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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
 
 
 
 
FORM
10-Q
 
 
 
 
 
 
QUARTERLY
 
REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
OF 1934
For the quarterly period ended
September 30, 2020
 
OR
 
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
For the transition period from
 
to
 
 
Commission file number
001-12019
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
Pennsylvania
 
23-0993790
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
 
19428 – 2380
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000
 
Not Applicable
Former name, former address and former fiscal year,
 
if changed since last report.
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
 
Indicate by check mark whether the Registrant (1) has filed all reports
 
required to be filed by Section 13 or 15(d) of the Securities Exchange
 
Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
 
to file such reports), and (2) has been subject to such filing requirements
 
for the past 90
days.
 
Yes
 
 
No
 
 
 
Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required
 
to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter
 
period that the registrant was required to submit such files) .
 
Yes
 
 
No
 
 
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”
 
in Rule 12b-2 of
the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
 
Smaller reporting
 
company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
 
for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange
 
Act.
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined
 
in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common
 
stock, as of the latest practicable date.
 
 
 
Number of Shares of Common Stock
Outstanding on October 31, 2020
 
17,831,576
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
367,224
$
325,130
$
1,031,825
$
742,209
Cost of goods sold (
excluding amortization expense - See Note 14
)
 
227,032
 
220,073
 
660,396
 
486,224
Gross profit
 
140,192
 
105,057
 
371,429
 
255,985
Selling, general and administrative expenses
 
97,037
 
80,812
 
282,405
 
182,293
Indefinite-lived intangible asset impairment
38,000
Restructuring and related charges
1,383
24,045
3,585
24,045
Combination, integration and other acquisition-related
 
expenses
6,913
14,702
22,786
23,789
Operating income (loss)
 
34,859
(14,502)
 
24,653
 
25,858
Other (expense) income, net
 
(239)
 
203
 
(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
 
27,783
 
(20,401)
 
(19,863)
 
17,858
Taxes on income
 
(loss) before equity in net income of associated
companies
 
2,245
 
(5,633)
 
(7,603)
 
4,096
Income (loss) before equity in net income of associated
companies
 
25,538
 
(14,768)
 
(12,260)
 
13,762
Equity in net income of associated companies
 
1,804
 
1,787
 
3,536
 
2,806
Net income (loss)
27,342
(12,981)
(8,724)
16,568
Less: Net income attributable to noncontrolling interest
38
72
88
186
Net income (loss) attributable to Quaker Chemical Corporation
$
27,304
$
(13,053)
$
(8,812)
$
16,382
Per share data:
 
 
 
 
Net income (loss) attributable to Quaker Chemical Corporation
common shareholders – basic
$
1.53
$
(0.80)
$
(0.50)
$
1.15
Net income (loss) attributable to Quaker Chemical Corporation
 
common shareholders – diluted
$
1.53
$
(0.80)
$
(0.50)
$
1.14
Dividends declared
$
0.395
$
0.385
$
1.165
$
1.140
 
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)
 
$
27,342
$
(12,981)
$
(8,724)
$
16,568
Other comprehensive income (loss), net of tax
Currency translation adjustments
33,618
(28,305)
(10,582)
(29,256)
Defined benefit retirement plans
(257)
1,126
16,913
2,354
Current period change in fair value of derivatives
354
(3,738)
Unrealized gain (loss) on available-for-sale securities
556
(81)
453
1,499
Other comprehensive income (loss)
34,271
(27,260)
3,046
(25,403)
Comprehensive income (loss)
61,613
(40,241)
(5,678)
(8,835)
Less: Comprehensive (income) loss attributable to
noncontrolling interest
(56)
22
25
(115)
Comprehensive income (loss) attributable to Quaker Chemical
Corporation
$
61,557
$
(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
$
155,750
$
123,524
Accounts receivable, net
 
338,875
 
375,982
Inventories
 
 
Raw materials and supplies
 
77,893
 
82,058
Work-in-process
 
and finished goods
 
93,434
 
92,892
Prepaid expenses and other current assets
 
52,612
 
41,516
Total current
 
assets
 
718,564
 
715,972
Property, plant and
 
equipment, at cost
 
394,286
 
398,834
Less accumulated depreciation
 
(206,406)
 
(185,365)
Property, plant and
 
equipment, net
 
187,880
 
213,469
Right of use lease assets
39,781
42,905
Goodwill
 
612,144
 
607,205
Other intangible assets, net
 
1,045,040
 
1,121,765
Investments in associated companies
 
92,163
 
93,822
Deferred tax assets
 
13,085
 
14,745
Other non-current assets
 
44,531
 
40,433
Total assets
$
2,753,188
$
2,850,316
LIABILITIES AND EQUITY
 
 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
$
38,630
$
38,332
Accounts and other payables
 
