misappropriation of other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert the attention of our management and technical personnel away from operating our business. If we were to discover that our processes, apparatuses, technology, products or trademarks infringe the valid intellectual property rights of others, we might need to obtain licenses from these parties or substantially reengineer or rebrand our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to reengineer our products successfully or at an acceptable cost. Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology or using the infringing trademark. Additionally or alternatively, we may seek to challenge third-party patents in administrative proceedings before the United States patent office or one or more foreign patent offices. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Even if we ultimately prevail, the existence of lawsuits could prompt our customers to switch to alternative products. In addition, we have agreed, and will continue to agree, to indemnify certain customers for certain intellectual property infringement claims related to intellectual property relating to our products and the manufacture thereof. Should there be infringement claims against our licensees, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us.

Losses and damages in connection with information technology risks could adversely affect our operations.

Our operations materially depend on the reliable performance of a complex, worldwide and highly available information technology infrastructure with integrated processes. The networks and data centers we use are subject to damage by material events such as major disruptions to public infrastructure, including power outages,

 

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cyber or terrorist attacks, viruses, physical or electronic break-ins and fires. Despite various disaster recovery plans, there can be no assurance that our systems are appropriately redundant and we do not control the operations at the back-up facility we use. Accordingly, such an event could cause material disruptions in our operations.

The broad use of information technology systems has increased the risk of unauthorized access to confidential data, such as customer information, strategic projects, product formulas and other trade secrets, and the risk of destruction or manipulation of material data by employees or third parties. Release of third party confidential information could materially harm our reputation, affect our relationships with such parties and expose us to liability. Although we have introduced many security measures, including firewalls and information technology security policies, we cannot ensure that these measures offer the appropriate level of security. A security breach or other compromise of our information security safeguards could expose our confidential information, including third party confidential information in our possession (such as customer information) to theft and misuse, which could in turn adversely affect our relationships with such third parties and have an adverse effect on our business, financial condition, results of operations and cash flows.

We depend on good relations with our workforce, and any significant disruptions could adversely affect our operations.

As of December 31, 2016, we had 2,949 employees globally, approximately 49% of which were represented by a union, works council or other employee representative body. As of December 31, 2016, approximately 66% of our U.S. unionized employees were covered under collective bargaining agreements that will expire on or before December 31, 2018. Failure to reach agreement with any of our unionized work groups regarding the terms of their collective bargaining agreements or annual pay increases may result in a labor strike, work stoppage or slowdown. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the United States. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, many of our employees in Europe are represented by works councils that must approve any changes in conditions of employment, including salaries, benefits and staff changes, and may impede efforts to restructure our workforce. Although we believe that we have a good working relationship with our employees, a strike, work stoppage or slowdown by our employees or a dispute with our employees could result in a significant disruption to our operations or higher ongoing labor costs. In addition, our ability to make adjustments to control compensation and benefits costs, or otherwise adapt to changing business needs, may be limited by the terms and duration of our collective bargaining agreements.

We are subject to certain risks related to litigation filed by or against us, as well as administrative and regulatory proceedings, and adverse results may harm our business.

We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other administrative and regulatory proceedings filed by or against us, including remedies or damage awards, and adverse results in any litigation or other administrative and regulatory proceedings may materially harm our business. Litigation and other administrative and regulatory proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, environmental, health and safety matters, joint venture agreements, labor and employment matters, domestic and foreign antitrust matters or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds that are subject to third-party patents or other third-party intellectual property rights. Litigation based on environmental matters or exposure to hazardous substances in the workplace or from our products could result in significant liability for us. For example, we are currently subject to various asbestos premises liability claims that relate to employee or contractor exposure to asbestos contained in certain building materials at our sites. Furthermore, our

 

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international operations expose us to potential administrative and regulatory proceedings in foreign jurisdictions. Antitrust authorities in Brazil have publicly announced that they are investigating alleged cartel activities by Brazilian silicate manufacturers, including our Brazilian subsidiary (“PQ Brazil”). The authorities allege that the activities occurred over an approximately 10-year period beginning in the late 1990s, which is prior to the time we owned PQ Brazil. PQ Brazil is fully cooperating with the authorities. Adverse outcomes in any of the foregoing could have a material adverse effect on our business. See “Business—Legal Proceedings.”

The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to change or to take certain actions.

The indentures governing our outstanding indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur additional indebtedness, make investments, acquisitions, loans and advances, sell, transfer or otherwise dispose of our assets or incur liens. See “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Debt.” In addition, the restrictive covenants in the agreements governing our senior secured credit facilities require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control.

A breach of such covenants could result in an event of default unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such a default may allow our creditors to accelerate the related debt and may result in the acceleration of, or default under, any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.

Because our operations are conducted through our subsidiaries and joint ventures, we are dependent on the receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund our operations and expenses, including to make future dividend payments, if any.

Our operations are conducted through our subsidiaries and joint ventures. As a result, our ability to make future dividend payments, if any, is dependent on the earnings of our subsidiaries and joint ventures and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. We do not currently expect to declare or pay dividends on our common stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common stock, the agreements governing our outstanding indebtedness significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us.

We may need to recognize impairment charges related to goodwill, identified intangible assets and fixed assets.

We are required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate indefinite-lived intangible assets and fixed assets for impairment if there are indicators of a possible impairment.

There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and fixed assets. If, as a result of a general economic slowdown or deterioration in one or more

 

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of the industries in which we operate or in our financial performance or future outlook, or if the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have a material adverse effect on our results of operations and financial position.

Our ability to utilize our net operating losses is uncertain.

As of December 31, 2016, we had $383.2 million of net operating losses for U.S. federal income tax purposes. Our ability to utilize these net operating losses to offset future income tax liabilities depends on our future financial performance and our future taxable income. In addition, our utilization of these net operating losses is currently limited under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), impacting our ability to realize the benefits of these net operating losses. If any ownership changes occur within three years of the closing date of the Business Combination among stockholders owning directly or indirectly 5% or more of our common stock and that result in an aggregate ownership change with respect to such stockholders of more than 50% of our common stock, our utilization of these net operating losses and certain built-in losses would be subject to an additional limitation imposed by Section 382 of the Code.

We have unfunded and underfunded pension plan liabilities. We will require current and future operating cash flow to fund these shortfalls. We have no assurance that we will generate sufficient cash flow to satisfy these obligations.

We maintain defined benefit pension plans covering employees who meet age and service requirements. While some of our plans have been frozen, our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change in the expected rate of return on plan assets. Assets available to fund the pension and other postemployment benefit obligations of our plans as of December 31, 2016 were approximately $285.1 million, or approximately $86.2 million less than the measured pension benefit obligation on a GAAP basis. In addition, any changes in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.

We also contribute to two multi-employer pension plans on behalf of certain of our employees in the United States pursuant to union agreements that generally provide defined benefits to employees covered by collective bargaining agreements. A total of approximately 18 employees currently participate in such multi-employer pension plans. Funding requirements for benefit obligations of multi-employer pension plans are subject to certain regulatory requirements and we may be required to make cash contributions to one of these plans to satisfy certain underfunded benefit obligations. Absent an applicable exemption, a contributor to a U.S. multi-employer plan is liable upon its withdrawal from, or the termination of, a plan for its proportionate share of the plan’s underfunding, if any.

We also provide certain health care and life insurance benefits to certain of our employees and their dependents in the United States upon the retirement of such employee from us pursuant to union agreements. Costs of these other post-employment benefit plans are dependent upon numerous factors, assumptions and estimates.

