10-K 1 pqform10-k12312018.htm PQ GROUP HOLDINGS INC. FORM 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38221
 
PQ Group Holdings Inc.
 
Delaware
 
81-3406833
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
300 Lindenwood Drive
Malvern, Pennsylvania
 
19355
(Address of principal executive offices)
 
(Zip Code)
 
(610) 651-4400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common stock, par value $0.01 per share
 
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ý    No  ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of PQ Group Holdings Inc. voting and non-voting common equity held by non-affiliates as of June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) based on the closing sale price of $18.00 per share as reported on the New York Stock Exchange was $711,130,212.
The number of shares of common stock outstanding as of February 25, 2019 was 135,705,568.
 
 
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the PQ Group Holdings Inc. Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.




PQ GROUP HOLDINGS INC.

INDEX—FORM 10-K
December 31, 2018
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
Item 16.
 
 
 
 
 


i


PART I
Forward-looking Statements
This Annual Report on Form 10-K (“Form 10-K”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. 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 objections, 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. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include risks related to:

our exposure to local business risks and regulations in different countries;
general economic conditions;
exchange rate fluctuations;
legal and regulatory compliance;
significant developments relating to the U.S. administration, U.S. courts’ or the United Kingdom’s referendum on membership in the European Union;
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 or taxes earmarked for highway safety spending;
seasonal fluctuations in demand for some of our products;
retention of certain key personnel;
realization of our growth projects;
potential product liability claims;
existing and potential future government regulation;
the extensive environmental, health and safety regulations to which we are subject;
disruption of production and distribution of our products;
risk of loss beyond our available insurance coverage;
product quality;
successful integration of acquisitions;
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; and
our substantial indebtedness.

1


The forward-looking statements included herein are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-K to conform these statements to actual results or to changes in our expectations.
ITEM 1.
BUSINESS.
PQ Group Holdings Inc. (“PQ Group Holdings” or the “Company”) was incorporated in Delaware on August 7, 2015. PQ Holdings Inc. (“PQ Holdings”), a manufacturer of specialty catalysts, materials and chemicals, was incorporated in Delaware on June 22, 2007. Founded in 1831, our business has a nearly 200-year history of innovation, enabling environmental improvements in fuel efficiency and emissions, safer highway and airport travel, and healthier personal care products, while improving sustainability of our planet. On October 3, 2017, PQ Group Holdings completed its initial public offering (“IPO”). Our common stock is listed on the New York Stock Exchange under the stock ticker “PQG”.
Eco Services Operations LLC (“Eco Services”), which acquired substantially all of the assets of Solvay USA Inc.’s sulfuric acid refining services business unit on December 1, 2014 (the “2014 Acquisition”), was incorporated in Delaware on July 30, 2014. On May 4, 2016, we consummated a series of transactions (the “Business Combination”) to reorganize and combine the businesses of PQ Holdings and Eco Services under a new holding company, PQ Group Holdings, pursuant to a reorganization and transaction agreement, dated August 17, 2015, as amended, by and among PQ Group Holdings, PQ Holdings, PQ Corporation, Eco Services, 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 Services prior to the Business Combination as “legacy Eco.” Unless the context otherwise indicates, the terms “PQ Group Holdings Inc.,” “we,”, “us,” “our,” or the “Company” mean PQ Group Holdings Inc. and subsidiaries.
Our Company
We are an integrated global provider of specialty catalysts, materials and chemicals, and services that enable environmental improvements, enhance consumer products, and improve personal safety. Our value-added products seek to address global demand trends that are often either the subject of significant environmental and safety regulations or are driven by consumer preferences for environmentally friendlier alternative products, which we believe positions us to grow sales in excess of gross domestic product growth rates and provides us with high-margin growth opportunities. Specifically, 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 and skin softer. 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 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 2018 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 both regionally as well as globally. We believe that we hold our leading supply share positions in the key regions that we serve.
We believe our products deliver significant value to our customers, as demonstrated by our profit margins. Our products typically constitute a small portion of our customers’ overall end-product costs yet are critical to product performance. Our catalysts are highly technical, customized products that require customer collaboration and significant lead and qualification time, capital investment resources, and intellectual property to develop. As a result, we have generally maintained stable margins through macro economic cycles.
In 2018, we served over 4,000 customers globally across many end uses and, as of December 31, 2018, operated 71 manufacturing facilities which are strategically located across six continents. We are highly diversified by business, geography, and end use, and in 2018 the majority of our sales were for applications that have historically had relatively predictable, consistent demand patterns driven by consumption or frequent replacement cycles.

2


endusedestinationgeocustome.jpg
(1)
Percentage calculations include $156.7 million of total sales attributable to our Zeolyst Joint Venture (“Zeolyst JV”), which represents 50% of its total sales for the year ended December 31, 2018. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Basis of Presentation” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.
(2)
Based on the delivery destination for products sold in 2018.
Our Strategy
We intend to capitalize on our strong business foundation, market-based approach, and experienced management team to grow sales profitably, maintain high margins, deploy capital efficiently and generate free cash flow in order to create shareholder value. We believe that our long history of operational excellence and proven reliability, technology leadership, strong customer relationships, innovation track record and consistent business execution developed from our almost two centuries of combined industry experience positions us well to execute on our business strategy.
Our 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, coupled with consistent product quality and a reliable source of supply in a safe and environmentally sustainable manner. Products sold to our customers can be a high value-add 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 generally predictable maintenance capital expenditure requirements can produce attractive cash flows.



3


Our End Markets
The table below summarizes our key end use applications and products as well as the significant growth drivers in those applications.
 
 
 
2016 Pro Forma
Sales and
Zeolyst JV
Total Sales(1)(2)
 
 
 
2018 Sales and
Zeolyst JV
Total Sales(1)
2017 Sales and
Zeolyst JV
Total Sales(1)
 
 
 
 
 
Key End Uses
Significant Growth Drivers
Key PQ Products
 
 
 
 
 
 
Fuels & Emission Controls
21%
21%
20%
• Global regulatory requirements to:
• Refinery catalysts
 
 
 
 
• Remove nitrogen oxides from emissions
• Emission control catalysts
 
 
 
 
• Remove sulfur from diesel and gasoline
• Catalyst recycling services
 
 
 
 
• Increase gasoline octane in order to improve fuel efficiency while lowering vapor pressure to regulated levels
• Silicate for catalyst manufacturing
 
 
 
 
• Improve lubricant characteristics to improve fuel efficiencies
 
 
 
 
 
 
 
Consumer Products
16%
16%
18%
• Substitution of silicate materials for less environmentally friendly chemical additives in detergent and cleaning end uses
• Silica gels for edible oil and beer clarification
 
 
 
 
• Demand for improved quality and shelf life of beverages
• Precipitated silicas and zeolites for the surface coating, dentifrice, and dishwasher and laundry detergent applications
 
 
 
 
• Demand for improved oral hygiene and appearance
 
 
 
 
 
 
Highway Safety & Construction
19%
17%
16%
• Demand for enhanced "dry and wet" visibility of road and airport markings to improve safety
• Reflective markings for roadways and airports
 
 
 
 
• Drive for weight reduction in cements
• Hollow glass beads, or microspheres, for cement additives
 
 
 
 
 
 
Packaging & Engineered Plastics
17%
17%
17%
• Demand for increased process efficiency and reduction of by-products in production chemicals
• Catalysts for high-density polyethlene and chemicals syntheses
 
 
 
 
• Demand for high-density polyethlene lightweighting of automotive components
• Antiblocks for film packaging
 
 
 
 
• Enhanced properties in plastic composites for the automotive and electronics industries
• Solid and hollow microspheres for composite plastics
 
 
 
 
 
 
Industrial & Process Chemicals
20%
21%
21%
• Demand in the tire industry for reduced rolling resistance
• Silicate precursors for the tire industry
 
 
 
 
• Usage of silicate in municipal water treatment to inhibit corrosion in aging pipelines
• Glass beads, or microspheres, for metal finishing end uses
 
 
 
 
• Growth in manufacturing North America driving demand for metal finishing

 
 
 
 
 
 
Natural Resources
7%
8%
8%
• More environmentally friendly drilling fluids for oil and gas production
• Silicates for drilling muds
 
 
 
 
• Recovery in global oil drilling/U.S. copper production
• Sulfuric acid for mining
 
 
 
 
• Growing demand for lighter weight cements in oil and natural gas wells
• Microspheres for oil well cements
 
 
 
 
 
• Silicates and alum for water treatment mining
 
 
 
 
 
• Bleaching aids for paper

4


 
(1)
Percentage calculations include $156.7 million, $143.8 million and $131.3 million of total sales attributable to our Zeolyst Joint Venture, which represents 50% of its total sales for each of the years ended December 31, 2018, 2017 and 2016, respectively. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Basis of Presentation” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.
(2)
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.

Our Competitive Strengths

Favorable Secular Growth Trends 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 2018, a majority of our 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. We believe that our products incorporate environmental and safety innovative solutions to address evolving customer demands, examples of which include the following:
Light- and heavy-duty diesel engines are subject to a broad set of regulatory requirements, and are expected to be subject to increasingly stricter standards. Countries typically adopt a set of standards that limit the amount of nitrogen oxides, carbon dioxide, and other emissions allowed for diesel engines. The US Environmental Protection Agency and European Union have led other nations in terms of standards that limit the amount of nitrogen oxides, carbon dioxide and other emissions for diesel engines. Current truck standards, Europe VI, have largely been in place since 2010 for North America and since 2014 for Europe. Other emerging regions are expected to implement similar standards over the next two years. Specifically, China announced that it is moving to China VI (equivalent to Euro VI) starting in 2020. India has also announced a similar plan starting in 2020. We believe that compliance with existing regulations as well as any future regulations will offer global opportunities for our zeolite catalyst product group to support our customers in meeting these standards through our sales of emission control catalysts.
Given stringent 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.
Increased use of plastics as a substitute for heavier and less versatile materials such as glass and metal is driving increased global demand for polyethylene capacity expansions and production. In particular, these expansions are shifting towards silica-based technology, which we believe will drive growth for our silica catalysts product group.
We believe that additional demand and higher standards for retroreflectivity (or visibility) for roadway and aviation markings will continue to benefit our materials product group. We benefit from increased use and density per mile of road markings that include our products, such as some states and municipalities instituting wider highway striping lines. Further, we anticipate a benefit from recent innovations, including our ThermoDrop® product, which simplifies the road striping operations for our customers by using a new durable thermal plastic road marking material and 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 through our Performance Chemicals group. 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. For example, precipitated silicas are displacing carbon black in tires, and solid and hollow microspheres are displacing plastic volumes in lightweighting applications. 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.

