UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 20222023
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number 001-12019
001-12019
QUAKER CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania23-0993790
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 par valueKWRNew 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 reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.     Yes    x     No    o
days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T
(§ (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required
to submit such files).
Yes
☒
xNo
☐
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”,
and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filerxAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new
or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
o
☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
☐
oNo
☒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 October 31, 2022
Number of Shares of Common Stock Outstanding on October 31, 202317,984,916
17,931,664
Table of Contents
Quaker Chemical Corporation
1
QUAKER CHEMICAL CORPORATION
AND CONSOLIDATED
SUBSIDIARIESTable of Contents
Page
2
Financial Statements (Unaudited)
2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and September 30, 2022
2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and September 30, 2022
3
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and September 30, 2022
5
Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2023 and September 30, 2022
6
Notes to Condensed Consolidated Financial Statements
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
Quantitative and Qualitative Disclosures about Market Risk.
36
Controls and Procedures.
36
OTHER INFORMATION.
Legal Proceedings.
37
Risk Factors.
37
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
37
Item 5.
Other Information.
37
Exhibits.
38
39
Page
PART
I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and September 30, 2021
2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and
September 30, 2021
3
Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2021
5
Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2022 and September
30, 2021
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
27
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
44
Item 4.
Controls and Procedures.
45
PART
II
OTHER INFORMATION.
Item 1.
Legal Proceedings.
46
Item 1A.
Risk Factors.
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
46
Item 6.
Exhibits.
47
Signatures
471
Table of Contents
2
PART
I
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
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Net sales
$
492,218
$
449,072
$
1,458,777
$
1,314,117
Cost of goods sold (
excluding amortization expense - See Note 13
)
331,469
303,941
1,002,393
858,341
Gross profit
160,749
145,131
456,384
455,776
Selling, general and administrative expenses
115,456
104,215
343,081
317,204
Restructuring and related (credits) charges, net
(1,423)
(880)
(604)
593
Combination, integration and other acquisition-related expenses
2,107
5,786
7,992
18,259
Operating income
44,609
36,010
105,915
119,720
Other income (expense), net
85
647
(10,520)
19,344
Interest expense, net
(8,389)
(5,637)
(20,228)
(16,725)
Income before taxes and equity in net income of
associated companies
36,305
31,020
75,167
122,339
Taxes on income before
equity in net income of associated
Companies
10,185
795
14,425
26,702
Income before equity in net income of associated
Companies
26,120
30,225
60,742
95,637
Equity in net (loss) income of associated companies
(212)
848
(642)
7,668
Net income
25,908
31,073
60,100
103,305
Less: Net income attributable to noncontrolling interest
41
15
74
62
Net income attributable to Quaker Chemical Corporation
$
25,867
$
31,058
$
60,026
$
103,243
Per share data:
Net income attributable to Quaker Chemical Corporation
common shareholders – basic
$
1.44
$
1.74
$
3.35
$
5.78
Net income attributable to Quaker Chemical Corporation
common shareholders – diluted
$
1.44
$
1.73
$
3.35
$
5.76
Dividends declared
$
0.435
$
0.415
$
1.265
$
1.205
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Net sales$490,612 $492,218 $1,486,204 $1,458,777 
Cost of goods sold (excluding amortization expense -
   See Note 13)		307,265 331,469 951,716 1,002,393 
Gross profit183,347 160,749 534,488 456,384 
Selling, general and administrative expenses122,810 115,456 362,212 343,081 
Restructuring and related charges (credits), net1,019 (1,423)6,034 (604)
Combination, integration and other acquisition-related expenses— 2,107 — 7,992 
Operating income59,518 44,609 166,242 105,915 
Other (expense) income, net(2,713)85 (8,558)(10,520)
Interest expense, net(12,781)(8,389)(38,744)(20,228)
Income before taxes and equity in net income of associated companies44,024 36,305 118,940 75,167 
Taxes on income before equity in net income of associated companies13,593 10,185 36,956 14,425 
Income before equity in net income of associated companies30,431 26,120 81,984 60,742 
Equity in net income (loss) of associated companies3,279 (212)10,660 (642)
Net income33,710 25,908 92,644 60,100 
Less: Net income attributable to noncontrolling interest40 41 94 74 
Net income attributable to Quaker Chemical Corporation$33,670 $25,867 $92,550 $60,026 
Per share data:
Net income attributable to Quaker Chemical Corporation common shareholders – basic$1.87 $1.44 $5.15 $3.35 
Net income attributable to Quaker Chemical Corporation common shareholders – diluted$1.87 $1.44 $5.14 $3.35 
Dividends declared$0.455 $0.435 $1.325 $1.265 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited; Dollars in thousands)
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Net income
$
25,908
$
31,073
$
60,100
$
103,305
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(71,986)
(19,905)
(155,284)
(29,201)
Defined benefit retirement plans
497
904
2,400
2,593
Current period change in fair value of derivatives
(140)
436
1,535
1,450
Unrealized loss on available-for-sale securities
(818)
(215)
(2,385)
(2,961)
Other comprehensive loss
(72,447)
(18,780)
(153,734)
(28,119)
Comprehensive (loss) income
(46,539)
12,293
(93,634)
75,186
Less: Comprehensive
loss attributable to
noncontrolling interest
(3)
(15)
(5)
(68)
Comprehensive (loss) income attributable to Quaker Chemical
Corporation
$
(46,542)
$
12,278
$
(93,639)
$
75,118
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Net income$33,710 $25,908 $92,644 $60,100 
Other comprehensive (loss) income, net of tax
Currency translation adjustments(25,504)(71,986)(24,116)(155,284)
Defined benefit retirement plans281 497 852 2,400 
Current period change in fair value of derivatives1,241 (140)5,804 1,535 
Unrealized (loss) gain on available-for-sale securities(637)(818)938 (2,385)
Other comprehensive loss(24,619)(72,447)(16,522)(153,734)
Comprehensive income (loss)9,091 (46,539)76,122 (93,634)
Less: Comprehensive loss attributable to noncontrolling interest(36)(3)(55)(5)
Comprehensive income (loss) attributable to Quaker Chemical Corporation$9,055 $(46,542)$76,067 $(93,639)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Unaudited; Dollars in thousands, except par value)
Unaudited
September 30,
December 31,
2022
2021
ASSETS
Current assets
Cash and cash equivalents
$
138,891
$
165,176
Accounts receivable, net
461,912
430,676
Inventories
Raw materials and supplies
165,280
129,382
Work-in-process
and finished goods
151,860
135,149
Prepaid expenses and other current assets
66,760
59,871
Total current
assets
984,703
920,254
Property, plant and equipment,
at cost
425,650
434,344
Less: Accumulated depreciation
(237,276)
(236,824)
Property, plant and equipment,
net
188,374
197,520
Right of use lease assets
37,005
36,635
Goodwill
591,032
631,194
Other intangible assets, net
915,956
1,027,782
Investments in associated companies
76,748
95,278
Deferred tax assets
10,519
16,138
Other non-current assets
27,163
30,959
Total assets
$
2,831,500
$
2,955,760
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
20,471
$
56,935
Accounts payable
209,343
226,656
Dividends payable
7,800
7,427
Accrued compensation
32,993
38,197
Accrued restructuring
1,798
4,087
Accrued pension and postretirement benefits
1,536
1,548
Other accrued liabilities
91,790
95,617
Total current
liabilities
365,731
430,467
Long-term debt
931,491
836,412
Long-term lease liabilities
25,697
26,335
Deferred tax liabilities
151,208
179,025
Non-current accrued pension and postretirement benefits
38,222
45,984
Other non-current liabilities
39,521
49,615
Total liabilities
1,551,870
1,567,838
Commitments and contingencies (Note 18)
Equity
Common stock $
1
par value; authorized
30,000,000
shares; issued and
outstanding 2022 –
17,931,205
shares; 2021 –
17,897,033
shares
17,931
17,897
Capital in excess of par value
925,037
917,053
Retained earnings
553,685
516,334
Accumulated other comprehensive loss
(217,655)
(63,990)
Total Quaker
shareholders’ equity
1,278,998
1,387,294
Noncontrolling interest
632
628
Total equity
1,279,630
1,387,922
Total liabilities and equity
$
2,831,500
$
2,955,760
September 30,
2023		December 31,
2022
ASSETS
Current assets
Cash and cash equivalents$198,358$180,963
Accounts receivable, net446,459472,888
Inventories
Raw materials and supplies129,204151,105
Work-in-process and finished goods121,566133,743
Prepaid expenses and other current assets70,72455,438
Total current assets966,311994,137
Property, plant and equipment, at cost431,565428,190
Less: Accumulated depreciation(235,125)(229,595)
Property, plant and equipment, net196,440198,595
Right of use lease assets38,59543,766
Goodwill504,457515,008
Other intangible assets, net890,464942,925
Investments in associated companies92,96588,234
Deferred tax assets9,56911,218
Other non-current assets33,70527,739
Total assets$2,732,506$2,821,622
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt$19,246$19,245
Accounts payable190,067193,983
Dividends payable8,1907,808
Accrued compensation43,64139,834
Accrued restructuring3,5905,483
Accrued pension and postretirement benefits1,5741,560
Other accrued liabilities85,79986,873
Total current liabilities352,107354,786
Long-term debt804,973933,561
Long-term lease liabilities22,16326,967
Deferred tax liabilities151,606160,294
Non-current accrued pension and postretirement benefits27,34428,765
Other non-current liabilities33,21238,664
Total liabilities1,391,4051,543,037
Commitments and contingencies (Note 18)
Equity
Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding
September 30, 2023 – 18,000,855 shares; December 31, 2022 – 17,950,264 shares
18,00117,950
Capital in excess of par value938,473928,288
Retained earnings538,628469,920
Accumulated other comprehensive loss(154,724)(138,240)
Total Quaker shareholders’ equity1,340,3781,277,918
Noncontrolling interest723667
Total equity1,341,1011,278,585
Total liabilities and equity$2,732,506$2,821,622
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited; Dollars in thousands)
Unaudited
Nine Months Ended
September 30,
2022
2021
Cash flows from operating activities
Net income
$
60,100
$
103,305
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of debt issuance costs
2,589
3,562
Depreciation and amortization
60,692
65,440
Equity in undistributed earnings of associated companies, net of dividends
3,612
(7,563)
Acquisition-related fair value adjustments related to inventory
—
801
Deferred compensation, deferred taxes and other,
net
(8,811)
(21,865)
Share-based compensation
8,635
8,441
Loss on extinguishment of debt
5,246
—
Gain on disposal of property, plant,
equipment and other assets
(33)
(4,819)
Combination and other acquisition-related expenses, net of payments
(4,265)
(1,705)
Restructuring and related (credits) charges
(604)
593
Pension and other postretirement benefits
(6,556)
(5,638)
(Decrease) increase in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(65,256)
(68,664)
Inventories
(72,386)
(72,962)
Prepaid expenses and other current assets
(11,081)
(24,512)
Change in restructuring liabilities
(1,234)
(4,557)
Accounts payable and accrued liabilities
3,059
32,652
Net cash (used in) provided by operating activities
(26,293)
2,509
Cash flows from investing activities
Investments in property,
plant and equipment
(20,230)
(12,823)
Payments related to acquisitions, net of cash acquired
(9,421)
(31,975)
Proceeds from disposition of assets
65
14,744
Net cash used in investing activities
(29,586)
(30,054)
Cash flows from financing activities
Payments of long-term debt
(668,500)
(28,558)
Proceeds from long-term debt
750,000
—
(Payments) borrowings on revolving credit facilities, net
(10,418)
39,143
Borrowings (payments) on other debt, net
2,131
(585)
Financing-related debt issuance costs
(3,734)
—
Dividends paid
(22,302)
(21,175)
Stock options exercised, other
(616)
704
Net cash provided by (used in) financing activities
46,561
(10,471)
Effect of foreign exchange rate changes on cash
(16,967)
(2,486)
Net decrease in cash and cash equivalents
(26,285)
(40,502)
Cash and cash equivalents at the beginning of the period
165,176
181,895
Cash and cash equivalents at the end of the period
$
138,891
$
141,393
Nine Months Ended
September 30,
20232022
Cash flows from operating activities
Net income$92,644 $60,100 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of debt issuance costs1,059 2,589 
Depreciation and amortization61,434 60,692 
Equity in undistributed earnings of associated companies, net of dividends(7,486)3,612 
Deferred compensation, deferred taxes and other, net(515)(8,844)
Share-based compensation11,189 8,635 
Loss on extinguishment of debt— 5,246 
Combination and other acquisition-related expenses, net of payments— (4,265)
Restructuring and related charges (credits), net6,034 (604)
Pension and other postretirement benefits(2,000)(6,556)
Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:
Accounts receivable22,133 (65,256)
Inventories30,607 (72,386)
Prepaid expenses and other current assets(9,771)(11,081)
Change in restructuring liabilities(7,914)(1,234)
Accounts payable and accrued liabilities2,046 3,059 
Net cash provided by (used in) operating activities199,460 (26,293)
Cash flows from investing activities
Investments in property, plant and equipment(25,794)(20,230)
Payments related to acquisitions, net of cash acquired— (9,421)
Proceeds from disposition of assets— 65 
Net cash used in investing activities(25,794)(29,586)
Cash flows from financing activities
Payments of long-term debt(14,075)(668,500)
Proceeds from long-term debt— 750,000 
Payments on revolving credit facilities, net(112,835)(10,418)
Borrowings on other debt, net797 2,131 
Financing-related debt issuance costs— (3,734)
Dividends paid(23,459)(22,302)
Other stock related activity(953)(616)
Net cash (used in) provided by financing activities(150,525)46,561 
Effect of foreign exchange rate changes on cash(5,746)(16,967)
Net increase (decrease) in cash and cash equivalents17,395 (26,285)
Cash and cash equivalents at the beginning of the period180,963 165,176 
Cash and cash equivalents at the end of the period$198,358 $138,891 
The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Changes in Equity
(Unaudited; Dollars in thousands, except per share amounts)
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
—
—
38,615
—
17
38,632
Amounts reported in other
comprehensive loss
—
—
—
(26,630)
(2)
(26,632)
Dividends ($
0.395
per share)
—
—
(7,062)
—
—
(7,062)
Share issuance and equity-based
compensation plans
24
3,577
—
—
—
3,601
Balance at March 31, 2021
$
17,875
$
908,748
$
455,493
$
(53,228)
$
565
$
1,329,453
Net income
—
—
33,570
—
30
33,600
Amounts reported in other
comprehensive gain
—
—
—
17,285
8
17,293
Dividends ($
0.395
per share)
—
—
(7,062)
—
—
(7,062)
Share issuance and equity-based
compensation plans
3
2,114
—
—
—
2,117
Balance at June 30, 2021
$
17,878
$
910,862
$
482,001
$
(35,943)
$
603
$
1,375,401
Net income
—
—
31,058
—
15
31,073
Amounts reported in other
comprehensive loss
—
—
—
(18,780)
—
(18,780)
Dividends ($
0.415
per share)
—
—
(7,424)
—
—
(7,424)
Share issuance and equity-based
compensation plans
11
3,415
—
—
—
3,426
Balance at September 30, 2021
$
17,889
$
914,277
$
505,635
$
(54,723)
$
618
$
1,383,696
Balance at 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 at March 31, 2022
$
17,912
$
918,699
$
528,716
$
(70,261)
$
634
$
1,395,700
Net income
—
—
14,343
—
28
14,371
Amounts reported in other
comprehensive loss
—
—
—
(74,985)
(33)
(75,018)
Dividends ($
0.415
per share)
—
—
(7,438)
—
—
(7,438)
Share issuance and equity-based
compensation plans
8
2,943
—
—
—
2,951
Balance at June 30, 2022
$
17,920
$
921,642
$
535,621
$
(145,246)
$
629
$
1,330,566
Net income
—
—
25,867
—
41
25,908
Amounts reported in other
comprehensive loss
—
—
—
(72,409)
(38)
(72,447)
Dividends ($
0.435
per share)
—
—
(7,803)
—
—
(7,803)
Share issuance and equity-based
compensation plans
11
3,395
—
—
—
3,406
Balance at September 30, 2022
$
17,931
$
925,037
$
553,685
$
(217,655)
$
632
$
1,279,630
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 plans15 1,646 — — — 1,661 
Balance as of March 31, 2022$17,912 $918,699 $528,716 $(70,261)$634 $1,395,700 
Net income— — 14,343 — 28 14,371 
Amounts reported in other comprehensive loss— — — (74,985)(33)(75,018)
Dividends ($0.415 per share)— — (7,438)— — (7,438)
Share issuance and equity-based compensation plans8 2,943 — — — 2,951 
Balance as of June 30, 2022$17,920 $921,642 $535,621 $(145,246)$629 $1,330,566 
Net income— — 25,867 — 41 25,908 
Amounts reported in other comprehensive loss— — — (72,409)(38)(72,447)
Dividends ($0.435 per share)— — (7,803)— — (7,803)
Share issuance and equity-based compensation plans11 3,395 — — — 3,406 
Balance as of September 30, 2022$17,931 $925,037 $553,685 $(217,655)$632 $1,279,630 
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 plans32 1,386 — — — 1,418 
Balance as of March 31, 2023$17,982 $929,674 $491,632 $(123,177)$677 $1,316,788 
Net income— — 29,346 — 47 29,393 
Amounts reported in other comprehensive loss— — — (6,931)(38)(6,969)
Dividends ($0.435 per share)— — (7,830)— — (7,830)
Share issuance and equity-based compensation plans17 5,267 — — — 5,284 
Balance as of June 30, 2023$17,999 $934,941 $513,148 $(130,108)$686 $1,336,666 
Net income— — 33,670 — 40 33,710 
Amounts reported in other comprehensive loss— — — (24,616)(3)(24,619)
Dividends ($0.455 per share)— — (8,190)— — (8,190)
Share issuance and equity-based compensation plans2 3,532 — — — 3,534 
Balance as of September 30, 2023$18,001 $938,473 $538,628 $(154,724)$723 $1,341,101 
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
6
Table of Contents
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 September 30, 20222023 (the “Report”),
the terms “Quaker Houghton,”
the “Company,”
“we, “we,” and “our” refer to Quaker Chemical
Corporation (doing business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires.
As used in these Notes to Condensed Consolidated Financial Statements,
the The “Combination” refers to the legacy Quaker combination
with Houghton International, Inc. (“Houghton”).
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 nine months ended September 30, 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 and customer industry disaggregation. As a result of the Company’s new organizational structure effective January 1, 2023, the Company reallocated goodwill previously held by the former Global Specialty Businesses segment to the remaining business segments as of January 1, 2023. However, the Company did not recast the carrying amount of goodwill for the year ended December 31, 2022. 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 Pennsylvania
business 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
four
segments: Americas; Europe, Middle East and Africa (“EMEA”); Asia/Pacific; and
Global Specialty
Businesses.
Hyper-inflationary economies
Based on various indices or index compilations being used to monitor inflation
as well as economic instability,
Argentina’s and
Türkiye’s economies were
considered hyper-inflationary under U.S. GAAP effective
July 1, 2018 and April 1, 2022, respectively.
As
of, and for the three and nine months ended September 30, 2022,
2023, the Company's Argentine
and Turkish subsidiaries represented a
combined
1
% 1% and
2
% 2% of the Company’s consolidated
total assets and net sales, respectively.
During the three and nine months ended
September 30, 2023, the Company recorded $1.2 million and $2.9 million of remeasurement losses associated with the applicable currency conversions, respectively. Comparatively, during the three and nine months ended September 30, 2022, the Company recorded $
1.0
$1.0 million and $
1.2
$1.2 million respectively,
of remeasurement losses associated with the
applicable currency conversions, related to Argentina
and Türkiye.
Comparatively, during the three
and nine months ended September
30, 2021, the Company recorded less than $
0.1
million and $
0.3
million, respectively, of
remeasurement losses associated with the
applicable currency conversions related to Argentina.
respectively. These losses were recorded within foreign exchange losses, net, which is a
component of otherOther (expense) income, net, in the Company’s
Condensed Consolidated Statements of Income.
Operations.
Note 2 – Business Acquisitions
2022Previous Acquisitions
Subsequent to the date of these financial statements, inIn 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
$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 Metalsmetals industry. As of September 30, 2023, the allocation of the purchase of this acquisition has been finalized.
industry.
7
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
8
In January 2022, the Company acquired a business that provides pickling
inhibitor technologies, drawing lubricants and stamping
oil, and various other lubrication, rust preventative, and cleaner applications,
which 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 Company allocated $
5.6
million of the purchase price to intangible assets, comprised of $
5.1
million of customer relationships to be amortized over
14
years; and $
0.5
million of existing product technologies to be amortized
over
14
years.
In addition, the Company recorded $
1.8
million of goodwill related to expected value not allocated to other acquired
assets, all of which is expected to be tax deductible in various jurisdictions in which
the Company operates.
During the third quarter
of 2022 the Company finalized post-closing adjustments that resulted in
the Company paying less than $
0.1
$0.1 million of additional
purchase consideration.
Factors contributing to the purchase price that resulted Also in goodwill included
the acquisition of business
processes and personnel that will allow Quaker Houghton to better serve
its customers.
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, which is part of the Global Specialty Businesses
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.
The results of operationsallocation of the purchase prices of both of these January 2022 acquisitions subsequent to
the respective acquisition dates are included in thehave been finalized.
unaudited Condensed Consolidated Statements of Income for the nine month
period ended September 30, 2022.
Applicable
transaction expenses associated with these acquisitions are included
in Combination, integration and other acquisition-related
expenses in the Company’s unaudited
Condensed Consolidated Statements of Income.
Certain pro forma and other information is not
presented, as the operations of the acquisitions are not considered material
to the overall operations of the Company for the periods
presented.
The results of operations of the October acquisition is not included in the Consolidated Statements of
Operations because
the date of closing was subsequent to September 30, 2022.
Preliminary purchase price allocation of assets acquired and liabilities
assumed for this business acquired has not been presented as that information
is not available as of the date of these Condensed
Consolidated Financial Statements.
Previous Acquisitions
In November 2021, the Company acquired Baron Industries, (“Baron”),
a privately held company that provides vacuum
impregnation services of castings, powder metals and electrical components
for its Global Specialty 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 that are payable at various times from 2022 through 2025.
The earn-out provisions could total a maximum of $
4.5
$4.5 million.
In September 2022, the Company paid $
2.5
million related to certain of these earnout provisions.
The Company recorded an
incremental earn-out expense of $
0.1
million during the three and nine months ended September 30, 2022 related to
these earnout
provisions, recorded within the financial
statement caption “Combination, integration and other acquisition-related
expenses” on the
Company’s Condensed Consolidated
Statements of Income.
As of September 30, 2022,2023, the Company has remaining earnoutearn-out liabilities
recorded on its Condensed Consolidated Balance Sheet of $
1.6
$1.1 million.
The Company allocated $
8.0
million of the purchase price to
intangible assets, $
1.1
million of property, plant
and equipment and $
1.5
million of other assets acquired net of liabilities assumed,
which includes $
0.3
million of cash acquired.
In addition, the Company recorded $
0.4
million of goodwill, all of which is expected to
be tax deductible.
Intangible assets comprised $
7.2
million of customer relationships to be amortized over
15 years
; and $
0.8
million
of existing product technology to be amortized over
13 years
.