 

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Risks Related to this Offering and to our Common Stock

CCMP and INEOS will continue to have significant influence over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

Following completion of this offering, investment funds affiliated with CCMP will beneficially own     % of our outstanding common stock (    % if the underwriters exercise their option to purchase additional shares in full) and INEOS will beneficially own     % of our outstanding common stock (    % if the underwriters exercise their option to purchase additional shares in full). For as long as affiliates of CCMP and INEOS continue to beneficially own a substantial percentage of the voting power of our outstanding common stock, they will continue to have significant influence over us. For example, they will be able to strongly influence or effectively control the election of all of the members of our board of directors and our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of additional indebtedness, the issuance of any additional shares of common stock or other equity securities, the repurchase or redemption of shares of our common stock and the payment of dividends.

Additionally, CCMP and INEOS are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. CCMP and INEOS may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. See “—Our certificate of incorporation after this offering will contain a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely impact our business.”

Our stock price could be extremely volatile and, as a result, you may not be able to resell your shares at or above the price you paid for them.

Since our inception, there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained following completion of this offering. In addition, the stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

    variations in our operating performance and the performance of our competitors;

 

    actual or anticipated fluctuations in our quarterly or annual operating results;

 

    publication of research reports by securities analysts about us, our competitors or our industry;

 

    our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

    additions or departures of key personnel;

 

    strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

    the passage of legislation or other regulatory developments affecting us or our industry;

 

    changes in legislation, regulation and government policy as a result of the U.S. presidential and congressional elections;

 

    speculation in the press or investment community;

 

    changes in accounting principles;

 

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    terrorist acts, acts of war or periods of widespread civil unrest;

 

    natural disasters and other calamities; and

 

    changes in general market and economic conditions.

In addition, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline rapidly and unexpectedly. We are exposed to the impact of any global or domestic economic disruption, including any potential impact of the vote by the United Kingdom to exit the European Union, commonly referred to as “Brexit.”

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

If we fail to maintain effective internal control over financial reporting and effective disclosure controls and procedures, we may not be able to accurately report our financial results in a timely manner or prevent fraud, which may adversely affect investor confidence in our company.

We are not currently required to comply with the rules of the Securities and Exchange Commission (the “SEC”) implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. Although we will be required to disclose changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until our second annual report required to be filed with the SEC.

To comply with the requirements of being a public company, we may need to undertake various actions, to develop, implement and test additional processes and other controls. Testing and maintaining internal controls can divert our management’s attention from other matters related to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate resulting in our management being unable to assert that our internal control over financial reporting is effective.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

As a private company, we identified a material weakness related to our control environment that was the result of the fact that Eco had insufficient resources and financial expertise to effectively carry out the accounting functions for its business. This identified material weakness contributed to control deficiencies in legacy Eco’s internal control over financial reporting that originated prior to the Business Combination. These deficiencies related to: (i) the inadequate design of controls to review the transactions within Eco’s account for goods received, but not invoiced, for appropriateness at period end which resulted in misstatements to cost of goods sold and property, plant and equipment and (ii) the inadequate design of appropriate controls to account for fair value adjustments to property, plant, and equipment, which resulted in misstatements to depreciation expense following the Business Combination. These control deficiencies were considered to be material weaknesses because they could have resulted in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

 

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We have implemented improved processes and internal controls through integration with PQ Group Holdings processes and upgrading the organizational design and personnel performing the processes and controls specific to the Eco business unit. These control deficiencies were unremediated as of December 31, 2016 as the controls that we designed after the Business Combination to address these control deficiencies had not been operating for a sufficient amount of time to conclude that they had been remediated. We have completed further testing of these corrective actions and believe that the remediation activities were sufficient to remediate the previously existing material weaknesses as of March 31, 2017.

We cannot provide assurance that additional material weaknesses or control deficiencies will not occur in the future. If we identify additional material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting in future periods, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Following completion of this offering, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

There may be sales of a substantial amount of our common stock after this offering by our current stockholders, and these sales could cause the price of our common stock to fall.

Following completion of this offering, there will be                  shares of our common stock outstanding. Of our issued and outstanding shares, all of the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Following completion of this offering, approximately     % and     % of our outstanding common stock (or approximately     % and     % if the underwriters exercise their option to purchase additional shares in full) will be held by affiliates of CCMP and by INEOS, respectively.

Each of our officers and directors and certain holders of our common stock have entered into a lock-up agreement with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, as representatives of the underwriters, which regulates their sales of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions. Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. See “Shares Eligible for Future Sale—Lock-Up Agreements.”

Sales of substantial amounts of our common stock in the public market after this offering, the perception that such sales will occur, or early release of these lock-up agreements could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares of our common stock to be outstanding following completion of this offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our remaining outstanding shares will become available for resale in the public market as shown in the chart below, subject to the provisions of Rule 144 and Rule 701.

 

Number of Shares

  

Date Available for Resale

  

180 days after this offering (                 , 2018)

subject to certain exceptions

 

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Beginning 180 days after this offering, subject to certain exceptions, investment funds affiliated with CCMP may require us to register shares of our common stock held by them for resale under the federal securities laws, subject to reduction upon the request of the underwriter of the offering, if any. See “Certain Relationships and Related Party Transactions—Amended and Restated Stockholders Agreement.” Registration of those shares would allow the investment funds affiliated with CCMP to immediately resell their shares in the public market. Any such sales or anticipation thereof could cause the market price of our common stock to decline.

In addition, following completion of this offering, we intend to register shares of our common stock that we expect to issue pursuant to the 2017 Plan. For more information, see “Shares Eligible for Future Sale—Registration Statements on Form S-8.”

Provisions in our charter documents after this offering and Delaware law may deter takeover efforts that you feel would be beneficial to stockholder value.

In addition to investment funds affiliated with CCMP’s and INEOS’s beneficial ownership of a substantial percentage of our common stock, provisions in our certificate of incorporation and bylaws after this offering and Delaware law could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and the ability of our board of directors to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquiror. Our certificate of incorporation will also impose some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock other than investment funds affiliated with CCMP. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the company may be unsuccessful. See “Description of Capital Stock—Anti-Takeover Effects of our Certificate of Incorporation and Bylaws.”

Our certificate of incorporation after this offering will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

    any derivative action or proceeding brought on our behalf;

 

    any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

    any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware, our certificate of incorporation or our bylaws;

 

    any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; or

 

    any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

In addition, our certificate of incorporation will provide that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party.

 

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Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the pro forma book value of your stock of $         per share as of June 30, 2017 based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. You will experience additional dilution upon the exercise of options to purchase shares of our common stock, including those options currently outstanding and those granted in the future, and the issuance of restricted stock or other equity awards under our stock incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders will experience substantial additional dilution. See “Dilution.”

Our certificate of incorporation after this offering will contain a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely impact our business.

Each of CCMP and INEOS, and the members of our board of directors who are affiliated with CCMP and INEOS, by the terms of our certificate of incorporation, will not be required to offer us any corporate opportunity of which they become aware and can take any such corporate opportunity for themselves or offer it to other companies in which they have an investment. We, by the terms of our certificate of incorporation, will expressly renounce any interest or expectancy in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we or our subsidiaries might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our certificate of incorporation will not be able to be amended to eliminate our renunciation of any such corporate opportunity arising prior to the date of any such amendment.

CCMP and INEOS are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if CCMP or INEOS allocate attractive corporate opportunities to themselves or their affiliates instead of to us.