165,582
 
170,929
Accrued compensation
 
36,994
 
45,620
Accrued restructuring
8,893
18,043
Other current liabilities
 
87,041
 
87,010
Total current
 
liabilities
 
337,140
 
359,934
Long-term debt
 
846,070
 
882,437
Long-term lease liabilities
28,061
31,273
Deferred tax liabilities
 
189,439
 
211,094
Other non-current liabilities
 
126,047
 
123,212
Total liabilities
 
1,526,757
 
1,607,950
Commitments and contingencies (Note 19)
Equity
 
 
Common stock $
1
 
par value; authorized
30,000,000
 
shares; issued and
 
 
outstanding 2020 –
17,830,541
 
shares; 2019 –
17,735,162
 
shares
17,831
17,735
Capital in excess of par value
 
900,602
 
888,218
Retained earnings
 
382,521
 
412,979
Accumulated other comprehensive loss
 
(75,010)
 
(78,170)
Total Quaker
 
shareholders’ equity
 
1,225,944
 
1,240,762
Noncontrolling interest
 
487
1,604
Total equity
1,226,431
1,242,366
Total liabilities and
 
equity
$
2,753,188
$
2,850,316
 
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)
$
16,568
Adjustments to reconcile net (loss) income to net cash provided
 
by operating activities:
 
 
Amortization of debt issuance costs
 
3,562
 
792
Depreciation and amortization
 
62,818
 
23,868
Equity in undistributed earnings of associated companies,
 
net of dividends
 
1,415
 
(129)
Acquisition-related fair value adjustments related to inventory
229
10,214
Deferred compensation, deferred taxes and other,
 
net
 
(30,657)
 
(17,204)
Share-based compensation
 
17,820
 
3,042
Loss (gain) on disposal of property,
 
plant, equipment and other assets
 
105
 
(111)
Insurance settlement realized
 
(818)
 
(624)
Indefinite-lived intangible asset impairment
38,000
Combination and other acquisition-related expenses, net of
 
payments
2,498
(14,218)
Restructuring and related charges
3,585
24,045
Pension and other postretirement benefits
 
16,219
 
434
Increase (decrease) in cash from changes in current assets and current
 
 
liabilities, net of acquisitions:
Accounts receivable
 
30,225
 
2,655
Inventories
 
2,137
 
1,376
Prepaid expenses and other current assets
 
(113)
 
(10,931)
Change in restructuring liabilities
(12,772)
(4,645)
Accounts payable and accrued liabilities
 
(13,481)
 
344
 
Net cash provided by operating activities
 
112,048
 
35,476
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
11
75
Insurance settlement interest earned
 
41
 
185
 
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
750,000
(Repayments) borrowings on revolving credit facilities,
 
net
 
(16,485)
 
85,966
(Repayments) borrowings on other debt, net
(527)
 
415
Financing-related debt issuance costs
(23,747)
Dividends paid
 
(20,520)
 
(15,003)
Stock options exercised, other
 
2,385
 
733
Purchase of noncontrolling interest in affiliates
(1,047)
Distributions to noncontrolling affiliate shareholders
(751)
 
Net cash (used in) provided by financing activities
 
(65,077)
 
798,364
 
Effect of foreign exchange rate changes on
 
cash
 
(529)
 
(1,889)
Net increase in cash, cash equivalents and restricted cash
 
31,178
 
24,035
Cash, cash equivalents and restricted cash at the beginning
 
of the period
 
143,555
 
124,425
Cash, cash equivalents and restricted cash at the end of
 
the period
$
174,733
$
148,460
 
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 $
1.7
 
million, with approximately $
0.7
 
million related to the three months ended March 31, 2020 and
approximately $
1.0
 
million related to the three months ended June 30, 2020.
Hyper-inflationary economies
Economies that have a cumulative three-year rate of inflation
 
exceeding
100
% 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
1
% of
the Company’s consolidated
 
total assets and net sales, respectively.
 
During the three and nine months ended September 30, 2020,
 
the
Company recorded $
0.2
 
million and $
0.3
 
million, respectively,
 
of remeasurement losses associated with the applicable
 
currency
conversions related to Argentina.
 
Comparatively, during
 
the three and nine months ended September 30, 2019,
 
the Company recorded
$
0.7
 
million and $
0.9
 
million of remeasurement losses associated with the applicable
 
currency conversion related to Argentina.
 
