UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
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1
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
2
3
4
5
6
Item 2.
33
Item 3.
49
Item 4.
50
PART II
.
Item 1.
51
Item 1A.
51
Item 2.
53
Item 6.
54
Signatures
54
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
$
$
$
$
Cost of goods sold (
excluding amortization expense - See Note 14
)
Gross profit
Selling, general and administrative expenses
Indefinite-lived intangible asset impairment
Restructuring and related charges
Combination, integration and other acquisition-related expenses
Operating income (loss)
(14,502 )
Other (expense) income, net
(239 )
(22,407 )
(389 )
Interest expense, net
(6,837 )
(6,102 )
(22,109 )
(7,611 )
Income (loss) before taxes and equity in net income of
associated companies
(20,401 )
(19,863 )
Taxes on income (loss) before equity in net income of associated
companies
(5,633 )
(7,603 )
Income (loss) before equity in net income of associated
companies
(14,768 )
(12,260 )
Equity in net income of associated companies
Net income (loss)
(12,981 )
(8,724 )
Less: Net income attributable to noncontrolling interest
Net income (loss) attributable to Quaker Chemical Corporation
$
$
(13,053 )
$
(8,812 )
$
Per share data:
Net income (loss) attributable to Quaker Chemical Corporation
common shareholders – basic
$
$
(0.80 )
$
(0.50 )
$
Net income (loss) attributable to Quaker Chemical Corporation
common shareholders – diluted
$
$
(0.80 )
$
(0.50 )
$
Dividends declared
$
$
$
$
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income (loss)
$
$
(12,981 )
$
(8,724 )
$
Other comprehensive income (loss), net of tax
Currency translation adjustments
(28,305 )
(10,582 )
(29,256 )
Defined benefit retirement plans
(257 )
Current period change in fair value of derivatives
(3,738 )
Unrealized gain (loss) on available-for-sale securities
(81 )
Other comprehensive income (loss)
(27,260 )
(25,403 )
Comprehensive income (loss)
(40,241 )
(5,678 )
(8,835 )
Less: Comprehensive (income) loss attributable to
noncontrolling interest
(56 )
(115 )
Comprehensive income (loss) attributable to Quaker Chemical
Corporation
$
$
(40,219 )
$
(5,653 )
$
(8,950 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
Unaudited
September 30,
December 31,
2020
2019
ASSETS
Current assets
Cash and cash equivalents
$
$
Accounts receivable, net
Inventories
Raw materials and supplies
Work-in-process and finished goods
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation
(206,406 )
(185,365 )
Property, plant and equipment, net
Right of use lease assets
Goodwill
Other intangible assets, net
Investments in associated companies
Deferred tax assets
Other non-current assets
Total assets
$
$
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
$
Accounts and other payables
Accrued compensation
Accrued restructuring
Other current liabilities
Total current liabilities
Long-term debt
Long-term lease liabilities
Deferred tax liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 19)
Equity
Common stock $
outstanding 2020 –
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
(75,010 )
(78,170 )
Total Quaker shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
$
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Unaudited
Nine Months Ended
September 30,
2020
2019
Cash flows from operating activities
Net (loss) income
$
(8,724 )
$
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of debt issuance costs
Depreciation and amortization
Equity in undistributed earnings of associated companies, net of dividends
(129 )
Acquisition-related fair value adjustments related to inventory
Deferred compensation, deferred taxes and other, net
(30,657 )
(17,204 )
Share-based compensation
Loss (gain) on disposal of property, plant, equipment and other assets
(111 )
Insurance settlement realized
(818 )
(624 )
Indefinite-lived intangible asset impairment
Combination and other acquisition-related expenses, net of payments
(14,218 )
Restructuring and related charges
Pension and other postretirement benefits
Increase (decrease) in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
(113 )
(10,931 )
Change in restructuring liabilities
(12,772 )
(4,645 )
Accounts payable and accrued liabilities
(13,481 )
Net cash provided by operating activities
Cash flows from investing activities
Investments in property, plant and equipment
(12,184 )
(10,112 )
Payments related to acquisitions, net of cash acquired
(3,132 )
(798,064 )
Proceeds from disposition of assets
Insurance settlement interest earned
Net cash used in investing activities
(15,264 )
(807,916 )
Cash flows from financing activities
Payments of term loan debt
(28,132 )
Proceeds from long-term debt
(Repayments) borrowings on revolving credit facilities, net
(16,485 )
(Repayments) borrowings on other debt, net
(527 )
Financing-related debt issuance costs
(23,747 )
Dividends paid
(20,520 )
(15,003 )
Stock options exercised, other
Purchase of noncontrolling interest in affiliates
(1,047
Distributions to noncontrolling affiliate shareholders
(751 )
Net cash (used in) provided by financing activities
(65,077 )
Effect of foreign exchange rate changes on cash
(529 )
(1,889 )
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the period
Cash, cash equivalents and restricted cash at the end of the period
$
$
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
6
Note 1 – Condensed Financial Information
As used in these Notes to Condensed Consolidated Financial Statements, the terms “Quaker”, “Quaker Houghton”, the
“Company”, “we”, and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires. As used in these Notes to Condensed Consolidated Financial Statements,
the term Legacy Quaker refers to the Company prior to the closing of its combination with Houghton International, Inc. (“Houghton”)
(herein referred to as the “Combination”).
The condensed consolidated financial statements included herein are unaudited 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 which are necessary for a fair statement of the financial
position, results of operations and cash flows for the interim periods. The results for the three and nine months ended September 30,
2020 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, 2019 (the “2019 Form 10-K”).
During the three months ended September 30, 2020, the Company identified and corrected certain immaterial adjustments relating
to the three months ended March 31, 2020 as well as the three and six months ended June 30, 2020. These adjustments related to the
Company’s over-recognition of cost of goods sold (“COGS”) and corresponding under -recognition of inventory, as well as the
associated tax impact of these adjustments, in the Company’s previously issued interim financial statements for the three months
ended March 31, 2020 and the three and six months ended June 30, 2020, respectively. These adjustments impact the Company’s
Americas reportable segment. The cumulative amount of reduction to COGS recorded in the three and nine months ended September
30, 2020 was approximately $
approximately $
Hyper-inflationary economies
Economies that have a cumulative three-year rate of inflation exceeding
% are considered hyper-inflationary in accordance
with U.S. GAAP. A legal entity that operates within an economy deemed to be hyper-inflationary is required to remeasure its
monetary assets and liabilities to the applicable published exchange rates and record the associated gains or losses resulting from the
remeasurement directly to the Condensed Consolidated Statements of Operations.
Based on various indices or index compilations currently being used to monitor inflation in Argentina as well as recent economic
instability, effective July 1, 2018, Argentina’s economy was considered hyper-inflationary under U.S. GAAP. As a result, the
Company began applying hyper-inflationary accounting with respect to the Company's wholly owned Argentine subsidiary beginning
July 1, 2018. In addition, Houghton has an Argentina subsidiary to which hyper-inflationary accounting also is applied. As of, and
for the three and nine months ended September 30, 2020 and 2019, the Company's Argentine subsidiaries represented less than
% of
the Company’s consolidated total assets and net sales, respectively. During the three and nine months ended September 30, 2020, the
Company recorded $
conversions related to Argentina. Comparatively, during the three and nine months ended September 30, 2019, the Company recorded
$
losses were recorded within foreign exchange (losses) gains, net, which is a component of other (expense) income, net, in the
Company’s Condensed Consolidated Statements of Operations.
Note 2 – Business Combinations
Houghton
On
, the Company completed the Combination, whereby the Company acquired all of the issued and outstanding
shares of
and shares of the Company’s common stock in accordance with the Share Purchase Agreement, dated April 4, 2017. Houghton is a
leading global provider of specialty chemicals and technical services for metalworking and other industrial applications. The
Company believes that combining the Legacy Quaker and Houghton products and service offerings allows Quaker Houghton to better
serve its customers in its various end markets.
The Combination was subject to certain regulatory and shareholder approvals. At a shareholder meeting held during 2017, the
Company’s shareholders approved the issuance of new shares of the Company’s common stock at closing of the Combination. Also
in 2017, the Company received regulatory approvals for the Combination from China and Australia. The Company received
regulatory approvals from the European Commission (“EC”) during the second quarter of 2019 and the U.S. Federal Trade
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
7
Commission (“FTC”) in July 2019. The approvals from the FTC and the EC required the concurrent divestiture of certain steel and
aluminum related product lines of Houghton, which were sold by Houghton on August 1, 2019 for approximately $
The final remedy agreed with the EC and the FTC was consistent with the Company’s previous expectation that the total divested
product lines would be approximately
% of the combined company’s net sales.
The following table summarizes the fair value of consideration transferred in the Combination:
Cash transferred to Houghton shareholders (a)
$
Cash paid to extinguish Houghton debt obligations
Fair value of common stock issued as consideration (b)
Total fair value of consideration transferred
$
(
a)
A portion is held in escrow by a third party, subject to indemnification rights that lapse upon the achievement of certain
milestones.
(b)
Amount was determined based on approximately
% of the common stock of the Company
immediately after the closing, and the closing price per share of Quaker Chemical Corporation common stock of $
August 1, 2019.
The Company accounted for the Combination under the acquisition method of accounting. This method requires the recording of
acquired assets, including separately identifiable intangible assets, at their fair value on the acquisition date. 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, including indefinite and definite-lived intangible assets, requires management’s judgment and
often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and
outflows, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. Fair values were
determined by management using a variety of methodologies and resources, including external independent valuation experts. The
valuation methods included physical appraisals, discounted cash flow analyses, excess earnings, relief from royal ty, and other
appropriate valuation techniques to determine the fair value of assets acquired and liabilities assumed.
The following table presents the final estimated fair values of Houghton net assets acquired:
Measurement
August 1,
Period
August 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
$
$
Accounts receivable, net
Inventories, net
Prepaid expenses and other assets
Property, plant and equipment
(66 )
Right of use lease assets
Investments in associated companies
Other non-current assets
Intangible assets
Goodwill
Total assets purchased
Short-term borrowings, not refinanced at closing
Accounts payable, accrued expenses and other accrued liabilities
Deferred tax liabilities
Long-term lease liabilities
Other non-current liabilities
Total liabilities assumed
Total consideration paid for Houghton
Less: cash acquired
Less: fair value of common stock issued as consideration
Net cash paid for Houghton
$
$
$
(1) As previously disclosed in the Company’s 2019 Form 10-K.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
8
As of September 30, 2020, the allocation of the purchase price for the Combination has been finalized and the
one-year
measurement period has ended. Houghton assets acquired and liabilities assumed have been assigned to each of the Company’s
reportable segments on a specific identification or allocated basis, as applicable. Measurement period adjustments recorded during
2020 related primarily to increasing the valuation allowances against the deferred tax assets associated with foreign tax credits
acquired as part of the Combination as additional information became available and was used to update the Company’s initial
estimates of expenses allocated to foreign source income and expected creditable foreign taxes. In addition, measurement period
adjustments included the recognition of additional other non-current assets and other non-current liabilities based on additional
information obtained regarding certain tax audits and associated rights to indemnification, and certain non-income tax liabilities
payable upon closing of the Combination in certain countries.
Commencing August 1, 2019, the Company’s Consolidated Statements of Operations included the results of Houghton. Net sales
of Houghton subsequent to closing of the Combination and included in the Company’s Consolidated Statements of Operations for the
three and nine months ending September 30, 2019 were $
information has been prepared as if the Combination had taken place on January 1, 2018. The unaudited pro forma results include
certain adjustments to each company’s historical actual results, including: (i) additional depreciation and amortization expense based
on the initial estimates of fair value step up and estimated useful lives of depreciable fixed assets, definite-lived intangible assets and
investment in associated companies acquired; (ii) adoption of required accounting guidance and alignment of related accounting
policies, (iii) elimination of transactions between Legacy Quaker and Houghton; (iv) elimination of results associated with the
divested product lines; (v) adjustment to interest expense, net, to reflect the impact of the financing and capital structure of the
combined Company; and (vi) adjustment for certain Combination, integration and other acquisition-related costs to reflect such costs
as if they were incurred in the period immediately following the pro-forma closing of the Combination on January 1, 2018. The
adjustments described in (vi) include an expense recorded in COGS associated with selling inventory acquired in the Combination
which was adjusted to fair value as part of purchase accounting, restructuring expense incurred associated with the Company’s global
restructuring program initiated post-closing of the Combination and certain other integration costs incurred post-closing included in
combination and other acquisition-related expenses. These costs have not been presented in the unaudited pro forma table below as
these costs on a pro forma basis were incurred during the three and nine months ended September 30, 2018. Unaudited pro forma
results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or
that may result in the future for various reasons, including the potential impact of revenue and cost synergies on the business.
Three
Nine
Months Ended
Months Ended
Unaudited Pro Forma
September 30,
September 30,
(as if the Combination occurred on January 1, 2018)
2019
2019
Net sales
$
$
Net income attributable to Quaker Chemical Corporation
Combination, integration and other acquisition-related expenses have been and are expected to continue to be significant. The
Company incurred total costs of approximately $
2020, respectively, primarily for professional fees related to Houghton integration activities. Comparatively, the Company incurred
total costs of approximately $
respectively, primarily for various professional fees and integration planning and regulatory approval as well as professional fees
associated with closing the Combination. These costs also include $
months ended September 30, 2020 and $
fees”) for the Combination during the three and nine months ended September 30, 2019, respectively. The Company had current
liabilities related to the Combination, integration and other acquisition-related activities of $
September 30, 2020, and December 31, 2019, respectively, primarily recorded within other accrued liabilities on its Condensed
Consolidated Balance Sheets.
Norman Hay
On
, the Company completed its acquisition of the operating divisions of
private U.K. company that provides specialty chemicals, operating equipment, and services to industrial end markets. The acquisition
adds new technologies in automotive, original equipment manufacturer (“OEM”), and aerospace, as well as engineering expertise
which is expected to strengthen the Company’s existing equipment solutions platform. The acquired Norman Hay assets and
liabilities were assigned to the Global Specialty Businesses reportable segment. The original purchase price was
a cash-free and debt-free basis, subject to routine and customary post-closing adjustments related to working capital and net
indebtedness levels.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
9
The following table presents the final estimated fair values of Norman Hay net assets acquired:
Measurement
October 1,
Period
October 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
$
$
Accounts receivable, net
Inventories, net
(49 )
Prepaid expenses and other assets
Property, plant and equipment
Right of use lease assets
Intangible assets
Goodwill
(82 )
Total assets purchased
Long-term debt included current portions
Accounts payable, accrued expenses and other accrued liabilities
(732 )
Deferred tax liabilities
Long-term lease liabilities
Total liabilities assumed
Total consideration paid for Norman Hay
(166 )
Less: estimated purchase price settlement (2)
(3,287 )
Less: cash acquired
Net cash paid for Norman Hay
$
$
$
(1)
As previously disclosed in the Company’s 2019 Form 10-K.
(2)
The Company finalized its post-closing adjustments for the Norman Hay acquisition and paid approximately
during the first quarter of 2020 to settle such adjustments.
As of September 30, 2020, the allocation of the purchase price for Norman Hay has been finalized.
Other Acquisitions
In May 2020, the Company acquired Tel Nordic ApS (“TEL”), a company that specializes in lubricants and engineering primarily
in high pressure aluminum die casting for its Europe, Middle East and Africa (“EMEA”) reportable segment. Consideration paid was
in the form of a convertible promissory note in the amount of
subsequently converted into shares of the Company’s common stock. An adjustment to the purchase price of approximately
million DKK, or less than $
Company allocated approximately $
the Company recorded approximately $
of which will be tax deductible. The allocation of the purchase price of TEL has not been finalized and the
one-year
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 March 2020, the Company acquired the remaining
% ownership interest in one of its South African affiliates, Quaker
Chemical South Africa Limited (“QSA”) for
Holdings South Africa. QSA is a part of the Company’s EMEA reportable segment. As this acquisition was a change in an existing
controlling ownership, the Company recorded $
interest in Capital in excess of par value. In 2018 the Company purchased certain formulations and product technology for the mining
industry for $
paid during the first quarter of 2019.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
10
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards Adopted
The Financial Accounting Standards Board (“FASB”) issued Account Standards Update (“ASU”)
2020-04,
Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
provide temporary optional expedients and exceptions for applying 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. As of September 30, 2020, the expedients
provided in ASU 2020-04 do not impact the Company; however, the Company will continue to monitor for potential impacts on its
consolidated financial statements.
The FASB issued ASU 2018-15
, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract
arrangement under a service contract. This guidance generally aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement under a service contract with the requirements for capitalizing implementation costs related to internal-use
software. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2019 and
should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early
adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. There was no
cumulative effect of adoption recorded within retained earnings on January 1, 2020.
The FASB issued ASU 2018-14,
Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans
August 2018 that modifies certain disclosure requirements for fair value measurements. The guidance removes certain disclosure
requirements regarding transfers between levels of the fair value hierarchy as well as certain disclosures related to the valuation
processes for certain fair value measurements. Further, the guidance added certain disclosure requirements including unrealized gains
and losses and significant unobservable inputs used to develop certain fair value measurements. The guidance within this accounting
standard update is effective for annual and interim periods beginning after December 15, 2019, and should be applied prospectively in
the initial year of adoption or prospectively to all periods presented, depending on the amended disclosure requirement. Early
adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. ASU 2018-14
addresses disclosures only and will not have an impact on the Company’s consolidated financial statements.
The FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
in June 2016 related to the accounting for and disclosure of credit losses. The FASB subsequently issued several
additional accounting standard updates which amended and clarified the guidance, but did not materially change the guidance or its
applicability to the Company. This accounting guidance introduces a new model for recognizing credit losses on financial
instruments, including customer accounts receivable, based on an estimate of current expected credit losses. The guidance within this
accounting standard update is effective for annual and interim periods beginning after December 15, 2019. Early adoption was
permitted. The Company did not early adopt, but did adopt the guidance in this accounting standard update, including all applicable
subsequent updates to this accounting guidance, as required, on a modified retrospective basis, effective January 1, 2020. Adoption
did not have a material impact to the Company’s financial statements as expected. However, as a result of this adoption, the Company
recorded a cumulative effect of accounting change that resulted in an increase to its allowance for doubtful accounts of approximately
$
In accordance with this guidance, the Company recognizes an allowance for credit losses reflecting the net amount expected to be
collected from its financial assets, primarily trade accounts receivable. This allowance represents the portion of the receivable that the
Company does not expect to collect over its contractual life, considering past events and reasonable and supportable forecasts of future
economic conditions. The Company’s allowance for credit losses on its trade accounts receivable is based on specific collectability
facts and circumstances for each outstanding receivable and customer, the aging of outstanding receivables and the associated
collection risk the Company estimates for certain past due aging categories, and also, the general risk to all outstanding accounts
receivable based on historical amounts determined to be uncollectible.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
11
Recently Issued Accounting Standards Not Yet Adopted
The FASB issued ASU 2020-01,
(Topic 323), and Derivatives and Hedging (Topic 815) –Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
January 2020 clarifying the interaction among the accounting standards related to equity securities, equity method investments, and
certain derivatives. The new guidance, among other things, states that a company should consider observable transactions that require
a company to either apply or discontinue the equity method of accounting, for the purposes of applying the fair val ue measurement
alternative immediately before applying or upon discontinuing the equity method. The new guidance also addresses the measurement
of certain purchased options and forward contracts used to acquire investments. The guidance within this accounting standard update
is effective for annual and interim periods beginning after December 15, 2020 and is to be applied prospectively. Early adoption is
permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.
The FASB issued ASU 2019-12
, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
The guidance within this accounting standard update removes certain exceptions, including the exception to the incremental approach
for certain intra-period tax allocations, to the requirement to recognize or not recognize certain deferred tax liabilities for equity
method investments and foreign subsidiaries, and to the general methodology for calculating income taxes in an interim period when a
year-to-date loss exceeds the anticipated loss for the year. Further, the guidance simplifies the accounting related to franchise taxes,
the step up in tax basis for goodwill, current and deferred tax expense, and codification improvements for income taxes related to
employee stock ownership plans. The guidance is effective for annual and interi m periods beginning after December 15, 2020. Early
adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.
The FASB issued ASU 2018-13
, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement
defined benefit pension or other postretirement plans. The amendments in this accounting standard update remove disclosures that are
no longer considered cost beneficial, clarify the specific requirements of certain disclosures, and add new disclosure requirements as
relevant. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2020, and
should be applied retrospectively to all periods presented. Early adoption is permitted. The Company has not early adopted the
guidance and is currently evaluating its implementation.
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 Company and the
chief operating decision maker assess its performance. During the third quarter of 2019 and in connection with the Combination, the
Company reorganized its executive management team to align with its new business structure, which reflects the method by which the
chief operating decision maker of the Company assesses its performance and allocates its resources. The Company’s current
reportable segment structure includes
The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and
operations managed globally by the Global Specialty Businesses segment, which includes the Company’s container, metal finishing,
mining, offshore, specialty coatings, specialty grease and Norman Hay businesses.
Although the Company changed its reportable segments in the third quarter of 2019, the calculation of the reportable segments’
measures of earnings remains otherwise generally consistent with past practices. Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and selling, general and administrative expenses (“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, are not included in segment operating earnings. Other items not specifically identified with the Company’s
reportable segments include interest expense, net and other (expense) income, net.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
12
The following table presents information about the performance of the Company’s reportable segments for the three and nine
months ended September 30, 2020 and 2019. Certain immaterial reclassifications within the segment disclosures for the three and
nine months ended September 30, 2019 have been made to conform with the Company’s current customer industry segmentation.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
Americas
$
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total net sales
$
$
$
$
Segment operating earnings
Americas
$
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment operating earnings
Combination, integration and other acquisition-related expenses
(6,913 )
(14,702 )
(22,786 )
(23,789 )
Restructuring and related charges
(1,383 )
(24,045 )
(3,585 )
(24,045 )
Fair value step up of inventory sold
(10,214 )
(226 )
(10,214 )
Indefinite-lived intangible asset impairment
(38,000 )
Non-operating and administrative expenses
(39,786 )
(29,203 )
(110,282 )
(68,621 )
Depreciation of corporate assets and amortization
(14,062 )
(9,055 )
(41,547 )
(12,770 )
Operating income (loss)
(14,502 )
Other (expense) income, net
(239 )
(22,407 )
(389 )
Interest expense, net
(6,837 )
(6,102 )
(22,109 )
(7,611 )
Income (loss) before taxes and equity in net income of
associated companies
$
$
(20,401 )
$
(19,863 )
$
Inter-segment revenues for the three and nine months ended September 30, 2020 were $
$
Specialty Businesses, respectively. Inter-segment revenues for the three and nine months ended September 30, 2019 were $
million and $
Asia/Pacific, and $
have been eliminated from each reportable segment’s net sales and earnings for all periods presented in the above tables.
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad range of formulated chemical specialty products and offers chemical
management services (“Fluidcare”) for various heavy industrial and manufacturing applications throughout its four segments. The
Combination increased the Company’s addressable metalworking, metals and industrial end markets, including steel, aluminum,
aerospace, defense, transportation-OEM, transportation -components, offshore sub-sea energy, architectural aluminum, construction,
tube and pipe, can and container, mining, specialty coatings and specialty greases. The Combination also strengthened the product
portfolio of the combined Company. The major product lines of Quaker Houghton include metal removal fluids, cleaning fluids,
corrosion inhibitors, metal drawing and forming fluids, die cast mold releases, heat treatment and quenchants, metal forging fluids,
hydraulic fluids, specialty greases, offshore sub-sea energy control fluids, rolling lubricants, rod and wire drawing fluids and surface
treatment chemicals.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
13
A substantial portion of the Company’s sales worldwide are made directly through its own employees and its Fluidcare programs,
with the balance being handled through distributors and agents. The Company’s employees typically visit the plants of customers
regularly, work on site, and, through training and experience, identify production needs, which can be resolved or otherwise addressed
either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The specialty
chemical industry comprises many companies similar in size to the Company, as well as companies larger and smaller than Quaker
Houghton. The offerings of many of the Company’s competitors differ from those of Quaker Houghton; some offer a broad portfolio
of fluids, including general lubricants, while others have a more specialized product range. All competitors provide different levels of
technical services to individual customers. Competition in the industry is based primarily on the ability to provide products that meet
the needs of the customer, render technical services and laboratory assistance to the customer and, to a lesser extent, on price.
As part of the Company’s Fluidcare business, certain third-party product sales to customers are managed by the Company. Where
the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers.
Where the Company acts as an agent, revenue is recognized on a net reporting basis at the amount of the administrative fee earned by
the Company for ordering the goods.
the Company considers whether it is primarily responsible for the obligation to provide the specified good, has inventory risk before
the specified good has been transferred to the customer and has discretion in establishing the prices for the specified goods. The
Company transferred third-party products under arrangements recognized on a net reporting basis of $
for the three and nine months ended September 30, 2020, respectively, and $
months ended September 30, 2019, respectively.
A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of
steel, aluminum, automobiles, aircraft, industrial equipment, and durable goods, and, therefore, the Company is subject to the same
business cycles as those experienced by these manufacturers and their customers. The Company’s financial performance is generally
correlated to the volume of global production within the industries it serves, rather than discretely related to the financial performance
of such industries. Furthermore, steel and aluminum customers typically have limited manufacturing locations compared to
metalworking customers and generally use higher volumes of products at a single location. As previously disclosed in its 2019 Form
10-K, during 2019, the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous
purchasing authority) accounted for approximately
% of consolidated net sales, with its largest customer accounting for
approximately
% of consolidated net sales.
Revenue Recognition Model
The Company applies the FASB’s guidance on revenue recognition which requires the Company to recognize revenue in an
amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services transferred to its
customers. To do this, the Company applies the five-step model in the FASB’s guidance, which requires the Company to: (i) identify
the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a
performance obligation.
The Company identifies a contract with a customer when a sales agreement indicates approval and commitment of the parties;
identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is probable that the Company will
collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In
most instances, the Company’s contract with a customer is the customer’s purchase order. For certain customers, the Company may
also enter into a sales agreement which outlines a framework of terms and conditions which apply to all future and subsequent
purchase orders for that customer. In these situations, the Company’s contract with the customer is both the sales agreement as well as
the specific customer purchase order. Because the Company’s contract with a customer is typically for a single transaction or
customer purchase order, the duration of the contract is almost always one year or less. As a result, the Company has elected to apply
certain practical expedients and omit certain disclosures of remaining performance obligations for contracts that have an initial term of
one year or less as permitted by the FASB.
The Company identifies a performance obligation in a contract for each promised good or service that is separately identifiable
from other obligations in the contract and for which the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer. The Company determines the transaction price as the amount of
consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable
consideration, significant financing elements, amounts payable to the customer or noncash consideration. For any contracts that have
more than one performance obligation, the Company allocates the transaction price to each performance obligation in an amount that
depicts the amount of consideration to which the Company expects to be entitled in exchange for satisfying each performance
obligation.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
14
In accordance with the last step of the FASB’s guidance, the Company recognizes revenue when, or as, it satisfies the
performance obligation in a contract by transferring control of a promised good or providing the service to the customer. The
Company recognizes revenue over time as the customer receives and consumes the benefits provided by the Company’s performance;
the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the
Company’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to
payment, including a profit margin, for performance completed to date. For performance obligations not satisfied over time, the
Company determines the point in time at which a customer obtains control of an asset and the Company satisfies a performance
obligation by considering when the Company has a right to payment for the asset; the customer has legal title to the asset; the
Company has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset;
or the customer has accepted the asset.
The Company typically satisfies its performance obligations and recognizes revenue at a point in time for product sales, generally
when products are shipped or delivered to the customer, depending on the terms underlying each arrangement. In circumstances
where the Company’s products are on consignment, revenue is generally recognized upon usage or consumption by the customer. For
any Fluidcare or other services provided by the Company to the customer, the Company typically satisfies its performance obligations
and recognizes revenue over time, as the promised services are performed. The Company uses input methods to recognize revenue
over time related to these services, including labor costs and time incurred. The Company believes that these input methods represent
the most indicative measure of the Fluidcare or other service work performed by the Company.
Other Considerations
The Company does not have standard payment terms for all customers; however the Company’s general payment terms require
customers to pay for products or services provided after the performance obligation is satisfied. The Company does not have
significant financing arrangements with its customers. The Company does not have significant amounts of variable consideration in
its contracts with customers and where applicable, the Company’s estimates of variable consideration are not constrained. The
Company records certain third-party license fees in other (expense) income, net, in its Condensed Consolidated Statements of
Operations, which generally include sales-based royalties in exchange for the license of intellectual property. These license fees are
recognized in accordance with their agreed-upon terms and when performance obligations are satisfied, which is generally when the
third party has a subsequent sale.
Practical Expedients and Accounting Policy Elections
The Company has made certain accounting policy elections and elected to use certain practical expedients as permitted by the
FASB in applying the guidance on revenue recognition. It is the Company’s policy to not adjust the promised amount of
consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period
between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service
will be one year or less. In addition, it is the Company’s policy to expense costs to obtain a contract as incurred when the expected
period of benefit, and therefore the amortization period, is one year or less. It is also the Company’s accounting policy to exclude
from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent
with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, value added, excise
and various other taxes. Lastly, the Company has elected to account for shipping and handling activities that occur after the customer
has obtained control of a good as a fulfilment cost rather than an additional promised service.
Contract Assets and Liabilities
The Company recognizes a contract asset or receivable on its Condensed Consolidated Balance Sheet when the Company
provides a good or service in advance of receiving consideration. A receivable is the Company’s right to consideration that is
unconditional and only the passage of time is required before payment of that consideration is due. A contract asset is the Company’s
right to consideration in exchange for goods or services that the Company has transferred to a customer.
material contract assets recorded on its Condensed Consolidated Balance Sheets as of September 30, 2020 or December 31, 2019.
A contract liability is recognized when the Company receives consideration, or if it has the unconditional right to receive
consideration, in advance of performance. A contract liability is the Company’s obligation to transfer goods or services to a customer
for which the Company has received consideration, or a specified amount of consideration is due, from the customer. The Company’s
contract liabilities primarily represent deferred revenue recorded for customer payments received by the Company prior to the
Company satisfying the associated performance obligation. Deferred revenues are presented within other current liabilities in the
Company’s Condensed Consolidated Balance Sheets.
revenue as of September 30, 2020 and December 31, 2019 , respectively. During the nine months ended September 30, 2020, the
Company satisfied all of the associated performance obligations and recognized into revenue the advanced payments received and
recorded as of December 31, 2019.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
15
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicals and its technical expertise as a global product
portfolio. The Company generally manages and evaluates its performance by segment first, and then by customer industry, rather than
by individual product lines. The Company has provided annual net sales information by major product lines that represent
approximately 10% or more of consolidated net sales in its 2019 Form 10-K, and those annual percentages are generally consistent
with the current quarter’s net sales by product line. Also, net sales of each of the Company’s major product lines are generally spread
throughout all three of the Company’s geographic regions, and in most cases, approximately proportionate to the level of total sales in
each region.
The following tables disaggregate the Company’s net sales by segment, geographic region, customer industry, and timing of
revenue recognized for the three and nine months ended September 30, 2020 and 2019. Certain immaterial reclassifications within the
disaggregated customer industry disclosures for the three and nine months ended September 30, 2019 have been made to conform with
the Company’s current customer industry segmentation.
Three Months Ended September 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
$
$
$
Metalworking and other
Global Specialty Businesses
$
$
$
$
Timing of Revenue Recognized
Product sales at a point in time
$
$
$
$
Services transferred over time
$
$
$
$
Three Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
$
$
$
Metalworking and other
Global Specialty Businesses
$
$
$
$
Timing of Revenue Recognized
Product sales at a point in time
$
$
$
$
Services transferred over time
$
$
$
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
16
Nine Months Ended September 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
$
$
$
Metalworking and other
Global Specialty Businesses
$
$
$
$
Timing of Revenue Recognized
Product sales at a point in time
$
$
$
$
Services transferred over time
$
$
$
$
Nine Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
$
$
$
Metalworking and other
Global Specialty Businesses
$
$
$
$
Timing of Revenue Recognized
Product sales at a point in time
$
$
$
$
Services transferred over time
$
$
$
$
Note 6 – Leases
The Company determines if an arrangement is a lease at its inception. This determination generally depends on whether the
arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for
consideration. Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and obtains
substantially all of the economic benefits from the use of, the underlying asset. Lease expense for variable leases and short-term
leases is recognized when the obligation is incurred.
The Company has operating leases for certain facilities, vehicles and machinery and equipment with remaining lease terms up to
Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by an option to extend the lease
that the Company is reasonably certain it will exercise. Operating leases are included in right of use lease assets, other current
liabilities and long-term lease liabilities on the Condensed Consolidated Balance Sheet. Right of use lease assets and liabilities are
recognized at each lease’s commencement date based on the present value of its lease payments over its respective lease term. The
Company uses the stated borrowing rate for a lease when readily determinable. When a stated borrowing rate is not available in a
lease agreement, the Company uses its incremental borrowing rate based on information available at the lease’s commencement date
to determine the present value of its lease payments. In determining the incremental borrowing rate used to present value each of its
leases, the Company considers certain information including fully secured borrowing rates readily available to the Company and its
subsidiaries. The Company has immaterial finance leases, which are included in property, plant and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated Balance Sheet.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
17
Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease expense for the three and nine
months ended September 30, 2020 was $
three and nine months ended September 30, 2019 was $
three and nine months ended September 30, 2020 was $
expense for the three and nine months ended September 30, 2019 was $
Cash paid for operating leases during the nine months ended September 30, 2020 and 2019 was $
respectively. The Company recorded new right of use lease assets and associated lease liabilities of $
months ended September 30, 2020.
Supplemental balance sheet information related to the Company’s leases is as follows:
September 30,
December 31,
2020
2019
Right of use lease assets
$
$
Other current liabilities
Long-term lease liabilities
Total operating lease liabilities
$
$
Weighted average remaining lease term (years)
Weighted average discount rate
Maturities of operating lease liabilities as of September 30, 2020 were as follows:
September 30,
2020
For the remainder of 2020
$
For the year ended December 31, 2021
For the year ended December 31, 2022
For the year ended December 31, 2023
For the year ended December 31, 2024
For the year ended December 31, 2025 and beyond
Total lease payments
Less: imputed interest
(6,928 )
Present value of lease liabilities
$
Note 7 – Restructuring and Related Activities
All costs incurred to date relate to severance costs to reduce headcount as well as costs to close certain facilities and are recorded
in restructuring and related charges in the Company’s Condensed Statements of Operations. As described in Note 4 of Notes to
Condensed Consolidated Financial Statements, restructuring 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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
18
Activity in the Company’s accrual for restructuring under the QH Program for the nine months ended September 30, 2020 is as
follows:
QH Program
Accrued restructuring as of December 31, 2019
$
Restructuring and related charges
Cash payments
(12,772 )
Currency translation adjustments
Accrued restructuring as of September 30, 2020
$
In connection with the plans for closure of certain manufacturing and non-manufacturing facilities, the Company made a decision
to make available for sale certain facilities during the second quarter of 2020. As a result, certain buildings and land with an aggregate
book value of approximately $
September 30, 2020.