Factors contributing to the purchase price that resulted in goodwill
included the acquisition of business processes and personnel that will allow Quaker
Houghton to better serve its customers.
During
Additionally, during the third quarter of 2022 the Company finalized post-closing adjustments
that resulted in the Company receiving a payment of less than $
0.1
$0.1 million.
In November 2021, the Company acquired a business that provides hydraulic
fluids, coolants, cleaners, and rust preventative oils
in Türkiye for its EMEA reportable segment for
3.2
million EUR or approximately $
3.7
million.
In September 2021, the Company acquired the remaining interest in Grindaix
GmbH (“Grindaix”), a Germany-based, high-tech
provider of coolant control and delivery systems for its Global Specialty Businesses reportable
segment for
2.4
million EUR or
approximately $
2.9
million, which is gross of approximately $
0.3
million of cash acquired.
Previously, in February
2021, the
Company acquired a
38
% ownership interest in Grindaix for
1.4
million EUR or approximately $
1.7
million.
The Company recorded
its initial investment as an equity method investment within the Condensed
Consolidated Financial Statements and accounted for the
purchase of the remaining interest as a step acquisition whereby the Company
remeasured the previously held equity method
investment to its fair value.
In June 2021, the Company acquired certain assets for its chemical milling
maskants product line in the Global Specialty
Businesses reportable segment for
2.3
million EUR or approximately $
2.8
million.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
9
In February 2021, the Company acquired a tin-plating solutions business
for the steel end market for $
25.0
million.
This
acquisition is part of each of the Company’s
geographic reportable segments.
The Company allocated $
19.6
million of the purchase
price to intangible assets, comprised of $
18.3
million of customer relationships, to be amortized over
19
years; $
0.9
million of existing
product technology to be amortized over
14
years; and $
0.4
million of a licensed trademark to be amortized over
3
years.
In addition,
the Company recorded $
5.0
million of goodwill, all of which is expected to be tax deductible in various jurisdictions
in which we
operate.
Factors contributing to the purchase price that resulted in goodwill included the
acquisition of business processes and
personnel that will allow Quaker Houghton to better serve its customers.
As of September 30, 2022, the allocation of the purchase price of all of the Company’s
2022 acquisitions, the acquisition in
Türkiye and Baron have not been finalized and the one-year measurement
period has not ended.
Further adjustments may be
necessary as a result of the Company’s
on-going assessment of additional information related to the fair value of
assets acquired and
liabilities assumed.
In December 2020, the Company acquired Coral Chemical Company,
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” “Sellers”) have worked to
finalize certain post-closing adjustments.
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.
During the third quarterfirst nine months of 2022,2023, there have been no
material changes to the facts and circumstances of the claim asserted by the
Sellers, and the Company continues to believe the
potential range of exposure for this claim is $$0 to $1.5 million.
0
to $
1.5
million.
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards
Adopted
The FASBThere have been no recently issued ASU 2020
-04,accounting standards that will have a material impact on the Company’s condensed consolidated financial statements and related footnote disclosures.
Reference Rate Reform (Topic
848): Facilitation of the Effects of Reference Rate Reform
on
Financial Reporting
in March 2020.
The FASB subsequently
issued ASU 2021-01,
Reference Rate Reform (Topic
848): Scope
in
January 2021 which clarified the guidance but did not materially change
the guidance or its applicability to the Company.
The
amendments provide temporary optional expedients and exceptions
for applying U.S. GAAP to contract modifications, hedging
relationships and other transactions to ease the potential accounting
and financial reporting burden associated with transitioning away
from reference rates that are expected to be discontinued, including
the London Interbank Offered Rate (“LIBOR”).
ASU 2020-04 is
effective for the Company as of March 12, 2020 and generally can
be applied through December 31, 2022.
On June 17, 2022, the
Company entered into an amendment to its primary credit facility which,
among other things, provided for the use of a USD currency
LIBOR successor rate (the Secured Overnight Financing Rate (“SOFR”)).
See Note 14 of Notes to Condensed Consolidated Financial
Statements.
Note 4 – Business Segments
The Company’s operating
segments, which are consistent with its reportable segments, reflect the structure of the Company’s
internal organization, the method by which the Company’s
resources are allocated and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has
four
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 globally
byregion. All prior period information has been recast to reflect the Global Specialty Businesses segment.
The Global
Specialty Businesses segment includes the Company’s
container, metal finishing,
mining, offshore, specialty coatings, specialty
grease and Norman Hay 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
(credits), net, are not included in segment operating earnings.
Other
items not specifically identified with the Company’s
reportable segments include Interest expense, net and Other (expense) income,
net.
8
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
10
The following table presents information about the performance of the Company’s
reportable segments for the three and ninesegments:
months ended September 30, 2022 and 2021.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Net sales
Americas$245,899 $254,678 $750,531 $702,580 
EMEA139,620 134,386 435,602 426,739 
Asia/Pacific105,093 103,154 300,071 329,458 
Total net sales$490,612 $492,218 $1,486,204 $1,458,777 
Segment operating earnings
Americas$69,148 $66,749 $204,280 $164,065 
EMEA27,922 15,479 81,076 58,803 
Asia/Pacific30,963 26,723 86,604 76,146 
Total segment operating earnings128,033 108,951 371,960 299,014 
Combination, integration and other acquisition-related expenses— (2,107)— (7,992)
Restructuring and related (charges) credits, net(1,019)1,423 (6,034)604 
Non-operating and administrative expenses(52,280)(47,852)(154,001)(139,894)
Depreciation of corporate assets and amortization(15,216)(15,806)(45,683)(45,817)
Operating income59,518 44,609 166,242 105,915 
Other (expense) income, net(2,713)85 (8,558)(10,520)
Interest expense, net(12,781)(8,389)(38,744)(20,228)
Income before taxes and equity in net income of associated companies$44,024 $36,305 $118,940 $75,167 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Net sales
Americas
$
186,546
$
150,799
$
513,438
$
425,343
EMEA
113,367
122,241
362,107
365,491
Asia/Pacific
91,211
98,659
295,273
286,924
Global Specialty Businesses
101,094
77,373
287,959
236,359
Total net sales
$
492,218
$
449,072
$
1,458,777
$
1,314,117
Segment operating earnings
Americas
$
44,986
$
31,273
$
107,991
$
97,155
EMEA
9,883
20,153
39,932
68,802
Asia/Pacific
23,336
23,285
67,469
73,990
Global Specialty Businesses
30,746
20,663
83,622
69,041
Total segment operating
earnings
108,951
95,374
299,014
308,988
Combination, integration and other acquisition-related expenses
(2,107)
(5,786)
(7,992)
(18,259)
Restructuring and related credits (charges), net
1,423
880
604
(593)
Fair value step up of acquired inventory sold
-
-
-
(801)
Non-operating and administrative expenses
(47,852)
(38,691)
(139,894)
(122,760)
Depreciation of corporate assets and amortization
(15,806)
(15,767)
(45,817)
(46,855)
Operating income
44,609
36,010
105,915
119,720
Other income (expense), net
85
647
(10,520)
19,344
Interest expense, net
(8,389)
(5,637)
(20,228)
(16,725)
Income before taxes and equity in net income of
associated companies
$
36,305
$
31,020
$
75,167
$
122,339
Inter-segment revenues for the three and nine months ended September
30, 2022, were $
2.6
million and $
8.8
million for
Americas, $
6.4
million and $
27.7
million for EMEA, $
0.3
million and $
0.7
million for Asia/Pacific, and $
2.3
million and $
6.0
million
for Global Specialty Businesses, respectively.
Inter-segment revenues
for the three and nine months ended September 30, 2021, were
$
3.6
million and $
9.3
million for Americas, $
6.8
million and $
21.9
million for EMEA, $
0.8
million and $
1.3
million for Asia/Pacific,
and $
1.8
million and $
5.9
million for Global Specialty Businesses, respectively.
However, allThe following table summarizes inter-segment
revenues. All inter-segment transactions have been
eliminated from each reportable operating segment’s
net sales and earnings for all periods presented in the above tables.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Americas$1,772 $2,702 $6,778 $9,200 
EMEA5,161 9,448 18,718 37,259 
Asia/Pacific793 327 1,329 739 
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 $
21.4
$21.6 million and $
61.7
$63.2 million
for the three and nine months ended September 30, 2023, respectively, and $21.4 million and $61.7 million for the three and nine months ended September 30, 2022, respectively,
respectively.
and $
18.9
million and $
53.4
million for the three and nine
months ended September 30, 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, aerospace,
industrial and agricultural equipment, and durable goods.
As previously disclosed in the
Company’s 20212022 Form 10-K, for
the year ended December 31, 2021, the Company’s
five largest customers combined (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.
9
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
11
Contract Assets and Liabilities
The Company had no material contract assets recorded on its Condensed
Consolidated Balance Sheets as of September 30, 2022
2023 or December 31, 2021.2022.
The Company had approximately $
6.0
$2.8 million and $
7.0
$5.7 million of deferred revenue as of September 30, 20222023 and December 31,
2021, 2022, respectively.
For the nine months ended September 30, 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 than
by 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. Prior period information has been recast to reflect the Company’s current period customer industry disaggregation. See Note 1 of Notes to Condensed Consolidated Financial Statements.
revenue recognized for the three and nine months ended September 30, 2022
Three Months Ended September 30, 2023
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$67,957 $32,630 $49,320 $149,907 
Metalworking and other177,942 106,990 55,773 340,705 
$245,899 $139,620 $105,093 $490,612 
Timing of Revenue Recognized
Product sales at a point in time$235,209 $128,586 $102,305 $466,100 
Services transferred over time10,690 11,034 2,788 24,512 
$245,899 $139,620 $105,093 $490,612 
and 2021.
Nine Months Ended September 30, 2023
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$204,834 $104,376 $144,109 $453,319 
Metalworking and other545,697 331,226 155,962 1,032,885 
$750,531 $435,602 $300,071 $1,486,204 
Timing of Revenue Recognized
Product sales at a point in time$718,187 $402,508 $291,740 $1,412,435 
Services transferred over time32,344 33,094 8,331 73,769 
$750,531 $435,602 $300,071 $1,486,204 
Three Months Ended September 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
69,249
$
32,690
$
52,856
$
154,795
Metalworking and other
117,297
80,677
38,355
236,329
186,546
113,367
91,211
391,124
Global Specialty Businesses
67,469
20,185
13,440
101,094
$
254,015
$
133,552
$
104,651
$
492,218
Timing of Revenue Recognized
Product sales at a point in time
$
244,162
$
127,045
$
101,945
$
473,152
Services transferred over time
9,853
6,507
2,706
19,066
$
254,015
$
133,552
$
104,651
$
492,21810
Three Months Ended September 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
56,954
$
38,483
$
53,994
$
149,431
Metalworking and other
93,845
83,758
44,665
222,268
150,799
122,241
98,659
371,699
Global Specialty Businesses
46,008
19,253
12,112
77,373
$
196,807
$
141,494
$
110,771
$
449,072
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
12
Three Months Ended September 30, 2022
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$67,943 $32,748 $51,341 $152,032 
Metalworking and other186,735 101,638 51,813 340,186 
$254,678 $134,386 $103,154 $492,218 
Timing of Revenue Recognized
Product sales at a point in time$243,699 $124,566 $99,929 $468,194 
Services transferred over time10,979 9,820 3,225 24,024 
$254,678 $134,386 $103,154 $492,218 
Nine Months Ended September 30, 2022
Nine Months Ended September 30, 2022
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$185,784 $107,163 $163,239 $456,186 
Metalworking and other516,796 319,576 166,219 1,002,591 
$702,580 $426,739 $329,458 $1,458,777 
Timing of Revenue Recognized
Product sales at a point in time$669,945 $396,944 $321,031 $1,387,920 
Services transferred over time32,635 29,795 8,427 70,857 
$702,580 $426,739 $329,458 $1,458,777 
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
188,782
$
107,115
$
163,739
$
459,636
Metalworking and other
324,656
254,992
131,534
711,182
513,438
362,107
295,273
1,170,818
Global Specialty Businesses
187,099
61,530
39,330
287,959
$
700,537
$
423,637
$
334,603
$
1,458,777
Timing of Revenue Recognized
Product sales at a point in time
$
670,581
$
400,870
$
326,760
$
1,398,211
Services transferred over time
29,956
22,767
7,843
60,566
$
700,537
$
423,637
$
334,603
$
1,458,777
Nine Months Ended September
30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
155,546
$
108,391
$
151,944
$
415,881
Metalworking and other
269,797
257,100
134,980
661,877
425,343
365,491
286,924
1,077,758
Global Specialty Businesses
137,447
61,203
37,709
236,359
$
562,790
$
426,694
$
324,633
$
1,314,117
Timing of Revenue Recognized
Product sales at a point in time
$
537,161
$
400,982
$
316,222
$
1,254,365
Services transferred over time
25,629
25,712
8,411
59,752
$
562,790
$
426,694
$
324,633
$
1,314,117
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machinery
and equipment with remaining lease terms up to
9 years
.
8 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 92 years.
93 years
.
The Company has
had no
material variable lease costs, sublease income, or finance leases for the three and nine
months ended September
30, 20222023 and 2021.2022. The following table sets forth the components of
the Company’s lease cost for three and nine
months endedexpense are as follows:
September 30, 2022 and 2021:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Operating lease expense$3,886 $3,664 $11,532 $10,592 
Short-term lease expense193 201 587 625 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Operating lease expense
$
3,664
$
3,408
$
10,592
$
10,568
Short-term lease expense
201
221
625
75511
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
13
Supplemental cash flow information related to the Company’s
leases is as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$3,917 $3,768 $11,547 $10,575 
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new operating lease liabilities2,910 2,599 6,566 10,672 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating leases
$
3,768
$
3,365
$
10,575
$
10,433
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new
operating lease liabilities
2,599
1,711
10,672
5,587
Supplemental balance sheet information related to the Company’s
leases is as follows:
September 30,
2023		December 31,
2022
Right of use lease assets$38,595 $43,766 
Other current liabilities12,113 12,024 
Long-term lease liabilities22,163 26,967 
Total operating lease liabilities$34,276 $38,991 
Weighted average remaining lease term (years)4.825.10
Weighted average discount rate4.67 %4.36 %
September 30,
December 31,
2022
2021
Right of use lease assets
$
37,005
$
36,635
Other current liabilities
11,143
9,976
Long-term lease liabilities
25,697
26,335
Total operating lease liabilities
$
36,840
$
36,311
Weighted average
remaining lease term (years)
5.4
5.6
Weighted average
discount rate
4.43%
4.22%
Maturities of operating lease liabilities were as follows:
September 30,
2023
For the remainder of 2023$3,691 
For the year ended December 31, 202412,589 
For the year ended December 31, 20258,417 
For the year ended December 31, 20266,286 
For the year ended December 31, 20273,051 
For the year ended December 31, 2028 and beyond5,614 
Total lease payments39,648 
Less: imputed interest(5,372)
Present value of lease liabilities$34,276 
September 30,
2022
For the remainder of 2022
$
3,262
For the year ended December 31, 2023
10,668
For the year ended December 31, 2024
8,429
For the year ended December 31, 2025
6,087
For the year ended December 31, 2026
4,512
For the year ended December 31, 2027 and beyond
6,785
Total lease payments
39,743
Less: imputed interest
(2,903)
Present value of lease liabilities
$
36,840
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 Combination inCombination. As of December 31, 2022, the thirdCompany substantially completed all of the initiatives under the QH Program with only an immaterial amount of remaining severance still to be paid, which has been paid as of September 30, 2023.
In the fourth quarter of 2019. The QH Program2022, 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 September 30, 2023, the program included restructuring and associated
severance costs to reduce total headcount by approximately 400 people globally, as well as100 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 final costs associated with the QH Programwill depend on a
number of factors andthat are subject to change; however, the Company had reduction in headcount and site closures under the QH
Program in 2022 and expects final headcount reductions to continue into 2023. Employee separation benefits varied depending on
local regulations within certain foreign countries and included severance and other benefits.
change.
12
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
14
AllEmployee separation benefits vary depending on local regulations within certain foreign countries and include severance and other benefits. Restructuring costs incurred related 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 under the QH Program. These costs are recorded
in Restructuring and related (credits) charges in
the Company’s Condensed
Consolidated Statements of Income.
The credits recognized in the nine months ended September 30, 2022
reflect customary and routine adjustments to initial estimates for
employee separation costs.
At this time, the Company does not
expect to incur material additional costs under the QH Program.
Operations. As described in Note 4 of the Notes to Condensed Consolidated
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.
Activity inIn connection with the Company’s accrual
plans for restructuring underclosure of certain manufacturing and non-manufacturing facilities, the QH ProgramCompany has made available for sale certain facilities and property. During the ninethree months ended September 30, 2022
is2023, the Company classified certain properties with aggregate book value of approximately $6.9 million as held-for-sale that are recorded in Prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheets. The Company expects to complete the sale of these properties over the next 12 months.
Changes in the Company’s accruals for its restructuring programs are as follows:
Restructuring Programs
Accrued restructuring as of December 31, 2022$5,483
Restructuring and related charges, net6,034 
Cash payments(7,914)
Currency translation adjustments(13)
Accrued restructuring as of September 30, 2023$3,590
QH Program
Accrued restructuring as of December 31, 2021
$
4,087
Restructuring and related (credits)
(604)
Cash payments
(1,234)
Currency translation adjustments
(451)
Accrued restructuring as of September 30, 2022
$
1,798
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense
in its Condensed Consolidated Statements of IncomeOperations:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Stock options$203$533$837$1,269
Non-vested stock awards and restricted stock units2,4291,7837,1924,998
Director stock ownership plan3095653
Performance stock units1,1138753,1042,314
Total share-based compensation expense$3,775$3,200$11,189$8,634
Share-based compensation expense is recorded in SG&A, except for $0.1 million and $0.2 million for the three and nine months ended September 30, 2022, and 2021:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Stock options
$
533
$
298
$
1,269
$
938
Non-vested stock awards and restricted stock units
1,783
1,277
4,998
3,963
Non-elective and elective 401(k) matching contribution in stock
—
—
—
1,553
Director stock ownership plan
9
241
53
660
Performance stock units
875
491
2,314
1,327
Total share-based
compensation expense
$
3,200
$
2,307
$
8,634
$
8,441
Share-based compensation expense is recorded in SG&A, except for less than
$
0.1
million and $
0.2
million for the three and nine
months ended September 30, 2022, respectively,
and $
0.2
million and $
0.7
million for the three and nine months ended September 30,
2021,
respectively, recorded within
Combination, integration and other acquisition-related expenses.
Stock Options
During the first nine months of 2022, the Company granted stock options
under its long-term incentive plan (“LTIP”)
that are
subject only to time vesting over a
three year
period.
For the purposes of determining the fair value of stock option awards, the
Company used a Black-Scholes option pricing model and the assumptions set forth
in the table below:
March 2022
July 2022
Grant
Grant
Number of options granted
27,077
4,837
Dividend yield
0.80
%
0.79
%
Expected volatility
38.60
%
40.47
%
Risk-free interest rate
2.07
%
2.87
%
Expected term (years)
4.0
4.0
The fair value of these options is amortized on a straight-line basis over the
vesting period.
As of September 30, 2022,
2023, unrecognized compensation expense related to allunvested stock options granted was $
2.0
$0.5 million, to be recognized over a weighted average
remaining period of 0.9 years.
1.5Restricted Stock Awards and Restricted Stock Units
During the nine months ended September 30, 2023, the Company granted 38,894 non-vested restricted shares and 6,675 non-vested restricted stock units 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 September 30, 2023, unrecognized compensation expense related to the non-vested restricted shares was $8.0 million, to be recognized over a weighted average remaining period of 1.4 years, and unrecognized compensation expense related to non-vested restricted stock units was $1.6 million, to be recognized over a weighted average remaining period of 1.5 years.
13
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
Restricted Stock Awards
and Restricted Stock Units
During the nine months ended September 30, 2022, the Company granted
35,846
non-vested restricted shares and
4,490
non-
vested restricted stock units under its LTIP,
which are subject to time-based vesting, generally over a
three year
period.
The fair value
of these grants is based on the trading price of the Company’s
common stock on the date of grant.
The Company adjusts the grant
date fair value of these awards for expected forfeitures based on historical experience.
As of September 30, 2022, unrecognized
compensation expense related to the non-vested restricted
shares was $
5.9
million, to be recognized over a weighted average
remaining period of
1.6
years, and unrecognized compensation expense related to non-vested restricted
stock units was $
1.0
million,
to be recognized over a weighted average remaining period of
1.9
years.
Performance Stock Units
TheAs a component of its LTIP, the Company grants performance-dependentperformance-based stock unit awards (“PSUs”) as a component
of its LTIP,
, which will be settled in a
certain 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 measurement
period forof the PSUsmarket-based and performance objectives is generally
from January 1 of the year of grant through December 31 of the year prior
to issuance 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 date
and usingwhich included the following assumptions set forth in the table below:
2023
Grants
Number of PSUs granted16,861
Risk-free interest rate3.85%
Dividend yield0.96%
Expected term (years)3.0
2022
Grants
Number of PSUs granted
18,462
Risk-free interest rate
2.11
%
Dividend yield
0.93
%
Expected term (years)
3.0
As of September 30, 2022, basedBased on the conditions of the PSUs and performance
to date for each award,of the outstanding PSU awards as of September 30, 2023, the Company estimates
that it will
no
t issue any25,613 fully vested shares as of the applicable settlement date of allfor such outstanding
PSUs awards.
As of September 30,
2022, 2023, there was approximately $
4.8
$8.0 million of total unrecognized compensation cost related to PSUs, which the Company
expects to
recognize over a weighted-average period of 2.2 years.
2.0
years.
Defined Contribution Plan
Note 9 – Pension and Other Postretirement Benefits
The Company has a 401(k) plan with an employer match covering a majority
components of its U.S. employees.
The Company matchesnet periodic benefit cost (income) are as follows:
50
Three Months Ended September 30,Nine Months Ended September 30,
Pension BenefitsOther Postretirement BenefitsPension BenefitsOther Postretirement Benefits
20232022202320222023202220232022
Service cost$109$166$—$1 $320$520$—$1
Interest cost2,4871,272148 7,4523,9495119
Expected return on plan assets(2,033)(1,942)——(6,056)(6,038)——
Actuarial loss (gain) amortization103238(36)(23)308743(95)(70)
Prior service cost (income) amortization183(4)(8)268(12)(17)
Net periodic benefit cost (income)$684 $(263)$(26)$(22)$2,050 $(818)$(56)$(67)
%
of the first
6
% of compensation that is contributed to the plan, with a maximum matching contribution of
3
% of compensation.
Additionally, the plan
provides for non-elective nondiscretionary contributions on behalf of participants
who have completedIn July 2023, one year
of service equal to
3
% of the eligible participants’ compensation.
Beginning in April 2020 and continuing through March 2021, the
Company matched both non-elective and elective 401(k) contributions
in fully vested shares of the Company’s common
stock rather
than cash.
There were
no
matching contributionspension plans in stockthe U.K. liquidated approximately $50 million of its invested assets and subsequently funded and entered into an insurance annuity contract, which will provide for the three and nine months endedpension plan’s defined benefit obligations to participants.
Employer Contributions
As of September 30, 2022.
