UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM
10-Q
 
 
☒
QUARTERLY
 
REPORT PURSUANT TO SECTION 13
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended
June 30, 2021
2022
OR
 
☐
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
ACT OF 1934
For the transition period from
 
to
 
Commission file number
001-12019
QUAKER CHEMICAL CORPORATION
(Exact name of Registrantregistrant as specified in its charter)
 
 
Pennsylvania
 
23-0993790
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
 
19428 – 2380
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000
Not Applicable
Former name, former address and former fiscal year,
 
if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
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
 
☒
 
No
 
☐
 
Indicate by check mark whether the Registrantregistrant 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
 
☒
 
No
 
☐
 
Indicate by check mark whether the Registrantregistrant 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
“emerging growth company”
in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
 
☒
Accelerated filer
 
☐
 
Non-accelerated filer
 
☐
 
Smaller reporting
company
☐
Emerging growth company
 
☐
 
If an emerging growth company, indicate by check mark if the Registrantregistrant 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 Registrantregistrant is a shell company (as defined
 
defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
☐
 
No
 
☒
Indicate the number of shares outstanding of each of the
issuer’s classes of common
stock, as of the latest practicable date.
Number of Shares of Common Stock
Outstanding on July 31, 20212022
 
17,878,24717,929,045
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
PART
 
I
FINANCIAL INFORMATION
Item 1.
 
Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of OperationsIncome
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Net sales
$
492,388
$
435,262
$
286,040966,559
$
865,045
$
664,601
Cost of goods sold (
excluding amortization expense - See Note 1413
)
342,824
 
280,811
 
188,654670,924
 
554,400
Gross profit
 
433,364
Gross profit149,564
 
154,451
 
97,386295,635
 
310,645
231,237
Selling, general and administrative expenses
 
115,830
108,679
 
86,667227,625
 
212,989
185,368
Indefinite-lived intangible asset impairment
0
0
0
38,000
Restructuring and related (credits) charges, net
(1)
298
486819
1,473
2,202
Combination, integration and other acquisition-related expenses
expenses1,832
6,658
7,9955,885
12,473
15,873
Operating income (loss)
 
31,903
38,816
2,238
61,306
 
83,710
Other (expense) income, net
 
(10,206)
Other income (expense), net(8,399)
 
14,010
 
(993)(10,605)
 
18,697
(22,168)
Interest expense, net
(6,494)
(5,618)
(6,811)(11,839)
(11,088)
(15,272)
Income (loss) before taxes and equity in net (loss) income of
associated companies
 
17,010
47,208
 
(5,566)38,862
 
91,319
(47,646)
Taxes on income before
 
(loss) before equity in net (loss) income of associated
companies
 
1,374
15,218
 
3,2224,240
 
25,907
(9,848)
Income (loss) before equity in net (loss) income of associated
companies
 
15,636
31,990
 
(8,788)34,622
 
65,412
(37,798)
Equity in net (loss) income of associated companies
 
(1,265)
1,610
 
1,066(430)
 
6,820
1,732
Net income (loss)
14,371
33,600
(7,722)34,192
72,232
(36,066)
Less: Net income attributable to noncontrolling interest
28
30
1333
47
50
Net income (loss) attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
(7,735)34,159
$
72,185
$
(36,116)
Per share data:
 
 
 
 
Net income (loss) attributable to Quaker Chemical Corporation
common shareholders – basic
$
0.80
$
1.88
$
(0.43)1.91
$
4.04
$
(2.03)
Net income (loss) attributable to Quaker Chemical Corporation
 
common shareholders – diluted
$
0.80
$
1.88
$
(0.43)1.91
$
4.03
Dividends declared
$
(2.03)
Dividends declared0.415
$
0.395
$
0.3850.830
$
0.790
$
0.770
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
Unaudited
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Net income (loss)
$
14,371
$
33,600
$
(7,722)34,192
$
72,232
$
(36,066)
Other comprehensive (loss) income, (loss), net of tax
Currency translation adjustments
(76,433)
16,165
10,551(83,299)
(9,296)
(44,200)
Defined benefit retirement plans
1,407
397
2131,903
1,689
17,170
Current period change in fair value of derivatives
575
452
(111)1,675
1,014
(4,092)
Unrealized (loss) gain (loss) on available-for-sale securities
(567)
279
1,608(1,567)
(2,746)
(103)
Other comprehensive (loss) income (loss)
(75,018)
17,293
12,261(81,288)
(9,339)
(31,225)Comprehensive (loss) income
Comprehensive income (loss)(60,647)
50,893
4,539(47,096)
62,893
(67,291)
Less: Comprehensive (income) loss
income (loss) attributable to
noncontrolling interest
5
(38)
(14)(1)
(53)
81
Comprehensive (loss) income (loss) attributable to Quaker Chemical
Corporation
$
(60,642)
$
50,855
$
4,525(47,097)
$
62,840
$
(67,210)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
value)
Unaudited
June 30,
 
December 31,
20212022
20202021
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
$
145,610202,348
$
181,833165,176
Accounts receivable, net
 
418,642465,352
 
372,974430,676
Inventories
 
 
Raw materials and supplies
163,055
116,491
86,148129,382
Work-in-process
 
and finished goods
150,387
126,318
101,616135,149
Prepaid expenses and other current assets
 
60,84464,674
 
50,15659,871
Total current
 
assets
 
867,9051,045,816
 
792,727920,254
Property, plant and equipment,
 
equipment, at cost
 
424,360432,068
 
423,253434,344
Less accumulatedLess: Accumulated depreciation
(239,571)
(229,919)
(219,370)(236,824)
Property, plant and equipment,
 
equipment, net
192,497
194,441
203,883197,520
Right of use lease assets
36,16036,317
38,50736,635
Goodwill
 
633,449610,167
 
631,212631,194
Other intangible assets, net
 
1,068,795962,580
 
1,081,3581,027,782
Investments in associated companies
 
98,01383,678
 
95,78595,278
Deferred tax assets
 
13,39210,897
 
16,56616,138
Other non-current assets
 
32,66428,804
 
31,79630,959
Total assets
$
2,944,8192,970,756
$
2,891,8342,955,760
LIABILITIES AND EQUITY
 
 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
$
48,07914,485
$
38,96756,935
Accounts and other payablespayable
 
219,617246,345
 
198,872226,656
Dividends payable
7,437
7,427
Accrued compensation
 
33,39929,359
 
43,30038,197
Accrued restructuring
5,2783,812
8,2484,087
Accrued pension and postretirement benefits
1,541
1,548
Other currentaccrued liabilities
 
94,06197,746
 
93,57395,617
Total current
 
liabilities
 
400,434400,725
 
382,960430,467
Long-term debt
 
847,154972,369
 
849,068836,412
Long-term lease liabilities
25,66825,695
27,07026,335
Deferred tax liabilities
 
181,264156,468
 
192,763179,025
Non-current accrued pension and postretirement benefits
42,755
45,984
Other non-current liabilities
 
114,89842,178
 
119,05949,615
Total liabilities
 
1,569,4181,640,190
 
1,570,9201,567,838
Commitments and contingencies (Note 19)18)
Equity
 
 
Common stock $
1
 
par value; authorized
30,000,000
 
shares; issued and
 
 
outstanding 20212022 –
17,878,13717,919,750
 
shares; 20202021 –
17,850,61617,897,033
 
shares
17,87817,920
17,85117,897
Capital in excess of par value
 
910,862921,642
 
905,171917,053
Retained earnings
 
482,001535,621
 
423,940516,334
Accumulated other comprehensive loss
 
(35,943)(145,246)
 
(26,598)(63,990)
Total Quaker
 
shareholders’ equity
 
1,374,7981,329,937
 
1,320,3641,387,294
Noncontrolling interest
 
603629
550628
Total equity
1,375,4011,330,566
1,320,9141,387,922
Total liabilities and
equity
$
2,944,8192,970,756
$
2,891,834
2,955,760
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Unaudited
Six Months Ended
June 30,
2022
2021
Cash flows from operating activities
Net income
$
34,192
$
72,232
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of debt issuance costs
2,236
2,375
Depreciation and amortization
41,036
44,188
Equity in undistributed earnings of associated companies, net of dividends
3,400
(6,715)
Acquisition-related fair value adjustments related to inventory
0
801
Deferred compensation, deferred taxes and other,
net
(10,223)
(13,849)
Share-based compensation
5,433
6,134
Loss on extinguishment of debt
5,246
0
Loss (gain) on disposal of property,
plant, equipment and other assets
15
(5,356)
Combination and other acquisition-related expenses, net of payments
(3,880)
(2,305)
Restructuring and related charges
819
1,473
Pension and other postretirement benefits
(2,269)
(2,223)
(Decrease) increase in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(51,944)
(47,252)
Inventories
(58,427)
(57,020)
Prepaid expenses and other current assets
(5,558)
(20,111)
Change in restructuring liabilities
(797)
(4,214)
Accounts payable and accrued liabilities
32,298
22,274
Net cash used in operating activities
(8,423)
(9,568)
Cash flows from investing activities
Investments in property,
plant and equipment
(15,138)
(6,974)
Payments related to acquisitions, net of cash acquired
(9,383)
(29,424)
Proceeds from disposition of assets
85
14,744
Net cash used in investing activities
(24,436)
(21,654)
Cash flows from financing activities
Payments of long-term debt
(668,500)
(19,065)
Proceeds from long-term debt
750,000
0
Borrowings on revolving credit facilities, net
16,703
29,433
Repayments on other debt, net
(155)
(219)
Financing-related debt issuance costs
(3,734)
0
Dividends paid
(14,862)
(14,113)
Stock options exercised, other
(821)
(416)
Net cash provided by (used in) financing activities
78,631
(4,380)
Effect of foreign exchange rate changes on cash
(8,600)
(683)
Net increase (decrease) in cash and cash equivalents
37,172
(36,285)
Cash and cash equivalents at the beginning of the period
165,176
181,895
Cash and cash equivalents at the end of the period
$
202,348
$
145,610
The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
6
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash FlowsChanges in Equity
(Dollars in thousands)thousands, except per share amounts)
(Unaudited)
UnauditedAccumulated
Six Months EndedCapital in
June 30,
Other
2021Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2020
Cash flows from operating activities$
17,851
$
905,171
$
423,940
$
(26,598)
$
550
$
1,320,914
Net income
0
0
38,615
0
17
38,632
Amounts reported in other
comprehensive loss
0
0
0
(26,630)
(2)
(26,632)
Dividends ($
0.395
 
per share)
0
0
(7,062)
0
0
(7,062)
Share issuance and equity-based
compensation plans
24
3,577
0
0
0
3,601
Balance at March 31, 2021
$
17,875
$
908,748
$
455,493
$
(53,228)
$
565
$
1,329,453
Net income
0
0
33,570
0
30
33,600
Amounts reported in other
comprehensive gain
0
0
0
17,285
8
17,293
Dividends ($
0.395
 
per share)
0
0
(7,062)
0
0
(7,062)
Share issuance and equity-based
compensation plans
3
2,114
0
0
0
2,117
Balance at June 30, 2021
$
17,878
$
910,862
$
482,001
$
(35,943)
$
603
$
1,375,401
Balance at December 31, 2021
$
17,897
$
917,053
$
516,334
$
(63,990)
$
628
$
1,387,922
Net income
0
0
19,816
0
5
19,821
Amounts reported in other
comprehensive loss
0
0
0
(6,271)
1
(6,270)
Dividends ($
0.415
 
per share)
0
0
(7,434)
0
0
(7,434)
Share issuance and equity-based
compensation plans
15
1,646
0
0
0
1,661
Balance at March 31, 2022
$
17,912
$
918,699
$
528,716
$
(70,261)
$
634
$
1,395,700
Net income
0
0
14,343
0
28
14,371
Amounts reported in other
comprehensive loss
0
0
0
(74,985)
(33)
(75,018)
Dividends ($
0.415
 
per share)
0
Net income (loss)0
(7,438)
0
0
(7,438)
Share issuance and equity-based
compensation plans
8
2,943
0
0
0
2,951
Balance at June 30, 2022
$
72,23217,920
$
(36,066)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Amortization of debt issuance costs
2,375
2,375
Depreciation and amortization
44,188
42,079
Equity in undistributed earnings of associated companies,
net of dividends
(6,715)
3,219
Acquisition-related fair value adjustments related to inventory
801
229
Deferred compensation, deferred taxes and other,
net
(13,849)
(22,033)
Share-based compensation
6,134
7,673
(Gain) loss on disposal of property,
plant, equipment and other assets
(5,356)
81
Insurance settlement realized
0
(542)
Indefinite-lived intangible asset impairment
0
38,000
Combination and other acquisition-related expenses, net of
payments
(2,305)
1,860
Restructuring and related charges
1,473
2,202
Pension and other postretirement benefits
(2,223)
18,784
(Decrease) increase in cash from changes in current assets and
current
liabilities, net of acquisitions:
Accounts receivable
(47,252)
61,659
Inventories
(57,020)
(3,689)
Prepaid expenses and other current assets
(20,111)
(2,849)
Change in restructuring liabilities
(4,214)
(9,592)
Accounts payable and accrued liabilities
22,274
(58,728)
Net cash (used in) provided by operating activities
(9,568)
44,662
Cash flows from investing activities
Investments in property,
plant and equipment
(6,974)
(7,534)
Payments related to acquisitions, net of cash acquired
(29,424)
(3,132)
Proceeds from disposition of assets
14,744
11
Insurance settlement interest earned
0
37
Net cash used in investing activities
(21,654)
(10,618)
Cash flows from financing activities
Payments of term loan debt
(19,065)
(18,702)
Borrowings on revolving credit facilities, net
29,433
205,500
Repayments on other debt, net
(219)
(684)
Dividends paid
(14,113)
(13,662)
Stock options exercised, other
(416)
(1,923)
Purchase of noncontrolling interest in affiliates
0
(1,047)
Distributions to noncontrolling affiliate shareholders
0
(751)
Net cash (used in) provided by financing activities
(4,380)
168,731
Effect of foreign exchange rate changes on
cash
(683)
(4,575)
Net (decrease) increase in cash, cash equivalents and restricted
cash
(36,285)
198,200
Cash, cash equivalents and restricted cash at the beginning
of the period
181,895
143,555
Cash, cash equivalents and restricted cash at the end of
the period921,642
$
145,610535,621
$
341,755(145,246)
$
629
$
1,330,566
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
67
Note 1 – Basis of Presentation and Description of Business
 
Basis of Presentation
As used in these Notes to Condensed Consolidated
Financial Statements of
this Quarterly Report on Form 10-Q for the period
ended June 30, 2022 (the “Report”),
the terms “Quaker”
“Quaker Houghton,”
 
the
“Company, “Company,”
 
“we,” and “our” refer to Quaker Chemical
Corporation (doing
business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires.
 
As used in these Notes to Condensed Consolidated Financial Statements,
 
Financial Statements,
the term Legacy Quaker“Combination” refers to the Company priorlegacy Quaker combination
to the closing of its combination with Houghton International,
Inc. (“Houghton”)
(herein referred to as the “Combination”).
 
The condensed consolidated financial statements included herein are unaudited
 
are unaudited and have
have been prepared in accordance with generally accepted accounting principles
 
accounting principles in the United States (“U.S. GAAP”) for
interim financial
financial reporting and the United States Securities and Exchange Commission
 
(“SEC”) regulations.
 
Certain information and footnote
disclosures normally included in financial statements prepared in accordance
 
in accordance with U.S. GAAP have been condensed or
omitted
pursuant to such rules and regulations.
 
In the opinion of management, the financial statements reflect all adjustments
 
consisting only
of normal recurring adjustments which are
necessary for a fair statement of
the financial position,
results of operations and cash flows
for the interim periods.
 
The results for the
six months ended June 30, 20212022 are not necessarily indicative of the
 
of the results to be expected
for the full year.
 
These financial
statements should be read in conjunction with the Company’s
 
Annual Report filed on Form 10-K for
the year
ended December 31,
2020 2021 (the “2020“2021 Form 10-K”).
 
Description of Business
The Company was organized in 1918, incorporated
as a Pennsylvania
business corporation in 1930, and in August
2019
completed the Combination with Houghton to form
Quaker Houghton.
 
Quaker Houghton is the global leader in industrial process
fluids.
 
With a presence around the world, including
 
including operations in over
25
 
countries, the Company’s customers
 
include thousands of
the world’s most advanced and specialized
 
and specialized steel, aluminum, automotive, aerospace, offshore, can,
 
offshore, can, mining, and metalworking
companies.
 
Quaker Houghton develops, produces, and markets a broad range of formulated
 
of formulated chemical specialty products and offe
rsoffers
chemical management services (which the Company refers
to as “Fluidcare”“Fluidcare
TM
”) for various heavy industrial and manufacturing
applications throughout its
4
 
segments: Americas; Europe, Middle East and Africa (“EMEA”);
Asia/Pacific; and
Global Specialty
Businesses.
Hyper-inflationary economies
Based on various indices or index compilations being
used to monitor inflation
in Argentina as well as economic
instability,
effective July 1, 2018, Argentina’s
 
economy was considered hyper-inflationary under U.S.
GAAP.
 
As of, and for the three and six
months ended June 30, 2021,2022, the Company's Argentine
 
subsidiaries represented less than
1
% of the Company’s consolidated
 
total
assets and net sales, respectively.
 
During the three and six months ended June 30, 2021,2022, the Company
recorded less than $
0.1
 
million
and $
0.30.2
million,
 
million, respectively, of remeasurement
 
losses associated with the applicable currency conversions related
to Argentina.
 
Comparatively,
 
during the three and six months ended June 30, 2020,2021, the Company recorded
 
Company recorded less than $
0.1
 
million and $
0.10.3
 
million,
respectively, of remeasurement
 
remeasurement losses associated with the applicable currency
conversions
 
related to Argentina.
 
These losses were
recorded within foreign exchange losses, net, which
is a component of other
(expense) income, (expense), net, in the Company’s
Condensed
Consolidated Statements of Operations.
COVID-19
Management continues to monitor the impact that the COVID-19
pandemic is having on the Company,
the overall specialty
chemical industry,
and the economies and markets in which the Company operates.
The full extent of the COVID-19 pandemic
related business and travel restrictions and changes to
business and consumer behavior intended to reduce its spread are
uncertain as of
the date of this Quarterly Report on Form 10-Q for the
period ended June 30, 2021 (the “Report”) as COVID-19
and the responses of
governmental authorities continue to evolve globally.
Further, management continues to
evaluate how COVID-19-related circumstances, such as remote
work arrangements, affect
financial reporting processes, internal control over financial
reporting, and disclosure controls and procedures.
While the
circumstances have presented and are expected to continue
to present challenges, at this time, Management does not believe that
COVID-19 has had a material impact on financial reporting
processes, internal control over financial reporting,
and disclosure
controls and procedures.Income.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
7
The Company cannot reasonably estimate the magnitude
of the effects these conditions will have on the Company’s
operations in
the future as they are subject to significant uncertainties
relating to the ultimate geographic spread of the virus,
the incidence and
severity of the symptoms, the duration or resurgences
of the outbreak including the impact of new variants, the global
availability and
acceptance of vaccines as well as their efficacy,
the length of the travel restrictions and business closures imposed by
governments of
impacted countries, and the economic response by governments
of impacted countries, all of which continue to evolve.
To the extent
that the Company’s customers and
suppliers continue to be significantly and adversely impacted by
COVID-19, this
could reduce the availability,
or result in delays, of materials or supplies to or from
the Company, which in
turn could significantly
interrupt the Company’s
business operations.
Such impacts could grow and become more significant to the
Company’s operations
and the Company’s liquidity
or financial position.
Therefore, given the speed and frequency of continuously
evolving developments
with respect to this pandemic, the Company cannot reasonably
estimate the magnitude or the full extent to which COVID-19
may
impact the Company’s results
of operations, liquidity or financial position.
Note 2 – Business Acquisitions
2022 Acquisitions
In January 2022, the Company acquired a business that provides pickling
inhibitor technologies for the steel industry,
drawing
lubricants and stamping oil for metalworking, and various other lubrication,
rust preventative, and cleaner applications, for its
Americas reportable segment for approximately $
8.0
million.
This business broadens the Company’s
product offerings within its
existing metals and metalworking business in the Americas region.
The Company allocated $
5.6
million of the purchase price to
intangible assets, comprised of $
5.1
million of customer relationships to be amortized over
14 years
; and $
0.5
million of existing
product technologies to be amortized over
14 years
.
In addition, the Company recorded $
1.8
million of goodwill related to expected
value not allocated to other acquired assets, all of which is expected to be tax deductible
in various jurisdictions in which the
Company operates.
In January 2022, the Company acquired a business related to the sealing and impregnation
of metal castings for the automotive
sector, as well as impregnation resin and
impregnation systems for metal parts, for its Global Specialty Businesses reportable segment
for approximately
1.2
million EUR or approximately $
1.4
million.
This business expands the Company's geographic presence in
Germany as well as broadens its product offerings and
service capabilities within its existing impregnation business.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
8
The results of operations of the 2022 acquisitions subsequent to the respective
acquisition dates are included in the unaudited
Condensed Consolidated Statements of Income for the six month period ended
June 30, 2022.
Applicable transaction expenses
associated with these acquisitions are included in Combination,
integration and other acquisition-related expenses in the Company’s
unaudited Condensed Consolidated Statements of Income.
Certain pro forma and other information is not presented, as the operations
of the acquisitions are not considered material to the overall operations
of the Company for the periods presented.
Previous Acquisitions
In November 2021, Acquisitionsthe Company acquired Baron Industries (“Baron”),
a privately held Company that provides vacuum
impregnation services of castings, powder metals and electrical components for
its Global Specialty Businesses reportable segment for
$
11.0
million, including an initial cash payment of $
7.1
million, subject to post-closing adjustments as well as certain earn-out
provisions initially estimated at $
3.9
million that are payable at different times from 2022 through
2025.
The earn-out provisions
could total a maximum of $
4.5
million.
The Company allocated $
8.0
million of the purchase price to intangible assets, $
1.1
million of
property, plant and
equipment and $
1.5
million of other assets acquired net of liabilities assumed, which includes $
0.3
million of cash
acquired.
In addition, the Company recorded $
0.4
million of goodwill, all of which is expected to be tax deductible.
Intangible assets
comprised $
7.2
million of customer relationships to be amortized over
15 years
; and $
0.8
million of existing product technology to be
amortized over
13 years
.
In November 2021, the Company acquired a business that provides hydraulic
fluids, coolants, cleaners, and rust preventative oils
in Turkey for its EMEA reportable segment for
3.2
million EUR or approximately $
3.7
million.
In September 2021, the Company acquired the remaining interest in Grindaix
-GmbH (“Grindaix”), a Germany-based, high-tech
provider of coolant control and delivery systems for its Global Specialty Businesses reportable
segment for
2.4
million EUR or
approximately $
2.9
million, which is gross of approximately $
0.3
million of cash acquired.
Previously, in February
2021, the
Company acquired a
38
% ownership interest in Grindaix for
1.4
million EUR or approximately $
1.7
million.
The Company recorded
its initial investment as an equity method investment within the Condensed Consolidated
Financial Statements and accounted for the
purchase of the remaining interest as a step acquisition whereby the Company
remeasured the previously held equity method
investment to its fair value.
In June 2021, the Company acquired certain assets for its chemical milling
 
maskants product line in the Global Specialty Businesses
Businesses reportable segment for
2.3
 
million EUR or approximately $
2.8
 
million.
The Company accounted for the acquisition using the asset
acquisition method under ASC 805,
Business Combinations
.
In February 2021, the Company acquired a tin-plating solutions business
 
solutions business for the steel end market for approximately $
2525.0
 
million.
 
This
This acquisition is part of each of the Company’s
 
geographic reportable segments.
 
The Company allocated $
19.6
 
million of the purchase
purchase price to intangible assets, comprised of $
18.3
 
million of customer relationships, to be amortized over
19 years
; $
0.9
 
million
of existing
product technology to be amortized over
14 years
; and $
0.4
 
million of a licensed trademark to be amortized over
3 years
.
 
In addition,
the Company recorded $
5.0
 
million of goodwill related to expected value not allocated
to other acquired
assets, all of
which is
expected to be tax deductible.deductible in various jurisdictions in which we operate.
Factors contributing to the purchase price that resulted in
goodwill included the acquisition of business processes and personne
l
that will allow Quaker Houghton to better serve its customers.
 
As of June 30, 2021,2022, the allocation of the purchase price has not
been finalized and the
one
year
measurement period has not ended.
Further adjustments may be necessary as a resultof all of the Company’s
 
on-going assessment of2022 acquisitions, Grindaix, the acquisition in
additional information related to the fair value of assets acquiredTurkey,
 
and liabilities assumed.
Additionally, in February
2021, the Company acquired a
38
% ownership interest in a Germany-based, high-tech
provider of
coolant control and delivery systems for approximately
1.4
million EUR or approximately $
1.7
million.
The Company recorded this
investment as an equity method investment within
the Condensed Consolidated Financial Statements.
The results of operations of the acquired assets and businesses subsequent
to the respective acquisition dates are included in the
Condensed Consolidated Statements of Operations as of June
30, 2021.
Applicable transaction expenses associated with these
acquisitions are included in Combination, integration
and other acquisition-related expenses in the Company’s
Condensed
Consolidated Statements of Operations.
Certain pro forma and other information is not presented, as the
operations of the acquired
assets and businesses are not considered material to the
overall operations of the Company for the periods presented.
Previous Acquisitions
In December 2020,
the Company completed its acquisition of Coral Chemical Company
(“Coral”), a privately held, U.S.-based
provider of metal finishing fluid solutions.
The acquisition provides technical expertise and product solutions
for pre-treatment,
metalworking and wastewater treatment applications
to the beverage cans and general industrial end markets.
The original purchase
price was approximately $
54.1
million, subject to routine and customary post-closing adjustments related
to working capital and net
indebtedness levels.
The Company anticipates finalizing its post-closing adjustments
for the Coral acquisition during 2021 and
currently estimates it will receive approximately $
0.1
million to settle such adjustments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
8
The following table presents the preliminary estimated fair
values of Coral net assets acquired:
Measurement
December 22,
December 22,
Period
2020
2020 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
958
$
0
$
958
Accounts receivable
8,473
0
8,473
Inventories
4,527
0
4,527
Prepaid expenses and other assets
181
0
181
Property, plant and
equipment
10,467
652
11,119
Intangible assets
30,300
(500)
29,800
Goodwill
2,814
270
3,084
Total assets purchased
57,720
422
58,142
Long-term debt including current portions and finance leases
183
556
739
Accounts payable, accrued expenses and other accrued
liabilities
3,482
0
3,482
Total liabilities assumed
3,665
556
4,221
Total consideration
paid for Coral
54,055
(134)
53,921
Less: estimated purchase price settlement
0
(134)
(134)
Less: cash acquired
958
0
958
Net cash paid for Coral
$
53,097
$
0
$
53,097
(1) As previously disclosed in the Company’s
2020 Form 10-K
.
Measurement period adjustments recorded during the first
six months of 2021 include certain adjustments related
to refining
original estimates for assets and liabilities for certain
acquired finance leases, as well the adjustment to reflect the expected
settlement
of post-closing working capital and net indebtedness true
ups to the original purchase price.
As of June 30, 2021,
the allocation of the
purchase price for Coral hasBaron have not been finalized and the
one year
one-year measurement period has not ended.
 
Further adjustments may be
necessary as a result of the Company’s
 
on-going assessment of additional information related to the
fair value of
assets acquired and
liabilities assumed.
 
In MayDecember 2020, the Company acquired TelCoral Chemical Corporation
 
Nordic ApS (“TEL”Coral”), a company that specializes in lubricants and engineeringprivately held U.S.-based provider of metal
finishing fluid solutions.
 
primarily
in high pressure aluminum die casting for its Europe,
Middle East and Africa (“EMEA”) reportable segment.
Consideration paid was
in the form of a convertible promissory note in the amount
of
20.0
million DKK, or approximately $
2.9
million, which was
subsequently converted into shares of the Company’s
common stock.
An adjustmentSubsequent to the purchase priceacquisition, the Company and the sellers of approximately
0.4
million DKK, or less than $
0.1
Coral (the “Sellers”) have worked
 
million, was made as a result of finalizing ato finalize
certain post-closing adjustments.
 
settlement inDuring the second quarter of 2020.2022, after failing to reach resolution,
 
Thethe Sellers filed suit asserting
certain amounts owed related to tax attributes of the acquisition.
Based on the facts and circumstances of the claim asserted by the
Sellers, the Company allocated approximatelybelieves the potential range of exposure for this claim is $
2.40
 
million of the purchase price to intangible assets to be amortized
over
17 years
.
In addition,
the Company recorded approximately $
0.51.5
 
million of goodwill, related to expected value not allocated to
other acquired assets, none
of which will be tax deductible.
As of June 30, 2021, the allocation of the purchase price of TEL
was finalized and the
one year
measurement period ended.
In March 2020, the Company acquired the remaining
49
% ownership interest in one of its South African affiliates,
Quaker
Chemical South Africa Limited (“QSA”) for
16.7
million ZAR, or approximately $
1.0
million, from its joint venture partner PQ
Holdings South Africa.
QSA is a part of the Company’s
Europe, Middle East and Africa (“EMEA”) reportable segment.
As this
acquisition was a change in an existing controlling ownership,
the Company recorded $
0.7
million of excess purchase price over the
carrying value of the noncontrolling interest in Capital in
excess of par value.
In October 2019, the Company completed its acquisition
of the operating divisions of Norman Hay plc (“Norman
Hay”), a private
U.K. company that provides specialty chemicals, operating
equipment, and services to industrial end markets.
The original purchase
price was
80.0
million GBP,
on a cash-free and debt-free basis, subject to routine
and customary post-closing adjustments related to
working capital and net indebtedness levels.
The Company finalized its post-closing adjustments for
the Norman Hay acquisition and
paid approximately
2.5
million GBP during the first quarter of 2020 to settle such adjustments.million.
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
9
Note 3 – Recently Issued Accounting Standards
 
Recently Issued Accounting Standards
 
Adopted
The Financial Accounting Standards Board (“FASB”)FASB issued ASU 2020
 
issued Account Standards Update (“ASU”)
ASU 2019-12
, Income Taxes
(Topic
740): Simplifying the Accounting for Income Taxes
in December 2019 to simplify the accounting for income taxes.
The
guidance within this accounting standard update
removes certain exceptions, including the exception to the
incremental approach for
certain intra-period tax allocations, to the requirement
to recognize or not recognize certain deferred tax liabilities for
equity method
investments and foreign subsidiaries, and to the general
methodology for calculating income taxes in an interim period
when a year-to-
date loss exceeds the anticipated loss for the year.
Further, the guidance simplifies the accounting
related to franchise taxes, the step
up in tax basis for goodwill, current and deferred tax
expense, and codification improvements for income taxes related
to employee
stock ownership plans.
The guidance is effective for annual and interim
periods beginning after December 15, 2020.
The Company
adopted this standard on a prospective basis, effective
January 1, 2021.
There was no cumulative effect of adoption recorded
within
retained earnings on January 1, 2021.
The FASB issued
ASU 2020-04,-04,
Reference Rate Reform (Topic
 
848): Facilitation of the Effects of Reference Rate Reform
 
Reform on
Financial Reporting
 
in March 2020.
 
The FASB subsequently
 
issued ASU 2021-01,
Reference Rate Reform (Topic
 
848): Scope
 
in
January 2021 which clarified the guidance but did
not materially change
the guidance or its applicability to
the Company.
 
The
amendments provide temporary optional expedients and exceptions
 
exceptions for applying U.S. GAAP to contract modifications,
hedging
relationships and other transactions to ease the potential accounting
 
accounting and financial reporting burden associated with transitioning
away
from reference rates that are expected to be discontinued, including
 
including the London Interbank Offered Rate (“LI
BOR”LIBOR”).
 
ASU 2020-04 is
effective for the Company as of March 12,
2020 and generally can
be applied through December 31, 2022.
 