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense in its Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Stock options
$
$
$
$
Non-vested restricted stock awards and restricted stock units
Non-elective and elective 401(k) matching contribution in stock
Employee stock purchase plan
Director stock ownership plan
Performance stock units
Annual incentive plan
Total share-based compensation expense
$
$
$
$
Share-based compensation expense is recorded in SG&A, except for approximately $
and nine months ended September 30, 2020, respectively, and $
September 30, 2019, respectively, recorded within Combination, integration and other acquisition-related expenses. The increase in
total share-based compensation expense for the nine months ended September 30, 2020 includes performance stock unit s, annual
incentive plan accruals, and non-elective and elective 401(k) matching contributions in stock as components of share-based
compensation beginning in 2020, described further below.
Stock Options
During the first quarter of 2020, the Company granted stock options under its long-term incentive plan (“LTIP”) that are subject
only to time-based 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:
Number of options granted
Dividend yield
%
Expected volatility
%
Risk-free interest rate
%
Expected term (years)
The fair value of these options is amortized on a straight -line basis over the vesting period. As of September 30, 2020,
unrecognized compensation expense related to all stock options granted was $
remaining period of
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
19
Restricted Stock Awards and Restricted Stock Units
During the nine months ended September 30, 2020, the Company granted
vested restricted stock units under its LTIP , 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, 2020, unrecognized compensation
expense related to the non-vested restricted shares was $
years, and unrecognized compensation expense related to non-vested restricted stock units was $
weighted average remaining period of
Performance Stock Units
In March 2020, the Company included performance -dependent stock awards (“PSUs”) as a component of its LTIP, which will be
settled in a certain number of shares subject to market -based and time-based vesting conditions. The number of fully vested shares
that may ultimately be issued as settlement for each award may range from
% up to
% of the target award, subject to the
achievement of the Company’s total shareholder return (“TSR”) relative to the performance of the Company’s peer group, the S&P
Midcap 400 Materials group. The service period required for the PSUs is three years and the TSR measurement period for the PSUs is
from January 1, 2020 through December 31, 2022.
Compensation expense for PSUs is measured based on their grant date fair value and is recognized on a straight-line basis over
the three-year vesting period. The grant-date fair value of the PSUs was estimated using a Monte Carlo simulation on the grant date
and using the following assumptions: (i) a risk-free rate of
%; (ii) an expected term of
historical volatility for each of the companies in the peer group, including Quaker Houghton.
As of September 30, 2020, the Company estimates that it will issue approximately
date of the award based on the conditions of the PSUs and Company’s closing stock price on September 30, 2020. As of September
30, 2020, there was approximately $
to recognize over a weighted-average period of
Annual Incentive Plan
The Company maintains an Annual Incentive Plan (“AIP”), which may be settled in cash or a certain number of shares subject to
performance-based and time-based vesting conditions. It is the Company’s current intention to settle the 2020 AIP in shares, and
therefore, expense associated with the AIP in 2020 is recorded as a component of share-based compensation expense. The number of
fully vested shares that may ultimately be issued as settlement for each award is subject to the achievement of the Company’s
performance against certain internal financial and non-financial metrics and approval by the Company’s Compensation Committee.
Compensation expense for the AIP is measured based on the estimated total value of the award. The number of shares that will
ultimately be issued under the AIP award will be equal to the final value of the award converted into a number of shares based on the
trading price of the Company’s common stock on the date of settlement. As of September 30, 2020, the Company estimates that it
will issue approximately
Company’s projected performance against its performance metrics and Company’s closing stock price on September 30, 2020.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majority of its U.S. employees. The Company matches
%
of the first
% of compensation that is contributed to the plan, with a maximum matching contribution of
% of compensation.
Additionally, the plan provides for non-elective nondiscretionary contributions on behalf of participants who have completed one year
of service equal to
% of the eligible participant's compensation. The Company’s matching contributions and non-elective
contributions may be made in cash or in fully vested shares of the Company’s common stock. Beginning in April 2020, the Company
began matching both non-elective and elective 401(k) contributions in fully vested shares of its common stock rather than cash. For
the three and nine months ended September 30, 2020, total contributions were $
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
20
Note 9 – Pension and Other Postretirement Benefits
The components of net periodic benefit (income) cost for the three and nine months ended September 30, 2020 and 2019 are as
follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2020
2019
2020
2019
2020
2019
2020
2019
Service cost
$
$
$
$
$
$
$
$
Interest cost
Expected return on plan assets
(3,526 )
(2,140 )
(7,246 )
(4,102 )
Settlement charge
Actuarial loss amortization
Prior service cost amortization
(42 )
(34 )
(123 )
(117 )
Net periodic benefit (income)
cost
$
(188 )
$
$
$
$
$
$
$
Employer Contributions
The Company previously disclosed in its 2019 Form 10-K that it expected to make minimum cash contributions of $
to its U.S. and foreign pension plans and approximately $
September 30, 2020, $
and its other postretirement benefit plans, respectively.
This excludes the $
of 2020, as required, to terminate the Legacy Quaker U.S. Pension Plan, noted above.
Note 10 – Other (Expense) Income, Net
The components of other (expense) income, net, for the three and nine months ended September 30, 2020 and 2019 are as
follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Income from third party license fees
$
$
$
$
Foreign exchange (losses) gains, net
(1,897 )
(3,080 )
(5 )
(Loss) gain on fixed asset disposals, net
(24 )
(105 )
Non-income tax refunds and other related credits
Pension and postretirement benefit income (costs),
non-service components
(513 )
(22,491 )
(2,304 )
Other non-operating income, net
(56 )
Total other (expense) income, net
$
(239 )
$
$
(22,407 )
$
(389 )
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
21
Pension and postretirement benefit income (costs), non-service components during both the three and nine months ended
September 30, 2020 includes the $
Statements. In addition, this line also includes $
charge during the nine months ended September 30, 2020, also described in Note 9 of Notes to Condensed Consolidated Financial
Statements.
Note 11 – Income Taxes and Uncertain Income Tax Positions
The Company’s effective tax rate for the three and nine months ended September 30, 2020 was an expense of
% and a benefit
of
%, respectively, compared to a benefit of
% and an expense of
%, respectively, for the three and nine months ended
September 30, 2019. The Company’s effective tax rate for the three and nine months ended September 30, 2020 was impacted by the
pre-tax loss for the nine months ended September 30, 2020, the tax effect of certain one-time pre -tax costs as well as certain tax
charges and benefits in the current period related to the impact of recently issued tax regulations and other changes in foreign tax
credit valuation allowances, discussed below, tax law changes in foreign jurisdictions, and the tax impact of the Company’s
termination of its Legacy Quaker U.S. Pension Plan. Applying the recently issued tax regulations resulted in a $
benefit on the foreign tax credit valuation allowance and a $
recognized in the third quarter of 2020. Comparatively, the three and nine months ended September 30, 2019 effectiv e tax rates were
impacted by certain non-deductible costs associated with the Combination and withholding tax expense associated with the assumed
repatriation of previously untaxed current earnings and profits of certain of the Company’s foreign subsidiaries, partially offset by
favorable return to provision adjustments in the current year and certain share-based compensation-related tax benefits for deductions
in excess of compensation costs associated with stock option exercises. Additionally, in the third quarter of 2019, the Company
recorded a cumulative year-to-date tax benefit as a result of one of its subsidiaries receiving approval for the renewal of the
concessionary
% tax rate compared to its
% statutory tax rate.
On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, the Coronavirus Aid, Relief and
Economic Security Act (the “CARES Act”) was enacted into law, providing a stimulus to the U.S. economy in the form of various
individual and business assistance programs as well as temporary changes to existing tax law. The changes include a postponement of
certain tax payments, deferral of the employer’s portion of the social security tax and certain other payroll-related incentives, and an
increase in the interest expense limitation under Section 163(j) of the Internal Revenue Code from
% to
% for the 2019 and 2020
tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. Under the
CARES Act, the Company has the option to use its 2019 adjusted taxable income in determining its interest expense limitation under
Section 163(j). While the Company is still considering whether to make this election for 2020, the current year tax provision takes
into account this potential election and associated tax benefit, which offsets an increase to the Company’s foreign tax credit valuation
allowance recognized during the current quarter primarily driven by changes in current year projected taxable income due to the
negative impacts from COVID-19. In addition, the Company reviewed its existing deferred tax assets in light of COVID-19 and
determined that, at this time, no change in valuation allowance is required except with regard to its foreign tax credits as noted below.
While the ultimate impact of COVID-19 on the Company’s results of operations is still uncertain, the Company will continue to assess
future changes in projected taxable income to determine if they result in additional changes to any of the Company’s valuation
allowances.
As previously disclosed in its 2019 Form 10-K, the Company had a deferred tax liability of $
which primarily represents the Company’s estimate of non-U.S. taxes it will incur to repatriate certain foreign earnings to the U.S.
During the first nine months of 2020, the Company made certain adjustments to the deferred tax liability to take into account a tax law
change enacted in the first quarter in a certain foreign jurisdiction, the inclusion of other earnings to be repatriated, and the actual
repatriation of earnings, resulting in a deferred tax liability of $
on its balance sheet expected to be utilized between
. As of September 30, 2020, the Company had net realizable
foreign tax credits of $
. The change in net realizable
foreign tax credits during the first nine months of 2020 was primarily driven by the Company's update to its initial opening balance
sheet estimate with respect to acquired Houghton foreign tax credit deferred tax assets, described in Note 2 of Notes to Condensed
Consolidated Financial Statements, as well as approximately $
based on revised taxable income projections and changes to the interest expense limitation under the CARES Act amongst other
factors.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
22
The Company continues to recognize interest and penaltie s associated with uncertain tax positions as a component of taxes on
income (loss) before equity in net income of associated companies in its Condensed Consolidated Statements of Operations. The
Company recognized a credit for interest of $
million and $
2020, respectively. Comparatively, the Company recognized an expense for interest of $
for penalties of less than $
September 30, 2020, the Company had accrued $
Condensed Consolidated Balance Sheets, compared to $
accrued at December 31, 2019.
As of September 30, 2020, the Company’s cumulative liability for gross unrecognized tax benefits was $
of $
During the nine months ended September 30, 2020 and 2019, the Company recognized a decrease of $
million, respectively, in its cumulative liability for gross unrecognized tax benefits due to the expiration of the applicable statutes of
limitations for certain tax years.
The Company estimates that during the year ending December 31, 2020 it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
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, 2020.
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 Brazil from
, Italy from
,
China from
, Canada from
, the Netherlands and the United Kingdom from
, Spain from
, Mexico, Germany, and
the U.S. from
, India from fiscal year beginning April 1, 2017 and ending March 31,
, and various U.S. state tax jurisdictions
from
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years
. The Company has filed for competent authority relief related to these assessments
under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development (“OECD”) for
all years except 2007. During the second quarter of 2020, the Company received notification that the Italian and Dutch competent
authorities reached an agreement as part of the MAP involving tax years 2008 through 2015. The Company has tentatively agreed to
the reduced tax assessments and has recorded $
is consistent with the tentative agreement reached involving tax years 2008 through 2015. As of September 30, 2020, the Company
believes it has adequate reserves for uncertain tax positions with respect to this matter.
Houghton Italia, S.r.l is also currently involved in a corporate income tax audit with the Italian tax authorities covering tax years
2014 through 2018. As part of the purchase accounting related to the Combination, the Company has established a $
reserve for uncertain tax positions relating to this audit. Since this reserve relates to tax periods prior to the Combination, the
Company has submitted an indemnification claim against funds held in escrow by Houghton’s former owners for certain tax liabilities
arising pre-Combination. As a result, a corresponding $
purchase accounting that would offset the $
the 2014 to 2018 audit periods as well as the seven-month period in 2019 prior to the Combination. As of September 30, 2020, the
Company believes it has adequate reserves for uncertain tax positions.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
23
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations for the three and nine months ended September 30, 2020 and
2019:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Basic earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
$
(13,053 )
$
(8,812 )
$
Less: (income) loss allocated to participating securities
(113 )
(40 )
Net income (loss) available to common shareholders
$
$
(13,007 )
$
(8,768 )
$
Basic weighted average common shares outstanding
Basic earnings (loss) per common share
$
$
(0.80 )
$
(0.50 )
$
Diluted earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
$
(13,053 )
$
(8,812 )
$
Less: (income) loss allocated to participating securities
(113 )
(40 )
Net income (loss) available to common shareholders
$
$
(13,007 )
$
(8,768 )
$
Basic weighted average common shares outstanding
Effect of dilutive securities
Diluted weighted average common shares outstanding
Diluted earnings (loss) per common share
$
$
(0.80 )
$
(0.50 )
$
During the third quarter of 2019, the Company issued approximately
% of
the common stock of the Company immediately after the closing, as a component of the consideration transferred in the Combination.
Certain stock options and restricted stock units are not included in the diluted earnings (loss) per share calculation because the effect
would have been anti-dilutive. All of the Company’s potentially dilutive shares for the nine months ended September 30, 2020 and
the three months ended September 30, 2019 are anti-dilutive and not included in the dilutive earnings (loss) per share calculations
because of the Company’s net loss for the periods. There were
calculations for the three months ending September 30, 2020 and the nine months ended September 30, 2019.
Note 13 – Restricted Cash
subsidiary’s asbestos litigation. The proceeds of the settlement and release agreements have been deposited into interest bearing
accounts that earned less than $
ended September 30, 2019. The interest was offset by $
compared to $
corresponding deferred credit was established in other non-current liabilities for an equal and offsetting amount, and will remain until
the restrictions lapse or the funds are exhausted via payments of claims and costs of defense.
The following table provides a reconciliation of cash, cash equivalents and restricted cash as of September 30, 2020 and 2019,
and December 31, 2019 and 2018:
September 30,
December 31,
2020
2019
2019
2018
Cash and cash equivalents
$
$
$
$
Restricted cash included in other current assets
Restricted cash included in other assets
Cash, cash equivalents and restricted cash
$
$
$
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
24
Note 14 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2020 were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2019
$
$
$
$
$
Goodwill acquired
Currency translation and other adjustments
(7,262 )
Balance as of September 30, 2020
$
$
$
$
$
Other adjustments in the table above include updates to the Company’s allocation of the Houghton purchase price and associated
goodwill to each of the Company’s reportable segments during the first nine months of 2020, including a $
Americas, a $
Business.
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of September 30, 2020 and
December 31, 2019 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2020
2019
2020
2019
Customer lists and rights to sell
$
$
$
$
Trademarks, formulations and product technology
Other
Total definite -lived intangible assets
$
$
$
$
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded
$
Comparatively, the Company recorded $
September 30, 2019, respectively.
Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:
For the year ended December 31, 2020
$
For the year ended December 31, 2021
For the year ended December 31, 2022
For the year ended December 31, 2023
For the year ended December 31, 2024
For the year ended December 31, 2025
Goodwill and intangible assets that have indefinite lives are not amortized and are required to be assessed at least annually for
impairment. The Company completes its annual goodwill and indefinite-lived intangible asset impairment test during the fourth
quarter of each year. The Company continuously evaluates if triggering events indicate a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
As of March 31, 2020, the Company evaluated the initial impact of COVID-19 on the Company’s operations, and the volatility
and uncertainty in the economic outlook as a result of COVID-19 to determine if they indicated it was more likely than not that the
carrying value of any of the Company’s reporting units or indefinite-lived or long-lived assets was not recoverable. The Company
concluded that the impact of COVID-19 did not represent a triggering event as of March 31, 2020 with regards to the Company’s
reporting units or indefinite-lived and long-lived assets, except for the Company’s Houghton and Fluidcare trademark and tradename
indefinite-lived intangible assets.
The determination of estimated fair value of the Houghton and Fluidcare trademark and tradename indefinite-lived assets was
based on a relief from royalty valuation method which requires management’s judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to the weighted average cost of capital (“WACC”) as well as projected
net sales. In the first quarter of 2020, as a result of the impact of COVID-19 driving a decrease in projected legacy Houghton net sales
in the current year and the impact of the current year decline on projected future legacy Houghton net sales as well as an increase in
the WACC assumption utilized in the quantitative impairment assessment, the Company concluded that the estimated fair values of
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
25
the Houghton and Fluidcare trademark and tradename intangible assets were less than their carrying values. As a result, an
impairment charge of $
recorded in the first quarter of 2020. The Company’s estimate of fair value and the carrying value of these Houghton and Fluidcare
trademark and tradename indefinite-lived intangible assets as of September 30, 2020 was $
indefinite-lived intangible assets totaled $
intangible assets totaling $
As of September 30, 2020, the Company continued to evaluate the on-going impact of COVID-19 on the Company’s operations,
and the volatility and uncertainty in the economic outlook as a result of COVID-19, to determine if this indicated it was more likely
than not that the carrying value of any of the Company’s reporting units or indefinite-lived or long-lived intangible assets were not
recoverable. The Company concluded that the impact of COVID-19 did not represent a triggering event as of September 30, 2020
with regards to any of the Company’s reporting units or indefinite-lived and long-lived intangible assets.
While the Company concluded that the impact of COVID-19 did not represent a triggering event as of September 30, 2020 for
any of its other long-lived or indefinite-lived assets or reporting units, the Company will continue to evaluate the impact of COVID-19
on the Company’s current and projected results. If the current economic conditions worsen or projections of the timeline for recovery
are significantly extended, then the Company may conclude in the future that the impact from COVID-19 requires the need to perform
further interim quantitative impairment tests, which could result in additional impairment charges in the future.