For2023, $3.4 million and $0.1 million of contributions have been made to the nine
months ended September 30, 2021, totalCompany’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 were $
1.5of approximately $5.2 million to its U.S. and foreign pension plans and approximately $0.2 million to its other postretirement benefit plans in 2023.
million.
14
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
16
Note 9 – Pension and Other Postretirement
Benefits
The components of net periodic benefit (income) cost for the three and
nine months ended September 30, 2022 and 2021 are as
follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2022
2021
2022
2021
2022
2021
2022
2021
Service cost (income)
$
166
$
289
$
1
$
(2)
$
520
$
921
$
1
$
1
Interest cost (income)
1,272
1,078
8
(1)
3,949
3,262
19
20
Expected return on plan assets
(1,942)
(2,075)
—
—
(6,038)
(6,250)
—
—
Actuarial loss (gain)
amortization
238
737
(23)
(85)
743
2,449
(70)
(85)
Prior service cost (income)
amortization
3
3
(8)
—
8
8
(17)
—
Net periodic benefit (income)
cost
$
(263)
$
32
$
(22)
$
(88)
$
(818)
$
390
$
(67)
$
(64)
Employer Contributions
As of September 30, 2022, $
5.5
million and $
0.1
million of contributions have been made to the Company’s
U.S. and foreign
pension plans and its other postretirement benefit plans, respectively
.
Taking into consideration
current minimum cash contribution
requirements, the Company currently expects to make full year cash contributions
of approximately $
6.6
million to its U.S. and
foreign pension plans and approximately $
0.2
million to its other postretirement benefit plans in 2022
.
Note 10 – Other Income (Expense), Net(expense) income, net
The components of otherOther (expense) income, (expense), net for the three and nine months
ended September 30, 2022 and 2021 are as follows:
follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Income from third party license fees$245$253$891$906
Foreign exchange losses, net(2,498)(1,928)(10,049)(5,859)
(Loss) gain on disposals of property, plant, equipment and other assets, net(25)48 (91)33
Non-income tax refunds and other related credits (expense)911221,339 (1,617)
Pension and postretirement benefit (costs) income, non-service components(549)452(1,674)1,406
Facility remediation recoveries, net—1,1041,0141,104
Loss on extinguishment of debt——— (6,763)
Other non-operating income, net233412270
Total other (expense) income, net$(2,713)$85$(8,558)$(10,520)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Income from third party license fees
$
253
$
314
$
906
$
1,026
Foreign exchange (losses) gain, net
(1,928)
368
(5,859)
(1,948)
Gain (loss) on disposals of property,
plant, equipment and other
assets, net
48
(537)
33
4,819
Non-income tax refunds and other related credits (expense)
122
3
(1,617)
14,395
Pension and postretirement benefit income,
non-service components
452
343
1,406
596
Loss on extinguishment of debt
—
—
(6,763)
—
Gain on insurance recoveries
1,104
—
1,104
—
Other non-operating income, net
34
156
270
456
Total other income
(expense), net
$
85
$
647
$
(10,520)
$
19,344
Gain (loss) on disposals of property,
plant, equipment and other assets, net, during the three months ended September 30, 2021,
includes losses related to certain fixed asset disposals resulting from property
damage.
See Note 18 of Notes to Condensed
Consolidated Financial Statements.
During the nine months ended September 30, 2021, this caption also includes
the gain on the sale
of certain held-for-sale real property assets related to
the Combination.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17
Non-income tax refunds and other related credits (expense) during
the nine months ended September 30, 2023 and nine months ended September 30, 2022 includes
include adjustments to a Combination-related indemnification assetsasset associated with the
settlement of certain income tax audits at certain of the
Company’s Italian and German
affiliates for tax periods prior to August 1, 2019.
See Note 11 of Notes to Condensed Consolidated
Financial Statements.
DuringFacility remediation recoveries, net, during the nine months ended September 30, 2021 this caption includes certain
non-income tax credits for2023 and the
Company’s Brazilian subsidiaries.
three and nine months ended September 30, 2022, reflect gains recorded on the payments received from insurers related to previously incurred costs from the remediation and restoration of property damage incurred during the three months ended September 30, 2021. See Note 18 of Notes to the Condensed Consolidated Financial Statements.
Loss on extinguishment of debt during the nine months ended September
30, 2022, includes therepresents a write-off of certain previously
unamortized deferred financing costs as well as a portion of the third
party and creditor debt issuance costs incurred to execute an
amendment to the Company’s primary
credit facility.
See Note 14 of Notes to the Condensed Consolidated Financial Statements.
Gain on insurance recoveries during the three and nine months ended September
30, 2022, reflects payments received from
insurers related to the property damage incurred during the three
months ended September 2021, noted above.
See Note 18 of Notes
to the Condensed Consolidated Financial Statements.
Note 11 – Income Taxes
and Uncertain Income Tax Positions
Positions
The Company’s effective
tax rates for the three and nine months ended September 30, 20222023 were
28.1
% 30.9% and
19.2
% 31.1%, respectively,
compared to
2.6
% 28.1% and
21.8
% 19.2% for the three and nine months ended September 30, 2021,2022, respectively.
The Company’s effective
tax
rate for the ninethree months ended September 30, 20222023 was primarily impacted by foreign tax inclusions, withholding taxes, return to provision adjustments, the impact of U.S. Department of Treasury guidance on the usage of foreign tax credits, and the mix of earnings. The effective tax rate for the first nine months of 2023 was further impacted by various
other items including a declinechanges to the valuation allowance for and the usage of foreign tax credits due to an enacted law change in forecasted profitsBrazil, and
earnings mix, share-based compensation. Comparatively, the prior year effective tax rates were largely impacted by foreign tax inclusions, changes in the valuation allowance
for foreign tax credits, the impact of audit settlements, reached
with Italian tax authorities, a reduction in reserves for uncertain tax positions,
withholding taxes, and withholding taxes.
the impact of forecasted earnings and the mix of such earnings. In addition, the Company
incurred higher tax expense during the three and nine months ended
September 30, 2022 at one of its subsidiaries as it accrued taxes at
a statutory tax rate of
25
% while it awaits recertification of a concessionary
15
% tax rate, which was available to the Company during
all of 2021.
Comparatively, the prior year
Company’s effective tax rates were largely impacted by changes in permanent
reinvestment assertions,
changes in foreign tax credit valuation allowances, tax law changes in a foreign
jurisdiction, deferred tax benefits related to an
intercompany intangible asset transfer and the income tax impacts of certain
non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
As of December 31, 2021, the Company had a deferred tax liability of $
8.4
million on certain undistributed foreign earnings,
which primarily represents the Company’s
estimate of non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S.
As of September 30, 2022 this deferred tax liability balance was $
6.9
million.
As of September 30, 2022, the
Company’s cumulative liability
for gross unrecognized tax benefits was $
16.2
million, a decrease of approximately $
6.3
million from
the cumulative liability accrued as of December 31, 2021.
The Company continues to recognize interest and penalties associated with uncertain
tax positions as a component of taxes on
income before equity in net income of associated companies in its Condensed
Consolidated Statements of Income.
The Company
recognized an expense for interest of $
0.1
million and a benefit for interest of $
0.2
million and a benefit of less than $
0.1
million and
$
1.6
million for penalties in its Condensed Consolidated Statement of Income for
the three and nine months ended September 30, 2022 were impacted by the Company recording earnings of one of its subsidiaries at a statutory tax rate of 25% while the recertification of its concessionary 15% tax rate was pending receipt.
2022, respectively,
and recognized an expenseAs previously reported, Houghton Italia, S.r.l was involved in a corporate income tax audit with the Italian tax authorities covering tax years 2014 through 2018. The Company settled all years 2014 through 2018 for interest of approximately $
0.2
$3.7 million and, $
0.4
million and a benefit of less than
$
0.1
million and $
0.2
million for penalties in its Condensed Consolidated Statement of Incomeaccordingly, released all reserves relating to this audit for the
three settled tax years during the first quarter of 2022. The settlement is to be paid via installments through 2026 and, nine months ended
through September 30, 2021, respectively.
As of September 30, 2022,2023, the Company had accrued $
2.6
has paid $1.5 million for cumulative interest and $
1.4
of such installments. Having received approximately $1.2 million for cumulative penalties in its Condensed Consolidated
Balance Sheets, compared to $
3.1
million for cumulative interest and
$
3.1
million for cumulative penalties accrued at December 31, 2021.
Duringfrom escrow during the nine months ended September 30, 2022 and 2021,quarter, the Company
recognized decreases has a remaining indemnification receivable of $
3.8
$3.2 million and $
1.2
million, respectively,
in connection with its cumulative liabilityclaim against the former owners of Houghton for gross unrecognizedany pre-Combination tax benefits due to the settlement of
income tax audits with
both the Italian and German tax authorities,liabilities arising from this matter, as well as the expiration of the
applicable statutes of limitations for certainother audit settlements and tax years.
The Company estimates that during the year ending December 31, 202
2
it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
4.1matters.
million due to the settlement of income tax audits and the expiration of the statute of
limitations with regard to certain tax positions.
This estimated reduction in the cumulative liability for unrecognized
tax benefits does
not consider any increase in liability for unrecognized tax benefits with regard
to existing tax positions or any increase in cumulative
liability for unrecognized tax benefits with regard to new tax positions for
the year ending December 31, 2022.
The Company and its subsidiaries are subject to U.S. Federal income tax,
as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain subject
to examination by major tax jurisdictions include Italy from
2007
, Brazil from
2011
,
the Netherlands from
2016
, Canada, China, Mexico and the U.S. from
2017
, Germany, Spain and 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
.
15
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18
As previously reported,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. In addition, in July 2023, the Company was notified by the Italian tax authorities have assessed additional
tax due fromof an audit to commence for one of the Company’s subsidiary,
Quaker Italia
S.r.l., relatingItalian subsidiaries for tax year 2019. Both of these audit proceedings are ongoing and the Company has been providing documentation in response to the tax years
2007
through
2015
.
all of their inquiries. The Company has filednot established any reserves for competent authority relief from these assessments undermatters at this time.
the Mutual Agreement Procedures (“MAP”) of the Organization
for Economic Co-Operation and Development for all years except
2007.
In 2020, the respective tax authorities in Italy,
Spain and the Netherlands reached agreement with respect to the MAP
proceedings which the Company had accepted.
As of September 30, 2022, the Company received $
1.6
million in refunds from the
Netherlands and Spain.
In February 2022, the Company received a settlement notice from the Italian taxing
authorities confirming the
amount due of $
2.6
million, having granted the Company’s request
to utilize its remaining net operating losses to partially offset
the
liability.
As of September 30, 2022, the Company has paid the full settlement amount,
of which approximately $
0.2
million was
confirmed to be refundable.
Houghton Italia, S.r.l was involved
in a corporate income tax audit with the Italian tax authorities covering tax years
2014
through
2018
.
During the fourth quarter of 2021, the Company settled a portion of the Houghton
Italia, S.r.l. corporate income tax audit
with
the Italian tax authorities for the tax years 2014 and 2015.
During the nine months ended September 30, 2022, the Company settled
tax years 2016 through 2018 for a total of $
2.1
million.
In total, the Company has now settled all years 2014 through 2018 for $
3.7
million.
Accordingly, the Company has
released all reserves relating to this audit for the settled tax years.
As a result of the
settlement and reserve release the Company recognized a net benefit
to the tax provision of $
1.9
million during the first nine months
of 2022.
The Company has an indemnification receivable of approximately $
3.6
million in connection with its claim against the
former owners of Houghton for any pre-Combination tax
liabilities arising from this matter, as well as other audit
settlements.
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations for
the three and nine months ended September 30, 2022 andcalculations:
2021:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation$33,670 $25,867 $92,550 $60,026 
Less: income allocated to participating securities(164)(115)(464)(250)
Net income available to common shareholders$33,506 $25,752 $92,086 $59,776 
Basic weighted average common shares outstanding17,908,75417,847,30517,889,44417,835,976
Basic earnings per common share$1.87 $1.44 $5.15 $3.35 
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation$33,670 $25,867 $92,550 $60,026 
Less: income allocated to participating securities(164)(115)(464)(250)
Net income available to common shareholders$33,506 $25,752 $92,086 $59,776 
Basic weighted average common shares outstanding17,908,75417,847,30517,889,44417,835,976
Effect of dilutive securities12,52012,56616,70915,465
Diluted weighted average common shares outstanding17,921,27417,859,87117,906,15317,851,441
Diluted earnings per common share$1.87 $1.44 $5.14 $3.35 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
25,867
$
31,058
$
60,026
$
103,243
Less: income allocated to participating securities
(115)
(119)
(250)
(413)
Net income available to common shareholders
$
25,752
$
30,939
$
59,776
$
102,830
Basic weighted average common shares outstanding
17,847,305
17,812,216
17,835,976
17,800,082
Basic earnings per common share
$
1.44
$
1.74
$
3.35
$
5.78
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
25,867
$
31,058
$
60,026
$
103,243
Less: income allocated to participating securities
(115)
(119)
(250)
(412)
Net income available to common shareholders
$
25,752
$
30,939
$
59,776
$
102,831
Basic weighted average common shares outstanding
17,847,305
17,812,216
17,835,976
17,800,082
Effect of dilutive securities
12,566
58,176
15,465
59,986
Diluted weighted average common shares outstanding
17,859,871
17,870,392
17,851,441
17,860,068
Diluted earnings per common share
$
1.44
$
1.73
$
3.35
$
5.76
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
25,896
and
24,618
for the three
11,598 and nine months ended September 30, 2022, respectively,
and
5,531
and
3,722
10,453 for the three and nine months ended September 30, 2023, respectively, and 25,896 and 24,618 for the three and nine months ended September 30, 2022, respectively.
2021, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19
Note 13 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2022 were as follows:
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 (reductions)
1,853
—
—
(59)
1,794
Currency translation adjustments
(810)
(16,826)
(16,462)
(7,858)
(41,956)
Balance as of September 30, 2022
$
215,066
$
118,694
$
145,996
$
111,276
$
591,032
Gross carrying amounts and accumulated amortization for definite-lived
intangible assets as of September 30, 2022 and
December 31, 2021 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2022
2021
2022
2021
Customer lists and rights to sell
$
803,346
$
853,122
$
173,893
$
147,858
Trademarks, formulations and product
technology
150,164
163,974
42,484
38,747
Other
6,611
6,309
5,973
5,900
Total definite-lived
intangible assets
$
960,121
$
1,023,405
$
222,350
$
192,505
The Company amortizes definite-lived intangible assets on a straight-line basis over
their useful lives.
The Company recorded
$
14.1
million and $
43.3
million of amortization expense for the three and nine months ended September
30, 2022, respectively.
Comparatively,
the Company recorded $
14.9
million and $
44.7
million of amortization expense for the three and nine months ended
September 30, 2021, respectively.
Estimated annual aggregate amortization expense for the current year
and subsequent five years and beyond is as follows:
For the year ended December 31, 2022
$
55,628
For the year ended December 31, 2023
55,454
For the year ended December 31, 2024
54,848
For the year ended December 31, 2025
54,027
For the year ended December 31, 2026
53,835
For the year ended December 31, 2027 and beyond
513,988
The Company had four indefinite-lived intangible assets totaling
$
178.2
million as of September 30, 2022, including $
177.1
million of indefinite-lived intangible assets for trademarks and tradenames associated
with the Combination.
Comparatively, the
Company had four indefinite-lived intangible assets for trademarks and
tradenames totaling $
196.9
million as of December 31, 2021.
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 continues to monitor various financial, economic and
geopolitical conditions impacting the Company,
including the ongoing Russia-Ukraine war and the Company’s
decision to cease
operations in Russia, continued raw material cost escalation, supply chain
constraints and disruptions, as well as rising interest rates
and the cost of capital among other factors.
The Company concluded that these and other factors, which have and continue to
impact
the Company, did not
represent a triggering event during the third quarter of 2022, except for
the Company’s EMEA reporting unit
and the associated goodwill, as well as the related asset group.
The Company concluded that during the third quarter of 2022 the
escalation of these events adversely impacted EMEA’s
ongoing financial, performance and representedeconomic or geopolitical conditions did not represent a triggering event.
As a resultIn connection with the Company’s reorganization and the associated change in reportable segments and reporting units during the first quarter of this conclusion,2023, the Company completed an interimperformed the required impairment
assessment for its EMEA assessments directly before and immediately after the change in reporting unit, as well as
the related asset group, during the third quarter of 2022.
The Companyunits and concluded that the undiscounted cash flows exceeded the
carrying value of the long-lived assets, and it iswas not more likely than not that
an impairment exists.
In completing a quantitative
goodwill impairment test, the Company comparesfair values of any of the Company’s previous or new reporting unit
’s fair value, primarily based on future
discounted cash flows, to
itsunits were less than their respective carrying value in order to determine if an impairment charge is warranted.
The estimates of future discounted cash flows involve
considerable management judgment and are based upon certain significant
assumptions including the weighted average cost of capital
amounts.
16
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
20
Changes in the carrying amount of goodwill were as well as projected EBITDA, which includes assumptions relatedfollows. Prior period information has been recast to revenue
growth rates, gross margin levels and operating
expenses.
As a result of this interim impairment assessment,
the estimated fair value of the EMEA reporting unit exceeded its
carrying value by approximately
22
% and the Company concluded no impairment was warranted.
Notwithstanding the results ofreflect the Company’s
interim impairment assessment, if the Company is unable to successfully
implement selling price increases aimed at more than offsetting
raw material costs and ongoing inflationary pressures and the financial
performance current period reportable segments. See Note 1 of the EMEA reporting unit declines further,
or interest rates continue to rise and this leads to an increase in the cost of
capital,
then it is possible these financial, economic and geopolitical conditions could
result in another triggering event for the EMEA
reporting unit in the future and could lead to a potential impairment
.
In addition, if any of these financial, economic or geopolitical
conditions has a more significant adverse effect on the Company,
these could lead to a potential impairment of the Company’s
goodwill or other indefinite-lived or long-lived assets.
Note 14 – Debt
Debt as of September 30, 2022 and December 31, 2021 includes the following:
As of September 30, 2022
As of December 31, 2021
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Original Revolver
—
$
—
1.62%
$
211,955
Original U.S. Term
Loan
—
—
1.65%
540,000
Original Euro Term
Loan
—
—
1.50%
137,616
Amended Revolver
4.12%
201,536
—
—
Amended U.S. Term
Loan
4.26%
600,000
—
—
Amended Euro Term
Loan
1.50%
139,627
—
—
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
2,903
Various
1,777
Total debt
$
954,066
$
901,348
Less: debt issuance costs
(2,104)
(8,001)
Less: short-term and current portion of long-term debts
(20,471)
(56,935)
Total long-term debt
$
931,491
$
836,412
Credit facilities
The Company, its wholly
owned subsidiary,
Quaker Chemical B.V.,
as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,
and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the “Original Credit Facility”).
The Original Credit Facility was comprised of a $
400.0
million
multicurrency revolver (the “Original Revolver”), a $
600.0
million term loan (the “Original U.S. Term
Loan”), each with the
Company as borrower, and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the “Original Euro Term
Loan”) with
Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a
five year
term, maturing in
August 2024
.
During June 2022, the Company,
and its wholly owned subsidiary,
Quaker Houghton B.V.,
as borrowers, Bank of America, N.A.,
as administrative agent, U.S. Dollar swing line lender and letter of credit
issuer, Bank of America Europe Designated Active
Company, as Euro
Swing Line Lender, certain guarantors and other lenders
entered into an amendment to the Original Credit Facility
(the “Amended Credit Facility”). The Amended Credit Facility established
(A) a new $
150.0
million Euro equivalent senior secured
term loan (the “Amended Euro Term
Loan”), (B) a new $
600.0
million senior secured term loan (the “Amended U.S. Term
Loan”),
and (C) a new $
500.0
million senior secured revolving credit facility (the “Amended Revolver”).
The Company has the right to
increase the amount of the Amended Credit Facility by an aggregate amount
not to exceed the greater of $
300.0
million or
100
% of
Consolidated EBITDA, subject to certain conditions including the agreement
to provide financing by any lender providing such
increase).
In addition, the Amended Credit Facility also:
(i) eliminated
the requirement that material foreign subsidiaries must guaranty the Original Euro
Term Loan;
(ii) replaced
the U.S. Dollar borrowings reference rate from LIBOR to SOFR;
(iii) extended the maturity date of the Original Credit Facility from
August 2024
to
June 2027
; and
(iv) effected certain other changes to the Original Credit
Facility as set forth in the Amended Credit Facility.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - ContinuedStatements.
(Dollars in thousands, except per share
AmericasEMEAAsia/PacificGlobal
Specialty
Businesses		Total
Balance as of December 31, 2022$215,899$34,567$150,375$114,167$515,008
Reallocation of reporting units63,697 31,711 18,759 (114,167)—
Balance as of January 1, 2023279,596 66,278 169,134 — 515,008 
Currency translation adjustments2,561 (805)(12,307)— (10,551)
Balance as of September 30, 2023$282,157$65,473$156,827$—$504,457
Gross carrying amounts
unless otherwise stated) and accumulated amortization for definite-lived intangible assets were as follows:
(Unaudited)
Gross Carrying
Amount		Accumulated
Amortization		Net Book Value
September 30, 2023December 31, 2022September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Customer lists and rights to sell$824,893$831,600$226,956$191,286$597,937$640,314
Trademarks, formulations and product technology157,362158,56452,53446,281104,828112,283
Other5,8547,5765,7346,3901201,186
Total definite-lived intangible assets$988,109$997,740$285,224$243,957$702,885$753,783
21
The Company used the proceeds of the Amended Credit Facility to repay
all outstanding loans under the Original Credit Facility,
unpaid accrued interest and feesamortizes definite-lived intangible assets on the closing date under the Original
Credit Facility and certain expenses and fees.
U.S. Dollar-
denominated
borrowings under the Amended Credit Facility bear interest, at the Company’s
election, at the base rate or term SOFR
plus an applicable rate ranging from
1.00
% to
1.75
% for term SOFR loans and from
0.00
% to
0.75
% for base rate loans, depending
upon the Company’s consolidated
net leverage ratio.
Loans based on term SOFR also include a spread adjustment equal to
0.10
% per
annum.
Borrowings under the Amended Credit Facility denominated
in currencies other than U.S. Dollars bear interest at the
alternative currency term rate plus the applicable rate ranging from
1.00
% to
1.75
%.
The Amended Credit Facility contains affirmative
and negative covenants, financial covenants and events of default, including
without limitation restrictions on (a) the incurrence of additional
indebtedness;
(b) investments in and acquisitions of other businesses,
lines of business and divisions; (c) the making of dividends or capital stock
purchases;
and (d) dispositions of assets.
Dividends and
share repurchases are permitted in annual amounts not exceeding the greater
of $
75
million annually and
25
% of consolidated
EBITDA if there is no default.
If the consolidated net leverage ratio is less than
2.50
to
1.00
, then the Company is no longer subject to
restricted payments.
Financial covenants contained in the Amended Credit Facility include
a consolidated interest coverage ratio test and a
consolidated net leverage ratio test.