5



Leading Supply Positions in Key Product Groups
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 2018 for products that generated more than 90% of our 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. 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. We produce value-added products that we believe are critical to the performance characteristics of our customers’ products.
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 operate in North America and hold an estimated number one supply share position in the United States in sulfuric acid regeneration based on 2018 sales volume with an estimated supply share of greater than 50%. We are a leading supplier of refinery hydrocracking finished and support catalysts used to remove sulfur, and emission control catalysts used in the heavy- and light-duty diesel industries to reduce nitrogen oxide emissions. We are also a global supplier of silica catalysts and supports for polyethylene manufacturers and the exclusive supplier of methyl methacrylate (“MMA”) catalysts used in the patented Alpha process practiced by the global MMA leader.
In our Performance Chemicals and Materials business, where we are a leading supplier in the United States, Europe and Latin America, we largely support customers with regional and local production due to costs of shipping. For the chemicals product group, we estimate that we had approximately three times the sodium silicate supply share of our nearest competitor based on 2018 sales volume.

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.
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 high-density polyethylene (“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.

Long-Term, High-Quality Customer Relationship
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 2018 sales, that average more than 50 years. In addition, our customer base is diversified, with our top ten customers in 2018 representing approximately 23% of our sales for the year ended December 31, 2018 and no customer representing more than 4% of our 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 or shifts in customer demand and contracts.


6


Pass-through of Raw Material Costs and Long Term Customer Arrangements
We have 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, 2018, approximately 40% of our Performance Chemicals sales (mostly comprised of sodium silicate sales) were derived from contracts that included raw material pass-through clauses. Most of our refining services contracts feature minimum volume protection and/or quarterly price adjustments for items such as commodity inputs, labor, the Chemical Engineering Plant Cost Index or natural gas. In 2018, approximately 80% of our refining services product group sales were sold under contracts that included some form of raw material pass-through clause. These price adjustments generally reflect our refining services actual cost structure in producing sulfuric acid, and tend to provide us with some protection against volatility in labor, fixed costs and raw material pricing. Freight expenses are generally passed through directly to customers.
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.
Within our Environmental Catalysts and Services business, we partner with customers under long-term contract agreements, mutually exclusive product supply arrangements and/or specified products for certain license production processes. In our refining services product group, approximately 70% of our production capacity serves customers with five to ten year take or pay contracts for our regeneration product line. Excluding contracts with automatic evergreen provisions, approximately 60% of our sulfuric acid volume for the year ended December 31, 2018 was under contracts expiring at the end of 2020 or beyond.
In our silica catalysts product group, we supply under various term agreements ranging from 1 to 10 years for each of polyolefin catalysts, silica supports and support catalysts, and are a mutually exclusive supplier of methyl methacrylate catalyst to a leading global producer. In our zeolite catalysts product group, we operate with a mix of evergreen and various term contracts ranging from 1 to 3 years to supply catalysts and zeolite powders for the refining, petrochemical and chemical industries and nitrogen oxide control catalysts for diesel transportation industries. Within the Performance Chemicals and Materials business, our performance chemical product group operates under customer supply contracts ranging from 1 to 5 years. Our performance materials product group typically operates under customer supply contracts that typically last one year.

Stable Margins and Cash Flow Generation Across Macroeconomic Cycles
We have demonstrated the ability to maintain stable margins while continuing to grow our business in different macroeconomic environments. 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.
Our cash flow generation has been driven, in part, by our disciplined capital investment and tax attributes that may also provide cash flow benefits in the future. As of December 31, 2018, we had $284.2 million of net operating losses for U.S. federal income tax purposes, along with related net operating losses for state tax purposes, and $344.2 million of tax deductible intangibles and goodwill, both of which may provide us with additional cash tax savings in future years in which we generate taxable income.

Experienced Management Team
Our senior management team has substantial industry experience and a proven track record. 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 reduction 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.

7



Our Business Segments
We are an integrated, global provider of specialty catalysts, 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 two centuries of combined experience 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.
We conduct operations through two reporting segments: (1) Environmental Catalysts and Services, and (2) Performance Materials and Chemicals. In our Environmental Catalysts and Services segment, we have three product groups: silica catalysts, zeolite catalysts, and refining services. We operate our zeolite catalyst product group through Zeolyst International and Zeolyst C.V. (our 50% owned joint venture with CRI Zeolites, an affiliate of Royal Dutch Shell plc. that we refer to collectively as our “Zeolyst Joint Venture”). In our Performance Materials and Chemicals segment, we have two product groups: performance materials and performance chemicals.
The table below summarizes certain information regarding our two reporting segments and our five product groups for the year ended December 31, 2018.
 
 
Year ended December 31, 2018
Segments and Product Groups
 
Sales
 
% of Total Sales
 
Zeolyst Joint Venture Sales(1)
 
% of Total Sales and Zeolyst Joint Venture Sales(1)(2)
 
Net Income
 
Adjusted EBITDA(1)
 
% of Total Adjusted EBITDA(1)(3)
 
 
(in millions, except percentages)
Environmental Catalysts & Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Silica Catalysts
 
$
72.1

 
4.5
 %
 
$

 
4.1
 %
 
 
 
 
 
 
Zeolite Catalyst
 

 
 %
 
156.7

 
8.9
 %
 
 
 
 
 
 
Refining Services
 
455.6

 
28.3
 %
 

 
25.8
 %
 
 
 
 
 
 
Subtotal
 
$
527.7

 
32.8
 %
 
$
156.7

 
38.7
 %
 
 
 
$
257.6

 
51.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Materials & Chemicals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Chemicals
 
$
717.3

 
44.6
 %
 
$

 
40.6
 %
 
 
 
 
 
 
Performance Materials
 
378.3

 
23.5
 %
 

 
21.4
 %
 
 
 
 
 
 
Sales Eliminations
 
(11.8
)
 
(0.7
)%
 

 
(0.7
)%
 
 
 
 
 
 
Subtotal
 
$
1,083.8

 
67.4
 %
 
$

 
61.3
 %
 
 
 
$
243.4

 
48.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eliminations/Corporate
 
(3.3
)
 
(0.2
)%
 

 
 
 
 
 
(37.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
1,608.2

 
100.0
 %
 
$
156.7

 
100.0
 %
 
$
58.3

 
$
464.0

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Percentage calculations include $156.7 million of total sales attributable to our Zeolyst Joint Venture, which represents 50% of its total sales for the year ended December 31, 2018. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Basis of Presentation” for a description of the treatment of our Zeolyst Joint Venture in our consolidated financial information.
(2)
Percentage calculations exclude $3.3 million in intersegment sales eliminations.
(3)
Percentage calculations exclude $37.0 million in corporate expenses.


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Environmental Catalysts & 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 critical for our customers in these growing applications and impart essential functionality in chemical and refining production processes and in emission 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.
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 HDPE, a high strength and high stiffness plastic used in packaging films, bottles, 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. Because these catalysts are highly technical and customized for our customers to produce resins with specific properties, they are often covered under long-term supply agreements and, in some cases, we are a customer’s sole source supplier. In addition, we produce silica products that are used to prevent opposite faces of polyolefin and polyester films from adhering to one another during manufacturing or otherwise.
Zeolite Catalysts. Our zeolite catalysts product group is a leading global supplier of emission control catalysts as well as a supplier of specialty catalysts, precursors, and formulations to refineries and downstream petrochemicals and chemical companies. We operate this product group through our 50% share in our Zeolyst Joint Venture. These specialty zeolite-based catalysts are sold to the emission 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 to the hydrocracking catalyst industry as a direct seller and supplier to other catalyst suppliers.
 
Many of our zeolite powders are used in an advanced emission control technology called selective catalytic reduction. This process uses ammonia to react with engine exhaust gases via our catalysts in order to convert nitrogen oxides (NOx), a pollutant, into nitrogen and water. We believe that our zeolite catalysts can enable selective catalytic reduction technology to reduce the amount of nitrogen oxides in such exhaust gases by more than 90%. We believe that this technology is one of the most cost-effective methods to reduce diesel engine emissions. Emission control regulations have created demand for this technology, and we believe that future regulations will generate additional growth and development opportunities for this technology and, as a result, our zeolite catalysts and precursors.
Refining Services. In 2018, we estimate that our refining services product group 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.
Sulfuric acid is the primary catalyst used in the production of alkylates for gasoline production at refineries. Alkylate is a critical gasoline additive that increases octane and lowers vapor pressure. Alkylate is also a major component of premium gasoline which is needed in order for turbocharged engines to meet increasingly stringent fuel efficiency standards. 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.  
After sulfuric acid is used in an alkylation unit, it becomes spent acid, which is diluted with water and hydrocarbons, and then needs to be recycled before it can be reused. Sulfuric acid regeneration enables refineries to manage their spent acid and obtain fresh acid for reuse in their alkylation processes. Because storage space for fresh and spent acid is typically limited, and the cost to refineries of interruption to their alkylation units would be significant, refineries seek to have a continuous and reliable source of supply for sulfuric acid. By providing regeneration services, as well as purchasing by-product sulfur from customers as a source of energy and for use in manufacturing virgin sulfuric acid, we believe that we provide our refining customers with a full solution for their sulfuric acid needs.
Sulfuric acid is created either through the burning of sulfur in furnaces, or as a by-product of other industrial processes, primarily the smelting of copper and other base metals. We produce a range of high quality virgin sulfuric acid products by burning sulfur in our plants for supply to a diverse set of end uses. Sulfur-burned acid is generally considered to be of higher purity and quality than smelter-produced acid and, as a result, smelter-produced acid is not suitable for some industrial users including several of our larger customers who require higher quality and differentiated sulfuric acid products, such as super-saturated sulfuric acid (oleum) and other high purity specialty acids. Virgin sulfuric acid and regenerated sulfuric acid are

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manufactured in our regeneration plants using the same production equipment and, in addition, we have one facility in Houston, Texas that produces only virgin sulfuric acid from sulfur.
Competition
Our silica catalysts and zeolite catalysts products groups are leading global catalyst platforms that primarily produce catalysts and services for customers in the petrochemicals and refining industries. In these areas 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, and we typically compete on the basis of performance, product consistency, reliability, and responsiveness to changes in customer demand.
Our refining services product group is highly regionalized due to shipping costs and our customer integration requirements. Our network of facilities is concentrated in the major areas of growth in sulfuric acid demand in the United States. Approximately 60% of United States refining capacity is located in the Gulf Coast region and California and our plant locations in these key refining regions enables us to maintain highly efficient supply chain networks with our customers, including in some cases captive pipelines connecting us to our refinery customers. In addition product can be shipped by barge, rail and truck. We compete in the North American refining services industry with competitors such as Chemtrade and Veolia and we compete on the basis of price, reliability, and responsiveness to changes in customer demand, which is a function of scale, proximity to customer locations and operational expertise. We believe that we benefit from industry 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 and new plants can involve more challenges in obtaining the necessary local, regional and state permits. In addition, existing supply chains, including captive pipeline connections and other transportation logistics add to the competitive advantages available to incumbent producers. As a result, we believe that our integrated and strategically located network of facilities and end-to-end logistics assets in the United States provide us with a significant competitive advantage and would be costly for our competitors to replicate.
Manufacturing
We manufacture our zeolyst-based catalyst products using sodium silicate liquids purchased directly from our performance chemicals product group to make specialty zeolite products. These zeolites are either used directly to produce catalysts or are sold as a precursor to other catalyst manufacturers.

