Ecovyst, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Financial Instruments

Financial Instruments

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

20. Financial Instruments:

The Company uses interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with the Company’s derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the interest rate cap agreements are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreements into earnings are recorded as part of interest expense in the consolidated statements of income as the Company makes its interest payments on the hedged portion of its senior secured credit facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.

In July 2016, the Company entered into interest rate cap agreements, paying a premium of $1,551 to mitigate interest rate volatility from July 2016 through July 2020 by employing varying cap rates, ranging from 1.50% to 3.00% on $1,000,000 of notional variable-rate debt.

In November 2018, the Company entered into additional interest rate cap agreements to mitigate interest rate volatility from July 2020 through July 2022, with a cap rate of 3.50% on $500,000 of notional variable-rate debt and a $3,380 premium annuitized during the effective period. In February 2020, the Company restructured these agreements to lower the interest cap rate to 2.50% with an incremental $130 premium annuitized during the effective period. In March 2020, the Company again amended such interest rate cap agreements to lower the cap rate to 0.84% and paid an additional $900 premium annuitized during the effective period. The term and notional amount remained unchanged, and the total cumulative annuitized premium on the $500,000 of notional variable-rate debt was $4,410.

Upon the expiration of the July 2016 interest rate cap agreements in July 2020, the Company entered into additional interest rate cap agreements to mitigate interest rate volatility from August 2020 to August 2023, with a cap rate of 1.00% on $400,000 of notional variable-rate debt. The total annuitized premium on the $400,000 of notional variable-rate debt was $137.

In August 2021, PQ Corporation novated $900,000 of its interest rate caps to Ecovyst Catalyst Technologies LLC. Other than the novation, there were no other changes to the interest rate caps in connection with the novation.

In January 2022, the Company entered into two new forward starting interest rate cap agreements, with notional amounts of $250,000 each and with a cap rate of 1.00%. The term for one of the interest rate caps is July 2022 through October 2024 and the term for the other is September 2023 through October 2025. The total cumulative annuitized premium is $4,450. The cap rate in effect at December 31, 2022 was 1.00%.

In November 2022, the Company entered into a new interest rate cap agreement to mitigate interest rate volatility from July 2023 through July 2024, with a cap rate of 1.00% on $150,000 of notional variable-rate debt and annuitized premium of $5,268 during the effective period, and mitigate interest rate volatility from July 2024 through July 2026, with a cap rate of 1.00% and 175,000 notional variable-rate debt and annuitized premium of $6,145 during the effective period.

On February 21, 2023, we amended all existing interest rate cap agreements to replace LIBOR with SOFR as the benchmark interest rate, with all other terms of the agreements remaining the same.

Use of Derivative Financial Instruments to Manage Foreign Currency Risk. The Company is exposed to risks related to its net investments in foreign operations due to fluctuations in foreign currency exchange rates, and prior to the sale of the Performance Materials and Performance Chemicals businesses, particularly between the United States dollar and the Euro.

The Company entered into multiple cross-currency interest rate swap arrangements with an aggregate notional amount of €280,000 in October 2019 to hedge the exposure on the net investments of certain of its Euro-denominated

subsidiaries in its Performance Materials and Performance Chemicals businesses. The Company recorded these swap agreements at fair value as assets or liabilities in its consolidated balance sheet. In March 2021, as a result of the Performance Materials and Performance Chemicals divestitures, the Company settled its cross-currency swaps. At the date of settlement, the total notional value of the cross-currency swaps was $311,380. The Company paid $13,170 in cash to settle the swaps, which is included in net cash used in investing activities, discontinued operations in the Company’s consolidated statement of cash flows for the year ended December 31, 2021, as the underlying subsidiary subject to the net investment hedging relationship was part of the Performance Chemicals business.

As the derivatives were designated and qualified as net investment hedges, changes in the fair value of the swaps attributable to changes in the spot exchange rates are recognized in cumulative translation adjustment (“CTA”) within OCI and are held there until the hedged net investments are sold or substantially liquidated. Changes in the fair value of the swaps attributable to the cross currency basis spread were excluded from the assessment of hedge effectiveness and were recorded in current period earnings. Upon such sale or liquidation, the amount recognized in CTA was reclassified to earnings and reported in the same line item as the gain or loss on the liquidation of the net investments. In connection with the sales of the Performance Materials business in December 2020 and Performance Chemicals business in August 2021, amounts deferred in CTA related to the cross-currency swaps were reclassified from accumulated other comprehensive income and recognized as part of the respective losses on sale.

The fair values of derivative instruments held as of December 31, 2022 and 2021 are shown below:


		December 31,
	Balance sheet location	2022		2021
Derivative assets:
Derivatives designated as cash flow hedges:

Interest rate caps	Prepaid and other current assets	$	18,510	$	—

Interest rate caps	Other long-term assets	15,864		1,080





Total derivative assets		$	34,374	$	1,080

Derivative liabilities:
Derivatives designated as cash flow hedges:

Interest rate caps	Accrued liabilities	$	—	$	1,288

Interest rate caps	Other long-term liabilities	2,071		—



Total derivative liabilities		$	2,071	$	1,288

The following table shows the effect of the Company’s derivative instruments designated as hedges on accumulated other comprehensive income (loss) (“AOCI”) and the statements of income for the years ended December 31, 2022, 2021 and 2020:


		Years ended December 31,
		2022				2021				2020
	Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income
Interest rate caps	Interest (expense) income	$	32,510	$	(683)	$	3,441	$	(444)	$	167	$	(54)

The following table shows the effect of the Company’s cash flow hedge accounting on the consolidated statements of income for the years ended December 31, 2022, 2021 and 2020:


	Location and amount of gain (loss) recognized in income on cash flow hedging relationships
	Years ended December 31,
	2022				2021				2020
	Cost of goods sold		Interest (expense) income		Cost of goods sold		Interest (expense) income		Cost of goods sold		Interest (expense) income
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded	$	(595,529)	$	(37,217)	$	(434,540)	$	(36,990)	$	(344,967)	$	(50,409)

The effects of cash flow hedging:
Gain (loss) on cash flow hedging relationships:
Interest contracts:
Amount of gain (loss) reclassified from AOCI into income	—		(683)		—		(444)		—		(54)

The amount of unrealized losses in AOCI related to the Company’s cash flow hedges that is expected to be reclassified to the consolidated statement of income over the next twelve months is $214 as of December 31, 2022.

The following table shows the effect of the Company’s net investment hedges on AOCI and the consolidated statements of income for the years ended December 31, 2021 and 2020, respectively:


	Amount of pre-tax gain (loss) recognized in OCI on derivative				Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) reclassified from AOCI into income				Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
	Years ended December 31,					Years ended December 31,					Years ended December 31,
	2021		2020			2021		2020			2021		2020
Cross currency swaps	$	9,787	$	(23,622)	Net (loss) income from discontinued operations, net of tax(1)	$	9,754	$	1,967	Interest (expense) income	$	545	$	5,090

(1)Includes the gain (loss) on the sale of the underlying subsidiary