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity to sell our common stock at prices equal to or greater than the price you paid in this offering.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which an active trading market on the New York Stock Exchange will develop. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for our common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering, or at all.

 

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As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

Prior to this offering, we operated on a private basis. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the New York Stock Exchange and other applicable securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly, which may strain our resources or divert management’s attention.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (the “DRC”) and adjoining countries. The SEC requires annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These reporting requirements, first applicable to us in 2019, will require us to conduct due diligence to comply with such requirements. There will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. These rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices.

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

We intend to use the net proceeds from this offering primarily to repay a portion of our indebtedness. Our management will have broad discretion in the application of the remaining net proceeds of this offering, if any. We cannot specify with certainty the additional uses to which we will apply any remaining net proceeds that we receive from this offering. Accordingly, you will be relying on the judgment of our management with regard to the use of such net proceeds, and you will not have the opportunity as part of your investment decision to assess whether the proceeds are being used appropriately. You may not agree with how the proceeds are used. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for the company. The failure by our management to apply these funds effectively could adversely affect our ability to continue to maintain and expand our business.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facilities and outstanding notes. See “—Because our operations are conducted through our subsidiaries and joint ventures, we are dependent on the receipt of distributions and dividends or other payments from our subsidiaries and joint ventures for cash to fund our operations and expenses, including to make future dividend payments, if any.” As a result, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for it.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Industry,” contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short- and long-term business operations and objectives, and financial needs. Examples of forward-looking statements include, but are not limited to, statements we make regarding our liquidity, including 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 the foreseeable future. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” 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 in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Some of the key factors that could cause actual results to differ from our expectations include risks related to:

 

    our exposure to local business risks and regulations in different countries;

 

    general economic conditions;

 

    exchange rate fluctuations;

 

    legal and regulatory compliance;

 

    technological or other changes in our customers’ products;

 

    our and our competitors’ research and development;

 

    fluctuations in prices of raw materials and relationships with our key suppliers;

 

    substantial competition;

 

    non-payment or non-performance by our customers;

 

    reliance on a small number of customers;

 

    potential early termination or non-renewal of customer contracts in our refining services product group;

 

    reductions in highway safety spending;

 

    seasonal fluctuations in demand for some of our products;

 

    retention of certain key personnel;

 

    our expansion projects;

 

    potential product liability claims;

 

    existing and potential future government regulation;

 

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    the extensive environmental, health and safety regulations to which we are subject;

 

    disruption of production and distribution of our products;

 

    our insurance coverage;

 

    product quality;

 

    our acquisition strategy;

 

    our joint venture investments;

 

    our failure to protect our intellectual property and infringement on the intellectual property rights of third parties;

 

    information technology risks;

 

    potential labor disruptions;

 

    litigation and other administrative and regulatory proceedings;

 

    our substantial indebtedness; and

 

    other factors that are described in “Risk Factors.”

The forward-looking statements included in this prospectus 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 prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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THE RECLASSIFICATION

In connection with this offering, on                 , 2017, we reclassified our Class A common stock into common stock and then effected a             -for-1 split of our common stock. Following the reclassification of our Class A common stock, we had two classes of common stock outstanding, common stock and Class B common stock. The Class B common stock was identical to the Class A common stock, except that the Class B common stock was convertible into shares of our common stock as described below, and each share of Class B common stock was entitled to a preferential payment upon any liquidating distribution by us to holders of our capital stock, whether by dividend, distribution or otherwise, equal to the unreturned paid-in-capital amount for such share ($         ). After payment of this preference amount, each share of common stock and Class B common stock shared equally in all distributions by us to holders of our common stock.

Immediately prior to this offering, we will convert each outstanding share of our Class B common stock into approximately                  shares of our common stock plus an additional number of shares of our common stock determined by dividing the unreturned paid-in capital amount of such share of Class B common stock, or $         per share, by the initial public offering price of a share of our common stock in this offering, rounded to the nearest whole share. Holders of our Class B common stock will not receive any cash payments from us in connection with the conversion of the Class B common stock.

References to the “Reclassification” throughout this prospectus refer to the reclassification of our Class A common stock into our common stock, the             -for-1 split of our common stock and the conversion of our Class B common stock into our common stock.

Assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus,                  shares of common stock will be outstanding immediately after the Reclassification but before this offering. The actual number of shares of our common stock that will be issued as a result of the Reclassification is subject to change based on the actual initial public offering price. See “Description of Capital Stock.”

Because the number of shares of common stock into which a share of our Class B common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price would have a corresponding impact on the number of outstanding shares of our common stock presented in this prospectus after giving effect to this offering. The following number of shares of our common stock would be outstanding immediately after the Reclassification but before this offering, assuming the initial public offering prices for our common stock shown below.

 

     $      $      $      $      $  

Class B conversion factor

              

Shares outstanding(1)

              

 

(1) For additional information regarding the impact of a change in the initial public offering price on the number of shares outstanding after giving effect to this offering, see Note          to our unaudited pro forma consolidated financial statements included under “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings.”

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of the shares of our common stock in this offering, after deducting underwriting discounts and commissions and estimated expenses payable by us, will be approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full). This estimate assumes an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus.

We intend to use the net proceeds from this offering to redeem approximately $         million in aggregate principal amount of PQ Corporation’s Floating Rate Senior Unsecured Notes due 2022 (the “Floating Rate Senior Unsecured Notes”), including accrued and unpaid interest and applicable redemption premiums, and the remaining net proceeds, if any, for general corporate purposes. As of June 30, 2017, there was $525.0 million aggregate principal amount of Floating Rate Senior Unsecured Notes outstanding and approximately $0.4 million of accrued and unpaid interest. The Floating Rate Senior Unsecured Notes bear interest at an annual rate equal to the three-month LIBOR plus 10.75%, with a 1% LIBOR floor, and mature on May 1, 2022, provided that if PQ Corporation’s 8.5% Senior Notes due 2022 have been refinanced or otherwise repaid prior to such date, the Floating Rate Senior Unsecured Notes will instead mature on May 1, 2023. Up to 50% of the Floating Rate Senior Unsecured Notes may be redeemed at a price equal to 106% of the principal amount thereof plus accrued and unpaid interest using the net proceeds from this offering and the remaining 50% may be redeemed at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, plus a “make whole” premium of     %, calculated assuming a redemption date of                     , 2017. For additional information regarding the Floating Rate Senior Unsecured Notes, see “Description of Certain Indebtedness.”

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares in full), assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. An increase (decrease) of 1.0 million in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us from this offering by approximately $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares in full), assuming the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. In the event the net proceeds to us from this offering are lower than the assumed amount, the amount of Floating Rate Senior Unsecured Notes that we intend to redeem would change by a corresponding amount. The information above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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DIVIDEND POLICY

Our board of directors does not currently intend to pay regular dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following this offering and may, subject to compliance with the covenants contained in the agreements governing our credit facilities, the indentures governing our outstanding notes, applicable law and other considerations, determine to pay dividends in the future. See “Description of Certain Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2017 on (1) an actual basis and (2) an as adjusted basis to give effect to (i) the Reclassification that will be completed immediately prior to this offering, as described under “The Reclassification,” as if it had occurred on June 30, 2017 and based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, and (ii) the sale by us of                  shares of our common stock in this offering, assuming no exercise of the underwriters’ option to purchase additional shares, at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, and the application of the net proceeds therefrom, as described under “Use of Proceeds,” after deducting estimated underwriting discounts and commissions and estimated expenses payable by us.