Catalyst Manufacturing Platform

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We produce regenerated sulfuric acid and virgin sulfuric acid through our furnace operations. Regenerated sulfuric acid is produced by breaking down the spent acid in our furnace into the usable components of sulfuric acid and water. Virgin sulfuric acid is produced by burning sulfur and certain sulfur-rich components at high temperatures within a furnace. The chart below summarizes the manufacturing platform for our refining services product group.

Refining Services Manufacturing Platform

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Performance Materials & 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, except China, serving diverse and growing end uses such as personal and industrial cleaning products, highway beads, 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. 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. We believe 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 products are also 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 matting agents in 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 end uses, 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 performance chemicals product group, which is the backbone of our additives and catalyst platform, is highly regionalized because of the expense of shipping sodium silicates extended distances due to their water content. As a result, our network of regional silicate plants is strategically located to support the customers that we serve. In addition, we maintain

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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, excluding China, and we estimate that we have three times the sodium silicates supply share as our nearest competitor based on 2018 sales volume. Key end uses for our performance chemicals products include catalyst precursors, food and beverage, personal care, cleaning products, coatings, tires, soil stabilization and paper de-inking.
Silicates. Silicates and their family of derivatives, such as silicas, have functional attributes that are used as additives and ingredients to enhance product performance as binders, fillers, flow control agents, and carriers in our customers’ products. Our silicates are used in a diverse range of applications. In detergents and cleaning products, silicates provide corrosion inhibition, alkalinity, emulsification, and deflocculation. In construction materials such as roofing granules, cement, ceramics, adhesives, and coatings, our products are used as a binding agent. In addition, our products are ingredients in consumer products, including 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. Silicates and silicate derivatives are recognized on the Safer Chemicals Ingredients List of the EPA’s Safer Choice program, which we believe positively impacts our ability to compete in consumer product applications.
Silicate Derivatives. Silica derivatives include specialty silicas, zeolite products, spray dry silicates, magnesium silicate, and other specialty chemicals. Silica derivatives are used in personal care products as a binder in pharmaceutical products, and as a source of alkaline in cleaning products, such as industrial cleaners. In addition, our silica derivatives are used in natural resources applications such as in drilling fluids as a lubricant binder. Some of our silicas and zeolites are used by our Environmental Catalysts and Services business to produce catalysts and catalyst precursors. We believe that this internal source of supply is a competitive advantage both for our performance chemicals product group, which can take advantage of opportunities to maximize the use of our sodium silicates production capacity and for our silica catalysts and zeolite catalysts product groups, which are able to access a consistent quality source of precursors.
Silica Gels. Silica gels are used as drying agents or adsorbents and desiccants for food and industrial products. For example, silica gels are used in the brewing industry to remove certain compounds that cause chilled beer to look cloudy, and are used as clarification agents for wines and fruit juices, and as an adsorbent of free fatty acid and other contaminants in the refining of cooking oils. In personal care, silica gels are used as carriers for vitamins and pharmaceuticals, and as a flow conditioner and an oil absorption agent in face powders. In industrial and engineered plastics, silica gels are used for gloss control in coil, wood, general industrial, leather and other high-performance surface coatings applications. In addition, highly-porous specialty silica gels are used in ink-receptive coatings for inkjet media. Some recently developed silica-based products are designed for ultraviolet-cured coatings and other low solvent formulations that offer more environmentally friendly characteristics. Silica gels are also used to create coatings that have significant capacity to absorb ink in order to allow for quick setting of colorants and faster ink dry times, which can improve color density and reduce ink bleed.
Precipitated Silicas. Precipitated silicas represent the largest volume of specialty silica products based on 2018 sales volume, but are also concentrated among a limited number of suppliers. Precipitated silica applications include filler in rubber for green tire applications and gel dentifrice formulations used in toothpaste as an abrasive or thickener. Precipitated silicas are an alternative to calcium carbonates because of their compatibility with different fluorides and their softness. In addition, precipitated silicas are used as functional filler in polyethylene membranes for lead-acid batteries, which are used in most automobiles. In agricultural end uses, precipitated silicas are used as carriers for liquid ingredients in dry animal feeds and as a flow aid and dispersant in insecticide formulations for crop care. We continue to collaborate with our customers to innovate in this industry. For example, we recently worked with certain customers to deliver enhanced products for whitening applications that offer improved cleaning performance with low abrasion.
Zeolites. We produce zeolites by combining sodium silicate with aluminum trihydrate and other materials. These products are used as builders in detergents. We also use these products to serve newer applications such as stabilizers in the production of polyvinylchloride, a titanium dioxide replacement for paints and coatings, and coatings applications for food grade paper.
Other Specialty Silicates. Other specialty silicates that we produce are used for a variety of industrial, personal care, and cleaning products. End uses include refractory, cleaning products, oil processing, hair bleach, fire retardants, water treatment, and adhesives. Our specialty silicate products are also used in drilling fluids for oil and gas wells to maintain drill hole integrity.

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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 in 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.
In the highway safety applications, our microspheres are used with a variety of binders, such as water- and solvent-borne paint, epoxy coatings, and thermoplastics. Our microspheres are mixed in with, and/or dropped onto, these binders as pavement markings are being applied. These microspheres remain partly exposed after the markings dry and provide retroreflectivity that increases the visibility of the road markings at night and during inclement weather. We sell these microspheres primarily to federal and state government agencies, municipalities, highway contractors, binder manufacturers and airport agencies. Demand for our performance materials products has grown as a result of increased spending for maintenance and upgrading of existing roads and the construction of new roads around the world. Demand for our highway safety products is principally driven by replacement demand and new road construction and, as such, demand for these products has grown through economic cycles without exhibiting as pronounced cyclicality as other end uses. Highway safety budgets in the United States are typically funded by taxes on gasoline and are not typically tied to economic cycles or to the state and local government budgeting process. The United States federal government has taken an active role in implementing regulations and initiating infrastructure development in an effort to improve highway safety. In addition, the continuing need to maintain and upgrade an aging United States highway infrastructure has translated into relatively consistent government expenditure in this area. 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 sell highly specialized solid and hollow microspheres and metal coated particles for a variety of uses such as plastic additives, conductive applications, metal finishing, and other industrial and consumer applications. For metal finishing, our performance materials are propelled from blasting equipment to clean, peen, debur, and finish metal in industrial and process chemical end uses. Our performance material products offer the ability to design lighter parts while maintaining strength and reliability. Our performance materials are often a preferred substitute for other media such as industrial sand, aluminum oxide, iron and steel because they do not damage parts and they allow for better process control, limit surface contamination, and can be more environmentally friendly.
Other applications for our microspheres include additives into paints and coatings for thermal insulation, to reduce weight and ingredients in cosmetics to improve feel attributes and improve flow functionality. Our microspheres are also used in drilling fluids to provide lubrication and strength. Within the natural resources industry, our performance materials are used in oil-drilling muds to improve lubricity and reduce friction in horizontal drilling. In addition, our hollow microspheres are used as sensitizers for water-based industrial explosives in mining, quarrying, and construction. Sensitizers are also used in explosives to increase the energy of a detonation.
Competition
In our Performance Materials and Chemicals business, we primarily compete with other global producers such as OxyChem, Grace and Evonik. We believe that our industry leadership position, scale, and industry presence provides us with a competitive advantage over competitors who compete only in particular end uses. We believe that it would be costly and difficult for a new entrant or existing competitor to replicate our breadth or economies of scale in the production of microspheres.
We believe that we are the only global silicates producer with operations in North America, Europe, South America and Australia, and we believe that we have technical and cost 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. We compete primarily on a regional basis due to the costs associated with shipping sodium silicates, and we estimate that we had approximately three times the sodium silicate supply share of our nearest competitor based on 2018 sales volume. Our network of regional silicate plants is strategically located to support the industries that we serve. In addition, we maintain a few larger dedicated facilities to service our derivative products. We believe 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. In the industry

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served by our Performance Materials and Chemicals business, we compete primarily on the basis of performance, product consistency, quality, reliability, and ability to innovate in response to customer demands. Our competitors are primarily regional suppliers.
Manufacturing
Performance chemicals are produced through an integrated supply chain beginning with regional and large scale upstream production of sodium silicates and downstream derivatives. Sodium silicates are produced regionally because of the expense of shipping sodium silicates extended distances due to their water content. Our sodium silicates are produced by fusing industrial sand and soda ash in our proprietary furnace operations. We dissolve the molten silicate from the furnace into water and sell these products in liquid form. Downstream derivatives are produced through a variety of chemical operations that create aqueous, solid, and gel forms for our products.
For the year ended December 31, 2018, approximately 40% of our North American silicate sales, which represented a significant portion of our performance chemicals product group sales, were derived from contracts that included raw material cost pass-through clauses. Under these contracts, there is usually a time lag of between three and nine months for cost changes to pass-through, depending on the magnitude of the change, industry dynamics and the terms of the particular contract.

Performance Chemicals Manufacturing Platform

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We produce our highway safety products and other microspheres by crushing raw materials, such as recycled glass or cullet, and then feeding these raw materials into a furnace. The product is coated or treated in other ways to meet particular customer and end use specifications. The beads are then bagged and stocked for shipment. The flowchart below outlines our performance materials’ production process.

Performance Materials Manufacturing Platform

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Raw Materials
We estimate that our raw materials costs represent approximately 40% of total cost of goods sold in the year ended December 31, 2018. 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.
We are able to negotiate our supply agreements for our key raw materials based on our leading industry position and global scale in an effort to achieve competitive pricing. We also maintain a raw material quality audit and qualification program designed to ensure that the material we purchase satisfies stringent quality requirements. Key raw materials for our product groups include:
Key Raw Materials
 
Product Group
 
 
 
Soda Ash
 
Performance Chemicals, Refining Services, Performance Materials
Sodium hydroxide ("caustic soda")
 
Performance Chemicals, Refining Services
Cullet
 
Performance Materials
Sulfur
 
Refining Services
Industrial sand
 
Performance Chemicals, Performance Materials
Aluminum trihydrate
 
Performance Chemicals, Refining Services
While natural gas is not a direct feedstock for any individual product, we use natural gas powered furnaces to heat raw materials and create the chemical reactions necessary to manufacture our products. We maintain multiple suppliers