The consolidated net leverage ratio at the end of a quarter may not be
greater than
4.00
to
1.00
,
subject to a permitted increase during a four-quarter
period after certain acquisitions.
straight-line basis over their useful lives. The Company hasrecorded amortization expense as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Amortization expense$14,529 $14,102 $43,734 $43,343 
Estimated annual aggregate amortization expense for the option of replacing thecurrent year and subsequent five years and beyond is as follows:
consolidated net leverage ratio test with a consolidated senior net leverage ratio
test if the Company issues certain types of unsecured
For the remainder of 2023$13,455
For the year ended December 31, 202456,630
For the year ended December 31, 202555,942
For the year ended December 31, 202655,650
For the year ended December 31, 202755,309
notes, subject to certain limitations.
Events of default in the Amended Credit Facility include without limitation
defaults for non-
payment, breach of representations and warranties, non-performance
of covenants, cross-defaults, insolvency,
and a change of control
in certain circumstances.
The occurrence of an event of default under the Amended Credit Facility could result
in all loans and other
obligations becoming immediately due and payable and the Amended
Credit Facility being terminated.
As of September 30, 2022, the
Company was in compliance with all of the Amended Credit Facility covenants.
The weighted average variable interest rate incurred on the outstanding
borrowings under the Original Credit Facility2023 and the
Amended Credit Facility during the nine months ended September
30, 2022 was approximately
2.4
%. As of September 30, 2022, the
interest rate on the outstanding borrowings under the Amended Credit
Facility was approximately
3.8
%.
In addition to paying interest
on outstanding principal under the Original Credit Facility,
the Company was required to pay a commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s consolidated
net leverage ratio under the Original Revolver in respect of the unutilized
commitments thereunder.
As part of the Amended Credit Facility,
the Company is required to pay a commitment fee ranging from
0.150
% to
0.275
% related to unutilized commitments under the Amended Revolver,
depending on the Company’s consolidated
net
leverage ratio.
The Company had unused capacity under the Amended Revolver of approximately
$
295
million, which is net of bank
letters of credit of approximately $
3
million, as of September 30, 2022.
The Company previously capitalized $
23.7
million of certain third-party debt issuance costs in connection with executing the
Original Credit Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Original Term
Loans and
recorded as a direct reduction of Long-term debt on the Condensed
Consolidated Balance Sheet.
Approximately $
8.3
million of the
capitalized costs were attributed to the Original Revolver and recorded
within Other assets on the Condensed Consolidated Balance
Sheet.
These capitalized costs were being amortized into Interest expense over
the
five year
term of the Original Credit Facility.
As
of December 31, 2021, the Company had $
8.0
million of debt issuance costs recorded as a reduction of Long-term debt attributable
to
the Original Credit Facility.
As of December 31, 2021, the Company had $
4.3
million of debt issuance costs recorded within Other
assets attributable to the Original Credit Facility.
Prior to executing the Amended Credit Facility,
the Company had $
6.6
million of
debt issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $
3.5
million of debt
issuance costs recorded within Other assets attributable to the Original
Credit Facility.
In connection with executing the Amended Credit Facility,
the Company recorded a loss on extinguishment of debt of
approximately $
6.8
million which includes the write-off of certain previously
unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurred
to execute the Amended Credit Facility.
Also in connection with
executing the Amended Credit Facility,
during the second quarter of 2022, the Company capitalized $
2.2
million of certain third-party
and creditor debt issuance costs.
Approximately $
0.7
million of the capitalized costs were attributed to the Amended Euro Term
Loan
and Amended U.S. Term
Loan.
These costs were recorded as a direct reduction of Long-term debt on the
Condensed Consolidated
Balance Sheet.
Approximately $
1.5
million of the capitalized costs were attributed to the Amended Revolver and
recorded within
Other assets on the Condensed Consolidated Balance Sheet.
These capitalized costs, as well as the previously capitalized costs that
were not written off will collectively be amortized into Interest expense
over the
five year
term of the Amended Credit Facility.
As of
September 30, 2022, the Company had $
2.1indefinite-lived intangible assets for trademarks and tradenames totaling $187.6 million and $189.1 million, respectively.
million of debt issuance costs recorded as a reduction of Long-term debt on the
Condensed Consolidated Balance Sheet and $
4.6
million of debt issuance costs recorded within Other assets on the Condensed
Consolidated Balance Sheet.
17
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
22Note 14 – Debt
The Originalfollowing table sets forth the components of the Company’s debt:
As of September 30, 2023As of December 31, 2022
Interest
Rate		Outstanding
Balance		Interest
Rate		Outstanding
Balance
Credit Facilities:
Revolver6.0%$82,838 5.2%$195,673 
U.S. Term Loan6.7%585,000 5.7%596,250 
Euro Term Loan5.0%146,918 3.1%151,572 
Industrial development bonds5.3%10,000 5.3%10,000 
Bank lines of credit and other debt obligationsVarious1,120 Various1,303 
Total debt$825,876 $954,798 
Less: debt issuance costs(1,657)(1,992)
Less: short-term and current portion of long-term debts(19,246)(19,245)
Total long-term debt$804,973 $933,561 
Credit facilities
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 “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 increase the amount of the Credit Facility requiredby an aggregate amount not to exceed the greater of $300.0 million or 100% of Consolidated EBITDA, subject to certain conditions including the agreement to provide financing by any lender providing such increase.
As of September 30, 2023, the Company was in compliance with all of the Credit Facility covenants. See Note 20 of Notes to fix itsConsolidated Financial Statements in the Company’s 2022 Form 10-K.
The weighted average variable interest
rates incurred on at leastthe outstanding borrowings under the Credit Facility during the three and nine months ended September 30, 2023 were approximately 6.4% and 6.1%, respectively. As of September 30, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 6.3%. As part of the Credit Facility, in addition to paying interest on outstanding principal, the Company is also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on the Company’s consolidated net leverage ratio. The Company had unused capacity under the Revolver of approximately $414 million, which is net of bank letters of credit of approximately $3 million, as of September 30, 2023.
20
% of its total Original Term
Loans.
In order to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with
the Original Credit Facility,
in November 2019,the 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 to an average fixed rate of
1.64
% 3.64% plus an applicable margin as provided in the Original Credit Facility
based on the Company’s
consolidated net leverage ratio.
At the time the Company entered into the swaps, and as As of September 30,
2022, 2023, the aggregate interest
rate on the swaps, including the fixed base rate plus anthe applicable margin,
was
3.1
% 5.3%.
The Amended Credit Facility does not require
the Company to fix variable interest rates on any portion of its borrowings.
As of September 30, 2022, the Company had not amended
its current interest rate swaps.
In October 2022, the Company’s interest
rate swap contracts expired.
Upon expiration, the Company is
entitled to a cash payment from the counterparties, which is materially consistent
with the fair value as of September 30, 2022.
See
Note 17 of Notes to Condensed Consolidated Financial Statements.
In connection with executing the original credit facility in 2019 and the amended Credit Facility during the second quarter of 2022, the Company capitalized an aggregate of $2.2 million of certain third-party and creditor debt issuance costs. Approximately $0.7 million of the capitalized costs were attributed to the Euro Term Loan and U.S. Term Loan. These costs were recorded as a direct offset of Long-term debt on the Condensed Consolidated Balance Sheet. Approximately $1.5 million of the capitalized costs were attributed to the Revolver and recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs will collectively be amortized into Interest expense over the five year term of the Credit Facility. As of September 30, 2023, the Company had $1.7 million of debt issuance costs recorded as an offset of Long-term debt on the Condensed Consolidated Balance Sheet and $3.6 million 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 an offset 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.
18
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
Industrial development bonds
As of September 30, 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 Amended 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 September 30, 20222023 was approximately
$
12
$34 million.
In addition to the bank letters of credit described in the “Credit facilities” subsection above, the Company’s other off-balance
sheet arrangements include certain financial and other guarantees. The Company’s total bank letters of credit and guarantees
outstanding as of September 30, 20222023 were approximately $5 million.
Interest expense, net
The Company incurred the following debt related expenses included
within Interest expense, net, in the Condensed Consolidated
Statements of Income:
Operations:
Three Months Ended
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Interest expense$12,598 $9,465 $40,863 $20,339 
Amortization of debt issuance costs353 353 1,059 2,589 
Total$12,951 $9,818 $41,922 $22,928 
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Interest expense
$
9,465
$
4,779
$
20,339
$
14,242
Amortization of debt issuance costs
353
1,187
2,589
3,562
Total
$
9,818
$
5,966
$
22,928
$
17,804
Based on the variable interest rates associated with the Amended Credit Facility,
as of September 30, 20222023 and the Original
Credit Facility as of December 31, 2021,2022, the amounts at which the Company’s
total debt were recorded are not materially different
from their fair market value.
On September 30, 2022, annual maturities on the Amended Credit Facility in the
next five fiscal years (excluding the reduction to
long-term debt attributed to capitalized and unamortized debt issuance
costs) are as follows:
`
September 30,
2022
For the remainder of 2022
$
4,623
For the year ended December 31, 2023
18,491
For the year ended December 31, 2024
23,113
For the year ended December 31, 2025
36,981
For the year ended December 31, 2026
36,981
For the year ended December 31, 2027
820,974
Total payments
$
941,163
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
23
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 and nine months ended September 30, 2022 and 2021::
Currency
Translation
Adjustments		Defined
Benefit
Pension
Plans		Unrealized
(Loss) Gain in
Available-for-
Sale Securities		Derivative
Instruments		Total
Balance at June 30, 2023$(130,738)$(4,024)$91 $4,563 $(130,108)
Other comprehensive (loss) income before Reclassifications(25,501)304 (802)1,612 (24,387)
Amounts reclassified from AOCI— 71 (4)67 
Related tax amounts— (94)169 (371)(296)
Balance at September 30, 2023$(156,239)$(3,743)$(546)$5,804 $(154,724)
Balance at June 30, 2022$(133,110)$(11,269)$(1,170)$303 $(145,246)
Other comprehensive (loss) income before Reclassifications(71,948)453 (1,006)(182)(72,683)
Amounts reclassified from AOCI— 210 (30)— 180 
Related tax amounts— (166)218 42 94 
Balance at September 30, 2022$(205,058)$(10,772)$(1,988)$163 $(217,655)
Defined
Unrealized
Currency
Benefit
(Loss) Gain in
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Other comprehensive (loss) income before
Reclassifications
(71,948)
453
(1,006)
(182)
(72,683)
Amounts reclassified from AOCI
—
210
(30)
—
180
Related tax amounts
—
(166)
218
42
94
Balance at September 30, 2022
$
(205,058)
$
(10,772)
$
(1,988)
$
163
$
(217,655)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
Other comprehensive (loss) income before
Reclassifications
(19,905)
488
(85)
567
(18,935)
Amounts reclassified from AOCI
—
709
(176)
—
533
Related tax amounts
—
(293)
46
(131)
(378)
Balance at September 30, 2021
$
(32,082)
$
(20,874)
$
381
$
(2,148)
$
(54,723)19
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
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
(155,215)
2,535
(3,326)
1,993
(154,013)
Amounts reclassified from AOCI
—
657
306
—
963
Related tax amounts
—
(792)
635
(458)
(615)
Balance at September 30, 2022
$
(205,058)
$
(10,772)
$
(1,988)
$
163
$
(217,655)
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income before
reclassifications
(29,207)
1,009
(489)
1,883
(26,804)
Amounts reclassified from AOCI
—
2,423
(3,259)
—
(836)
Related tax amounts
—
(839)
787
(433)
(485)
Balance at September 30, 2021
$
(32,082)
$
(20,874)
$
381
$
(2,148)
$
(54,723)
All reclassifications related to unrealized 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
Table of associated companies.
The amounts reported in other
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
24
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)$(1,484)$— $(138,240)
Other comprehensive income (loss) before reclassifications(24,078)915 640 7,538 (14,985)
Amounts reclassified from AOCI— 225 547 772 
Related tax amounts— (288)(249)(1,734)(2,271)
Balance as of September 30, 2023$(156,239)$(3,743)$(546)$5,804 $(154,724)
Balance as of December 31, 2021$(49,843)$(13,172)$397 $(1,372)$(63,990)
Other comprehensive (loss) income before reclassifications(155,215)2,535 (3,326)1,993 (154,013)
Amounts reclassified from AOCI— 657 306 — 963 
Related tax amounts— (792)635 (458)(615)
Balance as of September 30, 2022$(205,058)$(10,772)$(1,988)$163 $(217,655)
All reclassifications related to unrealized (loss) gain 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 noncontrolling interest are related to currency translation adjustments.
Note 16 – Fair Value
Measurements
The Company has valued its company-owned life insurance policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at September 30, 2022
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned During June 2023, the Company surrendered and liquidated $1.9 million of these life insurance
$
2,018
$
—
$
2,018
$
—
Total
$
2,018
$
—
$
2,018
$
—
Fair Value
Measurements at December 31, 2021
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,533
$
—
$
2,533
$
—
Total
$
2,533
$
—
$
2,533
$
—
policies. 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
Total
Fair Value		Fair Value Measurements as of September 30, 2023
Using Fair Value Hierarchy
AssetsLevel 1Level 2Level 3
Company-owned life insurance$285 $— $285 $— 
Total$285 $— $285 $— 
no
Total
Fair Value		Fair Value Measurements as of December 31, 2022
Using Fair Value Hierarchy
AssetsLevel 1Level 2Level 3
Company-owned life insurance$2,114 $— $2,114 $— 
Total$2,114 $— $2,114 $— 
t hold any Level 3 investments as of September 30, 2022 or December 31,
2021, respectively, so related
disclosures have not been included.
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.
20
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
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 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 in Other (expense) income, net. 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.
All open foreign exchange forward contracts as of September 30, 2023 were entered into as hedges against the U.S. dollar. As of September 30, 2023, the Company had open foreign exchange forward contracts with a notional U.S. dollar value of the following:
CurrencySeptember 30,
2023
Mexican Peso$41,900 
Japanese Yen4,500 
$46,400 
Open foreign exchange forward contracts as of September 30, 2023 had maturities occurring over a period of one month.
Interest Rate Swaps
In order to satisfy certain requirements of the Original Credit Facility as well as to manage
the Company’s exposure to
variable
interest rate risk associated with the Original Credit Facility,
such as the Secured Overnight Financing Rate (“SOFR”), 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 are designated as cash flow hedges and, as such, the contracts are marked-to-market
at each reporting date and any unrealized
gains or losses are included in AOCI to the extent effective
and reclassified to interest expense in the period during which the
transaction affects earnings or it becomes probable
that the forecasted transaction will not occur.
In June 2022, Interest rate swaps are entered into with a limited number of counterparties within several tranches, each of which allows for net settlement of all contracts through a single payment to participating counterparties in a single currency in the Company amendedevent of a default on or termination of any one contract. As such, in accordance with the Original Credit Facility.
See Note 14 of Notes toCompany’s accounting policy, these derivative instruments are recorded on a net basis within the Condensed Consolidated Financial
Statements.
The Amended Credit Facility does not require the Company to fix variable
interest rates on any portion of its borrowings.
In October 2022, the Company’s
interest rate swap contracts expired.
Upon expiration, the Company is entitled to a cash payment
from the counterparties, which is materially consistent with the fair value as of
September 30, 2022.
Balance Sheets.
The balance sheet classification and fair values of the Company’s
derivative instruments, which are Level 2 measurements, are as follows:
follows:
Fair Value
Condensed Consolidated
Balance Sheet Location		September 30,
2023		December 31,
2022
Derivatives designated as cash flow hedges:
Interest rate swapsOther non-current Assets$7,538 $— 
Foreign currency forward contractsOther current liabilities(564)$— 
$6,974 $— 
Fair Value
Condensed Consolidated
September 30,
December 31,
Balance Sheet Location
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
Prepaid expenses and other current assets
$
212
$
—
Other accrued liabilities
—
1,782
$
212
$
1,782
The following table presents the net unrealized (gain) loss deferred to AOCI:
September 30,
2023		December 31,
2022
Derivatives designated as cash flow hedges:
Interest rate swapsAOCI$5,804 $— 
September 30,
December 31,
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
163
$
1,372
$
163
$
1,37221
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
25
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
September 30,		Nine Months Ended
September 30,
2023202220232022
Interest rate swapsInterest expense, net$1,198 $134 $2,259 $(882)
Foreign exchange forward contractsOther (expense) income, net(29)— 2,107 — 
$1,169 $134 $4,366 $(882)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Amount and location of expense reclassified
Interest income
from AOCI into expense (effective portion)
(expense), net
$
134
$
(672)
$
(882)
$
(1,974)
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.
Note 18 – Commitments and Contingencies
The Company previously disclosed in its 2021 Form 10-K that AC Products, Inc.
(“ACP”), a wholly owned subsidiary,
in 2007,
agreed to operate two groundwater treatment systems, so as to hydraulically
contain groundwater contamination emanating from
ACP’s site until such time as the concentrations
of contaminants are below the current Federal maximum contaminant
level for four
consecutive quarterly sampling events. In 2014, ACP ceased operation
at one of its two groundwater treatment systems, as it had met
the above condition for closure. As of September 30, 2022, ACP continues
to operate the second groundwater treatment system, while
the Company discusses with the relevant authorities whether the second
groundwater treatment system meets the conditions for
closure.
In addition, the Santa Ana Regional Water
Quality Control Board requested that ACP conduct additional indoor
and outdoor
soil vapor testing on and near the ACP site to confirm that ACP continues to meet the applicable
local soil vapor standards.
As of
September 30, 2022, ACP performed such testing and is awaiting the review
of the results from the Santa Ana Regional Water
Quality
Control Board.
As of September 30, 2022, the Company believes that the range of pot
ential-known liabilities associated with the balance of the
ACP water remediation program is approximately $
0.1
million to $
1.0
million.
The low and high ends of the range are based on the
length of operation of the treatment system as determined by groundwater
modeling.
Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring and
program management.
The Company previously disclosed in its 2021 Form 10-K that an inactive
subsidiary of the Company that was acquired in 1978
sold certain products containing asbestos, primarily on an installed basis, and
is among the defendants in numerous lawsuits alleging
injury due to exposure to asbestos.
During the three and nine months ended September 30, 2022 there have been
no significant
changes to the facts or circumstances of this previously disclosed matter,
aside from on-going claims and routine payments associated
with this litigation.
Based on a continued analysis of the existing and anticipated future claims against this subsidiary,
it is currently
projected that the subsidiary’s total
liability over the next 50 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 environmental
matters related to certain
domestic and foreign properties.
These environmental matters primarily require the Company
to perform long-term monitoring and
maintenance at each of the applicable sites.
During the three and nine months ended September 30, 2022, there have
been no
significant changes to the facts or circumstances of these previously disclosed
matters, aside from on-going monitoring and
maintenance activities and routine payments associated with each of
the sites.
The Company continually evaluates its obligations
related to such matters, and based on historical costs incurred and
projected costs to be incurred over the next approximately 30 years,
has estimated the range of costs for all of these environmental matters, on
a discounted basis, to be between approximately $
5.0
million and $
6.0
million as of September 30, 2022, for which $
5.2
million was accrued within other accrued liabilities and other non-
current liabilities on the Company’s
Condensed Consolidated Balance Sheet as of September 30, 2022.
Comparatively, as of
December 31, 2021, the Company had $
5.6
million accrued for with respect to these matters.
Although there can be no assurance regarding the outcome of other
unrelated environmental matters, the Company believes that it
has made adequate accruals for costs associated with other environmental matters
for which it is aware, and has accrued $
0.4
million
as of both September 30, 2022 and December 31, 2021, respectively,
to provide for such anticipated future environmental assessments
and remediation costs.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
26
The Company previously disclosed in its 2021 Form 10-K that during the first nine
months of 2021, one of the Company’s
Brazilian subsidiaries received a notice that it had prevailed on an existing legal
claim in regard to certain non-income (indirect) taxes
that had been previously charged and paid.
The matter specifically related to companies’ rights to exclude the state tax on goods
circulation (a valued-added-tax or VAT
equivalent, known in Brazil as “ICMS”) from the calculation of certain additional indirect
taxes (specifically the program of social integration (“PIS”) and contribution
for the financing of social security (“COFINS”)) levied
by the Brazilian States on the sale of goods.
In May 2021, the Brazilian Supreme Court concluded that ICMS should
not be included
in the tax base of PIS and COFINS, and confirmed the methodology for calculating the
PIS and COFINS tax credit claims to which
taxpayers are entitled.
The Company’s Brazilian entities had previously
filed legal or administrative disputes on this matter and are
entitled to receive tax credits and interest dating back five years preceding the
date of their legal claims.
As a result of these court
rulings in the first nine months of 2021, the Company recognized non-income
tax credits of
67.0
million BRL or approximately $
13.3
million, which includes approximately $
8.4
million for the PIS and COFINS tax credits as well as interest on these tax credits of $
4.9
million.
The tax credits to which the Company’s
Brazilian subsidiaries are entitled are claimable once registered with the Brazilian
tax authorities which the Company subsequently completed.
These tax credits can be used to offset future Brazilian federal taxes
and
the Company currently anticipates using the full amount of credits during the
five year period of time permitted.
In connection with obtaining regulatory approvals for the Combination,
certain steel and aluminum related product lines of
Houghton were divested in August 2019. The Company previously disclosed
in its 2021 Form 10-K that in July 2021, the entity that
acquired these divested product lines submitted an indemnification claim
for certain alleged breaches of representation made by
Houghton in the agreement pursuant to which such assets had been divested.
The Company responded to the subject matters of the
indemnification claim and during the first quarter of 2022, the
matter was resolved consistent with the Company’s
expectations and
position that there were
no
amounts owed by the Company.
The Company previously disclosed in its 2021 Form 10-K that two of the Company’s
locations suffered property damagesdamage as a
result of flooding and electrical fire, respectively.
The Company maintains property and flood insurance for all of its facilities
locations globally.
During the three and nine months ended September 30, 2023, there have been no significant changes to the facts or circumstances of this previously disclosed matter, other than ongoing work with the Company’s insurance adjuster and insurance carrier regarding the insurance claims submitted. Through September 30, 2023, the Company has received cumulative payments from its insurers of $5.9 million associated with these events. During the nine months ended September 30, 2022, there have been no significant changes
to the facts or circumstances of
these previously disclosed matters, aside from the on-going restoration
of both sites.
The Company, its insurance
adjuster and
insurance carrier are actively managing the remediation and restoration
activities associated with these events and at this time the
Company has concluded, based on all available information and discussions
with its insurance adjuster and insurance carrier,
that the
losses were covered under the Company’s
property and flood insurance coverage, net of an aggregate deductible of $
2.0
million.
Through September 30, 2022,2023, the Company has received payments from
its insurers of $
3.9
million associated with these events.
During the three months ended September 30, 2022, the Company recognized
a gain on insurance recoveries of $
1.1
$1.0 million.
The
Company has recorded an insurance receivable of $
0.2
million as of September 30, 2022.
See Note 10 of Notes to the Condensed
Consolidated Financial Statements.
TheAs 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 in the Company’s 2022 Form 10-K. During the three and nine months ended September 30, 2023, there have been no significant changes to the facts or circumstances of any of the previously disclosed matters. In addition, during the three and nine months ended September 30, 2023, there are no new environmental matters or litigation which management currently
that the Company believes will not have a material adverse effect on the
Company’s results of operations,
cash flows, or financial condition.
In addition, Although there can be no assurance regarding the outcome of any of the ongoing environmental matters or litigation the Company is party to, the Company believes that it has an immaterial amountmade adequate accruals for costs and liabilities associated with environmental matters or provisions for ongoing litigation for which it is aware. The Company has accrued approximately $6 million as of contractualboth September 30, 2023 and December 31, 2022, respectively, for these ongoing matters.
purchase obligations.