Note 15 – Debt
Debt as of September 30, 2020 and December 31, 2019 includes the following:
As of September 30, 2020
As of December 31, 2019
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
$
$
U.S. Term Loan
EURO Term Loan
Industrial development bonds
Bank lines of credit and other debt obligations
Various
Various
Total debt
$
$
Less: debt issuance costs
(11,873 )
(14,196 )
Less: short-term and current portion of long-term debts
(38,630 )
(38,332 )
Total long -term debt
$
$
Credit facilities
The Company’s primary credit facility (as amended, the “New Credit Facility”) is comprised of a $
revolver (the “Revolver”), a $
million (as of August 1, 2019) Euro equivalent term loan (the “EURO Term Loan” and together with the “U.S. Term Loan”, the
“Term Loans” ) with Quaker Chemical B.V., a Dutch subsidiary of the Company as borrower, each with a five-year term maturing in
August 2024. Subject to the consent of the administrative agent and certain other conditions, the Company may designate additional
borrowers. The maximum amount available under the New Credit Facility can be increased by up to $
request if there are lenders who agree to accept additional commitments and the Company has satisfied certain other conditions.
Borrowings under the New Credit Facility bear interest at a base rate or LIBOR plus an applicable margin based upon the Company’s
consolidated net leverage ratio. There are LIBOR replacement provisions that contemplate a further amendment if and when LIBOR
ceases to be reported. The interest rate incurred on the outstanding borrowings under the New Credit Facility during the nine months
ended September 30, 2020 was approximately
%. As of September 30, 2020, the interest rate on the outstanding borrowings under
the New Credit Facility was approximately
%. In addition to paying interest on outstanding principal under the New Credit
Facility, the Company is required to pay a commitment fee ranging from
% to
% depending on the Company’s consolidated net
leverage ratio to the lenders under the Revolver in respect of the unutilized commitments thereunder. The Company has unused
capacity under the Revolver of approximately $
30, 2020.
The New Credit Facility is subject to certain financial and other covenants.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
26
quarterly principal amortization during their respective five-year maturities, with
% amortization of the principal balance due in
years 1 and 2,
% in year 3, and
% in years 4 and 5, with the remaining principal amount due at maturity. During the nine
months ended September 30, 2020, the Company made three quarterly amortization payments related to the Ter m Loans totaling
$
priority liens on substantially all of the assets of the Company and the domestic subsidiary guarantors, subject to certain customary
exclusions. The obligations of the Dutch borrower are guaranteed only by certain foreign subsidiaries on an unsecured basis.
The New Credit Facility required the Company to fix its variable interest rates on at least
% 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 New Credit
Facility, in November 2019, the Company entered into $
of
% plus an applicable margin as provided in the New 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, 2020, the aggregate interest rate on the swaps, including the
fixed base rate plus an applicable margin, was
%. See Note 18 of Notes to Condensed Consolidated Financial Statements.
The Company capitalized $
Facility. Approximately $
long-term debt on the Company’s Condensed Consolidated Balance Sheet. Approximately $
attributed to the Revolver and recorded within other assets on the Company’s Condensed Consolidated Balance Sheet. These
capitalized costs are being amortized into interest expense over the five-year term of the New Credit Facility. As of September 30,
2020 and December 31, 2019, the Company had $
reduction of long-term debt. As of September 30, 2020 and December 31, 2019, the Company had $
respectively, of debt issuance costs recorded within other assets.
Industrial development bonds
As of September 30, 2020 and December 31, 2019 , the Company had fixed rate, industrial development authority bonds totaling
$
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discounting facilities in one of its foreign subsidiaries, which are not
collateralized. The Company’s other debt obligations primarily consist of certain domestic and foreign low interest rate or interest-
free municipality-related loans, local credit facilities of certain foreign subsidiaries and capital lease obligations. Total unused
capacity under these arrangements as of September 30, 2020 was approximately $
For the three and nine months ended September 30, 2020 , the Company incurred the following debt related expenses included
within Interest expense, net, in the Condensed Consolidated Statements of Operations:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest expense
$
$
$
$
Amortization of debt issuance costs
Total
$
$
$
$
Based on the variable interest rates associated with the New Credit Facility, as of September 30, 2020 and December 31, 2019,
the amounts at which the Company’s total debt were recorded are not materially different from their fair market value.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
27
Note 16 – Equity
The following tables present the changes in equity, net of tax, for the three and nine months ended September 30, 2020 and 2019:
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at June 30, 2020
$
$
$
$
(109,264 )
$
$
Net income (loss)
Amounts reported in other comprehensive
income
Dividends ($
(7,048 )
(7,048 )
Share issuance and equity-based
compensation plans
Balance at September 30, 2020
$
$
$
$
(75,010 )
$
$
Balance at June 30, 2019
$
$
$
$
(78,881 )
$
$
Net (loss) income
(13,053 )
(12,981 )
Amounts reported in other comprehensive
loss
(27,166 )
(94 )
(27,260 )
Dividends ($
(6,826 )
(6,826 )
Shares issued related to the Combination
Share issuance and equity-based
compensation plans
Balance at September 30, 2019
$
$
$
$
(106,047 )
$
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
28
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2019
$
$
$
$
(78,170 )
$
$
Cumulative effect of an accounting change
(911 )
(911 )
Balance at January 1, 2020
(78,170 )
Net (loss) income
(8,812 )
(8,724 )
Amounts reported in other comprehensive
income (loss)
(114 )
Dividends ($
(20,735 )
(20,735 )
Acquisition of noncontrolling interest
(707 )
(340 )
(1,047 )
Distribution to noncontrolling interest
affiliate shareholders
(751 )
(751 )
Share issuance and equity-based
compensation plans
Balance at September 30, 2020
$
$
$
$
(75,010 )
$
$
Balance at December 31, 2018
$
$
$
$
(80,715 )
$
$
Cumulative effect of an accounting change
(44 )
(44 )
Balance at January 1, 2019
(80,715 )
Net income
Amounts reported in other comprehensive
loss
(25,332 )
(71 )
(25,403 )
Dividends ($
0 per share)
(16,894 )
(16,894 )
Shares issued related to the Combination
Share issuance and equity-based
compensation plans
Balance at September 30, 2019
$
$
$
$
(106,047 )
$
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
29
The following tables show the reclassifications from and resulting balances of AOCI for the three and nine months ended
September 30, 2020 and 2019:
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for -
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at June 30, 2020
$
(88,637 )
$
(17,363 )
$
$
(4,412 )
$
(109,264 )
Other comprehensive income (loss) before
reclassifications
(901 )
Amounts reclassified from AOCI
(104 )
Current period other comprehensive income (loss)
(317 )
Related tax amounts
(150 )
(106 )
(196 )
Net current period other comprehensive income (loss)
(257 )
Balance at September 30, 2020
$
(55,036 )
$
(17,620 )
$
$
(4,058 )
$
(75,010 )
Balance at June 30, 2019
$
(50,296 )
$
(29,323 )
$
$
$
(78,881 )
Other comprehensive (loss) income before
reclassifications
(28,211 )
(6 )
(27,538 )
Amounts reclassified from AOCI
(96 )
Current period other comprehensive (loss) income
(28,211 )
(102 )
(26,906 )
Related tax amounts
(281 )
(260 )
Net current period other comprehensive (loss) income
(28,211 )
(81 )
(27,166 )
Balance at September 30, 2019
$
(78,507 )
$
(28,197 )
$
$
$
(106,047 )
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for -
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2019
$
(44,568 )
$
(34,533 )
$
$
(320 )
$
(78,170 )
Other comprehensive (loss) income before
reclassifications
(10,468 )
(409 )
(4,855 )
(14,930 )
Amounts reclassified from AOCI
(229 )
Current period other comprehensive (loss) income
(10,468 )
(4,855 )
Related tax amounts
(8,228 )
(120 )
(7,231 )
Net current period other comprehensive (loss) income
(10,468 )
(3,738 )
Balance at September 30, 2020
$
(55,036 )
$
(17,620 )
$
$
(4,058 )
$
(75,010 )
Balance at December 31, 2018
$
(49,322 )
$
(30,551 )
$
(842 )
$
$
(80,715 )
Other comprehensive (loss) income before
reclassifications
(29,185 )
(26,292 )
Amounts reclassified from AOCI
(235 )
Current period other comprehensive (loss) income
(29,185 )
(24,335 )
Related tax amounts
(598 )
(399 )
(997 )
Net current period other comprehensive (loss) income
(29,185 )
(25,332 )
Balance at September 30, 2019
$
(78,507 )
$
(28,197 )
$
$
$
(106,047 )
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 of associated companies. The amounts reported in other
comprehensive income for noncontrolling interest are related to currency translation adjustments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
30
Note 17 – 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, 2020
Total
Using Fair Value Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
$
$
$
Total
$
$
$
$
Fair Value Measurements at December 31, 2019
Total
Using Fair Value Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
$
$
$
Total
$
$
$
$
The fair values of Company-owned life insurance assets are based on quotes for like instruments with similar credit ratings and
terms. The Company did not hold any Level 3 investments as of September 30, 2020 or December 31, 2019, respectively, so related
disclosures have not been included.
Note 18 – Hedging Activities
As previously disclosed in its 2019 Form 10-K, in order to satisfy certain requirements of the New Credit Facility as well as to
manage the Company’s exposure to variable interest rate risk associated with the New Credit Facility, in November 2019, the
Company entered into $
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. The Company has previously used derivative financial instruments primarily for the purposes of hedging
exposures to fluctuations in interest rates. The Company did not utilize derivatives designated as cash flow hedges during the three
and nine months ended September 30, 2019.
The balance sheet classification and fair values of the Company’s derivative instruments, which are Level 2 measurements, are as
follows:
Fair Value
Condensed Consolidated
September 30,
December 31,
Balance Sheet Location
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
$
$
$
The following table presents the net unrealized loss deferred to AOCI:
September 30,
December 31,
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
$
$
$
The following table presents the net loss reclassified from AOCI to earnings:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Amount and location of expense reclassified
from AOCI into Expense (Effective Portion)
Interest expense, net
$
(640 )
$
$
(1,105 )
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
31
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 19 – Commitments and Contingencies
The Company previously disclosed in its 2019 Form 10-K that AC Products, Inc. (“ACP”), a wholly owned subsidiary, has been
operating a groundwater treatment system to hydraulically contain groundwater contamination emanating from ACP’s site, the
principal contaminant of which is perchloroethylene. As of September 30, 2020, ACP believes it is close to meeting the conditions for
closure of the groundwater treatment system, but continues to operate this system while in discussions with the relevant authorities.
As of September 30, 2020, the Company believes that the range of potential-known liabilities associated with the balance of the ACP
water remediation program is approximately $
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 2019 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, 2020, 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 $
defense).
The Company previously disclosed in its 2019 Form 10-K that as a result of the closing of the Combination, the Company is now
party to Houghton environmental matters related to certain domestic and foreign properties currently or previously owned. These
environmental matters primarily require the Company to perform long-term monitoring as well as operating and maintenance at each
of the applicable sites. During the three and nine months ended September 30, 2020, 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 28 years, has estimated the present value range of costs for all
of the Houghton environmental matters, on a discounted basis, to be between approximately $
September 30, 2020, for which $
Company’s Condensed Consolidated Balance Sheet as of September 30, 2020. Comparatively, as of December 31, 2019, the
Company had $
The Company believes, although there can be no assurance regarding the outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $
million and $
future environmental assessments and remediation costs.
The Company is party to other litigation which management currently believes will not have a material adverse effect on the
Company’s results of operations, cash flows or financial condition. In addition, the Company has an immaterial amount of contractual
purchase obligations.
Note 20 – COVID-19 Global Pandemic
In early 2020, a global outbreak of COVID-19 occurred initially in China and then across all locations where the Company does
business, and which continued into the third quarter. In March 2020, the World Health Organization formally identified the COVID-
19 outbreak as a pandemic. In an effort to halt the outbreak of COVID-19, the governments of impacted countries, including but not
limited to the United States, the European Union, and China, have taken various actions to reduce its spread, including travel
restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders.
This outbreak and associated
measures to reduce its spread have caused significant disruption s to the operations of the Company and its suppliers and customers.
The disruptions and negative impact to the Company include significant volume declines and lower net sales initially at its China
subsidiaries in the first quarter of 2020 and subsequently, beginning late March and continuing into the third quarter, at almost all of
its other sites as the global economy slowed significantly in response to the pandemic. 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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts , unless otherwise stated)
(Unaudited)
32
Further, management continues to evaluate how COVID-19-related circumstances, such as remote work arrangements, have
affected financial reporting processes, internal control over financial reporting, and disclosure controls and procedures. While the
circumstances have presented and are expected to continue to present challenges, at this time, management does not believe that
COVID-19 has had a material impact on financial reporting processes, internal control over financial reporting, and disclosure
controls and procedures.
The full extent of the COVID-19 pandemic related business and travel restrictions and changes to business and consumer
behavior intended to reduce its spread are uncertain as of the date of this Report as COVID-19 and the responses of governmental
authorities continue to evolve globally. The Company cannot reasonably estimate the magnitude of the effects these conditions will
have on the Company’s operations as they are subject to significant uncertainties relating to the ultimate geographic spread of the
virus, the incidence and severity of the disease, the duration or resurgence of the outbreak, the length of the travel restrictions and
business closures imposed by governments of impacted countries, and the economic response by governments of impacted countries.
To the extent that the Company’s customers and suppliers continue to be significantly and adversely impacted by COVID-19, this
could reduce the availability, or result in delays, of materials or supplies to or from the Company, which in turn could significantly
interrupt the Company’s business operations. Such impacts could grow and become more significant to the Company’s operations
and the Company’s liquidity or financial position. Therefore, given the speed and frequency of continuously evolving developments
with respect to this pandemic, the Company cannot reasonably estimate the magnitude or the full extent to which COVID-19 may
impact the Company’s results of operations, liquidity or financial position.
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton”, the “Company”, “we” and “our” refer to Quaker Chemical Corporation
(doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. The term
Legacy Quaker refers to the Company prior to closing its combination with Houghton International, Inc. (“Houghton”) (herein
referred to as the “Combination”) on August 1, 2019. Throughout this Quarterly Report on Form 10-Q (the “Report”), all figures
presented, unless otherwise stated, reflect the results of operations of the combined company for the three and nine months ended
September 30, 2020 and for the three and nine months ended September 30, 2019 include the results of two months of Houghton’s
operations post-closing of the Combination on August 1, 2019.
Executive Summary
Quaker Houghton is a global leader in industrial process fluids. With a presence around the world, including operations in over
25 countries, our customers include thousands of the world’s most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, 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 United States.
The Company’s third quarter of 2020 performance continued to be affected by the COVID-19 pandemic and its impact on the
global economy, including most of the Company’s end customers. However, the Company is pleased with its third quarter
performance as it showed 28% sequential growth in net sales compared to the second quarter of 2020. Compared to the prior year,
third quarter net sales of $367.2 million increased 13% compared to $325.1 million in the third quarter of 2019 due primarily to the
inclusion of $74.6 million of Houghton and Norman Hay plc (“Norman Hay”) net sales. Excluding Houghton and Norman Hay net
sales, the Company’s net sales would have declined approximately 10% quarter-over-quarter, primarily driven by a decrease in sales
volumes of 8% due to the negative impacts of COVID-19 on global production levels in the current quarter. The Company’s gross
profit and selling, general and administrative expenses (“SG&A”) also increased due to the inclusion of Houghton and Norman Hay,
but both also benefited from the realization of cost savings associated with synergies achieved with the Combination as well as the
impact of lower SG&A due to further cost saving measures put in place to help offset the impacts of COVID-19.
The Company reported third quarter of 2020 net income of $27.3 million or $1.53 per diluted share compared to third quarter of
2019 net loss of $13.1 million or $0.80 per diluted share. The third quarter of 2019 net loss was impacted by initial inventory fair
value adjustments, restructuring charges and Combination costs that were high due to the Combination’s August 1, 2019 completion.
Excluding costs associated with the Combination and other non-core items in each period, the Company’s adjusted EBITDA of $63.9
million in the third quarter of 2020 increased 24% compared to $51.4 million in the prior year quarter, primarily due to the
Combination, the inclusion of Norman Hay and the benefits of cost savings realized from the Combination, which were partially offset
by the current quarter negative impacts of COVID-19. The Company’s non-GAAP earnings per diluted share were $1.56 in both the
third quarters of 2020 and 2019, as higher net income was offset by an additional 4.3 million shares issued as part of the consideration
for the Combination. 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 third quarter of 2019 and in connection with the Combination, the Company established a new reportable segment
structure that consists of four segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv)
Global Specialty Businesses. The Company’s 2020 operating performance by reportable segment reflected the positive impact of
Houghton’s performance in all of its segments and Norman Hay in its Global Specialty Businesses segment. Without the inclusion of
Houghton and Norman Hay, net sales would have been lower in all segments compared to the prior year, primarily driven by declines
in volume due to the negative impacts of COVID-19 on the Company’s end markets. As reported, all of the Company’s segment
operating earnings were higher compared to the third quarter of 2019 driven by the inclusion of Houghton and Norman Hay and cost
synergies achieved with the Combination partially offset by the negative impacts of COVID-19. 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 net operating cash flow of approximately $67.3 million in the third quarter of 2020 compared to $13.1 million
in the third quarter of 2019, resulting in an increase in its current year-to-date net operating cash flow to $112.0 million compared to
$35.5 million in the first nine months of 2019. The increase in net operating cash flow year-over-year was driven by the inclusion of
Houghton and Norman Hay earnings, releases in working capital primarily due to the volume declines related to COVID-19 and lower
cash outflows associated with the Combination. The key drivers of the Company’s operating cash flow and working capital are
further discussed in the Company’s Liquidity and Capital Resources section of this Item, below.