The following table should be read in conjunction with “The Reclassification,” “Use of Proceeds,” “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings,” “Selected Consolidated Financial Data of PQ Group Holdings,” “Supplemental Selected Consolidated Financial Data of Legacy PQ,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of
June 30, 2017
 
     Actual     As Adjusted(1)  
     (in thousands)  

Cash and cash equivalents

   $ 50,457     $  
  

 

 

   

 

 

 

Debt:

    

Senior secured U.S. dollar denominated term loan facility

   $ 920,792     $  

Senior secured Euro denominated term loan facility

    
321,752
 
 

6.75% Senior Secured Notes due 2022

     625,000    

Floating Rate Senior Unsecured Notes due 2022

     525,000    

8.5% Senior Notes due 2022

     200,000    

ABL revolving credit facility

     65,000    

Other

     70,944    
  

 

 

   

 

 

 

Total debt

     2,728,488    

Stockholder’s Equity:

    

Class A common stock, $0.01 par value per share, 160,500,000 shares authorized, 627,251 shares issued and 625,172 shares outstanding on an actual basis; no shares authorized, issued or outstanding on an as adjusted basis

     6    

Class B common stock, $0.01 par value per share, 30,000,000 shares authorized, 6,727,685 shares issued and 6,711,756 shares outstanding on an actual basis; no shares authorized, issued or outstanding on an as adjusted basis

     67    

Common stock, $0.01 par value per share; no shares authorized, issued or outstanding on an actual basis;                  shares authorized and                  shares issued and outstanding on an as adjusted basis

        

Preferred stock, $0.01 par value per share, 1,500,000 shares authorized and no shares issued and outstanding on an actual basis;                  shares authorized and no shares issued or outstanding on an as adjusted basis

        

Additional paid-in capital

     1,169,965    

Accumulated deficit

     (94,443  

Treasury stock, at cost

     (239  

Accumulated other comprehensive loss

     (15,798  

Total stockholders’ equity

     1,059,558    

Noncontrolling interest

     4,858    
  

 

 

   

 

 

 

Total capitalization

   $ 3,792,904     $               
  

 

 

   

 

 

 

 

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(1) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares in full), assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. An increase (decrease) of 1.0 million in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us from this offering by approximately $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares in full), assuming the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. In the event the net proceeds to us from this offering are lower than the assumed amount, the amount of Floating Rate Senior Unsecured Notes that we intend to redeem would change by a corresponding amount. See “Use of Proceeds.”

 

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DILUTION

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of the common stock is substantially in excess of the book value per share of our common stock attributable to the existing stockholders for the presently outstanding shares of common stock. We calculate net tangible book value per share of our common stock by dividing the net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of outstanding shares of our common stock.

Our net tangible book value at June 30, 2017 was approximately $(1,039.1) million, or $         per share of our common stock after giving effect to the Reclassification but before giving effect to this offering. Pro forma net tangible book value per share before this offering has been determined by dividing net tangible book value by the number of shares of common stock outstanding at June 30, 2017, assuming the Reclassification had taken place on June 30, 2017. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering.

After giving effect to the receipt of the estimated net proceeds from our sale of shares in this offering, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, and the application of the estimated net proceeds therefrom as described under “Use of Proceeds,” our pro forma net tangible book value at June 30, 2017 would have been approximately $         million, or $         per share of our common stock. This represents an immediate increase in net tangible book value per share of $         to existing stockholders and an immediate decrease in net tangible book value per share of $         to you. The following table illustrates this dilution per share.

 

      $               

Assumed initial public offering price per share

     

Pro forma net tangible book value per share at June 30, 2017

   $                  

Increase per share attributable to new investors in this offering

     
  

 

 

    

Pro forma net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $  
     

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after giving effect to this offering would be $         per share of our common stock. This represents an increase in pro forma net tangible book value of $         per share to existing stockholders and dilution in pro forma net tangible book value of $         per share of our common stock to you.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) our pro forma net tangible book value after giving effect to this offering by $         million, or by $         per share, assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. Because the number of shares of our common stock into which a share of our Class B common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price would also have a corresponding impact on our pro forma net tangible book value per share of our common stock. Our pro forma net tangible book value per share of our common stock would have been the following at June 30, 2017, assuming the initial public offering prices for our common stock shown below:

 

$                $                   $                   $                   $               

 

  

 

 

    

 

 

    

 

 

    

 

 

 
$    $      $      $      $  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth, as of June 30, 2017, the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price  
     Number      Percent     Amount      Percent     Per Share  

Existing stockholders(1)

               $                        $           

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100        100   $  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The number of shares purchased by existing stockholders is determined as follows:

 

Class B shares issued and outstanding as of June 30, 2017

  

Less: Class B treasury shares as of June 30, 2017

  
  

 

Net Class B shares outstanding as of June 30, 2017

  

Class B conversion factor(a)

  
  

 

Converted net Class B shares as of June 30, 2017

  

Common shares issued and outstanding as of June 30, 2017

  

Less: Common treasury shares as of June 30, 2017

  
  

 

Total common shares purchased by existing stockholders

  

 

(a) See “The Reclassification” for a computation of the Class B conversion factor.

Because the number of shares of our common stock into which a share of our Class B common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price would have a corresponding impact on the number of shares purchased by existing stockholders. The number of shares purchased by existing stockholders would have been the following as of June 30, 2017, assuming the initial public offering prices for our common stock shown below:

 

     $      $      $      $      $  

Class B conversion factor

              

Shares purchased by existing stockholders

              

Percent of total shares purchased by existing stockholders

              

 

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If the underwriters were to exercise their option to purchase additional shares in full, the percentage of shares of our common stock held by existing stockholders would be     %, and the percentage of shares of our common stock held by new investors would be     %.

To the extent any outstanding options or other equity awards are exercised or become vested or any additional options or other equity awards are granted and exercised or become vested or other issuances of our common stock are made, there may be further economic dilution to new investors.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

OF PQ GROUP HOLDINGS

The unaudited pro forma combined financial information for the year ended December 31, 2016 presented below was derived from our audited financial statements, which are included elsewhere in this prospectus.

On May 4, 2016, we consummated the Business Combination to reorganize and combine the businesses of legacy PQ and legacy Eco under a new holding company, PQ Group Holdings. Investment funds affiliated with CCMP held a controlling interest in legacy Eco prior to the Business Combination. Legacy Eco is treated as the acquirer in the Business Combination and the predecessor to PQ Group Holdings for accounting purposes.

The unaudited pro forma combined financial information includes our historical results of operations and the results of operations of legacy PQ, after giving pro forma effect to the following as if they had occurred on January 1, 2015:

 

    the Business Combination and the related financing transactions;

 

    the retroactive application of the reclassification of our Class A common stock into our common stock, the         -for-1 split of our common stock and the conversion of our Class B common stock into our common stock;

 

    the issuance of             shares of common stock in this offering; and

 

    the use of the net proceeds from this offering to repay $         million of outstanding indebtedness as described in “Use of Proceeds.”

