UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
☒
QUARTERLYREPORT PURSUANT TO SECTION 13 | | | | | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
March 31, 20222023
OR
| | | | | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐
TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period fromto 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.) |
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)
Conshohocken, Pennsylvania | 19428 – 2380 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
610
-
832-4000 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 |
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 reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 x No o☒
☐
Indicate by check mark whether the registrant has submittedelectronically every Interactive Data File required to be submittedpursuant to Rule 405 of RegulationS-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
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated
filer,”“smallerfiler”, “smaller reporting
company,”company”, and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | x | | Accelerated filer | o | |
| Non-accelerated filer | o | | Smaller reporting company | o | |
| | | | Emerging growth company | o | |
☒
☐
☐
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to usethe extended transition period for complying with any newor revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
o☐
Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).Yes ☐
☒x
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 April 30, 2022 | | | | | |
Number of Shares of Common Stock Outstanding on April 30, 2023 | 17,980,840 |
17,912,086
Quaker Chemical Corporation
1
QUAKER CHEMICAL CORPORATIONAND CONSOLIDATEDSUBSIDIARIESTable of ContentsPage
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
2
3
4
5
Condensed Consolidated Statements of Changes in Equity for the Three MonthsEnded March 31, 2022 and 20216
7
Item 2.
22
Item 3.
34
Item 4.
35
36
Item 1.
36
Item 1A.
36
Item 2.
36
Item 6.
37
Signatures
37
2
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of IncomeOperations
(Unaudited; Dollars in thousands, except per share data)
Unaudited
Three Months Ended March 31,
2022
2021
Net sales
$
474,171
$
429,783
Cost of goods sold (excluding amortization expense - See Note 13)
328,100
273,589
146,071
156,194
Selling, general and administrative expenses
111,795
104,310
Restructuring and related charges
820
1,175
Combination, integration and other acquisition-related expenses
4,053
5,815
29,403
44,894
Other (expense) income, net
(2,206)
4,687
Interest expense, net
(5,345)
(5,470)
Income before taxes and equity in net income of associated companies21,852
44,111
Taxes on income beforeequity in net income of associated companies2,866
10,689
Income before equity in net income of associated companies18,986
33,422
Equity in net income of associated companies
835
5,210
19,821
38,632
Less: Net income attributable to noncontrolling interest
5
17
Net income attributable to Quaker Chemical Corporation$
19,816
$
38,615
Per share data:
Net income attributable to Quaker Chemical Corporation common
shareholders – basic
$
1.11
$
2.16
Net income attributable to Quaker Chemical Corporation commonshareholders – diluted
$
1.11
$
2.15
Dividends declared
$
0.415
$
0.395 | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net sales | $ | 500,148 | | | $ | 474,171 | | | | | |
Cost of goods sold (excluding amortization expense - See Note 13) | 326,698 | | | 328,100 | | | | | |
Gross profit | 173,450 | | | 146,071 | | | | | |
Selling, general and administrative expenses | 119,549 | | | 111,795 | | | | | |
Restructuring and related charges, net | 3,972 | | | 820 | | | | | |
Combination, integration and other acquisition-related expenses | — | | | 4,053 | | | | | |
Operating income | 49,929 | | | 29,403 | | | | | |
Other expense, net | (2,239) | | | (2,206) | | | | | |
Interest expense, net | (13,242) | | | (5,345) | | | | | |
Income before taxes and equity in net income of associated companies | 34,448 | | | 21,852 | | | | | |
Taxes on income before equity in net income of associated Companies | 9,533 | | | 2,866 | | | | | |
Income before equity in net income of associated Companies | 24,915 | | | 18,986 | | | | | |
Equity in net income of associated companies | 4,626 | | | 835 | | | | | |
Net income | 29,541 | | | 19,821 | | | | | |
Less: Net income attributable to noncontrolling interest | 7 | | | 5 | | | | | |
Net income attributable to Quaker Chemical Corporation | $ | 29,534 | | | $ | 19,816 | | | | | |
Per share data: | | | | | | | |
Net income attributable to Quaker Chemical Corporation common shareholders – basic | $ | 1.64 | | | $ | 1.11 | | | | | |
Net income attributable to Quaker Chemical Corporation common shareholders – diluted | $ | 1.64 | | | $ | 1.11 | | | | | |
Dividends declared | $ | 0.435 | | | $ | 0.415 | | | | | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive
Income
(Unaudited; Dollars in thousands)
Unaudited
Three Months Ended March 31,2022
2021
Net income
$
19,821
$
38,632
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(6,866)
(25,461)
Defined benefit retirement plans
496
1,292
Current period change in fair value of derivatives
1,100
562
Unrealized loss on available-for-sale securities
(1,000)
(3,025)
Other comprehensive loss
(6,270)
(26,632)
Comprehensive income
13,551
12,000
Less: Comprehensive income attributable to noncontrollinginterest(6)
(15)
Comprehensive income attributable to Quaker Chemical Corporation
$
13,545
$
11,985 | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net income | $ | 29,541 | | | $ | 19,821 | | | | | |
| | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | |
Currency translation adjustments | 14,468 | | | (6,866) | | | | | |
Defined benefit retirement plans | (126) | | | 496 | | | | | |
Current period change in fair value of derivatives | 390 | | | 1,100 | | | | | |
Unrealized gain (loss) on available-for-sale securities | 334 | | | (1,000) | | | | | |
Other comprehensive income (loss) | 15,066 | | | (6,270) | | | | | |
| | | | | | | |
Comprehensive income | 44,607 | | | 13,551 | | | | | |
Less: Comprehensive income attributable to noncontrolling interest | (10) | | | (6) | | | | | |
Comprehensive income attributable to Quaker Chemical Corporation | $ | 44,597 | | | $ | 13,545 | | | | | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Unaudited; Dollars in thousands, except par value)
Unaudited
December 31,
2022
2021
ASSETS
Current assets
Cash and cash equivalents
$
161,552
$
165,176
Accounts receivable, net
458,459
430,676
Inventories
Raw materials and supplies
146,289
129,382
Work-in-processand finished goods153,506
135,149
Prepaid expenses and other current assets
67,853
59,871
987,659
920,254
Property, plant and equipment,at cost439,318
434,344
Less accumulated depreciation
(242,203)
(236,824)
Property, plant and equipment,net197,115
197,520
Right of use lease assets
38,245
36,635
Goodwill
630,938
631,194
Other intangible assets, net
1,012,068
1,027,782
Investments in associated companies
90,003
95,278
Deferred tax assets
11,496
16,138
Other non-current assets
29,198
30,959
Total assets
$
2,996,722
$
2,955,760
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
61,385
$
56,935
Accounts payable
253,906
226,656
Dividends payable
7,433
7,427
Accrued compensation
26,396
38,197
Accrued restructuring
4,435
4,087
Accrued pension and postretirement benefits
1,549
1,548
Other accrued liabilities
97,445
95,617
452,549
430,467
Long-term debt
858,287
836,412
Long-term lease liabilities
27,433
26,335
Deferred tax liabilities
170,622
179,025
Non-current accrued pension and postretirement benefits
44,667
45,984
Other non-current liabilities
47,464
49,615
Total liabilities
1,601,022
1,567,838
Commitments and contingencies (Note 18)
Equity
Common stock, $
1
outstanding 2022 –
17,911,583
17,897,033 shares
17,912
17,897
Capital in excess of par value
918,699
917,053
Retained earnings
528,716
516,334
Accumulated other comprehensive loss
(70,261)
(63,990)
Total Quakershareholders’ equity1,395,066
1,387,294
634
628
Total equity
1,395,700
1,387,922
Total liabilities and equity
$
2,996,722
$
2,955,760 | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 189,872 | | $ | 180,963 |
Accounts receivable, net | 482,746 | | 472,888 |
Inventories | | | |
Raw materials and supplies | 148,119 | | 151,105 |
Work-in-process and finished goods | 145,375 | | 133,743 |
Prepaid expenses and other current assets | 63,189 | | 55,438 |
Total current assets | 1,029,301 | | 994,137 |
Property, plant and equipment, at cost | 439,367 | | 428,190 |
Less: Accumulated depreciation | (236,279) | | | (229,595) | |
Property, plant and equipment, net | 203,088 | | 198,595 |
Right of use lease assets | 43,344 | | 43,766 |
Goodwill | 517,206 | | 515,008 |
Other intangible assets, net | 936,345 | | 942,925 |
Investments in associated companies | 90,841 | | 88,234 |
Deferred tax assets | 10,422 | | 11,218 |
Other non-current assets | 27,916 | | 27,739 |
Total assets | $ | 2,858,463 | | $ | 2,821,622 |
LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Short-term borrowings and current portion of long-term debt | $ | 19,350 | | $ | 19,245 |
Accounts payable | 216,633 | | 193,983 |
Dividends payable | 7,822 | | 7,808 |
Accrued compensation | 26,713 | | 39,834 |
Accrued restructuring | 6,809 | | 5,483 |
Accrued pension and postretirement benefits | 1,572 | | 1,560 |
Other accrued liabilities | 90,513 | | 86,873 |
Total current liabilities | 369,412 | | 354,786 |
Long-term debt | 921,555 | | 933,561 |
Long-term lease liabilities | 26,086 | | 26,967 |
Deferred tax liabilities | 157,935 | | 160,294 |
Non-current accrued pension and postretirement benefits | 28,985 | | 28,765 |
Other non-current liabilities | 37,702 | | 38,664 |
Total liabilities | 1,541,675 | | 1,543,037 |
Commitments and contingencies (Note 18) | | | |
Equity | | | |
Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding March 31, 2023 – 17,981,822 shares; December 31, 2022 – 17,950,264 shares | 17,982 | | 17,950 |
Capital in excess of par value | 929,674 | | 928,288 |
Retained earnings | 491,632 | | 469,920 |
Accumulated other comprehensive loss | (123,177) | | | (138,240) | |
Total Quaker shareholders’ equity | 1,316,111 | | 1,277,918 |
Noncontrolling interest | 677 | | 667 |
Total equity | 1,316,788 | | 1,278,585 |
Total liabilities and equity | $ | 2,858,463 | | $ | 2,821,622 |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited; Dollars in thousands)
Unaudited
Three Months Ended March 31,2022
2021
Cash flows from operating activities
Net income
$
19,821
$
38,632
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of debt issuance costs
1,187
1,187
Depreciation and amortization
20,447
22,145
Equity in undistributed earnings of associated companies, net of dividends
2,135
(5,105)
Acquisition-related fair value adjustments related to inventory
0
801
Deferred compensation, deferred taxes and other,net(3,778)
(9,888)
Share-based compensation
2,462
3,779
Gain on disposal of property, plant,equipment and other assets(23)
(5,410)
Combination and other acquisition-related expenses, net of payments
(4,246)
(2,884)
Restructuring and related charges
820
1,175
Pension and other postretirement benefits
(1,316)
(1,034)
(Decrease) increase in cash from changes in current assets and currentliabilities, net of acquisitions:
Accounts receivable
(26,270)
(46,270)
Inventories
(33,873)
(24,994)
Prepaid expenses and other current assets
(6,506)
(8,315)
Change in restructuring liabilities
(408)
(3,034)
Accounts payable and accrued liabilities
23,249
26,597
Net cash used in operating activities
(6,299)
(12,618)
Cash flows from investing activities
Investments in property,plant and equipment(8,847)
(3,934)
Payments related to acquisitions, net of cash acquired
(9,383)
(26,655)
Proceeds from disposition of assets
0
14,744
Net cash used in investing activities
(18,230)
(15,845)
Cash flows from financing activities
Payments of long-term debt
(14,112)
(9,551)
Borrowings on revolving credit facilities, net
43,000
30,000
Repayments on other debt, net
(102)
(188)
Dividends paid
(7,428)
(7,052)
Stock options exercised, other
(801)
(178)
Net cash provided by financing activities
20,557
13,031
Effect of foreign exchange rate changes on cash
348
(3,008)
Net decrease in cash and cash equivalents
(3,624)
(18,440)
Cash and cash equivalents at the beginning of the period
165,176
181,895
Cash and cash equivalents at the end of the period
$
161,552
$
163,455 | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash flows from operating activities | | | |
Net income | $ | 29,541 | | | $ | 19,821 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Amortization of debt issuance costs | 353 | | | 1,187 | |
Depreciation and amortization | 20,246 | | | 20,447 | |
Equity in undistributed earnings of associated companies, net of dividends | (4,401) | | | 2,135 | |
| | | |
Deferred compensation, deferred taxes and other, net | (2,231) | | | (3,801) | |
Share-based compensation | 3,527 | | | 2,462 | |
| | | |
| | | |
Combination and other acquisition-related expenses, net of payments | — | | | (4,246) | |
Restructuring and related charges | 3,972 | | | 820 | |
Pension and other postretirement benefits | (415) | | | (1,316) | |
(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions: | | | |
Accounts receivable | (3,974) | | | (26,270) | |
Inventories | (5,792) | | | (33,873) | |
Prepaid expenses and other current assets | (6,765) | | | (6,506) | |
Change in restructuring liabilities | (2,747) | | | (408) | |
Accounts payable and accrued liabilities | 6,468 | | | 23,249 | |
Net cash provided by (used in) operating activities | 37,782 | | | (6,299) | |
Cash flows from investing activities | | | |
Investments in property, plant and equipment | (6,161) | | | (8,847) | |
Payments related to acquisitions, net of cash acquired | — | | | (9,383) | |
| | | |
Net cash used in investing activities | (6,161) | | | (18,230) | |
Cash flows from financing activities | | | |
Payments of long-term debt | (4,703) | | | (14,112) | |
| | | |
(Payments) borrowings on revolving credit facilities, net | (9,776) | | | 43,000 | |
Payments on other debt, net | (469) | | | (102) | |
| | | |
Dividends paid | (7,809) | | | (7,428) | |
Other stock related activity | (2,109) | | | (801) | |
Net cash (used in) provided by financing activities | (24,866) | | | 20,557 | |
Effect of foreign exchange rate changes on cash | 2,154 | | | 348 | |
Net decrease in cash and cash equivalents | 8,909 | | | (3,624) | |
Cash and cash equivalents at the beginning of the period | 180,963 | | | 165,176 | |
Cash and cash equivalents at the end of the period | $ | 189,872 | | | $ | 161,552 | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statements of Changes in Equity
(Unaudited; Dollars in thousands, except per share amounts)
(Unaudited)
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
38,615
0
17
38,632
Amounts reported in other
comprehensive loss
0
0
0
(26,630)
(2)
(26,632)
Dividends ($
0.395
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
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
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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total |
Balance as of December 31, 2021 | $ | 17,897 | | | $ | 917,053 | | | $ | 516,334 | | | $ | (63,990) | | | $ | 628 | | | $ | 1,387,922 | |
Net income | — | | | — | | | 19,816 | | | — | | | 5 | | | 19,821 | |
Amounts reported in other comprehensive (loss) income | — | | | — | | | — | | | (6,271) | | | 1 | | | (6,270) | |
Dividends ($0.415 per share) | — | | | — | | | (7,434) | | | — | | | — | | | (7,434) | |
Share issuance and equity-based compensation plans | 15 | | | 1,646 | | | — | | | — | | | — | | | 1,661 | |
Balance as of March 31, 2022 | $ | 17,912 | | | $ | 918,699 | | | $ | 528,716 | | | $ | (70,261) | | | $ | 634 | | | $ | 1,395,700 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance as of December 31, 2022 | $ | 17,950 | | | $ | 928,288 | | | $ | 469,920 | | | $ | (138,240) | | | $ | 667 | | | $ | 1,278,585 | |
Net income | — | | | — | | | 29,534 | | | — | | | 7 | | | 29,541 | |
Amounts reported in other comprehensive income | — | | | — | | | — | | | 15,063 | | | 3 | | | 15,066 | |
Dividends ($0.435 per share) | — | | | — | | | (7,822) | | | — | | | — | | | (7,822) | |
Share issuance and equity-based compensation plans | 32 | | | 1,386 | | | — | | | — | | | — | | | 1,418 | |
Balance as of March 31, 2023 | $ | 17,982 | | | $ | 929,674 | | | $ | 491,632 | | | $ | (123,177) | | | $ | 677 | | | $ | 1,316,788 | |
| | | | | | | | | | | |
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The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
7
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 March 31, 2023 (the “Report”), the terms
“Quaker,” “Quaker Houghton,” the
“Company, “Company,” “we,” and “our” refer to Quaker Chemical Corporation
(doing (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,the term Legacy Quaker The “Combination” refers to the
Company prior to the closing of itslegacy Quaker combination
with Houghton International, Inc. (“Houghton”)
.(herein referred to as the “Combination”).Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and
have
been prepared in accordance with generally accepted accounting principles
in the United States (“U.S. GAAP”) for interim 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
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 three months ended March 31,
20222023 are not necessarily indicative
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, 20212022 (the “2021“2022 Form 10-K”).
During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The Company’s new structure includes three reportable segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia/Pacific. Prior to the Company’s reorganization, the Company’s historical reportable segments were: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. Prior period information has been recast to align with the Company’s business structure as of January 1, 2023, including reportable segments, customer industry disaggregation, and goodwill. See Notes 4, 5, and 13 of Notes to Condensed Consolidated Financial Statements.
Description of Business
The Company was organized in 1918 and incorporated as a Pennsylvaniabusiness corporation in 1930, and in August 2019 completed the Combination with Houghton to form Quaker Houghton.1930. Quaker Houghton is the global leader in industrial process
fluids.
With a presence around the world, including
operations in over
25
countries, the Company’s customers
include thousands of
the world’s most advanced and specialized
steel, aluminum, automotive, aerospace, offshore,
can,container, mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range of formulated chemical
specialty products and offers
chemical management services, (whichwhich the Company refers to as “Fluidcare
TM
”), for various heavy industrial and manufacturing applications.
applications throughout its
4
segments: Americas; Europe, Middle East and Africa (“EMEA”); Asia/Pacific; andGlobal SpecialtyBusinesses.
Hyper-inflationary economies
Based on various indices or index compilations being used to monitor inflationin Argentina as well as economic instability,Argentina’s and Türkiye’s economies were considered hyper-inflationary under U.S. GAAP effective July 1, 2018
Argentina’seconomy was considered hyper-inflationary under U.S. GAAP.and April 1, 2022, respectively. As of, and for the three months
ended March 31,
2022,2023, the Company's Argentine
and Turkish subsidiaries represented
less than1
% a combined 1% and 2% of the Company’s consolidated
total assets and
net sales, respectively.
During
eachthe three months ended March 31, 2023, the Company recorded $0.5 million of
remeasurement losses associated with the applicable currency conversions related to Argentina and Türkiye. Comparatively, during the three months ended March 31, 2022,
and 2021, the Company
recorded
$0.2
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,Other expense, net,
in the Company’s Condensed Consolidated
Statements of Income.