22
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Quaker Chemical Corporation
Management’s Discussion and Analysis
27
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton,”
the “Company,”
“we” “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 the
“Combination” “Combination” refers to the legacy Quaker combination with Houghton
International, Inc. (“Houghton”) on August 1, 2019.
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, container, mining,
and metalworking companies.
Our high-performing, innovative and sustainable solutions are backed
by
best-in-class technology,
deep process knowledge, and customized services.
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the U.S.
Overall,Despite a continued challenging economic environment, the Company delivered solidstrong results in the third quarter of 2022
despite continued and persistent financial, economic and
geopolitical headwinds, including ongoing raw material cost escalation
and overall inflationary pressures, supply chain and logistics
challenges, the direct and indirect impacts of the ongoing war in Ukraine, Zero-COVID
policies in China, and foreign currency
volatility.
Notwithstanding these challenges, net2023. Net sales in the third quarter of 2022
2023 were $492.2$490.6 million, an increasea decrease of 10%less than 1% compared
to $449.1$492.2 million in the third quarter of 2021.
2022. This was primarily driven by an increase in selling price and product mix of
approximately 25%2% and additional net sales from acquisitionsa favorable impact of 1%, partially
offset by a decline in organic sales volumes of 9% and
an unfavorable impact from foreign currency translation of 7%.
2%, offset by a 4% decrease in sales volumes. The increase in selling price and product mix was primarily the result
of strategic price increasesvalue-based pricing initiatives implemented, primarily in 2022, to offset the
ongoing inflationary pressures that began at the onset of 2021 and have escalated
throughout 2021 and into the first nine months of 2022.
pressures. The decline in organic sales volumes was primarily attributable to
softer soft end
market conditions, particularlyprimarily in Europethe Americas and Asia/Pacific, the wind-down
of the tolling agreement for products previously divested
related to the Combination and the direct and indirect impacts of the ongoing
war in Ukraine.
EMEA segments, partially offset by new business wins.
The Company generated net income in the third quarter of 20222023 of $25.9$33.7 million,
or $1.44$1.87 per diluted share, compared to net
income of $31.1$25.9 million, or $1.73$1.44 per diluted share in the third quarter
of 2021.
2022. Excluding non-recurring and non-core items in each period, the
Company’s third quarter of 2022
2023 non-GAAP earnings per diluted share were $1.74$2.05 compared to $1.63$1.74 in the prior
year quarter and the
Company’s current quarter
adjusted EBITDA was $70.3$84.4 million compared to $66.2$70.3 million in the third quarter
of 2021.
2022. These results
current quarter earnings were primarily driven by higher net sales in the current quarter coupled with
an improvementa recovery in gross margins compared to the prior
year quarter, partially offset
by the unfavorable impact of foreign currency translation and higher selling,
general and administrative
expenses (“SG&A”) as a result of significant year-over-year
inflationary pressures.
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.
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. The Company’s third quarter
of 20222023 operating performance in each of its fourthree reportable segments: (i) Americas;
(ii) Europe,
Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty
Businesses,segments reflect similar drivers to that of its
consolidated performance as each of the Company’s
reportableperformance. Operating earnings for all segments net sales benefitted from double-digit year-over-year
increases in selling price and product mix, while those increases in net sales were
partially offset by the significant and unfavorable
impact of foreign currency translation.
All geographic segments had lower organic sales volumes, however
organic sales volumes for
the Global Speciality Businesses increased in the third quarter of
2022 compared to the prior year quarter, due to continued end market
demand.
Operating earnings for the Global Specialty Businesses and Americas increased compared
to the prior year quarter, driven
by higher net sales and an improvement in margins.
Operating earnings for Asia/Pacific were relatively flat year-over-year
as lower
net sales were offset by an improvement in the segment’s
margins.
EMEA operating earnings declined compared to the prior year due
to the persistent and significant inflationary pressures on raw materials and
other costs and the negative impact of foreign currency
translation, partially offset by continued price
realization.
margins in 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 a netNet cash flows provided by operating cash outflow of $26.3 million in the first nine
months of 2022 compared to net operating cash
flow of $2.5activities were $199.5 million in the first nine months of 2021.
2023 compared to net cash flows used in operating activities of $26.3 million in the first nine months of 2022. The net operating cash outflowinflow year-over-year reflects lower year-to-date
higher operating performance in 20222023 compared to 20212022 as well as the continued
significant current yeara favorable shift from a working capital investment
primarily related in the prior year to higher accounts receivable due topositive cash flows from working capital in the increase in net
sales, higher inventory due to higher raw material costs and
lower levelsfirst nine months of accounts payable.
2023. 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.
Quaker Chemical Corporation
Management’s Discussion and Analysis
28
Overall, the Company delivered anotherstrong results in the third quarter of strong2023 including relatively stable net sales growth,
driven by strong price realization, both sequentially
and year-over-year.
Coupled with an improvement in gross margin, thesemargins. These factors contributed
to the Company’s current quarter
earnings growth despite the ongoing inflationary pressures, unfavorable
foreign currency translation, macroeconomic and geopolitical
challenges, soft end market conditions and other disruptionsfactors that have impacted the Company’s
customers and end markets. Looking at the remainder of 2022,
2023, the
Company remains focused on executing on items within its control
as it manages through a continued uneven and uncertain macroeconomic, geopolitical and end market environment,
and softer market conditions, primarily as well as the potential impact of the automotive industry labor dispute in Europe and Asia/Pacific.
the Americas segment. The Company is encouraged by its continued execution on its financial and operational priorities and the resiliencepositive momentum built through the first nine months of its diversified
portfolio despite significant uncertainty caused by several macroeconomic
factors.
We continue
2023 and continues to expect to deliver further sequential
gross margin improvement in the fourth quarter
of 2022, as well as higher earnings and cash flow in the second half of 20222023 as compared to
the first 2022.
half of 2022
Critical Accounting Policies and second half of 2021.
Estimates
On-going impact of COVID-19
The global outbreak of COVID-19Our significant accounting policies are described in March of 2020 has negatively impacted
all locations where the Company does business.
Although the Company has now operated in this COVID-19 environment
for more than two years, the full extent of the outbreak“Management’s Discussion and
related business impacts continue to remain uncertain Analysis” and volatile, and
therefore the full extent to which COVID-19 may impact the
Company’s future results of operations
or financial condition is uncertain.
This outbreak has significantly disrupted the operations of
the Company and those of its suppliers and customers and, at times during
the pandemic, the Company has experienced volume
declines as compared to pre-COVID-19 levels.
Management continues to monitor the impact that the COVID-19 pandemic is having
on the Company,
the overall specialty chemical industry and the economies and markets in which the Company
operates.
The
prolonged pandemic and resurgences of the outbreak including
as new variants continue to emerge, and continued restrictions on
day-
to-day life and business operations such as continuing restrictions in China,
as well as border controls or closures and transportation
disruptions,
may result in volume declines and lower net sales in future periods.
To the extent that the Company’s
customers and
suppliers are adversely impacted by COVID-19, this could reduce the
availability, or result in delays,
of materials or supplies to or
from the Company, which
in turn could significantly interrupt the Company’s
business operations.
Given this ongoing uncertainty,
the Company cautions that its future results of operations could be significantly
and adversely impacted by COVID-19.
While the
circumstances have presented and are expected to continue to present challenges
and have necessitated additional time and resources
to be deployed to sufficiently address the challenges
brought on by the pandemic at this time, Management does not believe that
COVID-19 has had a material impact on its financial reporting processes, internal
controls over financial reporting, or disclosure
controls and procedures.
The Company’s top priority
is to protect the health and safety of its employees and customers, while working to ensure business
continuity to meet customers’ needs.
During the pandemic, the Company has taken incremental steps to protect
the health and
wellbeing of its people in affected areas through various actions, including
enabling work at home where needed and practicable, and
employing social distancing standards, implementing travel restrictions where
applicable, enhancing onsite hygiene practices, and
instituting visitation restrictions at the Company’s
facilities.
The Company has not and does not expect that it will incur material
expenses implementing these health and safety policies.
All of the Company’s more than 30 production
facilities worldwide are open
and operating and are deemed as essential businesses in the jurisdictions where
they are operating.
The Company continues to expect
that the impacts from COVID-19 will gradually decline subject“Note 1 – Significant Accounting Policies” to the effective
containment of the virus and its variants and successful
distribution and acceptance of the available vaccines and treatments; however,
the incidence of reported cases of COVID-19 or a
variantConsolidated Financial Statements in several geographies where the Company has significant operations
remains relatively high.
Differing government responses
to these reported cases continues to evolve and it therefore remains highly uncertain
as to how long the global pandemic and related
economic challenges will last in each of the jurisdictions where the Company conducts
business and when our customers’ businesses
will recover to pre-COVID-19 levels.
While the actions the Company has taken to date to protect our workforce, to
continue to serve
our customers with excellence and to conserve cash and reduce costs as applicable,
2022 Form 10-K. There have been effective thus far,
further actions to
respondno material changes to the pandemiccritical accounting policies and estimates previously disclosed in its effects may be necessary as conditions2022 Form 10-K remain materially consistent.
continue
Recently Issued Accounting Standards
See Note 3 of Notes to evolve.
Impact of Political Conflicts
A significant portion of the Company’s
revenues and earnings are generated by non-U.S. operations.
This subjects the Company
to political and economic risks that could adversely affect the Company’s
business, liquidity, financial
position and results of
operations.
The existence of military conflicts, for example the Russian invasion of Ukraine, bring
inherent risks such as the potential
for supply chain disruptions, increased costs of resources including oil, decreased
trade activity and other consequences related to
economic or other sanctions.
The U.S. government and other nations have imposed significant restrictions
on most companies’ ability
to do businessCondensed Consolidated Financial Statements, in Russia as a result of the military conflict between Russia and Ukraine.
It is not possible to predict the broader or
longer-term consequencesPart I, Item 1, of this conflict, which could include further sanctions,
embargoes, regional instability,
geopolitical shiftsReport for a discussion regarding recently issued accounting standards.
and adverse effects on macroeconomic conditions,
security conditions, currency exchange rates and financial markets.
The military
conflict between Russia and Ukraine has had a negative impact on the Company’s
ability to sell to, ship products to, collect payments
from, and support customers in certain regions based on trade restrictions,
embargoes and export control law restrictions, and
logistics
restrictions including closures of air space.
If this conflict continues or expands, it could increase the costs, risks and adverse
impacts
from these new challenges.
The Company and its customers and suppliers may also be the subject of increased cyber-attacks.23
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Quaker Chemical Corporation
Management’s Discussion and Analysis
29
During the second quarter of 2022, the Company decided to cease its operations
in Russia.
The Company’s operations in the
conflict areas including Russia, Ukraine and Belarus historically represented
less than 2% of the Company’s consolidated net
sales
and less than 1% of the Company’s
consolidated total assets.
The Company’s primary exposure
in the conflict areas related to
outstanding customer accounts receivable.
The Company is actively monitoring its outstanding Russian receivables for collections
and has recorded incremental allowances
for doubtful accounts where warranted.
Liquidity and Capital Resources
AtAs of September 30, 2022, the Company2023, we had cash and cash equivalents of
$138.9 $198.4 million.
Total cash and cash equivalents was
$165.2 $181.0 million atas of December 31, 2021.
2022. The $26.3$17.4 million decreaseincrease in cash and cash equivalents was the net result of
$46.6 $199.5 million of
cash provided by financingoperating activities partially offset by $26.3 million of
cash used in operating activities, $29.6
$150.5 million of cash used in
financing activities, $25.8 million of cash used in investing activities and a $17.0 million negativean unfavorable impact due to the effect
of foreign currency translation.translation of approximately $5.8 million.
Net cash flows provided by operating activities were $199.5 million in the first nine months of 2023 compared to net cash flows used in operating activities wereof $26.3 million in the first nine
months of 2022 compared to net cash flows
provided by operating activities of $2.5 million in the first nine months
of 2021.
2022. The decreaseincrease in net operating cash flow year-over-
year-over-year reflects higher year-over-year operating performance as well as a cash inflow from working capital, notably reductions in accounts receivable and inventory, in the current year, reflects lowerdemonstrating the Company’s ongoing focus on cash conversion. Comparatively, during the first nine months of the year2022, operating performance
in 2022 compared to 2021 as well as the continuedcash flow was negatively impacted by a significant
current year working capital investment primarily related to higher
accounts receivable due to the increase in net sales, higher
inflationary impacts on inventory due to an increase in costs and to a lesser extent, a build in certain inventory
in response to global supply chain and logistics
challenges, as well as lower levels ofrelated pricing impacts on accounts payable due to timing.receivable.
Net cash flows used in investing activities were $29.6$25.8 million in the
first nine months of 20222023 compared to $30.1$29.6 million in the
first nine months of 2021.
2022. The relatively consistentlower level of cash used in investing activities year-over-year
is the net result of lower
cash proceeds from payments in the disposition of assets which included the sale of certain
held-for-sale real property assetscurrent year related to acquisitions which the
Combination Company had in the prior year, period, andpartially offset by higher capital expenditures
in the current year largely related to certain infrastructure and
sustainability-related spending,
partially offset by lower cash payments related to acquisitions as a result
of the level of acquisition
activity in each year.
See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report.
Net cash flows used in financing activities were $150.5 million in the first nine months of 2023 compared to net cash flows provided by financing activities wereof $46.6 million in the first
nine months of 2022 compared to net cash flows
used in financing activities of $10.5 million in the first nine months
of 2021.
2022. The increase in net cash flowsoutflows was primarily related to a
larger increase innet repayments of borrowings in the current yearfirst nine months of 2023, primarily under
the Company’s Credit Facility, described further below, as compared to net borrowings in the first nine months of 2022, which included the impact of new borrowings, net of repayments of old borrowings and debt issuance costs, related to the June 2022 credit facility
which was amended and extended, as amendment, described further
described below, in
the second quarter of 2022.
below. In addition, the Company paid $22.3$23.5 million of cash dividends during the first nine
months of 2022,2023, a $1.1$1.2 million, or 5% increase, in cash dividends compared
to the prior year.
year quarter.
The Company, its wholly
owned subsidiary,
Quaker Chemical B.V.,
as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,
and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the “Original Credit Facility”).
During June 2022, the
Company, and its wholly owned
subsidiary,
Quaker Houghton B.V.,
as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollardollar swing
line lender and letter of
credit issuer, Bank of America Europe
Designated Active Company,
as Euro Swing Line Lender, certain guarantors
and other lenders
entered into an amendment to the Original Credit Facilityits primary credit facility. The amended credit facility (the “Amended
Credit“Credit Facility”).
The Company used the proceeds of the
Amended Credit Facility to repay all outstanding loans under the Original
Credit Facility, as well as accrued interest
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 fees, and to
terminate the revolving credit commitments under the Original Credit
Facility.
The Company’s Amended Credit
Facility is comprised of(C) a $500.0 million multicurrency revolver,
a $600.0 million term loan and
a $150.0 million (as of June 17, 2022) Euro equivalent term loan (collectively,
the “Amended Term Loans”senior secured revolving credit facility (the “Revolver”)
with the Company and
Quaker Houghton B.V.,
as borrowers, each with a five-year term maturing in June 2027.
Subject to the consent of the Administrative
Agent and certain other
conditions, the The Company may designate additional borrowers. The Company
has the right to increase the
amount of the Amended Credit Facility by an aggregate amount not
to exceed the greater of (i) $300$300.0 million and (ii)or 100% of
Consolidated EBITDA, subject to certain conditions including
the agreement to provide financing by any Lenderlender providing any such increase.
increase. U.S. Dollar-denominated borrowings
underAs of September 30, 2023, the AmendedCompany had Credit Facility bear interest, atborrowings outstanding of $814.8 million. As of December 31, 2022, the Company’s
election, at the base
rate or term Secured Overnight Financing Rate (“SOFR”) plus an applicable
rate ranging from 1.00% to 1.75% for term SOFR loans
and from 0.00% to 0.75% for base rate loans, depending upon the
Company’s consolidated net leverage
ratio.
Loans based on term
SOFR also include a spread adjustment equal to 0.10% per annum.
Borrowings under the AmendedCompany had Credit Facility denominated in
currenciesborrowings outstanding of $943.5 million. The Company’s other than U.S. Dollars bear interest at the alternative currency
term rate plus the applicable rate ranging from 1.00% to
1.75%debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.1 million as of September 30, 2023 and $11.3 million as of December 31, 2022. In addition to paying interest on outstanding principalTotal unused capacity under
the Amended Credit Facility, the Company
is required to pay a
commitment fee ranging from 0.15% to 0.275% depending on the
these arrangements as of September 30, 2023 was approximately $34 million. The Company’s consolidatedtotal net leverage
ratio to the Lenders under the
Amended Revolver in respectdebt as of the unutilized commitments thereunder.
Quaker Chemical Corporation
Management’s DiscussionSeptember 30, 2023, which consists of total borrowings of $825.9 million less cash and Analysis
30
cash equivalents of $198.4 million, was $627.5 million. The Amended Credit Facility contains affirmative
and negative covenants, financial covenants and events of default that are
customary for agreements of this nature.
The Amended Credit Facility contains a number of customary business covenants,
including
without limitation restrictions on (a) the incurrence of additional
indebtedness by the Company or certain of its subsidiaries, (b)
investments in and acquisitions of other businesses, lines of business and
divisions by the Company or certain of its subsidiaries, (c)
the payment of dividends or capital stock purchases by the Company
or certain of its subsidiaries and (d) dispositions
of assets by the
Company or certain of its subsidiaries.
Dividends and share repurchases are permitted in annual amounts
not exceeding the greater of
$75 million annually and 25% of Consolidated EBITDA if there is no default.
If the Company’s consolidated
net leverage ratio is less
than 2.50 to 1.00 then the Company is no longer subject to restricted payments
.
Financial covenants contained in the Amended Credit Facility include
a consolidated interest coverage ratio test and a
consolidated net leverage ratio test.
The consolidated net leverage ratio at the end of a quarter may not be
greater than 4.00 to 1.00,
subject to a permitted increase during a four quarter period after certain
acquisitions.
The Company has the option of replacing the
consolidated net leverage ratio test with a consolidated senior net leverage ratio
test if the Company issues certain types of unsecured
debt, subject to certain customary limitations. Customary events of
default in the Amended Credit Facility include without limitation
defaults for non-payment, breach of representations and warranties, non
-performance of covenants, cross-defaults, insolvency,
and a
change of control of the Company in certain circumstances.
The occurrence of an event of default under the Amended Credit Facility
could result in all loans and other obligations becoming immediately
due and payable and the Amended Credit Facility being
terminated.
The Original Credit Facility required the Company to fix its variable interest
rates on at least 20% of its total Original Term
Loans.
In order to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with
the Original Credit Facility,
in November 2019, the Company entered into $170.0 million notional
amounts of three year interest rate
swaps at a base rate of 1.64% plus an applicable margin as provided
in the Original Credit Facility, based
on the Company’s
consolidated net leverage ratio.
At the time the Company entered into the swaps, and as of September 30,
2022, the aggregate interest
rate on the swaps, including the fixed base rate plus an applicable margin,
was 3.1%.
In October 2022, the Company’s interest rate
swap contracts expired.
Upon expiration, the Company is entitled to a cash payment from the counterparties, which
is materially
consistent with the fair value as of September 30, 2022.
The Amended Credit Facility does not require the Company to fix variable
interest rates on any portion of its borrowings.
The Company previously capitalized $23.7 million of certain third-party
debt issuance costs in connection with the Original
Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed
to the Original Term Loans and recorded
as a
direct reduction of Long-term debt on the Condensed Consolidated
Balance Sheet.
Approximately $8.3 million of the capitalized
costs were attributed to the Original Revolver and recorded within Other
assets on the Condensed Consolidated Balance Sheet.
These
capitalized costs were being amortized into Interest expense over
the five-year term of the Original Credit Facility.
As of December
31, 2021, the Company had $8.0 million of debt issuance costs recorded
as a reduction of Long-term debt attributable to the Original
Credit Facility.
As of December 31, 2021, the Company had $4.3 million of debt issuance
costs recorded within Other assets
attributable to the Original Credit Facility.
Prior to executing the Amended Credit Facility,
the Company had $6.6 million of debt
issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $3.5 million of debt issuance
costs recorded within Other assets attributable to the Original Credit Facility.
In connection with executing the Amended Credit
Facility, the Company
recorded a loss on extinguishment of debt of approximately $6.8 million which
includes the write-off of certain
previously unamortized deferred financing costs as well as a portion of
the third party and creditor debt issuance costs incurred to
execute the Amended Credit Facility.
Also in connection with executing the Amended Credit Facility,
during the third quarter of
2022, the Company capitalized $2.2 million of certain third-party
debt issuance costs.
Approximately $0.7 million of the capitalized
costs were attributed to the Amended Euro Term
Loan and Amended U.S. Term
Loan. These costs were recorded as a direct reduction
of Long-term debt on the Condensed Consolidated Balance Sheet.
Approximately $1.5 million of the capitalized costs were attributed
to the Amended Revolver and recorded within Other assets on the
Condensed Consolidated Balance Sheet.
These capitalized costs, as
well as the previously capitalized costs that were not written off
will collectively be amortized into Interest expense over the five-year
term of the Amended Credit Facility.
As of September 30, 2022,2023, the Company had $2.1 millionwas in compliance with all of debt issuance costs recorded
as athe Credit Facility covenants. Refer to the description of the Company’s primary Credit Facility in 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.
reduction of Long-term debtThe weighted average variable interest rate incurred on the Condensed Consolidated Balance Sheet
outstanding borrowings under the Credit Facility during the three and $4.6 million of debt issuance costs recorded within
Other assets on the Condensed Consolidated Balance Sheet.
nine months ended September 30, 2023 was approximately 6.4% and 6.1%, respectively. As of September 30, 2022,2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 6.3%. As part of the Credit Facility, in addition to paying interest on the outstanding principal, the Company had Amended Credit Facility borrowings
outstanding of $941.2 million.
As of
December 31, 2021,is also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on the Company’s consolidated net leverage ratio. The Company had Original Credit Facility borrowings
outstanding of $889.6 million.
The Company has unused
capacity under the Amended Revolver of approximately $295
$414 million, which is net of bank letters of credit of approximately $3 million, as
September 30, 2022.
The Company’s other debt obligations are
primarily industrial development bonds, bank lines of credit and
municipality-related loans, which totaled $12.9 million and $11.8
million as of September 30, 2022 and December 31, 2021,2023.
respectively.
Total unused capacity under
these arrangements as of September 30, 2022 was approximately $12 million.
The
Company’s total net debt
as of September 30, 2022 was $815.2 million.24
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
31
In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, such as SOFR, 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 September 30, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.3%. See Note 17 of Notes to Condensed Consolidated Financial Statements.
In connection with executing the original credit facility in 2019 and the amended Credit Facility during the second quarter of 2022, the Company capitalized certain third-party and creditor debt issuance costs. Costs attributed to the Euro Term Loan and U.S. Term Loan were recorded as a direct offset of Long-term debt on the Condensed Consolidated Balance Sheet. Costs attributed to the Revolver were recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs will collectively be amortized into Interest expense over the five-year term of the Credit Facility. As of September 30, 2023, the Company had $1.7 million of debt issuance costs recorded as an offset of Long-term debt on the Condensed Consolidated Balance Sheet and $3.6 million 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 an offset 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.