Overall, the Company’s third quarter results were negatively impacted by the continuing effects of COVID-19, but the
Company’s performance also showed good positive trends across the globe when compared sequentially to the second quarter of
2020. Notably, the Company continues to see lower production in most of its end markets compared to the prior year with the most
significant reductions in the automotive and aerospace industries. Despite these challenges, the Company was able to generate
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
significant net operating cash flow, continue to pay its regular dividends, pay down its debt and continue to execute its integration
plans for the Combination.
The current global economic slowdown and other impacts due to COVID-19 pose an unprecedented challenge, but the Company
expects to successfully navigate this downturn as the Company has demonstrated the ability, now and in the past, to respond quickly
to changing market conditions. The Company also expects to maintain sufficient liquidity and to remain in compliance with all of its
debt covenants despite these difficult economic times. The Company expects that its integration synergies and additional cost savings
actions as well as continuing share gains in the marketplace will help the Company during these challenging times. These factors,
coupled with the benefit of a projected gradual rebound in demand in the Company’s end markets, are expected to drive significant
adjusted EBITDA growth in 2021 and 2022.
Impact of COVID-19
In early 2020, the global outbreak of COVID-19 negatively impacted all locations where the Company does business. Although
the Company has now operated during several quarters in this COVID-19 environment, the full extent of the outbreak and related
business impacts remain uncertain 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
its suppliers and customers. The Company has experienced significant volume declines and lower net sales as further described in this
section, initially at its China subsidiaries in the first quarter of 2020 and, subsequently, beginning in late March and continuing into the
third quarter, throughout the rest of the business due to the global economic slowdown brought on by COVID-19. Management
continues to monitor the impact that the COVID-19 pandemic is having on the Company, the overall specialty chemical industry and
the economies and markets in which the Company operates.
Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Company cannot, as
of the date of this Report, reasonably estimate the magnitude or the full extent of the impact to its future results of operations or to the
ability of it or its customers to resume more normal operations, even as certain restrictions are lifted. The prolonged pandemic and a
resurgence in outbreak, and continued restrictions on day-to-day life and business operations may result in volume declines and lower
net sales in future periods as compared to pre-COVID-19 levels. To the extent that the Company’s customers and suppliers continue
to be significantly and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies
to or from the Company, which in turn could significantly interrupt the Company’s business operations. Given this ongoing
uncertainty, the Company cautions that its future results of operations, including the results for the remainder of 2020, could be
significantly adversely impacted by COVID-19.
Further, management continues to evaluate how COVID-19-related circumstances, such as remote work arrangements, have
affected financial reporting processes and systems, internal control over financial reporting, and disclosure controls and procedures.
While the circumstances have presented and are expected to continue to present challenges, at this time, management does not believe
that COVID-19 has had a material impact on financial reporting processes, internal controls over financial reporting, and disclosure
controls and procedures. For additional information regarding the potential impact of COVID-19, see Item 1A of Part II of this
Report.
The Company’s top priority is, and especially during this pandemic remains, to protect the health and safety of its employees and
customers, while working to ensure business continuity to meet customers’ needs:
●
Our People
actions, including enabling work at home where needed and possible, 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 does not expect that it will incur material expenses implementing health and safety
policies for employees, contractors, and customers.
●
Our Operations
as essential businesses in the jurisdictions where they are operating. The Company believes it has been able to meet the
needs of all its customers across the globe despite the current economic challenges.
●
Our Business Conditions
of 2020, which was consistent with expectations that April and May would be the worst months of the year and that the
Company would show gradual quarterly improvement sequentially throughout the remainder of the year. However, demand
still remained somewhat deflated compared to pre-COVID-19 levels as many customers maintained reduced production
levels during the third quarter of 2020. Excluding Houghton and Norman Hay net sales, all four of the Company’s reportable
segments showed declines in net sales due to COVID-19 during the third quarter of 2020 compared to the prior year, with the
Americas and EMEA being the most impacted and Asia/Pacific being the least impacted. The Company currently still
expects that the impact from COVID-19 will gradually improve sequentially each quarter subject to the effective containment
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
of the virus and its effects. However, the incidence of reported cases of COVID-19 appears to be again increasing in several
geographies where we have significant operations and it remains highly uncertain as to how long the global pandemic and
related economic challenges will last and when our customers’ businesses will recover.
●
Our Actions
eliminating all discretionary expenditures, delaying or freezing salary increases where legally permitted, reducing executives’
salaries, lowering targeted capital expenditures by approximately 30%, and accelerating and fine-tuning the Company’s
integration plan. These initiatives have been designed and implemented so that the Company can successfully manage
through this challenging situation while continuing to protect the health of its employees, meet customers’ needs, maintain
the Company’s long -term competitive advantages and above-market growth, and enable it to continue to effectively integrate
Houghton. While the Company has taken a number of actions to protect our workforce, to continue to serve our customers
with excellence and to conserve cash and reduce costs, which have been effective thus far, further actions to respond to the
pandemic and its effects may be necessary as conditions continue to evolve.
Liquidity and Capital Resources
At September 30, 2020, the Company had cash, cash equivalents and restricted cash of $174.7 million, including approximately
$19.0 million of restricted cash. Total cash, cash equivalents and restricted cash was $143.6 million at December 31, 2019, which
included $20.0 million of restricted cash. The $31.1 million increase in cash, cash equivalents and restricted cash was the net result of
$
112.0
65.0
million of cash used in investing activities as well as a $0.5 million negative impact due to the effect of foreign currency translation on
cash.
Net cash flows provided by operating activities were $112.0 million in the first nine months of 2020 compared to $35.5 million in
the first nine months of 2019. The Company’s current year net operating cash flow increase was largely due to the inclusion of
Houghton and Norman Hay earnings, r
eleases in working capital primarily due to the volume declines related to COVID-19, lower
cash outflows associated with the Combination
including $
5.0
Net cash flows used in investing activities were $
15.3
first nine months of 2019. This significant decrease in cash outflows used in investing activities was due to the prior year payments
related to the closing of the Combination on August 1, 2019. In addition, the Company had higher investments in property, plant and
equipment due to the inclusion of Houghton and Norman Hay capital expenditures in 2020 including higher expenditures related to
integrating the companies during the nine months ended September 30, 2020. Also, in the current year, the Company finalized the
post-closing adjustment related to Norman Hay and made an additional payment of approximately $
3.2
Net cash flows used in financing activities were $65.0 million in the first nine months of 2020 compared to cash provided in
financing activities of $798.4 million in the first nine months of 2019. The $863.4 million decrease in net cash flows was due
primarily to additional term loan and revolving credit facility borrowings in the prior year to close the Combination compared to $
28.1
million of current year debt repayments in accordance with its term loan agreements and a net $16.5 million reduction in borrowings
under the Company’s revolving credit facilities in the current year. The net reduction in borrowings in the current year includes the
drawdown in March 2020 of most of the available capacity under the Revolver as a precautionary measure to supplement cash on
hand at the onset of the pandemic which was subsequently repaid in September 2020. Also, as part of the Combination, the Company
incurred and paid debt issuance costs of approximately $23.7 million in the prior year. In addition, the Company paid $
20.5
cash dividends during the first nine months of 2020, a $
5.5
37
% increase in cash dividends compared to the prior year,
primarily due to the approximately 4.3 million shares issued at closing of the Combination, as well as both the current year and prior
year cash dividend per share increases. Finally, during the first nine months of 2020, the Company used $1.0 million to purchase the
remaining noncontrolling interest in one of its South African affiliates. Prior to this buyout, this South African affiliate made a
distribution to the prior noncontrolling affiliate shareholder of approximately $0.8 million in the first nine months of 2020. There
were no similar noncontrolling interest activities in the first nine months of 2019.
As previously disclosed in its Annual Report on Form 10 -K for the year ended December 31, 2019 (the “2019 Form 10-K”), on
August 1, 2019, the Company completed the Combination, whereby the Company acquired all of the issued and outstanding shares of
Houghton from Gulf Houghton Lubricants, Ltd. in accordance with the Share Purchase Agreement dated April 4, 2017. The final
purchase consideration was comprised of: (i) $170.8 million in cash; (ii) the issuance of approximately 4.3 million shares of common
stock of the Company with par value of $1.00, comprising 24.5% of the common stock of the Company at closing; and (iii) the
Company’s refinancing of $702.6 million of Houghton’s indebtedness at closing. Cash acquired in the Combination was $75.8
million. Prior to the Combination, the Company secured commitments from certain banks for a new credit facility (as amended, the
“New Credit Facility”). Concurrent with the closing of the Combination on August 1, 2019, the New Credit Facility became effective,
replacing the Company’s previous credit facility. See Note 2 and Note 15 of Notes to Condensed Consolidated Financial Statements.
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
As of September 30, 2020, the Company had New Credit Facility borrowings outstanding of $884.6 million. As of December 31,
2019, the Company had New Credit Facility borrowings outstanding of $922.4 million. The Company has unused capacity under the
Revolver of approximately $239 million, net of bank letters of credit of approximately $6 million, as of September 30, 2020. The
Company’s other debt obl igations are primarily industrial development bonds, bank lines of credit and municipality-related loans,
which totaled $12.0 million as of September 30, 2020 and $12.6 million as of December 31, 2019, respectively. Total unused capacity
under these arrangements as of September 30, 2020 was approximately $38 million. The Company’s total net debt as of September
30, 2020 was $740.8 million.
As of September 30, 2020 and December 31, 2019, the Company was in compliance with all of its bank
covenants, including those under the New Credit Facility.
The New 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 New 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 New 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, 2020, this aggregate rate was 3.1%.
The Company currently expects to realize Combination cost synergies on a pro forma combined company basis of $58 million in
2020, $75 million in 2021 and $80 million in 2022, which are increases from the Company’s previous expectations of $53 million,
$65 million and $75 million, respectively.
The Company estimates that it realized approximately $40 million of cost savings during
the first nine months of 2020 on a combined company pro forma basis.
The Company expects to incur additional costs and make associated cash payments to integrate Quaker and Houghton and
continue realizing the Combination’s total anticipated cost synergies. The Company expects cash payments,
including those pursuant
to the QH Program, described below, but excluding incremental capital expenditures related to the Combination, will be between
approximately 1.0 and 1.2 times its total anticipated 2022 cost synergies of $80 million. The Company expects to incur these costs
over a three-year period following the closing of the Combination, with a significant portion of these costs incurred or expected to be
incurred in 2019 and the current year.
The Company incurred $23.4 million of total Combination, integration and other acquisition-
related expenses in the first nine months of 2020, including $0.8 million of accelerated depreciation, described in the Non-GAAP
measures of this Item below. The Company had aggregate net cash outflows of approximately $20.9 million related to the
Combination, integration and other acquisition-related expenses during the first nine months of 2020. Comparatively, during the first
nine months of 2019, the Company incurred $25.9 million of total Combination, integration and other acquisition -related expenses,
including $2.1 million of ticking fees, described in the Non -GAAP Measures of this Item below, and aggregate net cash outflows
related to these costs were $40.1 million.
Quaker Houghton’s management approved, and the Company initiated, a global restructuring plan (the “QH Program”) in the
third quarter of 2019 as part of its planned cost synergies associated with the Combination and recorded a $24.0 million charge. The
QH Program includes restructuring and associated severance costs to reduce total headcount by approximately 350 people globally
and plans for the closure of certain manufacturing and non-manufacturing facilities. In connection with the plans for closure of certain
manufacturing and non-manufacturing facilities, the Company made a decision to make available for sale certain facilities during the
second quarter of 2020 resulting in the reclassification of approximately $
12.8
from property, plant and equipment as of September 30, 2020. The Company expects to receive amounts in excess of net book value
for the properties held for sale. Additionally, as a result of the QH Program, the Company recognized $
3.6
and related charges in the first nine months of 2020. The exact timing and total costs associated with the QH Program will depend on
a number of factors and is subject to change; however, the Company currently expects reduction in headcount and site closures will
continue to occur during 2020 and into 2021 under the QH Prog ram and estimates that the anticipated cost synergies realized under
this program will approximate one-times restructuring costs incurred. The Company made cash payments related to the settlement of
restructuring liabilities under the QH Program during the first nine months of 2020 of approximately $
12.8
million in the first nine months of 2019.
In the fourth quarter of 2018, the Company began the process of terminating its non-contributory U.S. pension plan (“the Legacy
Quaker U.S. Pension Plan”). The Company completed the Legacy Quaker U.S. Pension Plan termination during the first quarter of
2020. In order to terminate the Legacy Quaker U.S. Pension Plan in accordance with I.R.S. and Pension Benefit Guaranty
Corporation requirements, the Company was required to fully fund the Legacy Quaker U.S. Pension Plan on a termination basis and
the amount necessary to do so was approximately $1.8 million, subject to final true up adjustments. In the third quarter of 2020, the
Company finalized the amount of liability and related annuity payments and received a refund in premium of $1.6 million. In
addition, the Company recorded a non-cash pension settlement charge at plan termination of approximately $22.7 million in the first
quarter of 2020.
As of September 30, 2020, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $
28.6
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 $
8.3
offsetting benefits in other tax jurisdictions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
37
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 the Combination and integration, pension plan contributions, capital
expenditures, other business opportunities and other potential contingencies. 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 on our business and on global
economic conditions as well as industry uncertainties, which we cannot predict. We also cannot predict economic conditions and
industry downturns or the timing, strength or duration of recoveries. We may seek, as we believe appropriate, additional debt or
equity financing which would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund
future growth opportunities, including possible acquisitions and 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 2019 Form 10-K remain materially consistent.
However, due to the current impact as well as the volatility and uncertainty in the economic outlook as a result of COVID-19, the
Company re-evaluated certain of its estimates, most notably its estimates and assumptions with regards to goodwill and other
intangible assets during the first quarter of 2020.
Goodwill and other intangible assets:
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, including assumptions with respect to future cash inflows and outflows,
discount rates, royalty rates, asset lives and market multiples, among other items. When necessary, the Company consults with
external advisors to help determine fair value. For non-observable market values, the Company may determine fair value using
acceptable valuation principles, including the excess earnings, relief from royalty, lost profit or cost methods.
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. Goodwill and intangible
assets that have indefinite lives are not amortized and are required to be assessed at least annually for impairment. The Company
completes its annual goodwill and indefinite-lived intangible asset impairment test during the fourth quarter of each year. The
Company continuously evaluates if triggering events indicate a possible impairment in one or more of its indefinite -lived or long-lived
assets.
As of March 31, 2020, the Company evaluated the initial impact of COVID-19 on the Company’s operations, as well as the
volatility and uncertainty in the economic outlook as a result of COVID-19, to determine if this indicated it was more likely than not
that the carrying value of any of the Company’s indefinite-lived or long-lived assets was not recoverable. While the impact of
COVID-19 has already had a negative effect on the Company’s operations and was expected to significantly impact the Company’s
full year 2020 results, in evaluating if a triggering event was present for one or more of the Company indefinite-lived or long-lived
assets, the Company also considered the carrying value and estimated fair value for each asset, as well as the Company’s expected
impact from COVID-19 on each specific asset. The Company concluded that the impact of COVID-19 did not represent a triggering
event as of March 31, 2020 with regards to the Company’s indefinite-lived and long-lived assets, except for the Company’s Houghton
and Fluidcare trademark and tradename indefinite -lived intangible assets.
Given the relatively short period of time between the fair value determination for the acquired Houghton and Fluidcare trademark
and tradename indefinite-lived intangible assets as of the closing of the Combination on August 1, 2019, and the 2019 annual
impairment testing date of October 1, the Company’s 2019 annual impairment assessment concluded that the $242.0 million carrying
value of acquired Houghton and Fluidcare indefinite-lived intangible assets generally approximated fair value, with excess fair value
of less than 5%. Because of the previously concluded relatively narrow gap between fair value and carrying value, the Company
concluded in the first quarter of 2020 that the expected current year impact from COVID-19 on the Company’s net sales represented a
triggering event. As a result of the conclusion, the Company completed an interim quantitative indefinite-lived intangible asset
impairment assessment as of March 31, 2020.
The determination of estimated fair value of the Houghton and Fluidcare trademark and tradename indefinite-lived assets was
based on a relief from royalty valuation method which requires management’s judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to the weighted average cost of capital (“WACC”) as well as projected
net sales. In completing the interim quantitative impairment assessment as of March 31, 2020, the Company used a WACC
assumption of approximately 10% as well as current year forecasted net sales and management’s estimates with respect to future net
sales growth rates specific to legacy Houghton’s net sales. As a result of an increase in the WACC assumption as of March 31, 2020,
compared to the prior year fourth quarter annual impairment assessment, and the significant current year decline in projected legacy
Houghton net sales due to the impact of COVID-19, the Company concluded that the estimated fair values of these intangible assets
were less than their carrying values and that an impairment charge to write down their carrying values to their estimated fair values
Quaker Chemical Corporation
Management’s Discussion and Analysis
38
was warranted. This resulted in a first quarter of 2020 non-cash impairment charge of $38.0 million for these indefinite-lived
intangible assets. The Company performed a qualitative assessment over these indefinite-lived intangible assets as of September 30,
2020 and concluded that no further impairment indicators existed. The book value of these assets as of September 30, 2020 was
$204.0 million.