Operations.Note 2 – Business Acquisitions
2022Previous Acquisitions
In October 2022, the Company acquired a business that provides pickling and rinsing products and services, which is part of the EMEA reportable segment, for approximately 3.5 million EUR or approximately $3.5 million. This acquisition, along with the Company’s January 2022 acquisition in the Americas (described below), which had similar specializations and product offerings in pickling inhibitor technologies, strengthens Quaker Houghton’s position in pickling inhibitors and additives, enabling the Company to better support and optimize production processes for customers across the Metals industry. As of March 31, 2023, the allocation of the purchase of this acquisition in October 2022 has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s ongoing assessment of additional information related to the fair value of assets acquired and liabilities assumed.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
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 itswhich is part of the Americas reportable segment for approximately $
8.0
$8.0 million.
This business broadens the Company’s
product offerings within its
existing metals and metalworking business in the Americas region.
The During the third quarter of 2022 the Company
allocated $5.6
finalized post-closing adjustments that resulted in the Company paying less than $0.1 million of
theadditional purchase
price to intangible assets, comprised of $
5.1
million of customer relationships to be amortized over14
0.5
product technologies to be amortized over
14
years.In addition, the Company recorded $1.8
million of goodwill related to expectedvalue not allocated to other acquired assets, all of which is expected to be tax deductibleconsideration. Also in
various jurisdictionsin which theCompany 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 Businesswhich is part of the EMEA reportable segment
for approximately
1.2
million EUR or approximately
$1.4
$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 acquiredas part ofthe Norman Hay acquisition in 2019.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)(Unaudited)
8
business. The
results of operationsallocation of the
purchase prices of both of these January 2022
acquired assets and businesses subsequentto the respective acquisition dates are included inacquisitions has been finalized. the unaudited Condensed Consolidated Statements of Income for the quarter endedMarch 31, 2022.Applicable transaction expensesassociated with these acquisitions are included in Combination,integration and other acquisition-related expenses in the Company’sunaudited Condensed Consolidated Statements of Income.Certain pro forma and other information is not presented, as the operationsof the acquired assets and businesses are not considered material to the overall operationsof the Company for the periods presented.Previous Acquisitions
In November 2021, the Company acquired Baron Industries,
(“Baron”),a privately held
Companycompany that provides vacuum
impregnation services of castings, powder metals and electrical components
for its
Global Specialty BusinessesAmericas reportable segment for
$
11.0
$11.0 million, including an initial cash payment of
$ 7.1
$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
differentvarious times from 2022 through
2025.
The earn-out provisions
could total a maximum of $
4.5
$4.5 million.
The Company allocated $ 8.0
million of the purchase price to intangible assets, $1.1
property, plant andequipment and $1.5
million of other assets acquired net of liabilities assumed, which includes $0.3
acquired.In addition, the Company recorded $0.4
million of goodwill, all of which is expected to be tax deductible.Intangible assetscomprised $
7.2
million of customer relationships to be amortized over15 years
; and $
0.8
million of existing product technology to beamortized over
13 years
In November 2021, the Company acquired a business that provideshydraulic fluids, coolants, cleaners, and rust preventative oilsin Turkey for its EMEA reportable segment for
3.2
million EUR or approximately $3.7
In September 2021, the Company acquired the remaining interest in Grindaix-GmbH (“Grindaix”), a Germany-based, high-techprovider of coolant control and delivery systems for its Global Specialty Businesses reportablesegment for2.4
approximately $
2.9
million, which is gross of approximately $0.3
million of cash acquired.Previously, in February2021, theCompany acquired a
38
% ownership interest in Grindaix for
1.4
million EUR or approximately $1.7
million.The Company recordedits initial investment as an equity method investment within the Consolidated FinancialStatements and accounted for the purchase ofthe remaining interest as a step acquisition whereby the Company remeasuredthe previously held equity method investment to its fairvalue.
In June 2021, the Company acquired certain assets for its chemical milling maskantsproduct line in the Global SpecialtyBusinesses reportable segment for
2.3
million EUR or approximately $2.8
In February 2021, the Company acquired a tin-plating solutions business forthe steel end market for $25.0
acquisition is part of each of the Company’sgeographic reportable segments.The Company allocated $19.6
price to intangible assets, comprised of $
18.3
million of customer relationships, to be amortized over19 years
; $
0.9
product technology to be amortized over
14 years
; and $
0.4
million of a licensed trademark to be amortized over3 years
the Company recorded $
5.0
million of goodwill, all of which is expected to be tax deductible in various jurisdictions in whichweoperate.Factors contributing to the purchase price that resulted in goodwill included theacquisition of business processes andpersonnel that will allow Quaker Houghton to better serve its customers.
As of March 31,
2023, the Company has remaining earnout liabilities recorded on its Condensed Consolidated Balance Sheet of $1.6 million. Additionally, during the third quarter of 2022 the
allocationCompany finalized post-closing adjustments that resulted in the Company receiving a payment of
the purchase price of these acquisitions havenot been finalized and the one-yearless than $0.1 million.measurement period has not ended, with the exception of the tin-platingsolutions business acquired in February 2021, themeasurement period for which ended in February 2022.Further adjustments may be necessary as a result of the Company’son-goingassessment of additional information related to the fair value of assets acquiredand liabilities assumed.In December 2020, the Company acquired Coral Chemical
CorporationCompany, LLC (“Coral”),
a privately held U.S.-based provider of metal
finishing fluid solutions.
Subsequent to the acquisition, the Company and the sellers of Coral (the “Sellers”) have
worked to finalize
certain post-closing adjustments.
In April During the second quarter of 2022, after failing to reach resolution, the Sellers filed suit asserting certain
amounts owed
related to tax attributes of the acquisition.
Based on During the first quarter of 2023, there have been no material changes to the facts and circumstances of the claim asserted by the Sellers,
and the Company
believes continues to believe the potential range of exposure for this claim is $$0 to $1.5 million.
0
1.5
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting StandardsAdoptedThe FASBThere have been no recently issued
ASU 2020-04accounting standards that will have a material impact on the Company’s condensed consolidated financial statements and related footnote disclosures., Reference Rate Reform (Topic848): Facilitation of the Effects of Reference Rate ReformonFinancial Reporting
in March 2020.The FASB subsequentlyissued ASU 2021-01, Reference Rate Reform (Topic848): ScopeJanuary 2021 which clarified the guidance but did not materially changethe guidance or its applicability to the Company.Theamendments provide temporary optional expedients and exceptionsfor applying U.S. GAAP to contract modifications, hedgingrelationships and other transactions to ease the potential accountingand financial reporting burden associated with transitioning awayfrom reference rates that are expected to be discontinued, includingthe London Interbank Offered Rate (“LIBOR”).ASU 2020-04 isQuaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)(Unaudited)
9
effective for the Company as of March 12, 2020 and generally canbe applied through December 31, 2022.On December 10, 2021,the Company entered into a Second Amendment to Credit Agreement (“SecondAmendment”) with Bank of America N.A., an updateto provide for the use of a non-USD currency LIBOR successor rate.The Company elected to apply the expedients provided in ASU2020-04 with respect to the Second Amendment.The Company will continue to monitor for potential impacts related to its USD-based LIBOR rates.See Note 14 of Notes to Condensed Consolidated Financial Statements.Note 4 – Business Segments
The Company’s operatingsegments, which are consistent with its reportable segments, reflect the structure of theCompany’sinternal organization, the method by which the Company’sresources are allocated and the manner by which the chief operatingdecision maker assesses the Company’sperformance.4
three reportable segments: (i) Americas; (ii) EMEA;
(iii) Asia/Pacific; and
(iv) Global Specialty Businesses.(iii) Asia/Pacific. The three geographic segments are composed of the net sales and operations in
each respective
region, excluding net sales and operations managed globallyby the Global Specialty Businesses segment, whichincludesregion. All prior period information has been recast to reflect the Company’s
container,metal finishing,mining, offshore, specialty coatings, specialty grease and NormanHay businesses.new reportable segments. See Note 1 of Notes to Condensed Consolidated Financial Statements.Segment operating earnings for each of the Company’s
reportable segments are comprised of the segment’s
net sales less directly
related
costCost of goods sold (“COGS”) and
selling,Selling, general 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,
are not included in segment operating earnings.
Other
items not specifically identified with the Company’s
reportable segments include
interestInterest expense, net and
other (expense) income,Other expense, net.
The following table presents information about the performance8
months ended March 31, 2022 and 2021:
Three Months Ended
2022
2021
Net sales
Americas
$
154,144
$
134,871
EMEA
125,687
119,814
Asia/Pacific
104,234
96,706
Global Specialty Businesses
90,106
78,392
$
474,171
$
429,783
Segment operating earnings
Americas
$
29,220
$
32,234
EMEA
16,766
25,244
Asia/Pacific
21,907
27,478
Global Specialty Businesses
25,035
24,169
Totalsegment operating earnings92,928
109,125
Combination, integration and other acquisition-related expenses
(4,053)
(5,815)
Restructuring and related charges
(820)
(1,175)
Fair value step up of acquired inventory sold
0
(801)
Non-operating and administrative expenses
(43,463)
(40,992)
Depreciation of corporate assets and amortization
(15,189)
(15,448)
Operating income
29,403
44,894
Other (expense) income, net
(2,206)
4,687
Interest expense, net
(5,345)
(5,470)
Income before taxes and equity in net income of associated companies
$
21,852
$
44,111
Inter-segment revenues for the three months ended March 31,2022 and 2021 were $2.9
3.3
$
8.9
8.8
0.3
0.1
million for Asia/Pacific and $1.7
2.0
Specialty Businesses, respectively.However, all inter-segment transactionshave been eliminated from each reportable operatingsegment’s net sales and earnings forall periods presented in the above tables.Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
10The following table presents information about the performance of the Company’s reportable segments:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net sales | | | | | | | |
Americas | $ | 251,413 | | | $ | 212,091 | | | | | |
EMEA | 152,449 | | | 146,819 | | | | | |
Asia/Pacific | 96,286 | | | 115,261 | | | | | |
Total net sales | $ | 500,148 | | | $ | 474,171 | | | | | |
| | | | | | | |
Segment operating earnings | | | | | | | |
Americas | $ | 66,125 | | | $ | 45,022 | | | | | |
EMEA | 27,571 | | | 23,247 | | | | | |
Asia/Pacific | 27,652 | | | 24,501 | | | | | |
Total segment operating earnings | 121,348 | | | 92,770 | | | | | |
Combination, integration and other acquisition-related expenses | — | | | (4,053) | | | | | |
Restructuring and related charges, net | (3,972) | | | (820) | | | | | |
Non-operating and administrative expenses | (51,771) | | | (43,305) | | | | | |
Depreciation of corporate assets and amortization | (15,676) | | | (15,189) | | | | | |
Operating income | 49,929 | | | 29,403 | | | | | |
Other expense, net | (2,239) | | | (2,206) | | | | | |
Interest expense, net | (13,242) | | | (5,345) | | | | | |
Income before taxes and equity in net income of associated companies | $ | 34,448 | | | $ | 21,852 | | | | | |
The following table summarizes inter-segment revenues. All inter-segment transactions have been eliminated from each reportable segment’s net sales and earnings for all periods presented in the above tables.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Americas | 2,827 | | | 3,056 | | | | | |
EMEA | 6,093 | | | 12,176 | | | | | |
Asia/Pacific | 59 | | | 297 | | | | | |
Note 5 – Net Sales and Revenue Recognition
Arrangements Resulting in Net Reporting
As part of the Company’s Fluidcare
TM
business, certain third-party product sales to customers are managed by the Company.The Company transferred third-party products under arrangements recognized
on a net reporting basis of
$19.8
17.8
for the three months ended March 31,
2023 and 2022,
and 2021, respectively.
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,
aircraft,aerospace, industrial
and agricultural equipment, and durable
goods.
As previously disclosed in the
2021Company’s 2022 Form 10-K,
during for the year ended December 31,
2021,2022, the Company’s
five largest customers (each composed of multiple subsidiaries or
divisions
with semiautonomous purchasing authority) accounted for approximately
10
% 11% of consolidated net sales, with its largest customer
accounting for approximately
3
% 3% of consolidated net sales.
Contract Assets and Liabilities
The Company had no material contract assets recorded on its Condensed
Consolidated Balance Sheets as of March 31,
20222023 or
December 31, 2021.2022.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
The Company had approximately $
6.9
7.0
$5.7 million of deferred revenue as of March 31,
20222023 and December 31,
2021, 2022, respectively.
For
the three months ended March 31,
2022,2023, the Company satisfied all of the associated performance
obligations and
recognized into revenue the advance payments received and recorded
as of December 31,
2021.2022.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
reportable segment
first, and then by customer
industry,rather thanby individual product lines.Also, netindustries. 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,
are 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,industries, and timing of
revenue recognized forrecognized. Prior period information has been recast to reflect the three months ended March 31, 2022 and 2021.
Three Months Ended March 31, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
56,160
$
36,839
$
55,287
$
148,286
Metalworking and other
97,984
88,848
48,947
235,779
154,144
125,687
104,234
384,065
Global Specialty Businesses
57,264
20,021
12,821
90,106
$
211,408
$
145,708
$
117,055
$
474,171
TimingCompany’s current period customer industry disaggregation. See Note 1 of Revenue Recognized
Product sales at a point in time
$
201,284
$
137,203
$
114,625
$
453,112
Services transferred over time
10,124
8,505
2,430
21,059
$
211,408
$
145,708
$
117,055
$
474,171
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - ContinuedStatements.
(Dollars in thousands, except per share amounts,unless otherwise stated) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
| | Americas | | EMEA | | Asia/Pacific | | Consolidated Total |
Customer Industries | | | | | | | | |
Metals | | $ | 68,134 | | | $ | 39,103 | | | $ | 46,660 | | | $ | 153,897 | |
Metalworking and other | | 183,279 | | | 113,346 | | | 49,626 | | | 346,251 | |
| | | | | | | | |
| | | | | | | | |
| | $ | 251,413 | | | $ | 152,449 | | | $ | 96,286 | | | $ | 500,148 | |
| | | | | | | | |
Timing of Revenue Recognized | | | | | | | | |
Product sales at a point in time | | $ | 240,481 | | | $ | 141,506 | | | $ | 93,923 | | | $ | 475,910 | |
Services transferred over time | | 10,932 | | | 10,943 | | | 2,363 | | | 24,238 | |
| | $ | 251,413 | | | $ | 152,449 | | | $ | 96,286 | | | $ | 500,148 | |
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | Americas | | EMEA | | Asia/Pacific | | Consolidated Total |
Customer Industries | | | | | | | | |
Metals | | $ | 55,317 | | | $ | 36,793 | | | $ | 55,682 | | | $ | 147,792 | |
Metalworking and other | | 156,774 | | | 110,026 | | | 59,579 | | | 326,379 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 212,091 | | | $ | 146,819 | | | $ | 115,261 | | | $ | 474,171 | |
| | | | | | | | |
Timing of Revenue Recognized | | | | | | | | |
Product sales at a point in time | | $ | 201,775 | | | $ | 136,803 | | | $ | 112,548 | | | $ | 451,126 | |
Services transferred over time | | 10,316 | | | 10,016 | | | 2,713 | | | 23,045 | |
| | $ | 212,091 | | | $ | 146,819 | | | $ | 115,261 | | | $ | 474,171 | |
11
Three Months Ended March 31, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
46,793
$
34,274
$
49,743
$
130,810
Metalworking and other
88,078
85,540
46,963
220,581
134,871
119,814
96,706
351,391
Global Specialty Businesses
45,256
20,272
12,864
78,392
$
180,127
$
140,086
$
109,570
$
429,783
Timing of Revenue Recognized
Product sales at a point in time
$
171,594
$
131,162
$
106,399
$
409,155
Services transferred over time
8,533
8,924
3,171
20,628
$
180,127
$
140,086
$
109,570
$
429,783
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machinery
and equipment with remaining lease terms up to
10 years
. 9 years. Operating lease expense is recognized on a straight-line basis over the lease term. In addition,
the Company has certain land
use leases with remaining lease terms up to
93 years
.
92 years.The Company has
0
material variable lease costs or sublease income for three months ended March31, 2022 and 2021. Thefollowing table sets forth the components of the Company’slease cost for three months ended March 31, 2022 and 2021:10
Three Months Ended
March 31,
2022
2021
Operating lease expense
$
3,409
$
3,612
Short-term lease expense
219
251
Supplemental cash flow information related to the Company’sleases is as follows:
Three Months Ended
March 31,
2022
2021
Operating cash flows from operating leases
$
3,365
$
3,579
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new operating lease liabilities
4,689
3,050
Supplemental balance sheet information related to the Company’sleases is as follows:March 31,
December 31,
2022
2021
Right of use lease assets
$
38,245
$
36,635
Other current liabilities
10,540
9,976
Long-term lease liabilities
27,433
26,335
Total operating lease liabilities
$
37,973
$
36,311
Weighted averageremaining lease term (years)5.9
5.6
Weighted averagediscount rate4.14%
4.22%
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
12The Company has no material variable lease costs, sublease income, or finance leases for the three months ended March 31, 2023 and 2022. The components of the Company’s lease expense are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Operating lease expense | $ | 3,936 | | | $ | 3,409 | | | | | |
Short-term lease expense | 211 | | | 219 | | | | | |
Supplemental cash flow information related to the Company’s leases is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 3,857 | | | $ | 3,365 | | | | | |
Non-cash lease liabilities activity: | | | | | | | |
Leased assets obtained in exchange for new operating lease liabilities | 2,833 | | | 4,689 | | | | | |
Supplemental balance sheet information related to the Company’s leases is as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Right of use lease assets | $ | 43,344 | | | $ | 43,766 | |
| | | |
Other current liabilities | 12,652 | | | 12,024 | |
Long-term lease liabilities | 26,086 | | | 26,967 | |
Total operating lease liabilities | $ | 38,738 | | | $ | 38,991 | |
| | | |
Weighted average remaining lease term (years) | 4.96 | | 5.10 |
Weighted average discount rate | 4.50 | % | | 4.36 | % |
Maturities of operating lease liabilities as of March 31, 2022 were as follows:
| | | | | |
| March 31, 2023 |
For the remainder of 2023 | $ | 10,749 | |
For the year ended December 31, 2024 | 11,784 | |
For the year ended December 31, 2025 | 7,740 | |
For the year ended December 31, 2026 | 5,614 | |
For the year ended December 31, 2027 | 2,616 | |
For the year ended December 31, 2028 and beyond | 5,496 | |
Total lease payments | 43,999 | |
Less: imputed interest | (5,261) | |
Present value of lease liabilities | $ | 38,738 | |
March 31,
2022
For the remainder of 2022
$
8,990
For the year ended December 31, 2023
9,513
For the year ended December 31, 2024
7,292
For the year ended December 31, 2025
5,375
For the year ended December 31, 2026
4,338
For the year ended December 31, 2027 and beyond
7,046
Total lease payments
42,554
Less: imputed interest
(4,581)
Present value of lease liabilities
$
37,973
Note 7 – Restructuring and Related Activities
TheIn the third quarter of 2019, the Company’s management approved a global restructuring plan (the “QH Program”) as part of its initial plan to realize certain cost
synergies associated with the CombinationCombination. As of December 31, 2022, the Company substantially completed all of the initiatives under the QH Program with only an immaterial amount of remaining severance still to be paid, which is expected to be completed during 2023.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
In the thirdfourth quarter of 2019. The QH Program includes2022, the Company’s management initiated a global cost and optimization program to improve its cost structure and drive a more profitable and productive organization. As of March 31, 2023, the program included restructuring and associated
severance costs to reduce total headcount by approximately 400 people globally, as well as plans for75 positions globally. These headcount reductions began in the closurefourth quarter of certain
manufacturing2022 and non-manufacturing facilities.
are expected to continue throughout 2023. The exact timing
to complete all actions and
totalfinal costs associated
with the QH Program will depend on
a
number of factors
andthat are subject to
change; however,the Company currently expects reductions in headcount and site closures tochange.continue to occur throughout 2022 under the QH Program.Employee separation benefits
will vary depending on local regulations
within certain foreign countries and
will include severance and other benefits.