AsOn June 17, 2022, the
Company entered into an amendment to its primary credit facility which,
among other things, provided for the use of June 30, 2021, thea USD currency
expedients provided in ASU 2020-04 do not presentlyLIBOR successor rate (the Secured Overnight Financing Rate (“SOFR”)).
 
impact the Company; however, the Company
will continueSee Note 14 of Notes to monitor forCondensed Consolidated Financial
potential impacts on its consolidated financial statements.Statements.
Note 4 – Business Segments
The Company’s operating
 
segments, which are consistent with its reportable segments,
reflect the structure of the
Company’s
internal organization, the method by which the Company’s
 
the Company’s resources are allocated
and the manner by which the chief operating
decision maker assesses the Company’s
 
performance.
 
The Company has
4
 
reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
 
The three geographic segments are composed of the net
sales and operations in
each respective region, excluding net sales and operations managed globally
 
managed globally by the Global Specialty Businesses segment.
The Global
Specialty Businesses segment which
includes the Company’s
 
container, metal finishing, mining,
 
mining, offshore, specialty coatings, specialty
grease and
Norman Hay businesses.
Segment operating earnings for each of the Company’s
 
reportable segments are comprised of the segment’s
 
net sales less directly
related cost of goods sold (“COGS”) and selling, general and administrative
 
and administrative expenses (“SG&A”).
 
Operating expenses not directly
attributable to the net sales of each respective segment,
such as certain corporate
and administrative costs, Combination, integration
and other acquisition-related expenses, and Restructuring and related charges,
 
charges, are not included in segment operating
earnings.
 
Other
items not specifically identified with the Company’s
 
reportable segments include interestInterest expense, net and other
Other (expense) income, (expense),
net.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
10
The following table presents information about the performance of
 
of the Company’s reportable segments for
 
for the three and six
months ended June 30, 20212022 and 2020.
Certain immaterial reclassifications within the segment disclosures
for the three and six
months ended June 30, 2020 have been made to conform
with the Company’s current customer
industry segmentation.2021.
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Net sales
 
 
 
 
 
 
 
 
 
 
Americas
$
172,747
$
139,673
$
80,576326,891
$
274,544
$EMEA
210,472
EMEA123,053
 
123,436
 
77,702248,740
 
243,250
Asia/Pacific
 
182,541
Asia/Pacific99,828
 
91,559
 
68,421204,062
 
188,265
Global Specialty Businesses
 
141,973
Global Specialty Businesses96,760
 
80,594
 
59,341186,866
 
158,986
129,615
Total net sales
$
492,388
$
435,262
$
286,040966,559
$
865,045
$
664,601
Segment operating earnings
Americas
$
33,785
$
33,648
$
10,30363,005
$
65,882
$EMEA
39,491
EMEA13,283
23,405
10,47130,049
48,649
28,830
Asia/Pacific
22,226
23,227
19,26144,133
50,705
38,802
Global Specialty Businesses
27,841
 
24,209
 
16,39352,876
 
48,378
36,953
Total segment operating
 
earnings
 
97,135
104,489
 
56,428190,063
 
213,614
144,076
Combination, integration and other acquisition-related expenses
expenses(1,832)
(6,658)
(7,995)(5,885)
(12,473)
(15,873)
Restructuring and related chargescredits (charges), net
1
(298)
(486)(819)
(1,473)
(2,202)
Fair value step up of acquired inventory sold
 
0
(226)
(801)
(226)
Indefinite-lived intangible asset impairment
0
0
0
(38,000)(801)
Non-operating and administrative expenses
(48,579)
(43,077)
(32,045)(92,042)
(84,069)
(70,496)
Depreciation
of corporate assets and amortization
 
(14,822)
(15,640)
 
(13,438)(30,011)
 
(31,088)
(27,485)
Operating income (loss)
31,903
38,816
2,23861,306
83,710
(10,206)Other (expense) income, net
Other income (expense), net(8,399)
14,010
(993)(10,605)
18,697
(22,168)
Interest expense, net
(6,494)
 
(5,618)
 
(6,811)(11,839)
 
(11,088)
(15,272)
Income (loss) before taxes and equity in net (loss) income of
associated companies
$
17,010
$
47,208
$
(5,566)38,862
$
91,319
$
(47,646)
Inter-segment revenues for the three and six months ended
 
June 30, 2022, were $
3.3
million and $
6.2
million for Americas, $
12.4
million and $
21.3
million for EMEA, $
0.1
million and $
0.4
million for Asia/Pacific, and $
2.0
million and $
3.7
million for Global
Specialty Businesses, respectively.
Inter-segment revenues for the three and six months ended
June 30, 2021, were $
2.4
 
million and
$
5.7
 
million for Americas, $
6.3
million and $
15.1
 
million for EMEA, $
0.4
 
million and $
0.5
 
million for Asia/Pacific, and $
2.1
 
million and $
4.1
million for Global
Specialty Businesses, respectively.
Inter-segment revenues for the three and six months
ended June 30, 2020 were $
2.4
million and
$
5.3
million for Americas, $
5.3
million and $
10.8
million for EMEA, $
0.1
million and $
0.3
million for Asia/Pacific, and $
1.0
million
and $
2.34.1
 
million for Global Specialty Businesses, respectively.
 
However, all inter-segment transactions
 
transactions have been eliminated from
each reportable operating segment’s
 
net sales and earnings for all periods presented in the above
tables.
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad
range of formulated chemical specialty products and offers
chemical
management services (“Fluidcare”) for various heavy
industrial and manufacturing applications throughout its four
segments.
A
significant portion of the Company’s
revenues are realized from the sale of process fluids and services
made directly to manufacturers
through its own employees and its Fluidcare programs,
with the balance being handled through distributors and
agents.Arrangements Resulting in Net Reporting
As part of the Company’s Fluidcare
TM
 
Fluidcare business, certain third-party product sales to customers are
managed by the Company.
 
Where
the Company acts as a principal, revenues are recognized
on a gross reporting basis at the selling price negotiated with
its customers.
Where the Company acts as an agent, revenue is recognized on
a net reporting basis at the amount of the administrative fee earned
by
the Company for ordering the goods.Company.
 
The
Company transferred third-party products under arrangements recognized
 
on a net reporting
basis of $
20.5
million and $
40.3
million
for the three and six months ended June 30, 2022, respectively,
and $
16.7
 
million and $
34.5
 
million for the three and six months ended
June 30, 2021, respectively,
and $
6.2
million and $
18.7
million for the three and six months ended June 30,
2020, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
11
Customer Concentration
A significant portion of the Company’s
revenues are realized from the sale of process fluids and services to manufacturers of
steel, aluminum, automobiles, aerospace,
industrial and agricultural equipment, and durable goods.
As previously disclosed in the
Company’s
2020 2021 Form 10-K, during 2020,
the year ended December 31, 2021, the Company’s
 
five largest customers (each composed of
of multiple subsidiaries or divisions with semiautonomous purchasing authority)
 
purchasing authority) accounted for approximately
10
% of consolidated net
sales, with its largest customer accounting
for approximately
3
% of consolidated net sales.
Revenue Recognition Model
The Company applies the five-step model in the FASB’s
guidance, which requires the Company to: (i) identify
the contract with a
customer; (ii) identify the performance obligations in
the contract; (iii) determine the transaction price; (iv) allocate the
transaction
price to the performance obligations in the contract; and
(v) recognize revenue when, or as, the Company satisfies a performance
obligation.
Refer to the Company’s 2020
Form 10-K for additional information on the Company’s
revenue recognition policies,
including its practical expedients and accounting policy
elections.
Allowance for Doubtful Accounts
As previously disclosed in the Company’s
2020 Form 10-K, during 2020, the Company adopted, as required,
an accounting
standard update related to the accounting and disclosure
of credit losses effective January 1, 2020.
The Company recognizes an
allowance for credit losses, which represents the portion
of its trade accounts receivable that the Company does not expect
to collect
over the contractual life, considering past events and
reasonable and supportable forecasts of future economic conditions.
The
Company’s allowance
for credit losses on its trade accounts receivables is based on
specific collectability facts and circumstances for
each outstanding receivable and customer,
the aging of outstanding receivables, and the associated collection
risk the Company
estimates for certain past due aging categories, and
also, the general risk to all outstanding accounts receivable based on historical
amounts determined to be uncollectible.
The Company does not have any off-balance-sheet
credit exposure related to its customers.
Contract Assets and Liabilities
The Company recognizes a contract asset or receivable
on its Condensed Consolidated Balance Sheet when the Company
performs a service or transfers a good in advance
of receiving consideration.
A receivable is the Company’s
right to consideration that
is unconditional and only the passage of time is required
before payment of that consideration is due.
A contract asset is the
Company’s right to consideration
in exchange for goods or services that the Company has transferred
to a customer.
The Company
had no material contract assets recorded on its Condensed
 
Consolidated Balance Sheets as of June 30, 20212022 or
December
31, 2020.2021.
A contract liability is recognized when the Company
receives consideration, or if it has the unconditional right
to receive
consideration, in advance of performance.
A contract liability is the Company’s
obligation to transfer goods or services to a customer
for which the Company has received consideration,
or a specified amount of consideration is due, from the customer.
The Company’s
contract liabilities primarily represent deferred revenue
recorded for customer payments received by the Company
prior to the
Company satisfying the associated performance obligation.
Deferred revenues are presented within other current liabilities
in the
Company’s Condensed
Consolidated Balance Sheets.
The Company had approximately $
4.36.6
 
million and $
4.07.0
 
million of deferred
revenue as of June 30, 20212022 and December 31, 2020,2021,
respectively.
 
For the six months ended June 30, 2021,2022, the Company satisfied
all
of the associated
performance obligations and
recognized
into revenue the advance payments received and recorded
 
as of December
31, 2020.2021.
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicals
and its technical expertise as a global product
portfolio.
The Company generally manages and evaluates its performance by segment first, and
then by customer industry,
rather than
by individual product lines.
Also, net sales of each of the Company’s major product
lines are generally spread throughout all three of
the Company’s geographic
regions, and in most cases, approximately proportionate to the level of total
sales in each region.
The following tables disaggregate the Company’s
 
net sales by segment, geographic region, customer industry,
 
and timing of
revenue recognized for the three and six months ended
June 30, 2021 2022
and 2020.2021.
Three Months Ended June 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
63,373
$
37,586
$
55,596
$
156,555
Metalworking and other
109,374
85,467
44,232
239,073
172,747
123,053
99,828
395,628
Global Specialty Businesses
62,367
21,324
13,069
96,760
$
235,114
$
144,377
$
112,897
$
492,388
Timing of Revenue Recognized
Product sales at a point in time
$
225,135
$
136,622
$
110,190
$
471,947
Services transferred over time
9,979
7,755
2,707
20,441
$
235,114
$
144,377
$
112,897
$
492,388
Three Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
51,799
$
35,634
$
48,207
$
135,640
Metalworking and other
87,874
87,802
43,352
219,028
139,673
123,436
91,559
354,668
Global Specialty Businesses
46,183
21,678
12,733
80,594
$
185,856
$
145,114
$
104,292
$
435,262
Timing of Revenue Recognized
Product sales at a point in time
$
177,227
$
137,838
$
101,264
$
416,329
Services transferred over time
8,629
7,276
3,028
18,933
$
185,856
$
145,114
$
104,292
$
435,262
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
12
ThreeSix Months Ended June 30, 20202022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
32,687119,533
$
24,92474,425
$
35,416110,883
$
93,027304,841
Metalworking and other
47,889207,358
52,778174,315
33,00593,179
133,672474,852
80,576326,891
77,702248,740
68,421204,062
226,699779,693
Global Specialty Businesses
32,294119,631
15,56941,345
11,47825,890
59,341186,866
$
112,870446,522
$
93,271290,085
$
79,899229,952
$
286,040966,559
Timing of Revenue Recognized
Product sales at a point in time
$
108,644426,419
$
87,995273,825
$
78,195224,815
$
274,834925,059
Services transferred over time
4,22620,103
5,27616,260
1,7045,137
11,20641,500
$
112,870446,522
$
93,271290,085
$
79,899229,952
$
286,040966,559
Six Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
98,592
$
69,908
$
97,950
$
266,450
Metalworking and other
175,952
173,342
90,315
439,609
274,544
243,250
188,265
706,059
Global Specialty Businesses
91,439
41,950
25,597
158,986
$
365,983
$
285,200
$
213,862
$
865,045
Timing of Revenue Recognized
Product sales at a point in time
$
348,821
$
269,000
$
207,663
$
825,484
Services transferred over time
17,162
16,200
6,199
39,561
$
365,983
$
285,200
$
213,862
$
865,045
Six Months Ended June 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
79,360
$
54,812
$
77,005
$
211,177
Metalworking and other
131,112
127,729
64,968
323,809
210,472
182,541
141,973
534,986
Global Specialty Businesses
76,525
32,174
20,916
129,615
$
286,997
$
214,715
$
162,889
$
664,601
Timing of Revenue Recognized
Product sales at a point in time
$
277,446
$
206,418
$
159,351
$
643,215
Services transferred over time
9,551
8,297
3,538
21,386
$
286,997
$
214,715
$
162,889
$
664,601
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
13
Note 6 –- Leases
The Company determines if an arrangement is a lease
at its inception.
This determination generally depends on whether the
arrangement conveys the right to control the use of an
identified fixed asset explicitly or implicitly for a period of
time in exchange for
consideration.
Control of an underlying asset is conveyed if the Company
obtains the rights to direct the use of, and obtains
substantially all of the economic benefits from the use
of, the underlying asset.
Lease expense for variable leases and short-term
leases is recognized when the obligation is incurred.
The Company has operating leases for certain facilities, vehicles and machinery
 
and machinery and equipment with remaining lease terms up
to
10 years
.
 
In addition, the Company has certain land use leases with remaining
lease terms up to
94 years
.
The lease term for all of the
Company’s leases includes
the non-cancellable period of the lease plus any additional periods
covered by an option to extend the lease
that the Company is reasonably certain it will exercise.
Operating leases are included in right of use lease assets
, other current
liabilities and long-term lease liabilities
on the Condensed Consolidated Balance Sheet.
Right of use lease assets and liabilities are
recognized at each lease’s
commencement date based on the present value of its lease payments
over its respective lease term.
The
Company uses the stated borrowing rate for a lease when
readily determinable.
When a stated borrowing rate is not available in a
lease agreement, the Company uses its incremental borrowing
rate based on information available at the lease’s
commencement date
to determine the present value of its lease payments.
In determining the incremental borrowing rate used to present
value each of its
leases, the Company considers certain information
including fully secured borrowing rates readily available to the Company
and its
subsidiaries.
The Company has immaterial finance leases, which are
included in property, plant
and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated
Balance Sheet.
Operating lease expense is recognized on a straight-line
basis over the lease term. In addition,
 
Operatingthe Company has certain land
use leases with remaining lease expense for the three and sixterms up to
months ended June 30, 2021 was $93 years
3.6.
million and $
7.2
million, respectively.
Comparatively, operating
lease expense for the three
and six months ended June 30, 2020 was $
3.5
million and $
6.9
million, respectively.
Short-term lease expense for the three and six
months ended June 30, 2021 was $
0.2
million and $
0.5
million, respectively.
Comparatively, short-term
lease expense for the three
and six months ended June 30, 2020 was $
0.4
million and $
0.9
million, respectively.
The Company has
0
 
material variable lease
costs, or sublease income or finance leases for the three orand six months ended
 
June 30, 2021
2022 and 2020.2021. The following table sets forth the components of the Company’s
 
Cash paidlease cost for operating leases during thethree and six months ended
June 30, 2021 and 2020 was $
7.1
million and $
6.8
million,
respectively.
The Company recorded new right of use lease assets and associated lease liabilities
of $
3.9
million during the six
months ended June 30, 2021.
2022 and 2021:
Supplemental balance sheet information related to the Company’s
leases is as follows:
June 30,Three Months Ended
December 31,Six Months Ended
2021
2020
Right of use lease assets
$
36,160
$
38,507
Other current liabilities
10,064
10,901
Long-term lease liabilities
25,668
27,070
Total operating
lease liabilities
$
35,732
$
37,971
Weighted average
remaining lease term (years)
5.8
6.0
Weighted average
discount rate
4.26%
4.20%
Maturities of operating lease liabilities as of June 30,
2021 were as follows:
June 30,
June 30,
2022
2021
For the remainder of 2022
2021
Operating lease expense
$
6,052
For the year ended December 31, 2022
9,400
For the year ended December 31, 2023
7,234
For the year ended December 31, 2024
5,355
For the year ended December 31, 2025
4,260
For the year ended December 31, 2026 and beyond
8,152
Total lease payments
40,453
Less: imputed interest
(4,721)
Present value of lease liabilities3,519
$
35,7323,548
$
6,928
$
7,160
Short-term lease expense
205
283
424
534
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
1413
Supplemental cash flow information related to the Company’s
leases is as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating leases
$
3,442
$
3,489
$
6,807
$
7,068
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new
operating lease liabilities
3,385
825
8,074
3,875
Supplemental balance sheet information related to the Company’s
leases is as follows:
June 30,
December 31,
2022
2021
Right of use lease assets
$
36,317
$
36,635
Other current liabilities
10,452
9,976
Long-term lease liabilities
25,695
26,335
Total operating lease liabilities
$
36,147
$
36,311
Weighted average
remaining lease term (years)
5.6
5.6
Weighted average
discount rate
4.14%
4.22%
Maturities of operating lease liabilities were as follows:
June 30,
2022
For the remainder of 2022
$
6,201
For the year ended December 31, 2023
10,076
For the year ended December 31, 2024
7,815
For the year ended December 31, 2025
5,749
For the year ended December 31, 2026
4,449
For the year ended December 31, 2027 and beyond
6,678
Total lease payments
40,968
Less: imputed interest
(4,821)
Present value of lease liabilities
$
36,147
Note 7 – Restructuring and Related Activities
The Company’s management approved a global restructuring plan (the “QH Program”) as part of its plan to realize certain cost
synergies associated with the Combination in the third quarter of 2019. The QH Program includes restructuring and associated
severance costs to reduce total headcount by approximately 400 people globally, as well as plans for the closure of certain
manufacturing and non-manufacturing facilities. The exact timing and total costs associated with the QH Program will depend on a
number of factors and isare subject to change; however, the Company currently expects reduction in headcount and site closures tounder
the QH Program to continue to occur throughout 20212022 and into 2022 under the QH Program and estimates that anticipated cost synergies realized from the
QH Program will approximate one-times the restructuring costs incurred.2023. Employee separation benefits will vary depending on local
regulations within certain foreign countries and will include severance and other benefits.
All costs incurred to date relate to severance costs to reduce headcount,
 
headcountincluding customary and routine adjustments to initial
estimates for employee separation costs, as well as costs to close certain facilities
and are
recorded
in Restructuring and related
charges in the Company’s
 
Company’s Condensed Consolidated Statements
of Operations.Income.
 
As described in Note 4 of Notes to Condensed
Condensed Consolidated Financial Statements, restructuring
and related charges
are not included in the Company’s
 
the Company’s calculation of reportable
reportable segments’ measure of operating earnings
and therefore these costs are not reviewed
by or recorded to
reportable segments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
14
Activity in the Company’s accrual
 
accrual for restructuring under the QH Program for the six months ended
June 30, 2021 2022
is as follows:
QH Program
Accrued restructuring as of December 31,
2020 2021
$
8,2484,087
Restructuring and related charges
1,473819
Cash payments
(4,214)(797)
Currency translation adjustments
 
(229)(297)
Accrued restructuring as of June 30, 20212022
$
5,2783,812
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense
 
expense in its Condensed Consolidated Statements of Income
Operations for the three and six months ended June 30, 2021
2022 and 2020:2021:
 
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Stock options
$
469
$
332
$
353736
$
640
$
785
Non-vested stock awards and restricted stock units
1,667
1,290
1,2593,215
2,686
2,523
Non-elective and elective 401(k) matching contribution in
stock
0
1,1620
0
1,553
1,162
Director stock ownership plan
20
216
5444
419
94
Performance stock units
815
517
2801,438
836
280
Annual incentive plan
0
(117)
0
2,829
Total share-based
 
compensation expense
$
2,971
$
2,355
$
2,9915,433
$
6,134
$
7,673
Share-based compensation expense is recorded in SG&A, except for $
0.1
 
exceptmillion and $
0.2
million for the three and six months
ended June 30, 2022, respectively,
and $
0.2
 
million and $
0.5
 
million for the three and six months
ended June 30, 2021, respectively,
and $
0.3
million and $
0.8
million for the three and six months ended June 30, 2020, respectively,
recorded within Combination, integration
and other acquisition-related
expenses.
Stock Options
During the first six months of 2021,2022, the Company granted
stock options under
its long-term incentive plan (“LTIP”)
 
that are
subject only to time-basedtime vesting over a
three
 
year period.
 
For the purposes of determining the fair value of stock
option awards, the
Company used a Black-Scholes option pricing model and
which primarily used the assumptions set forth
in the table below:
March 2022
Grant
Number of options granted
25,25027,077
Dividend yield
0.850.80
%
Expected volatility
37.3338.60
%
Risk-free interest rate
0.602.07
%
Expected term (years)
4.0
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
The fair value of these options is amortized on a straight
-linestraight-line basis over the
vesting period.
 
As of June 30, 2021,
2022, unrecognized
compensation expense related to all stock options granted
 
granted was $
2.4
 
million, to be recognized over a weighted average remaining
period of
2.31.6
 
years.
 
Restricted Stock Awards
 
and Restricted Stock Units
During the six months ended June 30, 2021,2022, the Company
granted
17,69225,743
 
non-vested restricted shares and
2,7914,490
 
non-vested
restricted stock units under its LTIP,
 
which are subject to time-based vesting, generally over a
three year
 
period.
 
The fair value of
these grants is based on the trading price of the Company’s
 
common stock on the date of grant.
 
The Company adjusts the grant date
fair value of these awards for expected forfeitures based
on historical experience.
 
As of June 30, 2021,2022, unrecognized compensation
expense related to the non-vested restricted shares was $
6.36.2
 
million, to be recognized over a weighted average remaining period
 
period of
1.9
1.8
years, and unrecognized compensation expense
related to non-vested
restricted stock units was $
1.11.2
 