As of September 30, 2020, the Company continued to evaluate the on-going impact of COVID-19 on the Company’s operations,
and the volatility and uncertainty in the economic outlook as a result of COVID-19 to determine if again this indicated it was more
likely than not that the carrying value of any of the Company’s reporting units or indefinite-lived or long-lived assets was not
recoverable. The Company concluded that the impact of COVID-19 did not represent a triggering event as of September 30, 2020
with regards to any of the Company’s reporting units or indefinite-lived and long-lived assets. If the current economic conditions
worsen or projections of the timeline for recovery are significantly extended, then the Company may conclude in the future that the
impact from COVID-19 requires the need to perform further interim quantitative impairment tests, which could result in additional
impairment charges in the future.
Non-GAAP Measures
The information in this Report includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA,
adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP
earnings per diluted share. The Company believes these non-GAAP financial measures provide meaningful supplemental information
as they enhance a reader’s understanding of the financial performance of the Company, are indicative of future operating performance
of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not
considered indicative of future operating performance or not considered core to the Company’s operations. Non-GAAP results are
presented for supplemental informational purposes only and should not be considered a substitute for the financial information
presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income (loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on (loss) income before equity in net income of associated companies. The Company
also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not considered indicative of future
operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating
income which is calculated as operating income (loss) plus or minus certain items that are not considered indicative of future operating
performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are
calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The
Company believes these non-GAAP measures provide transparent and useful information and are widely used by analysts, investors,
and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent
basis.
Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance
measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest
expense, net, and taxes on income (loss) before equity in net income of associated companies, in each cash adjusted, as applicable, for
any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income
(loss) attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non -GAAP net
income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income
and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by analysts, investors, and
competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
Quaker Chemical Corporation
Management’s Discussion and Analysis
39
The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable
GAAP (unaudited) financial measures (dollars in thousands unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Operating income (loss)
$
34,859
$
(14,502)
$
24,653
$
25,858
Fair value step up of inventory sold (a)
—
10,214
226
10,214
Houghton combination, integration and other
6,913
14,702
23,442
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045
Customer bankruptcy costs (d)
—
—
463
—
Charges related to the settlement of a non-core equipment sale (e)
—
—
—
384
Indefinite-lived intangible asset impairment (f)
—
—
38,000
—
Non-GAAP operating income
$
43,155
$
34,459
$
90,369
$
84,290
Non-GAAP operating margin (%) (n)
11.8%
10.6%
8.8%
11.4%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
and Non-GAAP Net Income Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income (loss) attributable to Quaker Chemical Corporation
$
27,304
$
(13,053)
$
(8,812)
$
16,382
Depreciation and amortization (b)(l)
21,022
14,312
63,764
24,014
Interest expense, net (b)
6,837
6,102
22,109
7,611
Taxes on income (loss) before equity in net income
2,245
(5,633)
(7,603)
4,096
EBITDA
57,408
1,728
69,458
52,103
Equity income in a captive insurance company (g)
(542)
(524)
(697)
(1,260)
Fair value step up of inventory sold (a)
—
10,214
226
10,214
Houghton combination, integration and other
6,913
14,702
22,679
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045
Customer bankruptcy costs (d)
—
—
463
—
Charges related to the settlement of a non-core equipment sale (e)
—
—
—
384
Indefinite-lived intangible asset impairment (f)
—
—
38,000
—
Pension and postretirement benefit (income) costs,
(1,375)
513
22,491
2,304
Currency conversion impacts of hyper-inflationary economies (i)
154
728
278
891
Adjusted EBITDA
$
63,941
$
51,406
$
156,483
$
112,470
Adjusted EBITDA margin (%) (n)
17.4%
15.8%
15.2%
15.2%
Adjusted EBITDA
$
63,941
$
51,406
$
156,483
$
112,470
Less: Depreciation and amortization (b)
21,022
14,312
63,002
24,014
Less: Interest expense, net - adjusted (b)
6,837
5,747
22,109
5,531
Less: Taxes on income (loss) before equity in net income
8,337
6,086
15,473
17,913
Non-GAAP net income
$
27,745
$
25,261
$
55,899
$
65,012
Quaker Chemical Corporation
Management’s Discussion and Analysis
40
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
GAAP earnings (loss) per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
1.53
$
(0.80)
$
(0.50)
$
1.14
Equity income in a captive insurance company
(0.03)
(0.03)
(0.04)
(0.09)
Fair value step up of inventory sold per diluted share (a)
—
0.47
0.01
0.53
Houghton combination, integration and other
0.30
0.75
1.03
1.50
Restructuring and related charges per diluted share (c)
0.06
1.13
0.15
1.28
Customer bankruptcy costs per diluted share (d)
—
—
0.02
—
Charges related to the settlement of a non-core equipment
—
—
—
0.02
Indefinite-lived intangible asset impairment per diluted share (f)
—
—
1.65
—
Pension and postretirement benefit (income) costs,
(0.06)
0.02
0.83
0.12
Currency conversion impacts of hyper-inflationary
0.01
0.05
0.02
0.06
Transition tax adjustments per diluted share (j)
—
(0.03)
—
(0.03)
Impact of certain discrete tax items per diluted share (k)
(0.25)
—
(0.02)
—
Non-GAAP earnings per diluted share (o)
$
1.56
$
1.56
$
3.15
$
4.53
(a)
Fair value step up of inventory sold relates to expense associated with selling inventory of acquired businesses which was
adjusted to fair value as a part of purchase accounting. This increase to COGS is not indicative of the future operating
performance of the Company.
(b)
Houghton combination, integration and other acquisition-related expenses include certain legal, financial, and other advisory and
consultant costs incurred in connection with due diligence, regulatory approvals, integration planning, and closing the
Combination, as well as certain one-time labor costs associated with the Company’s acquisition-related activities. These costs are
not indicative of the future operating performance of the Company. Approximately $0.3 million and $1.5 million in the three and
nine months ended September 30, 2020, respectively, and approximately $3.4 million and $6.9 million in the three and nine
months ended September 30, 2019, 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 (loss) before equity in net income of associated
companies - adjusted reflects the impact of these items. During the nine months ended September 30, 2020, the Company
recorded $0.8 million of accelerated depreciation related to certain of the Company’s facilities, which is included in the caption
“Houghton combination, integration and other acquisition -related expenses” in the reconciliation of operating income (loss) to
non-GAAP operating income and included in the caption “Depreciation and amortization” in the reconciliation of net income
(loss) attributable to the Company to EBITDA, but excluded from the caption “Depreciation and amortization” in the
reconciliation of adjusted EBITDA to non-GAAP net income attributable to the Company. During the three and nine months
ended September 30, 2019, the Company incurred $0.4 million and $2.1 million, respectively, of ticking fees to maintain the bank
commitment related to the Combination. These interest costs are included in the caption “Interest expense, net” in the
reconciliation of net income (loss) attributable to the Company to EBITDA, but are excluded from the caption “Interest expense,
net – adjusted” in the reconciliation of adjusted EBITDA to non-GAAP net income. See Note 2 of Notes to Condensed
Consolidated Financial Statements, which appears in Item 1 of this Report.
(c)
Restructuring and related charges represent the costs incurred by the Company associated with the QH restructuring program
which was initiated in the third quarter of 2019 as part of the Company’s plan to realize cost synergies associated with the
Combination. These costs are not indicative of the future operating performance of the Company. See Note 7 of Notes to
Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(d)
Customer bankruptcy costs represent the cost associated with a specific reserve for trade accounts receivable related to a customer
who filed for bankruptcy protection. These expenses are not indicative of the future operating performance of the Company.
(e)
Charges related to the settlement of a non-core equipment sale represent the pre-tax charge related to a one-time, uncommon,
customer settlement associated with a prior sale of non -core equipment. These charges are not indicative of the future operating
performance of the Company.
Quaker Chemical Corporation
Management’s Discussion and Analysis
41
(f)
Indefinite-lived intangible asset impairment represents the non-cash charge taken to write down the value of certain indefinite-
lived intangible assets associated with the Houghton Combination. The Company has no prior history of goodwill or intangible
asset impairments and this charge is not indicative of the future operating performance of the Company. See Note 14 of Notes to
Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(g)
Equity income in a captive insurance company represents the after-tax income attributable to the Company’s interest in Primex,
Ltd. (“Primex”), a captive insurance company. The Company holds a 33% investment in and has significant influence over
Primex, and therefore accounts for this interest under the equity method of accounting. The income attributable to Primex is not
indicative of the future operating performance of the Company and is not considered core to the Company’s operations.
(h)
Pension and postretirement benefit (income) costs, non-service components represent the pre-tax, non-service component of the
Company’s pension and postretirement net periodic benefit cost in each period. These costs are not indicative of the future
operating performance of the Company. The nine months ended September 30, 2020 includes the $22.7 million settlement charge
for the Company’s termination of the Legacy Quaker U.S. Pension Plan. See Note 9 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(i)
Currency conversion impacts of hyper-inflationary economies represents the foreign currency remeasurement impacts associated
with the Company’s affiliates whose local economies are designated as hyper-inflationary under U.S. GAAP. During the three
and nine months ended September 30, 2020 and 2019, the Company incurred non-deductible, pre-tax charges related to the
Company’s Argentine affiliates. These charges related to the immediate recognition of foreign currency remeasurement in the
Condensed Consolidated Statements of Operations associated with these entities are not indicative of the future operating
performance of the Company. See Note 1 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of
this Report.
(j)
The impacts of certain discrete tax items included the impact of changes in the valuation allowance for foreign tax credits
acquired with the Combination, changes in withholding tax rates and the associated impact on previously accrued for distributions
at certain of the Company’s Asia/Pacific subsidiaries, additional reserves for uncertain tax positions related to tax audits at certain
of the Company’s EMEA subsidiaries, as well as the offsetting impact and amortization of a deferred tax benefit the Company
recorded in the fourth quarter of 2019 related to an intercompany intangible asset transfer. See Note 11 of Notes to Condensed
Consolidated Financial Statements, which appears in Item 1 of this Report.
(k)
Transition tax adjustments include certain tax adjustments recorded by the Company as a result of changes to the Company’s
initial fourth quarter of 2017 estimates associated with U.S. Tax Reform in December 2017. Specifically, the Company had
adjusted the initial amount estimated for the one-time charge on the gross deemed repatriation on previously un taxed accumulated
and current earnings and profits of certain of the Company’s foreign subsidiaries. In addition, the Company had adjusted its
initial estimate of the impact from certain internal revenue code changes associated with the deductibility of certain executive
compensation. These adjustments were based on guidance issued during 2018 and 2019 by the I.R.S., the U.S. Treasury and
various state taxing authorities and were the result of specific one-time events that are not indicative of the future operating
performance of the Company. See Note 11 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of
this Report.
(l)
Depreciation and amortization for the three and nine months ended September 30, 2020 includes approximately $0.2 million and
$0.9 million, respectively, and for both the three and nine months ended September 30, 2019 includes $0.1 million of
amortization expense recorded within equity in net income of associated companies in the Company’s Condensed Consolidated
Statements of Operations, which is attributable to the amortization of the fair value step up for the Company’s 50% interest in a
Houghton joint venture in Korea as a result of required purchase accounting.
(m)
Taxes on income (loss) before equity in net income of associated companies – adjusted presents the impact of any current and
deferred income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of net income (loss)
attributable to Quaker Chemical Corporation to adjusted EBITDA, and was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject to deductibility. Fair value step up of inventory sold described in (a)
resulted in incremental taxes of less than $0.1 million during the nine months ended September 30, 2020 and $2.6 million for both
the three and nine months ended September 30, 2019. Houghton combination, integration and other acquisition-related expenses
described in (b) resulted in incremental taxes of approximately $1.7 million and $5.1 million for the three and nine months ended
September 30, 2020, respectively, and $2.8 million and $4.5 million for the three and nine months ended September 30, 2019,
respectively. Restructuring and related charges described in (c) resulted in incremental taxes of $0.4 million and $0.9 million for
the three and nine months ended September 30, 2020, respectively, and $5.6 million for both the three and nine months ended
September 30, 2019. Customer bankruptcy costs described in (d) resulted in incremental taxes of $0.1 million during the nine
months ended September 30, 2020. Charges related to the settlement of a non-core equipment sale described in (e) resulted in
incremental taxes of $0.1 million for the nine months ended September 30, 2019. Indefinite-lived intangible asset impairment
described in (f) resulted in incremental taxes of $8.7 million during the nine months ended September 30, 2020. Pension and
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
postretirement benefit (income) costs, non-service components described in (h) resulted in a reduction of taxes of $0.3 million for
the three months ended September 30, 2020 and incremental taxes of $7.7 million for the nine months ended September 30, 2020,
and incremental taxes of $0.1 million and $0.5 million for the three and nine months ended September 30, 2019, respectively.
Transition tax adjustments described in (k) resulted in incremental taxes of $0.4 million for both the three and nine months ended
September 30, 2019. Tax impact of certain discrete items described in (j) resulted in a tax benefit of $4.5 million and $0.4 million
for the three and nine months ended September 30, 2020.
(n)
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.
(o)
The Company calculates non-GAAP earnings per diluted share as non-GAAP net income attributable to the Company per
weighted average diluted shares outstanding using the “two-class share method” to calculate such in each given period. The
calculation of GAAP and non-GAAP earnings (loss) per diluted share for the three and nine months ended September 30, 2019
was impacted by the 4.3 million share issuance in connection with the Combination. Therefore, the per diluted share result for
each of the first three quarters of 2019, as reported on a standalone basis, may not sum to the per diluted share result for the nine
months ended September 30, 2019.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet items, as defined under Item 303(a)(4) of Regulation S-K as of September 30,
2020. The Company’s only off -balance sheet items outstanding as of September 30, 2020 represented approximately $
12
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 also Note 15 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
Operations
Consolidated Operations Review – Comparison of the Third Quarter of 2020 with the Third Quarter of 2019
Net sales were $367.2 million in the third quarter of 2020 compared to $325.1 million in the third quarter of 2019. The net sales
increase of 13% quarter-over-quarter includes net sales from acquisitions, primarily Houghton and Norman Hay, of $74.6 million.
Excluding net sales related to acquisitions, the Company’s current quarter net sales would have declined approximately 10%, which
reflects a decrease in sales volumes of 8%, a negative impact from foreign currency translation of 1% and a decrease from selling
price and product mix of 1%. The primary driver of the volume decline in the current quarter was the negative impact of COVID-19
on global production levels.
COGS were $227.0 million in the third quarter of 2020 compared to $220.1 million in the third quarter of 2019. The increase in
COGS of 3% was primarily due to the inclusion of Houghton and Norman Hay sales and associated COGS, partially offset by the
prior year charge of $10.2 million to increase acquired Houghton inventory to its fair value described in the Non -GAAP Measures
section of this Item above, as well as lower COGS on the decline in Legacy Quaker net sales, described above.
Gross profit in the third quarter of 2020 of $140.2 million increased $35.1 million or 33% from the third quarter of 2019, due
primarily to additional gross profit from Houghton and Norman Hay. The Company’s reported gross margin in the current quarter
was 38.2% compared to 32.3% in the third quarter of 2019 which includes the inventory fair value step up described above.
Excluding the one-time increase to COGS in the prior year, the Company estimates that its gross margin for the third quarter of 2019
would have been approximately 35.5%. The estimated increase in gross margin quarter -over-quarter was primarily due to lower
COGS as a result of the Company’s progress on Combination-related logistics, procurement and manufacturing cost savings
initiatives, as well as a benefit from certain price and product mix in the Company’s raw materials.
SG&A in the third quarter of 2020 increased $16.2 million compared to the third quarter of 2019 due primarily to additional
SG&A from Houghton and Norman Hay. This increase was partially offset by lower SG&A due to the impact of COVID-19 cost
savings actions, including lower travel expenses, and the benefits of realized cost savings associated with the Combination.
During the third quarter of 2020, the Company incurred $6.9 million of Combination, integration and other acquisition-related
expenses, primarily for professional fees related to Houghton integration activities. Comparatively, the Company incurred $14.7
million of similar expenses in the prior year third quarter, primarily due to various professional fees related to integration planning and
regulatory approval as well as professional fees associated with closing the Combination. See the Non-GAAP Measures section of
this Item, above.
The Company initiated a restructuring program during the third quarter of 2019 as part of its global plan to realize cost synergies
associated with the Combination and recorded an initial $24.0 million restructuring charge. The Company expects reductions in
headcount and site closures under this program to continue during 2020 and into 2021. The Company recorded additional
restructuring and related charges of $1.4 million related to this program during the third quarter of 2020. See the Non-GAAP
Measures section of this Item, above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
43
Operating income in the third quarter of 2020 was $34.9 million compared to an operating loss of $14.5 million in the third
quarter of 2019. Excluding Combination, integration and other acquisition-related expenses, restructuring and related charges and
other non-core items, the Company’s current quarter non-GAAP operating income increased 25% to $43.2 million compared to $34.5
million in the prior year quarter, primarily due to additional operating income from Houghton and Norman Hay and the benefits from
cost savings related to the Combination partially offset by the negative impact of COVID-19.
The Company had other expense, net, of $0.2 million in the third quarter of 2020 compared to other income, net, of less than $0.2
million in the third quarter of 2019. The quarter-over-quarter change was primarily driven by higher foreign currency transaction
losses in the third quarter of 2020 as compared to the prior year third quarter partially offset by lower expenses from the non-service
components of pension and postretirement benefit costs in the current quarter.