All Restructuring costs
incurred to date relate toinclude severance costs to reduce headcount,
including customary and routine adjustments to initial
estimates for employee separation costs, as well as costs to close certain
facilities
andunder the QH Program. These costs are recorded in Restructuring and related
charges in the Company’s
Condensed Consolidated Statements of
Income.Operations. As described in Note 4 of Notes to
CondensedConsolidated Financial Statements,
restructuringRestructuring and related charges
are not included in the Company’s
calculation of reportable
segments’ measure of operating earnings and therefore these costs are not
reviewed by or recorded to reportable segments.
ActivityChanges in the Company’s
accrualaccruals for
its restructuring
under the QH Program for the three months ended March 31, 2022isprograms are as
follows:follows:
| | | | | |
| Restructuring Programs |
Accrued restructuring as of December 31, 2022 | $ | 5,483 |
Restructuring and related charges, net | 3,972 | |
Cash payments | (2,747) | |
Currency translation adjustments | 101 | |
Accrued restructuring as of March 31, 2023 | $ | 6,809 |
QH Program
Accrued restructuring as of December 31, 2021
$
4,087
Restructuring and related charges
820
Cash payments
(408)
Currency translation adjustments
(64)
Accrued restructuring as of March 31, 2022
$
4,435
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense
in its Condensed Consolidated Statements of
IncomeOperations: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Stock options | $ | 431 | | $ | 267 | | | | |
Non-vested stock awards and restricted stock units | 2,171 | | 1,548 | | | | |
Director stock ownership plan | 10 | | 24 | | | | |
Performance stock units | 915 | | 623 | | | | |
Total share-based compensation expense | $ | 3,527 | | $ | 2,462 | | | | |
Share-based compensation expense is recorded in SG&A, except for less than $0.1 million for the three months ended March 31, 2022, recorded within Combination, integration and 2021:
Three Months Ended
2022
2021other acquisition-related expenses.
Stock optionsOptions
$As of March 31, 2023, unrecognized compensation expense related to unvested stock options was $0.9 million, to be recognized over a weighted average remaining period of 1.3 years.
267Restricted Stock Awards and Restricted Stock Units
$
308
Non-vested stock awardsDuring the three months ended March 31, 2023, the Company granted 29,862 non-vested restricted shares and 6,675 non-vested restricted stock units
1,548
1,396
Non-elective under its long-term incentive plan (“LTIP”), which are subject to time-based vesting, generally over one to three years. The fair value of these grants is based on the last sale price of the Company’s common stock on the date of grant. As of March 31, 2023, unrecognized compensation expense related to the non-vested restricted shares was $10.6 million, to be recognized over a weighted average remaining period of 2.6 years, and elective 401(k) matching contribution in stock
0
1,553
Director stock ownership plan
24
203
Performanceunrecognized compensation expense related to non-vested restricted stock units
623
319
Total share-basedcompensation expense$
2,462
$
3,779
was $2.5 million, to be recognized over a weighted average remaining period of 1.8 years.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
13
Share-based compensation expense is recorded in SG&A, except for less than $
0.1
0.3
months ended March 31, 2022 and 2021, respectively,recorded within Combination, integration and other acquisition-relatedexpenses.
Stock Options
During the first quarter of 2022, the Company granted stock options underits long-term incentive plan (��LTIP”) that are subjectonly to time vesting over a
three year
period.For the purposes of determining the fair value of stock option awards, the Companyused a Black-Scholes option pricing model and the assumptions set forthin the table below:March 2022
Grant
Number of options granted
27,077
Dividend yield
0.80
%
Expected volatility
38.60
%
Risk-free interest rate
2.07
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight-line basis over the vesting period.As of March 31, 2022, unrecognizedcompensation expense related to all stock options grantedwas $2.9
million, to be recognized over a weighted average remainingperiod of
1.9
Restricted Stock Awardsand Restricted Stock UnitsDuring the three months ended March 31, 2022, the Company granted
17,425
non-vested restricted shares and4,490
restricted stock units under its LTIP,subject to time-based vesting, generally over athree year
period.The fair value of these grants isbased on the trading price of the Company’scommon stock on the date of grant.The Company adjusts the grant date fair value ofthese awards for expected forfeitures based on historical experience.As of March 31, 2022, unrecognized compensation expenserelated to the nonvested restricted shares was $
6.4
million, to be recognized over a weighted average remaining period of2.1
and unrecognized compensation expense related to nonvested restrictedstock units was $1.3
million, to be recognized over a weightedaverage remaining period of
2.3
Performance Stock Units
TheAs a component of its LTIP, the Company grants performance-dependentperformance-based stock unit awards (“PSUs”) as a componentof its LTIP,, which will be settled in acertain number of shares subject to market-based
or performance-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
% 0% up to
200
% 200% of the target award, subject to the achievement of
the Company’s
market-based total shareholder
return (“TSR”)
metric relative to the performance of the Company’s
peer group, the S&P Midcap 400
Materials
group.group, and separately the achievement of a performance-based return on invested capital (“ROIC”) measure. The service period required for the PSUs is
generally three years and the TSR measurementperiod forof the PSUsmarket-based and performance objectives is generallyfrom January 1 of the year of grant through December 31 of the year prior
to
issuancesissuance of the
shares upon settlement.shares.Compensation expense for PSUs
is measured based on
theirthe grant date fair value and is recognized on
a straight-line
vesting method basis over
the
three yearapplicable vesting period.
The fair value of PSUs granted with a ROIC condition is based on the trading price of the Company’s common stock on the date of grant. PSUs granted with a relative TSR condition are valued using a Monte Carlo simulation on the date of grant. The grant-date fair value of the PSUs
was estimatedvalued using a Monte Carlo
simulation,
on the grant dateand usingwhich included the following assumptions set forth in the table below:
| | | | | |
| 2023 Grants |
Number of PSUs granted | 15,707 |
Risk-free interest rate | 3.85% |
Dividend yield | 0.96% |
Expected term (years) | 3.0 |
March 2022
Grant
NumberBased on the conditions of the PSUs granted
16,820
Risk-free interest rate
2.11
%
Dividend yield
0.93
%
Expected term (years)
3.0
Asand performance to date for each of the outstanding PSU awards as of March 31,
2022,2023, the Company estimates that it will issue
047,203 fully vested shares
as of the applicable settlement date
of allfor such outstanding PSUs
awards based on the conditions of the PSUs and performanceto date for each award.awards. As of March 31,
2022,2023, there
was approximately $
6.4
$9.9 million of total unrecognized compensation cost related to PSUs, which the Company
expects to recognize
over a weighted-average period of 2.6 years.
2.3
Note 9 – Pension and Other Postretirement Benefits
The components of net periodic benefit (income) cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| Pension Benefits | | Other Postretirement Benefits | | | | |
| 2023 | | 2022 | | 2023 | | 2022 | | | | | | | | |
Service cost | $ | 104 | | $ | 180 | | $ | — | | $ | (8) | | | | | | | | | |
Interest cost | 2,455 | | 1,360 | | 19 | | 9 | | | | | | | | | |
Expected return on plan assets | (1,997) | | | (2,084) | | | — | | — | | | | | | | | |
Actuarial loss (gain) amortization | 101 | | 257 | | (30) | | | (24) | | | | | | | | | |
Prior service cost (income) amortization | 8 | | 2 | | (4) | | | 1 | | | | | | | | |
Net periodic benefit (income) cost | $ | 671 | | | $ | (285) | | $ | (15) | | | $ | (22) | | | | | | | | | |
Employer Contributions
As of March 31, 2023, $1.0 million and less than $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 $5.3 million to its U.S. and foreign pension plans and approximately $0.2 million to its other postretirement benefit plans in 2023.
13
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
14
Defined Contribution Plan
The Company has a 401(k) plan with an employer match coveringa majority of its U.S. employees.The Company matches50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum matching contribution of 3% ofcompensation.Additionally, the planprovides for non-elective nondiscretionary contributions on behalf of participantswho have completed one yearof service equal to
3
% of the eligible participants’ compensation.Beginning in April 2020 and continuing through March 2021, theCompany matched both non-elective and elective 401(k) contributionsin fully vested sharesof the Company’s common stockrather0
matching contributions in stock for the three months ended March 31, 2022. Forthe three months endedMarch 31, 2021, total contributions were $
1.5
Note 9 – Pension and Other PostretirementBenefitsThe components of net periodic benefit (income) cost for the three monthsended March 31, 2022 and 2021 are as follows:Three Months Ended March 31,Other
Pension Benefits
Postretirement Benefits
2022
2021
2022
2021
Service cost
$
180
$
316
$
(8)
$
1
Interest cost
1,360
1,090
9
11
Expected return on plan assets
(2,084)
(2,082)
0
0
Actuarial loss (gain) amortization
257
855
(24)
0
Prior service cost (income) amortization
2
2
1
0
Total net periodic benefit(income) cost$
(285)
$
181
$
(22)
$
12
Employer Contributions
As of March 31, 2022, $
1.0
0.1
million of contributions have been made to the Company’sU.S. and foreign pensionplans and its other postretirement benefit plans, respectively.Taking into considerationcurrent minimum cash contributionrequirements, the Company currently expects to make full year cash contributionsof approximately $6.6
foreign pension plans and approximately $
0.2
million to its other postretirement benefit plans in 2022.Note 10 – Other (Expense) Income, Netexpense, net
The components of
other (expense) income,Other expense, net
for the three months endedMarch 31, 2022 and 2021 are as follows:
March 31,
2022
2021
Income from third party license fees
$
404
$
339
Foreign exchange losses, net
(1,905)
(1,478)
Gain on disposals of property,plant, equipment and other assets, net23
5,410 | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Income from third party license fees | $ | 325 | | $ | 404 | | | | |
Foreign exchange losses, net | (3,326) | | | (1,905) | | | | |
| | | | | | | |
Non-income tax refunds and other related credits (expense) | 360 | | (1,322) | | | | |
Pension and postretirement benefit (costs) income, non-service components | (552) | | 479 | | | | |
| | | | | | | |
| | | | | | | |
Facility remediation recovery, net | 827 | | — | | | | |
Other non-operating income, net | 127 | | 138 | | | | |
Total other expense, net | $ | (2,239) | | $ | (2,206) | | | | |
Non-income tax refunds and other related credits (expense) credits
(1,322)
97
Pension and postretirement benefit income, non-service components
479
124
Other non-operating income, net
115
195
Total other (expense)income, net$
(2,206)
$
4,687
Non-income tax refunds and other related (expense) credits during the
three months ended March 31, 2022, includes
other expenserelatedadjustments to
ana Combination-related indemnification asset associated with the settlement of certain
income tax audits at one of the Company’s
Italian
affiliatesfor tax periods prior to August 1, 2019.
See Note 11 of Notes to Condensed Consolidated
Financial Statements.
Gain on disposals ofproperty, plant, equipmentand other assets,Facility remediation recovery, net, during the three months ended March 31,
2021, includes2023, reflects a gain
recorded on the
sale of certainheld-for-sale real property assets payments received from insurers related to
previously incurred costs from the
Combination.Foreign exchange losses, net, during eachremediation and restoration of
the three months endedMarch 31, 2022 and 2021 include foreign currency transaction losses of approximately$0.2
million related to hyper-inflationaryaccounting for the Company’s Argentinesubsidiaries.property damage. See Note
118 of Notes to
the 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)
15
Note 11 – Income Taxes
and Uncertain Income Tax
PositionsPositionsThe Company’s effective
tax rates for the three months ended March 31,
2023 and 2022
were 27.7% and
2021 were13.1
% and
24.2
The Company’s effective
tax rate for the three months ended March 31,
20222023 was impacted by various items including foreign tax inclusions, withholding taxes, foreign tax credits, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments. Comparatively, the prior year effective tax rate was largely
drivenimpacted by changes in
the valuation
allowance for foreign tax credits due to
recentlylegislative guidance issued
legislative guidanceand audit settlements reached with Italian tax authorities.
In addition, the Company incurred higher tax expense during the three months
ended March 31, 2022 related to
the Companyrecording earnings in one of itsthe Company’s subsidiaries recording earnings at a statutory tax rate of
25
% 25% while it awaitsthe recertification of aits concessionary
15
% tax
rate, which was available to the Company during all of 2021.Comparatively,the prior year first quarter effective 15% tax rate was
pending receipt.impacted by the sale of a subsidiary which included certain held-for-salereal property assets related to the Combination.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’sestimate of non-U.S. income taxes the Company will incur to ultimately remit certainearnings to the U.S.The balance as of March 31, 2022 was $8.0
As of March 31, 2022, the Company’scumulative liability for gross unrecognized tax benefits was $20.1
approximately $
2.4
million from the cumulative liability accrued as of December 31, 2021.The Company continues to recognize interest and penalties associated with uncertaintax positions as a component of taxes onincome before equity in net income of associated companies in its CondensedConsolidated Statementsof Income.The Companyrecognized a benefit of $
0.3
million for interest and a benefit of $1.6
million for penalties in its Condensed Consolidated Statements ofIncome for the three months ended March 31, 2022, and recognizedan expense of less than $0.1
million for interest and a benefit of$
0.1
million for penalties in its Condensed Consolidated Statements of Income for thethree months ended March 31, 2021.As ofMarch 31, 2022, the Company had accrued $
2.7
million for cumulative interest and $1.6
million for cumulative penalties in itsCondensed Consolidated Balance Sheets, compared to $
3.1
million for cumulative interest and $3.1
million for cumulative penaltiesaccrued at December 31, 2021.
During the three months ended March 31, 2022 and 2021, the Companyrecognized decreases of $2.8
0.3
respectively, in its cumulativeliability for gross unrecognized tax benefits due to the settlement of incometax audits with the Italiantax authorities, as well as the expiration of the applicable statutes oflimitations for certain tax years.The Company estimates that during the year ending December 31, 2022it will reduce its cumulative liability for grossunrecognized tax benefits by approximately $
4.2
million due to the settlement of income tax audits and the expiration of the statute oflimitations with regard to certain tax positions.This estimated reduction in the cumulative liability for unrecognizedtax benefits doesnot consider any increase in liability for unrecognized tax benefits with regardto existing tax positions or any increase in cumulativeliability for unrecognized tax benefits with regard to new tax positions forthe year ending December31, 2022.The Companyand its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of variousstate and foreigntax jurisdictions.Tax years that remain subjectto examination by major tax jurisdictions include Italy from2007
, Brazil from
2011
,
Germany from
2015
, the Netherlands, Mexico and China from
2016
, Canada, 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 and obtained 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.
Asfirst quarter of
March 31, 2022, the Company
hassettled the $2.6 million assessment due to the Italian tax authorities, while having already received
$1.6
$1.6 million in refunds from the
Netherlands and Spain.
In February 2022, As of March 31, 2023, the Company
received apaid the full settlement,
notice from the Italian taxingauthorities confirming theamount due of $
2.6
which approximately $0.2 million
having granted the Company’s requestto utilize its remaining net operating losses to partially offsetthe liability.As a result of the settlement the Company recognized tax expense of $0.8
million for the quarter ended March 31, 2022.was refunded.Houghton Italia, S.r.l
iswas 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 taxaudit with the Italian tax authorities for the tax years
2014
2015
.During the three months ended March 31, 2022 the Companysettled tax years 2016 through 2018 for a total of $
2.1
million.In total, the2018. The Company
has now settled all years 2014 through 2018 for
$
3.7
million.Accordingly, the Company has $3.7 million and, accordingly, released all reserves relating to this audit for the settled tax
years.As a result of thesettlement and reserve release the Company recognized a net benefitto the tax provision of $2.1
millionyears during the first quarter of
2022.
The settlement is to be paid via installments through 2026 and, through March 31, 2023, the Company paid $1.1 million of such installments. The Company has
established an indemnification receivable of
$3.8
$3.9 million in connection with its claim against the former
owners of Houghton for any pre-Combination tax liabilities arising from
this
matter.matter, as well as other audit settlements and tax matters.In the first quarter of 2023, the Company was notified by the Spanish tax authorities of audits to commence for several of its legal entities operating in Spain and spanning tax years 2018 through 2021. The Company arranged introductory meetings with the taxing authorities and has begun to provide documentation in response to their inquiries. The Company has not established any reserves for this matter at this time.
14
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
16
Houghton Deutschland GmbH is also under audit by the German tax authorities forthe tax years2015
2017
preliminary audit findings, primarily related to transfer pricing,the Company has recorded reserves for $0.3
0.3
million relates to tax periods prior to the Combination and therefore the Companyhas submitted anindemnification claim with Houghton’sformer owners for any tax liabilities arising pre-Combination.As a result, a correspondingindemnification receivable has also been established.
Note 12 – Earnings Per Share
The following table summarizes earnings per share
calculations forthe three months ended March 31, 2022 and 2021: calculations:Three Months Ended | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Basic earnings per common share | | | | | | | |
Net income attributable to Quaker Chemical Corporation | $ | 29,534 | | | $ | 19,816 | | | | | |
Less: income allocated to participating securities | (145) | | | (78) | | | | | |
Net income available to common shareholders | $ | 29,389 | | | $ | 19,738 | | | | | |
Basic weighted average common shares outstanding | 17,866,670 | | 17,826,061 | | | | |
Basic earnings per common share | $ | 1.64 | | | $ | 1.11 | | | | | |
| | | | | | | |
Diluted earnings per common share | | | | | | | |
Net income attributable to Quaker Chemical Corporation | $ | 29,534 | | | $ | 19,816 | | | | | |
Less: income allocated to participating securities | (145) | | | (78) | | | | | |
Net income available to common shareholders | $ | 29,389 | | | $ | 19,738 | | | | | |
Basic weighted average common shares outstanding | 17,866,670 | | 17,826,061 | | | | |
Effect of dilutive securities | 32,076 | | 25,798 | | | | |
Diluted weighted average common shares outstanding | 17,898,746 | | 17,851,859 | | | | |
Diluted earnings per common share | $ | 1.64 | | | $ | 1.11 | | | | | |
2022
2021
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
19,816
$
38,615
Less: income allocated to participating securities
(78)
(154)
Net income available to common shareholders
$
19,738
$
38,461
Basic weighted average common shares outstanding
17,826,061
17,785,370
Basic earnings per common share
$
1.11
$
2.16
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
19,816
$
38,615
Less: income allocated to participating securities
(78)
(154)
Net income available to common shareholders
$
19,738
$
38,461
Basic weighted average common shares outstanding
17,826,061
17,785,370
Effect of dilutive securities
25,798
70,607
Diluted weighted average common shares outstanding
17,851,859
17,855,977
Diluted earnings per commonshare$
1.11
$
2.15
Certain stock options,
restricted stock units, and PSUs are not included in the diluted earnings per share calculation
when the
effect would have been anti-dilutive.