The unaudited pro forma combined financial information has been prepared from, and should be read in conjunction with, the respective historical consolidated financial statements and related notes of PQ Group Holdings and legacy PQ appearing elsewhere in this prospectus. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We describe the assumptions underlying the pro forma adjustments in the accompanying notes, which should be read in conjunction with this unaudited pro forma combined financial information. The unaudited pro forma adjustments are based upon available information and assumptions that we believe are factually supportable, directly attributable to the Business Combination and the related financing transactions, and with respect to the statement of operations, expected to have a continuing impact on our business, and that we believe are reasonable under the circumstances. The unaudited pro forma combined statement of operations is not intended to represent what our results of operations would have been if the Business Combination and related financing transactions had occurred on January 1, 2015 or to project our results of operations for any future period. The unaudited pro forma combined statement of operations may not be comparable to, or indicative of, future performance.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands, except per share data)

 

    PQ Group Holdings Inc.     PQ Holdings Inc.              
    Year ended
December 31, 2016
    Period from
January 1, 2016
through
May 3, 2016
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Sales

  $ 1,064,177     $ 339,420     $ (556 )(1)    $ 1,403,041  

Cost of goods sold

    810,085       248,842       (21,818 )(1)(2)(3)(4)      1,037,109  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    254,092       90,578       21,262       365,932  

Selling, general and administrative expenses

    107,601       39,404       (1,964 )(5)      145,041  

Other operating expense, net

    62,301       13,565       (894 )(6)(7)      74,972  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    84,190       37,609       24,120       145,919  

Equity in net loss (income) from affiliated companies

    2,612       (8,078     (29,744 )(8)      (35,210

Interest expense

    140,315       37,310       10,320 (9)      187,945  

Debt extinguishment costs

    13,782       40,153       (52,142 )(10)(11)(12)      1,793  

Other expense (income), net

    (3,402     (5,467           (8,869
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and noncontrolling interest

    (69,117     (26,309     95,686       260  

Provision for income taxes

    10,041       11,391       36,535 (13)      57,967  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (79,158     (37,700     59,151       (57,707

Less: Net income attributable to the noncontrolling interest

    588       637             1,225  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the Combined Business

  $ (79,746   $ (38,337   $ 59,151     $ (58,932
 

 

 

   

 

 

   

 

 

   

 

 

 

Class B shares(14)

       

Net (loss) per share, basic and diluted

    —         —         —         —    

Weighted average shares outstanding, basic and diluted

    —         —         —         4,947,982  

Class A shares(14)

       

Net (loss) per share, basic and diluted

    —         —         —       $ (137.03

Weighted average shares outstanding, basic and diluted

    —         —         —         430,051  

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands)

 

(1) Represents the elimination of $556 in intercompany sales and related cost of goods sold between PQ Holdings and the company during the period from January 1, 2016 through May 3, 2016.
(2) Represents the depreciation expense associated with the step-up of fixed assets of $19,903, less the adjustment of previously recognized depreciation recorded by legacy PQ of $18,902, for the pre-Business Combination period from January 1, 2016 through May 3, 2016. Depreciation expense related to property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets, ranging from three to thirty-three years. Depreciation expense related to leasehold improvements is calculated on a straight-line basis over the shorter of the useful life of the improvement or remaining lease term.
(3) Represents the amortization expense associated with the step-up of certain intangible assets of $4,949 for the pre-Business Combination period from January 1, 2016 through May 3, 2016, less the adjustment of previously recognized amortization recorded by PQ Holdings of $1,528. Amortization expense is calculated on a straight-line basis over the estimated useful lives of the intangible assets, ranging from five to twenty years.
(4) Represents the adjustment of previously recognized, non-recurring amortization expense associated with the step-up in fair value of inventory of $25,684 for the year ended December 31, 2016.

Below is a summary of adjustments (1), (2), (3), and (4) outlined above to cost of goods sold to arrive at the net adjustment recorded in the pro forma statement of operations:

 

Category

   Adjustment  

Adjustments that increase cost of goods sold

  

(2) Depreciation expense related to the step-up in fair value of property, plant and equipment

   $ 19,903  

(3) Amortization expense related to the step-up in fair value of definite-lived intangible assets

     4,949  
  

 

 

 
     24,852  

Adjustments that decrease cost of goods sold

  

(1) Removal of cost of goods sold related to intercompany sales

     (556

(2) Removal of previously recognized depreciation expense recorded by PQ Holdings

     (18,902

(3) Removal of previously recognized amortization expense recorded by PQ Holdings

     (1,528

(4) Removal of the one-time charge related to the step-up in fair value of inventory

     (25,684
  

 

 

 
     (46,670
  

 

 

 

Reduction in cost of goods sold

   $ (21,818
  

 

 

 

Below is a summary of the assumptions used to calculate the depreciation expense related to the step-up in fair value of property, plant and equipment and the amortization expense related to the step-up in fair value of definite-lived intangible assets:

 

Asset Class

   Fair Value      Estimated
Useful Life
     Depreciation
Adjustment to
Cost of Goods Sold
 

Land

   $ 101,337        Indefinite      $  

Buildings

     112,041        15 to 33 years        3,202  

Machinery and equipment

     338,766        3 to 10 years        16,701  

Construction in progress

     131,529            
  

 

 

       

 

 

 
   $ 683,673         $ 19,903  
  

 

 

       

 

 

 

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands)

 

     Amount      Weighted-Average
Expected Useful Life
(in years)
     Amortization
Adjustment
to Cost of
Goods Sold
 

Intangible assets subject to amortization:

        

Trademarks

   $ 35,400        15      $  

Technical know-how

     189,300        20        3,120  

Contracts

     19,800        5.3        1,829  

Customer relationships

     268,700        10.6         

In-process research and development

     6,800            
  

 

 

       

 

 

 

Total intangible assets subject to amortization

     520,000           4,949  

Tradenames, not subject to amortization

     151,100        Indefinite         

Trademarks, not subject to amortization

     82,900        Indefinite         
  

 

 

       

Total

   $ 754,000         $ 4,949  
  

 

 

       

 

 

 

 

(5) Represents additional depreciation expense associated with the step-up of fixed assets of $1,161, less the adjustment of previously recognized depreciation expense recorded by legacy PQ of $980, for the pre-Business Combination period from January 1, 2016 through May 3, 2016. Adjustment also reflects changes related to the modification of stock compensation awards as a result of the Business Combination. Stock compensation expense has been adjusted to remove previously recorded stock compensation expense of $2,356 for legacy Eco and legacy PQ in the period from January 1, 2016 through May 3, 2016, as well as $1,174 related to an acceleration of expense due to a partial cash settlement related to the legacy Eco awards. The additional $1,385 for stock compensation expense based on the new capital structure represents the fair value of the newly granted awards that would have been recognized for the period from January 1, 2016 through May 3, 2016 assuming the Business Combination occurred on January 1, 2015. No further adjustment has been made, as the expense related to these awards is already reflected in the post-Business Combination period from May 4, 2016 through December 31, 2016.

 

Category

   Adjustment  

Adjustments that increase selling, general and administrative expenses

  

Depreciation expense related to the step-up in fair value of property, plant and equipment

   $ 1,161  

Stock compensation expense based on the new capital structure

     1,385  
  

 

 

 
     2,546  

Adjustments that decrease selling, general and administrative expenses

  

Removal of previously recognized depreciation expense recorded by PQ Holdings

     (980

Removal of the stock compensation acceleration clause related to the Business Combination

     (1,174

Removal of stock compensation expense based on the prior capital structure

     (2,356
  

 

 

 
     (4,510
  

 

 

 

Reduction in selling, general and administrative expenses

   $ (1,964
  

 

 

 

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands)

 

Below is a summary of the assumptions used to calculate the depreciation expense related to the step-up in fair value of property, plant and equipment:

 

Asset Class

   Fair Value      Estimated
Useful Life
     Depreciation
Adjustment to
Selling, General and
Administrative Expenses
 

Land

   $ 101,337        Indefinite      $  

Buildings

     112,041        15 to 33 years        176  

Machinery and equipment

     338,766        3 to 10 years        985  

Construction in progress

     131,529            
  

 

 

       

 

 

 
   $ 683,673         $ 1,161  
  

 

 

       

 

 

 

 

 

(6) Represents the amortization expense associated with the step-up of intangible assets of $9,437, less the adjustment of previously recognized amortization expense recorded by legacy PQ of $8,536, for the pre-Business Combination period from January 1, 2016 through May 3, 2016. Amortization expense related to trademarks, technical know-how, contracts and customer relationships is calculated on a straight-line basis over the estimated useful lives of the intangible assets, ranging from five to twenty years.
(7) Represents the adjustment of transaction fee costs of $1,795 related to the Business Combination.