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. During the first nine months ended 2023, the Company entered into and settled forward contracts resulting in cash proceeds of $2.1 million. See Note 17 of Notes to Condensed Consolidated Financial Statements.
In the first nine months of 2022, the Company incurred $10.4$8.0 million of total Combination, integration
and other acquisition-related expenses, described in the Non-GAAP Measures section of this Item below. The Company had net cash outflows related to the Combination, integration and other acquisition-related expenses during the first nine months of 2022 of $4.3 million. The Company had no Combination, integration and other acquisition-related expenses in the first nine
months of 2022, which includes $2.42023, except for $0.5 million ofin other expensesincome related to
changes for an indemnification assets, described inasset related to the Non-GAAPCombination.
Measures section of this Item below.
Comparatively, inDuring the first nine months
of 2021,2023, the Company incurred $13.6$3.8 million of total
Combination, integration and other acquisition-relatedstrategic planning expenses which
was net of a $5.4 million gain on the sale of certain held-for-
sale real property assets and also included $0.7 million of accelerated depreciation.
The Company had aggregate net cash outflows of
approximately $11.5 million related to the
Combination, integration and other acquisition-related expenses during
the first nine
months of 2022 as compared to $20.0$4.5 million during the first nine months
of 2021.
During the first nine months of 2022 the
Company incurred $10.7 million of strategic planning and transformation
expenses.
. The Company expects that theseto incur additional
operating costs and associated cash flows, as well as higher capital expenditures
related to strategic planning, process optimization and
the next phase of the Company’s long
-termlong-term integration to further optimize its footprint, processes and other functions
will continuefunctions in 2023 and thereafter.
2022 and extend into the next several years.
Quaker Houghton’s Management
The Company’s management approved, and the Company initiated, a global restructuring plan (the
“QH “QH Program”) in the
third quarter of 2019 as part of its planned cost synergies associated
with the Combination.
The As of December 31, 2022, the Company had substantially completed all of the initiatives under the QH Program included restructuring
with only an immaterial amount of remaining severance still to be paid, which has been paid as of September 30, 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 approximately
400 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 final costs associated with the QH
Program will depend on a number of factors and are subject to change; however,
thechange. The Company has had reduction in headcount and site
closures under the QH Program in 2022is continuing to evaluate and expects finalto implement further actions under this program, and as a result, additional headcount reductions
and restructuring costs may be incurred in the future. The Company expects to continue into 2023.
Atgenerate 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 time,program to be approximately 1 to 1.5 times savings. The Company recognized Restructuring and related charges of $6.0 million and $0.6 million for the Company does
not expect to incur material additional costs under the QH Program.
nine months ended September 30, 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 firstnine months
of 20222023 of approximately $1.8$7.9 million compared to $4.6
$0.4 million in the first nine months of 2021.2022. The Company has remaining restructuring accruals, as of September 30, 2023, for this program of $3.6 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 September 30, 2022,2023, the Company’s
gross liability for uncertain tax positions, including interest and penalties,
was $20.1
$20.4 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 $6.4$6.5 million as a result of
offsetting benefits in other tax jurisdictions.
In 2021,
25
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
The Company previously disclosed in its 2022 Form 10-K that two of the Company’s locations
suffered significant property damage as a result of flooding
and electrical fire.
fire, respectively. The
Company maintains property and flood insurance for all of its facilitieslocations globally.
The Company, its insurance
adjuster During the three and insurance
carrier are actively managingnine months ended September 30, 2023, there have been no significant changes to the remediation and restoration activities associated
facts or circumstances of this previously disclosed matter, other than ongoing work with both of these events and at this time the
Company has concluded, based on all available information and discussions
with its Company’s insurance adjuster and insurance carrier
that regarding the
losses incurred during 2021 were covered under the Company’s
property and flood insurance coverage, net of an aggregate deductible
of $2.0 million.
claims submitted. Through September 30, 2022,2023, the Company has received cumulative payments from its insurers of
$3.9 $5.9 million associated with
these events.
The During the nine months ended September 30, 2023, the Company has recorded anrecognized a gain on insurance receivablerecoveries of $0.2 million as of September
30, 2022.
$1.0 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 ongoing
acquisition integration and optimization, pension plan
contributions, capital expenditures, other businessgrowth opportunities (including
potential acquisitions), pension plan contributions, implementing actions to achieve the
Company’s sustainability
goals and other potential known or anticipated contingencies.
The Company also believes it has sufficient
additional liquidity to support its operating requirements and to fund its business
obligations for the period beyond the next twelve
months, as well, including the aforementioned items which are expected
to recur annually, as well as future principal
and interest
payments on the Company’s Amended
Credit Facility, tax obligations
and other long-term liabilities.
The Company’s liquidity
is
affected by many factors, some based on normal operations of
our business and others related to the impact of the pandemic and other
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 whichthat 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.
Critical Accounting Policies and Estimates
The Company’s critical accounting
policies and estimates, as set forth in its 2021
Form 10-K remain materially consistent.
However, due to the ongoing financial,
economic and geopolitical conditions impacting the Company,
the Company re-evaluated
certain of its estimates, most notably its estimates and assumptions with regards
to the fair value of its EMEA reporting unit during the
third quarter of 2022.
Quaker Chemical Corporation
Management’s Discussion and Analysis
32
Goodwill:
The Company accounts for business combinations under
the acquisition method of accounting.
This method requires
the recording of acquired assets, including separately identifiable intangible
assets, at their acquisition date fair values.
Any excess of
the purchase price over the estimated fair value of the
identifiable net assets acquired is recorded as goodwill.
The determination of
the estimated fair value of assets acquired requires management’s
judgment and often involves the use of significant estimates and
assumptions.
When necessary, the Company
consults with external advisors to help determine fair value.
Goodwill and intangible assets that have indefinite lives are not amortized
and are required to be assessed at least annually for
impairment.
The Company completes its annual goodwill and indefinite-lived intangible asset impairment
test during the fourth
quarter of each year, or more frequently
if triggering events indicate a possible impairment.
The Company continually
evaluates
financial performance, economic conditions and other recent developments
in assessing if a triggering event indicates that the carrying
values of goodwill, indefinite-lived, or long-lived assets are impaired.
The Company continues to monitor various financial, economic
and geopolitical conditions impacting the Company,
including the ongoing Russia-Ukraine war and the Company’s
decision to cease
operations in Russia, continued raw material cost escalation, supply
chain constraints and disruptions, as well as rising interest rates
and the cost of capital among other factors.
The Company concluded that these and other factors, which have and continue
to impact
the Company, did not
represent a triggering event during the third quarter of 2022, except for the Company’s
EMEA reporting unit
and the associated goodwill,
as well as the related asset group.
The Company concluded that during the third quarter of 2022 the
escalation of these events adversely impacted EMEA’s
financial performance and represented a triggering event.
As a result of this conclusion, the Company completed an interim impairment
assessment for its EMEA reporting unit, as well as
the related asset group, during the third quarter of 2022.
The Company concluded that the undiscounted cash flows exceeded
the
carrying value of the long-lived assets and it is not more likely than not that
an impairment exists.
In completing a quantitative
goodwill impairment test, the Company compares the reporting
unit’s fair value, primarily based
on future discounted cash flows, to
its carrying value in order to determine if an impairment charge
is warranted.
The estimates of future discounted cash flows involve
considerable management judgment and are based upon certain significan
t
assumptions including the weighted average cost of capital
as well as projected EBITDA, which includes assumptions related to
revenue growth rates, gross margin levels and operating
expenses.
As a result of this interim impairment assessment, the estimated fair value of
the EMEA reporting unit exceeded its
carrying value by approximately 22% and the Company concluded
no impairment was warranted.
In completing the interim
quantitative impairment assessment, the Company used a WACC
assumption of approximately 10.0% and holding all other
assumptions constant, the WACC
would have to increase by approximately 1.8 percentage points
before the Company’s EMEA
reporting unit would be considered impaired.
In addition, holding EBITDA margins and all other assumptions constant,
the
Company’s compound
annual revenue growth rate during the entire projection period would need to decline
by approximately 3.0
percentage points before the Company’s
EMEA reporting unit would be considered impaired.
Similarly, holding reve
nue growth rates
and all other assumptions constant, the Company’s
average EBITDA margins throughout the entire projection
period would need to
decline by approximately 1.7 percentage points before the
Company’s EMEA reporting unit would be
considered impaired.
Notwithstanding the results of the Company’s
interim impairment assessment, if the Company is unable to successfully
implement selling price increases aimed at more than offsetting
raw material costs and ongoing inflationary pressures and the financial
performance of the EMEA reporting unit declines further,
or interest rates continue to rise and this leads to an increase in the cost of
capital, then it is possible these financial, economic and geopolitical conditions
could result in another triggering event for the EMEA
reporting unit in the future and could lead to a potential impairment.
In addition, if any of these financial, economic or geopolitical
conditions has a more significant adverse effect on
the Company, these could lead to a potential impairment
of the Company’s
goodwill or other indefinite-lived or long-lived assets.
Non-GAAP Measures
The information in this Form 10-Q includes non-GAAP (unaudited)
financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating
income, non-GAAP operating margin, non-GAAP
net income and non-
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.
Quaker Chemical Corporation
Management’s Discussion In addition, our definitions of EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and Analysis
33non-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 (loss) income of associated companies.
The Company
also presents adjusted EBITDA, which is calculated as EBITDA plus or
minus certain items that are not considered indicative of future
operating performance or not considered core to the Company’s
operations.
In addition, the Company presents non-GAAP operating
income, which is calculated as operating income plus or minus certain items that
are not considered indicative of future operating
performance or not considered core to the Company’s
operations.
Adjusted EBITDA margin and non-GAAP operating margin
are
calculated as the percentage of adjusted EBITDA and non-GAAP operating
income to consolidated net sales, respectively.
The
Company believes these non-GAAP measures provide transparent
and useful information and are widely used by investors, analysts,
and peers in our industry as well as by management in assessing the operating
performance of the Company on a consistent basis.
Additionally, the
Company presents non-GAAP net income and non-GAAP earnings per diluted share
as additional performance
measures.
Non-GAAP net income is calculated as adjusted EBITDA, defined above,
less depreciation and amortization, interest
expense, net, and taxes on income before equity in net (loss) income
of associated companies, in each case adjusted, as applicable, for
any depreciation, amortization, interest or tax impacts resulting from
the non-core items identified in the reconciliation of net income
attributable to the Company to adjusted EBITDA.
Non-GAAP earnings per diluted share is calculated as non-GAAP net income
per
diluted share as accounted for under the “two-class share method.”
The Company believes that non-GAAP net income and non-
GAAPnon-GAAP earnings per diluted share provide transparent and useful information
and are widely used by investors, analysts, and peers in
our industry as well as by management in assessing the operating performance
of the Company on a consistent basis.
26
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
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 (dollars in thousands unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Non-GAAP Operating Income and Margin ReconciliationsThree Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Operating income$59,518 $44,609 $166,242 $105,915 
Combination, integration and other acquisition-related expenses (a)— 2,107 — 7,992 
Restructuring and related charges (credits), net (b)1,019 (1,423)6,034 (609)
Strategic planning expenses (c)1,093 4,545 3,759 10,745 
Russia-Ukraine conflict related expenses (d)— 88 — 2,183 
Other charges (e)206 1,016 855 2,681 
Non-GAAP operating income$61,836 $50,942 $176,890 $128,907 
Non-GAAP operating margin (%) (l)12.6 %10.3 %11.9 %8.8 %
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Operating income
$
44,609
$
36,010
$
105,915
$
119,720
Combination, restructuring and other
acquisition-related expenses (a)
717
5,083
7,421
20,371
Strategic planning and transformation expenses (b)
4,545
—
10,745
—
Executive transition costs (c)
913
285
2,097
1,097
Russia-Ukraine conflict related expenses (d)
88
—
2,183
—
Facility remediation costs, net (f)
—
1,490
—
1,490
Other charges (e)
70
320
546
613
Non-GAAP operating income
$
50,942
$
43,188
$
128,907
$
143,291
Non-GAAP operating margin (%) (m)
10.3%
9.6%
8.8%
10.9%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income ReconciliationsThree Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Net income attributable to Quaker Chemical Corporation$33,670 $25,867 $92,550 $60,026 
Depreciation and amortization (j)20,866 19,908 62,210 61,491 
Interest expense, net12,781 8,389 38,744 20,228 
Taxes on income before equity in net income of associated companies (k)13,593 10,185 36,956 14,425 
EBITDA80,910 64,349 230,460 156,170 
Equity (income) loss in a captive insurance company (f)(756)174 (748)2,199 
Combination, integration and other acquisition-related expenses (credits) (a)— 2,107 (475)10,387 
Restructuring and related charges (credits), net (b)1,019 (1,423)6,034 (609)
Strategic planning expenses (c)1,093 4,545 3,759 10,745 
Russia-Ukraine conflict related expenses (d)— 88 — 2,183 
Currency conversion impacts of hyper-inflationary economies (g)1,229 991 2,869 1,216 
Loss on extinguishment of debt (i)— — — 6,763 
Other charges (credits) (e)886 (540)1,515 172 
Adjusted EBITDA$84,381 $70,291 $243,414 $189,226 
Adjusted EBITDA margin (%) (l)17.2 %14.3 %16.4 %13.0 %
Adjusted EBITDA$84,381 $70,291 $243,414 $189,226 
Less: Depreciation and amortization (j)20,866 19,908 62,210 61,491 
Less: Interest expense, net12,781 8,389 38,744 20,228 
Less: Taxes on income before equity in net income of associated companies - adjusted (a)(k)13,806 10,821 36,766 27,189 
Non-GAAP net income$36,928 $31,173 $105,694 $80,318 
27
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
Non-GAAP Earnings per Diluted Share ReconciliationsThree Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders$1.87 $1.44 $5.14 $3.35 
Equity (income) loss in a captive insurance company per diluted share (f)(0.04)0.01 (0.04)0.12 
Combination, integration and other acquisition-related expenses (credits) per diluted share (a)— 0.09 (0.03)0.47 
Restructuring and related charges (credits), net per diluted share (b)0.04 (0.05)0.25 (0.02)
Strategic planning expenses per diluted share (c)0.04 0.19 0.17 0.46 
Russia-Ukraine conflict related expenses per diluted share (d)— 0.01 — 0.11 
Currency conversion impacts of hyper-inflationary economies per diluted share (g)0.07 0.060.16 0.07 
Loss on extinguishment of debt per diluted share (i)— — — 0.29 
Other charges (credits) per diluted share (e)0.04 (0.03)0.06 — 
Impact of certain discrete tax items per diluted share (h)0.03 0.02 0.16 (0.37)
Non-GAAP earnings per diluted share (m)$2.05 $1.74 $5.87 $4.48 
and Non-GAAP Net Income Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Net income attributable to Quaker Chemical Corporation
$
25,867
$
31,058
$
60,026
$
103,243
Depreciation and amortization (a)(k)
19,908
21,542
61,491
66,334
Interest expense, net
8,389
5,637
20,228
16,725
Taxes on income before
equity in net (loss) income
of associated companies (l)
10,185
795
14,425
26,702
EBITDA
64,349
59,032
156,170
213,004
Equity loss (income) in a captive insurance company (i)
174
(108)
2,199
(4,071)
Combination, restructuring and other
acquisition-related expenses (a)
717
4,906
9,817
14,265
Strategic planning and transformation expenses (b)
4,545
—
10,745
—
Executive transition costs (c)
913
285
2,097
1,097
Russia-Ukraine conflict related expenses (d)
88
—
2,183
—
Facility remediation (recovery) costs, net (f)
(1,104)
2,019
(1,104)
2,019
Brazilian non-income tax credits (g)
—
—
—
(13,293)
Loss on extinguishment of debt (h)
—
—
6,763
—
Other charges (e)
609
35
356
353
Adjusted EBITDA
$
70,291
$
66,169
$
189,226
$
213,374
Adjusted EBITDA margin (%) (m)
14.3%
14.7%
13.0%
16.2%
Adjusted EBITDA
$
70,291
$
66,169
$
189,226
$
213,374
Less: Depreciation and amortization - adjusted (a)
19,908
21,365
61,491
65,616
Less: Interest expense, net
8,389
5,637
20,228
16,725
Less: Taxes on income
before equity in net income
of associated companies - adjusted (a)(l)
10,821
9,765
27,189
31,277
Non-GAAP net income
$
31,173
$
29,402
$
80,318
$
99,756
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
1.44
$
1.73
$
3.35
$
5.76
Equity loss (income) in a captive insurance company
per diluted share (i)
0.01
(0.01)
0.12
(0.23)
Combination, restructuring and other
acquisition-related expenses per diluted share (a)
0.04
0.22
0.45
0.64
Strategic planning and transformation expenses per
diluted share (b)
0.19
—
0.46
—
Executive transition costs per diluted share (c)
0.04
0.01
0.09
0.05
Russia-Ukraine conflict related expenses per diluted share (d)
0.01
—
0.11
—
Facility remediation (recovery) costs, net per diluted share (f)
(0.05)
0.09
(0.05)
0.09
Brazilian non-income tax credits per diluted share (g)
—
(0.04)
—
(0.48)
Loss on extinguishment of debt per diluted share (h)
—
—
0.29
—
Other charges per diluted share (e)
0.04
—
0.03
0.02
Impact of certain discrete tax items per diluted share (j)
0.02
(0.37)
(0.37)
(0.29)
Non-GAAP earnings per diluted share (n)
$
1.74
$
1.63
$
4.48
$
5.56
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
(a)
Combination, restructuringintegration and other acquisition-related expenses include
(credits) in 2022 included certain legal, financial, and other advisory and
consultant costs incurred in connection with the Combination integrat
ionintegration activities including internal control readiness and
remediation as well as costs incurred by the Company similar expenses associated with the
QH restructuring program, which was initiated in the
third quarter of 2019 as part of the Company’s
plan to realize cost synergies associated with the Combination.
These amounts
also include expense associated with Company's other of the Company’s
acquisitions, including certain legal, financial, and other advisory
and consultant costs incurred in connection with due diligence as well as costs associated
with selling inventory from acquired
businesses which was adjusted to fair value as part of purchase accounting.
recent acquisitions. These costs are not indicative of the future operating
performance of the Company.
Approximately $0.3 million and $0.5 million for the three and nine months
ended September 30,
2022 respectively,
and approximately $0.2 million and $0.7 million in the three and nine months ended September
30, 2021,
respectively, of
these pre-tax costs were considered non-deductible for the purpose of determining the Company’s
effective tax
rate, and, therefore, taxes on income before equity in net income of associated
companies - adjusted reflects the impact of these
items.
During the nine months ended September 30, 2023, the Company recorded $0.5 million of other income due to changes in an indemnification asset related to the Combination. Similarly, during the nine months ended September 30, 2022, the Company recorded
$2.4 $2.4 million, respectively, of other expense due to changes in a Combination-related indemnification asset. The amounts recorded that are related to an
the changes in indemnification asset, which isassets are included in the caption “Combination,
restructuring integration and other acquisition-related (credits) expenses” in the
reconciliation of GAAP earnings per diluted share attributed to
Quaker Chemical Corporation common shareholders to Non-
GAAPNon-GAAP earnings per diluted share as well as the reconciliation of net
income attributable to Quaker Chemical Corporation to
Adjusted EBITDA and Non-GAAP net income.
During the three and nine months ended September 30, 2021, the Company
recorded $0.2 million $0.7 million, respectively,
of accelerated depreciation related to certain of the Company’s
facilities, which
is included in the caption “Combination, restructuring and other acquisition
-related expenses” in the reconciliation of operating
income to non-GAAP operating income and included in the caption
“Depreciation and amortization” in the reconciliation of net
income attributable to the Company to EBITDA, but excluded from the
caption “Depreciation and amortization - adjusted” in the
reconciliation of adjusted EBITDA to non-GAAP net income attributable
to the Company.
During the nine months ended
September 30, 2021, the Company recorded a $5.4 million gain on the sale of
certain held-for-sale real property assets related to
the Combination which is included in the caption “Combination,
restructuring and other acquisition-related expenses” in the
reconciliation of GAAP earnings per diluted share attributed to
Quaker Chemical Corporation common shareholders to Non-
GAAP earnings per diluted share as well as the reconciliation of net
income attributable to Quaker Chemical Corporation to
Adjusted EBITDA and Non-GAAP net income.
During the three and nine months ended September 30, 2022, respectively,
the
Company recorded restructuring and related credits of $1.4 million
and $0.6 million, respectively,
and $0.9 million and net
charges of $0.6 million during the three and nine months ended September
30, 2021, respectively.
During the nine months ended
September 30, 2021, the Company recorded $0.8 million related to the sale of
inventory from acquired businesses which was
adjusted to fair value.
See Notes 2, 7, 10, and 11 of Notes to Condensed Consolidated
Financial Statements, which appear in Item
1 of this Report.
(b)
Strategic planningRestructuring and transformation expenses include certain consultant
and advisory expenses forrelated charges (credits), net represent the costs (credits) incurred by the Company associated with the Company’s
long-term
strategic planning, as well as process optimization and the next phase
of the Company’s long-term integration
to further optimize
its footprint, processes and other functions.
restructuring programs. These costs (credits) are not indicative of the future operating performance of the Company. See Note 7 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.
(c)
Executive transition costs represent the costs related toStrategic planning expenses include certain consultant and advisory expenses for the Company’s
search, hiring strategic planning phase of its long-term process optimization and transitionintegration projects to a new CEO in connection
with the executive transition that took place in 2021 as well as the search,
hiringfurther optimize its footprint, processes and transition for other officers during the first
nine months of 2022.
functions. These expensesplanning phase costs are one-time in nature and not indicative of the future operating
performance of the Company.
Company.
(d)
Russia-Ukraine conflict related expenses represent the direct costs associated
with the Company’s
exit of operations in Russia
during 2022, primarilyincluding costs for employee separation benefits, as well as costs associated
with establishing specific reserves or changes
to existing reserves for trade accounts receivable within the Company’s
EMEA reportable segment due to the economic instability
associated withfor certain customer
accounts receivables which have beencustomers who filed for bankruptcy protection and were directly impacted by the current
economic conflict
between Russia and Ukraine or the Company’s
decision to end operations in Russia.
Ukraine. These expenses are not indicative of the
future operating performance of the Company.
(e)
Other charges (credits) include executive transition costs, facility remediation insurance recoveries, net, charges incurred
by an inactive subsidiary of the Company as a result of the termination of restrictions on
insurance settlement reserves and non-service components of the Company’s
pension and postretirement net periodic benefit income
and the foreign currency remeasurement impacts associated with the
Company’s affiliates whose
local economies are designated
as hyper-inflationary under U.S. GAAP.
These expenses are not indicative of the future operating performance
of the Company.
expense. See Notes 19 and 9 of Notes to Condensed Consolidated Financial Statements,
which appear in Item 1 of this Report.
(f)
Facility remediation (recovery) costs, net presents the costs associated
with remediation, cleaning and subsequent restoration costs
associated with property damages to certain of the Company’s
facilities, net of insurance recoveries received.
These charges are
non-recurring and are not indicative of the future operating performance
of the Company.