The calculated amount of anti-diluted shares not included were
15,327 and 12,260
2,083
months ended March 31, 2023 and 2022, and 2021, respectively.
Note 13 – Goodwill and Other Intangible Assets
The Company completes its annual goodwill and indefinite-lived intangible 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 other recent developments, including rising interest rates and the cost of capital among other factors, in assessing if a triggering event indicates that the carrying values of goodwill, indefinite-lived, or long-lived assets are impaired. The Company concluded that during the first quarter the ongoing financial, economic or geopolitical conditions did not represent a triggering event.
In connection with the Company’s reorganization and the associated change in reportable segments and reporting units during the first quarter of 2023, the Company performed the required impairment assessments directly before and immediately after the change in reporting units and concluded that it was not more likely than not that the fair values of any of the Company’s previous or new reporting units were less than its carrying amount.
Changes in the carrying amount of goodwill
for the three months endedMarch 31, 2022 were as
follows:follows. Prior period information has been recast to reflect the Company’s current period reportable segments. See Note 1 of Notes to Condensed Consolidated Financial Statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Americas | | EMEA | | Asia/Pacific | | Global Specialty Businesses | | Total |
Balance as of December 31, 2022 | $ | 215,899 | | $ | 34,567 | | $ | 150,375 | | $ | 114,167 | | $ | 515,008 |
Reallocation of reporting units | 63,697 | | | 31,711 | | | 18,759 | | | (114,167) | | | — |
Balance as of January 1, 2023 | 279,596 | | | 66,278 | | | 169,134 | | | — | | | 515,008 | |
Goodwill additions (reductions) | — | | | — | | | — | | | — | | | — |
Currency translation adjustments | 1,773 | | | (116) | | | 541 | | | — | | | 2,198 |
Balance as of March 31, 2023 | $ | 281,369 | | $ | 66,162 | | $ | 169,675 | | $ | — | | $ | 517,206 |
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2021
$
214,023
$
135,520
$
162,458
$
119,193
$
631,194
Goodwill additions
1,752
0
0
32
1,784
Currency translation adjustments
1,376
(2,569)
(328)
(519)
(2,040)
Balance as of March 31, 2022
$
217,151
$
132,951
$
162,130
$
118,706
$
630,93815
Gross Carrying
Accumulated
Amount
Amortization
2022
2021
2022
2021
Customer lists and rights to sell
$
855,309
$
853,122
$
159,576
$
147,858
Trademarks, formulations and producttechnology162,408
163,974
40,565
38,747
Other
6,361
6,309
5,989
5,900
Total definite-livedintangible assets$
1,024,078
$
1,023,405
$
206,130
$
192,505
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17Gross carrying amounts and accumulated amortization for definite-lived intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Customer lists and rights to sell | $ | 839,280 | | $ | 831,600 | | $ | 205,800 | | $ | 191,286 | | $ | 633,480 | | $ | 640,314 |
Trademarks, formulations and product technology | 160,149 | | 158,564 | | 48,856 | | 46,281 | | 111,293 | | 112,283 |
Other | 6,168 | | 7,576 | | 5,848 | | 6,390 | | 320 | | 1,186 |
Total definite-lived intangible assets | $ | 1,005,597 | | $ | 997,740 | | $ | 260,504 | | $ | 243,957 | | $ | 745,093 | | $ | 753,783 |
The Company amortizes definite-lived intangible assets on a straight-line basis over
their useful lives.
The Company recorded
$
14.6
14.8
million of amortization expense
for the three months ended Marchas follows:31, 2022 and 2021, respectively. | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Amortization expense | $ | 14,513 | | | $ | 14,553 | | | | | |
Estimated annual aggregate amortization expense for the current year
and subsequent five years
and beyond is as follows:
| | | | | |
For the remainder of 2023 | $ | 43,829 |
For the year ended December 31, 2024 | 57,734 |
For the year ended December 31, 2025 | 56,953 |
For the year ended December 31, 2026 | 56,708 |
For the year ended December 31, 2027 | 56,410 |
| |
For the year endedAs of March 31, 2023 and December 31, 2022,
$
59,465
For the year ended December 31, 2023
59,293
For the year ended December 31, 2024
58,701
For the year ended December 31, 2025
57,924
For the year ended December 31, 2026
57,678
For the year ended December 31, 2027 and beyond
532,124
The Company has four indefinite-lived intangible assets totaling $
194.1
million as of March 31, 2022, including $193.0
had indefinite-lived intangible assets for trademarks and
tradename associatedwith the Combination.Comparatively, the Company hadtradenames totaling $191.3 million and $189.1 million, respectively. four indefinitely-lived intangible assets for trademarks and tradenametotaling $196.9
million as of December 31, 2021.Note 14 – Debt
Debt as
The following table sets forth the components of March 31, 2022 and December 31, 2021 includes the following:Company’s debt:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Interest Rate | | Outstanding Balance | | Interest Rate | | Outstanding Balance |
Credit Facilities: | | | | | | | |
Revolver | 6.0% | | $ | 185,897 | | | 5.2% | | $ | 195,673 | |
U.S. Term Loan | 6.3% | | 592,500 | | | 5.7% | | 596,250 | |
Euro Term Loan | 4.1% | | 153,072 | | | 3.1% | | 151,572 | |
Industrial development bonds | 5.3% | | 10,000 | | | 5.3% | | 10,000 | |
Bank lines of credit and other debt obligations | Various | | 1,317 | | | Various | | 1,303 | |
Total debt | | | $ | 942,786 | | | | | $ | 954,798 | |
Less: debt issuance costs | | | (1,881) | | | | | (1,992) | |
Less: short-term and current portion of long-term debts | | | (19,350) | | | | | (19,245) | |
Total long-term debt | | | $ | 921,555 | | | | | $ | 933,561 | |
As of December 31, 2021
Interest
Interest
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.68%
$
254,453
1.62%
$
211,955
U.S. Term Loan
1.71%
528,750
1.65%
540,000
EURO Term Loan
1.50%
132,037
1.50%
137,616
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
1,659
Various
1,777
Total debt
$
926,899
$
901,348
Less: debt issuance costs
(7,227)
(8,001)
Less: short-term and current portion of long-term debts
(61,385)
(56,935)
Total long-term debt
$
858,287
$
836,412
Credit facilities
The Company’s primary credit facility(as amended, the “Credit Facility”) is comprised of a $400.0
revolver (the “Revolver”), a $
600.0
million term loan (the “U.S. TermLoan”), each with the Company as borrower,and a $150.0
million (as of August 1, 2019) Euro equivalent term loan (the “EURO TermLoan” and together with the “U.S. TermLoan”, the“Term Loans”)with Quaker Chemical B.V.,a Dutch subsidiary of the Company as borrower, eachwith a five year term maturing inAugust 2024
.Subject to the consent of the administrative agent and certain other conditions, the Companymay designate additionalborrowers.The maximum amount available under the Credit Facility can be increased by upto $300.0
request if there are lenders who agree to accept additional commitments andthe Company has satisfied certain other conditions.Borrowings under the Credit Facility bear interest at a base rate or LIBOR plus anapplicable margin based upon the Company’sconsolidated net leverage ratio.On December 10, 2021, the Company entered into the Second Amendment with Bank of AmericaN.A., to include among other things, an update to provide for use of a non-USDcurrency LIBOR successor rate.The variable interestrate incurred on the outstanding borrowings under the Credit Facility duringthe three months ended March 31, 2022 wasapproximately
1.6
%.As of March 31, 2022, the interest rate of the outstanding borrowings under the CreditFacility wasapproximately
1.7
%.In addition to paying interest on outstanding principal under the Credit Facility,the Company is required to paya commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s consolidatednet leverage ratio to the lenders under theRevolver in respect of the unutilized commitments thereunder.The Company has unused capacity under the Revolver ofapproximately $
142
million, net of bank letters of credit of approximately $4
million, as of March 31, 2022.Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18Credit facilities
The Credit Facility is subject toDuring 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
financialguarantors and other
covenants.lenders entered into an amendment to its primary credit facility. The Company’s initial consolidated net debtamended credit facility (the “Credit Facility”) established (A) a $150.0 million Euro equivalent senior secured term loan (the “Euro Term Loan”), (B) a $600.0 million senior secured term loan (the “U.S. Term Loan”), and (C) a $500.0 million senior secured revolving credit facility (the “Revolver”), each maturing in June 2027. The Company has the right 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 March 31, 2021, the consolidated net debt to adjusted EBITDA may not exceed 3.75 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 increase the amount of the dividend paid annually
exceedsCredit Facility by an aggregate amount not to exceed the greater of $50.0$300.0 million and 20%or 100% of consolidated adjustedConsolidated EBITDA, unlesssubject to certain conditions including the ratio of consolidated net debtagreement to provide financing by any lender providing such increase.
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount.
As of March 31, 2022 and
December 31, 2021,2023, the Company was in compliance with all of the Credit Facility covenantscovenants. See Note 20 of Notes to Consolidated Financial Statements in the Company’s 2022 Form 10-K.
.The Term Loanshave quarterlyprincipal amortizationweighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during their
five year
5.0
% amortization of the principal balance due in years 1 and 2,
7.5
% in year
3, and
10.0
% in years 4 and 5, with the remaining principal amount due at maturity.During the three months ended March 31, 2022,2023 was approximately 5.8%. As of March 31, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 5.9%. As part of the Credit Facility, in addition to paying interest on outstanding principal, the Company
made quarterly amortization paymentsis also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to
unutilized commitments under the
Term Loans totaling$ 14.1
million.The Credit Facility isguaranteed by certain ofRevolver, depending on the Company’s
domestic subsidiaries and consolidated net leverage ratio. The Company had unused capacity under the Revolver of approximately $311 million, which is
secured by first priority liens on substantially allnet of
the assetsbank letters of
credit of approximately $3 million, as of March 31, 2023.the Company and the domestic subsidiary guarantors, subject to certaincustomary exclusions.The obligations of the Dutch borrowerare guaranteed only by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable interest rates on at least
20
% of its total Term Loans.In order tosatisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Credit Facility,
in November 2019,the first quarter of 2023, the Company entered into $
170.0
$300.0 million notional amounts of
three year interest rate swaps
atto convert a
baseportion of the Company’s variable rate
borrowings to an average fixed rate of
1.64
%
3.64% plus an applicable margin as provided in the Credit Facility
based on the Company’s consolidated
net leverage ratio.
At the time the Company entered into the swaps, and as As of March 31,
2022,2023, the aggregate
interest rate on the swaps, including the fixed base rate plus
an the applicable margin, was
3.1
% 5.2%.
See Note 17 of Notes to Condensed Consolidated Financial Statements.
TheIn connection with executing the original credit facility in 2019 and the amended Credit Facility during the second quarter of 2022, the Company capitalized $
23.7
an aggregate of $2.2 million of certain third-party
and creditor debt issuance
costs in connection with executingthe Credit Facility. costs. Approximately $
15.5
$0.7 million of the capitalized costs were attributed to the
Euro Term
Loans Loan and
U.S. Term Loan. These costs were recorded as a direct reduction of
long- termLong-term debt on the
Company’sCondensed Consolidated
Balance Sheet.
Approximately
$8.3
$1.5 million of the capitalized costs were attributed to the
Revolver and recorded within
otherOther assets on the
Company’sCondensed Consolidated Balance Sheet.
These capitalized costs
are beingwill collectively be amortized into interestInterest expense over the
five year
term of the Credit Facility.
As of March 31,
2022 and December 31, 2021,2023, the
Company had $
7.2
8.0
million, respectively,of debt issuance costs recorded as a reduction of
long-term debt.As ofMarch 31, 2022Long-term debt on the Condensed Consolidated Balance Sheet and December 31, 2021, the Company had $
3.9
4.3
million, respectively,of debt issuance costs recorded
within Other assets on the Condensed Consolidated Balance Sheet. Comparatively, as of December 31, 2022, the Company had $2.0 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.within other assets.
Industrial development bonds
As of March 31,
20222023 and December 31,
2021,2022, the Company had fixed rate,
industrial development authority bonds totaling
$
10.0
$10.0 million in principal amount due in
2028
. 2028. These bonds have similar covenants to the Credit Facility noted above.
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discounting
facilities in certain foreign subsidiaries, which are not
collateralized.
The Company’s other debt obligations
primarily consist of certain domestic and foreign low interest rate or
interest-freeinterest-free municipality-related loans, local credit facilities of certain foreign subsidiaries,
and capital lease obligations.
Total unused
capacity under these arrangements as of March 31,
20222023 was approximately
$30
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 March 31, 20222023 were approximately $
6$5 million.
The Company incurred the following debt related expenses includedwithin Interest expense, net, in the Condensed ConsolidatedStatements of Income:17
Three Months Ended
2022
2021
Interest expense
$
4,746
$
4,650
1,187
1,187
Total
$
5,933
$
5,837
Based on the variable interest rates associated with the Credit Facility,as of March 31, 2022 and December 31, 2021, the amountsat which the Company’s total debtwere recorded are not materially different from their fair market value.Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19Interest expense, net
The Company incurred the following debt related expenses included within Interest expense, net, in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Interest expense | $ | 13,876 | | | $ | 4,746 | | | | | |
Amortization of debt issuance costs | 353 | | | 1,187 | | | | | |
Total | $ | 14,229 | | | $ | 5,933 | | | | | |
Based on the variable interest rates associated with the Credit Facility, as of March 31, 2023 and as of December 31, 2022, the amounts at which the Company’s total debt were recorded are not materially different from their fair market value.
Note 15 – Accumulated Other Comprehensive Income
The following tables show the reclassifications from and resulting balances
of accumulated other comprehensive income
(“AOCI”) for the three months ended March 31, 2022 and 2021:
:Defined | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency Translation Adjustments | | Defined Benefit Pension Plans | | Unrealized (Loss) Gain in Available-for- Sale Securities | | Derivative Instruments | | Total |
Balance as of December 31, 2022 | $ | (132,161) | | | $ | (4,595) | | | $ | (1,484) | | | $ | — | | | $ | (138,240) | |
Other comprehensive income (loss) before reclassifications | 14,465 | | | (243) | | | 462 | | | 506 | | | 15,190 | |
Amounts reclassified from AOCI | — | | | 76 | | | (40) | | | — | | | 36 | |
Related tax amounts | — | | | 41 | | | (88) | | | (116) | | | (163) | |
Balance as of March 31, 2023 | $ | (117,696) | | | $ | (4,721) | | | $ | (1,150) | | | $ | 390 | | | $ | (123,177) | |
| | | | | | | | | |
Balance as of December 31, 2021 | $ | (49,843) | | | $ | (13,172) | | | $ | 397 | | | $ | (1,372) | | | $ | (63,990) | |
Other comprehensive (loss) income before reclassifications | (6,867) | | | 432 | | | (1,277) | | | 1,429 | | | (6,283) | |
Amounts reclassified from AOCI | — | | | 229 | | | 11 | | | — | | | 240 | |
Related tax amounts | — | | | (165) | | | 266 | | | (329) | | | (228) | |
Balance as of March 31, 2022 | $ | (56,710) | | | $ | (12,676) | | | $ | (603) | | | $ | (272) | | | $ | (70,261) | |
Unrealized
Currency
Benefit
Translation
Retirement
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2021
$
(49,843)
$
(13,172)
$
397
$
(1,372)
$
(63,990)
Other comprehensive (loss) income before
reclassifications
(6,867)
432
(1,277)
1,429
(6,283)
Amounts reclassified from AOCI
0
229
11
0
240
Related tax amounts
0
(165)
266
(329)
(228)
Balance at March 31, 2022
$
(56,710)
$
(12,676)
$
(603)
$
(272)
$
(70,261)
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income beforereclassifications
(25,459)
781
(745)
730
(24,693)
Amounts reclassified from AOCI
0
862
(3,085)
0
(2,223)
Related tax amounts
0
(351)
805
(168)
286
Balance at March 31, 2021
$
(28,334)
$
(22,175)
$
317
$
(3,036)
$
(53,228)
All reclassifications related to unrealized
(loss) gain
(loss) in available-for-sale securities
relate to the Company’s 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
non-controllingnoncontrolling interest are related to
currency translation adjustments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
Note 16 – Fair Value
Measurements
The Company has valued its company-owned life insurance policies at fair value.
These assets are subject to fair valuemeasurement as follows:
Fair ValueMeasurements at March 31, 2022Total
Using Fair ValueHierarchyAssets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,395
$
0
$
2,395
$
0
Total
$
2,395
$
0
$
2,395
$
0
Fair ValueMeasurements at December 31, 2021Total
Using Fair ValueHierarchyAssets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance$
2,533
$
0
$
2,533
$
0
Total
$
2,533
$
0
$
2,533
$
0
The fair values of Company-owned life insurance assets are based on quotes
for like instruments with similar credit ratings and
terms. These assets are subject to fair value measurement as follows:terms.The Company did not hold any Level 3 investments as of March 31,2022 or December 31, 2021, respectively,so related | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Fair Value | | Fair Value Measurements as of March 31, 2023 Using Fair Value Hierarchy |
Assets | | | Level 1 | | Level 2 | | Level 3 |
Company-owned life insurance | | $ | 2,204 | | | $ | — | | | $ | 2,204 | | | $ | — | |
Total | | $ | 2,204 | | | $ | — | | | $ | 2,204 | | | $ | — | |
disclosures have not been included.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Fair Value | | Fair Value Measurements as of December 31, 2022 Using Fair Value Hierarchy |
Assets | | | Level 1 | | Level 2 | | Level 3 |
Company-owned life insurance | | $ | 2,114 | | | $ | — | | | $ | 2,114 | | | $ | — | |
Total | | $ | 2,114 | | | $ | — | | | $ | 2,114 | | | $ | — | |
Note 17 – Hedging Activities
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes.
Foreign Exchange Forward Contracts
A significant portion of the Company’s revenues and earnings are generated by its foreign operations. These foreign operations also represent a significant portion of the Company’s assets and liabilities. Generally, all of these foreign operations use the local currency as their functional currency and many have some operations in currencies other than their functional currency, which creates foreign exchange risk. The Company uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on certain assets and/or liabilities denominated in certain foreign currencies. These forward contracts are marked-to-market at each reporting date. Changes in the fair value of the underlying instrument and settlements are recognized in earnings. The fair value of the forward contract is determined from sources independent of the Company, including the financial institutions which are party to the derivative instruments.
During the three months ended March 31, 2023, the Company entered into and settled forward contracts with an aggregate notional amount totaling $16.0 million, resulting in cash proceeds of $0.3 million. The following table displays the notional amounts of the net foreign exchange hedge positions outstanding:
| | | | | | | | |
Currency | | March 31, 2023 |
Mexican Peso | | $ | 18,000 | |
| | |
| | |
Interest Rate Swaps
In order to satisfy certain requirements of the Credit Facility as well as to managethe Company’s exposure to variableinterest rate risk associated with the Credit Facility,
in
November 2019,the first quarter of 2023, the Company entered into
$170.0
$300.0 million notional amounts of
three year interest rate
swaps.swaps to convert a portion of the Company’s variable rate borrowings into a fixed rate obligation. See Note 14 of Notes to Condensed Consolidated Financial Statements.