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wherever possible and we seek to hedge our exposure to fluctuations in prices for natural gas through hedging activity in the United States, forward purchases of natural gas in the United States, Canada, and Europe, and the use of pass-through clauses for raw material and natural gas costs in our customer contracts. However, we may not be successful in passing through all increases in raw material costs or maintaining an uninterrupted supply of natural gas for all of our furnaces. See “Risk Factors-Risks Related to Our Business - 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”.
Joint Ventures
We have entered into several long-standing joint ventures to supplement our businesses and access other geographic locations, minimize costs and accelerate growth in areas we believe have significant business potential, with the most significant of these joint ventures including the following:
Zeolyst Joint Venture. Our Zeolyst Joint Venture is a long-standing partnership with CRI Zeolites Inc., which is an affiliate of Royal Dutch Shell, that dates back to 1988 and is focused on the development, manufacture and sale of zeolite-containing catalysts through manufacturing facilities located in Kansas and the Netherlands. We combine our expertise in zeolite supply and technology with our partner’s expertise in global refinery catalyst sales and technology. We have a 50% ownership stake in our Zeolyst Joint Venture. We supply sodium silicates from our performance chemicals product group to the Zeolyst Joint Venture to make specialty zeolites, which are used as precursors in emission control and custom catalysts. We also produce specialty zeolites that are precursors for the production of hydrocracking catalysts and other refinery and petrochemical catalysts that are used by our other product groups and sold to third parties. We manage the production of these specialty zeolites due to our expertise in zeolite production. These catalysts include 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.
PQ Holdings Mexicana S.A. de C.V. PQ Holdings Mexicana was established in 2000 as a joint venture with Solvay Alkalis, Inc. for the manufacture, marketing and sale of various chemicals, including sodium silicate, through manufacturing facilities in Tlalnepantla and Guadalajara, Mexico. We have an 80% ownership stake in PQ Holdings Mexicana.
Research and Development
We benefit from the highly-skilled technical capabilities of our employees dedicated to new product development. We operate six research and development facilities in the United States, Canada, the United Kingdom, the Netherlands, France and Spain. Our research and development activities are directed toward the development of new and improved products, processes, systems and applications for customers. Our research and development team is organized to support each of our operating businesses and staffed with experienced scientists, technical service representatives and process engineers with direct knowledge of our products. This business group and customer-oriented team structure provides strong links between our product development and manufacturing functions and our customer collaboration and specifications. These connections enable us to focus our development on timely and relevant products for our customers while remaining attentive to manufacturing considerations to enable us to produce new products profitably and in a timely manner. Product development activities are organized into research and development projects that are subject to regular reviews by the business teams in order to understand and address our customers’ evolving needs and invest in our growth by prioritizing innovation driven by these identified needs. In addition, we hold 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.
Intellectual Property
We evaluate on a case-by-case basis how best to use patents, trademarks, copyrights, trade secrets and other available intellectual property protections in order to protect our products and our critical investments in research and development, manufacturing and marketing. We focus on securing and maintaining patents for certain inventions such as composition-of-matter, while maintaining other inventions such as process improvements as trade secrets, derived from our market-based business model, in an effort to maximize the value of our product portfolio and manufacturing capabilities and reinforce our competitive advantage. Our policy is to seek appropriate intellectual property protection for significant product and process developments in the major areas where the relevant products are manufactured or sold. Patents may cover products, processes, intermediate products and product uses. Patents extend for varying periods in accordance with the date of patent application filing and the legal life of patents in the various countries in which the patents are registered. The protection

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afforded, which may also vary from country to country, depends upon the type of subject matter covered by the patent and the scope of the claims of the patent.
In most industrial countries, patent protection may be available for new substances and formulations, as well as for unique applications and production processes. However, given the geographical scope of our business and our continued growth strategy, there are regions of the world in which we do business or may do business in the future where intellectual property protection may be limited and difficult to enforce. Moreover, we monitor our competitors’ products and, if circumstances were to dictate that we do so, we would vigorously challenge the actions of others that conflict with our patents, trademarks and other intellectual property rights. We maintain appropriate information security policies and procedures reasonably designed to ensure the safeguarding of confidential information including, where appropriate, data encryption, access controls and employee awareness training.
We own or have rights to a number of patents relating to our products and processes. As of December 31, 2018, we owned 52 patented inventions in the United States, with approximately 309 patents issued in countries around the world and approximately 120 patent applications pending worldwide covering more than 20 additional inventions. As of December 31, 2018, we also had trademark rights in approximately 613 trademark registrations worldwide, including approximately 77 U.S. trademark registrations. We also have approximately 37 pending trademark applications, which include applications in the United States and worldwide. In addition to our registered and applied-for intellectual property portfolio, we also claim ownership of certain trade secrets and proprietary know-how developed by and used in our business. Including our joint ventures, we are party to certain arrangements whereby we license in the right to use certain intellectual property rights in connection with our business.
Seasonality
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 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.
Employees
As of December 31, 2018, we had 3,188 employees worldwide, of which 1,455 were employed in the United States, 503 were employed in Canada, Mexico, Brazil and Argentina, 888 were employed throughout Europe, 38 were employed in South Africa and 99 were employed in Indonesia. Our remaining employees are dispersed throughout Asia and Australia, primarily in Australia, China, Thailand and Japan. As of December 31, 2018, approximately 50% of our employees were represented by a union, works council or other employee representative body. We believe we have good relationships with our employees and their respective works councils, unions or other bargaining representatives. There have been no labor strikes or work stoppages in these locations in recent history.
Environmental Regulations
Obtaining, producing and distributing many of our products involve the use, storage, transportation and disposal of toxic and hazardous materials. We are subject to extensive, evolving and increasingly stringent national and local environmental laws and regulations, which address, among other things, the following:
emissions to the air;
discharges to soils and surface and subsurface waters;
other releases into the environment;
prevention, remediation or abatement of releases of hazardous materials into the indoor or outdoor environment;
generation, handling, storage, transportation, treatment and disposal of waste materials;
maintenance of safe conditions in the workplace;

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registration and evaluation of chemicals;
production, handling, labeling or use of chemicals used or produced by us; and
stewardship of products after manufacture.
We apply the principles of the Environmental Management standard of the International Organization for Standardization (ISO 14001) at our facilities throughout the world. For chemical facilities in the United States, we also adhere to the Responsible Care RC14001 Technical Specifications of the American Chemistry Council.
We maintain policies and procedures to monitor and control environmental, health and safety risks, and to monitor compliance with applicable state, national, and international environmental, health and safety requirements. We have a strong environmental, health and safety organization. We have a staff of professionals who are responsible for environmental health, safety and product regulatory compliance. We have implemented a corporate audit program for all of our facilities. However, we cannot provide assurance that we will at all times be in full compliance with all applicable environmental laws and regulations. We expect that stringent environmental regulations will continue to be imposed on us and our industry in general. Evolving chemical regulation programs throughout the world could impose testing requirements or restrictions on our chemical raw materials and products. These programs include the 2016 amendments to the U.S. Toxic Substances Control Act, under which the EPA will prioritize and evaluate chemicals for regulation, the E.U. REACH regulations, which have ongoing registration and evaluation requirements with associated testing costs and potential restrictions, the Korea REACH law, which is requiring registration and potentially testing of chemicals, and similar programs being developed in Taiwan, Turkey, India, and elsewhere. Based on our chemicals and the various regulations promulgated to date, we do not anticipate costly testing requirements or severe restrictions, but cannot guarantee that we will not be subject to requirements for our products or raw materials that could materially affect our operations.
Environmental Remediation. Environmental laws and regulations require mitigation or remediation of the effects of the disposal or release of chemical substances. Under some of these regulations, as the current or former owner or operator of a property, we could be held liable for the costs of removal or remediation of hazardous substances on or under the property, without regard to whether we knew of or caused the contamination, and regardless of whether the practices that resulted in the contamination were permitted at the time they occurred. Many of our current or former production sites have an extended history of industrial use, and it is impossible to predict precisely what effect these laws and regulations will have on us in the future. Soil and groundwater contamination requiring investigation and remediation has been discovered at some of the sites, and might occur or be discovered at other sites. Several active and former facilities currently are undergoing investigation and remediation, including sites in Rahway, NJ; Dominguez, CA; Martinez, CA; and Tacoma, WA.
Environmental Programs. We have comprehensive environmental, health and safety compliance, auditing and management programs in place to assist in our compliance with applicable regulatory requirements and with internal policies and procedures, as appropriate. Each facility has developed and implemented specific critical occupational health, safety, environmental, security and loss control programs.
We also have implemented a Health, Safety and Environmental (“HSE”) organizational structure with executive committee level leadership and dedicated environmental experts. We have Regional HSE Specialists and Managers who are embedded in the field and provide HSE expertise and support to operating sites. Certain, larger sites may have dedicated environmental or safety personnel. We have an established Product Safety/Stewardship management system compliant with the RC14001 technical specification along with two Product Stewardship Managers, one of which is a REACH Specialist. We conduct Product Stewardship reviews as part of new product development and routinely evaluate product safety risk for raw materials, intermediates and products.
 
Chemical Product Regulation
As a chemical company, we are subject to extensive and evolving regulations regarding the manufacture, processing, distribution, import, export, and labeling of our products and their raw materials. In the European Union, the REACH regulations initially went into effect in 2007, with implementation rolling out over time. REACH requires the registration of chemicals, along with a dossier of toxicological and ecotoxicity test results, or a plan to conduct such tests if they are currently unavailable. Registered chemicals then can be subject to further evaluation and potential restrictions. Our high-volume chemicals have been registered under REACH; up to 15 lower-volume chemicals (mainly catalysts) will be registered by the applicable 2018 deadline. To date, no testing has been required. A couple of our chemicals are being reviewed under REACH. Since the promulgation of REACH, other countries (e.g., China, Korea, Taiwan) have enacted and are in the

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process of implementing similar comprehensive regulation of chemicals. In the United States, legislation has been enacted that would require the EPA to review and require testing of certain chemicals. Based on our chemicals and the various regulations promulgated to date, we do not anticipate costly testing requirements or severe restrictions, but cannot guarantee that we will not be subject to requirements for our products or raw materials that could materially affect our operations. In particular, some of our products might be characterized as nanomaterials and then subjected to evolving, new nanomaterial regulations.
Available Information
Our website address is www.pqcorp.com. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”), as well as reports on Forms 3, 4 and 5 filed pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The SEC maintains an internet website, http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding our Company and other issuers that file electronically with the SEC. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct and the charters of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Health, Safety and Environment Committee of our Board of Directors are also available on our website and are available in print to any shareholder upon request by writing to PQ Investor Relations, 300 Lindenwood Drive, Malvern, PA 19355. In accordance with SEC rules, we intend to disclose any amendment (other than any technical, administrative or other non-substantive) to the Code of Business Conduct, or any waiver of any provision thereof with respect to any of our executive officers, on our website within four business days following such amendment or waiver.

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ITEM 1A.
RISK FACTORS.
In addition to the other information contained in this Form 10-K, you should carefully consider the following risks that we believe are the material risks that we face. The risks described below could have a material adverse impact on our business, financial condition, cash flows and results of operations, and should be read together and in conjunction with the forward-looking statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Form 10-K, and our consolidated financial statements and the accompanying notes thereto.