million, to be recognized over a
weighted average remaining period of
2.1
 
years.
Performance Stock Units
During the first six months of 2021, the Company granted
performance-dependent stock awards (“PSUs”) as a component of
its
LTIP,
which will be settled in a certain number of shares subject to market
-based and time-based vesting conditions.
The number of
fully vested shares that may ultimately be issued as settlement
for each award may range from
0
% up to
200
% of the target award,
subject to the achievement of the Company’s
total shareholder return (“TSR”) relative to the performance
of the Company’s peer
group, the S&P Midcap 400 Materials group.
The service period required for the PSUs is three years and the
TSR measurement
period for the PSUs is from January 1 of the year of grant
through December 31 of the year prior to issuance of the shares upon
settlement.
Compensation expense for PSUs is measured based on
their grant date fair value and is recognized on a straight-line basis over
the
three year
vesting period.
The grant-date fair value of the PSUs granted during
the first six months of 2021 was estimated using a
Monte Carlo simulation on the grant date and using the
following assumptions: (i) a risk-free rate of
0.29
%; (ii) an expected term of
3.0
years; and (iii) a three year daily historical volatility for each of
the companies in the peer group, including Quaker Houghton.
As of June 30, 2021, the Company estimates that it will issue
approximately
14,698
fully vested shares as of the applicable
settlement date of all outstanding PSUs awards based on
the conditions of the PSUs and performance to date for
each award.
As of
June 30, 2021, there was approximately $
4.2
million of total unrecognized compensation cost related to PSUs, which
the Company
expects to recognize over a weighted-average period
of
2.3
years.
Annual Incentive Plan
The Company maintains an Annual Incentive Plan
(“AIP”), which may be settled in cash or a certain number of
shares subject to
performance-based and time-based vesting conditions.
As of June 30, 2020, it was the Company’s
intention to settle the 2020 AIP in
shares, and therefore, expense associated with the AIP in
2020 was recorded as a component of share-based compensation
expense.
In
the fourth quarter of 2020, the Company determined that it
would settle the 2020 AIP in cash.
Therefore, the share-based
compensation associated with the AIP during the year
ended December 31, 2020 was reclassified from a component
of share-based
compensation expense to incentive compensation.
This determination and conclusion had no impact on the
classification of AIP
expense within the Company’s
Condensed Consolidated Statement of Operations for
the periods as both are a component of SG&A.
As of June 30, 2021, it is the Company’s
intention to settle the 2021 AIP in cash.
Defined Contribution Plan
The Company has a 401(k) plan with an employer
match covering a majority of its U.S. employees.
The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum
matching contribution of
3
% of compensation.
Additionally, the
plan provides for non-elective nondiscretionary contributions
on behalf of participants who have completed one year
of service equal to
3
% of the eligible participants’ compensation.
Beginning in April 2020 and continuing through March 2021,
the
Company matched both non-elective and elective 401(k)
contributions in fully vested shares of the Company’s
common stock rather
than cash.
For the three months ended June 30, 2021, there were
0
matching contributions in stock.
For the six months ended June
30, 2021, total contributions were $
1.5
million and for both the three and six months ended June 30, 2020,
total contributions were
$
1.2
million.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
Performance Stock Units
The Company grants performance-dependent stock awards (“PSUs”) as a component
of its LTIP,
which will be settled in a
certain number of shares subject to market-based and time-based vesting conditions.
The number of fully vested shares that may
ultimately be issued as settlement for each award may range from
0
% up to
200
% of the target award, subject to the achievement of
the Company’s total shareholder
return (“TSR”) relative to the performance of the Company’s
peer group, the S&P Midcap 400
Materials group.
The service period required for the PSUs is three years and the TSR measurement
period for the PSUs is generally
from January 1 of the year of grant through December 31 of the year prior
to issuance of the shares upon settlement.
Compensation expense for PSUs is measured based on their grant date fair value
and is recognized on a straight-line basis over
the three year vesting period.
The grant-date fair value of the PSUs was estimated using a Monte Carlo
simulation on the grant date
and using the following assumptions set forth in the table below:
March 2022
Grant
Number of PSUs granted
16,820
Risk-free interest rate
2.11
%
Dividend yield
0.93
%
Expected term (years)
3.0
As of June 30, 2022, based on the conditions of the PSUs and performance to date for
each award, the Company estimates that it
will
0
t issue any fully vested shares as of the applicable settlement date of all outstanding PSUs awards.
As of June 30, 2022, there
was approximately $
5.5
million of total unrecognized compensation cost related to PSUs which the Company
expects to recognize
over a weighted-average period of
2.1
years.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majority
of its U.S. employees.
The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum matching contribution of
3
% of compensation.
Additionally, the plan
provides for non-elective nondiscretionary contributions on behalf of participants
who have completed one year
of service equal to
3
% of the eligible participants’ compensation.
Beginning in April 2020 and continuing through March 2021, the
Company matched both non-elective and elective 401(k) contributions
in fully vested shares of the Company’s common
stock rather
than cash.
There were
0
matching contributions in stock for the three and six months ended June 30, 2022.
For the six months ended
June 30, 2021, total contributions were $
1.5
million.
Note 9 – Pension and Other Postretirement
Benefits
The components of net periodic benefit (income) cost for the three and
six months ended June 30, 2022 and 2021 are as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2022
2021
2022
2021
2022
2021
2022
2021
Service cost
$
174
$
316
$
8
$
2
$
354
$
632
$
0
$
3
Interest cost
1,317
1,094
2
10
2,677
2,184
11
21
Expected return on plan assets
(2,012)
(2,093)
0
0
(4,097)
(4,175)
0
0
Actuarial loss amortization
248
857
(23)
0
505
1,712
(47)
0
Prior service cost amortization
2
3
(9)
0
5
5
(8)
0
Net periodic benefit (income)
cost
$
(271)
$
177
$
(22)
$
12
$
(556)
$
358
$
(44)
$
24
Employer Contributions
As of June 30, 2022, $
1.7
million and $
0.1
million of contributions have been made to the Company’s
U.S. and foreign pension
plans and its other postretirement benefit plans, respectively.
Taking into consideration
current minimum cash contribution
requirements, the Company currently expects to make full year cash contributions
of approximately $
6.6
million to its U.S. and
foreign pension plans and approximately $
0.2
million to its other postretirement benefit plans in 2022
.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
16
Note 10 – Other (Expense) Income, Net
The components of other (expense) income, net, for the three and six months ended June
30, 2022 and 2021 are as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Income from third party license fees
$
249
$
373
$
653
$
712
Foreign exchange losses, net
(2,026)
(838)
(3,931)
(2,316)
(Loss) gain on disposals of property,
plant, equipment and other
assets, net
(38)
(54)
(15)
5,356
Non-income tax refunds and other related (expense) credits
(417)
14,295
(1,739)
14,392
Pension and postretirement benefit income,
non-service components
475
129
954
253
Loss on extinguishment of debt
(6,763)
0
(6,763)
0
Other non-operating income, net
121
105
236
300
Total other (expense)
income, net
$
(8,399)
$
14,010
$
(10,605)
$
18,697
Non-income tax refunds and other related (expense) credits during
the three and six months ended June 30, 2022, includes
adjustments to Combination-related indemnification assets associated with the
settlement of certain income tax audits at certain of the
Company’s Italian and German
affiliates for tax periods prior to August 1, 2019.
See Note 11 of Notes to Condensed Consolidated
Financial Statements.
During the second quarter of 2022, the Company recorded a loss on extinguishment
of debt of approximately
$
6.8
million which includes the write-off of certain previously unamortized
deferred financing costs as well as a portion of the third
party and creditor debt issuance costs incurred to execute an amendment
to the Company’s primary credit facility.
See Note 14 of
Notes to the Condensed Consolidated Financial Statements.
Loss (gain) on disposals of property,
plant, equipment and other assets, net, during the six months ended June 30, 2021,
includes a
gain on the sale of certain held-for-sale real property assets related
to the Combination.
Note 11 – Income Taxes
and Uncertain Income Tax
Positions
The Company’s effective
tax rates for the three and six months ended June 30, 2022 were
8.1
% and
10.9
%, respectively,
compared to
32.2
% and
28.4
% for the three and six months ended June 30, 2021, respectively.
The Company’s effective
tax rate for
the six months ended June 30, 2022 was largely driven by
state tax benefits, changes in the valuation allowance for foreign tax credits
due to recently issued legislative guidance,
the impact of audit settlements reached with German and Italian tax authorities, a deferred
tax benefit associated with an intercompany asset transfer,
a reduction in reserves for uncertain tax positions relating to management
fees, withholding taxes for increased forecasted dividends and the effects
of lower pre-tax earnings and the mix of such earnings.
In
addition, the Company incurred higher tax expense during the three and six months ended
June 30, 2022 at one of its subsidiaries as it
accrued taxes at a statutory tax rate of
25
% while it awaits recertification of a concessionary
15
% tax rate, which was available to the
Company during all of 2021.
Comparatively,
the prior year effective tax rates were largely impacted
by the sale of a subsidiary which
included certain held-for-sale real property assets related to the Combination
,
changes in foreign tax credit valuation allowances, tax
law changes in a foreign jurisdiction and the income tax impacts of certain
non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
As of December 31, 2021, the Company had a deferred tax liability of $
8.4
million on certain undistributed foreign earnings,
which primarily represents the Company’s
estimate of non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S.
As of June 30, 2022 this deferred tax liability balance was $
7.4
million.
As of June 30, 2022, the Company’s
cumulative liability for gross unrecognized tax benefits was $
17.8
million, a decrease of approximately $
4.7
million from the
cumulative liability accrued as of December 31, 2021.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17
The Company continues to recognize interest and penalties associated with uncertain
tax positions as a component of taxes on
income before equity in net income of associated companies in its Condensed
Consolidated Statements of Income.
The Company
recognized a benefit for interest of less than $
0.1
million and $
0.3
million and an expense of less than of $
0.1
million and a benefit of
$
1.5
million for penalties in its Condensed Consolidated Statement of Income for
the three and six months ended June 30, 2022,
respectively, and recognized
an expense for interest of approximately $
0.2
million and $
0.2
million and a benefit of less than $
0.1
million and $
0.2
million for penalties in its Condensed Consolidated Statement of Income for
the three and six months ended June 30,
2021, respectively.
As of June 30, 2022, the Company had accrued $
2.6
million for cumulative interest and $
1.5
million for
cumulative penalties in its Condensed Consolidated Balance Sheets, compared
to $
3.1
million for cumulative interest and $
3.1
million
for cumulative penalties accrued at December 31, 2021.
During the six months ended June 30, 2022 and 2021, the Company recognized
decreases of $
3.5
million and $
0.8
million,
respectively,
in its cumulative liability for gross unrecognized tax benefits due to the settlement
of income tax audits with both the
Italian and German tax authorities, as well as the expiration of the applicable
statutes of limitations for certain tax years.
The Company estimates that during the year ending December 31, 202
2
it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
4.2
million due to the settlement of income tax audits and the expiration of the statute of
limitations with regard to certain tax positions.
This estimated reduction in the cumulative liability for unrecognized
tax benefits does
not consider any increase in liability for unrecognized tax benefits with regard
to existing tax positions or any increase in cumulative
liability for unrecognized tax benefits with regard to new tax positions for
the year ending December 31, 2022.
The Company and its subsidiaries are subject to U.S. Federal income tax,
as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain subject
to examination by major tax jurisdictions include Italy from
2007
, Brazil from
2011
,
Germany from
2015
, the Netherlands and Mexico from
2016
, Canada, China, Spain and the U.S. from
2017
, the United Kingdom
from
2018
, India from fiscal year beginning April 1, 2017 and ending March 31,
2018
, and various U.S. state tax jurisdictions from
2011
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years 2007 through 2015. The Company has filed for competent authority relief from these assessments under
the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except
2007. In 2020, the respective tax authorities in Italy, Spain and the Netherlands reached agreement with respect to the MAP
proceedings which the Company had accepted.
As of June 30, 2022, the Company received $
1.6
million in refunds from the
Netherlands and Spain.
In February 2022, the Company received a settlement notice from the Italian taxing
authorities confirming the
amount due of $
2.6
million, having granted the Company’s request
to utilize its remaining net operating losses to partially offset
the
liability.
As of June 30, 2022, the Company has paid the full settlement amount, of which approximately
$
0.1
million may be
refundable.
Houghton Italia, S.r.l is also involved
in a corporate income tax audit with the Italian tax authorities covering tax years
2014
through
2018
.
During the fourth quarter of 2021, the Company settled a portion of the Houghton Italia,
S.r.l. corporate income tax
audit with the Italian tax authorities for the tax years 2014 and 2015.
During the six months ended June 30, 2022, the Company
settled tax years 2016 through 2018 for a total of $
2.1
million.
In total, the Company has now settled all years 2014 through 2018 for
$
3.7
million.
Accordingly, the Company has
released all reserves relating to this audit for the settled tax years.
As a result of the
settlement and reserve release the Company recognized a net benefit
to the tax provision of $
2.0
million during the first six months of
2022.
The Company has an indemnification receivable of $
3.6
million in connection with its claim against the former owners of
Houghton for any pre-Combination tax liabilities arising from this matter.
As previously reported, Houghton Deutschland GmbH is also under
audit by the German tax authorities for the tax years
2015
through
2017
.
In the second quarter of 2022 the Company settled the corporate tax audit for the
tax years 2015-2017 with the German
tax authorities for a total of $
0.1
million.
The Company has an indemnification receivable of $
0.3
million in connection with its claim
against the former owners of Houghton for any pre-Combination tax
liabilities arising from this matter.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
16
Note 9 – Pension and Other Postretirement
Benefits
The components of net periodic benefit cost for the
three and six months ended June 30, 2021 and 2020 are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2021
2020
2021
2020
2021
2020
2021
2020
Service cost
$
316
$
1,164
$
2
$
1
$
632
$
2,338
$
3
$
3
Interest cost
1,094
1,486
10
26
2,184
3,255
21
52
Expected return on plan assets
(2,093)
(1,761)
0
0
(4,175)
(3,720)
0
0
Settlement charge
0
0
0
0
0
22,667
0
0
Actuarial loss amortization
857
615
0
16
1,712
1,662
0
31
Prior service cost amortization
3
(41)
0
0
5
(81)
0
0
Net periodic benefit cost
$
177
$
1,463
$
12
$
43
$
358
$
26,121
$
24
$
86
As disclosed in the Company’s
2020 Form 10-K, in the fourth quarter of 2018, the
Company began the process of terminating its
legacy Quaker non-contributory U.S. pension plan
(“Legacy Quaker U.S. Pension Plan”).
During the third quarter of 2019, the
Company received a favorable termination determination
letter from the Internal Revenue Service (“I.R.S.”) and completed the
Legacy Quaker U.S. Pension Plan termination during the
first quarter of 2020.
In order to terminate the Legacy Quaker U.S. Pension
Plan in accordance with I.R.S. and Pension Benefit Guaranty Corporation
requirements, the Company was required to fully fund the
Legacy Quaker U.S. Pension Plan on a termination basis
and the amount necessary to do so was approximately $
1.8
million, subject to
final true up adjustments,
which were completed in the third quarter of 2020.
In addition, the Company recorded a non-cash pension
settlement charge at plan termination of
approximately $
22.7
million.
This settlement charge included the immediate recognition
into
expense of the related unrecognized losses within accumulated
other comprehensive (loss) income (“AOCI”) on the balance
sheet as
of the plan termination date.
Employer Contributions
As of June 30, 2021, $
2.1
million and $
0.1
million of contributions have been made to the Company’s
U.S. and foreign pension
plans and its other postretirement benefit plans, respectively
.
Taking into consideration
current minimum cash contribution
requirements, the Company currently expects to make
full year cash contributions of approximately $
6
million to its U.S. and foreign
pension plans and less than $
1
million to its other postretirement benefit plans in 2021
.
Note 10 – Other Income (Expense), Net
The components of other income (expense), net, for
the three and six months ended June 30, 2021 and 2020 are as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2021
2020
2021
2020
Income from third party license fees
$
373
$
208
$
712
$
512
Foreign exchange losses, net
(838)
(2,004)
(2,316)
(1,183)
Gain (loss) on disposals of property,
plant, equipment and other
assets, net
(54)
(83)
5,356
(81)
Non-income tax refunds and other related credits
14,295
832
14,392
2,131
Pension and postretirement benefit income (costs),
non-service components
129
(341)
253
(23,866)
Other non-operating income, net
105
395
300
319
Total other
income (expense), net
$
14,010
$
(993)
$
18,697
$
(22,168)
The Gain (loss) on disposals of property,
plant, equipment and other assets, net, during the six months
ended June 30, 2021,
includes the gain on the sale of certain held-for-sale
real property assets related to the Combination.
Non-income tax refunds and
other related credits during the three and six months ended
June 30, 2021 includes $
13.3
million related to certain non-income tax
credits for the Company’s
Brazilian subsidiaries described in Note 19 of Notes
to Condensed Consolidated Financial Statements.
Pension and postretirement benefit costs, non-service components
during the six months ended June 30, 2020 includes
$
22.7
million
related to the Legacy Quaker U.S. Pension Plan non
-cash settlement charge described in Note 9 of Notes to
Condensed Consolidated
Financial Statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17
Note 11 – Income Taxes
and Uncertain Income Tax
Positions
The Company’s effective
tax rates for the three and six months ended June 30, 2021 were
an expense of
32.2
% and
28.4
%,
respectively, compared
to an expense of
57.9
% and a benefit of
20.7
% for the three and six months ended June 30, 2020, respectively.
The Company’s current
year effective tax rates were largely
impacted by the sale of certain held-for-sale real
property assets related to
the Combination,
changes in foreign tax credit valuation allowances, tax law changes
in a foreign jurisdiction and the income tax
impacts of certain non-income tax credits recorded
by the Company’s Brazilian
subsidiaries described in Note 19 of Notes to
Condensed Consolidated Financial Statements.
Comparatively, the prior
year effective tax rates were impacted by the
tax effect of
certain one-time pre-tax losses as well as certain tax charges
and benefits in the prior year period including those related
to changes in
foreign tax credit valuation allowances, tax law changes in
a foreign jurisdiction, changes in uncertain tax positions and
the tax
impacts of the Company’s
termination of its Legacy Quaker U.S. Pension Plan.
As of December 31, 2020, the Company had a deferred
tax liability of $
5.9
million, which primarily represents the Company’s
estimate of non-U.S. taxes it will incur to repatriate
certain foreign earnings to the U.S.
The balance as of June 30, 2021 was $
6.5
million.
As of June 30, 2021, the Company’s
cumulative liability for gross unrecognized tax benefits was $
24.0
million, an increase of
$
1.8
million from the cumulative liability accrued as of December 31, 2020.
The Company continues to recognize interest and penalties
associated with uncertain tax positions as a component of
taxes on
income (loss) before equity in net income of associated
companies in its Condensed Consolidated Statements of Operations.
The
Company recognized an expense for interest of approximately
$
0.2
million and $
0.2
million and a benefit of less than $
0.1
million and
$
0.2
million for penalties in its Condensed Consolidated Statement of
Operations for the three and six months ended June 30, 2021,
respectively, and recognized
an expense of $
0.6
million and $
0.6
million for interest and an expense of $
0.6
million and $
0.5
million
for penalties in its Condensed Consolidated Statement of
Operations for the three and six months ended June 30, 2020
,
respectively.
As of June 30, 2021, the Company had accrued $
3.2
million for cumulative interest and $
3.6
million for cumulative penalties in its
Condensed Consolidated Balance Sheets, compared
to $
3.0
million for cumulative interest and $
3.9
million for cumulative penalties
accrued at December 31, 2020.
During the six months ended June 30, 2021 and 2020, the
Company recognized decreases of $
0.8
million and $
1.5
million, respectively,
in its cumulative liability for gross unrecognized tax benefits
due to the expiration of the
applicable statutes of limitations for certain tax years.
The Company estimates that during the year ending December
31, 2021 it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
1.5
million due to the expiration of the statute of limitations with regard
to certain tax
positions.
This estimated reduction in the cumulative liability for unrecognized
tax benefits does not consider any increase in liability
for unrecognized tax benefits with regard to existing tax
positions or any increase in cumulative liability for unrecognized
tax benefits
with regard to new tax positions for the year ending December
31, 2021.
The Company and its subsidiaries are subject to U.S. Federal income
tax, as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain
subject to examination by major tax jurisdictions include Italy
from
2006
, Brazil from
2011
,
the Netherlands and China from
2015
, Mexico, Spain, Germany and the United Kingdom from
2016
, Canada and the U.S. from
2017
,
India from fiscal year beginning April 1, 2018 and ending
March 31,
2019
, and various U.S. state tax jurisdictions from
2011
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years 2007 through 2015. The Company has filed for competent authority relief from these assessments under
the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except
2007. In 2020, the respective tax authorities in Italy, Spain and the Netherlands reached agreement with respect to the MAP
proceedings which the Company has accepted.
As of June 30, 2021, the Company has received $
1.6
million in refunds from the
Netherlands and Spain and expects to pay $
2.6
million due to Italy in the second half of 2021.
As of June 30, 2021, the Company
believes it has adequate reserves for the remaining
uncertain tax positions related to 2007.
Houghton Italia, S.r.l
is also involved in a corporate income tax audit with the Italian tax
authorities covering tax years
2014
through
2018
.
As of June 30, 2021, the Company has a $
5.6
million reserve for uncertain tax positions relating to matters related
to
this audit.
Since the reserve relates to the tax periods prior to August
1, 2019, the tax liability was established through purchase
accounting related to the Combination.
The Company has also submitted an indemnification claim against
funds held in escrow by
Houghton’s former owners
and as a result, a corresponding $
5.6
million indemnification receivable has also been established through
purchase accounting.
Houghton Deutschland GmbH is also under audit by
the German tax authorities for the tax years
2015
through
2017
.
Based on
preliminary audit findings, primarily related to
transfer pricing, the Company has recorded reserves for $
0.9
million as of June 30,
2021.
Of this amount, $
0.8
million relates to tax periods prior to the Combination and
therefore the Company has submitted an
indemnification claim with Houghton’s
former owners for any tax liabilities arising pre-Combination.
As a result, a corresponding
$
0.8
million indemnification receivable has also been established to
offset the $
0.8
million tax liability.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations for
 
for the three and six months ended June 30, 20212022 and 2020:2021:
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Basic earnings (loss) per common share
 
 
 
Net income (loss) attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
(7,735)34,159
$
72,185
$
(36,116)
Less: (income) lossincome allocated to participating securities
 
(58)
(134)
 
37(136)
 
(287)
146
Net income (loss) available to common shareholders
$
14,285
$
33,436
$
(7,698)
$
71,89834,023
$
(35,970)71,898
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,697,49617,830,218
17,793,915
17,685,010
Basic earnings (loss) per common share
$
0.80
$
1.88
$
(0.43)1.91
$
4.04
$
(2.03)
Diluted earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
(7,735)34,159
$
72,185
$
(36,116)
Less: (income) lossincome allocated to participating securities
(58)
(134)
 
37(136)
 
(287)
146
Net income (loss) available to common shareholders
$
14,285
$
33,436
$
(7,698)34,023
$
71,898
$
(35,970)
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,697,49617,830,218
17,793,915
17,685,010
Effect of dilutive securities
7,048
47,155
017,186
52,095
0
Diluted weighted average common shares outstanding
17,841,377
17,849,521
17,697,49617,847,404
17,846,010
17,685,010
Diluted earnings (loss) per common share
$
0.80
$
1.88
$
(0.43)1.91
$
4.03
$
(2.03)
Certain stock options, and restricted stock units and PSUs are not included
 
in the diluted earnings (loss) per share calculation when
the effect
effect would have been anti-dilutive.
 
The calculated amount of anti-diluted shares not included were
33,039
 
wasand
24,731
for the three
and six months ended June 30, 2022, respectively,
and
6,793
 
and
2,952
 
for the three and six
months ended June 30, 2021,
respectively.
All of the Company’s potentially
dilutive shares for the three and six months ended June
30, 2020 are anti-dilutive and not included in the dilutive
loss per share calculations because of the Company’s
net loss during the
periods.
Note 13 – Restricted Cash
Prior to December 2020, the Company had restricted cash recorded in other assets related to proceeds from an inactive subsidiary
of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an
original total value of $35.0 million.
The proceeds of both settlements were restricted and could
only be used to pay claims and costs
of defense associated with the subsidiary’s
asbestos litigation.
The proceeds of the settlement and release agreements
were deposited
into interest bearing accounts that earned less than
$
0.1
million offset by $
0.5
million of net payments during the six months ended
June 30, 2020.
Due to the restricted nature of the proceeds, a corresponding deferred
credit was established in other non-current
liabilities for an equal and offsetting amount
that continued until the restrictions lapsed.
As disclosed in the Company’s
2020 Form
10-K, during December 2020, the restrictions ended
on these previously received insurance settlements and the
Company transferred
the cash into an operating account.
The following table provides a reconciliation of cash,
cash equivalents and restricted cash as of June 30, 2021 and 2020
,
as well
as December 31, 2020 and 2019:
June 30,
December 31,
2021
2020
2020
2019
Cash and cash equivalents
$
145,610
$
322,497
$
181,833
$
123,524
Restricted cash included in other current assets
0
85
62
353
Restricted cash included in other assets
0
19,173
0
19,678
Cash, cash equivalents and restricted cash
$
145,610
$
341,755
$
181,895
$
143,555
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19
Note 1413 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
six months ended June 30, 2021 2022
were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 20202021
$
213,242214,023
$
140,162135,520
$
158,090162,458
$
119,718119,193
 
$
631,212631,194
Goodwill additions
1,2081,752
2,6260
1,3080
12832
5,2701,784
Currency translation and other adjustments
 
614237
(2,633)(9,969)
1,127(8,185)
(2,141)(4,894)
(3,033)(22,811)
Balance as of June 30, 20212022
$
215,064216,012
$
140,155125,551
$
160,525154,273
$
117,705114,331
 
$
633,449610,167
Gross carrying amounts and accumulated amortization for definite-lived
 
for definite-lived intangible assets as of June 30, 20212022 and December
31,
20202021 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2021
20202022
2021
20202022
2021
Customer lists and rights to sell
$
858,025828,690
 
$
839,551853,122
 
$
127,883167,145
 
$
99,806147,858
Trademarks, formulations and product
 
technology
 
168,004156,262
 
 
166,448163,974
 
 
34,93241,640
 
 
30,48338,747
Other
 
6,3906,269
 
 
6,3726,309
 
 
5,9095,933
 
 
5,8245,900
Total definitedefinite-lived
 
-lived intangible assets
$
1,032,419991,221
 
$
1,012,3711,023,405
 
$
168,724214,718
 
$
136,113192,505
The Company amortizes definite-lived intangible assets on
a straight-line basis over
their useful lives.
 
The Company recorded
$
14.7
million and $
29.2
million of amortization expense for the three and six months ended June
30, 2022, respectively.
Comparatively,
the Company recorded $
15.0
 
million and $
29.8
 
million of amortization expense for the three and six months
ended June 30, 2021, respectively.
Comparatively,
the Company recorded $
13.7
million and $
27.7
million of amortization expense for the three and six months ended
June 30, 2020,2021, respectively.
 
Estimated annual aggregate amortization expense for
the current year and subsequent five years is as follows:
For the year ended December 31, 2021
$
59,214
For the year ended December 31, 2022
59,564
For the year ended December 31, 2023
59,394
For the year ended December 31, 2024
58,750
For the year ended December 31, 2025
58,037
For the year ended December 31, 2026
57,740
The Company has four indefinite-lived intangible
 
assets totaling $
205.1
 
million as of both June 30, 2021 and December 31, 2020,
including $
204.0
 
million of indefinite-lived intangible assets for trademarks and
 
tradename associated with the Combination.
Goodwill and intangible assets that have indefinite lives are
 
not amortized and are required to be assessed at least annually
 
for
impairment.
 
The Company completes its annual goodwill and indefinite-lived
 
intangible asset impairment test during the fourth
quarter of each year.
 
The Company continuously evaluates if triggering events indicate
 
a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
The Company previously disclosed in its 2020 Form 10-K
 
that as of March 31, 2020, the Company concluded that the
 
impact of
COVID-19 did not represent a triggering event with
 
regards to the Company’s
 
reporting units or indefinite-lived and long-lived assets,
except for the Company’s
 
Houghton and Fluidcare trademarks and tradename indefinite
 
-lived intangible assets.
 
The determination of
estimated fair value of the Houghton and Fluidcare
 
trademarks and tradename indefinite-lived assets was based on a relief
 
from
royalty valuation method, which requires management’s
 
judgment and often involves the use of significant estimates and assumptions,
including assumptions with respect to the weighted average
 
cost of capital (“WACC”)
 
and royalty rates, as well as revenue growth
rates and terminal growth rates.
 
In the first quarter of 2020, as a result of the impact of
 
COVID-19 driving a decrease in projected
legacy Houghton net sales during that year and the impact
of the sales decline on projected future legacy Houghton
net sales as well as
an increase in the WACC
assumption utilized in the quantitative impairment
assessment, the Company concluded that the estimated
fair values of the Houghton and Fluidcare trademarks
and tradename intangible assets were less than their carrying values.
As a
result, an impairment charge of $
38.0
million was recorded in the first quarter of 2020 to write down
the carrying values of these
intangible assets to their estimated fair values.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
2019
AsEstimated annual aggregate amortization expense for the current year
and subsequent five years is as follows:
For the year ended December 31, 2022
$
57,515
For the year ended December 31, 2023
57,349
For the year ended December 31, 2024
56,760
For the year ended December 31, 2025
55,970
For the year ended December 31, 2026
55,752
For the year ended December 31, 2027 and beyond
522,946
The Company had four indefinite-lived intangible assets totaling
$
186.1
million as of June 30, 2021,2022, including $
185.0
million of
indefinite-lived intangible assets for trademarks and tradename associated
with the Combination.
Comparatively, the Company continued to evaluate allhad
four indefinite-lived intangible assets for trademarks and tradename
 
potential triggering events, including the on-going impacttotaling $
196.9
 
million as of COVID-December 31, 2021.
19 on the Company’s
The Company completes its annual goodwill and indefinite-lived intangible
 
operations,asset impairment test during the fourth quarter of
each year, or more frequently if triggering
events indicate a possible impairment.
The Company continually evaluates financial
performance, economic conditions and the volatility and uncertainty in the economic outlookother relevant developments
 
asin assessing if a result of COVID-19, to determine if
this indicatedtriggering event indicates that it wasis more likely
than not that the carrying
value of any of the Company’s
 
reporting units or indefinite-lived or long-
lived intangiblelong-lived assets wereis not recoverable.
The
Company continues to monitor various financial, economic and
geopolitical conditions impacting the Company,
including the Russia-
Ukraine war and the Company’s decision
to cease operations in Russia, raw material, supply chain, and logistics cost escalation,
and
rising interest rates and cost of capital among other factors.
 
The Company concluded that these and other factors which have and
continue to impact the impact of COVID-19Company did not
represent a triggering
event as of June 30, 2021.
While the Company concluded that the impact of COVID-19 did not
represent a triggering event as of June 30, 2022.
The Company continues to take action to
30, 2021,offset these headwinds including, but not limited to, implementing
selling price increases aimed at offsetting raw material costs and
ongoing inflationary pressures.
However, if the Company will continueis unable to evaluate thesuccessfully
 
impactimplement these actions and future or projected
financial performance declines, then it is possible any of COVID-19 on the Company’sthese financial, economic
 
current and projected results. If theor geopolitical conditions could represent a
current economic conditions worsen or projections
of the timeline for recovery are significantly extended, then
the Company may
concludetriggering event in the future thatand could lead to a potential impairment of the impact from COVID-19 requires
 
the need to perform further interim quantitative impairment tests,
which could result in additional impairment chargesCompany’s reporting unit goodwill
 
in the future.or other indefinite-
lived or long-lived assets.
Note 1514 – Debt
 
Debt as of June 30, 20212022 and December 31, 2020
2021 includes the following:
As of June 30, 20212022
As of December 31, 20202021
Interest
Outstanding
 
Interest
Outstanding
 
Rate
Balance
Rate
Balance
Credit Facilities:
Original Revolver
1.59%0
$
189,5030
1.62%
$
211,955
Original U.S. Term
Loan
0
0
1.65%
$540,000
160,000Original Euro Term
Loan
0
0
1.50%
137,616
Amended Revolver
3.05%
228,658
0
0
Amended U.S. Term
Loan
1.59%3.08%
555,000600,000
1.65%0
570,0000
EUROAmended Euro Term
Loan
1.50%
148,115148,917
1.50%0
157,0620
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
2,1651,495
Various
2,0721,777
Total debt
$
904,783989,070
$
899,134901,348
Less: debt issuance costs
(9,550)(2,216)
(11,099)(8,001)
Less: short-term and current portion of long-term debts
(48,079)(14,485)
(38,967)(56,935)
Total long
-termlong-term debt
$
847,154972,369
$
849,068836,412
Credit facilities
The Company’s primaryCompany, its wholly
 
credit facility (as amended, the “Credit Facility”) is comprisedowned subsidiary,
 
Quaker Chemical B.V.,
as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,
and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the “Original Credit Facility”).
The Original Credit Facility was comprised of a $
400.0
 
million multicurrency
multicurrency revolver (the “Revolver”“Original Revolver”), a $
600.0
 
million term loan (the “U.S.“Original U.S. Term
 
Loan”), each with the
Company as borrower,
and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the
“EURO Term Loan”
and together with the “U.S. “Original Euro Term
 
Loan”, the) with
“Term Loans”)
with Quaker Chemical B.V.,
 
a Dutch subsidiary of the Company as borrower,
 
each with a
five year
five-year term, maturing in
August 2024.2024
.
 
Subject
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
20
During June 2022, the Company,
and its wholly owned subsidiary,
Quaker Houghton B.V.,
as borrowers, Bank of America, N.A.,
as administrative agent, U.S. Dollar swing line lender and letter of credit
issuer, Bank of America Europe Designated Active
Company, as Euro
Swing Line Lender, certain guarantors and other lenders
entered into an amendment to the consentOriginal Credit Facility
(the “Amended Credit Facility”). The Amended Credit Facility established
(A) a new $
150.0
million Euro equivalent senior secured
term loan (the “Amended Euro Term
Loan”), (B) a new $
600.0
million senior secured term loan (the “Amended U.S. Term
Loan”),
and (C) a new $
500.0
million senior secured revolving credit facility (the “Amended Revolver”).
The Company has the right to
increase the amount of the administrative
agent and certain other conditions, the Company may designate additional
borrowers.
The maximum amount available under theAmended Credit Facility can beby an aggregate amount
 
increased by upnot to exceed the greater of $
300.0
 
million or
100
% of
Consolidated EBITDA, subject to certain conditions including the agreement
to provide financing by any lender providing such
increase).
In addition, the Amended Credit Facility also:
(i) eliminated
the requirement that material foreign subsidiaries must guaranty the Original Euro
Term Loan;
(ii) replaced
the U.S. Dollar borrowings reference rate from LIBOR to SOFR;
(iii) extended the maturity date of the Original Credit Facility from August 2024 to June 2027;
and
(iv) effected certain other changes to the Original Credit
Facility as set forth in the Amended Credit Facility.
The Company used the proceeds of the Amended Credit Facility to repay
all outstanding loans under the Original Credit Facility,
unpaid accrued interest and fees on the closing date under the Original
Credit Facility and certain expenses and fees.
U.S. Dollar-
denominated borrowings under the Amended Credit Facility bear
interest, at the Company’s
request if there are lenders who agree to accept additional election, at
 
commitmentsthe base rate or term SOFR
plus an applicable rate ranging from
1.00
% to
1.75
% for term SOFR loans and from
0.00
% to
0.75
% for base rate loans, depending
upon the Company has satisfied certain otherCompany’s consolidated
 
conditions.net leverage ratio.
 
Loans based on term SOFR also include a spread adjustment equal to
0.10
% per
annum.
Borrowings under the Amended Credit Facility denominated in currencies other
than U.S. Dollars bear interest at a basethe
alternative currency term rate plus the applicable rate ranging from
1.00
% to
1.75
%.
The Amended Credit Facility contains affirmative
 
rateand negative covenants, financial covenants and events of default, including
without limitation restrictions on (a) the incurrence of additional
indebtedness;
(b) investments in and acquisitions of other businesses,
lines of business and divisions; (c) the making of dividends or LIBOR plus an applicable margin based uponcapital stock
 
purchases;
and (d) dispositions of assets.
Dividends and
share repurchases are permitted in annual amounts not exceeding the Company’sgreater
of $
75
million annually and
25
% of consolidated
EBITDA if there is no default.
All restricted payments may be made if there is no default and if the consolidated
net leverage ratio is
less than
2.50
to
1.00
.
Financial covenants contained in the Amended Credit Facility include
a consolidated interest coverage ratio test and a
consolidated net leverage ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and when LIBOR
ceases to be reported.ratio test.
 
The consolidated net leverage ratio at the end of a quarter may not be
greater than
4.00
to
1.00
,
subject to a permitted increase during a four-quarter
period after certain acquisitions.
The Company has the option of replacing the
consolidated net leverage ratio test with a consolidated senior net leverage ratio
test if the Company issues certain types of unsecured
notes, subject to certain limitations.
Events of default in the Amended Credit Facility include without limitation
defaults for non-
payment, breach of representations and warranties, non-performance
of covenants, cross-defaults, insolvency,
and a change of control
in certain circumstances.
The occurrence of an event of default under the Amended Credit Facility could result
in all loans and other
obligations becoming immediately due and payable and the Amended
Credit Facility being terminated.
As of June 30, 2022, the
Company was in compliance with all of the Amended Credit Facility covenants.
The weighted average variable interest rate incurred on the outstanding
borrowings under
the Original Credit Facility as of and the
Amended Credit Facility during the
six months ended June 30, 2021
2022 was approximately
1.62.0
%. As of June 30, 2022, the interest rate on
the outstanding borrowings under the Amended Credit Facility was approximately
2.8
%.
 
In addition to paying interest on outstanding
principal under the Original Credit Facility,
 
the Credit
Facility, the Company
is was required to pay a commitment fee ranging from
0.2
% to
0.3
%
depending on the Company’s consolidated
net leverage ratio under the Original Revolver in respect of the unutilized commitments
thereunder.
As part of the Amended Credit Facility,
the Company is required to pay a commitment fee ranging from
0.150
% to
0.275
% related to unutilized commitments under the Amended Revolver,
depending on the Company’s
 
consolidated net leverage
leverage ratio to the lenders under the Revolver in
respect of the unutilized commitments thereunder.ratio.
 
The Company hashad unused
capacity under the Amended Revolver of
approximately $
206268
 
million, net of bank letters of credit of
approximately $
4
 
million, as of June 30,
2021.
2022.
The Credit Facility is subject to certain financial and other covenants. The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio could not exceed 4.25 to 1, with step downs in the permitted ratio over the term of the Credit
Facility.
As of June 30, 2021, the consolidated net debt to adjusted
EBITDA may not exceed
4.00
to 1.
The Company’s consolidated
adjusted EBITDA to interest expense ratio cannot
be less than
3.0
to 1 over the term of the agreement.
The Credit Facility also
prohibits the payment of cash dividends if the Company
is in default or if the amount of the dividend paid annually
exceeds the greater
of previously capitalized $
50.023.7
 
million andof certain third-party debt issuance costs in connection with executing the
20
% of consolidated adjusted EBITDA unless the ratio of consolidatedOriginal Credit Facility.
 
net debt to consolidated adjustedApproximately $
EBITDA is less than
2.015.5
 
to 1, in which case there is no such limitation on amount.
As of June 30, 2021 and December 31, 2020, the
Company was in compliance with allmillion of the Credit Facility covenants.capitalized costs were attributed to the Original Term
Loans and
recorded as a direct reduction of Long-term debt on the Condensed
Consolidated Balance Sheet.
Approximately $
8.3
 
The Term Loans havemillion of the
capitalized costs were attributed to the Original Revolver and recorded
 
quarterly principal amortization duringwithin Other assets on the Condensed Consolidated Balance
theirSheet.
These capitalized costs were being amortized into Interest expense over
the
five year
 
terms, with
5.0
% amortizationterm of the principal balance due in yearsOriginal Credit Facility.
 
1 and 2,As
7.5
% in year 3, and
10.0
% in years 4 and 5,
with the remaining principal amount due at maturity.
During the six months ended June 30,of December 31, 2021, the Company made
quarterly
amortization payments related to the Term
Loans totalinghad $
19.18.0
 
million.million of debt issuance costs recorded as a reduction of Long-term debt attributable
 
Theto
the Original Credit Facility is guaranteed by certainFacility.
As of December 31, 2021, the Company had $
4.3
million of debt issuance costs recorded within Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
21
Company’s domestic subsidiariesassets attributable to the Original Credit Facility.
 
and is secured by first priority liens on substantially all ofPrior to executing the Amended Credit Facility,
 
the Company had $
6.6
million of
debt issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $
3.5
million of debt
issuance costs recorded within Other assets attributable to the Original
Credit Facility.
In connection with executing the Amended Credit Facility,
the Company recorded a loss on extinguishment of debt of
approximately $
6.8
million which includes the write-off of certain previously
unamortized deferred financing costs as well as a
portion of the Companythird-party and the
domestic subsidiary guarantors, subject to certain customary exclusions.creditor debt issuance costs incurred
 
The obligationsto execute the Amended Credit Facility.
Also in connection with
executing the Amended Credit Facility,
during the second quarter of 2022, the Company capitalized $
2.2
million of certain third-party
and creditor debt issuance costs.
Approximately $
0.7
million of the Dutch borrower are guaranteed onlycapitalized costs were attributed to the Amended Euro Term
Loan
by certain foreign subsidiariesand Amended U.S. Term
Loan.
These costs were recorded as a direct reduction of Long-term debt on an unsecured basis.the
Condensed Consolidated
Balance Sheet.
Approximately $
1.5
million of the capitalized costs were attributed to the Amended Revolver and
recorded within
Other assets on the Condensed Consolidated Balance Sheet.
These capitalized costs, as well as the previously capitalized costs that
were not written off will collectively be amortized into Interest expense
over the five-year term of the Amended Credit Facility.
As of
June 30, 2022, the Company had $
2.2
million of debt issuance costs recorded as a reduction of Long-term
debt on the Condensed
Consolidated Balance Sheet and $
4.8
million of debt issuance costs recorded within Other assets on the Condensed Consolidated
Balance Sheet.
The Original Credit Facility required the Company to fix its variable interest
 
interest rates on at least
20
% of its total Original Term
Loans.
 