These interest rate swaps aredesignated as cash flow hedges and, as such, the contracts are marked-to-marketat each reporting date and any unrealized gains orlosses are included in AOCI to the extent effective and reclassified to interestexpense in the period during which the transactioneffects earnings or it becomes probable that the forecastedtransaction will not occur.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(
Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
20
The balance sheet classification and fair values of the Company’sderivative instruments, whichThese interest rate swaps are
Level 2 measurements, are asfollows:
Fair Value
Consolidated
December 31,
Balance Sheet Location
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
Other accrued liabilities
$
353
$
1,782
$
353
$
1,782
The following table presentshedges and, as such, the netcontracts are marked-to-market at each reporting date and any unrealized loss deferred to AOCI:
December 31,
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
272
$
1,372
$
272
$
1,372
The following table presents the net gain reclassified fromgains or losses are included in AOCI to earnings:
Three Months Ended
2022
2021
Amountthe extent effective and
location ofreclassified to interest expense
reclassifiedfrom AOCI into expense (Effective Portion)Interest expense, net
$
(637)
$
(643)
in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur. Interest rate swaps are entered into with a limited number 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
policy, these derivative instruments
are recorded on a net basis within the Condensed
Consolidated Balance Sheets.
The balance sheet classification and fair values of the Company’s derivative instruments, which are Level 2 measurements, are as follows:
| | | | | | | | | | | | | | | | | |
| | | Fair Value |
| Condensed Consolidated Balance Sheet Location | | March 31, 2023 | | December 31, 2022 |
Derivatives designated as cash flow hedges: | | | | | |
Interest rate swaps | Other non-current Assets | | $ | 506 | | | $ | — | |
| | | | | |
The following table presents the net unrealized (gain) loss deferred to AOCI:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Derivatives designated as cash flow hedges: | | | | |
Interest rate swaps | AOCI | $ | 390 | | | $ | — | |
| | | | |
The following table presents the net gain (loss) reclassified from AOCI to earnings:
| | | | | | | | | | | | | | | | | | |
| Location and Amount of Gain (Loss) Recognized in Statements of Operations |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Interest rate swaps | Interest expense, net | $ | — | | | $ | (637) | | | | | |
Foreign exchange forward contracts | Other expense, net | 293 | | | — | | | | | |
| | $ | 293 | | | $ | (637) | | | | | |
Note 18 – Commitments and Contingencies
The Company previously disclosed in its 2021 Form 10-K that AC Products, Inc.(“ACP”), a wholly owned subsidiary,has beenoperating a groundwater treatment system to hydraulically contain groundwatercontamination emanating from ACP’s site,theprincipal contaminant of which is perchloroethylene.As of March 31, 2022, ACP believes it is close to meeting the conditions forclosure of the groundwater treatment system, but continues to operatethis system while in discussions with the relevant authorities.As of March 31, 2022, the Company believes that the range of potential-knownliabilities associated with the balance of the ACPwater remediation program is approximately $
0.1
1.0
million.The low and high ends of the range are based on the lengthof operation of the treatment system as determined by groundwater modeling.Costs of operation include the operation andmaintenance of the extraction well, groundwater monitoring andprogram management.The Company previously disclosed in its
20212022 Form 10-K that
an inactivesubsidiarytwo of the
Company’s locations suffered property damages as a result of flooding and electrical fire, respectively. The Company
that was acquired in 1978sold certain products containing asbestos, primarily on an installed basis,maintains property and
is among the defendants in numerous lawsuits alleginginjury due to exposure to asbestos. flood insurance for all of its locations globally. During the three months ended March 31,
2022,2023, there have been no
significantchanges to the factsor 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 againstthis subsidiary, it is currentlyprojected that thesubsidiary’s total liability overthe next50 years
for these claims is approximately $0.3
million (excluding costs of defense).The Company previously disclosed in its 2021 Form 10-K that it is party to certain environmentalmatters related to certaindomestic and foreign properties.These environmental matters primarily require the Companyto perform long-term monitoring aswell as operating and maintenance at each of the applicable sites.During the three months ended March 31, 2022, there have beennosignificant changes to the facts or circumstances of
thesethis previously disclosed
matters, aside matter, other than the ongoing work with the Company’s insurance adjuster and insurance carrier regarding the insurance claims submitted. Through March 31, 2023, the Company has received cumulative payments from
on-going monitoring andmaintenance activities and routine paymentsits insurers of $5.7 million associated with
each ofthese events. During the
sites.The Company continually evaluates its obligationsrelated to such matters, and based on historical costs incurred andprojected costs to be incurred over the next27 years
, has estimated
the range of costs for all of these environmental matters, on a discountedbasis, to be between approximately $5
6
as ofthree months ended March 31, 2022, for which $
5.9
million was accrued within other accrued liabilities and other non-currentliabilities2023, the Company recognized a gain on
theCompany’sCondensed Consolidated Balance Sheet asinsurance recoveries of
March 31, 2022.Comparatively, as$0.8 million. See Note 10 of
December31, 2021, the Companyhad $
5.6
million accrued for with respect to these matters.Quaker Chemical Corporation
Notes to the Condensed Consolidated Financial Statements.
As previously disclosed in its 2022 Form 10-K, the Company is party to certain environmental matters and other litigation. See Note 26 of Notes to Consolidated Financial Statements - Continued
(Dollars in
thousands, except per share amounts,unless otherwise stated)(Unaudited)
21
Thethe Company’s 2022 Form 10-K. During the three months ended March 31, 2023, there have been no significant changes to the facts or circumstances of any of the previously disclosed matters. In addition, during the three months ended March 31, 2023, there are no new environmental matters or litigation that the Company believes
althoughwill have a material adverse effect on the Company’s results of operations, cash flows or financial condition. Although there can be no assurance regarding the
outcome of
other unrelatedany of the ongoing environmental matters
or litigation the Company is party to, the Company believes that
it has made adequate accruals for costs
and liabilities associated with
other environmental
problems of matters or provisions for ongoing litigation for which it is aware.
Approximately $0.4
The Company has accrued approximately $6 million
were accrued as of both March 31,
20222023 and December 31,
2021,2022, respectively,
to providefor
such anticipated future environmental assessments and remediation costs.In connection with obtaining regulatory approvals for the Combination,certain steel and aluminum related product lines ofHoughton were divested in August 2019.The Company previously disclosed in its 2021 Form 10-K that in July 2021, the entitythatacquired these
divested product lines submitted an indemnification claimfor certain alleged breaches of representation made byHoughton in the agreement pursuant to which such assets had been divested.The Company responded to the subject matters of theindemnification claim and during the first quarter of 2022 the matter was resolvedconsistent with the Company’s expectationsandposition that there were no amounts owed by the Company.
The Company previously disclosed in its 2021 Form 10-K that two of the Company’slocations suffered property damages as aresult of flooding and fire, respectively.The Company maintains property insurance for all of its facilities globally.During the threemonths ended March 31, 2022, there have been no significant changes tothe facts or circumstances of these previously disclosedmatters, aside from the on-going restoration of both sites.The Company, its insuranceadjuster and insurance carrier are activelymanaging the remediation and restoration activities associated with theseevents and at this time the Company has concluded, based onall available information and discussions with its insurance adjusterand insurance carrier, that the losses were coveredunder theCompany’s property insurancecoverage, net of an aggregate deductible of $2.0ongoing matters.
million.The Company has received payments fromits insurers of $
2.1
million and has recorded an insurance receivable associated with these events (anda gain on insurance recoveriesfor losses incurred) of $
0.5
million as of March 31, 2022.The Company is party to other litigation which management currentlybelieves will not have a material adverse effect on theCompany’s results of operations,cash flows or financial condition.In addition, the Company has an immaterial amount of contractualpurchase obligations.
20
Quaker Chemical Corporation
Management’s Discussion and Analysis
22
Management’s Discussion andAnalysis of Financial Condition and Results of Operations .
As used in this Report, the terms “Quaker Houghton,” the “Company,
,”
“we,”“we” and “our” refer to Quaker Chemical Corporation
(doing (doing business as Quaker Houghton), its subsidiaries, and associated companies,
unless the context otherwise requires.
The term
Legacy Quaker the “Combination” refers to the
Company prior to the closing of itslegacy Quaker combination
with Houghton International, Inc.
in 2019 (“Houghton”)
on August 1, 2019.(herein referred to as the “Combination”).
Executive Summary
Quaker Houghton is the global leader in industrial process fluids.
With a presence around the world, 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 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 U.S.
Overall, the Company’s first quarterof 2022 performance reflectedDespite continued progress navigating througha very challengingeconomic
environment, including significant raw material cost escalation, supplychain and
logistics disruptions and the direct,indirect and global impacts of the war in Ukraine and other global eventsthat presentedgeopolitical headwinds,
to the Company
in thedelivered a strong first quarter
of
2022.2023 performance. Net sales in the first quarter of
20222023 were
$474.2a record $500.1 million, an increase of
10%5% compared
to
$429.8$474.2 million in the first quarter
of
2021,2022. This was primarily driven by an increase in selling price and product mix
of approximately
17% and additional net sales fromacquisitions of 2%19%, partially offset by a decline in organic
sales
volumevolumes of
6%11% and
thean unfavorable impact from foreign currency
translation of 3%.
The increase in selling price and product mix iswas primarily the result ofcontinued and strategic price increases value-based pricing initiatives implemented
throughout 2022 to
help offset
the unprecedented increase inraw material costs as well as global supply chain and logistics and labor cost pressures that began during 2021 and continued through the first quarterof 2022.ongoing inflationary pressures. The decline in organic sales volumes was primarilyattributable to
the comparison to a very strong first quarter of 2021, wherecustomers replenished their supply chains due to thecontinued economic recovery from COVID-19,softer end market conditions, notably in EMEA and Asia/Pacific, the impact of
lowervolumes related tothe ongoing war in Ukraine, the wind-down of the tolling agreement for
products previously divested
products associated with related to the Combination and
lower sales volumes attributableto the
war in Ukraine.The Company’s
organicsalesvolumes increased approximately 3% sequentially compared to thefourth quarter of 2021, as continuedongoing value-based pricing initiatives, partially offset by new business wins
werepartially offset by the Company’sactions to strategically reduce volumes in accordance with its ongoing value-based pricinginitiatives..
The Company generated net income in the first quarter of
20222023 of $29.5 million, or $1.64 per diluted share, compared to net income of $19.8 million,
or $1.11 per diluted share
compared to ain the first
quarter of
2021 net income of $38.6 million, or $2.15 per dilutedshare.2022. Excluding non-recurring and non-core items in each period,
the Company’s first quarter of
20222023 non-GAAP earnings per diluted share were
$1.42$1.89 compared to
$2.11$1.42 in the prior year
first quarter
and the Company’s current quarter
adjusted EBITDA
of $60.4was $78.8 million
decreased 22% compared to
$77.1$60.4 million in the first quarter of
2021. 2022. These results were primarily driven by
lower gross marginsthe higher net sales in
the current quarter,
dueas described above, coupled with a recovery in gross margins compared to
significantly higher raw material andother input costs as well as the
direct and indirect impacts of global supply chain disruptions,and to a lesser extent,prior year quarter, partially offset by higher selling,
general and administrative expenses (“SG&A”)
.Sequentially, the Company’sadjusted EBITDA was relatively flat compared to thefourth quarter as a result of
2021.significant year-over-year inflationary pressures and higher labor-related costs. 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’sDuring the first quarter of
2022operating performance in each of2023, the Company reorganized its
fourexecutive management team to align with its new business structure. The Company’s new structure includes three reportable segments: (i)
Americas; (ii) Europe,
Middle East and Africa (“EMEA”);
and (iii) Asia/
Pacific; and (iv) Global SpecialtyBusinesses,Pacific. The Company’s first quarter of 2023 operating performance in each of its three reportable segments reflect similar drivers to that of its
consolidated
performance as each of the Company’sreportable segments net sales benefitted from double-digit increases in sellingprice and product mix and additional net sales from acquisitions, while mostsegments were partially offset by lower sales volumesand the unfavorable impact of foreign currency translation.performance. Operating earnings
from the Global Specialty Businessesfor all segments increased
compared to the prior year quarter,
whereas operating earnings fromdriven by higher net sales in the Americas
Asia/Pacific, and EMEA
segments declined.Thiswas a result of lower segment grossand an improvement in margins
whichwere unfavorably impacted by the lag in
price capture compared to the continuedcost pressures on our raw materials, global supply chain and logistics networks,and manufacturing, labor and other costs.all three segments. Additional
details of each segment’s
operating performance are further discussed in the Company’s
Reportable Segments Review,
in the
Operations section of this Item, below.
The Company had aNet cash flows provided by operating activities were $37.8 million in the first three months of 2023 compared to net cash flows used in operating cash outflowactivities of $6.3 million in the first quarterthree months of 2022 as compared to a net operating cashoutflow of $12.6 million in the first quarter of 2021.Despite the2022. The net operating cash outflowinflow year-over-year reflects higher operating performance in both periods, the increase in netoperating cash flow quarter-over-quarterwas primarily driven by a modest improvement in2023 compared to 2022 as well as lower working capital
compared to the prioryearfirst quarter, notably by a lower outflowrelated to accounts receivable partially offset by an increase in inventorydue to higher rawmaterial costs and a build in certain inventory in response to global supplychain and logistics challenges.investments year-over-year. The key drivers of the
Company’s operating
cash flow and working capital are further discussed in the Company’s
Liquidity and Capital Resources section
of this Item, below.
Overall, the Company delivered a strong quarter including a record level of net sales, driven by strong price realization and a recovery in gross margin in the current period. These factors contributed to the Company’s current quarter earnings growth despite ongoing inflationary pressures, macroeconomic and geopolitical challenges and other disruptions that impacted the Company’s customers and end markets. Looking at the remainder of 2023, the Company remains focused on executing on items within its control as it manages through a continued uneven and uncertain macroeconomic and end market environment. The Company is encouraged by its continued execution and the positive momentum of the first quarter of 2023 and continues to expect to deliver higher earnings in 2023 as compared to 2022.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in “Management’s Discussion and Analysis” and “Note 1 – Significant Accounting Policies” to the Consolidated Financial Statements in our 2022 Form 10-K. There have been no material changes to the critical accounting policies and estimates previously disclosed in its 2022 Form 10-K remain materially consistent.
Quaker Chemical Corporation
Management’s Discussion and Analysis
23
Overall, resultsRecently Issued Accounting Standards
See Note 3 of Notes to Condensed Consolidated Financial Statements, in
the first quarter of 2022 reflected the Company’sability to continue to navigate through persistent raw material cost pressures, supply chain challenges including those impactingon semiconductors for the automotive end markets and the impactsof certain global economic events including the Russia conflict with Ukraine.Increases in net sales in all segments were primarilydriven by an increase in selling price implemented to offset the ongoingand significant escalation of raw material costs and afavorable demand environment across most of the Company’smarkets.However, raw material cost increases continuedto outpacethe Company’s broad-basedpricing initiatives in the first quarter of 2022, and the Company’smargins and earnings reflect thesignificantly different cost environment in the firstquarter of 2022 compared to the first quarter of 2021.The Company continues toimplement further aggressive and strategic price increases and is activelymanaging its cost structure to mitigate the current andexpected inflationary pressures.While significant uncertainty exists, notably due to pandemic-relatedrestrictions in China and theongoing war in Ukraine, the Company remains committed to advancingits customer intimate strategy, recoveringits margins andinvesting in value enhancing initiatives to better position the Companyto continue to deliver on its growth potential.Ongoing impact of COVID-19
The global outbreak of COVID-19 has negatively impacted all locations wherethe Company does business.Although theCompany has now operated in this COVID-19 environment fortwo years, the full extent of the outbreak and related business impactscontinue to remain uncertain and volatile, and therefore the full extentto which COVID-19 may impact the Company’sfuture resultsof operations or financial condition is uncertain.This outbreak has significantly disrupted the operations of the Company and those ofits suppliers and customers and at times during the pandemic, the Companyhas experienced volume declines and lower net sales ascompared to pre-COVID-19 levels.Management continues to monitor the impact that the COVID-19 pandemicis having on theCompany, the overall specialtychemical industry and the economies and markets in which the Company operates.The prolongedpandemic and resurgences of the outbreak includingas new variants continue to emerge, and continued restrictions onday-to-day lifeand business operations as well as increased border controls or closures and transportationdisruptions may result in volume declinesand lower net sales in future periods.To the extent that the Company’scustomers and suppliers continue to be significantly andadversely impacted by COVID-19, this could reduce the availability,or result in delays, of materials or supplies to or from theCompany, which inturn could significantly interrupt the Company’sbusiness operations.Given this ongoing uncertainty,theCompany cautions that its future results of operations could be significantlyadversely impacted by COVID-19.While thecircumstances have presented and are expected to continue to present challenges,and have necessitated additional time and resourcesto be deployed to sufficiently address the challengesbrought on by the pandemic, at this time, management does not believe thatCOVID-19 has had a material impact on financial reporting processes, internalcontrols over financial reporting, or disclosure controlsThe Company’s top priority,especially during this pandemic, is to protect the health and safety of its employees andcustomers,while working to ensure business continuity to meet customers’ needs.The Company has taken steps to protect the health andwellbeing of its people in affected areas through various actions, includingenabling work at home where needed and practicable, andemploying social distancing standards, implementing travel restrictions whereapplicable, enhancing onsite hygiene practices, andinstituting visitation restrictions at the Company’sfacilities.The Company has not and does not expect that it will incur materialexpenses implementing these health and safety policies.With the exception of its Shanghai-based operations,which have been andcontinue to be significantly impacted since late March 2022 due to government restrictionscurrently in place in that province ofChina, all of the Company’s morethan 30 other production facilities worldwide are open and operatingand are deemed as essentialbusinesses in the jurisdictions where they are operating and the Company believesthat to date it has been able to meet the needs of allits customers across the globe despite the current challenges.The Company continues to expect that the impacts from COVID-19 willgradually decline subject to the effective containmentof the virus and its variants and successful distribution and acceptance of theavailable vaccines and treatments; however,the incidence of reported cases of COVID-19 or a variant in several geographies wherethe Company has significant operations remains high.Differing government responses to these reported cases continues toevolve andit therefore remains highly uncertain as to how long the global pandemicand related economic challenges will last in each of thejurisdictions where the Company does business and when our customers’businesses will recover to pre-COVID-19 levels.As a resultof the government-imposed quarantine and lockdown measures implementedat the end of March 2022, which are currently in effect,the Company’s Shanghai-based locations have been and continue to be significantly impacted as of the date ofthis Form 10-Q.Thenegative impact of these measures to operations and liquidity has and will beexperienced during the second quarter of 2022, and theultimate impact will depend on the duration of the quarantine and lockdownmeasures in effect.While the actions taken to date toprotect our workforce, to continue to serve our customers with excellenceand to conserve cash and reduce costs as applicable, havebeen effective thus far, further actionsto respond to the pandemic and its effects may be necessary as conditionscontinue to evolve.Impact of Political Conflicts
A significant portion of the Company’srevenues and earnings are generated by non-U.S. operations which subjectsthe Companyto political and economic risks that could adversely affect the Company’sbusiness, liquidity, financialposition and results ofoperations.The existence of military conflicts, for example the Russian invasion of Ukraine, bringinherent risks such as the potentialfor supply chain disruptions, decreased trade activity and other consequences relatedto economic or other sanctions.The U.S.Quaker Chemical Corporation
Management’s Discussion and Analysis
24
government and other nations have imposed significant restrictions onmost companies’ ability to do business in Russia as a result ofthe military conflict between Russia and Ukraine.It is not possible to predict the broader or longer-term consequencesPart I, Item 1, of this
conflict,Report for a discussion regarding recently issued accounting standards.which could include further sanctions, embargoes,regional instability, geopoliticalshifts and adverse effects on macroeconomicconditions, security conditions, currency exchange rates and financialmarkets.Such geo-political instability and uncertainty couldhave a negative impact on the Company’sability to sell to, ship products to, collect payments from, and support customers in certainregions based on trade restrictions, embargoes and exportcontrol law restrictions, and logistics restrictions including closures ofairspace, and could increase the costs, risks and adverse impacts from these newchallenges.The Company may also be the subject ofThe Company’s operations in theconflict areas including Russia, Ukraine and Belarus represent less than 2% ofthe Company’sconsolidated net sales and less than 1% of the Company’sconsolidated total assets.The Company’s primaryexposure in the conflictarea relates to outstanding customer accounts receivable.The Company is actively monitoring the outstanding receivables forcollections and has recorded incremental allowance for doubtful accountswhere warranted.The Company continues to review thefacts and circumstances of its customers and the impact of the ongoingsanctions as they relate to its continued business with impactedcustomers and the collectability of outstanding accounts receivable.The Company also has and continues to monitor the impact of thevolatility and uncertainty in the economic outlook as a result of the conflict with respectto the recoverability of its long-term andindefinite-lived assets, including assessing potential triggering events forimpairment considerations related to intangible assets andgoodwill.As of March 31, 2022, the Company concluded that the conflict and its current and projectedimpact to the Company didnot represent a triggering event and the Company continues to monitor and evaluatethe evolving situation.Liquidity and Capital Resources
AtAs of March 31,
2022, the Company2023, we had cash and cash equivalents of
$161.6 $189.9 million.