Below is a summary of the adjustments (6) and (7) outlined above to other operating expense, net to arrive at the net adjustment recorded in the pro forma statement of operations:

 

Category

   Adjustment  

Adjustments that increase other operating expense, net

  

(6) Amortization expense related to the step-up in fair value of definite-lived intangible assets

   $ 9,437  

Adjustments that decrease other operating expense, net

  

(6) Removal of previously recognized amortization expense recorded by PQ Holdings

     (8,536

(7) Removal of one-time transaction fees related to the Business Combination

     (1,795
  

 

 

 
     (10,331
  

 

 

 

Reduction in other operating expense, net

   $ (894
  

 

 

 

Below is a summary of the assumptions used to calculate the amortization expense related to the step-up in fair value of definite-lived intangible assets:

 

     Amount      Weighted-Average
Expected Useful Life
(in years)
     Amortization
Adjustment
to Other
Operating
Expense, Net
 

Intangible assets subject to amortization:

        

Trademarks

   $ 35,400        15      $ 784  

Technical know-how

     189,300        20         

Contracts

     19,800        5.3         

Customer relationships

     268,700        10.6        8,653  

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands)

 

     Amount      Weighted-Average
Expected Useful Life
(in years)
     Amortization
Adjustment
to Other
Operating
Expense, Net
 

In-process research and development

   $ 6,800         $  
  

 

 

       

 

 

 

Total intangible assets subject to amortization

     520,000           9,437  

Tradenames, not subject to amortization

     151,100        Indefinite         

Trademarks, not subject to amortization

     82,900        Indefinite         
  

 

 

       

Total

   $ 754,000         $ 9,437  
  

 

 

       

 

 

 

 

(8) Represents the amortization on the acquisition accounting adjustments for identifiable intangible assets of $2,211, less the adjustment of previously recognized amortization expense recorded by legacy PQ of $796 and the adjustment of $31,159 of non-recurring charges related to the step-up in fair value of inventory for our Zeolyst Joint Venture, for the pre-Business Combination period from January 1, 2016 through May 3, 2016. The adjustment related to the step-up in fair value of inventory for our Zeolyst Joint Venture is calculated by analyzing the historical inventory turnover rates and average profit margins of each component of our Zeolyst Joint Venture’s inventory to calculate a rate that is applied to each such component to determine a fair value as of the date of the Business Combination.

 

Category

   Adjustment  

Adjustments that increase equity in net loss (income) from affiliated companies

  

Removal of previously recognized amortization expense on definite-lived intangible assets related to our Zeolyst Joint Venture

   $ (796

Removal of the non-recurring post-Business Combination step-up in fair value of inventory related to our Zeolyst Joint Venture

     (31,159
  

 

 

 
     (31,955

Adjustments that decrease equity in net loss (income) from affiliated companies

  

Amortization expense related to the step-up of fixed and definite-lived intangible assets

     2,211  
  

 

 

 

Increase in equity in net loss (income) from affiliated companies

   $ (29,744
  

 

 

 

 

(9) Represents interest expense of $56,480 associated with our senior secured credit facilities less the adjustment of $36,371 in interest expense related to the legacy debt structure for the period of January 1, 2016 through May 3, 2016. Also represents amortization of deferred financing fees and original issue discount of $2,179 associated with our senior secured credit facilities less the adjustment of $2,873 in deferred financing fees and original issue discount related to the legacy debt structure for the period of January 1, 2016 through May 3, 2016.

 

                         Amortization of         
     Amount      Interest Rate     Interest
Payment
     OID      Deferred
Financing
Fees
     Total
Interest
Expense
 

U.S. dollar-denominated term loan facility

   $ 900,000        5.25   $ 17,106      $ 614      $ 464      $ 18,184  

Euro-denominated term loan facility

     300,000        5.00     5,037        204        133        5,374  

6.75% Senior Secured Notes due 2022

     625,000        6.75     13,945        118        208        14,271  

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(Dollars in thousands)

 

                         Amortization of         
     Amount      Interest Rate     Interest
Payment
     OID      Deferred
Financing
Fees
     Total
Interest
Expense
 

Floating Rate Senior Unsecured Notes due 2022

   $ 525,000        11.75   $ 20,392      $ 401      $ 37      $ 20,830  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 2,350,000        $ 56,480      $ 1,337      $ 842      $ 58,659  
Less historical interest expense of PQ Holdings Inc.        (39,244
Less historical interest expense of Eco Services        (9,095
                

 

 

 

Increase to pro forma interest expense

 

   $ 10,320  
                

 

 

 

A 1/8% increase or decrease in the respective base interest rates underlying the company’s variable-rate debt would result in an increase or decrease, as applicable, in pro forma interest expense associated with the company’s interest payments of approximately $698 for the period from January 1, 2016 through May 3, 2016. However, each of the respective base interest rates underlying the company’s variable-rate debt at the time of the Business Combination was subject to a floor such that a decrease in the respective base interest rates would have no impact on interest expense.

 

(10) Represents the write-off of existing deferred financing fees and original issue discount of $21,145 related to the legacy debt structure incurred prior to the Business Combination and related financing transactions.
(11) Includes the write-off of $26,250 in prepayment penalties associated with the refinancing of the legacy PQ and legacy Eco debt.
(12) Includes the write-off of $4,747 in refinancing charges.
(13) Represents the tax effect of the adjustments noted above, including $298 related to the change in tax status of Eco from a limited liability company to a C-corporation, which represents the tax provision had Eco been treated as a C-corporation for the period from January 1, 2016 through May 3, 2016. Each adjustment noted above was tax effected at the company’s statutory rate in effect for the applicable jurisdiction as of December 31, 2016. Eco’s weighted average statutory rate used to calculate the change in tax status was 37.25%.
(14) The number of Class A and Class B shares used to compute pro forma basic and diluted net (loss) per share is the number of shares outstanding as of December 31, 2016. Class B shares are considered preferential participating securities and will not be allocated any losses in the periods of net losses, but will be allocated income in the periods of net income. As a result, pro forma basic and diluted (loss) per share have not been computed for Class B shares.

 

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SELECTED CONSOLIDATED FINANCIAL DATA OF PQ GROUP HOLDINGS

The following tables set forth our selected historical consolidated financial data as of and for the periods indicated.

On May 4, 2016, we consummated the Business Combination to reorganize and combine the business of legacy PQ and legacy Eco under a new holding company, PQ Group Holdings. Investment funds affiliated with CCMP held a controlling interest in legacy Eco prior to the Business Combination. Legacy Eco is treated as the acquirer in the Business Combination and the predecessor to PQ Group Holdings for accounting purposes.