These
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
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. and certain other selling
 
shareholders in exchange for a combination of cash
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
 
$
37
 
million in cash.
 
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
3
% 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)
$
170,829
Cash paid to extinguish Houghton debt obligations
702,556
Fair value of common stock issued as consideration (b)
789,080
Total fair value
 
of consideration transferred
$
1,662,465
(
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
4.3
 
million shares, comprising
24.5
% of the common stock of the Company
immediately after the closing, and the closing price per
 
share of Quaker Chemical Corporation common stock
 
of $
182.27
 
on
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
$
75,821
$
$
75,821
Accounts receivable, net
178,922
178,922
Inventories, net
95,193
95,193
Prepaid expenses and other assets
10,652
666
11,318
Property, plant and
 
equipment
115,529
(66)
115,463
Right of use lease assets
10,673
10,673
Investments in associated companies
66,447
66,447
Other non-current assets
4,710
1,553
6,263
Intangible assets
1,028,400
1,028,400
Goodwill
494,915
4,625
499,540
Total assets purchased
2,081,262
6,778
2,088,040
Short-term borrowings, not refinanced at closing
9,297
9,297
Accounts payable, accrued expenses and other accrued liabilities
150,078
1,127
151,205
Deferred tax liabilities
205,082
4,098
209,180
Long-term lease liabilities
6,607
6,607
Other non-current liabilities
47,733
1,553
49,286
Total liabilities assumed
418,797
6,778
425,575
Total consideration
 
paid for Houghton
1,662,465
1,662,465
Less: cash acquired
75,821
75,821
Less: fair value of common stock issued as consideration
789,080
789,080
Net cash paid for Houghton
$
797,564
$
$
797,564
(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 $
119.5
 
million.
 
The following unaudited pro forma consolidated financial
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
$
386,396
$
1,170,981
Net income attributable to Quaker Chemical Corporation
22,491
70,533
Combination, integration and other acquisition-related
 
expenses have been and are expected to continue to be significant.
 
The
Company incurred total costs of approximately $
6.9
 
million and $
23.4
 
million for the three and nine months ended September 30,
2020,
 
respectively, primarily
 
for professional fees related to Houghton integration activities.
 
Comparatively,
 
the Company incurred
total costs of approximately $
15.1
 
million and $
25.9
 
million during the three and nine months ended September 30,
 
2019,
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 $
0.8
 
million of accelerated depreciation charges during
 
the nine
months ended September 30, 2020 and $
0.4
 
million and $
2.1
 
million of interest costs to maintain the bank commitment
 
(“ticking
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 $
9.1
 
million and $
6.6
 
million as of
September 30, 2020,
 
and December 31, 2019,
 
respectively, primarily recorded
 
within other accrued liabilities on its Condensed
Consolidated Balance Sheets.
 
Norman Hay
On
October 1, 2019
, the Company completed its acquisition of the operating divisions
 
of
Norman Hay plc
 
(“Norman Hay”), a
private U.K. company that provides specialty chemicals, operating
 
equipment, and services to industrial end markets.
 
The 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
80.0
 
million GBP,
 
on
a cash-free and debt-free basis, subject to routine and customary
 
post-closing adjustments related to working capital and net
indebtedness levels.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
18,981
$
$
18,981
Accounts receivable, net
15,471
15,471
Inventories, net
8,213
(49)
8,164
Prepaid expenses and other assets
4,203
138
4,341
Property, plant and
 
equipment
14,981
14,981
Right of use lease assets
10,608
10,608
Intangible assets
51,088
51,088
Goodwill
29,384
(82)
29,302
Total assets purchased
152,929
7
152,936
Long-term debt included current portions
485
485
Accounts payable, accrued expenses and other accrued liabilities
13,488
(732)
12,756
Deferred tax liabilities
12,746
905
13,651
Long-term lease liabilities
8,594
8,594
Total liabilities assumed
35,313
173
35,486
Total consideration
 
paid for Norman Hay
117,616
(166)
117,450
Less: estimated purchase price settlement (2)
3,287
(3,287)
Less: cash acquired
18,981
18,981
Net cash paid for Norman Hay
$
95,348
$
3,121
$
98,469
(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
2.5
 
million GBP
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
20.0
 
million DKK, or approximately $
2.9
 
million, which was
subsequently converted into shares of the Company’s
 
common stock.
 
An adjustment to the purchase price of approximately
0.4
million DKK, or less than $
0.1
 
million, was made as a result of finalizing a post-closing
 
settlement in the second quarter of 2020.
 
The
Company allocated approximately $
2.4
 
million of the purchase price to intangible assets to be amortized
 
over
17
 
years.
 