Total cash and cash equivalents
was
$165.2$181.0 million
atas of December 31,
2021.2022. The
$3.6$8.9 million
decreaseincrease in cash and cash equivalents was the net result
of
$18.2$37.8 million of cash
used in investingprovided by operating activities and
$6.3a positive impact due to the effect of foreign currency translation of $2.2 million partially offset by $24.9 million of cash used in
operatingfinancing activities
partiallyoffset by $20.6and $6.2 million of cash
provided byfinancing activities and a $0.3 million positive impact due to the effectof foreign currency translation.used in investing activities.Net cash flows
used inprovided by operating activities were
$6.3 million in the first three monthsof 2022 compared to net cash flows used inoperating activities of $12.6$37.8 million in the first three months of
2021.2023 compared to net cash flows used in operating activities of $6.3 million in the first three months of 2022. The increase in net operating cash
flowsflow year-over-year reflects higher year-over-year operating performance as well as lower levels of
$6.3 million wasprimarily driven by a lower working capital
outflow quarter-over-quarter,as the Company had a smaller increase in accountsreceivableinvestment in the
first quarter of 2022 duecurrent year, reflecting a more stable period as compared to
changes in current quarter netsales, which was partially offset by a higher outflow frominventory due to increases in raw material costs and continued buildof stock in response to global supply chain and logisticschallenges and other recent global economic events.Also, in the first quarter of 2022, the Company received a $2.8 million dividendfrom the Company’s Koreanjoint venture, with no similar dividend received in the prior year
period.and demonstrating the Company’s ongoing focus on cash conversion, including managing inventory levels.Net cash flows used in investing activities were
$18.2$6.2 million in the
first three months of
20222023 compared to
$15.8$18.2 million in the
first three months of
2021.This increase2022. The lower level of cash used in
cash outflows was ainvesting activities year-over-year is the result of
slightly lower
cash proceeds from the dispositionof assets whichincluded the sale of certain held-for-sale real property assets related to theCombination in the prior year period, and higher capital
expenditures in the current year
largely related to certaininfrastructure and
sustainability-related spending.These increases in cashused in investing activities were partially offset bylower cashthe absence of payments related to
acquisitions as a result of the level of acquisitionNet cash flows provided by financing activities were $20.6 million in the firstthree months of 2022 compared to $13.0 million inthe first three months of 2021.The increase in net cash flows was primarily related to an increase in borrowingsin the current yearunder the Company’s creditfacility as compared to the prior year.In addition, the Company paid $7.4 million of cash dividendsduring the first three months of 2022, a $0.4 million or 5% increase in cash dividendscompared to the prior year.acquisitions. See Note 2 of Notes
to Condensed Consolidated Financial Statements in Item 1 of this Report.
Net cash flows used in financing activities were $24.9 million in the first three months of 2023 compared to net cash flows provided by financing activities of $20.6 million in the first three months of 2022. The increase in net cash outflows was primarily related to net repayments of borrowings in the first three months of 2023, primarily under the Company’s Credit Facility, described further below, as compared to net borrowings in the first three months of 2022. In addition, the Company paid $7.8 million of cash dividends during the first three months of 2023, a $0.4 million, or 5% increase, in cash dividends compared to the prior year quarter.
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 its primary credit
facility. The amended credit facility
(the (the “Credit Facility”)
is comprised ofestablished (A) a
$400.0$150.0 million
multicurrencyrevolverEuro equivalent senior secured term loan (the
“Revolver” “Euro Term Loan”),
(B) a $600.0 million
senior secured term loan (the “U.S. Term
Loan”
), and (C) a $500.0 million senior secured revolving credit facility (the “Revolver”), each
with the Company as borrower, anda $150.0 million (as ofAugust 1, 2019) Euro equivalent term loan (the “Euro TermLoan” and together with the U.S. TermLoan”, the “Term Loans”)withQuaker Chemical B.V.,a Dutch subsidiary of the Company as borrower,each with a five year term maturing in
August 2024.SubjectJune 2027. The Company has the right to
increase the
consentamount of
the administrative agent and certain other conditions,the Company may designate additional borrowers.The maximum amount available under the Credit Facility
can be increased by
up an aggregate amount not to
exceed the greater of $300.0 million
ator 100% of Consolidated EBITDA, subject to certain conditions including the
Company’s requestif there areagreement to provide financing by any lender providing such increase.lenders who agree to accept additional commitments andAs of March 31, 2023, the Company hassatisfied certain other conditions.Borrowings under thehad Credit Facility
bear interest at a base rate plus an applicable marginbased onborrowings outstanding of $931.5 million. As of December 31, 2022, the Company had Credit Facility borrowings outstanding of $943.5 million. The Company’s consolidatedother debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.3 million as of both March 31, 2023 and December 31, 2022. Total unused capacity under these arrangements as of March 31, 2023 was approximately $35 million. The Company’s total net leverage ratio.debt as of March 31, 2023, which consists of total borrowings of $942.8 million less cash and cash equivalents of $189.9, was $752.9 million. The weighted average interest rate incurred on the outstanding borrowingsunder Credit Facility contains affirmative and negative covenants, financial covenants and events of default. Financial covenants contained in the Credit Facility
during both the first quarter of 2022include a consolidated interest coverage ratio test and
as of March 31, 2022 was approximately 1.6%.In addition to paying interest on outstanding principal under the Credit Facility, the Company is required to pay a
commitment fee ranging from 0.2%to 0.3% depending on the Company’sconsolidated net leverage
ratio
to the lenders under the Revolver in respect of the unutilized commitmentsthereunder.Quaker Chemical Corporation
Management’s Discussion and Analysis
25
The Credit Facility is subject to certain financial and other covenants.The Company’s initial consolidated netdebt toconsolidated adjusted EBITDA ratio could not exceed 4.25 to 1,with step downs in the permitted ratio over the term of the CreditFacility.test. As of March 31,
2022, the consolidated net debt to consolidated adjustedEBITDA ratio may not exceed 3.75 to 1.TheCompany’s consolidatedadjusted EBITDA to interest expense ratio may not be less than 3.0 to 1 over theterm of the agreement.TheCredit Facility also prohibits the payment of cash dividends if the Companyis in default or if the amount of the dividends paidannually exceeds the greater of $50.0 million and 20% of consolidated adjustedEBITDA unless the ratio of consolidated net debt toconsolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitationon amount.As of March 31, 2022 andDecember 31, 2021,2023, the Company was in compliance with all of the Credit Facility
covenants.
The Term Loanshave quarterlyprincipal amortization during their five year terms, with 5.0% amortization Refer to the description of the
principal balance due in years 1 and 2, 7.5% in year3, and 10.0% in years 4 and 5, with the remaining principal amount dueat maturity.TheCompany’s primary Credit Facility
is guaranteed by certainin Note 20 of Notes to Consolidated Financial Statements in its 2022 Form 10-K and in Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for more information about the covenants and events of default.The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three months ended March 31, 2023 was approximately 5.8%. As of March 31, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 5.9%. As part of the
Company’s domestic subsidiariesand is secured by first priority liens on substantially all of the assets of theCompany and thedomestic subsidiary guarantors, subject to certain customary exclusions.The obligations of the Dutch borrower are guaranteed onlyby certain foreign subsidiaries on an unsecured basis.
The Credit Facility,
requiredin addition to paying interest on the outstanding principal, the Company
is also required to
fix its variable interest ratespay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on
at least 20% the Company’s consolidated net leverage ratio. The Company had unused capacity under the Revolver of
its total Termapproximately $311 million, which is net of bank letters of credit of approximately $3 million, as of March 31, 2023.
Quaker Chemical Corporation
Management’s Discussion and Analysis
In order to
satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Credit Facility,
in
November 2019,the first quarter of 2023, the Company entered into
$170.0$300.0 million notional
amounts of
three yearthree-year interest rate swaps
atto convert a
baseportion of the Company’s variable rate
borrowings into an average fixed rate obligation of
1.64%3.64% plus an applicable margin as provided in the Credit Facility
based on the Company’s consolidated
net leverage ratio.
At the time the Company entered into the swaps, and as As of March 31,
2022,2023, the aggregate
interest rate on the swaps, including the fixed base rate plus
an the applicable margin, was
3.1%5.2%.
See Note 17 of Notes to Condensed Consolidated Financial Statements.The Company capitalized $23.7 million of certain third-party debt issuancecosts inIn connection with executing the
original credit facility in 2019 and the amended Credit
Facility.Approximately $15.5 millionFacility during the second quarter of
2022, the
Company capitalized
costs werecertain third-party and creditor debt issuance costs. Costs attributed to the
Euro Term
Loans Loan and
U.S. Term Loan were recorded as a direct reduction of
long-termLong-term debt on the
Company’s Condensed
Consolidated Balance Sheet.
Approximately $8.3 million of the capitalized costs were Costs attributed to the Revolver
andwere recorded within
otherOther assets on the
Company’sCondensed Consolidated Balance Sheet.
These
capitalized costs
are beingwill collectively be amortized into
interestInterest expense over the
five year five-year term of the Credit Facility.
As of March 31, 2022, the Company had
Credit Facility borrowings outstanding$1.9 million of
$915.2 million.Asdebt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.1 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet. Comparatively, as of December 31,
2021,2022, the
Company had Credit Facility borrowings outstanding$2.0 million of $889.6debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.
million.The Company has unused capacity underuses foreign exchange forward contracts to economically hedge the Revolverimpact ofapproximately $142 million, net of bank letters of credit of approximately$4 million, as of the variability in exchange rates on certain assets and/or liabilities denominated in certain foreign currencies. During the three months ended March 31, 2022.The Company’s other2023, the Company entered into and settled forward contracts with an aggregate notional amount totaling $16.0 million, resulting in cash proceeds of $0.3 million. See Note 17 of Notes to Condensed Consolidated Financial Statements.debt obligations are primarily industrial development bonds, banklinesIn the first three months of credit and municipality-related loans, which totaled $11.7million and $11.8 million as of March31, 2022
and December 31, 2021, respectively.Total unused capacity underthesearrangements as of March 31, 2022was approximately $30 million.The Company’s total net debt as ofMarch 31, 2022was $765.3million.
The, the Company incurred $6.0 million of total Combination,integration and other acquisition-related expenses, in the first quarter of2022, which includes $2.0 million of other expenses related to
an indemnification
asset, assets, described in the Non-GAAP Measures section
of this Item below.
Comparatively, in the first quarterof 2021, the Company incurred $0.8 million of total Combination,integrationand other acquisition-related expenses, which was net of a $5.4 million gainon the sale of certain held-for-sale real property assetsand also $0.4 million of accelerated depreciation.The Company had
aggregate net cash outflows
of approximately $8.3 millionrelated to the Combination,
integration and other acquisition-related expenses during the first
three monthsof 2022 of $4.2 million. The Company had no Combination, integration and other acquisition-related expenses in the first three months of 2023.During the first three months of 2023, the Company incurred $2.1 million of strategic planning expenses for the planning phase as compared to
$8.7 $3.1 million during the first
three months of 2021.During the first quarter of 2022 the Company incurred $3.1 million of strategicplanning and transformation expenses.. The Company expects that theseto incur additional operating costs and associatedcash flows, as wellas 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 functions in 20222023 and over the next several years.thereafter.Quaker Houghton’sThe Company’s managementapproved, and the Company initiated, a global restructuring plan (the“QH “QH Program”) in thethird quarter of 2019 as part of its planned cost synergies associated
with the Combination.
The As of December 31, 2022, the Company has substantially completed all of the initiatives under the QH Program
includes restructuringwith only an immaterial amount of remaining severance still to be paid, which is expected to continue into 2023. In the fourth quarter of 2022, the Company’s management initiated a global cost and
associated severance costsoptimization program to
reduce total headcount by approximately400 people globallyimprove its cost structure and
plans for the closure of certain manufacturingdrive a more profitable and
non-manufacturing facilities.productive organization. The exact timing
to complete all actions and
totalfinal costs associated
with the QH Program continuestowill depend on a number of factors and
isare subject to
change; however,reductions in headcountchange. The Company is continuing to evaluate and
site closures have occurred,expects to implement further actions under this program, and
the Company currently expectsas a result, additional headcount reductions and
site closures to occur throughout the year and estimates that theanticipated cost synergies realized under the QH Programwill approximate one-times restructuring costs
incurred.may be incurred in the future. The Company
expects to generate full run-rate cost savings from the global cost and optimization program of approximately $20 million by the end of 2024. The Company expects total cash costs of this program to be approximately 1 to 1.5 times savings. The Company recognized Restructuring and related charges of $4.0 million and $0.8 million in the first three months of 2023 and 2022, respectively, as a result of these programs. The Company made cash payments related to the settlement of restructuring liabilities under
the
QH Programrestructuring programs during the first
three months of 20222023 of approximately
$0.4$2.7 million compared to
$3.0$0.4 million in the
first three monthsof 2021.2022. The Company has remaining restructuring accruals as of March 31, 2023, for these programs of $6.8 million, which the Company expects to settle over the next twelve months. See Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report.As of March 31,
2022,2023, the Company’s
gross liability for uncertain tax positions, including interest and penalties,
was
$24.5$20.2 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, the amount of the payment may be reduced by up to
$7.2$6.3 million as a result of
offsetting benefits in other tax jurisdictions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
26
In 2021,The Company previously disclosed in its 2022 Form 10-K that two of the Company’s locations
suffered
significant property
damagedamages as a result of flooding
and
fire.electrical fire, respectively. The Company
maintains property
and flood insurance for all of its
facilitieslocations globally.
The Company, its During the three months ended March 31, 2023, there have been no significant changes to the facts or circumstances of this previously disclosed matter, other than the ongoing work with the Company’s insurance
adjuster and insurance carrier
are activelymanagingregarding the
remediation and restoration activities associated with bothof these events and at this timeinsurance claims submitted. Through March 31, 2023, the Company has
concluded,based on all available information and discussions with its insuranceadjuster and insurance carrier, that the losses incurredduring2021 were covered under the Company’sproperty insurance coverage, net of an aggregate deductible of $2.0million.The Companyhas received
cumulative payments from its insurers of
$2.1$5.7 million
and has recordedan insurance receivable associated with these
events of $0.5million as ofevents. During the three months ended March 31,
2022.2023, the Company recognized a gain on insurance recoveries of $0.8 million. See
NoteNotes 10 and 18 of Notes to
the Condensed Consolidated Financial Statements, in Item
1 of this
Report.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
its business objectives for at least the next twelve months, including but not
limited to, payments of dividends to shareholders,
costs related to ongoingacquisition integration and optimization,pension plan
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 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
Credit Facility,
transition 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 global 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 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 amount of potential capital requirements
cannot be 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
filing 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-GAAPnon-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.