Legacy Eco operated as a business unit of Solvay until the acquisition of substantially all of the assets of Solvay’s Eco Services business unit by Eco on December 1, 2014, and therefore, the financial statements of legacy Eco contained in this prospectus for periods prior to the 2014 Acquisition are not necessarily indicative of what legacy Eco’s financial position, results of operations and cash flows would have been had legacy Eco operated as a separate, standalone entity independent of Solvay. In connection with the 2014 Acquisition, the acquisition method of accounting was applied, and the assets and liabilities of legacy Eco were adjusted to fair value on December 1, 2014. Accordingly, with respect to the historical financial and related information of legacy Eco included in this prospectus, references to “Predecessor” include each of the periods from January 1, 2012 to November 30, 2014. For 2014, the results include 11 months of legacy Eco operating activity (January 1, 2014 to November 30, 2014) and include amounts that have been “carved out” from Solvay’s financial statements using assumptions and allocations made by Solvay to reflect Solvay’s Eco Services business unit on a stand-alone basis. References in this prospectus to “Successor” refer to the period from inception of Eco (July 30, 2014) to December 31, 2014, but only include one month of legacy Eco operating activity (December 1, 2014 to December 31, 2014), because there was no operating activity for the period from inception (July 30, 2014) to November 30, 2014, and reflects legacy Eco on a stand-alone basis.

The consolidated statement of operations data and cash flows data for the years ended December 31, 2016 and 2015, the Successor period from inception (July 30, 2014) to December 31, 2014 and Predecessor period from January 1, 2014 to November 30, 2014, and the consolidated balance sheet data as of December 31, 2016 and 2015 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and cash flows data for the six months ended June 30, 2017 and 2016 and the consolidated balance sheet data as of June 30, 2017 were derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and cash flows data for the years ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012 were derived from our combined financial statements not included in this prospectus.

 

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The selected historical consolidated financial data set forth below does not give pro forma effect to the Reclassification, the Business Combination or the 2014 Acquisition and should be read in conjunction with the disclosures set forth under “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

                            Successor     Predecessor  
    Six months
ended June 30,
    Year ended December 31,     Period from
inception
(July 30, 2014)
to December 31,
2014
    Period from
January 1, 2014
to November 30,
2014
    Year ended December 31,  
    2017     2016           2016                 2015                     2013                 2012        
   

Unaudited

                   

(Dollars in thousands)

     

Statement of operations data:

                 

Sales

  $ 722,198     $ 371,467     $ 1,064,177     $ 388,875     $ 35,539     $ 361,823     $ 390,834     $ 410,369  

Cost of goods sold

    532,072       283,068       810,085       278,791       30,160       265,829       286,371       294,754  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    190,126       88,399       254,092       110,084       5,379       95,994       104,463       115,615  

Selling, general and administrative expenses

    69,738       38,014       107,601       34,613       2,623       45,168       46,871       53,617  

Other operating expense, net

    27,324       25,588       62,301       19,696       16,347       5,593              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    93,064       24,797       84,190       55,775       (13,591     45,233       57,592       61,998  

Equity in net (income) loss from affiliated companies

    (14,622     4,693       2,612                                

Interest expense, net

    94,961       45,752       140,315       44,348       8,470       86       122       179  

Debt extinguishment costs

          11,858       13,782                                

Other (income) expense, net

    16,613       3,024       (3,402                       (3,266     (13,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and noncontrolling interest

    (3,888     (40,530     (69,117     11,427       (22,061     45,147       60,736       74,819  

(Benefit) provision for income taxes

    97       39,549       10,041                   14,602       21,445       26,342  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (3,985     (80,079     (79,158     11,427       (22,061     30,545       39,291       48,477  

Less: Net income attributable to the noncontrolling interest

    78       314       588                                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to PQ Group Holdings Inc.

  $ (4,063   $ (80,393   $ (79,746   $ 11,427     $ (22,061   $ 30,545     $ 39,291     $ 48,477  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                              Successor  
     Six months
ended June 30,
    Year ended December 31,      Period from
inception
(July 30, 2014)
to December 31,
2014
 
       2017         2016       2016     2015     
     Unaudited                     

Earnings (loss) per share:

           

Basic

           

Class B shares

   $     $     $     $ 7.58      $ (14.78

Class A shares

     (9.45     (186.90     (185.43             

Diluted

           

Class B shares

                       7.58        (14.78

Class A shares

     (9.45     (186.90     (185.43             

Weighted average shares outstanding:

           

Basic

           

Class B shares

     6,679,077       3,224,645       4,947,982       1,507,719        1,492,682  

Class A shares

     429,985       430,136       430,051               

Diluted

           

Class B shares

     6,679,077       3,224,645       4,947,982       1,507,719        1,492,682  

Class A shares

     429,985       430,136       430,051               

 

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                      Successor     Predecessor  
    Six months
ended
June 30,

2017
    Year ended December 31,     Period from
inception
(July 30, 2014)
to December 31,
2014
    Period from
January 1, 2014
to November 30,
2014
    Year ended December 31,  
            2016                 2015                      2013                   2012         
    Unaudited                          

(Dollars in thousands)

     

Balance sheet data (at end of period):

               

Cash and cash equivalents

  $ 50,457     $ 70,742     $ 25,155     $ 22,627       $     $  

Net working capital (deficit)(1)

    198,347       179,544       (9,895     (16,173       10,954       13,479  

Property, plant and equipment, net

    1,203,925       1,181,388       481,073       472,156         345,041       336,631  

Total assets

    4,390,031       4,259,671       1,007,636       1,025,094         742,046       756,291  

Total liabilities

    3,325,615       3,231,727       772,343       807,270         201,831       214,788  

Total debt, net of original issue discount and deferred financing costs including current portion

    2,676,048       2,562,198       673,101       675,254                

Total stockholders’ equity

    1,064,416       1,027,944       235,293       217,824         540,215       541,503  

Cash flows data:

               

Net cash provided by (used in):

               

Operating activities

  $ 21,751     $ 119,720     $ 44,715     $ (2,057   $ 57,593     $ 84,448     $ 81,195  

Investment activities

    (103,556     (1,929,680     (38,725     (888,347     (32,852     (41,703     (40,980

Financing activities

    66,817       1,861,433       (3,462     913,031       (24,741     (42,745     (40,215

Effect of exchange rate changes

    (5,299     (5,886                              

 

                            Successor     Predecessor  
    Six months ended
June 30,
    Year ended December 31,     Period from
inception
(July 30, 2014)
to December 31,
2014
    Period from
January 1, 2014
to November 30,
2014
    Year ended December 31,  
    2017     2016           2016                 2015                     2013                 2012        
    Unaudited     Unaudited     Unaudited     Unaudited     Unaudited     Unaudited     Unaudited     Unaudited  

(Dollars in thousands)

     

Segment Sales:

                 

Performance Materials & Chemicals

  $ 488,709     $ 173,648     $ 638,951     $     $     $     $     $  

Environmental Catalysts & Services(2)

    235,273       198,219       426,747       388,875       35,539       361,823       390,834       410,369  

Segment Adjusted EBITDA(3):

                 

Performance Materials & Chemicals

  $ 118,856     $ 46,574     $ 158,679     $     $     $     $     $  

Environmental Catalysts & Services

    120,678       78,703       196,825       117,704       9,122       98,075       105,499       110,786  

 

(1) Net working capital (deficit) is defined as current assets minus current liabilities minus cash and cash equivalents
(2) Excludes the company’s proportionate share of total net sales from the Zeolyst Joint Venture, which we account for as an equity method investment in accordance with GAAP. The proportionate share of total net sales from the Zeolyst Joint Venture is $63,369 and $94,516 for the six months ended June 30, 2017 and for the year ended December 31, 2016, respectively.
(3) Segment Adjusted EBITDA is exclusive of corporate expenses. See “Prospectus Summary—Summary Historical and Unaudited Pro Forma Financial and Other Data.”