In order to
satisfy this requirement as well as to manage the Company’s
 
Company’s exposure to variable
interest rate risk associated with
the Original Credit Facility,
in November 2019, the Company entered into $
170.0
 
million notional amounts of three yearthree-year interest rate
swaps at a base
rate of
1.64
%
plus an applicable margin as provided in the Original Credit Facility,
 
Credit Facility, based on
the Company’s
consolidated net
leverage ratio.
 
At the time the
Company entered into the swaps, and as of June 30, 2022,
 
2021, the aggregate interest rate
on the swaps, including the
fixed base rate plus
an applicable margin,
was
3.1
%.
 
The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.
As of June 30, 2022, the Company has not amended its
current interest rate swaps.
See Note 1817 of Notes to Condensed Consolidated Financial Statements.
The Company capitalized $
23.7
million of certain third-party debt issuance costs in connection
with executing the Credit Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Term
Loans and recorded as a direct reduction of long-
term debt on the Company’s
Condensed Consolidated Balance Sheet.
Approximately $
8.3
million of the capitalized costs were
attributed to the Revolver and recorded within other assets on
the Company’s Condensed Consolidated
Balance Sheet.
These
capitalized costs are being amortized into interest expense
over the five year term of the Credit Facility.
As of June 30, 2021 and
December 31, 2020, the Company had $
9.6
million and $
11.1
million, respectively,
of debt issuance costs recorded as a reduction of
long-term debt.
As of June 30, 2021 and December 31, 2020, the Company
had $
5.1
million and $
5.9
million, respectively, of
debt
issuance costs recorded within other assets.
 
Industrial development bonds
As of June 30, 20212022 and December 31, 2020,2021, the Company
had fixed rate,
industrial development authority bonds totaling
$
10.0
million in principal amount due in
2028
.
 
These bonds have similar covenants to the Amended Credit Facility noted above.
Bank lines of credit and other
debt obligations
The Company has certain unsecured bank lines of credit and discount
 
and discountinging facilities in one of itscertain foreign subsidiaries, which
are not
collateralized.
 
The Company’s other debt obligations
 
obligations primarily consist of certain domestic and foreign
low interest rate or interest-
free municipality-related loans, local credit facilities of
certain foreign subsidiaries
and capital lease obligations.
 
Total unused
capacity under these arrangements as of June 30, 20212022 was approximately
 
was approximately $
4028
 
million.
In addition to the bank letters of credit described in the “Credit facilities” subsection above, the Company’s only other off-balance
sheet arrangements include certain financial and other guarantees. The Company’s total bank letters of credit and guarantees
outstanding as of June 30, 20212022 were approximately $7$5 million.
The Company incurred the following debt related expenses included
 
included within Interest expense, net, in the Condensed
Consolidated
Statements of Operations:Income:
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Interest expense
$
6,134
$
4,813
$
5,95110,880
$
9,463
$
13,663
Amortization of debt issuance costs
1,1881,049
1,188
2,3752,236
2,375
Total
$
7,183
$
6,001
$
7,13913,116
$
11,838
$
16,038
Based on the variable interest rates associated with the CreditAmended
 
Credit Facility, as of June 30,
 
30, 20212022 and the Original Credit
Facility as of December 31, 2020,2021, the amounts
at which the Company’s
 
total debt were recorded are not materially different
from their
fair market value.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
22
22On June 30, 2022, annual maturities on the Amended Credit Facility in the next
five fiscal years (excluding the reduction to
long-term debt attributed to capitalized and unamortized debt issuance costs)
are as follows:
`
June 30,
2022
For the remainder of 2022
$
4,681
For the year ended December 31, 2023
18,723
For the year ended December 31, 2024
23,404
For the year ended December 31, 2025
37,446
For the year ended December 31, 2026
37,446
For the year ended December 31, 2027
855,875
Total payments
$
977,575
Note 1615 – EquityAccumulated Other Comprehensive Income
The following tables presentshow the changes in equity,reclassifications from and resulting balances
 
net of tax,accumulated other comprehensive income
(“AOCI”) for the three and six months ended June 30, 2021
2022 and 2020:2021:
AccumulatedDefined
CapitalUnrealized
Currency
Benefit
Gain (Loss) in
OtherTranslation
CommonPension
Excess ofAvailable-for-
RetainedDerivative
ComprehensiveAdjustments
NoncontrollingPlans
StockSale Securities
Par Value
Earnings
Loss
InterestInstruments
Total
Balance at March 31, 2022
$
(56,710)
$
(12,676)
$
(603)
$
(272)
$
(70,261)
Other comprehensive (loss) income before
reclassifications
(76,400)
1,650
(1,043)
747
(75,046)
Amounts reclassified from AOCI
0
218
325
0
543
Related tax amounts
0
(461)
151
(172)
(482)
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Balance at March 31, 2021
$
17,875(28,334)
$
908,748(22,175)
$
455,493317
$
(3,036)
$
(53,228)
$Other comprehensive income (loss) before
565reclassifications
$16,157
1,329,453(260)
Net income341
586
16,824
Amounts reclassified from AOCI
0
0852
33,5702
0
30854
33,600
Amounts reported in other comprehensive
incomeRelated tax amounts
0
0(195)
0(64)
17,285(134)
8
17,293
Dividends ($
0.395
per share)
0
0
(7,062)
0
0
(7,062)
Share issuance and equity-based
compensation plans
3
2,114
0
0
0
2,117(393)
Balance at June 30, 2021
$
17,878(12,177)
$
910,862(21,778)
$
482,001596
$
(2,584)
$
(35,943)
$
603
$
1,375,401
Balance at March 31, 2020
$
17,752
$
888,533
$
376,853
$
(121,524)
$
418
$
1,162,032
Net (loss) income
0
0
(7,735)
0
13
(7,722)
Amounts reported in other comprehensive
income
0
0
0
12,260
1
12,261
Dividends ($
0.385
per share)
0
0
(6,853)
0
0
(6,853)
Share issuance and equity-based
compensation plans
48
7,575
0
0
0
7,623
Balance at June 30, 2020
$
17,800
$
896,108
$
362,265
$
(109,264)
$
432
$
1,167,341
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
23
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2020
$
17,851
$
905,171
$
423,940
$
(26,598)
$
550
$
1,320,914
Net income
0
0
72,185
0
47
72,232
Amounts reported in other comprehensive
(loss) income
0
0
0
(9,345)
6
(9,339)
Dividends ($
0.790
per share)
0
0
(14,124)
0
0
(14,124)
Share issuance and equity-based
compensation plans
27
5,691
0
0
0
5,718
Balance at June 30, 2021
$
17,878
$
910,862
$
482,001
$
(35,943)
$
603
$
1,375,401
Balance at December 31, 2019
$
17,735
$
888,218
$
412,979
$
(78,170)
$
1,604
$
1,242,366
Cumulative effect of an accounting change
0
0
(911)
0
0
(911)
Balance at January 1, 2020
17,735
888,218
412,068
(78,170)
1,604
1,241,455
Net (loss) income
0
0
(36,116)
0
50
(36,066)
Amounts reported in other comprehensive
loss
0
0
0
(31,094)
(131)
(31,225)
Dividends ($
0.770
0 per share)
0
0
(13,687)
0
0
(13,687)
Acquisition of noncontrolling interest
0
(707)
0
0
(340)
(1,047)
Distributions to noncontrolling affiliate
shareholders
0
0
0
0
(751)
(751)
Share issuance and equity-based
compensation plans
65
8,597
0
0
0
8,662
Balance at June 30, 2020
$
17,800
$
896,108
$
362,265
$
(109,264)
$
432
$
1,167,341
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
24
The following tables show the reclassifications from and
resulting balances of AOCI for the three and six months ended
June 30,
2021 and 2020:
23
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for
-Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at MarchDecember 31, 2021
$
(28,334)(49,843)
$
(22,175)(13,172)
$
317397
$
(3,036)(1,372)
$
(53,228)(63,990)
Other comprehensive (loss) income (loss) before
reclassifications
16,157(83,267)
(260)2,082
341(2,320)
5862,175
16,824(81,330)
Amounts reclassified from AOCI
0
852447
2336
0
854783
Related tax amounts
0
(195)(626)
(64)417
(134)(500)
(393)(709)
Balance at June 30, 20212022
$
(12,177)(133,110)
$
(21,778)(11,269)
$
596(1,170)
$
(2,584)303
$
(35,943)
Balance at March 31, 2020
$
(99,187)
$
(17,576)
$
(460)
$
(4,301)
$
(121,524)
Other comprehensive income (loss) before
reclassifications
10,550
(336)
2,128
(144)
12,198
Amounts reclassified from AOCI
0
600
(93)
0
507
Related tax amounts
0
(51)
(427)
33
(445)
Balance at June 30, 2020
$
(88,637)
$
(17,363)
$
1,148
$
(4,412)
$
(109,264)
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total(145,246)
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income before
reclassifications
(9,302)
521
(404)
1,316
(7,869)
Amounts reclassified from AOCI
0
1,714
(3,083)
0
(1,369)
Related tax amounts
0
(546)
741
(302)
(107)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
Balance at December 31, 2019
$
(44,568)
$
(34,533)
$
1,251
$
(320)
$
(78,170)
Other comprehensive (loss) income before
reclassifications
(44,069)
492
(8)
(5,315)
(48,900)
Amounts reclassified from AOCI
0
24,966
(125)
0
24,841
Related tax amounts
0
(8,288)
30
1,223
(7,035)
Balance at June 30, 2020
$
(88,637)
$
(17,363)
$
1,148
$
(4,412)
$
(109,264)
All reclassifications related to unrealized gain (loss) in
available-for-sale securities relate
to the Company’s equity
 
equity interest in a
captive insurance company and are recorded in equity
in net income
of associated companies.
 
The amounts reported in other
comprehensive income for noncontrolling interest are
related to currency
translation adjustments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
25
Note 1716 – Fair Value
 
Measurements
The Company has valued its company-owned life insurance
policies at fair value.
 
These assets are subject to fair value
measurement as follows:
Fair Value
 
Measurements at June 30, 20212022
Total
Using Fair Value
 
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,1372,112
$
0
$
2,1372,112
$
0
Total
$
2,1372,112
$
0
$
2,1372,112
$
0
Fair Value
 
Measurements at December 31, 20202021
Total
Using Fair Value
 
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
 
$
1,9612,533
$
0
$
1,9612,533
$
0
Total
$
1,9612,533
$
0
$
1,9612,533
$
0
The fair values of Company-owned life insurance assets are based on quotes
 
on quotes for like instruments with similar credit ratings and
terms.
 
The Company did not hold any Level 3 investments as of June 30, 2022 or
 
30, 2021 or December 31, 2020,2021, respectively,
 
so related
disclosures have not been included.
Note 1817 – Hedging Activities
In order to satisfy certain requirements of the Original Credit
Facility as well as to manage
the Company’s
exposure to variable interest
interest rate risk associated with the Original Credit Facility,
 
in November 2019, the Company entered into $
170.0
 
million notional
amounts of
three
year
 
interest rate swaps.
 
See Note 1514 of Notes to Condensed Consolidated Financial Statements.
 
These interest rate
swaps are
designated as cash flow hedges and, as such, the contracts are marked-to-market
 
are marked-to-market at each reporting date and any unrealized gains
or
gains or losses are included in AOCI to the extent effective
 
and reclassified to interest expense in the period during which the
transaction
transaction affects earnings or it becomes probable that
 
that the forecasted transaction will not occur.
In June 2022, the Company amended the Original Credit Facility.
 
See Note 14 of Notes to the Condensed Consolidated Financial
Statements.
The Amended Credit Facility does not require the Company to fix variable
interest rates on any portion of its borrowings.
The balance sheet classification and fair values of the Company’s
 
Company’s derivative instruments,
which are Level 2 measurements, are as
follows:
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
24
Fair Value
Condensed Consolidated
June 30,
 
December 31,
Balance Sheet Location
20212022
20202021
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilitiesPrepaid expenses and other current assets
$
3,356394
$
4,6720
Other accrued liabilities
0
1,782
$
3,356394
$
4,6721,782
The following table presents the net unrealized (gain) loss deferred to
AOCI:
June 30,
 
December 31,
20212022
20202021
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
2,584(303)
$
3,5981,372
$
2,584(303)
$
3,5981,372
The following table presents the net loss reclassified from
AOCI to earnings:
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Amount and location of expense reclassified
from AOCI into expense (effective portion)
Interest expense, net
$
(378)
$
(659)
$
(483)(1,015)
$
(1,302)
$
(465)
Interest rate swaps are entered into with a limited number of counterparties,
 
of counterparties, each of which allows for net settlement
of all
contracts through a single payment in a single currency
in the event of a default
on or termination of any one
contract.
 
As such, in
accordance with the Company’s accounting
 
accounting policy,
these derivative instruments
are recorded on a net basis within
the Condensed
Consolidated Balance Sheets.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
26
Note 1918 – Commitments and Contingencies
The Company previously disclosed in its 20202021 Form 10-K
that AC Products, Inc.
(“ACP”), a wholly owned subsidiary,
 
has beenin 2007,
operating aagreed to operate two groundwater treatment systemsystems, so as to hydraulically
 
contain groundwater contamination emanating from
ACP’s site until such time as the concentrations
 
site,of contaminants are below the current Federal maximum contaminant
level for four
consecutive quarterly sampling events. In 2014, ACP ceased operation
at one of its two groundwater treatment systems, as it had met
the above condition for closure. As of June 30, 2022, ACP continues to operate
the second groundwater treatment system, while the
principal contaminant of which is perchloroethylene.Company discusses with the relevant authorities whether the second groundwater
treatment system meets the conditions for closure.
In addition, the Santa Ana Regional Water
Quality Control Board requested that ACP conduct additional indoor
and outdoor soil
vapor testing on and near the ACP site to confirm that ACP continues to
meet the applicable local soil vapor standards.
 
As of June 30, 2021,
2022, ACP believes itperformed such testing and is close to meetingawaiting the
conditions for
closure review of the groundwater treatment system, but continuesresults from
 
to operate this system while in discussions with the relevantSanta Ana Regional Water
 
authorities.Quality Control
Board.
As of June 30, 2021,2022, the Company believes that the range of potential-known
 
of potential-known liabilities associated with the balance
of the ACP water
water remediation program is approximately $
0.1
 
million to $
1.0
 
million.
 
The low and high ends of the range are based on the length of
of operation of the treatment system as determined
by groundwater modeling.
 
Costs of operation include the operation and maintenance
maintenance of the extraction well, groundwater monitoring and program
 
program management.
The Company previously disclosed in its 20202021 Form 10-K
that an inactive
subsidiary of the Company that was acquired
in 1978
sold certain products containing asbestos, primarily
on an installed basis, and
is among the defendants in numerous
lawsuits alleging
injury due to exposure to asbestos.
 
During the three and six months ended June 30, 2021,
2022, there have been no
significant changes to
the facts or circumstances of this previously disclosed matter,
 
aside from on-going claims and routine payments associated with
this
litigation.
 
Based on a continued analysis of the existing and anticipated
future claims against this subsidiary,
 
it is currently projected
that the subsidiary’s total liability over
 
liability over the next 50 years for these claims is approximately
$
0.40.3
 
million (excluding costs of defense).
The Company previously disclosed in its 20202021 Form 10-K
that it is party to certain environmental
matters related to certain
domestic and foreign properties currently or previously
owned by Houghton.properties.
 
These environmental matters primarily require the Company
Company to perform long-term monitoring as well as operatingand
and maintenance at each of the applicable sites.
 
During the three and
six months ended June 30, 2021,2022, there have been no significant
changes to the facts or circumstances of these previously disclosed matters,
 
disclosed
matters, aside from on-going monitoring and maintenance
activities and routine payments associated with each of the
sites.
 
The
Company continually evaluates its obligations related to such
matters, and based on historical costs incurred and projected
costs to be
incurred over the next 28 years, has estimated the present
value range of costs for all of the Houghton environmental
matters, on a
discounted basis, to be between approximately $
5.5
million and $
6.5
million as of June 30, 2021, for which $
6.0
million was accrued
within other accrued liabilities and other non-current
liabilities on the Company’s Condensed
Consolidated Balance Sheet as of June
30, 2021.
Comparatively, as of December
31, 2020, the Company had $
6.0
million accrued for with respect to these matters.
The Company believes, although there can be no assurance
regarding the outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other
environmental problems of which it is aware.
Approximately $
0.1
million was accrued as of both June 30, 2021 and December
31, 2020,
to provide for such anticipated future environmental
assessments and remediation costs.
The Company previously disclosed in its 2020 Form 10-K
that one of the Company’s subsidiaries
received a notice of inspection
from a taxing authority in a country where certain
of its subsidiaries operate which related to a non-income (indirect)
tax that may be
applicable to certain products the subsidiary sells.
To date, the Company
has not
received any assessment from the authority related to
potential liabilities that may be due from the Company’s
subsidiary.
Consequently, there is substantial uncertainty
with respect to the
Company’s ultimate liability
with respect to this indirect tax, as the application of
this tax in its given market is ambiguous and
interpreted differently among other peer companies
and taxing authorities.
The Company, with assistance
from independent experts,
has performed an evaluation of the applicability of this
indirect tax to the Company’s
subsidiaries in this country.
During the six
months ended June 30, 2021 and through the date of
this Report, there have been no significant changes to
the facts or circumstances
of this previously disclosed matter,
aside from
on-going discussions between the Company and the
taxing authority related to this
notice of inspection and independent testing conducted by
third-party consultants at the direction of the Company and the taxing
authority to determine if the Company’s
products have contents which subject them to this indirect tax.
Based on all of the
information available to the Company at this time, as of
June 30, 2021, the Company has recorded a liability of $
1.8
million in other
accrued liabilities, which reflects the Company’s
current best estimate of probable indirect tax owed, including
interest and taking into
account applicable statutes of limitations.
Because these amounts in part relate to a Houghton entity
acquired in the Combination and
for periods prior to the Combination, the Company
has submitted an indemnification claim with Houghton’s
former owners related to
this potential indirect tax liability.
The Company recorded a receivable in other assets for approximately
$
1.1
million, which reflects
the amount of the initial recorded liability for which
the Company anticipates being indemnified.
As noted, the Company believes
there is substantial uncertainty with respect to its ultimate liability
given the ambiguous application of this indirect tax.
At this time,
the Company’s current
best estimate of a potential range for possible assessments, including
additional amounts that may be assessed
under these indirect tax laws, would be $
0
to approximately $
40
million, which is net of approximately $
11
million of estimated
income tax deductions and approximately $
22
million of applicable rights to indemnification from Houghton’s
former owners.
During the first six months of 2021, one of the Company’s
Brazilian subsidiaries received a notice that it had prevailed
on an
existing legal claim in regard to certain non-income
(indirect) taxes that had been previously charged and paid.
The matter
specifically relates to companies’ rights to exclude the
state tax on goods circulation (a valued-added-tax or VAT
equivalent, known in
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
2725
matters, and based on historical costs incurred and projected costs to be incurred
over the next approximately 30 years, has estimated
the range of costs for all of these environmental matters, on a discounted
basis, to be between approximately $
5.0
million and $
6.0
million as of June 30, 2022, for which $
5.5
million was accrued within other accrued liabilities and other non-current
liabilities on the
Company’s Condensed Consolidated
Balance Sheet as of June 30, 2022.
Comparatively, as of December
31, 2021, the Company had
$
5.6
million accrued for with respect to these matters.
Although there can be no assurance regarding the outcome of other
unrelated environmental matters, the Company believes that it
has made adequate accruals for costs associated with other environmental problems
for which it is aware, and has accrued $
0.4
million
as of both June 30, 2022 and December 31, 2021, respectively,
to provide for such anticipated future environmental assessments and
remediation costs.
The Company previously disclosed in its 2021 Form 10-K that during the first six months
of 2021, one of the Company’s
Brazilian subsidiaries received a notice that it had prevailed on an existing
legal claim in regard to certain non-income (indirect) taxes
that had been previously charged and paid.
The matter specifically related to companies’ rights to exclude the state tax on goods
circulation (a valued-added-tax or VAT
equivalent, known in Brazil as “ICMS”) from
the calculation of certain additional indirect
taxes (specifically
the program of social integration (“PIS”)
and contribution
for the financing of social security (“COFINS”)) levied
levied by the Brazilian States on the sale of goods.
 
In May 2021,
the Brazilian Supreme Court concluded that ICMS should
 
not be included
in the tax base of PIS and COFINS, and confirmed
the
methodology for calculating the
PIS and COFINS tax credit
claims to which
taxpayers are entitled.
 
The Company’s Brazilian entities
had previously
filed legal or administrative disputes on
this matter and are
entitled to receive tax credits and interest dating
back to
five years preceding the
date of their legal claims.
 
As a result of these court
rulings in the first six months of 2021, the Company recognized non-income
 
the Company
recognized non-income tax credits of
67.0
 
million BRL or approximately $
13.3
million, which includes approximately $
8.4
 
million
for the PIS and COFINS tax credits as well as interest on these
tax credits of $
4.9
million.
 
The tax credits to which the Company’s
Brazilian subsidiaries are entitled are claimable once registered
with the Brazilian
tax authorities andwhich the Company anticipates
completing this step during the second half of 2021.subsequently completed.
 
These tax credits can be used to offset future Brazilian federal taxes
 
federal taxes and the
the Company currently anticipates using the full amount of
credits during the
five year period of time permitted.
In connection with obtaining regulatory approvals for the Combination,
 
Combination, certain steel and aluminum related product lines
of
Houghton were divested onin August 1, 2019. The Company previously disclosed
 
Inin its 2021 Form 10-K that in July 2021, the entity that
acquired these divested product lines submitted an indemnification claim
 
submitted anfor certain alleged breaches of representation made by
Houghton in the agreement pursuant to which such assets had been divested.
The Company responded to the subject matters of the
indemnification claim and during the first quarter of 2022, the
matter was resolved consistent with the Company’s
expectations and
position that there were no amounts owed by the Company.
The Company previously disclosed in its 2021 Form 10-K that two of the Company’s
locations suffered property damages as a
result of flooding and fire, respectively.
The Company maintains property insurance for certain alleged losses in accordance withall of its facilities globally.
During the six
months ended June 30, 2022, there have been no significant changes to
 
the termsfacts or circumstances of these previously disclosed
matters, aside from the Asset Purchase Agreement (“APA”)on-going restoration of both sites.
 
.The Company, its insurance
 
Underadjuster and insurance carrier are actively
managing the
terms of the APA, remediation and restoration activities associated with these
 
events and at this time the Company has 45 days to reviewconcluded, based on
all available information and discussions with its insurance adjuster and
insurance carrier, that the claim and respond
,
and as such, the Company is in the early stages of
evaluating the merits of the alleged losses in the indemnification
claim received.
As of the date of this Report,were covered under
 
the
Company’s property insurance
coverage, net of an aggregate deductible of $
2.0
million.
The Company does nothas received payments from
believe it is reasonably possible to determine or quantifyits insurers of $
2.1
 
any possible exposure.million and has recorded an insurance receivable associated with these events (and
 
a gain on insurance recoveries
for losses incurred) of $
0.9
million as of June 30, 2022.
The Company is party to other litigation which management currently
 
currently believes will not have a material adverse
effect on the
Company’s results of operations,
 
operations, cash flows or financial condition.
 
In addition, the Company has an immaterial amount of contractual
purchase obligations.
Quaker Chemical Corporation
Management’s Discussion and Analysis
2826
Item 2.
 
Management’s Discussion and Analysis
 
of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton,”
 
the “Company,”
 
“we” and “our” refer to Quaker Chemical Corporation
(doing business as Quaker Houghton), its subsidiaries, and associated companies,
 
associated companies, unless the context otherwise requires.
 
As used inThe term the
this Report, the term Legacy Quaker“Combination” refers to the Company
prior to the closing of itslegacy Quaker combination with Houghton International,
 
International, Inc.
(“Houghton”) (herein referred to as the “Combination”)
on August 1, 2019.
Throughout the Report, all figures presented, unless
otherwise stated, reflect the results of operations of the
combined company for the three months and six months ended
June 30,
2021
and 2020.
Executive Summary
Quaker Houghton is the global leader in industrial process
fluids.
 
With a presence around the world, including operations
 
including operations in over
25 countries, our customers include thousands of the world’s
 
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, container,
mining, and metalworking
companies.
 
Our high-performing, innovative and sustainable solutions are backed
 
backed by best-
in-classbest-in-class technology,
 
deep process knowledge, and customized services.
 
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the United States.U.S.
The Company had solidOverall, the Company’s second
quarter of 2022 performance reflected continued progress navigating
through a myriad of
financial, economic and geopolitical headwinds, including persistent and
significant raw material cost escalation and overall
inflationary pressures, supply chain and logistics challenges,
production and distribution disruptions due to COVID-19 related actions
in China, the direct and indirect impacts of the ongoing war in Ukraine
and foreign currency volatility.
Despite these challenges, net
sales in the second quarter results which reflectof 2022 were a record $492.4 million, representing
 
the continued COVID-19 recovery in the Company’s
end-marketsan increase of approximately 13% compared to $435.3
and customer demand as well as the on-going execution
of integration activities and synergy realization,
partially offset by raw
material cost headwinds driven by global supply chain pressures.
Specifically, net sales of $435.3
million in the second quarter of
2021 increased 52% compared to $286.0 million in the second 2021.
 
quarterThis was primarily driven by an increase in selling price and product mix of 2020, primarily due to higher volumes of 40%, includingapproximately
22% and additional net sales from acquisitions of 5%1%, the positivepartially offset
 
by a decline in organic sales volumes of 4% and the unfavorable
impact from foreign currency translation of 8%, and increases6%.
 
The increase in selling price
and product mix is primarily the result of approximately 4%.
strategic price
increases implemented to help offset the ongoing inflationary
pressures that began during 2021 and have continued into 2022.
 
The significant increase
decline in organic sales volumes comparedwas primarily attributable
to COVID-19 related disruptions in China, the wind-down of the tolling
agreement for products previously divested related to the
second quarter of 2020 was
primarily a result of the prior year second quarter being Combination,
 
the most severely impacted by COVID-19 globally,impact of the war in Ukraine and the Company’s
 
while the current quarterongoing
continued to experience end-market improvement and
continued market share gains.
Gross profit increased significantly quarter-over-
quarter as a result of higher net sales.
Despite significant increases in raw material costs, current
quarter gross margin of 35.5%
improved as compared to the prior year second quarter,
as the prior year was impacted by lower volumes due to COVID-19
on fixed
manufacturing costs.
Sequentially, the Company
experienced lower gross margins compared to the
first quarter of 2021 due to
significant raw material cost increases and global supply chain
and logistics pressures.value-based pricing initiatives.
The Company hadgenerated net income in the second quarter of 20212022 of $14.3
 
million, or $0.80 per diluted share, compared to net
income of $33.6 million, or $1.88 per diluted share compared
to a second
quarter of 2020 net loss of $7.7 million, or $0.43 per
diluted share.
The current quarter result includes $13.3 million of
non-operating
income related to certain non-income tax credits recorded
byin the Company’s Brazilian subsidiaries.
The Company’s prior year
second
quarter net loss was dramatically affected
by the COVID-19 pandemic and its impact on the global economy,
including most of the
Company’s end customers.
Excluding non-recurring items including the Brazil non-income
tax credits as well as costs associated
with the Combination and other non-core items in each period,
the Company’s second quarter of
 
20212021.
Excluding non-recurring and non-core items in each
period, the Company’s second
quarter of 2022 non-GAAP earnings per diluted
share were $1.82$1.32 compared
to $0.21$1.82 in the prior year
quarter and the Company’s current
 
second quarter.
The Company’s current quarter
adjusted EBITDA ofwas $58.5 million compared to $70.1
million increased 118% compared
to $32.1 million in the second quarter of 2020 primarily due
to the significant increase in net sales
quarter-over-quarter as well as higher realized cost synergies
from the Combination as compared to the second quarter
of 2020,
partially offset by higher raw material costs.
The Company estimates that it realized cost synergies associated
with the Combination
of approximately $18.5 million during the second quarter
of 2021 compared to approximately $12 million during
 
the second quarter of
2020.2021.
These results were primarily driven by lower gross margins in
the current quarter due to a significant increase in raw material
and other input costs as well as the direct and indirect impacts of global supply
chain disruptions, the unfavorable impact of foreign
currency, and to a lesser extent,
by higher selling, general and administrative expenses (“SG&A”).
 
See the Non-GAAP Measures
section of this Item below,
 
as well as other items discussed in the Company’s
 
Consolidated
Operations Review in the Operations
section of this Item,
below.
The Company’s second quarter
 
quarter of 20212022 operating performance in each of its four reportable
segments: (i) Americas;
(ii) Europe,
Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty
 
Global Specialty Businesses, reflect similar drivers to that of
its
consolidated performance.
All four segments had higher net sales compared to the second
quarterperformance as each of 2020 reflecting the negative
impact of COVID-19 on the prior year versus current quarter
improvement in the Company’s
 
end markets and overall market share
gains in each segment.
All of the Company’sreportable segments
benefited from higher sales volumes as compared to
the prior year quarter,
additional net sales benefitted year-over-year from acquisitions, the positive impact
from foreign currency translation due to the strengthening
of most majordouble-digit
currencies against the U.S. dollar, and
generally from increases in selling price and product mix.mix and additional net sales from
 
As reported, allacquisitions, while those increases in net sales for most
segments were partially offset by lower organic
sales volumes and the unfavorable impact of the Company’s
segment operating earnings were higher compared to theforeign currency translation.
 
Organic
volumes for the Global Speciality Businesses increased in the second
quarter of 2020 which reflects higher current quarter
net sales
coupled with a higher gross margin in most segments
as2022 compared to the prior year second quarter due to strong
demand for this segment’s products
 
.
Operating earnings for the Global Specialty Businesses and Americas
increased compared to the
prior year quarter, whereas operating earnings
for Asia/Pacific and EMEA declined, due to the persistent and significant
inflationary
pressures on raw materials and other costs, the impact of COVID-19 disruptions
in China, and the negative impact of foreign currency
translation, partially offset by continued price
realization.
Sequentially, operating earnings increased
in Global Speciality Businesses
and the Americas driven by higher selling
general prices, and administrative expenses (“SG&A”), which was therelatively consistent
 
resultin Asia/Pacific.
Operating margins for the three
aforementioned segments increased sequentially,
as price realization was able to help offset the inflationary pressures
on each of an increase in direct selling expenses associated with
the
significant increase in net sales and, to a lesser extent,
the low levels of prior year period SG&A as a result of COVID-19
temporary
cost savings measures.segment’s gross margins.
 