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 December 31, 2018, we operated 71 manufacturing facilities across six continents. For the year ended December 31, 2018, our foreign subsidiaries accounted for 40% of our 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, including the threat of escalating trade disputes that may result in higher tariffs;
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, energy, 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, catalysts and services 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. 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. General economic conditions and macroeconomic trends, including economic recessions and inflation, 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, 2018, we generated 40% of our 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, British pound, Canadian dollar, 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-U.S. 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.
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 with these laws and regulations may restrict our operations, trade practices, investment decisions and partnering activities and may expose us to liabilities. Such laws and regulations apply to companies, individual directors, officers, employees and agents.
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

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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.
Significant developments stemming from the U.S. administration, U.S. courts’ or the United Kingdom’s referendum on membership in the European Union could have an adverse effect on us.
The U.S. administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), and has raised the possibility of imposing significant increases on tariffs on goods imported into the United States, particularly from China and Mexico. For example, throughout 2018, the U.S. administration and China have been levying taxes on their respective imports. These changes, as well as any other changes in U.S. social, political, regulatory and economic conditions or laws and policies governing foreign trade, manufacturing and development and investment in the territories and countries where we or our customers operate could adversely affect our operating results and our business.
Additionally, in June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union and in March 2017, the government of the United Kingdom formally initiated the withdrawal process. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may last for years. Our business could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the European Union, may adversely affect our customers’ businesses and our operating results.
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, the ongoing shift in customer preferences in the detergent industry from powders to liquid has resulted in lower demand for 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.
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.

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Our substantial level of indebtedness could adversely affect our financial condition.
We have substantial indebtedness, which, as of December 31, 2018, totaled approximately $2,148.4 million. 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 investments, 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 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 purchases. 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.

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In addition, we have attempted to mitigate our exposure to the significant price volatility of natural gas 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. 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 products that compete with 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 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 could 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, 2018 our top 10 customers represented approximately 23% of our sales and no single customer represented more than 4% of our sales.
Refineries, which represent a sizable 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

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automatic evergreen provisions, approximately 60% of our sulfuric acid volume for the year ended December 31, 2018 was under contracts expiring at the end of 2020 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 15% of our sales for the year ended December 31, 2018 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 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 growth projects may result in significant expenditures before generating revenues, if any, which may materially and adversely affect our ability to implement our business strategy.
We 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 and 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

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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 and provisions, 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 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 occurs, 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 emission 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 affect 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.

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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, we 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 own or operate 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 December 31, 2018, 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 December 31, 2018, we had established reserves of approximately $3.4 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 December 31, 2018, our total reserves associated with environmental remediation and enforcement matters were $4.7 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 knew of, or caused, the release of such contaminants. 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.

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

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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. For example, in August 2017 we shut down our Houston and Baytown refining services facilities in coordination with our refinery partners in anticipation of Hurricane Harvey. The operational interruption at these facilities negatively impacted our sales in 2017 by approximately $7.7 million.
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;
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, which 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.

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The pro forma and non-GAAP financial information included in this Form 10-K 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 Form 10-K 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 Form 10-K 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.
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 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 December 31, 2018, we owned 52 patented inventions in the United States, with approximately 309 patents issued in countries around the world and approximately 120 patent applications pending worldwide covering more than 20 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,

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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.
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,

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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, cyber or terrorist attacks, viruses, malware, physical or electronic break-ins and fires. Despite various disaster recovery plans, there can be no assurance that our systems are appropriately redundant even though we 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, these measures may not 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, 2018, we had 3,188 employees globally, approximately 50% of which were represented by a union, works council or other employee representative body. As of December 31, 2018, approximately 70% of our U.S. unionized employees were covered under collective bargaining agreements that will expire on or before December 31, 2019. 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 benefit 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

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or contractor exposure to asbestos contained in certain building materials at our sites. Furthermore, our 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.
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 “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.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.
LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. Our senior secured term loan facility and asset-based revolving credit facility use LIBOR as a reference rate such that the interest due to our creditors under those facilities is calculated using LIBOR. As of December 31, 2018, we had outstanding approximately $1,157.5 million of debt that was indexed to LIBOR.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phaseout could cause LIBOR to perform differently than in the past or cease to exist. If LIBOR ceases to exist, we may need to renegotiate our credit agreements that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
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.

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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 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, 2018, we had $284.2 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, $144.4 million of these net operating losses are currently subject to limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), potentially impacting our ability to realize the benefits of these net operating losses.
Generally, if an ownership change occurs within three years of the closing date of the most recent change in control transaction, any existing net operating losses and certain built-in losses would be subject to an additional limitation pursuant to Section 382 of the Internal Revenue Code (“IRC”). Change in control as defined by Section 382 occurs when there is an ownership change among stockholders owning directly or indirectly 5% or more of our common stock and that results in an aggregate ownership change with respect to such stockholders of more than 50% of our common stock.
We have analyzed our transactional history and determined that the most recent change in control occurred in December of 2014. The Business Combination that occurred in May of 2016 did not result in a change in control as defined by Section 382, and as such, did not further limit the net operating losses available to us.
Our management believes that it is more likely than not that we will realize the entire $144.4 million of net operating losses subject to limitation in future years. The remaining $139.9 million relates to periods after the most recent change in control and would not be subject to Section 382 limitations.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA mandated significant changes to U.S. corporate taxation. Notable legislative changes include a reduction of the corporate tax rate from 35% to 21%, new additional limitations on the tax deductibility of interest, extensive changes to the regime governing the taxation of foreign earnings, immediate deductions for certain investments instead of deductions for depreciation expense over time, as well as modification or repeal of certain business deductions and credits. We are continuing to evaluate the overall impact of the TCJA, particularly as additional guidance is released by the U.S. Treasury and various tax jurisdictions. Any changes in tax laws or regulations could adversely affect our results of operations, cash flows and financial condition.
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, 2018 were approximately $287.5 million, or approximately $86.6 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.

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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.
Risks Related to our Common Stock
CCMP and INEOS continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
As of December 31, 2018, investment funds affiliated with CCMP beneficially owned approximately 45.7% of our outstanding common stock and INEOS beneficially owned approximately 22.3% of our outstanding common stock. 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.
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 launching our IPO in September 2017, the price of our common stock, as reported on the New York Stock Exchange, has ranged from a low of $12.88 on March 2, 2018 to a high of $18.69 on July 10, 2018. 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 herein 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;

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speculation in the press or investment community;
changes in accounting principles;
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 required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports, and we are required to disclose significant changes made in our internal controls and procedures on a quarterly basis. In addition, we are required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for the fiscal year ended December 31, 2018. This assessment includes disclosure of any material weakness identified by our management in our internal control over financial reporting.
If we identify a material weakness in our internal control over financial reporting, we may not be able to remediate the material weakness identified in a timely manner or maintain all of the controls necessary to remain in compliance with our reporting obligations. For example, we experienced a material weakness as a private company related to our control environment following the Business Combination, which was the result of the fact that Eco Services had insufficient resources and financial expertise to effectively carry out the accounting functions for its business. This material weakness was remediated as of March 31, 2017 and we have no newly identified material weaknesses as of December 31, 2018. If we are unable to 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, the market price of our common stock could be negatively affected, and we could become subject to investigations by the New York Stock Exchange, on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
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.
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 by our current stockholders, and these sales could cause the price of our common stock to fall.
As of December 31, 2018, there were 135,592,045 shares of our common stock outstanding. Approximately 45.7% and 22.3% of our outstanding common stock is held by affiliates of CCMP and by INEOS, respectively.
Sales of substantial amounts of our common stock in the public market, or the perception that such sales will occur, 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.

36


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. 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, we have registered shares of our common stock that are reserved for issuance under our 2016 Stock Incentive Plan and 2017 Omnibus Incentive Plan.
Provisions in our charter documents and Delaware law may deter takeover efforts that may 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 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 imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock other than INEOS and 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.
Our certificate of incorporation designates 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 provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware is 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 provides 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.
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.
Our certificate of incorporation contains 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, are not required to offer us any corporate opportunity of which they become

37


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, 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 may not 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.
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. 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.
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.

38


ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
Our operating headquarters are located in Malvern, Pennsylvania. As of December 31, 2018, we had 71 manufacturing facilities in 19 countries on six continents. We also had 14 administrative facilities and six research and development facilities located in 13 countries. Our joint ventures operated out of seven facilities located in six countries, including six manufacturing facilities. We also own or lease other properties, including office buildings, warehouses, testing facilities and sales offices.
The table below presents summary information regarding our principal facilities as of December 31, 2018.
Location
 
Approximate
Square Feet
 
Owned or 
leased
 
PM&C
 
EC&S
 
Principal Use or Key End Uses Served
Administrative facilities:
 
 
 
 
 
 
 
 
 
 
Amersfoort, Netherlands
 
4,176

 
Leased
 
X
 
 
 
Administrative
Lenexa, Kansas, United States
 
14,489

 
Leased
 
X
 
X
 
Administrative
Malvern, Pennsylvania, United States
 
33,000

 
Leased
 
X
 
X
 
Administrative
Research and development facilities:
 
 

 
 
 
 
 
 
 
 
Toronto, Canada
 
1,300

 
Leased
 
X
 
 
 
Research and Development
St. Pourcain-sur-Sioule, France
 
30,916

 
Owned
 
X
 
 
 
Research and Development; Highway Safety & Construction
Eijsden, Netherlands
 
4,306

 
Owned
 
X
 
 
 
Research and Development
Warrington, United Kingdom
 
14,155

 
Owned
 
X
 
X
 
Research and Development
Conshohocken, Pennsylvania, United States
 
74,968

 
Owned
 
X
 
X
 
Research and Development
Barcelona, Spain
 
20,548

 
Leased
 
X
 
 
 
Research and Development, Highway Safety & Construction
 
 
 
 
 
 
 
 
 
 
 
Manufacturing facilities:
 
 

 
 
 
 
 
 
 
 
Melbourne-Dandenong, Australia
 
59,599

 
Owned
 
X
 
 
 
Highway Safety & Construction and Consumer Products
Jacana, Brazil
 
43,753

 
Owned
 
X
 
 
 
Consumer Products and Industrial & Process Chemicals
Rio Claro, Brazil
 
193,750

 
Owned
 
X
 
X
 

Toronto, Canada
 
75,471

 
Owned
 
X
 
 
 
Highway Safety & Construction and Industrial & Process Chemicals
Lamotte, France
 
130,567

 
Leased
 
X
 
 
 
Industrial & Process Chemicals
Wurzen, Germany
 
124,915

 
Owned
 
X
 
 
 
Industrial & Process Chemicals and Natural Resources
Pasuruan, Indonesia
 
68,489

 
Owned
 
X
 
X
 
Consumer Products and Packaging & Engineered Plastics
Guadalajara, Mexico
 
105,866

 
Owned
 
X
 
 
 
Industrial & Process Chemicals
Tlalnepantla, Mexico
 
136,209

 
Owned
 
X
 
 
 
Industrial & Process Chemicals and Consumer Products
Eijsden, Netherlands
 
165,850

 
Owned/Leased(1)
 
X
 
 
 
Consumer Products and Industrial & Process Chemicals
Maastricht, Netherlands
 
70,073

 
Leased
 
X
 
 
 
Consumer Products and Industrial & Process Chemicals
Winschoten, Netherlands
 
134,548

 
Leased
 
X
 
 
 