 

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SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA OF LEGACY PQ

The following tables set forth certain selected consolidated financial data as of and for the periods indicated for legacy PQ on a stand-alone basis. The consolidated statement of operations data and cash flows data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 were derived from legacy PQ’s audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and cash flows data for the year ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2013 and 2012 were derived from legacy PQ’s consolidated financial statements not included in this prospectus. The consolidated statement of operations data and cash flows data for the three months ended March 31, 2016 and the consolidated balance sheet data as of March 31, 2016 were derived from legacy PQ’s unaudited consolidated financial statements included elsewhere in this prospectus.

The selected consolidated financial data set forth below should be read in conjunction with the “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

     Legacy PQ        
     Three months
ended
March 31,
    Legacy PQ  
       Year ended December 31,  

(Dollars in thousands)

   2016     2015      2014     2013      2012  
     unaudited                            

Statement of operations data:

            

Sales

   $ 237,393     $ 1,024,326      $ 1,114,904     $ 1,085,019      $ 1,084,782  

Cost of goods sold

     173,613       748,756        818,483       795,416        803,159  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     63,780       275,570        296,421       289,603        281,623  

Selling, general and administrative expenses

     28,524       107,097        110,886       111,229        112,138  

Other operating expense, net

     11,461       51,516        71,148       49,373        42,261  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     23,795       116,957        114,387       129,001        127,224  

Equity in net income from affiliated companies

     4,659       45,325        29,359       53,808        26,206  

Interest expense, net

     26,413       108,375        111,553       120,347        111,228  

Debt extinguishment costs

     —         —          2,476       20,287        20,063  

Other expense, net

     (3,422     21,383        23,886       3,316        (3,751
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes and noncontrolling interest

     5,463       32,524        5,831       38,859        25,890  

Provision for income taxes

     3,904       22,902        7,548       10,608        18,918  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

     1,559       9,622        (1,717     28,251        6,972  

Less: Net income attributable to the noncontrolling interest

     457       1,771        1,894       1,521        1,788  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Legacy PQ

   $ 1,102     $ 7,851      $ (3,611   $ 26,730      $ 5,184  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance sheet data (at end of period):

            

Cash and cash equivalents

   $ 44,195     $ 53,507      $ 100,836     $ 117,749      $ 124,451  

Net working capital (1)

     157,925       140,887        135,247       153,980        150,235  

Property, plant and equipment, net

     576,534       569,168        546,716       510,345        496,242  

Total assets

     2,293,912       2,268,084        2,310,262       2,379,308        2,333,480  

Total liabilities

     2,207,911       2,191,967        2,212,714       2,232,422        2,216,117  

Total debt, including current portion

     1,820,012       1,803,763        1,807,404       1,809,201        1,781,449  

Total stockholders' equity

     86,001       76,117        97,548       146,886        117,363  

 

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Table of Contents
     Legacy PQ        
     Three months
ended
March 31,
    Legacy PQ  
       Year ended December 31,  

(Dollars in thousands)

   2016     2015     2014     2013     2012  
     unaudited                          

Cash flows data:

          

Net cash provided by (used in):

          

Operating activities

   $ 6,229     $ 98,896     $ 120,410     $ 115,898     $ 84,971  

Investment activities

     (29,505     (125,144     (114,032     (125,358     (66,208

Financing activities

     13,912       (10,379     (14,787     6,929       (943

Effect of exchange rate changes on cash

     52       (10,702     (8,504     (4,171     (1,770

 

(1) Net working capital is defined as current assets minus current liabilities minus cash and cash equivalents.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors,” “Prospectus Summary—Summary Historical and Unaudited Pro Forma Financial and Other Data,” “Selected Consolidated Financial Data of PQ Group Holdings,” “Unaudited Pro Forma Condensed Combined Financial Information of PQ Group Holdings” and the historical audited and unaudited consolidated financial statements, including the related notes, appearing elsewhere in this prospectus. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31. All dollar values in this section, unless otherwise noted, are denoted in millions.

Overview

We are a leading global provider of catalysts, specialty materials and chemicals, and services that enable environmental improvements, enhance consumer products and increase personal safety. Our products and solutions help companies produce vehicles with improved fuel efficiency and cleaner emissions. Our materials are critical ingredients in consumer products that make teeth brighter, skin softer and wounds heal faster. We produce highly engineered materials that make highways and airports safer for drivers and pilots. Because our products are predominantly inorganic and carbon-free, we believe we contribute to improving the sustainability of our planet.

We conduct operations through two reporting segments: environmental catalysts and services and performance materials and chemicals. Our environmental catalysts and services business is a leading global innovator and producer of catalysts for the refinery, emissions control and petrochemical industries and is also a leading provider of catalyst recycling services to the North American refining industry. We believe our products are mission critical for our customers in these growing applications and impart essential functionality in chemical and refining production processes and in emissions control for engines. Our environmental catalysts and services business consists of three product groups: silica catalysts, zeolite catalysts and refining services. Our performance materials and chemicals business is a silicates and specialty materials producer with leading supply positions for the majority of our products sold in North America, Europe, South America, Australia and Asia (excluding China) serving diverse and growing end uses such as personal and industrial cleaning products, fuel efficient tires (“green tires”), surface coatings and food and beverage. Our products are essential additives, ingredients, and precursors that are critical to the performance characteristics of our customers’ products, yet typically represent only a small portion of our customers’ overall end-product costs. Our performance materials and chemicals business consists of two product groups: performance chemicals and performance materials. In 2016, we served over 4,000 customers globally across many end uses and, as of June 30, 2017, operated out of 72 manufacturing facilities, which are strategically located across six continents.

Company Background and Business Combination

On December 1, 2014, Eco Services Operations LLC (“Eco”), a Delaware limited liability company and an indirect subsidiary of investment funds affiliated with CCMP, acquired substantially all of the assets of Solvay’s Eco Services business unit (the “2014 Acquisition”).

On August 17, 2015, PQ Group Holdings Inc. (“PQ Group Holdings” or “the company”), PQ Holdings Inc. (“PQ Holdings”), PQ Corporation, Eco, Eco Services Intermediate Holdings LLC, Eco Services Group Holdings LLC, investment funds affiliated with CCMP, and certain other stockholders of PQ Holdings and Eco entered into a reorganization and transaction agreement pursuant to which the companies consummated a series of

 

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transactions (the “Business Combination”) to reorganize and combine the businesses of PQ Holdings and Eco under a new holding company, PQ Group Holdings. The Business Combination was consummated on May 4, 2016. We refer to the business of PQ Holdings prior to the Business Combination as “legacy PQ” and the business of Eco prior to the Business Combination as “legacy Eco.”

In accordance with GAAP, legacy Eco was the accounting acquirer in the Business Combination and, as such, legacy Eco is treated as our predecessor. Investment funds affiliated with CCMP held a controlling interest in legacy Eco and a non-controlling interest in legacy PQ prior to the Business Combination.

The following table summarizes, for each of the periods specified below and for which financial information is included for the issuer, PQ Group Holdings, in this prospectus, the portion, if any, of the financial results of legacy PQ and legacy Eco that is included in the financial results for such periods presented in accordance with GAAP.

 

                                                                    Successor            Predecessor  
           Six months ended
June 30,
          Pro forma
year ended
December 31,
2016
          Years ended
December 31,