Additional details of each segment’s operating performance
 
operating performance are further discussed in the Company’s
Reportable Segments Review,
 
in the Operations section of this Item, below.
The Company had a net operating cash outflow of $9.6 million
in the first six months of 2021 as compared to net operating cash
inflow of $44.7 million in the first six months of 2020.
The decrease in net operating cash flow year-over-year was primarily
driven
by a significant investment in working capital compared
to the prior year, mainly in accounts receivable,
due to higher net sales and
Quaker Chemical Corporation
Management’s Discussion and Analysis
27
The Company had a net operating cash outflow of $8.4 million in the first six months
 
29of 2022 as compared to a net operating cash
volumes, and inventory,outflow of $9.6 million in the first six months of 2021.
 
dueThe net operating cash outflow in both periods reflects a significant working
capital investment primarily related to higher raw material costs and restocking initiatives as a resultaccounts receivable due to
 
the increase in net sales as well as higher inventory due
primarily to the rising cost of raw materials and to a lesser extent a build in certain
inventory stock in response to global supply chain
and logistics
pressures. challenges.
 
The key drivers of the Company’s operating
 
operating cash flow and working capital are further discussed
in the Company’s
Company’s Liquidity and Capital
Resources section of this Item,
below.
Overall, the Company delivered another quarter of strong net sales growth,
driven by strong price realization and above market
growth.
The expected decline in earnings was primarily driven by ongoing inflationary
pressures, COVID-19 disruptions in China,
unfavorable currency translation, geopolitical issues and other disruptions
that impacted our customers and end markets.
Notwithstanding, we delivered double-digit year-over-year
increases in selling price and largely stabilized the Company’s
 
second quarter results were strong,gross
margins on a sequential basis despite significantcontinued increases
 
in raw material costs and supply chain
issues.our costs.
 
Significant improvement overLooking at the prior year inremainder of 2022, the Company’s
 
all segments was drivenfocus
remains on executing on items within its control.
The Company is encouraged by the continued recoverymomentum in theits business and resilience of its
end markets, with some regional differences.
 
Company’s end-
markets and increased customer demand from lowerThe Company continues to work with its customers to get the needed pricing to
 
levels experienced during 2020 as a result of COVID-19.
While sequential
operating performance as compared to the first quarter
of 2021 was slightly lower, continued
strong customer demand in the second
quarter of 2021 coupled with on-going market share
gains and the execution of integration activities and synergy
realization helped
offset the negative impacts from the continued
escalation of raw material costs and continued supply chain pressures.
As the Company looks forward to the rest of 2021,
it expects raw material costs to continue to increase,
and it is implementing
additional price increases to help offset them
.
In addition, while the Company expects customer demand and sales volumes
to remain
strong,
we anticipate some near-term headwinds in automotive due
to the semiconductor shortage and some seasonality trends which
the Company typically experiences in the second halfpersistent inflationary pressures on its margin while
 
of the year.also exhibiting continued cost controls.
 
Despite these near-term headwinds,significant uncertainty
caused by several macroeconomic factors, the Company
 
continues to
expect 2021 will result in a step change in its profitability fromto deliver sequential gross margin expansion
 
2020 as the Company completes its integration cost synergies,and earnings
continues to take further sharegrowth in the marketplace, benefits
from projected gradual rebound in demand, and sees the positive
impactsecond half of
its recent acquisitions.
2022.
On-going impact of COVID-19
The global outbreak of COVID-19 in March of 2020 has negatively impacted
 
all locations where the Company does business.
 
Although the
Company has now operated in this COVID-19 environment
 
for over a year,more than two years, the full extent
of the outbreak and
related business
impacts continue to remain uncertain and volatile, and
therefore the
full extent to which COVID-19 may impact the
Company’s
future results of operations
operations or financial condition is uncertain.
 
This outbreak has significantly disrupted the operations of
the
Company and those of its
suppliers and customers.customers and, at times during
 
Thethe pandemic, the Company has experienced volume
declines and lower
net sales as compared to pre-COVID-19 levels as
a result of the outbreak, as further described in this section.levels.
 
Management continues to monitor the impact that the COVID-19
pandemic is having
on the Company,
 
the overall specialty chemical industry and the economies and
markets in which the Company
operates.
 
Given the speed and frequency of the continuously evolving developments
with respect to this pandemic, the Company
cannot, as of the date of this Report, reasonably estimate
the magnitude or the full extent of the impact to its future results
of
operations or to the ability of it or its customers to resume
more normal operations, even as certain restrictions are lifted.operates.
 
The
prolonged pandemic and resurgences
of the outbreak
including as new variants continue to emerge,
,
and continued restrictions on day-to-day
day-
to-day life
and business operations such as recent restrictions in China as well as border
controls or closures and transportation
disruptions may result in volume declines
and lower net sales in future periods as compared to pre
-COVID-19 levels.periods.
 
To
the extent that the Company’s
 
customers and
suppliers continue to be significantly and
are adversely impacted by COVID-19, this could
reduce the availability,
 
availability, or result in delays,
of materials or supplies to or
from the Company, which
 
which in turn could significantly interrupt
the Company’s
business operations.
 
Given this ongoing uncertainty,
the Company cautions that its future results of operations could
be significantly
and adversely impacted by COVID-19.
 
Further, management continues to evaluate how
COVID-19-relatedWhile the
circumstances such as remote work arrangements, illness or
staffing shortages and travel restrictions have affected
financial reporting
processes and systems, internal control over financial reporting,
and disclosure controls and procedures.
While the circumstances
have presented and are expected to continue to present challenges
 
present challenges, and have necessitated additional time and resources
resources to be deployed
to sufficiently address the challenges brought
 
brought on by the pandemic at this time, managementManagement does not believe that
COVID-19 has had
a material impact on its financial reporting processes, internal
 
controls over financial reporting, or disclosure
controls and
procedures.
 
The Company’s top
priority especially during this pandemic,
 
is to protect the health and safety of its employees and
customers,
while working to ensure business
continuity to meet customers’
needs.
 
TheDuring the pandemic, the Company continues to takehas taken incremental steps to protect
the health
and
wellbeing of its people in affected areas through
various actions, including
enabling work at home where needed
and possible,practicable, and
employing social distancing standards, implementing
travel restrictions where
applicable, enhancing onsite hygiene
practices, and
instituting visitation restrictions at the Company’s
 
facilities.
 
The Company has not and does not expect that it will incur
material
expenses implementing these health and safety policies.
 
All of the Company’s 31more than 30 production
 
production facilities worldwide are open and
and operating and are deemed as essential businesses in the jurisdictions where
 
jurisdictions where they are operating.
 
The Company believes that to date it
has been able to meet the needs of all its customers across the
globe despite the current economic challenges.
The Company’s second
quarter of 2021 showed substantial year-over-year
improvement from the prior year second quarter,
which was the most severely
impacted by COVID-19, and continued a trend of gradual
improvement which began in the second half of 2020.
The Company
continues to expect
that the impactimpacts from COVID-19
will gradually improvedecline subject to the effective containment
 
containment of the virus and its
variants and successful
distribution and acceptance
of the available vaccines that have been developed.and treatments; however,
 
However, the incidence of reported
cases of COVID-19 or a
variant in several geographies where the Company
has significant operations
remains high andrelatively high.
Differing government responses
to these reported cases continues to
evolve and it
therefore remains highly uncertain
as to how long the global pandemic
and related
economic challenges will last in each of the jurisdictions where the Company conducts
business and when our customers’ businesses
businesses will recover to pre-COVID-19 levels.
 
The Company took various actions to temporarily conserve
cash and reduce costs
during and these temporary initiatives were designed and
implemented so thatThough the Company could successfully managewas able to supply customers with value added solutions,
 
through theas a result of
challenging COVID-19 situation while continuing to protectthe government-imposed quarantine and lockdown measures implemented
 
at the healthend of its employees, meet customers’ needs,March 2022 and continuing in effect until
early June 2022, the Company’s Shanghai,
 
maintain the
Quaker Chemical Corporation
Management’s Discussion and Analysis
China-based locations were significantly impacted.
 
The negative impact of those measures
30
Company’s long-term
competitive advantageson our operations and liquidity was experienced during the second quarter of 2022
 
and above-market growth,the ultimate impact will depend on how
quickly the Chinese economy recovers from the quarantine and enable it to continue to effectivelylockdown
 
integrate Houghton.measures that were temporarily implemented.
 
While the
actions the Company has taken to date to protect our workforce,
to continue to
serve our customers with excellence and to conserve
cash and
reduce costs as applicable, have been effective thus far,
 
further actions to respond to the pandemic and its effects may
 
may be
necessary as conditions
continue to evolve.
Quaker Chemical Corporation
Management’s Discussion and Analysis
28
Impact of Political Conflicts
A significant portion of the Company’s
revenues and earnings are generated by non-U.S. operations.
This subjects the Company
to political and economic risks that could adversely affect the Company’s
business, liquidity, financial
position and results of
operations.
The existence of military conflicts, for example the Russian invasion of Ukraine,
bring inherent risks such as the potential
for supply chain disruptions, increased costs of resources including oil, decreased
trade activity and other consequences related to
economic or other sanctions.
The U.S. government and other nations have imposed significant restrictions
on most companies’ ability
to do business in Russia as a result of the military conflict between Russia and Ukraine.
It is not possible to predict the broader or
longer-term consequences of this conflict, which could include further sanctions,
embargoes, regional instability,
geopolitical shifts
and adverse effects on macroeconomic conditions,
security conditions, currency exchange rates and financial markets.
The military
conflict between Russia and Ukraine has had a negative impact on the Company’s
ability to sell to, ship products to collect payments
from, and support customers in certain regions based on trade restrictions,
embargoes and export control law restrictions, and
logistics
restrictions including closures of air space.
If this conflict continues or expands, it could increase the costs, risks and adverse impacts
from these new challenges.
The Company and its customers and suppliers may also be the subject of increased cyber-attacks.
During the second quarter of 2022, the Company decided to cease its operations
in Russia.
The Company’s operations
in the
conflict areas including Russia, Ukraine and Belarus historically represented
less than 2% of the Company’s consolidated net
sales
and less than 1% of the Company’s
consolidated total assets.
The Company’s primary exposure
in the conflict areas related to
outstanding customer accounts receivable.
The Company is actively monitoring its outstanding Russian receivables for collections
and has recorded incremental allowances
for doubtful accounts where warranted.
Liquidity and Capital Resources
At June 30, 2021,2022, the Company had cash and cash equivalents andof $202.3
 
restricted cash of $145.6 million.
 
Total cash and cash equivalents
 
equivalents andwas $165.2
restricted cash was $181.9 million at December 31, 2020.2021.
 
The $36.3$37.2 million decreaseincrease in cash and cash equivalents and restricted
cash
was the net result of approximately $21.7 $78.6
million of cash
provided by financing activities partially offset by $8.4 million
 
of cash used in investingoperating activities, $9.6$24.4 million of cash used in operating
activities,
$4.4 million of cash used in financinginvesting activities and a
$0.7$8.6 million negative impact due to the effect
of foreign
currency translation.
Net cash flows used in operating activities were $9.6$8.4 million in the first six months
 
of 2022 compared to net cash flows used in
operating activities of $9.6 million in the first six months of 2021 compared to net cash
flows provided
by operating activities of $44.7 million in the first six
months of 2020.2021.
 
The decrease in net operating cash flowsoutflow in both periods reflects working
capital investment primarily related to higher accounts receivable due to
the increase in net sales and higher inventory due primarily to
the rising cost of $54.2 million was
primarily driven byraw materials and to a significant changelesser extent a build in workingcertain inventory
 
capital, partially
offset by higher earnings in the current year.response to global supply chain and logistics
challenges.
 
The significant
increaseslight improvement in current year net sales resulted in a largeoperating cash flow year-over-year
 
increase in accounts receivableis a result of a lower working capital investment partially
offset by lower earnings in the first six months of 2021 as2022 compared
 
to
accounts receivable being a cash inflow in the prior
year as sales significantly declined during the first six months of
2020 due to the
initial negative impact from COVID-19.
In addition, the Company has experienced an increase in inventory
in the first six months of
2021 as a result of rising raw material costs as well as a build
in inventory to ensure the Company has appropriate stock
to meet
customer demands particularly given the current stress on
the global supply chain.
In addition, the Company had higher cash
dividends received from its associated companies in
the first six months of 2020, primarily due to $5.0 million
received from the
Company’s joint venture
in Korea with no similar dividend received in the first six months of
2021 related to the timing of dividends
received. 2021.
Net cash flows used in investing activities were $21.7
$24.4 million in the
first six months of 20212022 compared to $10.6
$21.7 million in the first
six months of 2020.2021.
 
This increase in cash outflows was driven by highera result of lower cash payments related
to acquisitions during the first six
months of 2021, including $25.0 million for certain assets related
to tin-plating solutions primarily for steel end markets.
These higher
cash outflows were partially offset by cash proceeds
of approximately $14.7 million from the disposition of
assets which
includes the included
the sale of certain held-for-sale real property assets related
 
assetsto the Combination in the prior year period, and higher capital expenditures
in the current year largely related to the Combination.certain infrastructure
 
Capital expendituresand sustainability-related spending.
These increases in cash used in
investing activities were relatively consistent at $7.0partially offset by lower cash
payments related to acquisitions as a result of the level of acquisition activity in
each year.
See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of
this Report.
Net cash flows provided by financing activities were $78.6 million in the first
six months of 2022 compared to net cash flows
used in financing activities of $4.4 million in the first six months of 2021 compared to $7.5
million in the first six months of 2020.
Net cash flows used in financing activities were $4.4
million in the first six months of 2021 compared to net cash
flows provided
by financing activities of $168.7 million in the first six months
of 2020.2021.
 
The decrease of $173.1 millionincrease in net cash flows was
primarily related to an
increase in borrowings in the priorcurrent year borrowings of most of the
available liquidity under the Company’s
 
revolving credit facility, related
to the economic uncertainty brought on by COVID-19.which was amended
 
These additional prior year borrowings were repaid duringand extended, as further described
below, in the second
 
the third quarter of
2020. 2022.
 
In addition, the Company paid $14.1$14.9 million of cash dividends
during the first six months
of 2021,
2022, a $0.5$0.7 million or 3%
5% increase in cash dividends compared to the prior
year.
 
Finally, during
The Company, its wholly
owned subsidiary,
Quaker Chemical B.V.,
as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,
and the first six monthsother lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the “Original Credit Facility”).
 
During June 2022, the Company,
and its wholly owned subsidiary,
Quaker Houghton B.V.,
as borrowers, Bank of 2020,America, N.A., as administrative agent, U.S. Dollar swing
line lender and letter of
credit issuer, Bank of America Europe
Designated Active Company,
as Euro Swing Line Lender, certain guarantors
and other lenders
entered into an amendment to the Original Credit Facility (the “Amended
Credit Facility”).
The Company used $1.0 millionthe proceeds of the
Amended Credit Facility to repay all outstanding loans under the Original
Credit Facility, as well as accrued interest
and fees, and to
purchaseterminate the remaining noncontrolling interest in arevolving credit commitments under the Original Credit
 
South Africa affiliate.
Facility.
Prior to this buyout, this South Africa affiliate made
a
distribution to the prior noncontrolling affiliate
shareholder of approximately $0.8 million in the first six months
of 2020.
There wereQuaker Chemical Corporation
no similar noncontrolling interest activities in the first six monthsManagement’s Discussion and Analysis
of 2021.29
The Company’s primaryAmended Credit
 
credit facility (the “Credit Facility”)Facility is comprised of a $400.0
$500.0 million multicurrency revolver, (the
“Revolver”), a $600.0 million term loan (the “U.S. Termand
Loan”), each with the Company as borrower,
and a $150.0 million (as of
August 1, 2019) June 17, 2022) Euro equivalent term loan (the “Euro(collectively,
 
the “Amended Term Loan” and togetherLoans”)
 
with the U.S. Term Loan”,
the “Term Loans”) withCompany and
Quaker ChemicalHoughton B.V.,
 
a Dutch subsidiary of the Company as borrower,
borrowers, each with a five yearfive-year term maturing in August 2024.June 2027.
 
Subject
to the consent of the administrative agentAdministrative
Agent and certain other
conditions, the Company may designate additional borrowers.
 
borrowers. The Company has the right to increase the
maximum amount available underof the Amended Credit Facility by an aggregate amount not
 
can be increased by up to $300.0exceed the greater of (i) $300 million at the Company’s
request if there areand (ii) 100% of
lenders who agreeConsolidated EBITDA, subject to accept additional commitments andcertain conditions, including
 
the Company has satisfied certain other conditions.agreement to provide financing by any Lender providing any such
increase. U.S. Dollar-denominated borrowings
 
Borrowings under the
Amended Credit Facility bear interest, at a base rate or LIBOR plus an
applicable margin based on the Company’s
 
election, at the base
rate or term Secured Overnight Financing Rate (“SOFR”) plus an applicable
rate ranging from 1.00% to 1.75% for term SOFR loans
and from 0.00% to 0.75% for base rate loans, depending upon the
Company’s consolidated net leverage
ratio.
 
There are LIBOR replacement provisions that contemplateLoans based on term
SOFR also include a furtherspread adjustment equal to 0.10% per annum.
 
amendment if and when LIBOR ceases to be reported.
The
weighted average interest rate incurred on the outstanding
borrowingsBorrowings under the Amended Credit Facility during bothdenominated in
currencies other than U.S. Dollars bear interest at the first six monthsalternative currency
 
ofterm rate plus the applicable rate ranging from 1.00% to
2021 and as of June 30, 2021 was approximately 1.6
%1.75%.
In addition to paying interest on outstanding principal under
 
the Amended Credit
Facility, the Company
 
is required to pay a
commitment fee ranging from 0.2%0.15% to
0.3% 0.275% depending on the Company’s
 
Company’s consolidated net leverage
leverage ratio to the lendersLenders under the
Amended Revolver in
respect of the unutilized commitments thereunder.
The Amended Credit Facility is subject to certaincontains affirmative
and negative covenants, financial covenants and events of default that are
other covenants.customary for agreements of this nature.
 
The Company’s initial consolidatedAmended Credit Facility contains a number of customary business covenants,
 
net debt toincluding
consolidated adjusted EBITDA ratio could not exceedwithout limitation restrictions on (a) the incurrence of additional
 
4.25 to 1, with step downsindebtedness by the Company or certain of its subsidiaries, (b)
investments in the permitted ratio over theand acquisitions of other businesses, lines of business and
 
termdivisions by the Company or certain of its subsidiaries, (c)
the Credit
Facility.payment of dividends or capital stock purchases by the Company
 
Asor certain of June 30, 2021,its subsidiaries and (d) dispositions of assets by the
Company or certain of its subsidiaries.
Dividends and share repurchases are permitted in annual amounts
not exceeding the greater of
$75 million annually and 25% of Consolidated EBITDA if there is no default.
All restricted payments may be made if there is no
default and if the consolidated net debt to consolidatedleverage ratio is less than 2.50
 
adjusted EBITDAto 1.00.
Financial covenants contained in the Amended Credit Facility include
a consolidated interest coverage ratio test and a
consolidated net leverage ratio test.
The consolidated net leverage ratio at the end of a quarter may not exceedbe
greater than 4.00 to 1.1.00,
subject to a permitted increase during a four quarter period
after certain acquisitions.
 
The Company has the option of replacing the
Company’s consolidated net leverage ratio test with a consolidated senior net leverage ratio
 
adjusted EBITDA to interest expense ratio may not be less than
3.0 to 1 over the term of the agreement.
The
Credit Facility also prohibits the payment of cash dividends
test if the Company is in default or if the amountissues certain types of the dividen
ds paidunsecured
annually exceeds the greater of $50.0 million and
20% of consolidated adjusted EBITDA unless the ratio of
consolidated net debt, to
Quaker Chemical Corporation
Management’s Discussion and Analysis
31
consolidated adjusted EBITDA is less than 2.0 to 1,
in which case there is no such limitation on amount.
As of June 30, 2021, and
December 31, 2020, the Company was in compliance with
all of the Credit Facility covenants.
The Term Loans
have quarterly
principal amortization during their five year terms,
with 5.0% amortization of the principal balance due in years 1 and
2, 7.5% in year
3, and 10.0% in years 4 and 5, with the remaining principal
amount due at maturity.
The Credit Facility is guaranteed by certain of the
Company’s domestic subsidiaries
and is secured by first priority liens on substantially all of
the assets of the Company and the
domestic subsidiary guarantors, subject to certain customary exclusions.limitations. Customary events of
default in the Amended Credit Facility include without limitation
defaults for non-payment, breach of representations and warranties, non
-performance of covenants, cross-defaults, insolvency,
and a
change of control of the Company in certain circumstances.
 
The occurrence of an event of default under the Amended Credit Facility
could result in all loans and other obligations ofbecoming immediately
due and payable and the Dutch borrower are guaranteed onlyAmended Credit Facility being
by certain foreign subsidiaries on an unsecured basis.terminated.
The Original Credit Facility required the Company to fix its variable interest
 
interest rates on at least 20% of its total Original Term
Loans.
 
In order to
satisfy this requirement as well as to manage the Company’s
 
Company’s exposure to variable
interest rate risk associated with
the Original Credit Facility,
in November 2019, the Company entered into $170.0 million notional
 
million notional amounts of three year interest rate
swaps at a base
rate of 1.64%
plus an applicable margin as provided
in the
Original Credit Facility, based on
 
on the Company’s
consolidated net
leverage ratio.
 
At the time the
Company entered into the swaps, and as of June 30, 2022,
 
2021, the aggregate interest rate
on the swaps, including the
fixed base rate plus
an applicable margin,
was 3.1%.
 
The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.
The Company previously capitalized $23.7 million of certain third-party
 
debt issuance costs in connection with executing
the Original
Credit Facility.
 
Approximately $15.5 million of the capitalized costs were attributed
 
to the Original Term Loans and recorded
 
recorded as a
direct reduction of long-
termLong-term debt on the Company’sCondensed Consolidated
 
Consolidated Balance Sheet.
 
Approximately $8.3 million of the capitalized
costs were
attributed to the
Original Revolver and recorded within other Other
assets on the Company’sCondensed Consolidated Balance Sheet.
These
capitalized costs were being amortized into Interest expense over
the five-year term of the Original Credit Facility.
As of December
31, 2021, the Company had $8.0 million of debt issuance costs recorded
as a reduction of Long-term debt attributable to the Original
Credit Facility.
As of December 31, 2021, the Company had $4.3 million of debt issuance
costs recorded within Other assets
attributable to the Original Credit Facility.
Prior to executing the Amended Credit Facility,
the Company had $6.6 million of debt
issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $3.5 million of debt issuance
costs recorded within Other assets attributable to the Original Credit Facility.
In connection with executing the Amended Credit
Facility, the Company
recorded a loss on extinguishment of debt of approximately $6.8 million which
includes the write-off of certain
previously unamortized deferred financing costs as well as a portion of
the third party and creditor debt issuance costs incurred to
execute the Amended Credit Facility.
Also in connection with executing the Amended Credit Facility,
during the second quarter of
2022, the Company capitalized $2.2 million of certain third-party
debt issuance costs.
Approximately $0.7 million of the capitalized
costs were attributed to the Amended Euro Term
Loan and Amended U.S. Term
Loan. These costs were recorded as a direct reduction
of Long-term debt on the Condensed Consolidated Balance Sheet.
Approximately $1.5 million of the capitalized costs were attributed
to the Amended Revolver and recorded within Other assets on the
 
Condensed Consolidated Balance Sheet.
 
These capitalized costs, areas
beingwell as the previously capitalized costs that were not written off
will collectively be amortized into interestInterest expense over the five yearfive-year
Quaker Chemical Corporation
Management’s Discussion and Analysis
30
term of the Amended Credit Facility.
 
As of June 30, 2022, the Company had $2.2 million of debt issuance
costs recorded as a
reduction of Long-term debt on the Condensed Consolidated Balance Sheet
and $4.8 million of debt issuance costs recorded within
Other assets on the Condensed Consolidated Balance Sheet.
As of June 30, 2021,2022, the Company had Amended Credit Facility borrowings outstanding
 
outstanding of $892.6$977.6 million.
 
As of December 31, 2020, the
2021,
the Company had Original Credit Facility borrowings outstanding of
 
of $887.1$889.6 million.
 
The Company has unused capacity under
the Amended Revolver of
approximately $206$268 million, net of bank letters of
 
credit of approximately $4 million, as of June 30, 2021.2022.
 
The Company’s other debt
obligations are primarily industrial development bonds,
bank lines of credit and municipality-related loans, whichmunicipality
 
-related loans,
which totaled $12.2
$11.5 million and $12.1 $11.8
million as of June 30, 20212022 and
December 31, 2020,2021, respectively.
 
Total unused capacity under
under these arrangements
as of June 30, 20212022 was approximately $40$28 million.
 
The Company’s total net debt
as of June
30, 20212022 was $759.2 $786.7
million.
The Company estimates that it realized cost synergies
in the first six months of 2021 of approximately $36.5 million
compared to
approximately $22 million in the first six months of 2020.
The Company continues to expect to realize Combination
cost synergies of
approximately $75 million in 2021 and $80 million in
2022.
The Company continues to expect to incur additional costs
and make
associated cash payments to integrate Quaker and Houghton
and continue realizing the Combination’s
total anticipated cost synergies.
The Company expects total cash payments, including
those pursuant to the QH Program, described below,
but excluding incremental
capital expenditures related to the Combination,
will be approximately 1.3 times its total anticipated 2022 cost
synergies of $80
million.
A significant portion of these costs were already incurred
in 2019, 2020 and the first six months of 2021, but the Company
expects to continue to incur such costs throughout
the remainder of 2021.
The Company incurred $7.6$8.3 million of total Combination, integration
integration and other acquisition-related expenses in the
first six
months of 2021,2022, which includes $0.5$2.4 million of accelerated
depreciation and is net of a $5.4 million gain on the sale ofother expenses related to
 
certain held-for-sale real propertyindemnification assets, described in the
Non-GAAP
Measures section of this Item below.
 
Comparatively, in the first six months
 
of 2020,2021, the Company incurred $16.5$7.6 million of total
Combination, integration and other acquisition-related expenses, which
 
expenses.was net of a $5.4 million gain on the sale of certain held-for-
sale real property assets and also included $0.5 million of accelerated depreciation.
 
The Company had aggregate net cash outflows of
approximately
$14.8approximately $9.2 million related to the Combination, integration and other acquisition
 
other acquisition-related-related expenses during the first six months
of 20212022 as
compared to $13.8$14.8 million during the first six months of 2021.
 
2020.During the first six months of 2022, the Company incurred
$6.2 million of strategic planning and transformation expenses.
 
The Company expects that these additional operating costs and
associated cash flows, as well as higher capital expenditures related
to strategic planning, process optimization and the next phase of
the Company’s long-term integration
to further optimize its footprint, processes and other functions will continue
in 2022 and
potentially extend into the next several years.
Quaker Houghton’s managementManagement
 
approved, and the Company initiated, a global restructuring plan (the
 
plan (the “QH“QH Program”) in the
third quarter of 2019 as part of its planned cost synergies associated
 
associated with the Combination.
 
The QH Program includes restructuring
and associated severance costs to reduce total headcount by approximately
 
by approximately 400 people globally and plans for the closure
of certain
manufacturing and non-manufacturing facilities.
 
In connection with the plans for closure of certain manufacturing
and non-
manufacturing facilities, the Company made a decision
to make available for sale certain facilities during the second
quarter of 2020.
During the first quarter of 2021, certain of these facilities were
sold and the Company recognized a gain on disposal of $5.4 million
included within other income (expense), net on the Condensed
Consolidated Statement of Operations.
The exact timing and total
costs associated with the QH Program will dependdepe
 
nds on a
number of factors and is subject to change; however,
 
reductions in headcount
and site closures have continued into 2021.occurred, and the Company
The Company currently expects additional headcount reductions and
site closures to occur
intothroughout 2022 and estimates that the anticipated cost synergies
realized under the QH Program will approximate one-times restructuring
costs incurred.into 2023.
 
The Company made cash
payments related to the settlement of
restructuring liabilities under
the QH Program during
the first six months of 20212022 of
approximately $4.2$0.8 million
compared to $9.6$4.2 million in the first six months
of 2020.2021.
As of June 30, 2021,2022, the Company’s
 
gross liability for uncertain tax positions, including interest and
penalties, was $30.8$21.9 million.
 
The Company cannot determine a reliable estimate of
the timing of cash
flows by period
related to its uncertain tax
position liability.
 
However, should the entire liability be paid,
 
be paid, the amount of the payment may be reduced by up
to $7.7$6.9 million as a result of offsetting
benefits in other tax jurisdictions.
During the fourth quarter of 2020, oneIn 2021, two of the Company’s locations
 
subsidiaries receivedsuffered significant property damage as a noticeresult of
inspection from a taxing authority in a country where certain flooding
 
and fire.
The Company
maintains property insurance for all of its subsidiaries operate, which relate to a non-income
(indirect) tax
Quaker Chemical Corporation
Management’s Discussion and Analysis
32
that may be applicable to certain products the subsidiary
sells.
To date, the Company
has not received any assessment from the
authority related to potential liabilities that may be due
from the Company’s subsidiary.
Consequently, there is substantial
uncertainty
with respect to the Company’s
ultimate liability with respect to this indirect tax.
During the first six months of 2021, the Company
recorded $13.3 million of non-income tax credits for
certain of its Brazilian subsidiaries.facilities globally.
 
The Company, expects to utilizeits insurance
adjuster and insurance carrier are actively
managing the remediation and restoration activities associated with both
of these creditsevents and at this time the Company has concluded,
to offset certain Brazilian federal tax payments overbased on all available information and discussions with its insurance
 
approximatelyadjuster and insurance carrier, that the following two years beginning inlosses incurred
during
2021 were covered under the second halfCompany’s
property insurance coverage, net of 2021.an aggregate deductible of $2.0
million.
The Company
has received payments from its insurers of $2.1 million and has recorded
an insurance receivable associated with these events of $0.9
million as of June 30, 2022.
 
See
Note 1918 of Notes to Condensed Consolidated Financial
Statements in Item
1 of this Report.
The Company believes that its existing cash, anticipated
cash flows from
operations and available additional liquidity
will be
sufficient to support its operating requirements and fund
 
and fund its business objectives for at least the next twelve
months, including but not
limited to, payments of dividends to shareholders, costs related to ongoing
 
to the Combinationacquisition integration and integration,optimization, pension plan contributions,
capital
contributions, capital expenditures, other business opportunities (including
 
potential acquisitions), implementing actions to achieve the
Company’s sustainability
goals and other potential known or anticipated contingencies.
 
The Company’sCompany believes it has sufficient
additional liquidity to support its operating requirements and to fund its business
obligations for the period beyond the next twelve
months as well, including the aforementioned items which are expected
to recur annually, as well as future principal
and interest
payments on the Company’s Amended
Credit Facility, tax obligations
and other long-term liabilities.
The Company’s liquidity
is
affected by many factors, some
based on normal operations of
our business and others related
to the impact of the pandemic and other
pandemicglobal events on our business and on global economic
conditions as well as industry uncertainties,
which we cannot
predict.
 
We also
cannot predict economic conditions and industry downturns or the
 
or the timing, strength or duration of recoveries.
 
We may seek,
 
as we
believe appropriate, additional
debt or equity financing which would
provide capital for
corporate purposes, working capital funding,
additional liquidity needs or to fund future growth opportunities, including
 
possible acquisitions and organic investments.
 
