Ecovyst, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Divestitures

Divestitures

9 Months Ended

Sep. 30, 2021

Discontinued Operations and Disposal Groups [Abstract]

Segment divestitures

3. Divestitures:

Performance Materials Divestiture

On December 14, 2020, the Company completed the sale of its Performance Materials business for $650,000. In the fourth quarter of 2020, the Performance Materials business met the criteria set forth in Accounting Standards Codification 205-20, Presentation of Financial Statements - Discontinued Operations (“ASC 205-20”), as the sale represented a strategic shift that had a major effect on the Company’s operations and financial results. As a result, the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2020 reflect the Performance Materials business as a discontinued operation. The divested business historically represented a reportable segment of the Company, including certain Australian operations that were historically reported in the Performance Chemicals reportable segment.

The following table summarizes the results of discontinued operations related to the Performance Materials divestiture:


	Three months ended September 30, 2020		Nine months ended September 30, 2020
Sales	$	106,777	$	280,663
Cost of goods sold	80,449		208,854
Selling, general and administrative expenses	8,710		26,337
Other operating expense, net	3,879		16,585
Operating income	13,739		28,887

Interest expense, net (1)	3,894		12,810
Other income, net	(1,126)		(961)

Income from discontinued operations before income tax	10,971		17,038
(Benefit) provision for income taxes	(420)		3,085
Income from discontinued operations, net of tax	$	11,391	$	13,953

(1)The closing of the transaction triggered the Company’s obligation to provide partial repayment under its Amended and Restated Term Loan Credit Agreement, dated May 4, 2016 and its New Term Loan Credit Agreement, dated as of July 22, 2020. As such, interest expense has been allocated to discontinued operations on the basis of the Company’s mandatory repayment of $275,787 of the Senior Secured Term Loan Facility due February 2027 and its mandatory repayment of $188,722 of the new Senior Secured Term Loan Facility due February 2027.

During the three months ended September 30, 2021, the Company incurred transaction costs of $264 and stock-based compensation expense of $1,194, and an associated tax benefit of $339 related to the Performance Materials divestiture which is included in loss from discontinued operations, net of tax. During the nine months ended September 30, 2021, the Company incurred transaction costs of $1,794 and stock-based compensation expense of $2,477, and an associated tax benefit of $1,045 related to the Performance Materials divestiture which is included in loss from discontinued operations, net of tax.

Net income attributable to the noncontrolling interest related to the Performance Materials business, net of tax was $97 and $219 for the three and nine months ended September 30, 2020, respectively. Net income attributable to Ecovyst Inc., related to the Performance Materials business, net of tax was $11,294 and $13,734 for the three and nine months ended September 30, 2020, respectively.

Upon the close of the transaction, the Company entered into a Transition Services Agreement with the buyer pursuant to which the buyer is receiving certain services to provide for the orderly transition of various functions and processes after the closing of the transaction. The services under the Transition Services Agreement include information technology, accounting, tax, financial services, human resources, facilities, and other administrative support services. These services were provided for a period of nine months, with three 30-day extensions available. The Company billed $253 and $3,314 under the Transition Services Agreement to the buyer during the three and nine months ended September 30, 2021, respectively. Those billings are included in selling, general and administrative expenses on the condensed consolidated financial statements for the three and nine months ended September 30, 2021.

Performance Chemicals Divestiture

On February 28, 2021, the Company entered into a definitive agreement to sell its Performance Chemicals business to Sparta Aggregator L.P. (the “Buyer”), a partnership established by Koch Minerals & Trading, LLC and Cerberus Capital Management, L.P., for $1,100,000, subject to certain adjustments including indebtedness, cash, working capital and transaction expenses. The Company completed the sale of the Performance Chemicals business on August 1, 2021.

In the first quarter of 2021, the Performance Chemicals business met the discontinued operations criteria set forth in ASC 205-20, as the sale represents a strategic shift that will have a major effect on the Company’s operations and financial results. As a result, the Company’s condensed consolidated financial statements for all periods presented reflect the Performance Chemicals business as a discontinued operation. The Performance Chemicals business historically represented a reportable segment of the Company.

Prior to the closing of the transaction, the disposal group was tested for recoverability as of each of the balance sheet dates since meeting the discontinued operations criteria, and the Company recognized an estimated disposal loss of $13,990 and $109,584 during the three and six months ended June 30, 2021, respectively, which was included in net loss from discontinued operations, net of tax on the condensed consolidated statements of income for the respective periods.

The final loss on the sale of the Performance Chemicals business was $157,539, which is included in net (loss) income from discontinued operations, net of tax in the Company’s condensed consolidated statements of income for the nine months ended September 30, 2021. The following is a reconciliation of the loss recorded on the sale:


Net proceeds received from the sale of the Performance Chemicals business	$	980,350
Transaction costs	(35,402)
Net assets derecognized	(1,102,487)
Loss on sale of the Performance Chemicals business	$	(157,539)

In connection with the sale of the Performance Chemicals business and the related loss, as noted above, the Company has recognized a tax benefit of $33,052 within net loss from discontinued operations, net of tax on the condensed consolidated statement of income.