In addition,
the Company recorded approximately $
0.5
 
million of goodwill, related to expected value not allocated to
 
other acquired assets, none
of which will be tax deductible.
 
The allocation of the purchase price of TEL has not been
 
finalized and the
one-year
 
measurement
period has not ended.
 
Further adjustments may be necessary as a result of the
 
Company’s 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
49
% ownership interest in one of its South African affiliates,
 
Quaker
Chemical South Africa Limited (“QSA”) for
16.7
 
million ZAR, or approximately $
1.0
 
million, from its joint venture partner PQ
Holdings South Africa.
 
QSA is a part of the Company’s
 
EMEA reportable segment.
 
As this acquisition was a change in an existing
controlling ownership, the Company recorded $
0.7
 
million of excess purchase price over the carrying value of
 
the noncontrolling
interest in Capital in excess of par value.
 
In 2018 the Company purchased certain formulations and product
 
technology for the mining
industry for $
1.0
 
million, with $
0.5
 
million of the purchase price paid at signing and the remaining
 
$
0.5
 
million of the purchase price
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
 
in March 2020.
 
The amendments
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
 
in August 2018 that clarifies the accounting for implementation
 
costs incurred in a cloud computing
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
 
in
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
$
1.1
 
million, a decrease to deferred tax liabilities of $
0.2
 
million and a decrease to retained earnings of $
0.9
 
million.
 
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,
 
Investments – Equity Securities (To
 
pic 321), Investments – Equity Method and Joint Ventures
(Topic
 
323), and Derivatives and Hedging (Topic
 
815) –Clarifying the Interactions between Topic
 
321, Topic
 
323, and Topic
 
815
 
in
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
 
in December 2019.
 
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
 
in August 2018 that modifies certain disclosure
 
requirements for employers that sponsor
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
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.
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
$
119,540
$
116,691
$
330,012
$
260,663
EMEA
 
94,005
 
82,369
 
276,546
 
183,806
Asia/Pacific
 
84,877
 
74,266
 
226,850
 
165,234
Global Specialty Businesses
 
68,802
 
51,804
 
198,417
 
132,506
Total net sales
$
367,224
$
325,130
$
1,031,825
$
742,209
Segment operating earnings
Americas
$
31,099
$
23,765
$
70,590
$
52,069
EMEA
17,439
13,303
46,269
31,034
Asia/Pacific
27,304
20,404
66,106
45,375
Global Specialty Businesses
 
21,161
 
15,245
 
58,114
 
36,819
Total segment operating
 
earnings
 
97,003
 
72,717
 
241,079
 
165,297
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)
 
34,859
(14,502)
24,653
25,858
Other (expense) income, net
(239)
203
(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
$
27,783
$
(20,401)
$
(19,863)
$
17,858
Inter-segment revenues for the three and nine
 
months ended September 30, 2020 were $
1.7
 
million and $
7.0
 
million for Americas,
$
5.3
 
million and $
16.1
 
million for EMEA, $
0.2
 
million and $
0.5
 
million for Asia/Pacific, and $
1.1
 
million and $
3.4
 
million for Global
Specialty Businesses, respectively.
 
Inter-segment revenues for the three and nine
 
months ended September 30, 2019 were $
2.1
million and $
4.8
 
million for Americas, $
5.3
 
million and $
15.4
 
million for EMEA, less than $
0.1
 
million and $
0.1
 
million for
Asia/Pacific, and $
1.4
 
million and $
4.1
 
million for Global Specialty Businesses, respectively.
 
However, all inter-segment
 
transactions
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.
 
In determining whether the Company is acting as a principal
 
or an agent in each arrangement,
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 $
11.1
 
million and $
29.9
 
million
for the three and nine months ended September 30,
 
2020, respectively, and
 
$
13.6
 
million and $
34.4
 
million for the three and nine
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
12
% of consolidated net sales, with its largest customer
 
accounting for
approximately
6
% 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.
 
The Company had
no
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.
 