In addition, our definitions of 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, as discussed and reconciled below to the most comparable respective GAAP measures, may not be comparable to similarly named measures reported by other companies.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 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,
investors, and
competitorspeers 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-GAAPnon-GAAP earnings per diluted share provide transparent and useful information
and are widely used by
investors, analysts,
investors, and
competitors peers 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
27
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 | | | | | | | | | | | | | | | |
Non-GAAP Operating Income and Margin Reconciliations | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Operating income | $ | 49,929 | | | $ | 29,403 | | | | | |
Combination, integration and other acquisition-related expenses (a) | — | | | 4,053 | | | | | |
Restructuring and related charges, net (b) | 3,972 | | | 820 | | | | | |
Strategic planning expenses (c) | 2,087 | | | 3,088 | | | | | |
| | | | | | | |
Russia-Ukraine conflict related expenses (d) | — | | | 1,166 | | | | | |
Other charges (e) | 305 | | | 631 | | | | | |
Non-GAAP operating income | $ | 56,293 | | | $ | 39,161 | | | | | |
Non-GAAP operating margin (%) (j) | 11.3 | % | | 8.3 | % | | | | |
Three Months Ended
2022
2021
Operating income
$
29,403
$
44,894
Combination, integration and other acquisition-related expenses (a)
4,053
6,230
Strategic planning and transformation expenses (b)
3,088
-
Restructuring and related charges (c)
820
1,175
Fair value step up of acquired inventory sold (d)
—
801
Executive transition costs (e)
539
504
Inactive subsidiary's non-operating litigation costs (f)
92
51
Customer insolvency costs (g)
1,166
—
Non-GAAP operating income
$
39,161
$
53,655
Non-GAAP operating margin (%) (n)
8.3%
12.5%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and
Non-GAAP Net Income Reconciliations
Three Months Ended
2022
2021
Net income attributable to Quaker Chemical Corporation
$
19,816
$
38,615
Depreciation and amortization (a) (l)
20,727
22,448
Interest expense, net (a)
5,345
5,470
Taxes on incomebefore equity in net income of associated companies (m)2,866
10,689
EBITDA
$
48,754
$
77,222
Equity loss (income) in a captive insurance company (h)
244
(3,080)
Combination, integration and other acquisition-related expenses (a)
6,032
427
Strategic planning and transformation expenses (b)
3,088
—
Restructuring and related charges (c)
820
1,175
Fair value step up of acquired inventory sold (d)
—
801
Executive transition costs (e)
539
504
Inactive subsidiary's non-operating litigation costs (f)
92
51
Customer insolvency costs (g)
1,166
—
Pension and postretirement benefit income, non-service components(i)(479)
(124)
Currency conversion impacts of hyper-inflationary economies (j)
188
172
Adjusted EBITDA
$
60,444
$
77,148
Adjusted EBITDA margin (%) (n)
12.7%
18.0%
Adjusted EBITDA
$
60,444
$
77,148
Less: Depreciation and amortization - adjusted (a)
20,727
22,033
Less: Interest expense, net
5,345
5,470
Less: Taxes on incomebefore equity in net income of associated companies - adjusted(k)(m)8,902
11,739
Non-GAAP net income
$
25,470
$
37,906
| | | | | | | | | | | | | | | |
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income Reconciliations | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net income attributable to Quaker Chemical Corporation | $ | 29,534 | | | $ | 19,816 | | | | | |
Depreciation and amortization (h) | 20,510 | | | 20,727 | | | | | |
Interest expense, net | 13,242 | | | 5,345 | | | | | |
Taxes on income before equity in net income of associated companies (i) | 9,533 | | | 2,866 | | | | | |
EBITDA | 72,819 | | | 48,754 | | | | | |
Equity (income) loss in a captive insurance company (f) | (422) | | | 244 | | | | | |
Combination, integration and other acquisition-related expenses (a) | — | | | 6,032 | | | | | |
Restructuring and related charges, net (b) | 3,972 | | | 820 | | | | | |
Strategic planning expenses (c) | 2,087 | | | 3,088 | | | | | |
| | | | | | | |
Russia-Ukraine conflict related expenses (d) | — | | | 1,166 | | | | | |
| | | | | | | |
Other charges (e) | 335 | | | 340 | | | | | |
Adjusted EBITDA | $ | 78,791 | | | $ | 60,444 | | | | | |
Adjusted EBITDA margin (%) (j) | 15.8 | % | | 12.7 | % | | | | |
| | | | | | | |
Adjusted EBITDA | $ | 78,791 | | | $ | 60,444 | | | | | |
Less: Depreciation and amortization (h) | 20,510 | | | 20,727 | | | | | |
Less: Interest expense, net | 13,242 | | | 5,345 | | | | | |
Less: Taxes on income before equity in net income of associated companies - adjusted (a)(i) | 11,047 | | | 8,902 | | | | | |
Non-GAAP net income | $ | 33,992 | | | $ | 25,470 | | | | | |
Quaker Chemical Corporation
Management’s Discussion and Analysis
28
Non-GAAP Earnings per Diluted Share Reconciliations | | | | | | | | | | | | | | | |
Non-GAAP Earnings per Diluted Share Reconciliations | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders | $ | 1.64 | | | $ | 1.11 | | | | | |
Equity (income) loss in a captive insurance company per diluted share (f) | (0.02) | | | 0.01 | | | | | |
Combination, integration and other acquisition-related expenses per diluted share (a) | — | | | 0.25 | | | | | |
Restructuring and related charges, net per diluted share (b) | 0.17 | | | 0.03 | | | | | |
Strategic planning expenses per diluted share (c) | 0.10 | | | 0.14 | | | | | |
Russia-Ukraine conflict related expenses per diluted share (d) | — | | | 0.06 | | | | | |
Other charges per diluted share (e) | 0.01 | | | 0.01 | | | | | |
Impact of certain discrete tax items per diluted share (g) | (0.01) | | | (0.19) | | | | | |
Non-GAAP earnings per diluted share (k) | $ | 1.89 | | | $ | 1.42 | | | | | |
Three Months Ended
2022
2021
GAAP earnings per diluted share attributable to Quaker Chemical Corporation$
1.11
$
2.15
Equity loss (income) in a captive insurance company per diluted share (h)
0.01
(0.17)
(a)Combination, integration and other acquisition-related expenses per dilutedshare (a) 0.25
0.04
Strategic planning and transformation expenses per diluted share (b)
0.14
—
Restructuring and related charges per diluted share (c)
0.03
0.05
Fair value step up of acquired inventory sold per diluted share (d)
—
0.03
Executive transition costs per diluted share (e)
0.02
0.02
Inactive subsidiary's non-operating litigation costs per diluted share (f)
Customer insolvency costs per diluted share (g)
0.06
—
Pension and postretirement benefit costs, non-service components per dilutedshare (i)(0.02)
Currency conversion impacts of hyper-inflationary economies perdiluted share (j)0.01
0.01
Impact of certain discrete tax items per diluted share (k)
(0.19)
(0.02)
Non-GAAP earnings per diluted share (o)
$
1.42
$
2.11
(a)
Combination,integration and other acquisition-related expenses include certain legal, financial,
and other advisory and consultant
costs incurred in connection with
integration activities including internalcontrol readiness and remediation.These costs are notindicative of the
future operating performance of the Company.Less than $0.1 million and $0.1 million for the three monthsended March 31, 2022 and 2021, respectively,of these pre-tax costs were considered non-deductible for the purpose ofdetermining the Company’seffective tax rate, and, therefore, taxes on income before equity innet income of associatedcompanies - adjusted reflects the impact of these items.During the three months ended March 31, 2022, the Company recorded$2.0 million of other expense related to an indemnification asset.During the three months ended March 31, 2021, the Companyrecorded $0.4 million of accelerated depreciation related to certain ofthe Company’s facilities, which is includedin the caption“Combination integration
activities. These amounts also include expense associated with the Company's other recent acquisitions, including certain legal, financial, and other
acquisition-related expenses”advisory and consultant costs incurred in
thereconciliation of operating income to non-GAAPoperating income and included in the caption “Depreciation and amortization”in the reconciliation of net income attributable tothe Company to EBITDA, but excluded from the caption “Depreciationand amortization – adjusted” in the reconciliation ofadjusted EBITDA to non-GAAP net income attributable to the Company.During the three months ended March 31, 2021, theCompany recorded a $5.4 million gain on the sale of certain held-for-salereal property assets related to the Combination which isincluded in the caption “Combination, integration and other acquisition-relatedexpenses” in the reconciliation of GAAP earningsper diluted share attributable to Quaker Chemical Corporation commonshareholders to Non-GAAP earnings per diluted share aswell as the reconciliation of net income attributable to Quaker Chemical Corporationto Adjusted EBITDA and Non-GAAP netincome.
(b)
Strategic planning and transformation expenses include certain consultantand advisory expenses for the Company’slong-termstrategic planning, as well as process optimization and the next phaseof the Company’s long-term integrationto further optimizeits footprint, processes and other functions.connection with due diligence. These costs are not indicative of the future operating performance of the Company.
Less than $0.1 million for the three months ended March 31, 2022 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 months ended March 31, 2022, the Company recorded $2.0 million of other expense related to an indemnification asset, which is included in the caption “Combination, integration 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. There were no Combination, integration and other acquisition-related expenses incurred in the first quarter of 2023. See Notes 2, 10, and 11 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.(c)
(b)Restructuring and related charges represent thecosts incurred by the Company associated with the QHCompany’s restructuring program which was initiated in the third quarter of 2019 as part of the Company’splan to realize cost synergies associated with theCombination.programs. These costs are not indicative of the future operating performance of the Company.
See Note 7 of Notes to
Condensed Consolidated Financial Statements, which
appearsappear in Item
1 of this Report.
(d)
Fair value step up(c)Strategic planning expenses include certain consultant and advisory expenses for the Company’s strategic planning phase of acquired inventory sold relatesits long-term process optimization and integration projects to expense associated with sellinginventory from acquired businesses whichwas adjusted to fair value as part of purchase accounting.further optimize its footprint, processes and other functions. These
increasesplanning phase costs are one-time in
costs of goods sold (“COGS”) arenature and not indicative of
the future operating performance of the Company.
(e)
Executive transition(d)Russia-Ukraine conflict related expenses represent the costs representassociated with a specific reserve or changes to existing reserves for trade accounts receivable within the Company’s EMEA reportable segment related to certain customers who filed for bankruptcy protection as well as costs related to specific reserves recorded for certain customer accounts receivables which in each case were directly impacted by the Company’ssearch, hiringongoing conflict between Russia and transition to a new CEO in connectionwith the executive transition that took place in 2021 as well as the on-goingsearch for a new Chief Human Resources Officerduring the first quarter of 2022.Ukraine. These expenses are not indicative of the future operating performance of the
Company. Company.(f)
Inactive subsidiary’s non-operating litigation(e)Other charges include executive transition costs, represent thefacility remediation insurance recoveries, net, charges incurred byan inactive subsidiary of the Company andareas a result of the termination of restrictions on insurance settlement reserves,
.These charges are not indicative non-service components of the
futureoperating performance ofCompany’s pension and postretirement net periodic benefit income, and the Company.
Quaker Chemical Corporation
Management’s Discussion and Analysis
29
(g)
Customer insolvency costs represent the costsforeign currency remeasurement impacts associated with
a specificreserve or changes to existing reserves for trade accountsreceivable within the Company’s
EMEA reportable segment related to certain customers who filed forbankruptcy protection affiliates whose local economies are designated as
well as costs related to specific reserves recorded for certain customer accountsreceivables which have been directly impacted bythe current economic conflict between Russia and Ukraine. hyper-inflationary under U.S. GAAP. These expenses are not indicative of the future operating performance
of the Company.
See Notes 1, 9 and 18 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.(h)
(f)Equity loss (income)income in a captive insurance company represents the after-tax(loss) income attributable to the Company’sinterest 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)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)Quaker Chemical Corporation
PensionManagement’s Discussion and
postretirement benefit income,Analysis
non-service components represent the pre-tax, non-servicecomponent of theCompany’s pension and postretirementnet periodic benefit income in each period.These costs are not indicative of the futureoperating performance of the Company.See Note 9 of Notes to Condensed Consolidated Financial Statements, which appearsinItem 1 of this Report.
(j)
Currency conversion impacts of hyper-inflationary economies representsthe foreign currency remeasurement impacts associatedwith the Company’s affiliateswhose local economies are designated as hyper-inflationary underU.S. GAAP.During both thethree months ended March 31, 2022and 2021, the Company incurred non-deductible, pre-tax chargesrelated to the Company’sArgentine affiliates.The charges incurred related to the immediate recognition of foreign currencyremeasurement in theConsolidated Statements of Income associated with these entities are not indicativeof the future operating performance of theCompany.See Note 1 of Notes to Condensed Consolidated Financial Statements, which appearsin Item 1 of this Report.(k)
(g)The impacts of certain discrete tax items include changes in valuationallowances 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
a result of tax law
changes in the U.S. due to the issuance of final foreign tax credit regulations
during the
period.period ended March 31, 2023. Additionally, the Company has
discrete items related to
the remeasurement of deferred taxes on the transfer of intellectual property and the release of the reserves for uncertain tax positions
settled during the
quarterperiod 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.
(l)
(h)Depreciation and amortization for both the three months ended March 31, 2023 and 2022 and 2021 each includedinclude approximately $0.3million of amortization expense recorded within equity in net income of associated companies
in the Company’s Condensed Consolidated
Statement Statements of
Income, 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.
(m)
(i)Taxes on incomebefore equity in net income of associated companies – adjusted presents the impactof 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, integration and other acquisition-related expenses
described in (a) resulted in incremental taxes of
approximately $1.4 million
and $0.1million duringfor the three months ended March 31,
20222022. Restructuring and
2021, respectively.Strategic planning and transformation expenses describes related charges, net described in (b) above resulted
in incremental taxes of
$0.7$1.0 million
duringand $0.2 million for the three months ended March 31,
2022.Restructuring2023 and
related charges2022, respectively. Strategic planning expenses described in (c)
above resulted in incremental
taxes of
$0.2$0.5 million
during each ofand $0.7 million for the three months ended March 31,
20222023 and
2021.Fair value step up of acquired inventorysold2022, respectively. Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes of
$0.2$0.3 million
duringthe three months ending March 31, 2021.Executivetransition expenses described in (e) resulted in incremental taxes of $0.1million during each of the three months ended March 31,2022 and 2021.Inactive subsidiary non-operating litigation costs described in (f) resulted in incrementaltaxes of less than $0.1million for
each of the three months ended March 31,
2022 and 2021.Customer insolvency costs2022. Other charges described in
(g) resulted inincremental taxes of $0.3 million during the three months endedMarch 31, 2022.Pension and postretirement benefit income,non-service components described in (i)(e) resulted in a
net tax benefit of
less than $0.1
million and
incremental taxes of less than $0.1 million for the three months
ended March 31,
2023 and 2022,
and 2021, respectively.
The impact of certain discrete items described in
(k)(g) resulted in
aincremental tax
benefitexpense of
$3.4 less than $0.1 million and
$0.4$3.4 million for the three months ended March 31,
20222023 and
2021,2022, respectively.
(n)
(j)The Company calculates adjusted EBITDA marginand non-GAAP operating margin as the percentage of adjusted EBITDAand non-GAAP operating income to consolidated net sales.
(o)
(k)The Company calculates non-GAAP earnings per diluted share as non-GAAPnon-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.
Quaker Chemical Corporation
Management’s Discussion and Analysis
30
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet commitments or
obligations as of March 31,
2022.2023. The Company’s
only off-balanceoff-balance sheet items outstanding as of March 31,
2022 represented2023 includes approximately
$6 $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.
Operations
Consolidated Operations Review – Comparison of the First Quarter of
20222023 with the First Quarter of
20212022Net sales were $500.1 million in the first quarter of 2023 compared to $474.2 million in the first quarter of 2022 compared to $429.8million in the first quarter of 2021.2022. The net sales increase of
$44.4$25.9 million or
10%5% quarter-over-quarter reflects
increasesan increase in
selling price and product mix of
approximately 17% andadditional net sales from acquisitions of 2%19%, partially offset
by a decline in
organic sales
volumevolumes of approximately
6%11% and the unfavorable
impact from foreign currency translation of
approximately 3%.
The increase in selling price and product mix
iswas primarily driven by
price increasesyear-over-year impact of our value-based pricing initiatives implemented to
help offset the significant increases in raw
material and other input
costs that began during 2021.costs. The decline in
organic sales
volumes was primarily attributable to
softer end market conditions, notably in EMEA and Asia/Pacific, the
comparison to a very strong first quarterimpacts of
2021, where customers replenished their supplychains, the
impactongoing war in Ukraine, the wind-down of
lower volumesthe tolling agreement for products previously divested related to the
tolling agreementfor previously divested products associated withCombination, and the
Combinationand lower sales volumes attributable to the war in Ukraine.Company’s ongoing value-based pricing initiatives.
COGS were
$326.7 million in the first quarter of 2023 compared to $328.1 million in the first quarter of 2022,
compareda decrease of $1.4 million. The relatively consistent level of COGS in both periods reflects lower spend on the decline in current year volumes, which more than offset higher costs due to
$273.6million in the first quarter of 2021.The increase inCOGS of $54.5 million or 20% was driven by the associated COGS on theincrease in net sales described above as well as continuedincreasesinflationary pressures in the Company’s global
raw material,
manufacturing and supply chain and logistics costs compared to the prior year.
Gross profit
was $173.5 million in the first quarter of 2023 compared to $146.1 million in the first quarter of 2022,
decreased $10.1an increase of $27.4 million or
6%from the first quarter of 2021.19%. The Company’s reported
gross margin in the first quarter of
20222023 was
30.8%34.7% compared to
36.3% in the first quarter of 2021.The Company’s current quartergross margin reflects a significant increase in rawmaterial and other input costs experienced throughout the first quarter of2022 andthe impacts of constraints on the global supply chain, partially offsetby the Company’s ongoing value-based pricing initiatives.SG&A 30.8% in the first quarter of 2022 increased $7.5primarily driven by the year-over-year impact of our value-based pricing initiatives implemented to offset the significant increases in raw material and other input costs.
Quaker Chemical Corporation
Management’s Discussion and Analysis
SG&A was $119.5 million
or 7% comparedtoin the first quarter of
2021 due primarily2023 compared to
$111.8 million in the
impact first quarter of
sales2022, an increase $7.8 million or 7%, driven by higher labor-related costs including year-over-year inflationary increases
and higher levels of incentive compensation on
direct selling costs, inflationary impacts on higheroperating costs, costs associated with strategic planning and transformation initiatives (see the Non-GAAP Measures section ofthis Item, above), and additional SG&A from recent acquisitionsimproved Company performance, partially offset by lower SG&A due to foreign currency
translation
and lower incentive compensation compared to the prior year.
In addition, SG&A was lowerThe Company incurred $4.1 million of Combination, integration and other acquisition-related operating expenses in
the prior year period as a result of continuedtemporary cost saving measures the Companyimplemented in response to the onset of COVID-19.During the first quarter of 2022,
the Company incurred $4.1 millionof Combination,integration and other acquisition-relatedoperating expenses primarily for professional fees related to the Houghtonintegration and other acquisition-related activities.Comparatively,the Company incurred $5.8 million of expenses in the prior year first quarter,primarily due to various professional
fees related to legal, financial and other advisory and consultant expenses
for integration
activities including internal control readinessand remediation.activities. There were no similar expenses incurred in the first quarter of 2023. See the Non-GAAP Measures section of this Item, above.
The Company
initiated a restructuring program during the third quarterof 2019 as part of its global plan to realize cost synergiesassociated with the Combination.The Company incurred Restructuring and related charges
forof $4.0 million and $0.8 million during the first quarters of 2023 and 2022, respectively, related to reductions
in headcount and site
closures under
this program, net of adjustments to initial estimates for severanceof $0.8 millionthe Company’s previous and
$1.2 million during the firstquarters of 2022 and 2021, respectively.current restructuring programs. See the Non-GAAP Measures section of this Item, above.
Operating income in the first quarter of
20222023 was
$29.4$49.9 million compared
to
$44.9$29.4 million in the first quarter of
2021.2022. Excluding
non-recurring and non-core expenses that are not indicative of the future operating
performance of the Company described in the
Non-GAAPNon-GAAP Measures section of this Item, above, the Company’s
current quarter non-GAAP operating income
decreasedincreased to
$39.2 millioncompared to $53.7$56.3 million in the
prior year first quarter
of 2023 as compared to $39.2 million in the first quarter of 2022 primarily due
to
the lowerhigher gross profit
partially offset by higher SG&A, described above.
The Company had
otherOther expense, net of $2.2 million in
the first quarterof 2022 compared to other income, net of $4.7 million inboth the first quarter of
2021.2023 and 2022. Both the first quarter of 2023 and 2022 included foreign exchange transaction losses. The first quarter of
2023 also included a gain on insurance recoveries, while the first quarter of 2022
includes other expensesincluded an expense related to
the impact of certain adjustmentto the Company’sa Combination-related indemnification
receivables, while the prior year first quarter other income includes a gain onthe sale of certain held-for-sale real property assets. asset. See the Non-GAAP Measures section of this Item, above.