The timing and
and amount of potential capital requirements cannot be determined
 
determined at this time and will depend on a number of factors,
including the
actual and projected demand for our products, specialty
chemical industry conditions, competitive factors, and the
condition of
financial markets, among others.
Non-GAAP Measures
The information in this Form 10-Q includes non-GAAP (unaudited)
financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating
income, non-GAAP operating margin, non-GAAP
net income and non-
GAAP earnings per diluted share.
The Company believes these non-GAAP financial measures provide
meaningful supplemental
information as they enhance a reader’s understanding
of the financial performance of the Company,
are indicative of future operating
performance of the Company,
and facilitate a comparison among fiscal periods, as the
non-GAAP financial measures exclude items
that are not considered indicative of future operating performance
or not considered core to the Company’s
operations.
Non-GAAP
results are presented for supplemental informational
purposes only and should not be considered a substitute for the
financial
information presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income
(loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on income
(loss) before equity in net income of associated companies.
The Company
also presents adjusted EBITDA which is calculated as EBITDA
plus or minus certain items that are not considered indicative of
future
operating performance or not considered core to the Company’s
operations.
In addition, the Company presents non-GAAP operating
income which is calculated as operating income (loss) plus
or minus certain items that are not considered indicative
of future operating
performance or not considered core to the Company’s
operations.
Adjusted EBITDA margin and non-GAAP operating
margin are
calculated as the percentage of adjusted EBITDA and
non-GAAP operating income to consolidated net sales, respectively.
The
Company believes these non-GAAP measures provide
transparent and useful information and are widely used by analysts, investors,
and competitors in our industry as well as by management
in assessing the operating performance of the Company on
a consistent
basis.
Additionally, the
Company presents non-GAAP net income and non-GAAP earnings
per diluted share as additional performance
measures.
Non-GAAP net income is calculated as adjusted EBITDA, defined
above, less depreciation and amortization, interest
expense, net, and taxes on income before equity in
net income of associated companies, in each case adjusted,
as applicable, for any
depreciation, amortization, interest or tax impacts resulting
from the non-core items identified in the reconciliation
of net income
attributable to the Company to adjusted EBITDA.
Non-GAAP earnings per diluted share is calculated as non
-GAAP net income per
diluted share as accounted for under the “two-class share
method.”
The Company believes that non-GAAP net income and non-
GAAP earnings per diluted share provide transparent
and useful information and are widely used by analysts, investors,
and
competitors in our industry as well as by management in
assessing the operating performance of the Company on a consistent
basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
31
actual and projected demand for our products, specialty chemical indust
ry conditions, competitive factors, and the condition of
financial markets, among others.
Non-GAAP Measures
The information in this Form 10-Q includes non-GAAP (unaudited)
financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating
income, non-GAAP operating margin, non-GAAP
net income and non-
GAAP earnings per diluted share.
The Company believes these non-GAAP financial measures provide meaningful
supplemental
information as they enhance a reader’s understanding
of the financial performance of the Company,
are indicative of future operating
performance of the Company,
and facilitate a comparison among fiscal periods, as the non-GAAP financial
measures exclude items
that are not considered indicative of future operating performance or not
considered core to the Company’s operations.
Non-GAAP
results are presented for supplemental informational purposes only
and should not be considered a substitute for the financial
information presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income attributable
to the Company before depreciation and
amortization, interest expense, net, and taxes on income before equity
in net (loss) income of associated companies.
The Company
also presents adjusted EBITDA which is calculated as EBITDA plus or
minus certain items that are not considered indicative of future
operating performance or not considered core to the Company’s
operations.
In addition, the Company presents non-GAAP operating
income which is calculated as operating income plus or minus certain items that
are not considered indicative of future operating
performance or not considered core to the Company’s
operations.
Adjusted EBITDA margin and non-GAAP operating margin
are
calculated as the percentage of adjusted EBITDA and non-GAAP operating
income to consolidated net sales, respectively.
The
Company believes these non-GAAP measures provide transparent
and useful information and are widely used by investors, analysts,
and peers in our industry as well as by management in assessing the operating
performance of the Company on a consistent basis.
Additionally, the
Company presents non-GAAP net income and non-GAAP earnings per diluted share
as additional performance
measures.
Non-GAAP net income is calculated as adjusted EBITDA, defined above,
less depreciation and amortization, interest
expense, net, and taxes on income before equity in net (loss) income
of associated companies, in each case adjusted, as applicable, for
any depreciation, amortization, interest or tax impacts resulting from
the non-core items identified in the reconciliation of net income
attributable to the Company to adjusted EBITDA.
Non-GAAP earnings per diluted share is calculated as non-GAAP net income
per
diluted share as accounted for under the “two-class share method.”
The Company believes that non-GAAP net income and non-
GAAP earnings per diluted share provide transparent and useful information
and are widely used by investors, analysts, and peers in
our industry as well as by management in assessing the operating performance
of the Company on a consistent basis.
Certain of the prior period non-GAAP financial measures presented
in the following tables have been adjusted to conform with
current period presentation.
The following tables reconcile the Company’s
non-GAAP financial measures (unaudited) to their most
directly comparable GAAP (unaudited) financial measures
(dollars in thousands unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Operating income
$
31,903
$
38,816
$
61,306
$
83,710
Combination, restructuring and other
acquisition-related expenses (a)
1,831
7,082
6,704
15,288
Strategic planning and transformation expenses (b)
3,112
—
6,200
—
Executive transition costs (c)
645
308
1,184
812
Russia-Ukraine conflict related expenses (d)
929
—
2,095
—
Other charges (e)
385
242
476
293
Non-GAAP operating income
$
38,805
$
46,448
$
77,965
$
100,103
Non-GAAP operating margin (%) (l)
7.9%
10.7%
8.1%
11.6%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
The following tables reconcile the Company’s
non-GAAP financial measures (unaudited) to their most
directly comparable
GAAP (unaudited) financial measures (dollars in thousands unless
otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2021
2020
2021
2020
Operating income (loss)
$
38,816
$
2,238
$
83,710
$
(10,206)
Houghton combination, integration and other
acquisition-related expenses (a)
6,784
8,253
13,014
16,529
Restructuring and related charges (b)
298
486
1,473
2,202
Fair value step up of acquired inventory sold (c)
—
226
801
226
CEO transition costs (d)
308
—
812
—
Inactive subsidiary's non-operating litigation costs (e)
242
—
293
—
Customer bankruptcy costs (f)
—
—
—
463
Indefinite-lived intangible asset impairment (g)
—
—
—
38,000
Non-GAAP operating income
$
46,448
$
11,203
$
100,103
$
47,214
Non-GAAP operating margin (%) (o)
10.7%
3.9%
11.6%
7.1%
32
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
and Non-GAAP Net Income Reconciliations
Three Months Ended
Six Months Ended
June 30,
 
June 30,
 
2021
20202022
2021
20202022
2021
Net income (loss) attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
(7,735)34,159
$
72,185
$
(36,116)
Depreciation and amortization (a)(m)(j)
20,856
22,344
21,15841,583
44,792
42,742
Interest expense, net
6,494
5,618
6,81111,839
11,088
15,272
Taxes on income before
 
(loss) before equity in net (loss) income
 
of associated companies (k)
1,374
15,218
3,2224,240
25,907
(9,848)EBITDA
EBITDA43,067
76,750
23,45691,821
153,972
12,050
Equity incomeloss (income) in a captive insurance company (h)(f)
1,781
(883)
(482)2,025
(3,963)
(155)
Houghton combination, integrationCombination, restructuring and other
 
acquisition-related expenses (a)
6,6582,248
7,9636,956
7,0859,100
15,7669,359
RestructuringStrategic planning and related chargestransformation expenses (b)
298
486
1,473
2,202
Fair value step up of acquired inventory sold (c)3,112
—
2266,200
801—
226
CEOExecutive transition costs (d)(c)
645
308
—1,184
812
—Russia-Ukraine conflict related expenses (d)
Inactive subsidiary's non-operating litigation costs (e)
242929
—
2932,095
—
Customer bankruptcy costs (f)
—
—
—
463
Indefinite-lived intangible asset impairment (g)
—
—
—
38,000
Pension and postretirement benefit (income) costs,
non-service components (i)
(129)
341
(253)
23,866
Brazilian non-income tax credits (j)(g)
—
(13,293)
—
(13,293)
Loss on extinguishment of debt (h)
6,763
—
Currency conversion impacts of hyper-inflationary economies (k)6,763
106—
73Other charges (e)
278(54)
124219
(253)
318
Adjusted EBITDA
$
58,491
$
70,057
$
32,063118,935
$
147,205
$
92,542
Adjusted EBITDA margin (%) (o)(l)
11.9%
16.1%
11.2%12.3%
17.0%
13.9%
Adjusted EBITDA
$
58,491
$
70,057
$
32,063118,935
$
147,205
$
92,542
Less: Depreciation and amortization - adjusted (a)
20,856
22,218
20,86941,583
44,251
41,980
Less: Interest expense, net
6,494
5,618
6,81111,839
11,088
15,272
Less: Taxes on income
 