Interest expense, net, increased $0.7 million compared to the third quarter of 2019 primarily due to an additional month of
borrowings in the current quarter under the Company’s term loans and revolving credit facility to finance the closing of the
Combination on August 1, 2019, as well as higher current quarter borrowings outstanding as a result of the additional revolver
borrowings in March 2020 at the onset of the pandemic, partially offset by a decline in overall interest rates during the current quarter.
The Company’s effective tax rates for the third quarters of 2020 and 2019 were an expense of 8.1% compared to a benefit of
27.6%, respectively. The Company’s current quarter effective tax rate was impacted by certain one -time items including benefits
related to the impact of recently issued U.S. tax regulations and other changes in foreign tax credit valuation allowances, a change in a
foreign subsidiary’s statutory rate and impacts related to the Combination. Similarly, the prior year third quarter tax rate was impacted
by the pre-tax losses driven by Combination costs, restructuring charges and inventory fair value expense previously mentioned.
Excluding the impact of these items as well as all other non-core items in each quarter, described in the Non-GAAP Measures section
of this Item, above, the Company estimates that its third quarters of 2020 and 2019 effective tax rates would have been approximately
24% and 20%, respectively. The higher estimated current quarter tax rate was driven by a change in the current quarter earnings
footprint to entities with higher statutory tax rates as well as a cumulative year-to-date tax benefit recorded during the third quarter of
2019 as a result of one of its subsidiaries receiving approval for the renewal of a concessionary 15% tax rate compared to its 25%
statutory tax rate. The concessionary tax rate was available to the Company’s subsidiary during all quarters of 2020. The Company
may experience continued volatility in its effective tax rates due to several factors, including the timing of tax audits and the expiration
of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of the timing and amount of certain
incentives in various tax jurisdictions, the treatment of certain acquisition-related costs and the timing and amount of certain share-
based compensation-related tax benefits, among other factors. In addition, the foreign tax credit valuation allowance is based on a
number of variables, including forecasted earnings, which may vary.
Equity in net income of associated companies was consistent at $1.8 million in both the third quarters of 2020 and 2019.
Net income attributable to noncontrolling interest was consistent at less than $0.1 million in both the third quarters of 2020 and
2019.
Foreign exchange negatively impacted the Company’s third quarter results by approximately $0.18 per diluted share, primarily
due to higher foreign exchange transaction losses quarter -over-quarter and to a lesser extent, an aggregate negative impact from
foreign currency translation on earnings.
Consolidated Operations Review – Comparison of the First Nine Months of 2020 with the First Nine Months of 2019
Net sales were $1,031.8 million in the first nine months of 2020 compared to $742.2 million in the first nine months of 2019. The
net sales increase of 39% year-over-year includes net sales from acquisitions, primarily Houghton and Norman Hay, of $407.4
million. Excluding net sales related to acquisitions, the Company’s current year net sales would have declined approximately 16%,
which reflects a decrease in sales volumes of 13%, a negative impact from foreign currency translation of 2 % and a decrease from
selling price and product mix of 1%. Consistent with the third quarter of 2020 description above, the primary driver of the volume
decline in the current year was the negative impact of COVID-19 on global production levels.
COGS were $660.4 million in the first nine months of 2020 compared to $486.2 million in the first nine months of 2019. The
increase in COGS of 36% was primarily due to the inclusion of Houghton and Norman Hay sales and associated COGS and the
current year $0.8 million of accelerated depreciation charges partially offset by the prior year $10.2 million of an inventory fair value
step up charge described in the Non-GAAP Measures section of this Item above, and lower COGS on the decline in legacy Quaker net
sales, described above.
Gross profit in the first nine months of 2020 increased $115.4 million or 45% from the first nine months of 2019, due primarily to
additional gross profit from Houghton and Norman Hay. The Company’s reported gross margin in the current period was 36.0%
compared to 34.5% in the first nine months of 2019, which included the inventory fair value step up described above. Excluding this
one-time increase to COGS in the prior year, the Company estimates that its gross margin for the first nine months of 2019 would
have been relatively consistent with the current year at 35.9%.
Quaker Chemical Corporation
Management’s Discussion and Analysis
44
SG&A in the first nine months of 2020 increased $100.1 million compared to the first nine months of 2019 due primarily to
additional SG&A from Houghton and Norman Hay, partially offset by the same drivers described in the third quarter description
above.
During the first nine months of 2020, the Company incurred $22.8 million of Combination, integration and other acquisition-
related expenses, primarily for professional fees related to Houghton integration activities. Comparatively, the Company incurred
$23.8 million of similar expenses in the prior year, primarily due to various professional fees related to integration planning and
regulatory approval as well as professional fees associated with closing the Combination. See the Non-GAAP Measures section of
this Item, above.
As described above, the Company initiated a restructuring program during the third quarter of 2019 as part of its global plan to
realize cost synergies associated with the Combination. The Company recorded additional restructuring and related charges of $3.6
million during the first nine months of 2020 compared to $24.0 million first nine months of 2019. See the Non-GAAP Measures
section of this Item, above.
During the first quarter of 2020, the Company recorded a $38.0 million non-cash impairment charge to write down the value of
certain indefinite-lived intangible assets associated with the Combination. This non-cash impairment charge is related to certain
acquired Houghton trademarks and tradenames and is primarily the result of the current year negative impacts of COVID-19 on their
estimated fair values. There were no impairment charges in the second or third quarters of 2020 or in the prior year. See the Critical
Accounting Policies and Estimates section as well as the Non -GAAP Measures section, of this Item, above.
Operating income in the first nine months of 2020 was $24.7 million compared to $25.9 million in the first nine months of 2019.
Excluding Combination, integration and other acquisition -related expenses, restructuring and related charges, the non-cash indefinite-
lived intangible asset impairment charge, and other non-core items, the Company’s current year non-GAAP operating income of $90.4
million increased compared to $84.3 million in the prior year, primarily due to additional operating income from Houghton and
Norman Hay and the benefits from costs savings related to the Combination partially offset by the negative impact of COVID-19.
The Company’s other expense, net, was $22.4 million in the first nine months of 2020 compared to $0.4 million in the prior year
period. The year-over-year increase in other expense, net was primarily due to the first quarter of 2020 non-cash settlement charge of
$22.7 million associated with the termination of the Legacy Quaker U.S. Pension Plan, described in the Non -GAAP Measures section
of this Item, above, as well as higher foreign currency transaction losses in the current year.
Interest expense, net, increased $14.5 million in the first nine months of 2020 compared to the first nine months of 2019 primarily
due to additional borrowings under the Company’s term loans and revolving credit facility to finance the closing of the Combination
on August 1, 2019.
The Company’s effective tax rates for the first nine months of 2020 and 2019 were a benefit of 38.3% and an expense of 22.9%,
respectively. The Company’s current year effective tax rate was impacted by the pre-tax loss for the nine months ended September
30, 2020, the tax effect of certain one-time pre-tax costs as well as certain one-time tax charges and benefits in the current period,
including those mentioned in the three months analysis above as well as those related to the impact of recently issued U.S. tax
regulations and other changes in the valuation allowances for foreign tax credits acquired with the Combination, additional charges
taken for uncertain tax positions related to certain foreign tax audits, and the tax impact of the Company’s termination of its Legacy
Quaker U.S. Pension Plan. Comparatively, the prior year effective tax rate was primarily impacted by certain non-deductible costs
associated with the Combination. Excluding the impact of these items as well as all other non-core items in each year, described in
the Non-GAAP Measures section of this Item, above, the Company estimates that its first nine months of 2020 and 2019 effective tax
rates were relatively consistent at approximately 23% and 22%, respectively.
Equity in net income of associated companies increased $
0.7
million in the first nine months of 2020 compared to the first nine
months of 2019, primarily due to additional earnings from Houghton’s 50% interest in a joint venture in Korea partially offset by
lower earnings as compared to the prior year period from the Company’s interest in a captive insurance company.
See the Non-GAAP
Measures section of this Item, above.
Net income attributable to noncontrolling interest was $0.1 million in the first nine months of 2020 compared to $0.2 million in
the first nine months of 2019.
Foreign exchange negatively impacted the Company’s first nine months of 2020 results by approximately $0.27 per diluted share,
primarily due to higher foreign exchange transaction losses year-over-year and to a lesser extent, an aggregate negative impact from
foreign currency translation on earnings.
Reportable Segments Review - Comparison of the Third Quarter of 2020 with the Third Quarter of 2019
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 third quarter of 2019 and in connection with the Combination, the Company reorganized its executive
Quaker Chemical Corporation
Management’s Discussion and Analysis
45
management team to align with its new business structure, which reflects the method by which the Company assesses its performance
and allocates its resources. The Company’s current reportable segment structure includes four segments: (i) Americas; (ii) EMEA;
(iii) Asia/Pacific; and (iv) Global Specialty Businesses. The three geographic segments are composed of the net sales and operations
in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which
includes the Company’s container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses.
Segment operating earnings for the Company’s reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s product sales. Operating expenses not directly attributable to the net sales of each respective
segment are not included in segment operating earnings, such as certain corporate and administrative costs, Combination, integration
and other acquisition-related expenses, Restructuring and related charges, and COGS related to acquired inventory sold, which is
adjusted to fair value as part of purchase accounting. Other items not specifically identified with the Company’s reportable segments
include interest expense, net, and other (expense) income, net.
Americas
Americas represented approximately 32% of the Company ’s consolidated net sales in the third quarter of 2020. The segment’s
net sales were $119.5 million, an increase of $2.8 million or 2% compared to the third quarter of 2019. The increase in net sales
reflects the inclusion of one additional month of Houghton net sales of $18.6 million, as the Combination closed on August 1 in the
prior year. Excluding Houghton net sales, the segment’s net sales decrease quarter-over-quarter of approximately 13% was due to
lower volumes of 11% and a negative impact of foreign currency translation of 4%, partially offset by increases in selling price and
product mix of 2%. The current quarter volume decline was driven by the economic slowdown due to the impacts of COVID-19. The
foreign exchange impact was primarily due to the weakening of the Brazilian real and the Mexican peso against the U.S. dollar, as
these exchange rates averaged 5.38 and 22.06, respectively, in the third quarter of 2020 compared to 3.97 and 19.43, respectively, in
the third quarter of 2019. This segment’s operating earnings were $31.1 million, an increase of $7.3 million or 31% compared to the
third quarter of 2019. The increase in segment operating earnings reflects the higher net sales with the inclusion of Houghton, noted
above, as well as an increase in gross margin due to the Company’s progress on Combination-related logistics, procurement and
manufacturing cost savings initiatives, and lower SG&A as a result of cost savings actions in response to COVID-19, including lower
travel expenses, and the benefits of realized cost savings associated with the Combination, partially offset by the inclusion of one
additional month of Houghton SG&A.
EMEA
EMEA represented approximately 26% of the Company’s consolidated net sales in the third quarter of 2020. The segment’s net
sales were $94.0 million, an increase of $11.6 million or 14% compared to the third quarter of 2019. The increase in net sales reflects
the inclusion of one additional month of Houghton net sales of $19.1 million, as the Combination closed on August 1 in the prior year.
Excluding Houghton net sales, the segment’s net sales decrease quarter-over-quarter of 9% was due to lower volumes of 15%,
partially offset by a positive impact of foreign currency translation of 4% and increases in selling price and product mix of 2%. The
current quarter volume decline was driven by the economic slowdown due to the impacts of COVID-19. The foreign exchange impact
was primarily due to the strengthening of the euro against the U.S. dollar as this exchange rate averaged 1.17 in the third quarter of
2020 compared to 1.11 in the third quarter of 2019. This segment’s operating earnings were $17.4 million, an increase of $4.1 million
or 31% compared to the third quarter of 2019, which reflects the inclusion of Houghton net sales, noted above, coupled with an
increase in gross margin due to the Company’s progress on Combination-related logistics, procurement and manufacturing cost
savings initiatives. These drivers of the increase in segment operating earnings were partially offset by higher SG&A, including one
additional month of Houghton SG&A, partially offset by cost savings actions in response to COVID-19, including lower travel
expenses, and the benefits of realized cost savings associated with the Combination.
Asia/Pacific
Asia/Pacific represented approximately 23% of the Company’s consolidated net sales in the third quarter of 2020. The segment’s
net sales were $84.9 million, an increase of $10.6 million or 14% compared to the third quarter of 2019. The increase in net sales
reflects the inclusion of one additional month of Houghton net sales of $13.0 million, as the Combination closed on August 1 in the
prior year. Excluding Houghton net sales, the segment’s net sales decrease of 3% quarter-over-quarter was driven by a decrease in
selling price and product mix of 5%, partially offset by higher volumes of 1% and a positive impact of foreign currency translation of
1%. The foreign exchange impact was primarily due to the strengthening of the Chinese renminbi against the U.S. dollar as this
exchange rate averaged 6.92 in the third quarter of 2020 compared to 7.02 in the third quarter of 2019. This segment’s operating
earnings were $27.3 million, an increase of $6.9 million or 34% compared to the third quarter of 2019. The increase in segment
operating earnings reflects the inclusion of Houghton net sales noted above, and an increase in gross margin due to the Company’s
progress on Combination-related logistics and procurement and manufacturing cost savings initiatives. Segment SG&A was relatively
consistent quarter-over-quarter as increases from one additional month of Houghton SG&A were largely offset by cost savings actions
in response to COVID-19, including lower travel expenses, and the benefits of realized cost savings associated with the Combination.
Quaker Chemical Corporation
Management’s Discussion and Analysis
46
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the Company’s consolidated net sales in the third quarter of 2020.
The segment’s net sales were $68.8 million, an increase of $17.0 million or 33% compared to the third quarter of 2019. The increase
in net sales reflects the inclusion of one additional month of Houghton net sales and the entire quarter of Norman Hay net sales,
totaling $23.8 million, as the Combination closed on August 1 and the Norman Hay acquisition occurred on October 1 in the prior
year. Excluding Houghton and Norman Hay net sales, the segment’s net sales decrease of 13% quarter-over-quarter was driven by
lower volumes of 5%, decreases in selling price and product mix of 6% and a negative impact from foreign currency translation of
2%. The current quarter volume decline was primarily due to a decrease in the Company’s specialty coatings business driven by
Boeing’s decision to temporarily stop production of the 737 Max aircraft and continued volume declines due to the economic
slowdown due to the impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the Brazilian real
against the U.S. dollar described in the Americas section, above. This segment’s operating earnings were $21.2 million, an increase of
$5.9 million or 39% compared to the third quarter of 2019. The increase in segment operating earnings reflects the inclusion of
incremental Houghton and Norman Hay net sales, noted above, on relatively consistent gross margin levels, partially offset by higher
SG&A, including one additional month of Houghton SG&A and the entire quarter of Norman Hay SG&A.
Reportable Segments Review - Comparison of the First Nine Months of 2020 with the First Nine Months of 2019
Americas
Americas represented approximately 32% of the Company’s consolidated net sales in the first nine months of 2020. The
segment’s net sales were $330.0 million, an increase of $69.3 million or 27% compared to the first nine months of 2019. The increase
in net sales reflects the inclusion of seven additional months of Houghton net sales of $119.9 million, as the Combination closed on
August 1 in the prior year. Excluding Houghton net sales, the segment’s net sales decrease year-over-year of 19% was due to lower
volumes of 17% and a negative impact of foreign currency translation of 4%, partially offset by increases in selling price and product
mix of 2%. The current year volume decline was driven by the economic slowdown that began in late March and continued into the
third quarter of 2020 due to the impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the
Brazilian real and the Mexican peso against the U.S. dollar, as these exchange rates averaged 5.01 and 21.62, respectively, in the first
nine months of 2020 compared to 3.88 and 19.25, respectively in the first nine months of 2019. This segment’s operating earnings
were $70.6 million, an increase of $18.5 million or 36% compared to the first nine months of 2019. The increase in segment operating
earnings reflects the inclusion of incremental Houghton net sales, noted, above, and relatively consistent gross margins year-over-year,
partially offset by higher SG&A, including seven additional months of Houghton SG&A in the current year.
EMEA
EMEA represented approximately 27% of the Company’s consolidated net sales in the first nine months of 2020. The segment’s
net sales were $276.5 million, an increase of $92.7 million or 50% compared to the first nine months of 2019. The increase in net
sales reflects the inclusion of seven additional months of Houghton net sales of $117.2 million, as the Combination closed on August
1 in the prior year. Excluding Houghton net sales, the segment’s net sales decrease year-over-year of 13% was due to lower volumes
of 15%, partially offset by a positive impact of foreign currency translation of 1% and increases in selling price and product mix of
1%. The current year volume decline was driven by the economic slowdown that began in late March due to the impacts of COVID-
19 and an overall reduced production in certain EMEA countries that began in the second half of 2019 and continued into the third
quarter of 2020 due to the impacts of COVID-19. The foreign exchange impact was primarily due to the strengthening of the euro
against the U.S. dollar in the third quarter of 2020, noted in the quarter-over-quarter comparison above, which reflected the results of
Houghton in both the current and prior year reported figures. This segment’s operating earnings were $46.3 million, an increase of
$15.2 million or 49% compared to the first nine months of 2019. The increase in segment operating earnings reflects the inclusion of
incremental Houghton net sales, noted, above, and relatively consistent gross margins year-over-year, partially offset by higher
SG&A, including seven additional months of Houghton SG&A in the current year.
Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in the first nine months of 2020. The
segment’s net sales were $226.9 million, an increase of $61.6 million or 37% compared to the first nine months of 2019. The increase
in net sales reflects the inclusion of seven additional months of Houghton net sales of $79.7 million, as the Combination closed on
August 1 in the prior year. Excluding Houghton net sales, the segment’s net sales decrease of 11% year-over-year was driven by
lower volumes of 8%, a negative impact of foreign currency translation of 1% and decreases in selling price and product mix of 2%.