Interest expense, net,
decreased $0.1was $13.2 million
in the first quarter of 2023 compared to
the first quarterof 2021, due to a slight decrease in the averageborrowings outstanding$5.3 million in the first quarter of 2022,
compared to the firstquarteran increase of
2021 on relatively consistent$7.9 million as a result of an increase in interest rates
quarter-over-quarter, as well as higher average borrowings outstanding during
both the first quarter of 2022 and 2021.current year quarter.
The Company’s effective
tax rates for the first quarters of
2023 and 2022
were 27.7% and
2021 were 13.1%
and 24.2%, respectively.
The Company’s
effective tax rate for the three months ended March 31,
2022 2023 was impacted by various items including foreign tax inclusions, withholding taxes, foreign tax credits, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments. Comparatively, the prior year effective tax rate was largely
drivenimpacted by changes in the valuation allowance for foreign
tax
credits due to
recently issued legislative guidance
issued and
impacts dueaudit settlements reached with Italian tax authorities. In addition, the Company incurred higher tax expense during the three months ended March 31, 2022 related to
settlementsreached on certainone of the Company’s subsidiaries recording earnings at a statutory tax
audits.Comparatively,rate of 25% while the
prior year first quarter effective recertification of its concessionary 15% tax rate was
impacted by the sale ofa subsidiary which included certain held-for-sale real propertyQuaker Chemical Corporation
Management’s Discussion and Analysis
31
assets related to the Combination.pending receipt. 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 effective tax rates for
both the first
quarterquarters of
20222023 and
20212022 would have been approximately 27%
and 25%, respectively.. The
Company incurred higher tax expense during the three months ended March 31, 2022 primarily related to the Company recording earningsin one of its subsidiaries at a statutory tax rate of25% while it awaits recertification of a concessionary 15% tax rate, whichwas available to the Company during all of 2021.TheCompany 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, 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 $4.4was $4.6 million
in the first quarter of 2023 compared to $0.8 million in the first quarter of 2022,
compared to the first quarteran increase of
2021, $3.8 million, primarily due to
lowerhigher current year income from the Company’s
interest in a captive insurance company
andas well as 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
quartersquarter of
20222023 and
2021.2022.Foreign exchange unfavorably impacted the Company’s
first quarter of
20222023 results by approximately
4%7% 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 first quarter.
Reportable Segments Review - Comparison of the First Quarter of
20222023 with the First Quarter of
20212022The 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.
During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The
Company has fourCompany’s new structure includes three reportable segments: (i) Americas; (ii) EMEA;
and (iii)
Asia/Pacific.
Quaker Chemical Corporation
Management’s Discussion and Analysis
The three geographic segments are comprised of the assets and operations in each respective region, including assets and operations formerly included in the Global Specialty Businesses segment. Prior to the Company’s reorganization, the Company’s historical reportable segments were: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed ofAll prior period information has been recast to reflect the net sales and operationsin each respective region, excluding netsales and operations managed globally by the Global Specialty Businessessegment, which includes the Company’s
container, metalfinishing, mining, offshore, specialty coatings, specialtygrease and Norman Hay businesses. new reportable segments.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
and Restructuring and related
charges, and COGS relatedto acquired inventory sold, which is adjusted to fair value as part of purchase accounting, are not included in segment operating earnings.charges. Other items not specifically identified with the Company’s
reportable
segments include interest expense, net, and other (expense) income,expense, net.
Americas
Americas represented approximately 33%50% of the Company’sconsolidated net sales in the first quarter of 2022.2023. The segment’s net sales were
$154.1$251.4 million, an increase of
$19.3$39.3 million or
14%19%, compared
to the first quarter of
2021.2022. The increase in net sales was
due to higher selling price and product mix of 22% and
additional net sales fromacquisitionsthe favorable impact of
2%foreign currency translation of 1%, partially offset by
decreasesa decrease in
organic sales volumes of
10%4%.
The increase in selling price and product mix
iswas primarily driven by
priceincreases implemented tohelp offset the
significant increases in raw material andother input costs that began during 2021 and have continued in 2022.Thecurrent quarter decline in organic sales volume was largelydriven by theyear-over-year impact of
lower volumes related to the tolling agreement forpreviously divested products associated with the Combinationand the prior year period comparison,which included a strong reboundfrom COVID-19 impacts.This segment’s operating earnings were $29.2million, a decrease of $3.0 million or 9% compared to thefirst quarter of 2021.The decrease in segment operating earnings was primarily a result of lower grossmargins driven by the lag inprice increases as compared to continued raw material cost increases and globalsupply chain and logistics pressures, as well as higherSG&A including an increase in direct selling costs, SG&A from acquisitionsand year-over-year inflationary increases.EMEA
EMEA represented approximately 26% of the Company’sconsolidated net sales in the first quarter of 2022.The segment’s netsales were $125.7 million, an increase of $5.9 million or 5% comparedto the first quarter of 2021.The increase in net sales was dueto higher selling price and product mix of 18% and additional net sales fromacquisitions of 2%, partially offset by the unfavorableimpact of foreign currency translation of 9% and a decrease in organicsales volumesof 6%.The increase in selling price and productmix is primarily driven by price increases implemented
throughout 2022 to
help offset
the significant increases in raw material and other input
coststhat began during 2021 and have continued in 2022.costs. The current quarter decline in organic volume declinesales volumes was primarily drivenby softer market conditions, the currenteconomic pressures including the direct and indirect impactswind-down of the
Russia-Ukraine conflict tolling agreement for products previously divested related to the Combination and the
impact of economic and othersanctionsCompany’s ongoing value-based pricing initiatives partially offset by
other nations on Russia as well as the prior year period comparisonincluding a strong rebound from COVID-19 impacts.The foreign exchange impact was primarily due to the weakening of theeuro against the U.S. dollar as this exchange rate averaged1.12 in the first quarter of 2022 compared to 1.21 in the first quarter of2021.new business wins. This segment’s operating earningswere $16.8$66.1 million, adecreasean increase of
$8.5$21.1 million or
34%47%, compared to the first quarter of
2021.The decrease in segment operating earnings was2022 primarily
aQuaker Chemical Corporation
Management’s Discussion and Analysis
32
result of lower gross margins driven by the lag in price increases as comparedto continued raw material cost increases and globalsupply chain and logistics pressures, coupled with higher SG&A includingan increase in direct selling costs, SG&A from acquisitionsand year-over-year inflationary increases.Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’sconsolidated net sales in the first quarter of 2022.The segment’snet sales were $104.2 million, an increase of $7.5 million or 8% comparedto the first quarter of 2021.The increase in net sales wasdriven by higher
selling price and product mix of 12% partially offsetby lower organicnet sales
volumes of 4%.The increasecoupled with a recovery in
sellingprice and product mix is primarily driven by price increases implementedto help offsetmargins reflecting the Company’s ongoing initiatives aimed at offsetting the significant increases in raw material andinflationary pressures impacting the business.other input costs that began during 2021 and continued throughoutthe first quarter of 2022.The current quarter decline in organicEMEAsales volume was primarily driven by lower activity primarily in China relatedto government mandates regarding the current yearOlympics as well as country restrictions over power and export relatedactivity compared to a very favorable demand environment inthe prior year period.This segment’s operating earningswere $21.9 million, a decrease of $5.6 million or 20% compared to the firstquarter of 2021.The decrease in segment operating earnings was primarily a result of lower gross marginsdriven by the lag in priceincreases as compared to continued raw material cost increases and globalsupply chain and logistics pressures, coupled with higherSG&A including an increase in direct selling costs and year-over-year inflationaryincreases.Global Specialty Businesses
Global Specialty BusinessesEMEA represented approximately 19%31% of theCompany’s consolidated net sales in thefirst quarter of 2022.2023. The segment’s net sales were $90.1$152.4 million, an increase of $11.7$5.6 million or 15%4%, comparedto the first quarter of 2021.The increase in net sales2022. This was driven by higher selling price and product mix of 10%, includingNorman Hay, additional net sales fromacquisitionsof 4% and an increase in organic sales volumes of 2%19%, partially offset
by the unfavorable impact
fromof foreign currency
transactiontranslation of
approximately 1% 4% and a decrease in sales volumes of 11%.
The increase in selling price and product mix iswas primarily driven by the year-over-year impact of price increases implemented throughout 2022 to help offset thesignificant increases in raw material and other input
costs that began during2021costs. The decline in sales volumes was primarily driven by softer market conditions, including the direct and continued throughoutindirect impacts of the ongoing war in Ukraine, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives and the wind-down of the tolling agreement for products previously divested related to the Combination. The unfavorable foreign currency translation impact was primarily due to the strengthening of the U.S. dollar against the euro as this exchange rate averaged 1.07 U.S. dollar per euro in the first quarter of 2023 compared to 1.12 U.S. dollar per euro in the first quarter of 2022. This segment’s operating earnings were $27.6 million, an increase of $4.3 million or 19%, compared to the first quarter of 2022. The increase in segment operating earnings was primarily driven by higher net sales coupled with a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures on impacting the business.
Asia/Pacific
Asia/Pacific represented approximately 19% of the Company’s consolidated net sales in the first quarter of 2023. The segment’s net sales were $96.3 million, a decrease of $19.0 million or 16%, compared to the first quarter of 2022. The decrease in net sales was driven by lower organic sales volumes of 22% and an unfavorable impact from foreign currency translation of 6%, partially offset by higher selling price and product mix of 12%. The decline in organic sales volumes was primarily
attributableto a favorable demand environment for our products.driven by softer market conditions, including the impact of COVID-19 lockdown measures, primarily in China, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives. The
unfavorable foreign
exchange impact was primarily due to the
weakeningstrengthening of
the euroagainst the U.S. dollar
describedagainst the Chinese renminbi as this exchange rate averaged 6.84 Chinese renminbi per U.S. dollar in the
EMEA section above.first quarter of 2023 compared to 6.35 Chinese renminbi per U.S. dollar in the first quarter of 2022. The increase in selling price and product mix was primarily driven by year-over-year impact of price increases implemented throughout 2022 to offset the significant increases in raw material and other input costs. This
segment’s operating earnings were
$25.0 $27.7 million, an increase of
$0.9$3.2 million or
4%13% compared to the first quarter
of
2021.2022. The
increase in segment operating earnings
reflectswas primarily driven by a recovery in margins reflecting the
aforementionedhigher net sales partially offset byCompany’s ongoing initiatives aimed at offsetting the significant inflationary pressures as well as slightly lower
gross marginsinthe current year coupled with higherlevels of SG&A, including an increasewhich more than offset the decline in directnet sales.
29
selling costs, SG&A from acquisitions
Quaker Chemical Corporation
Management’s Discussion and year-over-yearAnalysis
inflationary increases.
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 Corporationus 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
on our current expectations about future events, including statements regarding the potential
effects of the
COVID-19 pandemic,
the Russia and
Ukraine conflict, inflation, bank failures, higher interest rate environment, global supply chain constraints on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity,
andremediate anyremain in compliance with the terms of
ourthe Company’s credit facility, expectations about future demand and raw material
weaknesses in internal control overfinancial reporting,costs and statements regarding the impact of increased
raw material costs and pricing
initiatives on our currentexpectations about future events.initiatives.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 Ukrainianand Russian conflict;conflict and actions taken by various governments and governmental organizations in response; •inflationary pressures, cost increases and the impacts of constraints and disruptions in the global supply chain;
•the potential benefits of acquisitions
•the potential for a variety of macroeconomic events, including the possibility of global or regional recessions, inflation generally, continued or accelerated cost increases in prices of raw materials such as oil and increasing interest rates, to impact the impactsvalue of constraints anddisruptionsour assets or result in the global supply chain;asset impairments or otherwise adversely affect our business; •
our current and future results and plans including our sustainability goals; and
•
statements that include the words “may,”“could, “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend, “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.
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for
20212022 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 as a result of supply chain disruption.disruptions.
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 byvarious governments, which could exacerbate some or all of the otherrisks and uncertainties faced by the Company,as well as
inflationary pressures, including the
potential for
continued 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 businesswill depend on, among other things, the extent and duration of thepandemic, the severity of the disease and the number of peopleinfected with the virus including new variants, the continued uncertaintyregarding global availability,administration, acceptance andlong-term efficacy of vaccines, or other treatments forCOVID-19 or its variants, the longer-term effectson the economy of thepandemic, including the resulting market volatility,and by the measures taken by governmental authorities and other third partiesrestricting day-to-day life and business operations and the lengthof time that such measures remain in place, as well as laws and othergovernmental programs implemented to address the pandemic or assist impactedbusinesses, such as fiscal stimulus and otherlegislation designed to deliver monetary aid and other relief.Other factors could also adversely affect us, including those related
to
acquisitions and the integration of acquired businesses.
Our forward-looking statements are subject to risks, uncertainties andassumptions about the Company
Quaker Chemical Corporation
Management’s Discussion and
its operations that are subject to changebased on various important factors, some of which are beyond our control.These risks, uncertainties, and possible inaccurate assumptions relevant to ourbusiness could cause our actualresults to differ materially from expected and historicalresults.Analysis
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
20212022 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.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.
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,
2021,2022, and we believe there has been no material
change to that
information. information, except the interest rate risk noted below.Interest Rate Risk.
During June 2022, the Company entered into an amendment to its primary credit facility (the “Original Credit Facility”, or as amended, the “Credit Facility”). See Note 20 of Notes to Consolidated Financial Statements included in Item 8 of our 2022 Form 10-K and Note 14 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. As of December 31, 2022, borrowings under the Credit Facility bear interest at either term Secured Overnight Financing Rate (“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 Credit Facility, if interest rates rise significantly, the cost of debt to the Company will increase. This may have an adverse effect on the Company, depending on the extent of the Company’s borrowings outstanding throughout a given year. As of December 31, 2022, and March 31, 2023, the Company had outstanding borrowings under the Credit Facility of approximately $943.5 million and $931.5 million, respectively. The weighted average interest rate applicable on outstanding borrowings under the Credit Facility was approximately 4.9% and 5.9% as of December 31, 2022, and March 31, 2023, respectively. The weighted average interest rate applicable on outstanding borrowings under the Original Credit Facility and the Credit Facility during the year ended December 31, 2022 was approximately 3.0% and the three months ended March 31, 2023 was approximately 5.8%. An interest rate change of 100 basis points would result in an approximate $9.4 million and $9.3 million increase or decrease to interest expense for the year ended December 31, 2022 and the year ended December 31, 2023, respectively.
35In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of three year interest rate swaps to convert a portion of the Company’s variable rate borrowings into an average fixed rate obligation of 3.64% plus an applicable margin as provided in the Credit Facility based on the Company’s consolidated net leverage ratio. As of March 31, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.2%. These interest rate swaps are designated and qualify as cash flow hedges. The Company has previously used derivative financial instruments primarily for the purpose of hedging exposures to fluctuations in interest rates.
Item 4.
Controls and Procedures.
Evaluation of disclosure controlsand 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 )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 March 31,
2022,2023, 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 March 31,
20222023 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
March 31, 2022.2023.
36
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 18 of
the Notes to the
Condensed Consolidated Financial Statements in Part I, Item 1, of
this Report.
The Company’s business, financial
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
results.
In addition to the other information set forth in
this Report, you should carefully consider the risk factors previously disclosed
in Part I, Item 1A of our
20212022 Form 10-K.
While there There have been no material changes to the risk factors described
in our 2021 Form 10-K,reference is made to the developments discussedtherein. under the headings
Ongoing impact of COVID-19
Impact of Political Conflicts
within 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
the Company’s common stock acquired
by the Company during
the period covered by this Report:
(c) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | (a) Total Number of Shares Purchased (1) | | (b) Average Price Paid Per Share (2) | | (c) Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (3) |
January 1 - January 31 | | 103 | | $ | 196.87 | | | — | | $ | 86,865,026 | |
February 1 - February 28 | | 30,521 | | $ | 215.44 | | | — | | $ | 86,865,026 | |
March 1 - March 31 | | 5,033 | | $ | 193.28 | | | — | | $ | 86,865,026 | |
Total | | 35,657 | | $ | 201.86 | | | — | | $ | 86,865,026 | |
(d)
Approximate Dollar
(a)
(b)
Average
as part of
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
January 1 - January 31
$
—
$
February 1 - February 28
$
—
$
March 1 - March 31
$
—
$
Total
$
—
$
(1)
All of these shares were acquired from employees related to the surrenderof Quaker Chemical Corporation shares in payment of the exercise price of employee stock options exercised or
for the payment of taxes upon exercise of employee
stock options or the vesting of restricted stock awards or units.
(2)
The price paid for shares acquired from employees pursuant to employeebenefit and share-based compensation plans is based on the closing price of the Company’s
common stock on the date of exercise or vesting as specified by the 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 theCompany 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
quarter ended March 31,
2022.2023.Limitation on the Payment of Dividends
The Credit Facility has certain limitations on the payment of dividends
and other so-called restricted
payments.payment covenants. See Note 14 of
Notes to Condensed Consolidated Financial Statements, in Part I, Item
1, of this Report.
37
(a) Exhibits
3.1
–
3.2
–
31.1
–
31.2
–
32.1
–
32.2
–
101.INS
–
Inline XBRL Instance Document*
101.SCH
–
Inline XBRL TaxonomyExtension Schema Document*101.CAL
–
Inline XBRL TaxonomyCalculation Linkbase Document*101.DEF
–
Inline XBRL TaxonomyDefinition Linkbase Document*101.LAB
–
Inline XBRL TaxonomyLabel Linkbase Document*101.PRE
–
Inline XBRL TaxonomyPresentation Linkbase Document*104
–
Cover Page Interactive Data File (formatted as Inline XBRL and containedin Exhibit 101.INS)* | | | | | | | | |
3.1 | – | |
3.2 | – | |
10.1 | – | |
10.2 | – | |
10.3 | – | |
31.1 | – | |
31.2 | – | |
32.1 | – | |
32.2 | – | |
101.INS | – | Inline XBRL Instance Document* |
101.SCH | – | Inline XBRL Taxonomy Schema Document* |
101.CAL | – | Inline XBRL Taxonomy Calculation Linkbase Document* |
101.DEF | – | Inline XBRL Taxonomy Definition Linkbase Document* |
101.LAB | – | Inline XBRL Taxonomy Label Linkbase Document* |
101.PRE | – | Inline XBRL Taxonomy Presentation Linkbase Document* |
104 | – | Cover Page Interactive Data File (formatted as Inline XBRL and 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: May 4, 2023 | Shane W. Hostetter, Senior Vice President, Chief Financial Officer (officer duly authorized on behalf of, and principal financial officer of, the Registrant) |
QUAKER CHEMICAL CORPORATION
(Registrant)
/s/ Shane W. Hostetter________________________________
Date: May 5, 2022
Shane W. Hostetter,Senior Vice President, Chief FinancialOfficer (officer duly authorized on behalf of, and principal
financial officer of, the Registrant)35