Packaging & Engineered Plastics and Industrial & Process Chemicals
Delfzijl, Netherlands
 
38,373

 
Leased(2)
 
 
 
X
 
Fuels and Emission Controls
Bangkok, Thailand
 
12,056

 
Owned
 
X
 
 
 
Highway Safety & Construction
Warrington, United Kingdom
 
371,063

 
Owned
 
X
 
X
 
Consumer Products, Packaging & Engineered Plastics and Highway & Safety Construction
Augusta, Georgia, United States (Plant 500)
 
121,502

 
Leased
 
X
 
 
 
Highway Safety & Construction
Baton Rouge, Louisiana, United States
 
13,503,600

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Baytown, Texas, United States
 
348,480

 
Owned
 
 
 
X
 
Fuels & Emission Controls

39


Brownwood, Texas, United States
 
107,900

 
Owned
 
X
 
 
 
Highway Safety & Construction and Packaging & Engineered Plastics
Chester, Pennsylvania, United States
 
172,707

 
Owned
 
X
 
 
 
Industrial & Process Chemicals and Packaging & Engineered Plastics
Dominguez, California, United States
 
1,437,480

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Gurnee, Illinois, United States
 
96,000

 
Owned
 
X
 
 
 
Industrial & Process Chemicals
Joliet, Illinois, United States
 
168,657

 
Owned
 
X
 
 
 
Highway Safety & Construction and Consumer Products
Hammond, Indiana, United States
 
1,132,560

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Houston, Texas, United States
 
2,003,760

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Kansas City, Kansas, United States
 
220,679

 
Owned(3)
 
 
 
X
 
Fuels & Emission Controls and Packaging & Engineered Plastics
Martinez, California, United States
 
5,096,520

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Muscatine, Iowa, United States
 
105,072

 
Owned
 
X
 
 
 
Highway Safety & Construction
Rahway, New Jersey, United States
 
124,035

 
Owned
 
X
 
 
 
Consumer Products and Industrial & Process Chemicals
Paris, Texas, United States
 
147,158

 
Owned
 
X
 
 
 
Highway Safety & Construction
Portland, Oregon, United States
 
1,176,120

 
Owned
 
 
 
X
 
Fuels & Emission Controls
Potsdam, New York, United States
 
88,798

 
Owned
 
X
 
 
 
Highway Safety & Construction
St. Louis, Missouri, United States
 
44,034

 
Owned
 
X
 
 
 
Production for Consumer Products and Highway & Safety Construction
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Approximately 89,911 square feet is owned and approximately 75,939 square feet is leased.
(2) 
The facility is used by our Zeolyst Joint Venture under a ground lease that we entered into with a third party.
(3) 
We lease a portion of the site to our Zeolyst Joint Venture.
ITEM 3.
LEGAL PROCEEDINGS.
From time to time we may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as personal injury, product liability and warranty claims, waste disposal practices, release of chemicals into the environment and other matters that may arise in the ordinary course of our business. We currently believe that there is no litigation pending that is likely to have a material adverse effect on our business. Regardless of the outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.

40


PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information, Holders and Dividends
Our common stock began trading on the New York Stock Exchange (“NYSE”) under the symbol “PQG” on September 29, 2017. As of February 25, 2019, there were 111 shareholders of record of our common stock. A substantially greater number of holders of our common stock hold their shares in “street name” through banks, brokers and other financial institutions.
We have not and do not currently intend to pay regular dividends on our common stock in the foreseeable future. The declaration and payment of any future dividends by our Board of Directors is 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. See Note 16 to our consolidated financial statements included in this Form 10-K for details regarding covenant restrictions on the payment of dividends under our debt agreements.
Stock Performance Graph
The graph below shows the cumulative total shareholder return of our common stock for the period from September 29, 2017 to December 31, 2018 as compared to the cumulative total return of the Russell 2000 Total Return Index and the S&P 1500 Specialty Chemicals Index, assuming an investment of $100 made at the respective closing prices on September 29, 2017. The information contained in the graph below is furnished and therefore not to be considered “filed” with the SEC, and is not incorporated by reference into any document that incorporates this Form 10-K by reference.

cumulativetotalreturna04.jpg
 
9/29/2017
 
12/31/2017
 
12/31/2018
PQG
$
100

 
$
95

 
$
86

Russell 2000
100

 
103

 
92

SP 1500 Spec Chem
100

 
106

 
99


41


Issuer Purchases of Equity Securities
Tax Withholdings
The following table contains information about shares of common stock delivered to the Company by employees to satisfy withholding tax obligations of the employees in connection with the vesting of restricted stock awards and restricted stock units during the fourth quarter of 2018.
 
 
 
 
 
 
 
 
Maximum Number
(or Dollar Value) of
Shares of Common Stock
that May Yet Be
Purchased Under the
Plans or Programs
 
 
 
 
 
 
Total Number of
Shares of Common Stock
Purchased as Part of
Publicly Announced
Plan or Programs
 
 
 
Total Number of
Shares of Common
Stock Purchased
 
Average Price
Paid per Share of
Common Stock
 
 
 
 
 
 
 
October 2018
 
116,740

 
$
17.68

 
N/A
 
N/A
November 2018
 

 
$

 
N/A
 
N/A
December 2018
 
6,376

 
$
13.80

 
N/A
 
N/A
Total
 
123,116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


42


ITEM 6.
SELECTED FINANCIAL DATA.
Selected financial data for the Company is presented in the following table and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and our consolidated financial statements and related notes thereto included in this Form 10-K. Selected financial data has been derived from our audited consolidated financial statements. Historical results are not necessarily indicative of the results to be expected for future periods.
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 Services on December 1, 2014, and therefore, the financial statements of legacy Eco contained in this Form 10-K for periods prior to such 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. Accordingly, references to “Predecessor” include the period from January 1, 2014 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 to “Successor” refer to the period from inception of Eco Services (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.
In addition to the analysis of historical results of operations, we have prepared unaudited supplemental pro forma results of operations for the years ended December 31, 2016 and 2015. The unaudited pro forma statements of operations reflect pro forma adjustments to the results of PQ Group Holdings to give effect to the Business Combination and the related financing transactions as if they had occurred on January 1, 2015. The unaudited pro forma adjustments include:
elimination of intercompany sales between legacy PQ and legacy Eco;
adjustments to depreciation expense related to the step-up in fair value of property, plant and equipment;
adjustments to amortization expense related to the step-up in fair value of definite-lived intangible assets;
removal of non-recurring adjustments related to the step-up in the fair value of inventory;
adjustments to stock compensation expense to reflect charges as they relate to our new capital structure;
adjustments related to the amortization of the step-up in fair value of property, plant, equipment and definite-lived intangible assets related to our Zeolyst Joint Venture;
adjustments to interest expense related to the senior secured term loan facility;
adjustments related to the write-off of existing deferred financing fees, original issue discounts and prepayment penalties; and
the tax effect of the aforementioned adjustments, including the effect related to the change in tax status of Eco Services from a limited liability company to a C-corporation.
The unaudited pro forma statements of operations have been prepared in accordance with Article 11 of Regulation S-X by combining the historical results of operations of legacy Eco and legacy PQ for the periods prior to May 4, 2016 and should be read in conjunction with our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
The unaudited pro forma statements of operations have been prepared for illustrative purposes only and are not necessarily indicative of the combined results of operations that would have been realized had the pro forma transactions been completed as of the dates indicated, nor are they meant to be indicative of any anticipated future results of operations. The unaudited pro forma adjustments are based upon available information and assumptions 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. In addition, the unaudited pro forma statements of operations do not include any pro forma adjustments to reflect expected cost savings or restructuring actions which may be achievable or the impact of any non-recurring activity and transaction-related costs.
We believe that the unaudited pro forma statements of operations are a useful presentation of our results of operations as they provide comparative information, period-over-period, on a more comparable basis.

43


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
 
Historical
 
Pro Forma
 
Period from
inception
(July 30, 2014) to
December 31, 2014
 
 
Period
from
January 1, 2014 to
November 30, 2014
 
 
Year ended
December 31,
 
Year ended
December 31,
 
 
 
 
 
2018
 
2017
 
2016
 
2015
 
2016
 
2015
 
 
 
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 
$
1,608,154

 
$
1,472,101

 
$
1,064,177

 
$
388,875

 
$
1,403,041

 
$
1,413,201

 
$
35,539

 
 
$
361,823

Net (loss) income
 
59,621

 
58,563

 
(79,158
)
 
11,427

 
(57,707
)
 
(25,171
)
 
(22,061
)
 
 
30,545

Net (loss) income attributable to PQ Group Holdings Inc.
 
$
58,300

 
$
57,603

 
$
(79,746
)
 
$
11,427

 
$
(58,932
)
 
$
(26,942
)
 
$
(22,061
)
 
 
$
30,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic income (loss) per share
 
$
0.44

 
$
0.52

 
$
(1.02
)
 
$
0.51

 
$

 
$

 
$
(0.99
)
 
 
$

Diluted income (loss) per share
 
$
0.43

 
$
0.52

 
$
(1.02
)
 
$
0.51

 
$

 
$

 
$
(0.99
)
 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
133,380,567

 
111,299,670

 
78,016,005

 
22,615,787

 

 

 
22,390,231

 
 

Diluted
 
134,684,931

 
111,669,037

 
78,016,005

 
22,615,787

 

 

 
22,390,231

 
 


 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
 
 
 
 
 
 
 
 
 
Period
from
inception
(July 30, 2014) to
December 31, 2014
 
 
Period
from
January 1, 2014 to
November 30, 2014
 
 
Year ended December 31,
 
 
 
 
 
2018
 
2017
 
2016
 
2015
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Position and Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
57,854

 
$
66,195

 
$
70,742

 
$
25,155

 
$
22,627

 
 
$

Property, plant and equipment, net
 
1,208,979

 
1,230,384

 
1,181,388

 
481,073

 
472,156

 
 

Total assets
 
4,327,425

 
4,415,455

 
4,259,671

 
1,007,636

 
1,025,094

 
 

Total debt, including current portion
 
2,113,957

 
2,230,486

 
2,562,198

 
673,101

 
675,254

 
 

Total stockholders' equity
 
1,664,145

 
1,631,919

 
1,027,944

 
235,293

 
217,824

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
248,644

 
$
165,173

 
$
122,708

 
$
44,715

 
$
(2,057
)
 
 
$
57,593

Investing activities
 
(119,290
)
 
(195,982
)
 
(1,915,763
)
 
(38,725
)
 
(888,347
)
 
 
(32,852
)
Financing activities
 
(137,225
)
 
19,833

 
1,858,445

 
(3,462
)
 
913,031

 
 
(24,741
)


44


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a global provider of specialty catalysts, materials, chemicals, and services with leading supply positions across our portfolio. We compete in the global specialty chemicals and materials industry where we seek to focus on attractive, high-growth applications. Our products and services provide critical performance to our customers’ products and we are able to offer many of our customers regionally sourced materials to reduce costs and improve delivery logistics. We provide our customers with a combination of product technology and applications knowledge, global supply chain capabilities, and local production and logistical support.
We conduct operations through two reporting segments: (1) Environmental Catalysts and Services, and (2) Performance Materials and Chemicals. Our Environmental Catalysts and Services business consists of three product groups: silica catalysts, zeolite catalysts, and refining 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 critical for our customers in these growing applications and impart essential functionality in chemical and refining production processes and in emission control for engines. Our Performance Materials and Chemicals business consists of two product groups: performance chemicals and performance materials. 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, except China, serving diverse and growing end uses such as personal and industrial cleaning products, highway beads, 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. In 2018, we served over 4,000 customers globally across many end uses and, as of December 31, 2018, operated out of 71 manufacturing facilities, which are strategically located across six continents.
On February 21, 2019, we announced that we will change the structure of our internal organization to create four independent businesses in order to promote increased visibility to business unit performance, optimize the Company’s product portfolio and create efficiencies. The reorganization, which will be effective as of March 1, 2019, will lead to the recognition of four reportable segments as follows:
Catalyst (including the Zeolyst Joint Venture)
Performance Chemicals
Performance Materials
Refining Services
Beginning with the quarter ending March 31, 2019, the segment results and disclosures will reflect the new segment structure for all periods presented.
Basis of Presentation
In accordance with accounting principles generally accepted in the United States (“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 PQ Group Holdings in this Form 10-K, 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.