before equity in net income
 
of associated companies - adjusted (a)(n)(k)
7,466
9,773
67316,368
21,512
7,136
Non-GAAP net income
$
23,675
$
32,448
$
3,71049,145
$
70,354
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
28,1540.80
$
1.88
$
1.91
$
4.03
Equity loss (income) in a captive insurance company
per diluted share (f)
0.10
(0.05)
0.11
(0.22)
Combination, restructuring and other
acquisition-related expenses per diluted share (a)
0.13
0.30
0.41
0.42
Strategic planning and transformation expenses per
diluted share (b)
0.13
—
0.27
—
Executive transition costs per diluted share (c)
0.03
0.02
0.05
0.04
Russia-Ukraine conflict related expenses per diluted share (d)
0.04
—
0.10
—
Brazilian non-income tax credits per diluted share (g)
—
(0.44)
—
(0.44)
Loss on extinguishment of debt per diluted share (h)
0.29
—
0.29
—
Other charges per diluted share (e)
(0.00)
0.01
(0.01)
0.02
Impact of certain discrete tax items per diluted share (i)
(0.20)
0.10
(0.39)
0.08
Non-GAAP earnings per diluted share (m)
$
1.32
$
1.82
$
2.74
$
3.93
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
(a)
Combination, restructuring and other acquisition-related expenses include
certain legal, financial, and other advisory and
consultant costs incurred in connection with the Combination integration
activities including internal control readiness and
remediation as well as costs incurred by the Company associated with the
QH restructuring program,
which was initiated in the
third quarter of 2019 as part of the Company’s
plan to realize cost synergies associated with the Combination
.
These amounts
also include expense associated with other of the Company’s
acquisitions, including cost associated with selling inventory from
acquired businesses which was adjusted to fair value as part of purchase
accounting.
These costs are not indicative of the future
operating performance of the Company.
Approximately $0.1 million and $0.2 million for the three and six months ended
June
30, 2022, respectively,
and approximately $0.4
million and $0.5 million in the three and six months ended June 30, 2021,
respectively, of
these pre-tax costs were considered non-deductible for the purpose of determining the Company’s
effective tax
rate, and, therefore, taxes on income before equity in net income of associated
companies - adjusted reflects the impact of these
items.
During the three and six months ended June 30, 2022, the Company recorded
$0.4 million and $2.4
million, respectively,
of other expense related to an indemnification asset, which is included
in the caption “Combination, restructuring and other
acquisition-related expenses” in the reconciliation of GAAP earnings per diluted
share attributed to Quaker Chemical Corporation
common shareholders to Non-GAAP earnings per diluted share as well as the reconciliation
of net income attributable to Quaker
Chemical Corporation to Adjusted EBITDA and Non-GAAP net income
.
During the
three and six months ended June 30, 2021,
the Company recorded $0.1 million $0.5 million, respectively,
of accelerated depreciation related to certain of the Company’s
facilities, which is included in the caption “Combination, restructuring
and other acquisition-related expenses” in the
reconciliation of operating income to non-GAAP operating
income and included in the caption “Depreciation and amortization”
in the reconciliation of net income attributable to the Company to
EBITDA, but excluded from the caption “Depreciation and
amortization - adjusted” in the reconciliation of adjusted EBITDA to non
-GAAP net income attributable to the Company.
During
the six months ended June 30, 2021, the Company recorded a $5.4 million
gain on the sale of certain held-for-sale real property
assets related to the Combination which is included in the caption “Combination,
restructuring and other acquisition-related
expenses” in the reconciliation of GAAP earnings per diluted share attributed
to Quaker Chemical Corporation common
shareholders to Non-GAAP earnings per diluted share as well as the reconciliation
of net income attributable to Quaker Chemical
Corporation to Adjusted EBITDA and Non-GAAP net income.
During the three and six months ended June 30, 2022,
respectively,
the Company recorded restructuring and related charges
of less than $0.1 million and $0.8 million, respectively,
and
$0.3 million and $1.5 million during the three and six months ended
June 30, 2021, respectively.
During the six months ended
June 30, 2021, the Company recorded $0.8 million related to the sale
of inventory from acquired businesses which was adjusted
to fair value.
See Notes 2, 7, 10 and 11 of Notes to Condensed Consolidated
Financial Statements, which appear in Item 1 of this
Report.
(b)
Strategic planning and transformation expenses include certain consultant
and advisory expenses for the Company’s
long-term
strategic planning, as well as process optimization and the next phase
of the Company’s long-term integration
to further optimize
its footprint, processes and other functions.
These costs are not indicative of the future operating performance of the Company.
(c)
Executive transition costs represent the costs related to the Company’s
search, hiring and transition to a new CEO in connection
with the executive transition that took place in 2021 as well as the search,
hiring and transition for other officers during the first
six months of 2022.
These expenses are one-time in nature and not indicative of the future operating performance
of the
Company.
(d)
Russia-Ukraine conflict related expenses represent the direct costs associated
with the Company’s
exit of operations in Russia
during the second quarter of 2022, primarily for employee separation
benefits, as well as costs associated with establishing
specific reserves or changes to existing reserves for trade accounts receivable
within the Company’s EMEA reportable segment
due to the economic instability associated with certain customer accounts receivables
which have been directly impacted by the
current economic conflict between Russia and Ukraine or the Company’s
decision to end operations in Russia.
These expenses
are not indicative of the future operating performance of the Company.
(e)
Other charges include charges incurred
by an inactive subsidiary of the Company as a result of the termination of restrictions on
insurance settlement reserves, non-service components of the Company’s
pension and postretirement net periodic benefit income
and the foreign currency remeasurement impacts associated with the
Company’s affiliates whos
e
local economies are designated
as hyper-inflationary under U.S. GAAP.
These expenses are not indicative of the future operating performance
of the Company.
See Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements,
which appear in Item 1 of this Report.
(f)
Equity loss (income) in a captive insurance company represents the after-tax
loss (income) attributable to the Company’s
interest
in Primex, Ltd. (“Primex”), a captive insurance company.
The Company holds a 32% investment in and has significant influence
over Primex, and therefore accounts for this interest under the equity method
of accounting.
The loss (income) attributable to
Primex is not indicative of the future operating performance of the
Company and is not considered core to the Company’s
operations.
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
(g)
Brazilian non-income tax credits represent indirect tax credits related to certain
of the Company’s Brazilian subsidiaries
prevailing in a legal claim as well as the Brazilian Supreme Court ruling
on these non-income tax matters.
The non-income tax
credits arising from the claim and court ruling are non-recurring
and not indicative of the future operating performance of the
Company.
See Note 18 of Notes to Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(h)
In connection with executing the Amended Credit Facility,
the Company recorded a loss on extinguishment of debt of
approximately $6.8 million which includes the write-off
of certain previously unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurred
to execute the Amended Credit Facility.
These expenses are
not indicative of the future operating performance of the Company.
See Note 14 of Notes to Condensed Consolidated Financial
Statements, which appears
in Item 1 of this Report.
(i)
The impacts of certain discrete tax items include changes in valuation
allowances recorded on certain Brazilian branch foreign tax
credits and the recording of deferred taxes on Brazilian branch income.
Both of these discrete items related to tax law changes in
the U.S. due to the issuance of final foreign tax credit regulations during the
period.
Additionally, the Company
has discrete
items related to the release of the reserves for uncertain tax positions settled during
the quarter and certain taxes, penalties, and
interest due as a result of the settlements.
See Note 11 of Notes to Condensed Consolidated
Financial Statements, which appears
in Item 1 of this Report.
(j)
Depreciation and amortization for the three and six months ended June 30,
2022 includes approximately $0.2 million and $0.5
million, respectively,
and for the three and six months ended June 30, 2021 includes $0.3 million and $0.6 million,
respectively,
of amortization expense recorded within equity in net loss (income)
of associated companies in the Company’s
Condensed
Consolidated Statements of income, which is attributable to the amortization
of the fair value step up for the Company’s
50%
interest in a joint venture in Korea as a result of required purchase accounting.
(k)
Taxes on income
before equity in net loss (income) of associated companies – adjusted presents the impact
of any current and
deferred income tax expense (benefit), as applicable, of the reconciling
items presented in the reconciliation of net income
attributable to Quaker Chemical Corporation to adjusted EBITDA, and
was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject to deductibility.
Combination, restructuring and other acquisition-
related expenses described in (a) resulted in a tax benefit of approximatel
y
$0.1 million and incremental taxes of $1.6 million for
the three and six months ended June 30, 2022, respectively,
compared to $1.6 million and $2.2 million for the three and six
months ended June 30, 2021, respectively.
Strategic planning and transformation expenses describes in (b) above resulted in
incremental taxes of $0.7 million and $1.4 million for the three and
six months ended June 30, 2022, respectively.
Executive
transition costs described in (c) resulted in incremental taxes of $0.2
million and $0.3 million for the three and six months ended
June 30, 2022, respectively,
compared to $0.1 million and $0.2 million for the three and six months ended
June 30, 2021,
respectively.
Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes
of $0.2 million and $0.5
million for the three and six months ended June 30, 2022, respectively.
Other charges described in (e) resulted in incremental
taxes of less than $0.1 million and a tax benefit of less than $0.1 million for
the three and six months ended June 30, 2022,
respectively, compared
to $0.1 million during each of the three and six months ended June 30, 2021.
Brazilian non-income tax
credits described in (g) resulted in incremental taxes of $5.3 million during
the three and six months ended June 30, 2021.
Loss
on extinguishment of debt described in (h) resulted in incremental
taxes of $1.6 million during the three and six months ended
June 30, 2022.
The impact of certain discrete items described in (i) resulted in a tax benefit of
$3.5 million and $6.9 million for
the three and six months ended June 30, 2022, respectively,
compared to $1.9 million and $1.5 million for the three and six
months ended June 30, 2021, respectively.
(l)
The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage of adjusted EBITDA
and
non-GAAP operating income to consolidated net sales.
(m)
The Company calculates non-GAAP earnings per diluted share as non
-GAAP net income attributable to the Company per
weighted average diluted shares outstanding using the “two-class share method”
to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet commitments or
obligations as of June 30, 2022.
The Company’s off
-balance
sheet items outstanding as of June 30, 2022 includes approximately $5
million of total bank letters of credit and guarantees.
The bank
letters of credit and guarantees are not significant to the Company’s
liquidity or capital resources.
See Note 14 of Notes to Condensed
Consolidated Financial Statements in Item 1 of this Report.
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
Operations
Consolidated Operations Review – Comparison of the Second Quarter of 2022
with the Second Quarter of 2021
Net sales were $492.4
million in the second quarter of 2022 compared to $435.3 million in the second quarter
of 2021.
The net
sales increase of $57.1 million or 13% quarter-over-quarter reflects increases
in selling price and product mix of approximately 22%
and additional net sales from acquisitions of 1% partially offset
by the unfavorable impact from foreign currency translation
of 6% and
a decline in organic sales volumes of approximately 4%.
The increase in selling price and product mix is primarily driven by price
increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021 and
continued into 2022.
The decline in organic sales volumes was primarily attributable
to COVID-19 related production disruptions in
China, the tolling agreement for products previously divested related
to the Combination, the ongoing war in Ukraine and the
Company’s ongoing value
-based pricing initiatives.
COGS were $342.8 million in the second quarter of 2022 compared
to $280.8 million in the second quarter of 2021.
The increase
in COGS of $62.0 million or 22% was driven by the continued increases in the
Company’s global raw material and
supply chain and
logistics costs compared to the prior year.
Gross profit in the second quarter of 2022 decreased $4.9 million or 3%
from the second quarter of 2021.
The Company’s
reported gross margin in the second quarter of 2022 was 30.4%
compared to 35.5% in the second quarter of 2021.
The Company’s
current quarter gross margin reflects the continued significant
increase in raw material and other input costs experienced throughout
the second quarter of 2022 and the impacts of constraints on the global
supply chain, partially offset by the Company’s
ongoing value-
based pricing initiatives.
SG&A in the second quarter of 2022 increased $7.2 million or 7% compared
to the second quarter of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation driven higher
operating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currency
translation compared to the prior year.
During the second quarter of 2022, the Company incurred $1.8 million
of Combination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $6.7 million of expenses in the prior year second quarter,
primarily due to various professional
fees related to legal, financial and other advisory and consultant expenses
for integration activities including internal control readiness
and remediation.
See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during the third quarter
of 2019 as part of its global plan to realize cost synergies
associated with the Combination.
The Company incurred Restructuring and related (credits) charges
for reductions in headcount and
site closures under this program, net of adjustments to initial estimates for severance
of a credit of less than $0.1 million and a charge
of $0.3 million during the second quarters of 2022 and 2021, respectively.
See the Non-GAAP Measures section of this Item, above.
Operating income in the second quarter of 2022 was $31.9 million compared
to $38.8 million in the second quarter of 2021.
Excluding non-recurring and non-core expenses that are not indicat
ive of the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company’s
current quarter non-GAAP operating income decreased to
$38.8 million compared to $46.4 million in the prior year second quarter primarily
due to the lower gross profit and higher SG&A
described above.
The Company had other expense, net, of $8.4 million in the second quarter
of 2022 compared to other income, net of $14.0
million in the second quarter of 2021.
The second quarter of 2022 includes a loss on extinguishment of debt of $6.8 million
associated
with the refinancing of the Original Credit Facility while the second quarter
of 2021 included $13.3 million of income related to
certain non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
See the Non-GAAP Measures section of this Item,
above.
In addition, the Company incurred higher foreign exchange transaction
losses in the second quarter of 2022 compared to the
prior year quarter.
Interest expense, net, increased $0.9 million compared to the second
quarter of 2021 as a result of increases in the average
borrowings outstanding in the second quarter of 2022 compared
to the second quarter of 2021 coupled with an increase in interest
rates quarter-over-quarter.
The Company’s effective
tax rates for the second quarters of 2022 and 2021 were 8.1% and 32.2%, respectively.
The Company’s
effective tax rate for the second quarter of 2022 was largely
driven by state tax benefits, a reduction in reserves for uncertain tax
positions relating to management fees, a deferred tax benefit associated with
an intercompany asset transfer,
withholding taxes for
increased forecasted dividends, and the effects of
lower pre-tax earnings and the mix of such earnings.
In addition, the Company
incurred higher tax expense during the second quarter of 2022 primarily
related to the Company recording earnings in one of its
subsidiaries at a statutory tax rate of 25% while it awaits recertification of
a concessionary 15% tax rate, which was available to the
Company during all of 2021.
Comparatively,
the prior year quarter effective tax rate was impacted by changes
in foreign tax credit
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
valuation allowances, tax law changes in foreign jurisdictions as well as the tax impacts
of certain non-income tax credits recorded by
the Company’s Brazilian subsidiaries.
Excluding the impact of non-core items in each quarter,
described in the Non-GAAP Measures
section of this Item, above, the Company estimates that its effective
tax rates for both the second quarters of 2022 and 2021 would
have been approximately 24%.
The Company expects continued volatility in its effective tax rates due
to several factors, including the
timing and scope of tax audits and the expiration of applicable statutes of limitations
as they relate to uncertain tax positions, the
unpredictability of the timing and amount of certain incentives in various
tax jurisdictions, including the high technology incentive at
one of our subsidiaries based in China which is currently up for triennial renewal,
the treatment of certain acquisition-related costs and
the timing and amount of certain share-based compensation-related
tax benefits, among other factors.
Equity in net income of associated companies decreased $2.9 million
in the second quarter of 2022 compared to the second
quarter of 2021, primarily due to lower current year income from
the Company’s interest in a captive insurance
company and from the
Company’s 50% interest in a joint venture
in Korea.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 million
in both the second quarters of 2022 and 2021.
Foreign exchange unfavorably impacted the Company’s
second quarter of 2022 results by approximately 11% driven
by the
impact from foreign currency translation on earnings as well as higher
foreign exchange transaction losses in the current quarter as
compared to the prior year second quarter.
Consolidated Operations Review – Comparison of the First Six Months of 2022
with the First Six Months of 2021
Net sales were $966.6 million in the first six months of 2022 compared to
$865.0 million in the first six months of 2021.
The net
sales increase of $101.5 million or 12% year-over-year reflects increases in selling
price and product mix of approximately 19% and
additional net sales from acquisitions of 2% partially offset by a decline
in organic sales volumes of approximately 5% and the
unfavorable impact from foreign currency translation of 4%.
The increase in selling price and product mix is primarily driven by price
increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021 and
continued into 2022.
The decline in sales volumes was primarily attributable to the comparison to a very strong
first half of 2021, and
primarily the first quarter of 2021, where customers replenished
their supply chains, the impact of lower volumes related to the tolling
agreement for products previously divested related to the Combination,
the ongoing war in Ukraine, COVID-19 disruptions in China
and the Company’s ongoing
value-based pricing initiatives.
COGS were $670.9 million in the first six months of 2022 compared
to $554.4 million in the first six months of 2021.
The
increase in COGS of $116.5 million or
21% was driven by the continued increases in the Company’s
global raw material and supply
chain and logistics costs compared to the prior year.
Gross profit in the first six months of 2022 decreased $15.0 million or 5%
from the first six months of 2021.
The Company’s
reported gross margin in the first six months of 2022 was 30.6% compared
to 35.9% in the first six months of 2021.
The Company’s
current year gross margin reflects a significant increase in
raw material and other input costs and the impacts of constraints on the
global supply chain, partially offset by the Company’s
ongoing value-based pricing initiatives.
SG&A in the first six months of 2022 increased $14.6 million or 7% compared
to the first six months of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation driven higher
operating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currency
translation compared to the prior year.
In addition, SG&A was lower in the
prior year period as a result of continued temporary cost saving measures the
Company implemented in response to the onset of
COVID-19.
During the first six months of 2022, the Company incurred $5.9 million of
Combination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $12.5 million of expenses in the prior year’s
first six months, primarily due to various
professional fees related to legal, financial and other advisory and
consultant expenses for integration activities including internal
control readiness and remediation.
See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during the third quarter
of 2019 as part of its global plan to realize cost synergies
associated with the Combination.
The Company incurred Restructuring and related charges for reductions
in headcount and site
closures under this program, net of adjustments to initial estimates for severance
of $0.8 million and $1.5 million during the first six
months of 2022 and 2021, respectively.
See the Non-GAAP Measures section of this Item, above.
Operating income in the first six months of 2022 was $61.3 million compared
to $83.7 million in the first six months of 2021.
Excluding non-recurring and non-core expenses that are not indicative
of the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company’s
current year non-GAAP operating income decreased to $78.0
million for the first six months of 2022 compared to $100.1 million in
the prior year’s first six months primarily due to the lower gross
profit and higher SG&A described above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
37
The Company had other expense, net, of $10.6 million in the first six months
of 2022 compared to other income, net of $18.7
million in the first six months of 2021.
The first six months of 2022’s results include
$6.8 million loss on extinguishment of debt
related to the Company’s
refinancing the Original Credit Facility and other expenses of $2.4 million related
to the impact of certain
adjustments to the Company’s
Combination related indemnification receivables, while the prior
year’s first six months of 2022 other
income includes $13.3 million of income related to certain non-income
tax credits recorded by the Company’s
Brazilian subsidiary as
well as a $5.4 million gain on the sale of certain held-for-sale
real property assets.
See the Non-GAAP Measures section of this Item,
above.
In addition, the Company incurred higher foreign exchange transaction
losses in the first six months of 2022 compared to the
prior year period.
Interest expense, net, increased $0.8 million compared to the first six months
of 2021, due to an increase in the average
borrowings outstanding in the first six months of 2022 coupled with an
increase in interest rates in the current year as compared to the
prior year.
The Company’s effective
tax rates for the first six months of 2022 and 2021 were 10.9% and 28.4%, respectively.
The
Company’s eff
ective tax rate for the six months ended June 30, 2022 was largely driven
by changes in the valuation allowance for
foreign tax credits due to recently issued legislative guidance, impacts due
to settlements reached on certain tax audits, state tax
benefits, a reduction in reserves for uncertain tax positions relating to management
fees, a deferred tax benefit associated with an
intercompany asset transfer, withholding
taxes for increased forecasted dividends and the effects of lower
pre-tax earnings and the mix
of such earnings.
Comparatively, the prior year six month
effective tax rate was impacted by the sale of a subsidiary which included
certain held-for-sale real property assets related to the
Combination, certain U.S. tax law changes and the tax impact of certain
non-
income tax credits recorded by the Company’s
Brazilian subsidiaries.
Excluding the impact of all other non-core items in each period,
described in the Non-GAAP Measures section of this Item, above,
the Company estimates that its effective
tax rates for the first six
months of 2022 and 2021 would have been approximately 26% and 24%,
respectively.
In addition, the Company incurred higher tax
expense during the six months ended June 30, 2022 primarily related to
the Company recording earnings in one of its subsidiaries at a
statutory tax rate of 25% while it awaits recertification of a concessionary
15% tax rate, which was available to the Company during
all of 2021.
Equity in net income of associated companies decreased $7.3 million
in the first six months of 2022 compared to the first six
months of 2021, primarily due to lower current year income from
the Company’s interest in a captive insurance
company and from the
Company’s 50% interest in a joint venture
in Korea.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 million
in both the first six months of 2022 and 2021.
Foreign exchange unfavorably impacted the Company’s
first six months of 2022 results by approximately 7% driven by the
impact from foreign currency translation on earnings as well as higher
foreign exchange transaction losses in the current year as
compared to the prior year’s first six months.
Reportable Segments Review - Comparison of the Second Quarter of 202
2
with the Second Quarter of 2021
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are allocated
and the manner by which the chief operating decision maker of the Company
assesses its
performance.
The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed of the net sales and operations
in each respective region, excluding net
sales and operations managed globally by the Global Specialty Businesses
segment, which includes the Company’s
container, metal
finishing, mining, offshore, specialty coatings, specialty
grease and Norman Hay businesses.
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s product
sales.
Operating expenses not directly attributable to the net sales of each respective
segment,
such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses,
Restructuring and related charges, and COGS related
to acquired inventory sold, which is adjusted to fair value as part of purchase
accounting,
are not included in segment operating earnings.
Other items not specifically identified with the Company’s
reportable
segments include interest expense, net, and other (expense) income, net.
Quaker Chemical Corporation
Management’s Discussion and Analysis
38
Americas
Americas represented approximately 35% of the Company’s
consolidated net sales in the second quarter of 2022.
The segment’s net
sales were $172.7 million, an increase of $33.1 million or 24% compared
to the second quarter of 2021.
The increase in net sales was
due to higher selling price and product mix of 28%, additional net sales from
acquisitions of 1% and a favorable impact from foreign
currency translation of 1%, partially offset by a 6% decline
in organic sales volumes.
The increase in selling price and product mix is
primarily driven by price increases implemented to help offset
the significant increases in raw material and other input costs that
began during 2021 and continued through the second quarter of 2022.
The current quarter decline in organic sales volumes was
primarily driven by the tolling agreement for previously divested products
related to the Combination, the Company’s
ongoing value-
based pricing initiatives and lower volumes into the automotive industry
due to the semiconductor supply constraints, partially offset
by net new business wins.
This segment’s operating earnings were
$33.8 million, an increase of $0.1 million compared to the second
quarter of 2021.
The increase in segment operating earnings was primarily driven by higher net sales which
were partially offset by
on-going inflationary pressures on our business.
EMEA
EMEA represented approximately 25% of the Company’s
consolidated net sales in the second quarter of 2022.
The segment’s
net sales were $123.1 million, a decrease of $0.4 million compared
to the second quarter of 2021.
This was driven by higher selling
price and product mix of 21% and additional net sales from acquisitions of
approximately 1%, partially offset by the unfavorable
impact of foreign currency translation of 15% and a decrease in organic
sales volumes of 7%.
The increase in selling price and
product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other
input costs that began during 2021 and continued through the second
quarter of 2022.
The decline in organic sales volumes was
primarily driven by the current geopolitical and macroeconomic pressures
including the direct and indirect impacts of the ongoing war
in Ukraine and the impact of the economic and other sanctions by other
nations on Russia in response to the war, as well as lower
volumes associated with the Company’s
ongoing value-based pricing initiatives, the tolling agreement for products
previously
divested related to the Combination and softer economic conditions in the
region.
The unfavorable foreign exchange impact was
primarily due to the strengthening of the U.S. dollar against the euro
as this exchange rate averaged 1.07 in the second quarter of 2022
compared to 1.20 in the second quarter of 2021.
This segment’s operating earnings were
$13.3 million, a decrease of $10.1 million or
43% compared to the second quarter of 2021.
The decrease in segment operating earnings was primarily a result of higher net sales
which were more than offset by lower gross margins
due to inflationary pressures on the Company’s
costs exceeding its value-based
pricing actions.
Operating earnings were also negatively impacted by foreign currency translation.
Asia/Pacific
Asia/Pacific represented approximately 20% of the Company’s
consolidated net sales in the second quarter of 2022.
The
segment’s net sales were $99.8
million, an increase of $8.3 million or 9% compared to the second quarter
of 2021.
The increase in net
sales was driven by higher selling price and product mix of 17% partially
offset by lower organic sales volumes of 4% and an
unfavorable impact from foreign currency translation of 4%.
The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021
and
continued through the second quarter of 2022, partially offset
by a net increase in volumes elsewhere in the region.
The decline in
organic sales volumes was primarily driven by lower
sales volumes in China as a result of the government imposed COVID-19
quarantine and related production disruptions implemented
at the end of March 2022 and continued throughout the second quarter of
2022.
The unfavorable foreign exchange impact was primarily due to the
strengthening of the U.S. dollar against the Chinese
renminbi as this exchange rate averaged 6.61 in the second quarter of 2022
compared to 6.46 in the second quarter of 2021.
This
segment’s operating earnings were
$22.2 million, a decrease of $1.0 million or 4% compared to the second quarter
of 2021.
The
decrease in segment operating earnings was primarily a result of higher
net sales which was more than offset by lower gross margins
due to inflationary pressures and higher costs as a result of the COVID-19 production
disruptions in China.
Global Specialty Businesses
Global Specialty Businesses represented approximately 20% of the
Company’s consolidated net sales in the
second quarter of
2022.
The segment’s net sales were $96.8
million, an increase of $16.2 million or 20% compared to the second quarter of 2021.
The
increase in net sales was driven by higher selling price and product
mix of 11%, additional net sales from acquisitions of 3% and
an
increase in organic sales volumes of 10%, partially offset
by the unfavorable impact from foreign currency translation
of 4%.
The
increase in selling price and product mix was primarily driven by price
increases implemented to help offset the significant increases
in raw material and other input costs that began during 2021 and continued
through the second quarter of 2022.
The increase in
organic sales volumes was primarily attributable
to a continued favorable demand environment for this segment’s
products.
The
unfavorable foreign exchange impact was primarily due to the strengthening
of the U.S. dollar against the euro as described in the
EMEA section above.
This segment’s operating earnings
were $27.8 million, an increase of $3.6 million or 15% compared to the
second quarter of 2021.
The increase in segment operating earnings reflects the higher net sales partially offset
by lower gross
margins in the current year and slightly higher operating
expenses due to inflationary pressures.
Quaker Chemical Corporation
Management’s Discussion and Analysis
39
Reportable Segments Review - Comparison of the First Six months of 2022
with the First Six months of 2021
Americas
Americas represented approximately 34% of the Company’s
consolidated net sales in the first six months of 2022.
The segment’s
net sales were $326.9 million, an increase of $52.4 million or 19% compared
to the first six months of 2021.
The increase in net sales
was due to higher selling price and product mix of 26%, additional net sales from
acquisitions of 1% and the favorable impacts of
foreign currency translation of 1%, partially offset by
a decrease in organic sales volumes of 9%.
The increase in selling price and
product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other
input costs that began during 2021 and have continued into 2022.
The current year decline in organic sales volumes was primarily
driven by lower sales volumes into the automotive end market, the tolling
agreement for previously divested products related to the
Combination, the prior year period comparison which included a
strong rebound from COVID-19 impacts and the Company’s
ongoing value-based pricing initiatives, partially offset
by net new business wins.
This segment’s operating earnings
were $63.0
million, a decrease of $2.9 million or 4% compared to the first six months of
2021.
The decrease in segment operating earnings was
primarily a result of higher net sales which was more than offset by
lower gross margins driven by inflationary pressures.
EMEA
EMEA represented approximately 26% of the Company’s
consolidated net sales in the first six months of 2022.
The segment’s
net sales were $248.7 million, an increase of $5.5 million or 2% compared
to the first six months of 2021.
The increase in net sales
was due to higher selling price and product mix of 19% and additional
net sales from acquisitions of 2%, partially offset by the
unfavorable impact of foreign currency translation of 12% and
a decrease in organic sales volumes of 7%.
The increase in selling
price and product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other input costs that began during 2021 and have continued into 2022.
The decline in organic sales volumes was primarily driven by
the current geopolitical and macroeconomic pressures including
the direct and indirect impacts of the ongoing war in Ukraine and the
impact of the economic and other sanctions by other nations on Russia in respons
e
to the war, lower volumes associated with the
Company’s ongoing value
-based pricing initiatives, the tolling agreement for products previously divested
related to the Combination,
the prior year period comparison which included a strong rebound from
COVID-19 impacts,
and softer economic conditions in the
region in the current period, partially offset by net new business wins.
The unfavorable foreign exchange impact was primarily due
to
the strengthening of the U.S. dollar against the euro as this exchange rate
averaged 1.09 in the first six months of 2022 compared to
1.21 in first six months of 2021.
This segment’s operating earnings were
$30.0 million, a decrease of $18.6 million or 38% compared
to the first six months of 2021.
The decrease in segment operating earnings was primarily a result of higher
net sales which was more
than offset by lower gross margins driven
by significant inflationary pressures and the negative impact of foreign
currency translation
year-over-year.
Asia/Pacific
Asia/Pacific represented approximately 21% of the Company’s
consolidated net sales in the first six months of 2022.
The
segment’s net sales were $204.1
million, an increase of $15.8 million or 8% compared to the first six months of 2021.
The increase in
net sales was driven by higher selling price and product mix of 14% partially
offset by lower organic sales volumes of 4% and the
unfavorable impacts of foreign currency translation of 2%.
The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021
and
continued into 2022.
The current year decline in organic sales volumes was primarily driven by
lower sales volumes in China as a
result of the government imposed COVID-19 quarantine and related
production disruptions implemented at the end of March 2022
and which continued throughout the second quarter of 2022 and the prior
year comparison which included a strong rebound from
COVID-19 impacts as customers replenished their supply chains, partially
offset by net new business wins.
This segment’s operating
earnings were $44.1 million, a decrease of $6.6 million or 13% compared
to the first six months of 2021.
The decrease in segment
operating earnings was primarily a result of higher net sales which was more
than offset by lower gross margins driven by significant
inflationary pressures and the unfavorable impact of foreign currency
translation.
Quaker Chemical Corporation
Management’s Discussion and Analysis
40
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the
Company’s consolidated net sales in the
first six months of
2022.
The segment’s net sales were $186.9
million, an increase of $27.9 million or 18% compared to the first six months of 2021.
The increase in net sales was driven by higher selling price and product
mix of 11%, an increase in organic sales volumes
of 6% and
additional net sales from acquisitions of 4%, partially offset
by the unfavorable impact from foreign currency translation of
approximately 3%.
The increase in selling price and product mix was primarily driven by price increases
implemented to help offset
the significant increases in raw material and other input costs that began during
2021 and continued into 2022.
The increase in
organic sales volumes was primarily attributable
to a continued favorable demand environment for this segment’s
products.
The
unfavorable foreign exchange impact was primarily
due to the strengthening of the U.S. dollar against the euro described in the EMEA
section above.
This segment’s operating earnings
were $52.9 million, an increase of $4.5 million or 9% compared to the first six
months of 2021.
The increase in segment operating earnings reflects higher net sales partially offset
by lower gross margins driven by
inflationary pressures and the negative impact of foreign currency
translation year-over-year.
Quaker Chemical Corporation
Management’s Discussion and Analysis
41
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation Reform
Act of 1995)
Certain information included in this Report and other materials filed or
to be filed by Quaker Chemical Corporation with the SEC,
as well as information included in oral statements or other written statements made
or to be made by us, contain or may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
These statements can be identified by the fact that they do not relate strictly to
historical or current facts.
We have based
these forward-looking statements, including statements regarding the potential
effects of the
COVID-19 pandemic and global supply chain constraints on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity and
remediate any of our material weaknesses in internal control over
financial reporting, and statements regarding the impact of increased
raw material costs and pricing initiatives on our current
expectations about future events.
These forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, future
performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19 pandemic;
•
the timing and extent of the projected impacts on our business as a result of the Ukrainian
and Russian conflict and
actions taken by various governments and governmental organizat
ions in response;
•
cost increases and the impacts of constraints and disruptions in the global supply
chain;
•
the potential for a variety of macroeconomic events, including the possibility of global
or regional recessions, inflation
generally, cost increases in
prices of raw materials such as oil and increasing interest rates, to impact the value
of our
assets or result in asset impairments;
•
our current and future results and plans including our sustainability goals;
and
•
statements that include the words “may,”
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities,
operational matters, capital spending, and
financing sources.
From time to time, forward-looking statements are also included in the Company’s
other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,
or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for 2021 and in any
other public statements we make may turn out to be wrong.
This can occur as a result of inaccurate assumptions or as a conseque
nce
of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements, whether
as a result of new information, future
events or otherwise.
However, any further disclosures made on
related subjects in the Company’s subsequent
reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’ products,
which subjects the Company to uncertainties related to downturns in a
customer’s business and unanticipated customer production
slowdowns and shutdowns, including as is currently being experienced by
many automotive industry companies as a result of supply chain disruption.
Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic,
including actions taken in response to the pandemic by
various governments, which could exacerbate some or all of the other
risks and uncertainties faced by the Company,
as well as
inflationary pressures, including the potential for significant increases
in raw material costs, supply chain disruptions, customer
financial instability,
rising interest rates and the possibility of economic recession, worldwide economic
and political disruptions
including the impacts of the military conflict between Russia and Ukraine,
the economic and other sanctions imposed by other nations
on Russia, suspensions of activities in Russia by many multinational companies
and the potential expansion of military activity,
foreign currency fluctuations, significant changes in applicable tax
rates and regulations, future terrorist attacks and other acts of
violence.
Furthermore, the Company is subject to the same business cycles as those experienced
by our customers in the steel,
automobile, aircraft, industrial equipment, and durable goods industries.
The ultimate impact of COVID-19 on our business will
depend on, among other things, the extent and duration of the pandemic,
the severity of the disease and the number of people infected
with the virus including new variants, the continued uncertainty regarding
global availability, administration,
acceptance and long-
term efficacy of vaccines, or other treatments for COVID-19 or
its variants, the longer-term effects on the economy of
the pandemic,
including the resulting market volatility,
and by the measures taken by governmental authorities and other third parties
restricting day-
to-day life and business operations and the length of time that such measures
remain in place, as well as laws and other governmental
programs implemented to address the pandemic or assist impacted
businesses, such as fiscal stimulus and other legislation designed to
deliver monetary aid and other relief.
Other factors could also adversely affect us, including those related
to acquisitions and the
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
integration of acquired businesses.
Our forward-looking statements are subject to risks, uncertainties and
assumptions about the
Company and its operations that are subject to change based on various important
factors, some of which are beyond our control.
These risks, uncertainties, and possible inaccurate assumptions relevant
to our business could cause our actual results to differ
materially
from expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-looking
statements.
For more information regarding these
risks and uncertainties as well as certain additional risks that we face, refer
to the Risk Factors section, which appears in Item 1A in
our 2021 Form 10-K and in our quarterly and other reports filed from time to
time with the SEC.
This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
Quaker Houghton on the Internet
Financial results, news and other information about Quaker Houghton
can be accessed from the Company’s
website at
https://www.quakerhoughton.com.
This site includes important information on the Company’s
locations, products and services,
financial reports, news releases and career opportunities.
The Company’s periodic and current reports
on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental schedules filed therewith,
and amendments to those reports, filed with the SEC are
available on the Company’s website,
free of charge, as soon as reasonably practicable after they
are electronically filed with or
furnished to the SEC.
Information contained on, or that may be accessed through, the Company’s
website is not incorporated by
reference in this Report and, accordingly,
you should not consider that information part of this Report.
43
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
We have evaluated
the information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report on
Form
10-K for the year ended December 31, 2021, and we believe there has been
no material change to that information, except the interest
rate risk noted below.
Interest Rate Risk.
The Company’s exposure
to interest rate risk relates primarily to its outstanding borrowings under its credit facility.
During June
2022, the Company entered into an amendment to its primary credit facility
(the “Original Credit Facility”, or as amended, the
“Amended Credit Facility”).
See Note 14 of Notes to Condensed Consolidated Financial Statements, which appears
in Item 1 of this
Report.
As of June 30, 2022, borrowings under the Amended Credit Facility bear interest at either
term SOFR or a base rate, in each
case, plus an applicable margin based upon the Company’s
consolidated net leverage ratio, and, in the case of term SOFR, a spread
adjustment equal to 0.10% per annum.
As a result of the variable interest rates applicable under the Amended Credit Facility,
if
interest rates rise significantly,
the cost of debt to the Company will increase.
This can have an adverse effect on the Company,
depending on the extent of the Company’s
borrowings outstanding throughout a given year.
As of June 30, 2022, the Company had outstanding borrowings under the
Amended Credit Facility of approximately $977.6
million.
The interest rate applicable on outstanding borrowings under the Amended
Credit Facility was approximately 2.8% as of
June 30, 2022.
As of December 31, 2021, the Company had outstanding borrowings under the
Original Credit Facility of
approximately $889.6 million. The variable interest rate incurred on the outstanding
borrowings under the Original Credit Facility
during the year ended December 31, 2021 was approximately 1.6%.
If interest rates had changed by 10% during 2021, the
Company’s interest expense for
the period ended December 31, 2021 on its credit facilities, including the Original
Credit Facility
borrowings outstanding post-closing of the Combination, would have correspondingly
increased or decreased by approximately $1
million.
Likewise, if interest rates had changed by 10% during the six month period ended June
30, 2022, the Company’s interest
expense for the six month period ended June 30, 2022 on its credit facilities, including
the Amended Credit Facility borrowings
outstanding, would have correspondingly increased or decreased by approximately
$2 million.
The Original Credit Facility required the Company to fix its variable interest rates on
at least 20% of its total term loans.
In order
to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Original
Credit Facility, in November
2019, the Company entered into $170.0 million notional amounts of
three year interest rate swaps at a
base rate of 1.64% plus an applicable margin as provided in
the Original Credit Facility, based on
the Company’s consolidated
net
leverage ratio.
At the time the Company entered into the swaps, and as of June 30, 2022, the aggregate
interest rate on the swaps,
including the fixed base rate plus an applicable margin,
was 3.1%.
The Amended Credit Facility does not require the Company to fix
variable interest rates on any portion of its borrowings.
44
Item 4.
Controls and Procedures.
Evaluation of disclosure controls
and procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), our management, including our
principal executive officer and principal financial officer,
has
evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this Report.
Based on that evaluation, our principal executive officer and our principal
financial officer
have concluded that, as of June 30, 2022, the end of the period covered by this Report, our
disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) were effective.
Changes in internal control over financial reporting.
As required by Rule 13a-15(d) under the Exchange Act, our
management, including our principal executive officer
and principal financial officer, has evaluated
our internal control over
financial reporting to determine whether any changes to our internal control
over financial reporting occurred during the
quarter ended June 30, 2022 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Based on that evaluation, there were no changes that have materially affected,
or are reasonably
likely to materially affect, our internal control over financial reporting
during the quarter ended June 30, 2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2021
2020
2021
2020
GAAP earnings (loss) per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
1.88
$
(0.43)
$
4.03
$
(2.03)
Equity income in a captive insurance company
per diluted share (h)
(0.05)
(0.03)
(0.22)
(0.01)
Houghton combination, integration and other
acquisition-related expenses per diluted share (a)
0.28
0.37
0.32
0.73
Restructuring and related charges per diluted
share (b)
0.02
0.02
0.07
0.09
Fair value step up of acquired inventory sold per diluted
share (c)
—
0.01
0.03
0.01
CEO transition costs per diluted share (d)
0.02
—
0.04
—
Inactive subsidiary's non-operating litigation costs per
diluted share (e)
0.01
—
0.01
—
Customer bankruptcy costs per diluted share (f)
—
—
—
0.02
Indefinite-lived intangible asset impairment per diluted
share (g)
—
—
—
1.65
Pension and postretirement benefit (income) costs,
non-service components per diluted share (i)
(0.01)
0.01
(0.01)
0.89
Brazilian non-income tax credits per diluted share (j)
(0.44)
—
(0.44)
—
Currency conversion impacts of hyper-inflationary
economies per diluted share (k)
0.01
0.01
0.02
0.01
Impact of certain discrete tax items per diluted share (l)
0.10
0.25
0.08
0.23
Non-GAAP earnings per diluted share (p)
$
1.82
$
0.21
$
3.93
$
1.59
(a)
Houghton combination, integration and other acquisition-related
expenses include certain legal, financial, and other advisory
and
consultant costs incurred in connection with post-closing
integration activities including internal control readiness and
remediation.
These costs are not indicative of the future operating performance
of the Company.
Approximately $0.4 million
and $0.5 million in the three and six months ended June
30, 2021,
respectively, of these
pre-tax costs were considered non-
deductible for the purpose of determining the Company’s
effective tax rate, and, therefore, taxes on income before
equity in net
income of associated companies - adjusted reflects the
impact of these items.
During the three and six months ended June 30,
2021, the Company recorded $0.1 million and $0.5 million,
respectively, of
accelerated depreciation related to certain of the
Company’s facilities compared
to $0.3 million and $0.8 million during the three and
six months ended June 30, 2020,
respectively, which
is included in the caption “Houghton combination, integration
and other acquisition-related expenses” in the
reconciliation of operating income (loss) to non-GAAP
operating income and included in the caption “Depreciation
and
amortization” in the reconciliation of net income
(loss) attributable to the Company to EBITDA, but excluded
from the caption
“Depreciation and amortization - adjusted” in the reconciliation
of adjusted EBITDA to non-GAAP net income attributable
to the
Company.
During the six months ended June 30, 2021, the Company recorded
a $5.4 million gain on the sale of certain held-for-
sale real property assets related to the Combination
which is included in the caption “Houghton combination,
integration and
other acquisition-related expenses” in the reconciliation
of GAAP earnings (loss) per diluted share attributed
to Quaker Chemical
Corporation common shareholders to Non-GAAP earnings
per diluted share as well as the reconciliation of net income
(loss)
attributable to Quaker Chemical Corporation to Adjusted
EBITDA and Non-GAAP net income.
See Note 2 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(b)
Restructuring and related charges represent
the costs incurred by the Company associated with the QH restructuring
program
which was initiated in the third quarter of 2019 as part
of the Company’s plan
to realize cost synergies associated with the
Combination.
These costs are not indicative of the future operating performance
of the Company.
See Note 7 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(c)
Fair value step up of acquired inventory sold relates
to expense associated with selling inventory of acquired
businesses which
was adjusted to fair value as a part of purchase accounting.
This increase to cost of goods sold (“COGS”) is not indicative
of the
future operating performance of the Company.
(d)
CEO transition costs represent the costs related to the
Company’s on-going search
for a new CEO in connection with the
previously announced executive transition planned for
the end of 2021.
These expenses are not indicative of the future operating
performance of the Company.
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
(e)
Inactive subsidiary’s
non-operating litigation costs represents the charges
incurred by an inactive subsidiary of the Company and
are a result of the termination of restrictions on insurance
settlement reserves as previously disclosed in the Company’s
2020
Form 10-K.
These charges are not indicative of the future operating
performance of the Company.
See Note 9 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(f)
Customer bankruptcy costs represent the cost associated
with a specific reserve for trade accounts receivable related
to a customer
who filed for bankruptcy protection.
These expenses are not indicative of the future operating
performance of the Company.
(g)
Indefinite-lived intangible asset impairment represents the
non-cash charge taken to write down the value
of certain indefinite-
lived intangible assets associated with the Houghton
Combination.
The Company has no prior history of goodwill or intangible
asset impairments and this charge is not indicative
of the future operating performance of the Company.
See Note 14 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(h)
Equity income in a captive insurance company represents the
after-tax income attributable to the Company’s
interest in Primex,
Ltd. (“Primex”), a captive insurance company.
The Company holds a 32% investment in and has significant
influence over
Primex, and therefore accounts for this interest under the
equity method of accounting.
The income attributable to Primex is not
indicative of the future operating performance of the
Company and is not considered core to the Company’s
operations.
(i)
Pension and postretirement benefit (income) costs, non-service
components represent the pre-tax, non-service component of
the
Company’s pension and
postretirement net periodic benefit cost in each period.
These costs are not indicative
of the future
operating performance of the Company.
The amount in the six months ended June 30, 2020 includes the
$22.7 million settlement
charge for the Company’s
termination of the Legacy Quaker U.S. Pension Plan.
See Note 9 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(j)
Brazilian non-income tax credits represent indirect tax
credits related to certain of the Company’s
Brazilian subsidiaries
prevailing in a legal claim as well as the Brazilian Supreme
Court ruling on these non-income tax matters.
The non-income tax
credit is non-recurring and not indicative of the future
operating performance of the Company.
See Note 19 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(k)
Currency conversion impacts of hyper-inflationary economies represents
the foreign currency remeasurement impacts associated
with the Company’s affiliates
whose local economies are designated as hyper-inflationary
under U.S. GAAP.
During the three
and six months ended June 30, 2021 and 2020, the
Company incurred non-deductible, pre-tax charges
related to the Company’s
Argentine affiliates.
These charges related to the immediate recognition
of foreign currency remeasurement in the Condensed
Consolidated Statements of Operations associated with
these entities are not indicative of the future operating
performance of the
Company.
See Note 1 of Notes to Condensed Consolidated Financial Statements, which
appears in Item 1 of this Report.
(l)
The impact of certain discrete tax items includes the impact
of changes in certain valuation allowance recorded
on certain of the
Company’s foreign
tax credits, tax law changes in a foreign jurisdiction, changes in withholding
rates, the tax impacts of non-
income tax credits associated with certain of the Company’s
Brazilian subsidiaries and the associated impact on previously
accrued for distributions at certain of the Company’s
Asia/Pacific subsidiaries, as well as the offsetting
impact
and amortization
of a deferred tax benefit the Company recorded
in the fourth quarters of 2019 and 2020 related to an intercompany
intangible
asset transfer.
See Note 11 of Notes to Condensed
Consolidated Financial Statements, which appears in Item 1
of this Report.
(m)
Depreciation and amortization for the three and six
months ended June 30, 2021 includes approximately $0.3
million and $0.6
million, respectively,
and for the three and six months ended June 30, 2020 includes $0.3
million and $0.7 million, respectively,
of amortization expense recorded within equity in
net income of associated companies in the Company’s
Condensed Consolidated
Statements of Operations, which is attributable to the
amortization of the fair value step up for the Company’s
50% interest in a
Houghton joint venture in Korea as a result of required
purchase accounting.
(n)
Taxes on income
before equity in net income of associated companies – adjusted
presents the impact of any current and deferred
income tax expense (benefit), as applicable, of
the reconciling items presented in the reconciliation of net income (loss)
attributable to Quaker Chemical Corporation to adjusted
EBITDA, and was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject
to deductibility.
Houghton combination, integration and other
acquisition-related expenses described in (a) resulted in
incremental taxes of $1.6 million and $1.7 million during the three and
six months ended June 30, 2021,
and $1.5 million and $3.4 million during the three and six months ended
June 30, 2020,
respectively.
Restructuring and related charges described in (b) resulted
in incremental taxes of $0.1 million and $0.3 million
during the three and six months ended June 30, 2021,
respectively, and $0.1 million
and $0.3 million for the three and six months
ended June 30, 2020, respectively.
Fair value step up of acquired inventory sold described in (c) resulted
in incremental taxes of
$0.2 million during the six months ending June 30, 2021
and less than $0.1 million during both the three and six months ended
June 30, 2020.
CEO transition expenses described in (d) resulted in incremental
taxes of $0.1 million and $0.2 million during the
three and six months ended June 30, 2021, respectively.
Inactive subsidiary litigation described in (e) resulted in incremental
taxes of $0.1 million during each of the three and six
months ended June 30, 2021.
Customer bankruptcy costs described in (f)
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
resulted in incremental taxes of $0.1 million during the
six months ended June 30, 2020.
Indefinite-lived intangible asset
impairment described in (g) resulted in incremental
taxes of $8.7 million during the six months ended June 30, 2020.
Pension and
postretirement benefit costs, non-service components described
in (i) resulted in a tax benefit of less than $0.1 million during each
of the three and six months ended June 30, 2021, and incremental
taxes of $0.1 million and $8.0 million for the three and
six
months ended June 30, 2020, respectively.
Brazilian non-income tax credits described in (j) resulted in
incremental taxes of $5.3
million during the three and six months ended June 30,
2021.
Tax impact of
certain discrete items described in (l) above resulted
in an incremental taxes of $1.9 million and $1.5 million
during the three and six months ended June 30, 2021,
respectively, and
$4.4 million and $4.0 million for the three and six months
ended June 30, 2020, respectively.
(o)
The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage
of adjusted EBITDA and
non-GAAP operating income to consolidated net sales.
(p)
The Company calculates non-GAAP earnings per diluted share
as non-GAAP net income attributable to the Company
per
weighted average diluted shares outstanding using the “two-class share
method” to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance
sheet items, as defined under Item 303(a)(4) of Regulation S-K as of
June 30,
2021.
The Company’s only
off-balance sheet items outstanding as of June 30
,
2021 represented approximately $7 million of total bank
letters of credit and guarantees.
The bank letters of credit and guarantees are not significant to
the Company’s liquidity
or capital
resources.
See Note 15 of Notes to Condensed Consolidated Financial Statements
in Item 1 of this Report.
Operations
Consolidated Operations Review – Comparison of the Second
Quarter
of 2021 with the Second Quarter of 2020
Net sales were $435.3 million in the second quarter of
2021 compared to $286.0 million in the second quarter
of 2020.
The net
sales increase of approximately $149.2
million or 52% quarter-over-quarter
was driven by higher sales volumes of 40%, which
includes additional net sales from recent acquisitions of
5%, the positive impact of foreign currency translation of
8% as well as
increases from selling price and product mix of approximately
4%.
The significant increase in sales volumes compared to the second
quarter of 2020 was primarily the result of the prior year
quarter being the most severely impacted by COVID-19
globally as well as
the continued improvement in end market conditions and
continued market share gains realized in the current quarter.
Sales from
acquisitions includes notably the Company’s
acquisition of Coral Chemical Company (“Coral”) in December
2020.
The positive
impact from foreign currency translation is primarily the
result of the strengthening of the euro, Chinese renminbi
and Mexican peso
against the U.S. dollar quarter-over-quarter
The increase from selling price and product mix includes
the benefits of current year
selling price increases implemented to date to help offset
the rising raw material costs.
COGS were $280.8 million in the second quarter of 2021
compared to $188.7 million in the second quarter of 2020
.
The increase
in COGS of 49%
was driven by the associated COGS on the increase in net
sales described above.
Gross profit in the second quarter of 2021 of $154.5
million increased $57.1 million or 59% from the second quarter
of 2020, due
primarily to the increase in net sales noted above.
The Company’s reported
gross margin in the second quarter of 2021 was 35.5%
compared to 34.0% in the second quarter of 2020.
Excluding one-time increases to COGS including accelerated
depreciation in both
periods and the impact of the inventory fair value
step up in the prior year quarter, described
in the Non-GAAP section of this Item
above, the Company estimates that its gross margins
in the second quarters of 2021 and 2020 would have been approximately
35.5%
and 34.2%, respectively.
While the Company has experienced unprecedented raw material
cost increases that began in the fourth
quarter of 2020 and are continuing throughout the first
half of 2021, the higher gross margin as compared
to the prior year quarter was
primarily driven by the Company’s
continued execution of Combination-related logistics, procurement
and manufacturing cost
savings initiatives versus the prior year impact of fixed manufacturing
costs on the abnormally low volumes due to COVID-19.
SG&A in the second quarter of 2021 increased $22.0 million
compared to the second quarter of 2020 due primarily to
the impact
of sales increases on direct selling costs, additional
SG&A from recent acquisitions, higher incentive compensation
on improved
operating performance in the current year,
and higher SG&A due to foreign currency translation.
In addition, SG&A was lower in the
prior year period as a result of certain temporary cost saving measures
the Company implemented in response to the onset of COVID-
19.
While the Company continues to manage costs during the on
-going pandemic, it has incurred higher SG&A as the global
economy continues to gradually rebound.
During the second quarter of 2021, the Company incurred
$6.7 million of Combination, integration and other acquisition-related
expenses primarily for professional fees related to Houghton integration
and other acquisition-related activities.
Comparatively, the
Company incurred $8.0 million of expenses in the prior
year second quarter, primarily due
to various professional fees related to legal,
financial and other advisory and consulting expenses for
integration activities.
See the Non-GAAP Measures section of this Item,
above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
37
The Company initiated a restructuring program during
the third quarter of 2019 as part of its global
plan to realize cost synergies
associated with the Combination.
The Company incurred restructuring and related charges for
reductions in headcount and site
closures under this program of $0.3 million and $0.5 million
during the second quarters of 2021 and 2020, respectively.
See the Non-
GAAP Measures section of this Item, above.
Operating income in the second quarter of 2021 was $38.8
million compared to $2.2 million in the second quarter of
2020.
Excluding Combination, integration and other acquisition
-related expenses, restructuring and related charges
and other non-core
items, the Company’s
current quarter non-GAAP operating income increased 315% to
$46.4 million compared to $11.2 million in
the
prior year quarter primarily due to the increase in net sales described
above and the benefits from cost savings related to the
Combination offset by increases in raw material
costs.
The Company had other income, net, of $14.0 million
in the second quarter of 2021 compared to other expense,
net, of $1.0
million in the second quarter of 2020.
The second quarter of 2021 includes $13.3 million related to
certain non-income tax credits
recorded by the Company’s
Brazilian subsidiaries as well as lower foreign currency transaction
losses compared to the prior quarter.
See the Non-GAAP Measures section of this Item, above.
Interest expense, net, decreased $1.2 million compared
to the second quarter of 2020 driven by lower current quarter
borrowings
outstanding as a result of the additional revolver
borrowings drawn down in March 2020 at the onset of the
pandemic as well as a
decline in overall interest rates quarter-over-quarter.
The Company’s effective
tax rates for the second quarters of 2021 and 2020 were 32.2%
and 57.9%, respectively.
The
Company’s current quarter
effective tax rate was impacted by the changes in foreign
tax credit valuation allowances, tax law changes
in foreign jurisdictions as well as the tax impacts of
certain non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
Comparatively,
the prior year second quarter effective tax rate was impacted
by the tax effect of certain one-time pre-tax losses.
Excluding the impact
of these items as well as all other non-core items in each
quarter, described in the Non
-GAAP Measures section
of this Item, above, the Company estimates that its second
quarters of 2021 and 2020 effective tax rates would
have been
approximately 24% and 18%, respectively.
The higher estimated current quarter tax rate was driven by the
impact of higher pre-tax
income in the current quarter as compared to the prior
year quarter on certain tax adjustments as well as increased withholding
taxes
on expected current year repatriated earnings.
The Company may experience continued volatility in its effective
tax rates due to
several factors, including the timing of tax audits and
the expiration of applicable statutes of limitations as they relate
to uncertain tax
positions, the unpredictability of the timing and
amount of certain incentives in various tax jurisdictions, the treatment
of certain
acquisition-related costs and the timing and amount
of certain share-based compensation-related tax benefits, among
other factors.
In
addition, the foreign tax credit valuation allowance is based
on a number of variables, including forecasted earnings,
which may vary.
Equity in net income of associated companies increased $0.5 million
in the second quarter of 2021 compared to the second
quarter of 2020, primarily due to higher current year
quarter income from the Company’s
interest in a captive insurance company
compared to the prior year quarter.
See the Non-GAAP Measures section of this Item, above.Net
income attributable to
noncontrolling interest was less than $0.1 million
in both the second quarters of 2021 and 2020.
Foreign exchange positively impacted the Company’s
second quarter results by approximately 10% driven by the positive
impact
from foreign currency translation on earnings as well as lower
foreign exchange transaction losses in the current
year quarter as
compared to the prior year second quarter.
Consolidated Operations Review – Comparison of the First Six
Months of 2021 with the First Six Months of 2020
Net sales were $865.0 million in the first six months of
2021 compared to $664.6 million in the first six months of
2020.
The net
sales increase of $200.4 million or 30% period-over-period
reflects a benefit from higher sales volumes of 22%, which includes
additional net sales from recent acquisitions of 4%,
the positive impact from foreign currency translation
of 5%, and increases in
selling price and product mix of 3%.
The increase in sales volumes compared to the first six months
of 2020 was primarily due to
improved end market conditions from the prior year impacts
of COVID-19 and continued market share gains.
Additional net sales
from acquisitions relate primarily to the acquisitions of
a tin-plating solutions business and Coral, acquired in February
2021 and
December 2020, respectively.
The positive impact from foreign currency translation
is primarily the result of the strengthening of the
euro and Chinese Renminbi against the U.S. dollar
year-over-year.
The increase from selling price and product mix includes the
benefits of current year selling price increases implemented
to date to help offset the rising raw material and
input costs.
COGS were $554.4 million in the first six months of 2021
compared to $433.4 million in the first six months of
2020.
The
increase in COGS of 28% was driven by the associated COGS
on the increase in net sales as described above, and to
a lesser extent,
an expense of $0.8 million associated with selling acquired
Coral inventory in the first six months of 2021 at its fair
value described in
the Non-GAAP Measures section of this Item above.
Gross profit in the first six months of 2021 increased $79.4
million or 34% from the first six months of 2020, due
primarily to the
increase in net sales described above.
The Company’s reported gross
margin in the first six months of 2021 was 35.9%
compared to
34.8% in the first six months of 2020.
Excluding one-time increases to COGS including accelerated
depreciation and the impact of
Quaker Chemical Corporation
Management’s Discussion and Analysis
38
the inventory fair value step up in both periods, described in the
Non-GAAP section of this Item above, the Company estimates that
its
gross margins in the first six months of
2021 and 2020 would have been approximately 36.1% and
34.9%, respectively.
The
Company’s higher current
year gross margin was primarily due to the same
impacts described in the second quarter description above.
SG&A in the first six months of 2021 increased $27.6
million compared to the first six months of 2020 due
primarily to the same
drivers described in the second quarter description above.
During the first six months of 2021,
the Company incurred $12.5 million of Combination, integration
and other acquisition-
related expenses primarily for professional fees related
to Houghton integration and other acquisition-related activities.
Comparatively,
the Company incurred $15.9 million of expenses in the first six
months of 2020,
primarily due to various professional
fees related to integration activities.
See the Non-GAAP Measures section of this Item, above.
As described above, the Company initiated a restructuring
program during the third quarter of 2019 as part of its global
plan to
realize cost synergies associated with the Combination.
The Company recorded restructuring and related charges
of $1.5 million
during the first six months of 2021 compared to
$2.2 million during the first six months of 2020 under this
program.
See the Non-
GAAP Measures section of this Item, above.
During the first quarter of 2020, the Company recorded
a $38.0 million non-cash impairment charge to write
down the value of
certain indefinite-lived intangible assets associated with the
Combination.
This non-cash impairment charge is related to certain
acquired Houghton trademarks and tradenames and
was primarily the result of the projected negative impacts of COVID-19
as of
March 31, 2020 on their estimated fair values.
There was no similar impairment charges recorded
during the first six months of 2021.
Operating income in the first six months of 2021 was $83.7
million compared to an operating loss of $10.2 million in
the first six
months of 2020.
Excluding Combination, integration and other acquisition-related
expenses, restructuring and related charges, the
non-cash indefinite-lived intangible asset impairment
charge, and other non-core items, the Company’s
current year non-GAAP
operating income of $100.1 million increased compared
to $47.2 million in the prior year period, primarily due to the
increase in net
sales described above and the continued benefits from
cost savings related to the Combination.
The Company’s other
income, net, was $18.7 million in the first six months of 2021 compared
to other expense, net of $22.2
million in the prior year period.
The year-over-year change was primarily due to other
income related to certain non-income tax
credits recorded by the Company’s
Brazilian subsidiaries during the second quarter of 2021 as well as the
gain on the sale of certain
held-for-sale real property assets during the first
quarter of 2021 compared to a first quarter of 2020 pension plan
settlement charge
associated with the termination of the Legacy Quaker
U.S. Pension Plan.
See the Non-GAAP Measures section of this Item, above.
Interest expense, net, decreased $4.2 million in the first
six months of 2021 compared to the first six months of 2020
driven by
lower current year borrowings outstanding as a result of
the additional revolver borrowings drawn down in March 2020
at the onset of
the pandemic as well as a decline in overall interest rates year-over-year,
as the weighted average interest rate incurred on borrow
ings
under the Company’s credit
facility was approximately 1.6% during the first six months of
2021 compared to approximately 2.5%
during the first six months of 2020.
The Company’s effective
tax rates for the first six months of 2021 and 2020 was an expense
of 28.4% compared to a benefit of
20.7%, respectively.
The Company’s effective
tax rate for the six months ended June 30, 2021 was impacted
by the sale of certain
held-for-sale real property assets related to the
Combination, certain U.S. tax law changes and the tax impact of certain
non-income
tax credits recorded by the Company’s
Brazilian subsidiaries.
Comparatively,
the prior year first six months effective tax rate was
impacted by the tax effect of certain one-time
pre-tax losses as well as certain tax charges and benefits in
the current period including
those related to changes in foreign tax credit valuation allowances,
tax law changes in a foreign jurisdiction, and the tax impacts of
the
Company’s termination
of its Legacy Quaker U.S. Pension Plan and the Houghton
indefinite-lived trademarks and tradename
intangible asset impairment.
Excluding the impact of these items as well as all other non-core
items in each year, described in the
Non-GAAP Measures section of this Item, above,
the Company estimates that its first six months of 2021 and 2020
effective tax rates
were relatively consistent at approximately 24% and 21%,
respectively.
The year-over-year increase was largely
driven by the impact
of higher pre-tax income in the current year period as compared
to the prior year period on certain adjustments as well as increased
withholding tax on expense on current year repatriated
earnings.
Equity in net income of associated companies increased $5.1 million
in the first six months of 2021 compared to the first six
months of 2020, primarily due to higher current year earnings from
the Company’s interest in a captive
insurance company.
See the
Non-GAAP Measures section of this Item, above.
In addition, the Company had higher earnings year-over-year
from the Company’s
50% interest in its joint venture in Korea.
Net income attributable to noncontrolling interest was less than
$0.1 million in both the first six months of 2021 and 2020.
Foreign exchange positively impacted the Company’s
first six months of 2021 results by approximately 4% driven by the positive
impact from foreign currency translation on earnings partially
offset by higher foreign exchange transaction losses in
the current year
as compared to the prior year period.
Quaker Chemical Corporation
Management’s Discussion and Analysis
39
Reportable Segments Review - Comparison of the Second
Quarter of 2021
with the Second Quarter of 2020
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are
allocated and the manner by which the chief operating decision
maker of the Company assesses its
performance.
The Company has four reportable segments: (i) Americas;
(ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed of the net
sales and operations in each respective region, excluding net
sales and operations managed globally by the Global
Specialty Businesses segment, which includes the Company’s
container, metal
finishing, mining, offshore, specialty coatings,
specialty grease and Norman Hay businesses.
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s
product sales.
Operating expenses not directly attributable to the net
sales of each respective
segment,
such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses,
Restructuring and related charges, and COGS related
to acquired inventory sold, which is adjusted to fair value
as part of purchase
accounting,
are not included in segment operating earnings.
Other items not
specifically identified with the Company’s
reportable
segments include interest expense, net, and other (expense)
income, net.
Americas
Americas represented approximately 32% of the Company’s
consolidated net sales in the second quarter of 2021.
The segment’s
net sales were $139.7 million, an increase of $59.1
million or 73% compared to the second quarter of 2020.
The increase in net sales
reflects the inclusion of additional net sales from acquisitions, primarily
Coral.
Excluding sales from acquisitions, the segment’s
net
sales increase quarter-over-quarter of
approximately 65% was driven by higher volumes of 54%,
a benefit in selling price and product
mix of 7% and the positive impact of foreign currency
translation of 4%.
The current quarter volume increase was driven by the
continued economic rebound from the COVID-19
slowdown as the pandemic notably impacted this segment during
the second quarter
of 2020.
The foreign exchange impact was driven by the strengthening
of the Mexican peso against the U.S. dollar,
as this exchange
rate averaged 20.02 in the second quarter of 2021 compared to
23.32 during the second quarter of 2020.
This segment’s operating
earnings were $33.6 million, an increase of $23.3
million or 227% compared to the second quarter of 2020.
The increase in segment
operating earnings reflects the higher net sales describe
d
above coupled with a higher current quarter gross margin,
partially offset by
higher SG&A, including SG&A from acquisitions and
an increase in SG&A as the prior year second quarter included temporary
cost
savings measures implemented in response to the onset of
the COVID-19 pandemic.
EMEA
EMEA represented approximately 28% of the Company’s
consolidated net sales in the second quarter of 2021.
The segment’s
net sales were $123.4 million, an increase of $45.7
million or 59% compared to the second quarter of 2020.
The increase in net sales
was driven by increases in volumes of 38%, the positive impact
of foreign currency translation of 13%, a benefit from selling
price
and product mix of 5%, and additional net sales from acquisitions
of 3%.
The current quarter volume increase was driven by the
continued economic rebound from the COVID-19
slowdown as the pandemic notably impacted this segment during
the second quarter
of 2020.
The foreign exchange impact was primarily driven by the
strengthening of the euro against the U.S. dollar as this exchange
rate averaged 1.20 in the second quarter of 2021 compared
to 1.10 in the second quarter of 2020.
This segment’s operating earnings
were $23.4 million, an increase of $12.9 million or 124%
compared to the second quarter of 2020.
The increase in segment operating
earnings reflects the higher net sales described above
coupled with a higher current quarter gross margin, partially
offset by higher
SG&A as the prior year second quarter included temporary
cost savings measures implemented in response to the
onset of the
COVID-19 pandemic.
Asia/Pacific
Asia/Pacific represented approximately 21% of the
Company’s consolidated net
sales in the second quarter of 2021.
The
segment’s net sales were $91.6
million, an increase of approximately $23.1 million or 34% compared
to the second quarter of 2020.
The increase in net sales quarter-over-quarter
was driven by increases in volumes of 26% and the positive impact
of foreign currency
translation of 9% and additional net sales from acquisitions
of less than 1%, partially offset by decreases from
selling price and
product mix of 2%.
The current quarter volume increase was driven by the continued economic
rebound from the COVID-19
slowdown.
The foreign exchange impact was primarily due to the strengthening
of the Chinese renminbi against the U.S. dollar as
this exchange rate averaged 6.46 in the second quarter
of 2021 compared to 7.09 in the second quarter of 2020.
This segment’s
operating earnings were $23.2 million, an increase of
$4.0 million or 21% compared to the second quarter of 2020.
The increase in
segment operating earnings reflects the higher net sales descr
ibed above partially offset by lower gross margins
on rising raw material
costs as well as higher SG&A which includes an increase in
direct selling costs associated with higher net sales.
Global Specialty Businesses
Global Specialty Businesses represented approximately
19% of the Company’s consolidated
net sales in the second quarter of
2021.
The segment’s net sales were $80.6
million, an increase of $21.3 million or 36% compared to the second
quarter of 2020.
The
Quaker Chemical Corporation
Management’s Discussion and Analysis
40
increase in net sales reflects the inclusion of additional
net sales from acquisitions, primarily Coral.
Excluding net sales from
acquisitions, the segment’s
net sales would have increased 27% quarter-over-quarter
driven by increases in selling price and product
mix, including Norman Hay,
of 15%, increases in volumes of 7% and the positive impact
of foreign currency translation of
approximately 5%.
The foreign exchange impact was a result of similar strengthening
of certain currencies in EMEA and Americas as
described above.
This segment’s operating earnings
were $24.2 million, an increase of $7.8 million or 48%
compared to the second
quarter of 2020.
The increase in segment operating earnings reflects the higher net
sales described above coupled with higher gross
margins compared to the second quarter of 2020,
partially offset by higher SG&A as the prior
year second quarter included temporary
cost savings measures implemented in response to the
onset of the COVID-19 pandemic.
Reportable Segments Review - Comparison of the First Six
months of 2021 with the First Six months of 2020
Americas
Americas represented approximately 32% of the Company’s
consolidated net sales in the first six months of 2021.
The segment’s
net sales were $274.5 million, an increase of $64.0
million or 30% compared to the first six months of 2020.
The increase in net sales
was due to higher sales volumes of 21%, additional
net sales from acquisitions of 6% primarily resulting from
Coral, and benefits
from selling price and product mix of 3%.
The current year volume increase was driven by the continued
economic rebound from the
COVID-19 slowdown as the pandemic began in late
March and continued throughout the second quarter of 2020.
This segment’s
operating earnings were $65.9 million, an increase of
$26.4 million or 67% compared to the first six months of 2020.
The increase in
segment operating earnings reflects the higher net sales described
above coupled with higher gross margins in the
current year period,
partially offset by higher SG&A.
EMEA
EMEA represented approximately 28% of the Company’s
consolidated net sales in the first six months of 2021.
The segment’s
net sales were $243.3 million, an increase of $60.7
million or 33% compared to the first six months of 2020.
The increase in net sales
was due to higher sales volumes of 17%, the positive impacts
from foreign exchange translation of 10%, increases in
selling price and
product mix of 4% and additional net sales from acquisitions
of 2%.
The current year volume increase was driven by the continued
economic rebound from the COVID-19 slowdown
as the pandemic began in late March and continued throughout the
second quarter
of 2020.
The foreign exchange impact was primarily due to the strengthening
of the euro and British pound against the U.S. dollar as
these exchange rates averaged 1.21 and 1.39, respectively,
during the first six months of 2021 compared to 1.10
and 1.26, respectively,
during the first six months of 2020.
This segment’s operating earnings
were $48.6 million, an increase of $19.8 million or 69%
compared to the first six months of 2020.
The increase in segment operating earnings reflect the higher
net sales described above
coupled with improved gross margins in
the current year period, partially offset by higher SG&A.
Asia/Pacific
Asia/Pacific represented approximately 22% of the
Company’s consolidated net
sales in the first six months of 2021.
The
segment’s net sales were $188.3
million, an increase of $46.3 million or 33% compared to the first
six months of 2020.
The increase
in net sales was driven by higher sales volumes of
approximately 26% and the positive impact of foreign currency
translation of 7%.
The current year volume increase was driven by
the continued gradual economic rebound from the COVID-19 slowdown
as the
pandemic notably impacted China during the first quarter of
2020 and then the rest of the region during the second quarter
of 2020.
The foreign exchange impact was primarily due to the
strengthening of the Chinese renminbi against the U.S. dollar as
this exchange
rate averaged 6.47 during the first six months of 2021 compared
to 7.03 during the first six months of 2020.
This segment’s operating
earnings were $50.7 million, an increase of $11.9
million or 31% compared to the first six months of 2020.
The increase in segment
operating earnings were a result of the higher net sales described
above partially offset by lower gross margins
compared to the first
six months of 2020 driven by increasing raw material
costs in the current year, as well as higher
SG&A.
Global Specialty Businesses
Global Specialty Businesses represented 18% of the
Company’s consolidated net sales in the
first six months of 2021.
The
segment’s net sales were $159.0
million, an increase of $29.4 million or 23% compared to the first
six months of 2020.
The increase
in net sales was driven by benefits from selling price
and product mix, including Norman Hay,
of 18%, additional net sales from
acquisitions of 7% primarily driven by Coral, and the
positive impact of foreign currency transaction of 4%, partially
offset by
decreases in volumes of 6%.
The foreign exchange impact was a result of similar strengthening
of certain currencies in EMEA and
Americas as described above.
Both the changes in selling price and product mix and
sales volumes were primarily driven by higher
shipments of a lower priced product in the Company’s
mining business in the period year period.
This segment’s operating earnings
were $48.4 million, an increase of $11.4
million of 31% compared to the first six months of 2020.
The increase in segment operating
earnings reflects the higher net sales described above
on relatively consistent gross margins period
-over-period, partially offset by
slightly higher SG&A in the current year.
Quaker Chemical Corporation
Management’s Discussion and Analysis
41
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation
Reform Act of 1995)
Certain information included in this Report and other
materials filed or to be filed by Quaker Chemical Corporation
with the
Securities and Exchange Commission (“SEC”) (as well as information
included in oral statements or other written statements made
or
to be made by us) contain or may contain forward-looking
statements within the meaning of Section 27A of the Securities Act
of
1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
These statements can be identified by the
fact that they do not relate strictly to historical or
current facts.
We have based
these forward-looking statements, including statements
regarding the potential effects of the COVID-19
pandemic on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient
liquidity and remediate any of our material weaknesses in internal
control over
financial reporting, and statements regarding the impact
of increased raw material costs and pricing initiative
s
on our current
expectations about future events.
These forward-looking statements include statements with respect
to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations,
future performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19
pandemic and any projected global economic rebound
or
anticipated positive results due to Company actions taken
in response to the pandemic;
•
our current and future results and plans; and
•
statements that include the words “may,”
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and
future business activities, operational matters, capital spending,
and
financing sources.
From time to time, forward-looking statements are also included in
the Company’s other periodic
reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released
to, or statements made to, the public.
Any or all of the forward-looking statements in this Report,
in the Company’s Annual
Report to Shareholders for 2020 and in any
other public statements we make may turn out to be wrong.
This can occur as a result of inaccurate assumptions
or as a consequence
of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining
our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated
from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements,
whether as a result of new information, future
events or otherwise.
However, any further disclosures made
on related subjects in the Company’s
subsequent reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’
products, which subjects the Company to uncertainties related
to downturns in a
customer’s business and unanticipated customer
production slowdowns and shutdowns, including as is currently
being experienced by
many automotive industry companies.
Other major risks and uncertainties include, but are not limited
to, the primary and secondary
impacts of the COVID-19 pandemic, including actions
taken in response to the pandemic by various governments, which
could
exacerbate some or all of the other risks and uncertainties
faced by the Company,
including the potential for significant increases in
raw material costs, supply chain disruptions, customer
financial instability, worldwide
economic and political disruptions, foreign
currency fluctuations, significant changes in applicable
tax rates and regulations, future terrorist attacks and other acts of
violence.
Furthermore, the Company is subject to the same business
cycles as those experienced by our customers in the
steel, automobile,
aircraft, industrial equipment, and durable goods industries.
The ultimate impact of COVID-19 on our business will depend
on,
among other things, the extent and duration of the pandemic, the
severity of the disease and the number of people infected with
the
virus including as new variants emerge, the
continued uncertainty regarding global availability,
administration, acceptance and long-
term efficacy of vaccines, or other treatments for
COVID-19 or its variants, the longer-term effects
on the economy by the pandemic,
including the resulting market volatility,
and by the measures taken by governmental authorities and other
third parties restricting day-
to-day life and business operations and the length of time
that such measures remain in place, as well as laws and other governmental
programs implemented to address the pandemic
or assist impacted businesses, such as fiscal stimulus and other
legislation designed to
deliver monetary aid and other relief.
Other factors could also adversely affect us, including
those related to the Combination and
other acquisitions and the integration of acquired businesses.
Our forward-looking statements are subject to risks, uncertainties and
assumptions about the Company and its operations that
are subject to change based on various important factors, some
of which are
beyond our control.
These risks, uncertainties, and possible inaccurate assumptions relevant
to our business could cause our actual
results to differ materially from expected
and historical results.
Therefore, we caution you not to place undue reliance
on our forward-looking statements.
For more information regarding these
risks and uncertainties as well as certain additional
risks that we face, refer to the Risk Factors section, which appears
in Item 1A in
our 2020 Form 10-K and in our quarterly and other reports
filed from time to time with the SEC.
This discussion is provided as
permitted by the Private Securities Litigation Reform Act
of 1995.
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
Quaker Houghton on the Internet
Financial results, news and other information about
Quaker Houghton can be accessed from the Company’s
website at
https://www.quakerhoughton.com.
This site includes important information on the Company’s
locations, products and services,
financial reports, news releases and career opportunities.
The Company’s periodic
and current reports on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental
schedules filed therewith, and amendments to those reports, filed with
the SEC are
available on the Company’s
website, free of charge, as soon as reasonably
practicable after they are electronically filed with or
furnished to the SEC.
Information contained on, or that may be accessed through,
the Company’s website is not
incorporated by
reference in this Report and, accordingly,
you should not consider that information part of this Report.
43
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
We have evaluated
the information required under this Item that was disclosed in Part II,
Item 7A, of our Annual Report on Form
10-K for the year ended December 31, 2020, and we
believe there has been no material change to that information.
44
Item 4.
Controls and Procedures.
Evaluation of disclosure controls
and procedures.
As required by Rule 13a-15(b) under the Securities Exchange
Act of 1934, as
amended (the “Exchange Act”), our management,
including our principal executive officer and principal financial
officer, has
evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act ) as of the
end of the period covered by this Report.
Based on that evaluation, our principal executive officer
and our principal financial officer
have concluded that, as of the end of the period covered by
this Report, our disclosure controls and procedures (as defined
in Rule
13a-15(e) under the Exchange Act) were not effective
as of June 30, 2021 because of the material weaknesses in our
internal control
over financial reporting, as described below.
As previously disclosed in “Item 9A. Controls and Procedures.”
in the Company’s 2020
Form 10-K, through the process of
evaluating risks and corresponding changes to the
design of existing or the implementation of new controls
in light of the significant
non-recurring transactions that occurred during 2019,
including the Combination, the Company identified certain deficiencies in
its
application of the principles associated with the
Committee of Sponsoring Organizatio
n
of the Treadway
Commission in Internal
Control – Integrated Framework (2013)
that management has concluded in the aggregate constitute a material
weakness.
A material
weakness is a deficiency,
or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable
possibility that a material misstatement of annual or interim
financial statements will not be prevented or detected on
a timely basis.
We did not
design and maintain effective controls in response to the
risks of material misstatement.
Specifically, changes to existing
controls or the implementation of new controls were not
sufficient to respond to changes to the risks of material
misstatement in
financial reporting as a result of becoming a larger,
more complex global organization due to the Combination.
This material
weakness also contributed to an additional material weakness as we did
not design and maintain effective controls
over the review of
pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
These material weaknesses did not
result in material misstatements to the interim or annual
consolidated financial statements.
However, these material weaknesses could
result in misstatements to our account balances and disclosures
that could result in a material misstatement to the interim
or annual
consolidated financial statements that would not be
prevented or detected.
Notwithstanding these material weaknesses, the Company
has concluded that the unaudited condensed consolidated financial
statements included in this Report present fairly,
in all material respects, the financial position of the Company as of
June 30, 2021
and December 31, 2020, and that the results of its operations
and its cash flows and changes in equity for both the
three and six month
periods ended June 30, 2021 and 2020, are in conformity
with accounting principles generally accepted in the United States of
America.
Progress on Remediation
of Material Weaknesses
The Company and its Board of Directors, including the
Audit Committee of the Board of Directors, are committed to maintaining
a strong internal control environment.
Since identifying the material weaknesses, the Company
has dedicated a significant amount of
time and resources to remediate all of the previously identified
material weaknesses as quickly and effectively
as possible. During
2020 and into 2021,
the Company dedicated multiple internal resources and supplemented
those internal resources with various third-
party specialists to assist with the formalization of
a robust and detailed remediation plan.
In undertaking remediation activities, the
Company has hired additional personnel dedicated to
financial and information technology compliance to further
supplement its
internal resources.
In addition, the Company has established a global network
of personnel to assist local management in
understanding control performance and documentation
requirements.
In order to sustain this network, the Company conducts periodic
trainings and hosts discussions to address questions on
a current basis.
However, the impact of COVID-19,
including travel
restrictions and remote work arrangements required
the Company to adapt and make changes to its internal controls
integration plans
as well as its remediation plans, and has presented and
is expected to continue to present challenges with regards to the
timing of the
Company’s remediation
and integration plan activities.
Despite the challenges brought on by COVID-19 and
driven by the Company’s
priority of creating a long-term sustainable control
structure to ensure stability for a company that has more
than doubled in size since August 2019, the Company continues
to make
substantial strides towards remediating the underlying
causes of the previously disclosed material weaknesses in our
risk assessment
process and within our revenue process, as further discussed
below.
Risk Assessment –
We previously determined
that our risk assessment process was not designed adequately
to respond to changes
to the risks of material misstatement to financial reporting.
In order to remediate this material weakness, we have designed
and
implemented an improved risk assessment process, including
identifying and assessing those risks attendant to the
significant changes
within the Company as a result of becoming a larger,
more complex global organization due to the
Combination.
During 2020, a full
review was performed of our processes and controls across
significant locations in order to identify and address potential
design gaps.
In addition to individual transactional-level control enhancements,
this review resulted in (i) an enhanced financial statement
risk
assessment, (ii) the standardization of existing legal entity
and newly implemented segment quarterly analytics and
quarterly closing
packages completed by key financial reporting personnel, (iii) a
global account reconciliation review program and (iv)
enhancements
to our quarterly identification and reassessment of new and
existing business and information technology risks that could
affect our
financial reporting.
Monitoring is also performed through our enhanced quarterly
controls certification process, whereby changes in
business or information technology processes or control
owners are identified and addressed timely.
Although we have implemented
45
and tested the additional controls as noted in our remediation
plan and found them to be effective, this material
weakness will not be
considered remediated due to the Revenue – Price and
Quantity material weakness, discussed below.
Once the Revenue – Price and
Quantity material weakness is remediated, we expect
the Risk Assessment material weakness will also be remediated.
Revenue – Price and Quantity –
We previously
determined that we did not design and maintain effective
controls over the review
of pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
In order to remediate this
material weakness, the Company made significant progress
in its redesign of certain aspects of its revenue process and related
controls.
The Company has identified and agreed upon design enhancements
and requirements for each revenue sub-process.
The
design includes enhancements to entity-level and transactional
-level manual controls as well as IT general and application
controls.
During July 2021 and through the date of this Form
10-Q filing for the period ended June 30, 2021, the Company has
been in the
process of implementing these design changes both
centrally and locally.
We expect to
complete the implementation in the third
quarter of 2021.
While the Company believes that the enhancements to these
entity-level, transactional and IT general and application
controls will sufficiently address the material weakness
previously identified, because the additional controls
have not been fully
implemented and tested, this material weakness is not yet remediated.
The existing material weakness will not be considered
remediated until the applicable remedial controls have
been fully implemented and operate for a sufficient
period of time and
management has concluded, through testing, that
the controls are operating effectively.
Given the significant resources the Company has dedicated
to remediation of its material weaknesses, the Company is committed
to remediation and expects that in 2021 it will successfully implement
the enhanced design of its revenue processes and have a
sufficient operational effectiveness period
to evidence remediation over its price and quantity material weakness
and, concurrently,
evidence remediation over its risk assessment material weakness
in 2021 as well.
Changes in internal control over financial
reporting.
As required by Rule 13a-15(d) under the Exchange Act,
our
management, including our principal executive officer
and principal financial officer, has evaluated
our internal control over
financial reporting to determine whether any changes
to our internal control over financial reporting occurred during
the
quarter ended June 30, 2021 that have materially affected,
or are reasonably likely to materially affect, our
internal control
over financial reporting.
Based on that evaluation, there were no changes that have materially
affected, or are reasonably
likely to materially affect, our internal control
over financial reporting during the quarter ended June
30, 2021.
46
PART
 