The Company had approximately $
3.6
 
million and $
2.2
 
million of deferred
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
$
42,098
$
25,362
$
45,001
$
112,461
Metalworking and other
77,442
68,643
39,876
185,961
119,540
94,005
84,877
298,422
Global Specialty Businesses
39,197
17,429
12,176
68,802
$
158,737
$
111,434
$
97,053
$
367,224
Timing of Revenue Recognized
Product sales at a point in time
$
153,820
$
107,093
$
94,660
$
355,573
Services transferred over time
4,917
4,341
2,393
11,651
$
158,737
$
111,434
$
97,053
$
367,224
 
Three Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
48,600
$
26,377
$
43,264
$
118,241
Metalworking and other
68,091
55,992
31,002
155,085
116,691
82,369
74,266
273,326
Global Specialty Businesses
38,834
5,169
7,801
51,804
$
155,525
$
87,538
$
82,067
$
325,130
Timing of Revenue Recognized
Product sales at a point in time
$
150,904
$
85,579
$
80,359
$
316,842
Services transferred over time
4,621
1,959
1,708
8,288
$
155,525
$
87,538
$
82,067
$
325,130
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
121,458
$
80,174
$
122,006
$
323,638
Metalworking and other
208,554
196,372
104,844
509,770
330,012
276,546
226,850
833,408
Global Specialty Businesses
115,722
49,603
33,092
198,417
$
445,734
$
326,149
$
259,942
$
1,031,825
Timing of Revenue Recognized
Product sales at a point in time
$
431,266
$
313,511
$
254,011
$
998,788
Services transferred over time
14,468
12,638
5,931
33,037
$
445,734
$
326,149
$
259,942
$
1,031,825
 
Nine Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
129,031
$
75,578
$
100,868
$
305,477
Metalworking and other
131,632
108,228
64,366
304,226
260,663
183,806
165,234
609,703
Global Specialty Businesses
102,149
13,170
17,187
132,506
$
362,812
$
196,976
$
182,421
$
742,209
Timing of Revenue Recognized
Product sales at a point in time
$
352,504
$
194,911
$
177,416
$
724,831
Services transferred over time
10,308
2,065
5,005
17,378
$
362,812
$
196,976
$
182,421
$
742,209
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
11
 
years.
 
In addition, the Company has certain land use leases with remaining
 
lease terms up to
95
 
years.
 
The lease term for all of the
Company’s leases includes
 
the non-cancellable period of the lease plus any additional periods
 
covered by an option to extend the lease
that the Company is reasonably
 
certain it will exercise.
 
Operating leases are included in right of use lease assets, other current
liabilities and long-term lease liabilities on the Condensed
 
Consolidated Balance Sheet.
 
Right of use lease assets and liabilities are
recognized at each lease’s
 
commencement date based on the present value of its lease payments
 
over its respective lease term.
 
The
Company uses the stated borrowing rate for a lease when
 
readily determinable.
 
When a stated borrowing rate is not available in a
lease agreement, the Company uses its incremental borrowing
 
rate based on information available at the lease’s
 
commencement date
to determine the present value of its lease payments.
 
In determining the incremental borrowing rate used to present
 
value each of its
leases, the Company considers certain information
 
including fully secured borrowing rates readily available to the Company
 
and its
subsidiaries.
 
The Company has immaterial finance leases, which are
 
included in property, plant
 
and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated
 
Balance Sheet.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 $
3.7
 
million and $
10.6
 
million, respectively.
 
Comparatively, operating lease
 
expense for the
three and nine months ended September 30, 2019 was
 
$
2.5
 
million and $
6.0
 
million, respectively.
 
Short-term lease expense for the
three and nine months ended September 30, 2020 was
 
$
0.2
 
million and $
1.1
 
million, respectively.
 
Comparatively, short-term
 
lease
expense for the three and nine months ended September
 
30, 2019 was $
0.5
 
million and $
0.8
 
million, respectively.
 
The Company has
no
 
material variable lease costs or sublease income for the three or
 
nine months ended September 30, 2020 and 2019.
 
Cash paid for operating leases during the nine months ended September
 
30, 2020 and 2019 was $
10.5
 
million and $
5.9
 
million,
respectively.
 
The Company recorded new right of use lease assets and associated lease liabilities
 
of $
6.1
 
million during the nine
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
$
39,781
$
42,905
Other current liabilities
11,185
11,177
Long-term lease liabilities
28,061
31,273
Total operating
 
lease liabilities
$
39,246
$
42,450
Weighted average
 
remaining lease term (years)
6.0
6.2
Weighted average
 
discount rate
4.21%
4.21%
Maturities of operating lease liabilities as of September
 
30, 2020 were as follows:
September 30,
2020
For the remainder of 2020
$
4,689
For the year ended December 31, 2021
11,584
For the year ended December 31, 2022
8,019
For the year ended December 31, 2023
5,912
For the year ended December 31, 2024
4,387
For the year ended December 31, 2025 and beyond
11,583
Total lease payments
46,174
Less: imputed interest
(6,928)
Present value of lease liabilities
$
39,246
Note 7 – Restructuring and Related Activities
As previously disclosed in its 2019 Form 10-K, in the third quarter of 2019, the Company’s management approved a global