45


 
 
Years ended
December 31,
 
 
2018
 
2017
 
2016
Operations of legacy Eco
 
Included
 
Included
 
Included
Operations of legacy PQ
 
Included
 
Included
 
Partially included (May 4 to December 31)
 
 
 
 
 
 
 
Our zeolite catalysts product group operates through our Zeolyst Joint Venture, which we account for as an equity method investment in accordance with GAAP. 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 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 and includes Zeolyst Joint Venture adjustments on a proportionate basis based on our 50% ownership interest.
Key Performance Indicators
Adjusted EBITDA and Adjusted Net Income
Adjusted EBITDA and adjusted net income are financial measures that are not prepared in accordance with GAAP and that we use to evaluate our operating performance, for business planning purposes and to measure our performance relative to that of our competitors. Adjusted EBITDA and adjusted net income are presented as key performance indicators as we believe these financial measures will enhance a prospective investor’s understanding of our results of operations and financial condition. EBITDA consists of net income (loss) attributable to PQ Group Holdings before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) depreciation, amortization and interest of our 50% share of our Zeolyst Joint Venture. Adjusted net income consists of net income (loss) attributable to PQ Group Holdings adjusted for (i) non-operating income or expense and (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance. We believe that these non-GAAP financial measures provide investors with useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business.
You should not consider adjusted EBITDA or adjusted net income in isolation or as alternatives to the presentation of our financial results in accordance with GAAP. The presentation of our adjusted EBITDA and adjusted net income financial measures may differ from similar measures reported by other companies and may not be comparable to other similarly titled measures. In evaluating adjusted EBITDA and adjusted net income, you should be aware that we are likely to incur expenses similar to those eliminated in this presentation in the future and that certain of these items could be considered recurring in nature. Our presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Reconciliations of adjusted EBITDA and adjusted net income to GAAP net income (loss) are included in the results of operations discussion that follows for each of the respective periods.
Key Factors and Trends Affecting Operating Results and Financial Condition
Sales
Our Environmental Catalysts and Services sales have grown primarily due to expansion into new end applications, including emission control catalysts, polymer catalysts, and refining catalysts, as well as continued supply share gains. Sales in our Environmental Catalysts and Services segment are made on both a purchase order basis and pursuant to long-term contracts.
Historically, our Performance Materials and Chemicals business has experienced relatively stable demand both seasonally and throughout economic cycles, due to the diverse consumer and industrial end uses that our products serve. Expansions into new applications, including personal care and consumer cleaning, as well as share gains in existing end

46


uses, have added to our sales growth. Product sales from our performance chemicals product group are made on both a purchase order basis and pursuant to long-term contracts. In the performance materials product group, sales have been driven by the growth of spending on repair, maintenance and upgrade of existing highways and the construction of new highways and roads by governments around the world. Product sales in our performance materials product group are made principally on a purchase order basis. There may be modest fluctuations in timing of orders, but orders are mainly driven by demand and general economic conditions.
Cost of Goods Sold
Cost of goods sold consists of variable product costs, fixed manufacturing expenses, depreciation expense and freight expenses. Variable product costs include all raw materials, energy and packaging costs that are directly related to the manufacturing process. Fixed manufacturing expenses include all plant employment costs, manufacturing overhead and periodic maintenance costs. The primary raw materials for our Environmental Catalysts and Services business include spent sulfuric acid, sulfur, sodium silicates, acids, bases, and certain metals. Most of our refining services contracts feature take-or-pay volume protection and/or quarterly price adjustments for commodity inputs, labor, the Chemical Engineering Index (U.S. chemical plant construction cost index) and natural gas. Spent acid for our refining services product group is supplied by customers for a nominal charge as part of their contracts. Over 80% of our refining services product group sales for the year ended December 31, 2018 were under contracts featuring quarterly price adjustments. The price adjustments generally reflect actual costs for producing acid and tend to protect us from volatility in labor, fixed costs and raw material pricing.
The primary raw materials used in the manufacture of products in our Performance Materials and Chemicals business include soda ash, industrial sand, aluminum trihydrate, sodium hydroxide (also known as “caustic soda”), and cullet. For the year ended December 31, 2018, approximately 40% of our North American silicate sales, which is a significant portion of our performance chemicals product group sales, were derived from contracts that included raw material pass-through clauses. Under these contracts, there generally is a time lag of three to nine months for price changes to pass through, depending on the magnitude of the change in cost and other market dynamics. Freight expenses are generally passed through directly to customers.
While natural gas is not a direct feedstock for any product, all businesses use natural gas powered furnaces to heat raw materials and create the chemical reactions necessary to produce end-products. We maintain multiple suppliers wherever possible, hedge exposure to fluctuations in prices for natural gas purchases in the United States, make forward purchases of natural gas in the United States, Canada, and Europe to mitigate our exposure to price volatility, and structure our customer contracts when possible to allow for the pass-through of raw material and natural gas costs.
Joint Ventures
We account for our investments in our equity joint ventures under the equity method. Our largest joint venture, the Zeolyst Joint Venture, manufactures high performance, specialty, zeolite-based catalysts for use in the emission control industry, the petrochemical industry and other areas of the broader chemicals industry. We share proportionally in the management of our joint ventures with the other parties to each such joint venture.
Seasonality
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 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.
Foreign Currency
As a global business, we are subject to the impact of gains and losses on currency translations, which occur when the financial statements of foreign operations are translated into U.S. dollars. We operate a geographically diverse business with approximately 40% of our sales for the years ended December 31, 2018 and 2017 in currencies other than the U.S. dollar. Because our consolidated financial results are reported in U.S. dollars, sales or earnings generated in currencies other

47


than the U.S. dollar can result in a significant increase or decrease in the amount of those sales and earnings when translated to U.S. dollars. The foreign currencies to which we have the most significant exchange rate exposure include the Euro, British pound, Canadian dollar, Brazilian real and the Mexican peso.
Pro Forma Results of Operations
In addition to the analysis of historical results of operations, we have prepared unaudited supplemental pro forma results of operations for the year ended December 31, 2016. The unaudited pro forma statement of operations reflects pro forma adjustments to the results of PQ Group Holdings to give effect to the Business Combination and the related financing transactions as if they had occurred on January 1, 2015. The unaudited pro forma adjustments include:
elimination of intercompany sales between legacy PQ and legacy Eco;
adjustments to depreciation expense related to the step-up in fair value of property, plant and equipment;
adjustments to amortization expense related to the step-up in fair value of definite-lived intangible assets;
removal of non-recurring adjustments related to the step-up in the fair value of inventory;
adjustments to stock compensation expense to reflect charges as they relate to our new capital structure;
adjustments related to the amortization of the step-up in fair value of property, plant, equipment and definite-lived intangible assets related to our Zeolyst Joint Venture;
adjustments to interest expense related to the senior secured term loan facility;
adjustments related to the write-off of existing deferred financing fees, original issue discounts and prepayment penalties; and
the tax effect of the aforementioned adjustments, including the effect related to the change in tax status of Eco Services from a limited liability company to a C-corporation.
The unaudited pro forma statement of operations has been prepared in accordance with Article 11 of Regulation S-X by combining the historical results of operations of legacy Eco and legacy PQ for the periods prior to May 4, 2016 and should be read in conjunction with our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
The unaudited pro forma statement of operations has been prepared for illustrative purposes only and is not necessarily indicative of the combined results of operations that would have been realized had the pro forma transactions been completed as of the dates indicated, nor are they meant to be indicative of any anticipated future results of operations. The unaudited pro forma adjustments are based upon available information and assumptions 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. In addition, the unaudited pro forma statement of operations does not include any pro forma adjustments to reflect expected cost savings or restructuring actions which may be achievable or the impact of any nonrecurring activity and transaction-related costs.
We believe that the unaudited pro forma statement of operations is a useful presentation of our results of operations as it provides comparative information, period-over-period, on a more comparable basis.

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Results of Operations
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Highlights
The following is a summary of our financial performance for the year ended December 31, 2018 compared with the year ended December 31, 2017.
Sales
Sales increased $136.1 million to $1,608.2 million. The increase in sales was primarily due to increased volumes and higher average customer prices and favorable mix for the year ended December 31, 2018.
Gross Profit
Gross profit increased $4.9 million to $381.7 million. Our increase in gross profit was primarily due to higher pricing, increased volumes and the earnings contributed by the Sovitec acquisition, which were partially offset by higher manufacturing costs and the unfavorable impact on our product mix due to increased sales of lower-margin goods for the year ended December 31, 2018.
Operating Income
Operating income increased by $17.7 million to $183.6 million. Our increase in operating income was primarily due to an increase in gross profit, as noted above, and the favorable impact related to a long-term contract termination, which was partially offset by increased public-company costs for the year ended December 31, 2018.
Equity in Net Income of Affiliated Companies
Equity in net income of affiliated companies for the year ended December 31, 2018 was $37.6 million, compared with net income of $38.8 million for the year ended December 31, 2017. The decrease was due to lower earnings of $3.4 million generated by our Zeolyst Joint Venture during the year ended December 31, 2018 as compared to the year ended December 31, 2017 and $2.0 million of lower amortization on the fair value step-up of the underlying assets of our Zeolyst Joint Venture, which was a result of the Business Combination.

49


The following is our consolidated statements of operations and a summary of financial results for the years ended December 31, 2018 and 2017.
 