The following table summarizes the results of discontinued operations related to the Performance Chemicals business for the periods presented:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Sales	$	54,973	$	145,244	$	389,870	$	456,462
Cost of goods sold	39,582		115,902		284,220		363,740
Selling, general and administrative expenses	6,552		9,709		29,758		31,440
Other operating (income) expense, net(1)	(18,993)		5,075		10,337		19,154
Goodwill impairment charge	—		—		75,080		—
Loss on sale of the Performance Chemicals business	123,035		—		157,539		—
Operating income (loss)	(95,203)		14,558		(167,064)		42,128
Equity in net (income) from affiliated companies	(25)		(49)		(111)		(128)
Interest expense, net (2)	1,916		4,318		10,730		11,698
Other expense (income), net	153		334		(6,210)		(3,100)
(Loss) income from discontinued operations before income tax	(97,247)		9,955		(171,473)		33,658
(Benefit) provision for income taxes	(22,494)		(9,125)		(15,576)		31,354
(Loss) income from discontinued operations, net of tax	$	(74,753)	$	19,080	$	(155,897)	$	2,304

(1)The Company reclassified transaction costs that were previously recorded to this line item and included those charges in the line item Loss on sale of the Performance Chemicals business during the three months ended September 30, 2021 .

(2)Upon the close of the transaction, the Company used a portion of the net proceeds to repay a portion of its outstanding debt amounting to $526,363. Refer to Note 13 for additional details on the repayment of outstanding debt. Prior to the Company’s debt refinancing in June 2021, the Company’s outstanding term loan facilities had mandatory repayment provisions. As a result, interest expense has been allocated to discontinued operations on the basis of the Company’s total repayment of $526,363.

Net income attributable to the noncontrolling interest related to the Performance Chemicals business, net of tax was $76 and $200 for the three months ended September 30, 2021 and 2020, respectively. Net income (loss) income attributable to Ecovyst Inc., related to the Performance Chemicals business, net of tax was $(74,829) and $18,880 for the three months ended September 30, 2021 and 2020, respectively.

Net income attributable to the noncontrolling interest related to the Performance Chemicals business, net of tax was $333 and $685 for the nine months ended September 30, 2021 and 2020, respectively. Net (loss) income attributable to Ecovyst Inc., related to the Performance Chemicals business, net of tax was $(156,230) and $1,619 for the nine months ended September 30, 2021 and 2020, respectively.

The following table summarizes the assets and liabilities of discontinued operations related to the divestiture of the Performance Chemicals business as of December 31, 2020.


	December 31, 2020
ASSETS
Cash and cash equivalents	$	22,153
Accounts receivables, net	87,202
Inventories, net	74,647
Prepaid and other current assets	21,088
Current assets held for sale	$	205,090

Investments in affiliated companies	$	324
Property, plant and equipment, net	391,524
Goodwill	326,173
Other intangible assets, net	388,857
Right-of-use lease assets	19,296
Other long-term assets	23,269

Long-term assets held for sale	$	1,149,443

LIABILITIES
Accounts payable	$	74,728
Operating lease liabilities—current	8,479
Accrued liabilities	25,330
Current liabilities held for sale	$	108,537

Deferred income taxes	$	49,690
Operating lease liabilities—noncurrent	10,047
Other long-term liabilities	95,617
Long-term liabilities held for sale	$	155,354

In connection with the divestiture of the Performance Chemicals business, the Company entered into a contract manufacturing agreement effective on August 2, 2021 with PQ Silicas UK Ltd., a subsidiary of the Buyer, related to a facility in Warrington, United Kingdom. Pursuant to this agreement, the Buyer will manufacture and sell silica catalyst finished good products to the Company, which are finished good products sold within the Company’s Catalyst Technologies segment. Additionally, certain machinery, equipment, and other tangible personal property assets identified in the Agreement (“Catalyst Production Assets”) owned by the Buyer will be used exclusively in the manufacture of silica catalyst products for the Company. The Company does not meet the requirements for a sale-leaseback transaction as described in Accounting Standards Codification 842-40, Leases - Sale-Leaseback Transactions. Under the failed-sale-leaseback accounting model, the Company is deemed under GAAP to still own the Catalyst Production Assets, which the Company must continue to reflect in its consolidated balance sheet and depreciate over the assets’ remaining useful lives. Based on the estimated fair market values of the Catalyst Production Assets, the failed-sale-leaseback accounting treatment resulted in a loss of $14,104 due to the requirement to treat a certain amount of the pre-tax cash proceeds from the divestiture as though it were the result of a financing obligation. The agreement has an initial term of five years, with an option to renew, as well as an “Option Bill of Sale” which provides for the transfer from the Buyer to the Company of the Catalyst Production Assets upon the Company’s exercise of a one-dollar purchase option. Payments made to the Buyer under the contact manufacturing agreement were $1,351 for the three and nine months ended September 30, 2021.

In addition to the contract manufacturing agreement noted above, the Company also entered into certain supply agreements with the Buyer, as well as a Transition Services Agreement, pursuant to which the Buyer is receiving and performing certain services to provide for the orderly transition of various functions and processes after the closing of the transaction. The services under the Transition Services Agreement include information technology, accounting, tax, financial services, human resources, facilities, and other administrative support services. These services are provided for a period of six months. Billings under the Transition Services Agreement to the Buyer during the three and nine months ended September 30, 2021 were immaterial. Those billings are included in selling, general and administrative expenses on the condensed consolidated financial statements for the three and nine months ended September 30, 2021.