See Note 18 of Notes to Condensed
Consolidated Financial Statements, which appears in Item 1 of this Report.
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
(g)
Brazilian non-income tax credits represent indirect tax credits related to certain
of the Company’s Brazilian subsidiaries
prevailing in a legal claim as well as the Brazilian Supreme Court ruling
on these non-income tax matters.
The 2021 impact to
Non-GAAP earnings per diluted share reflects the tax only adjustment
related to the Brazilian Supreme Court ruling on the
taxability of interest income.
The non-income tax credit is non-recurring and not indicative of the future operating
performance
of the Company.
See Note 18 of Notes to Condensed Consolidated Financial Statements, which
appears appear in Item 1 of this Report.
(h)
28
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In connection with executing the Amended Credit Facility,
the Company recorded a loss on extinguishment of debt ofQuaker Chemical Corporation
approximately $6.8 million which includes the write-off
Management’s Discussion and Analysis
of certain previously unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurred
to execute the Amended Credit Facility.
These expenses are
not indicative of the future operating performance of the Company.
See Note 14 of Notes to Condensed Consolidated Financial
Statements, which appears in Item 1 of this Report.
(i)
(f)Equity (income) loss (income) in a captive insurance company represents the after-tax
loss (income) income attributable to the Company’s
interest
in Primex, Ltd. (“Primex”), a captive insurance company.
The Company holds a 32% investment in and has significant influence
over Primex, and therefore accounts for this interest under the equity method
of accounting.
The (income) loss (income) attributable to
Primex is not indicative of the future operating performance of the
Company and is not considered core to the Company’s operations.
operations.(g)Currency conversion impacts of hyper-inflationary economies represents the foreign currency remeasurement impacts associated with the Company’s affiliates whose local economies are designated as hyper-inflationary under U.S. GAAP. During both the three and nine months ended September 30, 2023 and 2022, the Company incurred non-deductible, pre-tax charges related to the Company’s Argentina and Türkiye affiliates. The charges incurred related to the immediate recognition of foreign currency remeasurement in the Consolidated Statements of Income associated with these entities are not indicative of the future operating performance of the Company. See Note 1 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(j)
(h)The impacts of certain discrete tax items include changes in valuation
allowances recorded on certain Brazilian branch foreign tax
credits and the recording ofrelated deferred taxes on Brazilian branch income.
Both of thesetaxes. These discrete items relatedrelate to tax law changes occurring in
2022 and 2023, both in the United States and Brazil which impacted the creditability of Brazilian foreign taxes in the U.S. due to the issuance of final foreign tax credit regulations during the
period.
Additionally, the Company
has discrete
items related to the remeasurement of deferred taxes on the transfer
of intellectual property and the release of the reserves for
uncertain tax positions settled during the period and certain taxes, penalties,
and interest due as a result of the settlements.
positions. See
Note 11 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(k)(i)In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million during the period ended September 30, 2022 which includes the write-off of certain previously unamortized deferred financing costs as well as a portion of the third-party and creditor debt issuance costs incurred to execute the Amended Credit Facility. These expenses are not indicative of the future operating performance of the Company. See Note 14 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(j)Depreciation and amortization for the three and nine months ended
September 30, 2022 includes approximately $0.3 million and
$0.8 million, respectively,
and forboth the three and nine months ended September 30, 20212023 and September 30, 2022 includes approximately $0.3 million
and $0.9$0.8 million,
respectively, of
amortization expense recorded within equity in net loss (income)income of associated companies
in the Company’s
Condensed Consolidated Statements of income,Operations, which is attributable to
the amortization of the fair value step up for the
Company’s 50% interest in a joint venture
in Korea as a result of required purchase accounting.
(l)
(k)Taxes on income
before equity in net loss (income)income of associated companies – adjusted presents the impact
of any current and
deferred income tax expense (benefit), as applicable, of the reconciling
items presented in the reconciliation of net income
attributable to Quaker Chemical Corporation to adjusted EBITDA and
was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject to deductibility.
Combination, restructuringintegration and other acquisition-
relatedacquisition-related expenses (credits) described in (a) resulted in an incremental taxestax expense of approximately
$0.2
$0.5 million and $1.8 million for the three and
nine months ended September 30, 2022, respectively,
compared to $1.2 million and $3.4 million for the three and nine months
ended September 30, 2021, respectively.
Strategic planning and transformation expenses describes in (b) above resulted in
incremental taxes of $1.0 million and $2.4 million for the three and
nine months ended September 30, 2022, respectively.
Executive transition costs described in (c) resulted in incremental taxes of
$0.2 million and $0.5 million for the three and nine
months ended September 30, 2022, respectively,
compared to $0.1 million and $0.3 million for the three and nine months ended
September 30, 2021, respectively.
Russia-Ukraine conflict related expenses described in (d) resulted in
incremental taxes of less
than $0.1 million and $0.5
$1.9 million for the three and nine months ended September 30, 2022,
respectively.
Other charges
described in (e) resulted in a tax benefit of less than $0.1 million Restructuring and $0.1 million
for the three and nine months ended September
30, 2022, respectively,
and incremental taxes of less than $0.1 million and $0.1 million in the three and nine months ended
September 30, 2021.
Facility remediation (recovery) costs,related charges (credits), net described in (f) resulted in a tax benefit
of $0.3 million in the
three and nine months ended September 30, 2022, respectively and
incremental taxes of $0.5 million in the three and nine months
ended September 30, 2021.
Brazilian non-income tax credits described in (g) resulted in incremental
taxes of approximately $0.6
million and a tax benefit of $4.7 million during the three and nine months ended
September 30, 2021, respectively.
Loss on
extinguishment of debt described in (h)(b) above resulted in incremental taxes of
$1.6 $0.2 million during the nine months ended September 30,
2022.
The impact of certain discrete items described in (j) resulted in a tax benefit of $0.5 million
and an incremental expense of
$6.4$1.5 million for the three and nine months ended September 30,
2022, 2023, respectively, compared
to aan incremental benefit of $6.5$0.3 million and
$5.1 $0.1 million for the three and nine months ended September 30,
2021, 2022, respectively.
Strategic planning expenses described in (c) above resulted in incremental taxes of $0.3 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, compared to incremental taxes of $1.0 million and $2.5 million for the three and nine months ended September 30, 2022, respectively. Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes of less than $0.1 million and $0.5 million for the three and nine months ended September 30, 2022, respectively. Other charges described in (e) resulted in incremental taxes of $0.2 million and $0.4 million for the three and nine months ended September 30, 2023, compared to incremental taxes of $0.1 million and a tax benefit of $0.1 million for the three and nine months ended September 30, 2022, respectively. The impact of certain discrete items described in (h) resulted in a tax benefit of $0.5 million and $2.9 million for the three and nine months ended September 30, 2023, respectively, compared to a tax benefit of $0.5 million and incremental taxes of $6.4 million for the three and nine months ended September 30, 2022, respectively. Loss on extinguishment of debt described in (i) resulted in incremental taxes of $1.6 million during the nine months ended September 30, 2022.
(m)
(l)The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage of adjusted EBITDA
and
non-GAAP operating income to consolidated net sales.
(n)
(m)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.
29
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Quaker Chemical Corporation
Management’s Discussion and Analysis
37
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet commitments or
obligations as of September 30, 2022.
2023. The Company’s off-
balanceoff-balance sheet items outstanding as of September 30, 20222023 includes approximately
$5 $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 Third
Quarter of 20222023 with the Third Quarter of 20212022
Net sales were $490.6 million in the third quarter of 2023 compared to $492.2 million in the third quarter of 2022 compared
to $449.1 million in the third quarter of 2021.
2022. The net sales
increase decrease of $43.1$1.6 million, or 10%less than 1%, quarter-over-quarter reflects an increase
in selling price and product mix of 25%approximately 2% and additional net
sales from acquisitionsa favorable impact of 1%foreign currency translation of 2%, partially offset by a decline
in organic sales volumes of approximately 9% and the unfavorable impact
from foreign currency translation of 7%4%.
The increase in selling price and product mix was primarily driven by price
increases
implemented to offset the significant increases in raw
material and other input costs that began during 2021 and has continued in 2022.
year-over-year impact of our value-based pricing initiatives. The decline in organic sales volumes was primarily
attributable to softer end market conditions particularly in Europeacross the Company’s EMEA and
Asia/Pacific, the wind-down of the tolling agreement for products previously
divested related to the Combination Americas segments and the impact of
the ongoing war in Ukraine,Company’s value-based pricing initiatives, partially offset by netan increase in sales volumes in the Asia/Pacific segment and a positive contribution from new
business wins including the impact of the Company’s
ongoing value-based
pricing initiatives.in all segments.
COGS were $307.3 million in the third quarter of 2023 compared to $331.5 million in the third quarter of 2022, compareda decrease of $24.2 million. The decrease in COGS reflects lower spend on the decline in current year sales volumes and to a lesser extent softening in the Company’s global raw material costs.
$303.9Gross profit was $183.3 million in the third quarter of 2021.
The increase in
COGS of $27.5 million or 9% was driven by the continued increases in the Company’s
global raw material, manufacturing and supply
chain and logistics costs2023 compared to the prior year.
Gross profit$160.7 million in the third quarter of 2022, increased $15.6an increase of approximately $22.6 million or 11%
from the third quarter of 2021.
14%. The Company’s reported
gross margin in the third quarter of 20222023 was 32.7%, an improvement
37.4% compared to 32.3% in the third quarter of 2021 as increases in
selling prices, due to the Company’s
value based pricing initiatives, helped offset the significant increase
in raw material and other
input costs experienced throughout the third quarter of 2022.
SG&A32.7% in the third quarter of 2022 increased $11.2primarily driven by the year-over-year impact of our value-based pricing initiatives, primarily implemented in 2022, which offset significant increases in raw material and other input costs.
SG&A was $122.8 million or 11%
compared toin the third quarter of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation-driven higher
operating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currency
translation2023 compared to the prior year.
During$115.5 million in the third quarter of 2022, thean increase of approximately $7.3 million or 6%, driven by higher labor-related costs, including year-over-year inflationary increases, and higher levels of incentive compensation due to improved Company performance.
The Company incurred $2.1 million of Combination,
integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $5.8 million ofoperating expenses in the prior year third quarter
of 2022, primarily due to various professional
fees related to legal, financial and other advisory and consultant expenses
for Combination integration activities including internal control readiness
and remediation.
Seeactivities. There were no similar expenses incurred in the Non-GAAP Measures sectionthird quarter of this Item, above.2023.
The Company initiated a restructuring program during the third quarter
of 2019 as part of its global plan to realize cost synergies
associated with the Combination.
The Company incurred restructuringRestructuring and related (credits) charges
for reductions in headcount and
site closures under this program, net of adjustments to initial estimates for severance
of$1.0 million and a credit of $1.4 million and $0.9 million
during the third quarters of 2023 and 2022, respectively, related to reductions in headcount and 2021, respectively.
site closures under the Company’s restructuring programs. See the Non-GAAP Measures section of this Item, above.
Operating income in the third quarter of 20222023 was $44.6$59.5 million compared
to $36.0$44.6 million in the third 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-GAAP Measures section of this Item, above, the Company’s
current quarter non-GAAP operating income increased to
$50.9 million compared to $43.2 $61.8 million in the prior year third quarter of 2023 as compared to $50.9 million in the third quarter of 2022 primarily
due to the lowerhigher gross profit andpartially offset by higher SG&A,
as described above.
The Company had Other expense, net of $2.7 million in the third quarter of 2023 as compared to other income, net of $0.1 million in the third quarter
of 2022. Both the third quarter of 2023 and 2022 included foreign exchange transaction losses, which were higher in the current year. The third quarter of 2022 compared to $0.6also included facility remediation recoveries, net of $1.1 million. The Company had no such facility remediation recoveries during the third quarter of 2023. See the Non-GAAP Measures section of this Item, above.
Interest expense, net, was $12.8 million in the third quarter of
2021.
The third quarter of 2022 included a gain on insurance recoveries, see the Non-GAAP Measures
section of this Item, above.
In
addition, the Company incurred foreign exchange transaction losses in the third
quarter of 2022 2023 compared to the foreign exchange
transaction gains in the prior year quarter.
Interest expense, net, increased $2.8$8.4 million compared to the third quarter
of 2021 as a result of increases in the average
borrowings outstanding in the third quarter of 2022, compared to
the third quarteran increase of 2021 coupled with$4.4 million as a result of an increase in interest rates
quarter-over-quarter.
partially offset by a reduction in borrowings outstanding.
30
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Quaker Chemical Corporation
Management’s Discussion and Analysis
38
The Company’s effective
tax rates for the third quarters of 2023 and 2022 were 30.9% and 2021 were 28.1% and 2.6%, respectively.
The Company’s
effective tax rate for the third quarter of 2023 was primarily impacted by foreign tax inclusions, withholding taxes, return to provision adjustments, the impact of U.S Department of Treasury guidance on the usage of foreign tax credits, and the impact of forecasted pre-tax earnings and the mix of such earnings. Comparatively, the effective tax rate for the third quarter of 2022
was largely driven by a decline in forecasted profits and earnings mix,
foreign tax
inclusions, changes in the valuation allowance for foreign tax credits,
inclusions, a reduction in reserves for uncertain tax positions, and
withholding taxes.taxes, and the impact of forecasted pre-tax earnings and the mix of such earnings. In addition, the Company incurred highereffective tax expense
duringrate for the third quarter of 2022 primarily related towas impacted by the
Company recording earnings inof one of its subsidiaries at a statutory tax rate of
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 quarter effective tax rate was
primarily driven by a one-time deferred tax benefit related to an intercompany
intangible asset transfer.pending receipt. Excluding
the impact of non-
corenon-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 itsthe third quarters of 20222023 and 20212022 would have been approximately
26% 28% and 25%26%, respectively.
The Company expects
continued volatility in its effective tax rates due to several factors,
including the timing and scope of tax audits and the expiration of
applicable statutes of limitations as they relate to uncertain tax positions,
the unpredictability of the timing and amount of certain
incentives in various tax jurisdictions, including the high technology incentive
at one of our subsidiaries based in China which is
currently up for triennial renewal, the treatment of certain acquisition-related
costs and the timing and amount of certain share-based
compensation-related tax benefits, among other factors.
Equity in net income of associated companies decreased $1.1was $3.3 million
in the third quarter of 2023 compared to a net loss of $0.2 million in the third quarter of 2022, compared to the third quarteran increase of
2021, $3.5 million, primarily due to lowerhigher current year income from the Company’s
interest in a captive insurance company due to lower market
performance on equity investments andas well as from the Company’s
50% interest in a joint venture in Korea due to overall market challenges.
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 third quartersquarter of 20222023 and 2021.
2022.
Foreign exchange unfavorablynegatively impacted the Company’s
third quarter of 2023 results by approximately 1% compared to the third quarter of 2022 results by approximately 7% driven by the impact
from foreign currency translation on earnings as well as higher foreign
exchange transaction losses in the current quarter as compared
to the prior year third quarter.
Consolidated Operations Review – Comparison of the First Nine Months of 2022
2023 with the First Nine Months of 20212022
Net sales were $1,486.2 million in the first nine months of 2023 compared to $1,458.8 million in the first nine months of 2022 compared to $1,314.1
million in the first nine months of 2021.
2022. The net sales increase of $144.7$27.4 million or 11%
2% year-over-year reflects increases in selling price
and product mix of approximately
21% and additional net sales from acquisitions of 1% 11%, partially offset
by a decline in organic sales volumes of approximately 6% and
the unfavorable impact from foreign currency translation of 5%9%.
The increase in selling price and product mix was primarily driven
by price increases implemented to help offset the significant increases
in raw material and other input costs that began during 2021
and continued in 2022.
year-over-year impact of our value-based pricing initiatives. The decline in sales volumes was primarily attributable to softer end market conditions across all regions, the comparison
to a strong first halfCompany’s value-based pricing initiatives and customer order patterns, as well as the impacts of 2021, and
primarilythe ongoing war in Ukraine in the first quarter of 2021, where customers replenished their
supply chains.
Lower volumes were also due to softer end
market conditions, particularly in EuropeEMEA segment, and Asia/Pacific, the wind-down
of the tolling agreement for products previously divested
related to the Combination, and the impact of the ongoing war in Ukraine,
partially offset by net new business wins, including the
impact of the Company’s ongoing
value-based pricing initiatives.as mentioned above.
COGS were $951.7 million in the first nine months of 2023 compared to $1,002.4 million in the first nine months of 2022 compared
to $858.3 million in the first nine months of 2021.
2022. The
increase decrease in COGS of $144.1$50.7 million or 17% was driven by5% reflects lower spend on the significant
increasedecline in current year sales volumes, which more than offset higher costs due to inflationary pressures in the Company’s global raw
material,
manufacturing and supply chain and logistics costs compared to the prior
year.
Gross profit in the first nine months of 20222023 increased $0.6$78.1 million or
less than 1% 17% from the first nine months of 2021.
2022. The
Company’s reported gross
margin in the first nine months of 20222023 was 31.3%36.0% compared to 34.7%31.3% in
the first nine months of 2021.
2022. The Company’s current year
improvement in gross margin reflectswas primarily driven by the year-over-year impact of our value-based pricing initiatives and, to a significant increaselesser extent, decreases in raw material
and other input costs and the impacts of
constraints on the global supply chain, partially offset by
the Company’s ongoing value
-based pricing initiatives.costs.
SG&A in the first nine months of 20222023 increased $25.9$19.1 million or 8%6% compared
to the first nine months of 2021 due primarily to
the impact2022 driven by higher labor-related costs including year-over-year inflationary increases and higher levels of sales increasesincentive compensation on direct selling costs, inflation driven higher
operating costs, costs associated with strategic planning
and transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent
acquisitions,
improved Company performance, partially offset by lower SG&A due to foreign currency
translation compared to the prior year.
In addition, SG&A was
lowerThe Company incurred $8.0 million of Combination, integration and other acquisition related operating expenses in the prior year period as a result of continued temporary cost saving
measures the Company implemented in response to the
onset of COVID-19.
During the first nine months of 2022, the Company incurred $8.0
million of Combination, integration and other acquisition-
related operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $18.3 million of expenses in the prior year’s
first nine months, primarily due to various
professional fees related to legal, financial and other advisory and
consultant expenses for integration activities including internal
control readiness and remediation.
There were no similar costs in the first nine months of 2023. See the Non-GAAP Measures section of this Item, above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
39
The Company initiated a restructuring program during the third quarter
of 2019 as part of its global plan to realize cost synergies
associated with the Combination.
The Company incurred Restructuring and related charges of $6.0 million and credits for reductions in headcount and
site
closures under this program, net of adjustments to initial estimates for severance
of $0.6 million during the first nine months of 2022
compared to Restructuring2023 and 2022, respectively, related charges forto reductions in headcount
and site closures under this program, net of adjustments to
initial estimates for severance of $0.6 million during the first nine
months of 2021.
Company’s previous and current restructuring programs. See the Non-GAAP Measures section of this Item, above.
above.
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Quaker Chemical Corporation
Management’s Discussion and Analysis
Operating income in the first nine months of 20222023 was $105.9$166.2 million
compared to $119.7$105.9 million in the first nine months 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-GAAP Measures
section of this Item, above, the Company’s
current year non-GAAP operating income
decreased increased to $128.9$176.9 million for the first nine months of 20222023 compared
to $143.3$128.9 million in the prior year’s first nine months
primarily due to the lowerhigher gross profit andpartially offset by higher SG&A, described above.
The Company had otherOther expense net, of $8.6 million in the first nine months of 2023 compared to $10.5 million in the first nine months
of 2022 compared to other income, net of $19.3
million in the first nine months of 2021.
2022. The first nine months of 2022’s2023 and 2022 results include
$6.8 $1.0 million and $1.1 million, respectively, of loss on extinguishment of debt
related to the Company’s
refinancing the Original Credit Facility and also higher foreign currency transaction
losses year-over-year,
facility remediation recoveries, while the prior year’s first nine months of 2022 other incomeOther expense also includes
$14.4 a $6.8 million of non-income tax credits recorded byloss on extinguishment of debt related to the
Company’s Brazilian subsidiaries
as well as a $4.8 million gain onrefinancing the saleOriginal Credit Facility. See the Non-GAAP Measures section of certain held-for-sale real property assets.this Item, above. Also, there was higher foreign currency transaction losses in 2023 compared to 2022.
Interest expense, net, increased $3.5$18.5 million compared to the first nine
months of 2021, due to an increase in the average
borrowings outstanding in the first nine months of 2023 compared to the first nine months of 2022, coupled
withdue to an increase in interest rates in the current year partially offset by lower borrowings outstanding as compared to
the prior year.
The Company’s effective
tax rates for the first nine months of 2023 and 2022 were 31.1% and 2021 were 19.2% and 21.8%, respective
ly.
respectively. The
Company’s effective
tax rate for the nine months ended September 30, 2023 was primarily impacted by changes to the valuation allowance for and the usage of foreign tax credits due to an enacted law change in Brazil and additional guidance from the U.S Department of Treasury, foreign tax inclusions, withholding taxes, share-based compensation, state income taxes, and the impact of forecasted pre-tax earnings and the mix of such earnings. Comparatively, the effective tax rate for the nine months ended September 30, 2022 was largely driven
impacted by a decline in forecasted profits and
earnings mix, foreign tax inclusions, changes in the valuation allowance
for foreign tax credits, the impact of audit settlements, reached
with Italian tax authorities, a reduction in reserves for uncertain tax positions,
withholding taxes, and withholding taxes.the impact of forecasted pre-tax earnings and the mix of such earnings. In addition, the Company
incurred highereffective tax expenserate during the nine months ended September
30, 2022 primarily related towas impacted by the Company recording earnings in
of one of its subsidiaries at a statutory tax rate of 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 nine-month effective tax rate was impacted
by certain U.S.
tax law changes, the tax impact of certain non-income tax credits recorded by
the Company’s Brazilian subsidiaries, and a deferred
tax
benefit related to an intercompany intangible asset transfer.
pending receipt. Excluding the impact of non-core items in each period, described in
the
Non-GAAP Measures section of this Item, above, the Company estimates that
its effective tax rates for the first nine months of 2022
2023 and 20212022 would have been approximately 26%28% and 25%26%, respectively.
The Company expects continued volatility in its effective tax rates due to several factors, including the timing and scope of tax audits and the expiration of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of the timing and amount of certain incentives in various tax jurisdictions, 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 (loss) of associated companies decreased $8.3increased $11.3 million
in the first nine months of 20222023 compared to the first nine
months of 2021,2022, primarily due to lowerhigher current year income from
the Company’s interest in a captive insurance
company due to lower
market performance on equity investments     (see the Non-GAAP Measures
section of this Item, above), as well as lowerhigher current year
income from the Company’s 50% interest
in a joint venture in Korea.
Net income attributable to noncontrolling interest was less than $0.1 million
in both the first nine months of 20222023 and 2021.
2022.
Foreign exchange unfavorably impacted the Company’s
first nine months of 20222023 results by approximately 7%3% driven by the
impact from foreign currency translation on earnings as well as higher
foreign exchange transaction losses in the current year as
compared to the prior year’s first nine months.
Reportable Segments Review - Comparison of the Third
Quarter of 2022
2023 with the Third Quarter of 20212022
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are allocated
and the manner by which the chief operating decision maker of the Company
assesses its
performance.
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.