 
Years ended
December 31,
 
Change
 
 
2018
 
2017
 
$
 
%
 
 
(in millions, except percentages)
Sales
 
$
1,608.2

 
$
1,472.1

 
$
136.1

 
9.2
 %
Cost of goods sold
 
1,226.5

 
1,095.3

 
131.2

 
12.0
 %
Gross profit
 
381.7

 
376.8

 
4.9

 
1.3
 %
Gross profit margin
 
23.7
%
 
25.6
%
 
 
 
 
Selling, general and administrative expenses
 
168.6

 
146.7

 
21.9

 
14.9
 %
Other operating expense, net
 
29.5

 
64.2

 
(34.7
)
 
(54.0
)%
Operating income
 
183.6

 
165.9

 
17.7

 
10.7
 %
Operating income margin
 
11.4
%
 
11.3
%
 
 
 
 
Equity in net (income) from affiliated companies
 
(37.6
)
 
(38.8
)
 
1.2

 
(3.1
)%
Interest expense, net
 
113.7

 
179.0

 
(65.3
)
 
(36.5
)%
Debt extinguishment costs
 
7.8

 
61.9

 
(54.1
)
 
(87.4
)%
Other expense, net
 
11.1

 
24.4

 
(13.3
)
 
(54.5
)%
Income (loss) before income taxes and noncontrolling interest
 
88.6

 
(60.6
)
 
149.2

 
(246.2
)%
Provision (benefit) for income taxes
 
29.0

 
(119.2
)
 
148.2

 
(124.3
)%
Effective tax rate
 
32.7
%
 
196.6
%
 
 
 
 
Net income
 
59.6

 
58.6

 
1.0

 
1.7
 %
Less: Net income attributable to the noncontrolling interest
 
1.3

 
1.0

 
0.3

 
30.0
 %
Net income attributable to PQ Group Holdings Inc.
 
$
58.3

 
$
57.6

 
$
0.7

 
1.2
 %
 
 
 
 
 
 
 
 
 
Sales
 
 
Years ended
December 31,
 
Change
 
 
2018
 
2017
 
$
 
%
 
 
(in millions, except percentages)
Sales:
 
 
 
 
 
 
 
 
Silica Catalysts
 
$
72.1

 
$
75.3

 
$
(3.2
)
 
(4.2
)%
Refining Services
 
455.6

 
398.4

 
57.2

 
14.4
 %
Environmental Catalysts & Services
 
527.7

 
473.7

 
54.0

 
11.4
 %
 
 
 
 
 
 
 
 
 
Performance Chemicals
 
717.3

 
687.6

 
29.7

 
4.3
 %
Performance Materials
 
378.3

 
324.2

 
54.1

 
16.7
 %
Eliminations
 
(11.8
)
 
(10.0
)
 
(1.8
)
 
18.0
 %
Performance Materials & Chemicals
 
1,083.8

 
1,001.8

 
82.0

 
8.2
 %
 
 
 
 
 
 
 
 
 
Inter-segment sales eliminations
 
(3.3
)
 
(3.4
)
 
0.1

 
(2.9
)%
 
 
 
 
 
 
 
 
 
Total sales
 
$
1,608.2

 
$
1,472.1

 
$
136.1

 
9.2
 %
 
 
 
 
 
 
 
 
 

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Environmental Catalysts & Services: Sales in Environmental Catalysts and Services for the year ended December 31, 2018 were $527.7 million, an increase of $54.0 million, or 11.4%, compared to sales of $473.7 million for the year ended December 31, 2017. The increase in sales was primarily due to higher average selling price and customer mix of $28.6 million and an increase in volumes of $25.5 million.
The higher average selling price and customer mix was driven by higher cost pass-through pricing in our virgin sulfuric acid product group and favorable customer pricing in our regeneration services product group. The increase in volumes was driven by higher customer demand within our virgin sulfuric acid, regeneration services and polyolefin catalysts product lines, which was partially offset by lower methyl methacrylate sales.
Performance Materials & Chemicals: Sales in Performance Materials and Chemicals for the year ended December 31, 2018 were $1,083.8 million, an increase of $82.0 million, or 8.2%, compared to sales of $1,001.8 million for the year ended December 31, 2017. The increase in sales was primarily due to higher sales volumes of $49.2 million, higher average selling price and favorable customer mix of $31.3 million and the favorable effects of foreign currency translation of $1.5 million.
The integration of Sovitec into our existing European operations, growth in North American highway safety product sales and higher sodium silicate industrial demand more than offset a decline in consumer product sales. Higher average selling prices were principally a result of favorable cost pass-through pricing and price increases in certain product lines. The favorable effects of foreign currency were primarily driven by the weaker Euro and British Pound compared to the U.S. dollar, which were partially offset by a stronger Brazilian Real as compared to the U.S. dollar.
Gross Profit
Gross profit for the year ended December 31, 2018 was $381.7 million, an increase of $4.9 million, or 1.3%, compared with $376.8 million for the year ended December 31, 2017. The increase in gross profit was due to favorable customer pricing of $59.9 million, higher volumes of $36.7 million and favorable foreign currency translation of $1.1 million, which was offset by unfavorable manufacturing costs of $78.4 million, unfavorable product mix of $12.4 million and higher depreciation expense of $2.0 million.
Increased customer demand within our virgin sulfuric acid and regeneration services product groups, the integration of Sovitec into our existing European operations and higher sodium silicate industrial sales volumes more than offset a decline in sales related to the timing of customer orders in the methyl methacrylate market and slower sales in our consumer products group. The unfavorable change in manufacturing costs was driven by higher raw material costs, some of which are passed through in price, increased shipping and handling costs and the timing of plant maintenance costs incurred during the year ended December 31, 2018. The unfavorable change in manufacturing costs was partially offset by lower highway product group start-up costs, which were incurred during the year ended December 31, 2017. Unfavorable product mix was driven by increased volumes of lower-margin products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2018 were $168.6 million, an increase of $21.9 million, or 14.9%, compared with $146.7 million for the year ended December 31, 2017. The increase in selling, general and administrative expenses was due to higher compensation related expenses due to an increase in employee headcount, higher stock compensation expense of $10.7 million related to awards issued in conjunction with our IPO and increased professional fees.
Other Operating Expense, Net
Other operating expense, net for the year ended December 31, 2018 was $29.5 million, a decrease of $34.7 million, or 54.0%, compared with $64.2 million for the year ended December 31, 2017. The decrease in other operating expense, net was due to gains recognized in the year ended December 31, 2018 on the termination of a customer supply contract of $20.6 million and insurance recoveries totaling $6.5 million related to losses sustained as a result of Hurricane Harvey in August 2017 (of which $5.5 million was recorded in other operating expense, net), and higher expenses in the year ended December 31, 2017 related to severance and restructuring costs for a plant reduction in force, legal and professional fees related to our IPO, management advisory fees for agreements that terminated as a result of our IPO and transaction-related costs for our June 2017 acquisition of Sovitec. Partially offsetting the decrease in other operating expense, net was an increase in amortization expense related to the intangible assets identified as part of the Sovitec acquisition.

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Equity in Net Income of Affiliated Companies
Equity in net income of affiliated companies for the year ended December 31, 2018 was $37.6 million, a decrease of $1.2 million, compared with income of $38.8 million for the year ended December 31, 2017. The decrease was primarily due to $42.9 million of earnings generated by our Zeolyst Joint Venture during the year ended December 31, 2018 as compared to $46.3 million for the year ended December 31, 2017 which was a result of higher manufacturing costs, offset by increased sales of higher-margin products, and $2.0 million of lower amortization expense on the fair value step-up of the underlying assets of our Zeolyst Joint Venture, which was a result of the Business Combination.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2018 was $113.7 million, a decrease of $65.3 million, as compared with $179.0 million for the year ended December 31, 2017. The decrease in interest expense was due to lower average debt balances, mainly as a result of the repayment of outstanding debt with the proceeds from our IPO in October 2017, and reduction in interest rates related to our refinancing efforts completed during the year ended December 31, 2017 and first quarter of 2018.
Debt Extinguishment Costs
Debt extinguishment costs for the years ended December 31, 2018 and 2017 were $7.8 million and $61.9 million, respectively.
During the year ended December 31, 2018, we prepaid $100.0 million of outstanding principal balance on the New Term Loan Facility (as defined below). In connection with this prepayment, we wrote off $0.6 million of previously unamortized deferred financing costs and original issue discount of $1.3 million as debt extinguishment costs.
On February 8, 2018 we refinanced our existing senior secured term loan facility with a new $1,267.0 million senior secured term loan facility to reduce the applicable interest rates. We recorded $2.1 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previously unamortized deferred financing costs of $1.4 million and original issue discount of $2.4 million associated with the existing senior secured term loan facility were written off as debt extinguishment costs.
On December 11, 2017, we completed the issuance of $300.0 million in aggregate principal amount of 5.75% Senior Unsecured Notes due 2025, which were used to repay the remaining outstanding balance on our Floating Rate Senior Unsecured Notes due 2022 and 8.5% Senior Notes due 2022. In conjunction with the issuance of the senior unsecured notes, we paid $14.0 million in prepayment premiums and recorded $0.4 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $5.3 million and original issue discount of $1.2 million associated with the old debt were written off as debt extinguishment costs.
On October 3, 2017, we completed our IPO whereby we issued 29 million shares of our common stock at an offering price of $17.50 per share and used the proceeds to repay $446.2 million of our Floating Rate Senior Unsecured Notes due 2022. In conjunction with the IPO, we paid $32.3 million in prepayment premiums and wrote off existing unamortized deferred financing costs of $0.7 million and original issue discount of $7.6 million as debt extinguishment costs.
On August 7, 2017, we repriced the existing U.S. dollar-denominated tranche and existing Euro-denominated tranche of our term loans to reduce the applicable interest rates. We recorded $0.2 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $0.1 million and original issue discount of $0.2 million associated with the old debt were written off as debt extinguishment costs.
Other Expense, Net
Other expense, net was $11.1 million for the year ended December 31, 2018, a favorable change of $13.3 million, compared with other expense, net of $24.4 million for the year ended December 31, 2017. The change in other expense, net primarily consisted of $13.8 million of foreign currency losses for the year ended December 31, 2018 as compared to foreign currency losses of $25.8 million for the year ended December 31, 2017.
Provision (Benefit) for Income Taxes
The provision for income taxes for the year ended December 31, 2018 was $29.0 million compared to a $119.2 million benefit for the year ended December 31, 2017. The effective income tax rate for the year ended December 31, 2018 was 32.7% compared to 196.6% for the year ended December 31, 2017. The difference between the U.S. federal statutory income

52


tax rate and our effective income tax rate for the year ended December 31, 2018 was mainly due to the impact of the Global Intangible Low Taxed Income (“GILTI”) provisions of U.S. tax reform, the effect of permanent differences related to foreign currency exchange gain or loss, changes in valuation allowances, higher tax rates in foreign jurisdictions as compared to the U.S. statutory tax rate, foreign withholding taxes and state taxes.The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2017 was mainly due to the tax effects of U.S. tax reform which reduced the corporate tax rate, lower tax rates in foreign jurisdictions as compared to the U.S. federal tax rate, state taxes and foreign withholding taxes.
Net Income Attributable to PQ Group Holdings