The current year volume decline was driven by the economic slowdown that began in the first quarter in China and in late March
throughout the region due to the impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the
Chinese renminbi and Indian rupee against the U.S. dollar as these exchange rates averaged 6.99 and 74.01, respectively, in the first
nine months of 2020 compared to 6.86 and 70.11, respectively, in the first nine months of 2019. This segment’s operating earnings
were $66.1 million, an increase of $20.7 million or 46% compared to the first nine months of 2019. The increase in segment operating
earnings reflects the inclusion of incremental Houghton net sales, noted, above, and relatively consistent gross margins year-over-year,
partially offset by higher SG&A, including seven additional months of Houghton SG&A in the current year.
Quaker Chemical Corporation
Management’s Discussion and Analysis
47
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the Company’s consolidated net sales in the first nine months of
2020. The segment’s net sales were $198.4 million, an increase of $65.9 million or 50% compared to the first nine months of 2019.
The increase in net sales reflects the inclusion of seven additional months of Houghton net sales and the full year-to-date nine months
of Norman Hay net sales, totaling $90.6 million, as the Combination closed on August 1 and the Norman Hay acquisition closed on
October 1 in the prior year. Excluding Houghton and Norman Hay net sales, the segment’s net sales decrease of 19% year-over-year
was driven by lower volumes of 6%, decreases in selling price and product mix of 10% and a negative impact from foreign currency
translation of 3%. The current year volume decline was primarily due to a decrease in the Company’s specialty coatings business
driven by Boeing’s decision to temporarily stop production of the 737 Max aircraft and continued volume declines due to the
economic slowdown due to the impacts of COVID-19. Partially offsetting these volume declines, and contributing to the decrease in
selling price and product mix were higher shipments of a lower priced product in the Company’s mining business compared to the
prior year. The foreign exchange impact was primarily due to the weakening of the Brazilian real against the U.S. dollar described in
the Americas section, above. This segment’s operating earnings were $58.1 million, an increase of $21.3 million or 58% compared to
the first nine months of 2019. The increase in segment operating earnings reflects the inclusion of incremental Houghton and Norman
Hay net sales, noted, above, partially offset by higher SG&A, including seven additional months of Houghton and nine months of
Norman Hay SG&A in the current year.
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
Certain information included in this Report and other materials filed or to be filed by Quaker Chemical Corporation with the
Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or
to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the
fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements, including statements
regarding the potential effects of the COVID-19 pandemic on the Company’s business, results of operations, or financial condition
and our expectations to maintain sufficient liquidity and remain compliant with the terms of the Company’s credit facility on our
current expectations about future events.
These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, future performance, and business, including:
•
the potential benefits of the Combination;
•
the impacts on our business as a result of the COVID-19 pandemic and any projected global economic rebound or
anticipated positive results due to Company actions taken in response to the pandemic;
•
our current and future results and plans; and
•
statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities, operational matters, capital spending, and
financing sources. From time to time, forward-looking statements are also included in the Company’s other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to, or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s 2019 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 shutdowns. Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic, including actions taken in response to the pandemic by
various governments, which could exacerbate some or all of the other risks and uncertainties faced by the Company, including the
potential for significant increases in raw material costs, supply chain disruptions, customer financial stability, worldwide economic
and political conditions, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist
attacks and other acts of violence. Furthermore, the Company is subject to the same business cycles as those experienced by steel,
automobile, aircraft, industrial equipment, and durable goods manufacturers. The ultimate significance of COVID-19 on our business
will depend on, among other things, the extent, duration and strength of resurgence of the pandemic, the severity of the disease and the
Quaker Chemical Corporation
Management’s Discussion and Analysis
48
number of people infected with the virus, the continued uncertainty regarding widespread availability of a vaccine, the effects on the
economy by the pandemic, including the resulting market volatility, and by the measures taken by governmental authorities and other
third parties restricting day-to-day life and business operations and the length of time that such measures remain in place, and
governmental programs implemented to assist businesses impacted by the COVID-19 pandemic. Other factors could also adversely
affect us, including those related to the Combination and other acquisitions and the integration of the combined company as well as
other acquired businesses. Our forward-looking statements are subject to risks, uncertainties and assumptions about the Company and
its operations that are subject to change based on various important factors, some of which are beyond our control. These risks,
uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from
expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-looking statements. For more information regarding these
risks and uncertainties as well as certain additional risks that we face, refer to the Risk Factors section, which appears in Item 1A of
this Report, as well as Item 1A in our 2019 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.
49
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Quaker Houghton is exposed to the impact of interest rates, foreign currency fluctuations, changes in commodity prices and credit
risk. The current economic environment associated with COVID-19 has led to significant volatility and uncertainty with each of these
market risks. Other than the impact of the COVID-19 pandemic on market risks generally, we believe there has been no other
material change to the information disclosed in Part II, Item 7A, of our 2019 Form 10-K. See Item 1A, “Risk Factors”, of this Report
for additional discussion of the current and potential risks associated with the COVID-19 pandemic.
50
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures.
amended (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act ) as of the
end of the period covered by this Report. Based on that evaluation, our principal executive officer and our principal financial officer
have concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) were not effective as of September 30, 2020 because of the material weaknesses in our internal
control over financial reporting, as described below.
As previously disclosed in “Item 9A. Controls and Procedures.” in the Company’s 2019 Form 10-K, through the process of
evaluating risks and corresponding changes to the design of existing or the implementation of new controls in light of the significant
non-recurring transactions that occurred during 2019, including the Combination, the Company identified certain deficiencies in its
application of the principles associated with the Committee of Sponsoring Organization of the Treadway Commission in Internal
Control – Integrated Framework (2013) that management has concluded in the aggregate constitute a material weakness. A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
Specifically, management concluded that changes to existing controls or the implementation of new controls were not sufficient to
respond to changes to the risks of material misstatement to financial reporting. As a result of this deficiency in the design and
implementation of an effective risk assessment, this material weakness contributed to certain control deficiencies that management
concluded result in the following additional material weaknesses: (i) we did not design and maintain effective controls over the review
of pricing, quantity and customer data to verify that revenue recognized at certain locations was complete and accurate, and (ii) we did
not design and maintain effective controls over the reliability of data used to support the reasonableness of certain assumptions in the
accounting for business combinations.
Notwithstanding these material weaknesses, the Company has concluded that the unaudited condensed consolidated financial
statements included in this Report present fairly, in all material respects, the financial position of the Company as of September 30,
2020 and December 31, 2019, and the results of its operations and its cash flows and changes in equity for both the three and nine
month periods ended September 30, 2020 and 2019, are in conformity with accounting principles generally accepted in the United
States of America. However, these control deficiencies could have resulted in misstatements of interim condensed consolidated
financial statements and disclosures that could have resulted in a material misstatement that would not be prevented or detected.
Remediation Plan Activities.
As previously disclosed in “Item 9A. Controls and Procedures.” in the Company’s 2019 Form 10-K,
the Company and its Board of Directors are committed to maintaining a strong internal control environment. During the first nine
months of 2020, management began developing its full remediation plan and executing what will be a multi-step remediation process
to completely and fully remediate the material weaknesses identified and described above. The initial steps the Company has taken
include identifying dedicated internal resources supplemented with third-party specialists to assist with formalizing a robust and
detailed remediation plan, which is in the process of being implemented, and specifically completing an updated risk assessment,
including identifying and assessing those risks attendant to the significant changes within the Company as a result of becoming a
larger, more complex global organization as a result of the Combination. The Company is conducting a comprehensive review, and,
as appropriate, is updating its existing internal control framework to ensure that it has identified, developed and deployed the
appropriate business process and information technology general controls to meet the objectives and address the risks identified
through the updated risk assessment process. In undertaking this process and carrying out our remediation plan, the Company has
further supplemented its internal resources that are focused on internal control over financial reporting by hiring additional personnel
dedicated to financial and information technology compliance during 2020. Further, the Company is identifying and implementing
further modifications to strengthen its internal control environment. During the quarter ended September 30, 2020, as a result of
initial remediation activities related to the Company’s previously identified material weaknesses, the Company has modi fied certain
existing controls, or designed and in some instances implemented new controls. It is the Company’s goal to remediate all of the
previously identified material weaknesses as quickly and effectively as possible, however, the impact of COVID-19, including travel
restrictions and remote work arrangements has required the Company to adapt and make changes to its internal controls integration
plans as well as its remediation plans, and has presented and is expected to continue to present challenges with regards to the timing of
the Company’s remediation and integration plan activities.
Changes in internal control over financial reporting.
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, 2020
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that
evaluation,
other than the changes discussed above in connection with the changes designed and implemented as a result of the
Company’s remediation plan activities for the previously identified material weakne sses,
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, 2020.
51
PART II.
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been omitted.
Item 1. Legal Proceedings.
Incorporated by reference is the information in Note 19 of the Notes to the Condensed Consolidated Financial Statements in Part
I, Item 1, of this Report.
Item 1A. Risk Factors.
In addition to the other information set forth in this Report, you should carefully consider the risk set forth below, which updates
the risk factors previously disclosed in Part I, Item 1A of our 2019 Form 10-K, as well as the other risk factors described in the 2019
Form 10-K, which could materially affect our business, financial condition or future results. The risk described below, and the risks
described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
The outbreak of COVID-19 and its impact on business and economic conditions have negatively affected our business, results of
operations and financial condition and the extent and duration of those effects is uncertain.
Beginning in early 2020, there has been an outbreak of COVID-19, initially in China and which has spread globally, including
generally all locations where the Company does business. In March 2020, the World Health Organization formally identified the
COVID-19 outbreak as a pandemic. The COVID-19 pandemic, including the fear of exposure to and the actual effects of the illness,
together with the measures implemented to reduce its spread, including travel restrictions, shutdowns of businesses deemed
nonessential, and large gatherings and shelter -in-place or similar orders, have significantly impacted the global economy. The
pandemic has disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in
financial markets, and increased unemployment levels. In addition, it has resulted in temporary closures of many businesses, and
although many of the businesses have subsequently re-opened, they may be operating at reduced capacity or subject to additional
temporary shutdowns, while other closures may be prolonged or become permanent.
The scale and scope of the COVID-19 outbreak, the resulting pandemic, and the primary and secondary impacts on the economy
and financial markets have had a significant disruption on the operations of the Company and its suppliers and customers and have
adversely affected the Company’s results of operations and financial condition during the first nine months of 2020 as further
described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report. The
Company has experienced disruptions as a result of COVID-19, initially at its China subsidiaries in the first quarter of 2020 and,
subsequently, beginning in late March and continuing into the third quarter of 2020, throughout the rest of the business due to the
global economic slowdown. We have experienced, and may experience in the future, temporary site or facility closures at our own
facilities or those of our customers in response to government mandates in certain jurisdictions in which we operate. We may also be
required to close certain of our facilities for the safety of our employees in response to positive diagnoses for COVID-19. Even in
facilities that are not closed, we could be affected by reductions in employee availability and productivity, changes in operating
procedures, and increased costs
.
The Company anticipates that its future results of operations, including the results for the remainder
of 2020 may continue to be adversely impacted by COVID-19. In particular, the spread of COVID-19 and efforts to contain the virus
have had the following additional effects, which are likely to increase or become exacerbated the longer the crisis continues:
●
reduced the demand for our products and services as many customers have reduced production levels;
●
driven declines in volume and net sales across all reportable segments;
●
required us to adjust certain of our facility operating procedures and to take steps to reduce costs and preserve liquidity; and
●
negatively affected the estimated fair value of certain of the Company’s reporting units or other indefinite-lived or long-lived
assets, namely the Company’s Houghton and Fluidcare trademark and tradename indefinite-lived intangible assets, such that
their estimated fair values were less than their carrying values and required adjustments.
The spread of COVID-19, a further prolonged outbreak, and efforts to contain the virus in some cases have already or could in the
future also:
●
limit the availability and reduce the productivity of our employees;
●
impact our financial reporting systems and processes, internal control over financial reporting, and disclosure controls and
procedures, including our ability to ensure information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow for timely decisions regarding required disclosure;
●
present challenges as a result of travel restrictions and remote work arrangements, including impacting the timing of our ERP
system implementations which are an integral part of our integration activities, the timing of the Company’s remediation plan
activities as described in Item 4 Controls and Procedures, of this Report, and the Company’s first year assessment of internal
control over financial reporting for Houghton and Norman Hay, including the implementation of new or enhanced business
52
process and information technology general controls, as necessary, to meet the objectives and address the risks identified
once the Company completes its initial design assessment;
●
increase our costs as a result of emergency measures that we may take or that may be imposed on us by regulatory
authorities;
●
cause a delay in customer payments or cause a deterioration of the credit quality of other counterparties that could result in
credit losses or force both customer and supplier bankruptcies;
●
cause delays and disruptions in the availability of and timely delivery of materials and components used in our operations;
●
result in our inability to meet the requirements of the covenants in our existing credit facility, including covenants regarding
our consolidated interest coverage ratio and consolidated net leverage ratio, or increase our cost of capital or make additional
capital, including the refinancing of our credit facility, more difficult or available only on terms less favorable to us;
●
impact our liquidity position and cost of and ability to access funds from financial institutions and capital markets;
●
negatively affect the estimated fair values of the Company’s reporting units or other indefinite-lived or long-lived assets; and
●
cause other risks to impact us, including the risks described in the “Risk Factors” section of the 2019 Form 10-K.
Although the Company has implemented business continuity and emergency response plans to permit it to continue to provide
services and products to customers and support the Company’s operations, while also taking health and safety measures such as
implementing worker distancing measures, enhancing on-site hygiene measures, and using a remote workforce where possible, there
can be no assurance that the continued spread of COVID-19 and efforts to contain the virus (including, but not limited to, voluntary
and mandatory quarantines, restrictions on travel, limiting gatherings of people, and reduced operations and extended closures of
many businesses and institutions) will not further impact our business, results of operations and financial condition. However, given
the unprecedented and continually evolving developments with respect to this pandemic, the Company cannot, as of the date of this
Report, reasonably estimate the magnitude or full extent of the impact to its future results of operations or to the ability of it or its
customers to resume more normal operations. A further prolonged outbreak or resurgence and period of continued restrictions on day-
to-day life and business operations would likely result in volume declines and lower net sales into the fourth quarter of 2020 as well,
when compared to the prior year.
The ultimate significance of COVID-19 on our business will depend on, among other things, the extent, duration and strength of
resurgence of the pandemic, the severity of the disease and the number of people infected with the virus, the ultimate geographic
spread of the virus, the continued uncertainty regarding widespread availability of a vaccine, the effects on the economy by the
pandemic, including market volatility, and by the measures taken by governmental authorities and other third parties restricting day-
to-day life and the length of time that such measures remain in place, and laws or governmental programs implemented to assist
businesses impacted by the COVID-19 pandemic, such as fiscal stimulus and other legislation designed to deliver monetary aid and
other relief. The likelihood of a further impact on the Company that could be material increases the longer the virus impacts economic
activity levels in the United States and across the world.
53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Company
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)
(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
29,963
$
200.31
—
$
86,865,026
August 1 - August 31
514
$
194.00
—
$
86,865,026
September 1 - September 30
—
$
—
—
$
86,865,026
Total
30,477
$
200.20
—
$
86,865,026
(1)
All of these shares were acquired from employees upon their 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.
(2)
The price paid for shares acquired from employees pursuant to employee benefit and share-based compensation plans is, in
each case, based on the closing price of the Company’s common stock on the date of exercise or vesting as specified by the
plan pursuant to which the applicable option or restricted stock 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 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”) and 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, 2020.
Limitation on the Payment of Dividends
The New Credit Facility has limitations on the payment of dividends and other so-called restricted payments. See Note 15 of
Notes to Condensed Consolidated Financial Statements, in Part I, Item I, of this Report.
54
Item 6. Exhibits.
(a) Exhibits
3.1
–
3.2
–
31.1
–
31.2
–
32.1
–
.**
32.2
–
.**
101.INS
–
Inline XBRL Instance Document*
101.SCH
–
Inline XBRL Taxonomy Extension Schema Document*
101.CAL
–
Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
–
Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
–
Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
–
Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104
–
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)*
* Filed herewith.
** Furnished herewith.
*********
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
/s/ Mary Dean Hall
Date: November 5, 2020
Mary Dean Hall, Senior Vice President, Chief Financial
Officer and Treasurer (officer duly authorized on behalf
of, and principal financial officer of, the Registrant)
1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF THE COMPANY PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Michael F. Barry, certify that:
1.
I have reviewed this quarterly report on Form 10 -Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 5, 2020
/s/ Michael F. Barry
Michael F. Barry
Chief Executive Officer
1
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF THE COMPANY PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Mary Dean Hall, certify that:
1.
I have reviewed this quarterly report on Form 10 -Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 5, 2020
/s/ Mary Dean Hall
Mary Dean Hall
Chief Financial Officer
1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned hereby certifies that the Form 10-Q Quarterly Report of Quaker Chemical Corporation (the “Company”) for the
quarterly period ended September 30, 2020 filed with the Securities and Exchange Commission (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 5, 2020
/s/ Michael F. Barry
Michael F. Barry
Chief Executive Officer of Quaker Chemical Corporation
1
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned hereby certifies that the Form 10-Q Quarterly Report of Quaker Chemical Corporation (the “Company”) for the
quarterly period ended September 30, 2020 filed with the Securities and Exchange Commission (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 5, 2020
/s/ Mary Dean Hall
Mary Dean Hall
Chief Financial Officer of Quaker Chemical Corporation