II.
 
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been
omitted.
Item 1.
 
Legal Proceedings.
Incorporated by reference is the information in Note
19 18 of the Notes to
the Condensed Consolidated Financial
Statements in Part
I, Item 1, of this Report.
Item 1A. Risk Factors.
The Company’s business, financial
 
financial conditions,condition, results of operations and cash flows are
subject to various risks that
could cause
actual results to vary materially from recent results or from anticipated future
 
anticipated future results.
 
In addition to the other information set forth in
this Report, you should carefully consider the risk factors previously disclosed
 
previously disclosed in Part I, Item 1A of our 20202021 Form 10-K.
 
There haveWhile there
have been no material changes to the risk factors described therein.in our 2021 Form 10-K,
reference is made to the developments discussed
under the headings
On-going impact of COVID-19
and
Impact of Political Conflicts
within Part I, Item 2 of this Report.
Item 2.
 
Unregistered Sales of Equity Securities and Use of
Proceeds.
The following table sets forth information concerning shares of
 
shares of the Company’s
common stock acquired
by the Company during
the period covered by this Report:
(c)
(d)
Total
 
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
 
Value of
 
Shares that
Total
 
Number
Average
as part of
May Yet
 
be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
April 1 - April 30
616280
 
$
243.71162.86
 
—
$
86,865,026
 
May 1 - May 31
—729
$
—147.04
—
$
86,865,026
 
June 1 - June 30
—56
$
—149.52
—
$
86,865,026
 
Total
6161,065
 
$
243.71151.33
—
$
86,865,026
 
(1)
All of these shares were acquired from employees uponrelated to the surrender
 
their surrender of Quaker Chemical Corporation shares in payment
of
payment of the exercise price of employee stock options exercised or
 
for the payment of taxes upon exercise of employee stock
options
stock options or the vesting of restricted stock.stock awards or units.
 
(2)
The price paid for shares acquired from employees pursuant to employee
 
to employee benefit and share-based compensation
plans is in
each case, based on the closing price of the Company’s
 
common stock on the date of exercise or vesting as specified by the plan
plan pursuant to which the applicable option, restricted stock award, or restricted
 
stock unit was granted.
 
(3)
On May 6, 2015,
the Board of Directors of the Company approved, and the
 
Company announced, a share repurchase
program, pursuant to which the Company is authorized
to repurchase up to $100,000,000
$100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”),
and it has no expiration
date.
 
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program during the
 
during the quarter ended June 30, 2021.2022.
Limitation on the Payment of Dividends
The Amended Credit Facility has certain limitations on the payment of
 
of dividends and other so-called restricted payments.
 
See
Note 1514 of
Notes to Condensed Consolidated Financial Statements, in Part
 
Part I, Item 1, of this Report.
 
 
4746
Item 6.
 
Exhibits.
(a) Exhibits
3.1
–
3.2
–
10.1
–
Performance Incentive Plan.*†Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form
8-K filed on June 21, 2022.
10.2
–
10.3
–
10.4
–
10.5
–
10.6
–
31.1
–
31.2
–
32.1
–
.1350.**
32.2
–
.1350.**
101.INS
–
Inline XBRL Instance Document*
101.SCH
–
Inline XBRL Taxonomy
 
Extension Schema Document*
101.CAL
–
Inline XBRL Taxonomy
 
Extension Calculation Linkbase Document*
101.DEF
–
Inline XBRL Taxonomy
 
Extension Definition Linkbase Document*
101.LAB
–
Inline XBRL Taxonomy
 
Extension Label Linkbase Document*
101.PRE
–
Inline XBRL Taxonomy
 
Extension Presentation Linkbase Document*
104
–
Cover Page Interactive Data File (formatted as Inline XBRL and contained
 
contained in Exhibit 101.INS)*
*Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
*********
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has
duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
 
(Registrant)
 
 
 
 
/s/ Shane W.
Hostetter
Date: August 5, 20214, 2022
 
 
 
Shane W.
Hostetter,
 
Senior Vice President, Chief Financial
Officer (officer duly authorized on behalf of,
and principal
financial officer of, the Registrant)