The three 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 of the net sales and operations
in each respective region, excluding net
sales and operations managed globally by the Global Specialty Businesses
segment, which includesAll prior period information has been recast to reflect the Company’s
container, metal new reportable segments.
finishing, mining, offshore, specialty coatings, specialty
grease and Norman Hay businesses.
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s product
sales.
Operating expenses not directly attributable to the net sales of each respective
segment,
such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses
and Restructuring and related charges and COGS related
to acquired inventory sold, which is adjusted to fair value as part of purchase
accounting,
are not included in segment operating earnings.
(credits), net. Other items not specifically identified with the Company’s
reportable
segments include interestInterest expense, net, and otherOther (expense) income, net.net.
32
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Quaker Chemical Corporation
Management’s Discussion and Analysis
40
Americas
Americas represented approximately 38%50% of the Company’s
consolidated net sales in the third quarter of 2022.
2023. The segment’s
net sales were $186.5$245.9 million, an increasea decrease of $35.7$8.8 million or 24%3%, compared
to the third quarter of 2021.
The increase2022. This was driven by a decrease in net sales
was due to volumes of approximately 8%, partially offset by higher selling price and product mix of 30%approximately 3% and additional
net sales from acquisition of 1%, partially offset by a decrease
in organic sales volumes of 7%. The increase in selling price and
product mix was primarily driven by price increases implemented to
offset the significant increases in raw material and other input costs that
began during 2021 and continued through the third quarter of
2022.
The current quarter decline in organic sales volumes was primarily
driven by the wind-down of the tolling agreement for
products previously divested related to the Combination, the Company’s
ongoing value-based pricing initiatives and lower volumes
sold into the automotive industry due to the semiconductor supply constraints,
partially offset by net new business wins.
This
segment’s operating earnings were
$45.0 million, an increase of $13.7 million compared to the third quarter
of 2021 primarily driven
by higher net sales, which were partially offset by ongoing
inflationary pressures on the business.
EMEA
EMEA represented approximately 23% of the Company’s
consolidated net sales in the third quarter of 2022.
The segment’s net
sales were $113.4 million, a decrease of
$8.9 million, or 7%, compared to the third quarter of 2021.
This was driven by higher selling
price and product mix of 21% which was more than offset
by the unfavorablefavorable impact of foreign currency translation of 18% and a
decrease2%. The current quarter decline in sales volumes of 10%.
compared to the prior year was primarily driven by softer market conditions, customer order patterns and the Company’s value-based pricing initiatives, partially offset by new business wins. The increase in selling price and product mix was primarily driven by price
increases implemented
to offset the significant increases in raw material and other input
costs that began during 2021 and continued through the third quarter
year-over-year impact of 2022.
price increases. The decline in sales volumesfavorable foreign exchange impact was primarily driven by the current geopolitical and macroeconomic
pressures including the
direct and indirect impacts of the ongoing war in Ukraine and the impact
of the economic and other sanctions by other nations on
Russia in response to the war, as well as lower volumes
associated with the Company’s ongoing
value-based pricing initiatives, the
wind-down of the tolling agreement for products previously divested related
to the Combination and softer economic conditions in the
region.
The significant and unfavorable foreign currency translation impact was primarily
due to the strengtheningweakening of the U.S. dollar
against the euroMexican peso as this exchange rate averaged 1.01 in the third quarter
of 2022 compared to 1.18averaged 17.06 Mexican peso per U.S. dollar in the third quarter of 2021.
This
segment’s operating earnings were
$9.9 million, a decrease of $10.3 million or 51% compared2023 compared to the third quarter
of 2021.
The
decrease in segment operating earnings was primarily a result of lower
net sales and lower gross margins due to the significant
inflationary pressures on the Company’s
costs exceeding the impact of its value-based pricing actions.
Operating earnings in EMEA
were also negatively impacted by foreign currency translation.
Asia/Pacific
Asia/Pacific represented approximately 19% of the Company’s
consolidated net sales20.23 Mexican peso per U.S. dollar in the third quarter of 2022.
TheThis segment’s
net sales operating earnings were $91.2$69.1 million, a decreasean increase of $7.4$2.4 million or 8%4%, compared
to the third quarter of 2021.2022 primarily driven by an improvement in the segment’s operating margins.
EMEA
The decrease in
EMEA represented approximately 29% of the Company’s consolidated net sales in the third quarter of 2023. The segment’s net sales were $139.6 million, an increase of $5.2 million or 4%, compared to the third quarter of 2022. This was
driven by lower organic sales volumes of 20% and an unfavorable
impact from foreign currency translation of 6%, partially offset
by
higher selling price and product mix of 18%approximately 6% and a favorable impact from foreign currency translation of 7%, partially offset by a decrease in sales volumes of 9%.
The increase in selling price and product mix was primarily driven by the year-over-year impact of price increases
implementedincreases. The favorable foreign currency translation impact was primarily due to offset the significant increasesweakening of the U.S. dollar against the euro as this exchange rate averaged 1.09 U.S. dollars per euro in raw
material and other input costs that began during 2021 and continued through the
third quarter of 2023 compared to 1.01 U.S. dollars per euro in the third quarter of 2022. The decline in organic sales volumes was primarily
driven by softer market conditions, the Company’s value-based pricing initiatives, customer order patterns and the impacts of the wind-down of the tolling agreement for products previously divested related to the Combination as well as the ongoing war in Ukraine, partially offset by new business wins. This segment’s operating earnings were $27.9 million, an increase of $12.4 million or 80%, compared to the third quarter of 2022 primarily driven by an increase in China, as anet sales and an improvement in operating margins.
resultAsia/Pacific
Asia/Pacific represented approximately 21% of government imposed COVID-19 quarantines
and related production disruptions implemented at the end of March 2022
and
continued throughoutCompany’s consolidated net sales in the third quarter of 2022,2023. The segment’s net sales were $105.1 million, an increase of $1.9 million or 2%, compared to the third quarter of 2022. This was driven by higher sales volumes of 6% partially offset by
net an unfavorable impact from foreign currency translation of 4%. The increase in sales volumes was primarily driven by an increase in end market activity, albeit at lower levels and new business.
business wins, partially offset by the impacts of the Company’s value-based pricing initiatives. The increase in selling price and product mix was primarily driven by year-over-year impact of price increases. The unfavorable foreign exchange impact was
primarily due to the strengthening of the U.S. dollar against the Chinese renminbi
as this exchange rate averaged 6.85 in the third
quarter of 2022 compared to 6.47averaged 7.24 Chinese renminbi per U.S. dollar in the third quarter of 2021.
2023 compared to 6.84 Chinese renminbi per U.S. dollar in the third quarter of 2022. This segment’s operating earnings were
$23.3 $31.0 million, an increase of
$0.1 $4.2 million or 16% compared to the third quarter of 2021 as lower2022 primarily driven by an increase in net sales were offset
by improved margins.and an improvement in operating margins as well as slightly lower levels of SG&A.
Global Specialty Businesses
Global Specialty BusinessesReportable Segments Review - Comparison of the First Nine Months of 2023 with the First Nine Months of 2022
Americas
Americas represented approximately 21%50% of the
Company’s consolidated net sales in the
third quarter first nine months of 2022.
2023. The segment’s net sales were $101.1
$750.5 million, an increase of $23.7$48.0 million or 31%7% compared to the third quarter
first nine months of 2021.
The increase
in net sales2022. This was driven by higher selling price and product mix of 20%,
an increase in organic sales volumes of 12% and additional net
sales from acquisitionsa favorable impact of 2%foreign currency translation of 1%, partially offset by an unfavorable
impact from foreign currency translation of 6%.
The increase in
selling price and product mix was primarily driven by price increases
implemented to help offset the significant increases in raw
material and other input costs that began during 2021 and continued through
the third quarter of 2022.
The increase in organic sales
volumes was primarily attributable to a continued favorable demand
environment for this segment’s products.
The unfavorable
foreign exchange impact was primarily due to the strengthening
of the U.S. dollar against the euro as described in the EMEA section
above.
This segment’s operating earnings
were $30.7 million, an increase of $10.1 million or 49% compared to the third quarter
of
2021.
The increase in segment operating earnings reflects the higher net sales and
gross margins in the current year despite slightly
higher raw materials costs due to continued inflationary pressures.
Quaker Chemical Corporation
Management’s Discussion and Analysis
41
Reportable Segments Review - Comparison of the First Nine months of 2022
with the First Nine months of 2021
Americas
Americas represented approximately 35% of the Company’s
consolidated net sales in the first nine months of 2022.
The
segment’s net sales were $513.4
million, an increase of $88.1 million or 21% compared to the first nine months of 2021.
The increase
in net sales was due to higher selling price and product mix of 27%
and additional net sales from acquisitions of 1%, partially offset
by a decrease in organic sales volumes of 7%6%.
The increase in selling price and product mix was primarily driven by the year-over-year impact of price increases
implementedincreases. The favorable foreign currency impact was primarily due to help offset the significant increasesweakening of the U.S. dollar against the Mexican peso as this exchange rate averaged 17.78 Mexican peso per U.S. dollar in raw
material and other input costs that began during 2021 and have continued
into the first nine months of 2023 compared to 20.25 Mexican peso per U.S. dollar in the first nine months of 2022.
The decline in organic sales volumes compared to the prior year was primarily driven by lower sales volumes into
softer market conditions, the automotive end market,Company’s value-based pricing initiatives, customer order patterns, and the
wind-down of the tolling agreement for products previously divested related
to the Combination, the prior year period comparison
which included a strong rebound from COVID-19 impacts and the Company’s
ongoing value-based pricing initiatives, partially offset
by net new business wins.
wins, as mentioned above. This segment’s operating earnings were
$108.0204.3 million, an increase of $10.8$40.2 million or 11%
25%compared to
the first nine months of 2021.
The increase in segment operating earnings was2022 primarily a result of higher net
sales which more than
offset lower gross margins driven by inflationaryhigher net sales coupled with an improvement in operating margins, as mentioned above.
33
pressures.
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
EMEA
EMEA represented approximately 25%30% of the Company’s
consolidated net sales in the first nine months of 2022.
2023. The segment’s
net sales were $362.1$435.6 million, a decreasean increase of $3.4$8.9 million or 1%2% compared
to the first nine months of 2021.
The decrease in net sales
2022. This was a result of higher selling price and product mix of 20%13% and additional
net sales from acquisitions of 1%, more than offset by the
unfavorablea favorable impact of foreign currency translation of 15% and
approximately 1%, partially offset by a decrease in organic sales volumes of 7%12%.
The increase in selling
price and product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other input costs that began during 2021 and have continued into 2022.
The decline in organic sales volumes was primarily driven by
the current geopolitical and macroeconomic pressures including
the direct and indirect impacts of the ongoing war in Ukraine and the
impact of the economic and other sanctions by other nations on Russia in response
to the war, lower volumes
associated with the
Company’s ongoing value
-based pricing initiatives, the wind-down of the tolling agreement for products previously
divested related to
the Combination, the prior year period comparison which included
a strong rebound from COVID-19 impacts, and softer economic
conditions in the region in the current period, partially offset by
net new business wins.
The unfavorable foreign exchange impact was
primarily due to the strengthening of the U.S. dollar against the euro
as this exchange rate averaged 1.07 in the first nine months of
2022 compared to 1.20 in first nine months of 2021.
This segment’s operating earnings were $39.9
million, a decrease of $28.9
million or 42% compared to the first nine months of 2021.
The decrease in segment operating earnings was primarily a result of lower
gross margins driven by significant inflationary pressures
and the negative impact of foreign currency translation year-over-year.
Asia/Pacific
Asia/Pacific represented approximately 20% of the Company’s
consolidated net sales in the first nine months of 2022.
The
segment’s net sales were $295.3
million, an increase of $8.3 million or 3% compared to the first nine months of 2021.
The increase in
net sales was driven by higher selling price and product mix of 15%,
partially offset by lower organic sales volumes
of 9% and the
unfavorable impact of foreign currency translation of 3%.
The increase in selling price and product mix was primarily driven by the year-over-year impact of price
increases implemented increases. The favorable foreign currency impact was primarily due to help offset the significant
increasesweakening of the U.S. dollar against the euro as this exchange rate averaged 1.08 U.S. dollars per euro in raw material and other input costs that began during 2021 and
continued intothe first nine months of 2023 compared to 1.07 U.S. dollars per euro in the first nine months of 2022.
The decline in organic sales volumes was primarily driven by softer end
market conditions, in China as a result
the Company’s value-based pricing initiatives, customer order patterns, the impacts of the government imposed COVID-19 quarantine and related production
disruptionsongoing war in Ukraine and the prior year comparison which included a
strong rebound from COVID-19 impacts as customers replenished
their supply chains,wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by net new business wins.
This
segment’s operating earnings were $81.1 million, an increase of $22.3 million or 38% compared to the first nine months of 2022 primarily driven by higher net sales coupled with an improvement in operating margins, as mentioned above.
Asia/Pacific
$67.5
Asia/Pacific represented approximately 20% of the Company’s consolidated net sales in the first nine months of 2023. The segment’s net sales were $300.1 million, a decrease of $6.5$29.4 million or 9% compared to the first nine months of
2021.
The
decrease in segment operating earnings2022. This was primarily a result of higher
net sales, which was more than offsetdriven by lower gross margins
due to significant inflationary pressuressales volumes of 10% and thean unfavorable impact
of foreign currency translation.
Global Specialty Businesses
Global Specialty Businesses represented approximately 20%translation of the
Company’s consolidated net sales in the
first nine months of
2022.
The segment’s net sales were $288.0
million, an increase of $51.6 million or 22% compared to the first nine months of 2021.
The increase in net sales was driven5%, partially offset by higher selling price and product
mix of 15%, an increase6%.The decline in organic sales volumes was primarily driven by softer market conditions, customer order patterns, including the impact of 8%COVID-19 lockdown measures, primarily in China, and
additional net sales from acquisitions of 3%, the Company’s value-based pricing initiatives, partially offset
by new business wins.The unfavorable foreign exchange impact was primarily due to the unfavorable impact from foreign currency translationstrengthening of
approximately 4%.
the U.S. dollar against the Chinese renminbi as this exchange rate averaged 7.02 Chinese renminbi per U.S. dollar in the first nine months of 2023 compared to 6.59 Chinese renminbi per U.S. dollar in the first nine months of 2022. The increase in selling price and product mix was primarily driven by year-over-year impact of price increases,
implemented to help offset
the significant increases in raw material and other input costs that began during
2021 and continued into 2022.
The increase in
organic sales volumes was primarily attributable
to a continued favorable demand environment for this segment’s
products.
The
unfavorable foreign exchange impact was primarily due to the strengthening
of the U.S. dollar against the euro described in the EMEA
section above.
as mentioned above. This segment’s operating earnings
were $83.6$86.6 million, an increase of $14.6$10.5 million or 21%14% compared to the first
nine
months of 2021.
The increase2022. This was primarily driven by a recovery in segment operating earnings reflects highermargins as well as slightly lower levels of SG&A, which more than offset the decline in net sales, and comparable gross
margins, partially offsetas mentioned above.
by the negative impact of foreign currency translation.
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
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 conflict between Russia and Ukraine, 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,
remain in compliance with the terms of the Company’s credit facility, expectations about future demand and raw material costs and statements regarding the impact of increased raw material costs and
pricing initiatives on our current expectations 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 Ukrainian
and Russian conflict and
actions taken by various governments and governmental organizations
in response;
•the potential impacts of the automotive industry labor dispute
•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 value of our
assets or result in asset impairments;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.
34
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
Such statements include information relating to current and future business activities,
operational matters, capital spending, and
financing sources.
From time to time, forward-looking statements are also included in the Company’s
other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,
or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for 2021 2022 Form 10-K 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 and labor disputes.
Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic,
including actions taken in response to the pandemic by
various governments, which could exacerbate some or all of the other
risks and uncertainties faced by the Company,
as well as
inflationary pressures, including the potential for 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 conflictconflicts between Russia and Ukraine
and between Israel and Hamas, 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, the impact of consolidation in our industry, including loss or consolidation of a major customer and the potential occurrence of cyber-security breaches, cyber-security attacks and other security incidents.
of violence.
Furthermore, the Company is subject to the same business cycles as those experienced
by our customers in the steel,
automobile, aircraft, industrial equipment, and durable goods industries.
The ultimate impact of COVID-19 on our business will
depend
on, among other things, the extent and duration of the pandemic, the severity of
the disease and the number of people infected
with the virus including new variants, the continued uncertainty regarding
global availability, administration,
acceptance and long-
term efficacy of vaccines, or other treatments for COVID-19 or
its variants, the longer-term effects on the economy of
the pandemic,
including the resulting market volatility,
and by the measures taken by governmental authorities and other third parti
es restricting day-
to-day life and business operations and the length of time that such measures
remain in place, as well as laws and other governmental
programs implemented to address the pandemic or assist impacted
businesses, such as fiscal stimulus and other legislation designed to
deliver monetary aid and other relief.
Other factors could also adversely affect us, including those related
to acquisitions and the
integration of acquired businesses.
Our forward-looking statements are subject to risks, uncertainties and
assumptions about the
Quaker Chemical Corporation
Management’s Discussion and Analysis
43
Company and its operations that are subject to change based on various important
factors, some of which are beyond our control.
These risks, uncertainties, and possible inaccurate assumptions relevant
to our business could cause our actual results to differ
materially from expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-looking
statements.
For more information regarding these
risks and uncertainties as well as certain additional risks that we face,
refer to the Risk Factors section, which appears in Item 1A in
our 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.
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.
35
44Table of Contents
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, except the interest
rate risk information noted below.
Interest Rate Risk
The Company’s exposure to
interest rate risk relates primarily to its outstanding borrowings under its credit facility.
During June
2022, the Company entered into an amendment to its primary credit facility
(the (the “Original Credit Facility”, or as amended, the
“Amended Credit “Credit Facility”). SeeNote 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 September 30,December 31, 2022, borrowings under the Amended
Credit Facility bear interest at either term SOFRSecured 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 Amended Credit Facility,
if
interest rates rise significantly,
the cost of debt to the Company will increase. This canmay have an adverse effect
on the Company,
depending on the extent of the Company’s
borrowings outstanding throughout a given year.
As of September 30, 2022, the Company
had outstanding borrowings under the Amended Credit Facility of approximately
$941.2 million. The interest rate applicable on
outstanding borrowings under the Amended Credit Facility was approximately
3.8% as of September 30, 2022. As of December 31,
2021, 2022, and September 30, 2023, the Company had outstanding borrowings under the Original Credit
Facility of approximately $889.6 million.$943.5 million and $814.8 million, respectively. The variable
weighted average interest rate incurredapplicable on outstanding borrowings under the Credit Facility was approximately 4.9% and 6.3% as of December 31, 2022, and September 30, 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, 20212022 was
approximately 1.6%. If interest rates had changed by 10% during 2021, the
Company’s interest expense for
the period ended
December 31, 2021 on its credit facilities, including the Original Credit Facility borrowings
outstanding post-closing of the
Combination, would have correspondingly increased or decreased by approximately
$1 million. Likewise, if interest rates had changed
by 10% during3.0% and the nine month periodmonths ended September 30, 2022, the Company’s
2023 was approximately 6.1%. An interest rate change of 100 basis points would result in an approximate $9.4 million and $8.1 million increase or decrease to interest expense for the nine month periodyear ended December 31, 2022 and the year ended December 31, 2023, respectively.
September 30, 2022 on its credit facilities, including the Amended Credit
Facility borrowings outstanding, would have
correspondingly increased or decreased by approximately $2.2
million. The Original Credit Facility required the Company to fix its
variable interest rates on at least 20% of its total term loans. In order to satisfy this requirement
as well as to manage the Company’s
exposure to variable interest rate risk associated with the Original Credit Facility,
such as SOFR, 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 into an average fixed rate obligation of 1.64%
3.64% plus an applicable margin as provided in the
Original Credit Facility based
on the Company’s consolidated net
leverage ratio. At the time the Company entered into the swaps, and
asAs of September 30, 2022,2023, the aggregate interest rate on the swaps, including
the fixed base rate plus anthe applicable margin, was 3.1%5.3%.
In October 2022, the Company’s
These interest rate swap contracts expired.
Upon expiration,swaps are designated and qualify as cash flow hedges. The Company has previously used derivative financial instruments primarily for the Company is entitledpurpose of hedging exposures to a cash paymentfluctuations in interest rates.
from the counterparties, which is materially consistent with the fair value as of
September 30, 2022. The Amended Credit Facility
does not require the Company to fix variable interest rates on any portion of its borrowings.
45
Item 4.
Controls and Procedures.
Evaluation of disclosure controls
and procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), our management, including our
principal executive officer and principal financial officer,
has
evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this Report.
Based on that evaluation, our principal executive officer and our principal
financial officer
have concluded that, as of September 30, 2022,2023, the end of the period covered
by this Report, our disclosure controls and procedures
(as (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 September 30, 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 September 30, 2023.
2022.
36
Table of Contents
46
PART
II.
OTHER INFORMATION
Items 3 4 and 54 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.
Item 1A. Risk Factors.
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.
There have
been no material changes to the risk factors described therein.
Item 2.
Unregistered Sales of Equity Securities, and Use of Proceeds.Proceeds and Issuer Purchases of Equity Securities.
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)
July 1 - July 312,661$195.06 —$86,865,026 
August 1 - August 31130$204.79 —$86,865,026 
September 1 - September 30—$— —$86,865,026 
Total2,791$195.37 —$86,865,026 
(d)
Total
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
Value of
Shares that
Total
Number
Average
as part of
May Yet
be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
July 1 - July 31
258
$
135.19
—
$
86,865,026
August 1 - August 31
2,853
$
160.22
—
$
86,865,026
September 1 - September 30
473
$
165.52
—
$
86,865,026
Total
3,584
$
159.12
—
$
86,865,026
(1)
All of these shares were acquired from employees related to the surrender
of 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 employee
benefit 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 the
Company announced, a share repurchase
program, pursuant to which the Company is authorized to repurchase up to
$100,000,000 $100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”), and it has no expiration
date.
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program during the
quarter ended September 30, 2022.2023.
Limitation on the Payment of Dividends
The Amended 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.
47
Item 6.
Exhibits.5. Other Information.
(a) ExhibitsInsider Trading Arrangements and Policies
3.1
–
3.2
–
31.1
–
On August 31, 2023, Jeewat Bijlani, Executive Vice President, Chief Strategy Officer, entered into a Rule 10b5-1 written trading arrangement intended to satisfy the affirmative defense of Rule 13a-14(a) of10b5-1(c) under the Securities Exchange Act of 1934, as amended. Mr. Bijlani’s trading arrangement covers the sale of up to 2,900 shares of Company common stock and the exercise and sale of up to 6,338 shares of Company common stock upon the exercise of incentive and non-qualified stock options from December 1, 2023 until July 31, 2024.
1934.*
37
31.2
Table of Content
–Item 6. Exhibits.
Certification of Chief Financial Officer of the Companypursuant to Rule 13a-14(a) of the Securities Exchange Act of(a) Exhibits
1934.*
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
–
*Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
*********
38
Table of Content
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: November 2, 2023Shane W. Hostetter, Executive 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: November 3, 2022
Shane W. Hostetter,
Senior Vice President, Chief Financial
Officer (officer duly authorized on behalf of, and principal
financial officer of, the Registrant)39