QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
| | | | | | | Page | PART I. | | FINANCIAL INFORMATION | | Item 1. | | Financial Statements (unaudited) | |
| | Condensed Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 2017
and September 30, 20162018 | 2 |
| | and June 30, 2017 | | | Condensed Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended
September 30, 2017 and September 30, 2016 | 3 | | | June 30, 2018 and June 30, 2017 | | | Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172018 and December 31, 20162017 | 4 | | | Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 2017
and September 30, 20162018 | 5 | | | and June 30, 2017 | | | Notes to Condensed Consolidated Financial Statements | 6 | Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2023
| Item 3. | | Quantitative and Qualitative Disclosures about Market Risk | 3033
| Item 4. | | Controls and Procedures | 3134
| PART II. | | OTHER INFORMATION | 3235
| Item 1. | | Legal Proceedings | 3235
| Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | 3235
| Item 6. | | Exhibits | 3336
| Signatures | 3336
|
PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Quaker Chemical Corporation Condensed Consolidated Statements of Income (Dollars in thousands, except per share data) | | | Unaudited | | | Unaudited | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | Net sales | Net sales | $ | 212,918 | | $ | 190,428 | | $ | 609,010 | | $ | 555,420 | Net sales | $ | 221,962 | | $ | 201,183 | | $ | 434,017 | | $ | 396,092 | Cost of goods sold | Cost of goods sold | | 138,142 | | | 119,531 | | | 391,512 | | | 345,141 | Cost of goods sold | | 141,025 | | | 129,348 | | | 277,633 | | | 253,370 | Gross profit | | 74,776 | | | 70,897 | | | 217,498 | | | 210,279 | | | | Gross profit | | 80,937 | | | 71,835 | | | 156,384 | | | 142,722 | Selling, general and administrative expenses | Selling, general and administrative expenses | | 51,092 | | | 47,877 | | | 148,740 | | | 144,720 | Selling, general and administrative expenses | | 54,083 | | | 49,594 | | | 104,090 | | | 97,648 | Combination-related expenses | Combination-related expenses | | 9,675 | | | 1,157 | | | 23,088 | | | 1,157 | Combination-related expenses | | 4,291 | | | 4,338 | | | 9,500 | | | 13,413 | Operating income | | 14,009 | | | 21,863 | | | 45,670 | | | 64,402 | | | | Operating income | | 22,563 | | | 17,903 | | | 42,794 | | | 31,661 | Other income (expense), net | Other income (expense), net | | 249 | | | (10) | | | (1,427) | | | (245) | Other income (expense), net | | 261 | | | (1,571) | | | (108) | | | (1,676) | Interest expense | Interest expense | | (793) | | | (758) | | | (2,229) | | | (2,226) | Interest expense | | (1,602) | | | (780) | | | (3,294) | | | (1,436) | Interest income | Interest income | | 762 | | | 551 | | | 1,825 | | | 1,444 | Interest income | | 571 | | | 540 | | | 1,060 | | | 1,063 | Income before taxes and equity in net income of associated | | | | | | | | | | | | | | | Income before taxes and equity in net income of associated | | | | | | | | | | | | | companies | | 14,227 | | | 21,646 | | | 43,839 | | | 63,375 | companies | | 21,793 | | | 16,092 | | | 40,452 | | | 29,612 | Taxes on income before equity in net income of associated | Taxes on income before equity in net income of associated | | | | | | | | | | | | Taxes on income before equity in net income of associated | | | | | | | | | | | | | companies | | 3,140 | | | 6,121 | | | 14,229 | | | 19,664 | companies | | 3,668 | | | 4,224 | | | 9,224 | | | 11,089 | Income before equity in net income of associated companies | | 11,087 | | | 15,525 | | | 29,610 | | | 43,711 | | | | Income before equity in net income of associated companies | | 18,125 | | | 11,868 | | | 31,228 | | | 18,523 | Equity in net income of associated companies | Equity in net income of associated companies | | 617 | | | 826 | | | 2,049 | | | 1,389 | Equity in net income of associated companies | | 1,245 | | | 473 | | | 929 | | | 1,432 | Net income | | 11,704 | | | 16,351 | | | 31,659 | | | 45,100 | | | | Net income | | 19,370 | | | 12,341 | | | 32,157 | | | 19,955 | Less: Net income attributable to noncontrolling interest | Less: Net income attributable to noncontrolling interest | | 562 | | | 343 | | | 1,619 | | | 1,131 | Less: Net income attributable to noncontrolling interest | | 124 | | | 435 | | | 179 | | | 1,057 | Net income attributable to Quaker Chemical Corporation | $ | 11,142 | | $ | 16,008 | | $ | 30,040 | | $ | 43,969 | | | | Net income attributable to Quaker Chemical Corporation | $ | 19,246 | | $ | 11,906 | | $ | 31,978 | | $ | 18,898 | Per share data: | Per share data: | | | | | | | | | | | | Per share data: | | | | | | | | | | | | | Net income attributable to Quaker Chemical Corporation | | | | | | | | | | | | Net income attributable to Quaker Chemical Corporation | | | | | | | | | | | | | | Common Shareholders – basic | $ | 0.84 | | $ | 1.21 | | $ | 2.26 | | $ | 3.32 | | Common Shareholders – basic | $ | 1.44 | | $ | 0.90 | | $ | 2.40 | | $ | 1.42 | | Net income attributable to Quaker Chemical Corporation | | | | | | | | | | | Net income attributable to Quaker Chemical Corporation | | | | | | | | | | | | | Common Shareholders – diluted | $ | 0.83 | | $ | 1.21 | | $ | 2.25 | | $ | 3.32 | | Common Shareholders – diluted | $ | 1.44 | | $ | 0.89 | | $ | 2.40 | | $ | 1.42 | | Dividends declared | $ | 0.355 | | $ | 0.345 | | $ | 1.055 | | $ | 1.010 | Dividends declared | $ | 0.370 | | $ | 0.355 | | $ | 0.725 | | $ | 0.700 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation Condensed Consolidated Statements of Comprehensive Income (Dollars in thousands) | | | Unaudited | | | | | Three Months Ended | | Nine Months Ended | | | Unaudited | | | | September 30, | | September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | Net income | Net income | $ | 11,704 | | $ | 16,351 | | $ | 31,659 | | $ | 45,100 | Net income | $ | 19,370 | | $ | 12,341 | | $ | 32,157 | | $ | 19,955 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | | | | | | | | | | | | Other comprehensive (loss) income, net of tax | | Other comprehensive (loss) income, net of tax | | | | | | | | | | | | | Currency translation adjustments | | 5,764 | | | (715) | | | 18,528 | | | (1,074) | Currency translation adjustments | | (17,111) | | | 7,316 | | | (10,252) | | | 12,764 | | Defined benefit retirement plans | | 62 | | | 460 | | | 2,171 | | | 1,641 | Defined benefit retirement plans | | 1,496 | | | 1,791 | | | 1,580 | | | 2,109 | | Unrealized gain on available-for-sale securities | | 286 | | | 195 | | | 453 | | | 808 | Unrealized (loss) gain on available-for-sale securities | | (169) | | | (33) | | | (655) | | | 167 | | | Other comprehensive income (loss) | | 6,112 | | | (60) | | | 21,152 | | | 1,375 | | Other comprehensive (loss) income | | (15,784) | | | 9,074 | | | (9,327) | | | 15,040 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income | Comprehensive income | | 17,816 | | | 16,291 | | | 52,811 | | | 46,475 | Comprehensive income | | 3,586 | | | 21,415 | | | 22,830 | | | 34,995 | Less: Comprehensive income attributable to noncontrolling | | | | | | | | | | | | | Less: Comprehensive loss (income) attributable to | | Less: Comprehensive loss (income) attributable to | | | | | | | | | | | | | interest | | (409) | | | (520) | | | (2,037) | | | (1,217) | noncontrolling interest | | 47 | | | (486) | | | (103) | | | (1,628) | Comprehensive income attributable to Quaker Chemical | Comprehensive income attributable to Quaker Chemical | | | | | | | | | | | | Comprehensive income attributable to Quaker Chemical | | | | | | | | | | | | | Corporation | $ | 17,407 | | $ | 15,771 | | $ | 50,774 | | $ | 45,258 | Corporation | $ | 3,633 | | $ | 20,929 | | $ | 22,727 | | $ | 33,367 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation Condensed Consolidated Balance Sheets (Dollars in thousands, except par value and share amounts) | | | Unaudited | | | Unaudited | | | | September 30, | | December 31, | | | June 30, | | December 31, | | | | 2017 | | 2016 | | | 2018 | | 2017 | ASSETS | ASSETS | | | | | | ASSETS | | | | | | Current assets | Current assets | | | | | | Current assets | | | | | | | Cash and cash equivalents | $ | 109,088 | | $ | 88,818 | Cash and cash equivalents | $ | 90,220 | | $ | 89,879 | | Accounts receivable, net | | 218,243 | | | 195,225 | Accounts receivable, net | | 213,548 | | | 208,358 | | Inventories | | | | | | Inventories | | | | | | | | Raw materials and supplies | | 44,300 | | | 37,772 | | Raw materials and supplies | | 48,247 | | | 44,439 | | | Work-in-process and finished goods | | 45,952 | | | 39,310 | | Work-in-process and finished goods | | 47,683 | | | 42,782 | | Prepaid expenses and other current assets | | 24,272 | | | 15,343 | Prepaid expenses and other current assets | | 22,225 | | | 21,128 | | | Total current assets | | 441,855 | | | 376,468 | | Total current assets | | 421,923 | | | 406,586 | Property, plant and equipment, at cost | Property, plant and equipment, at cost | | 253,548 | | | 236,006 | Property, plant and equipment, at cost | | 255,342 | | | 255,990 | | Less accumulated depreciation | | (167,270) | | | (150,272) | Less accumulated depreciation | | (171,975) | | | (169,286) | | | Net property, plant and equipment | | 86,278 | | | 85,734 | | Net property, plant and equipment | | 83,367 | | | 86,704 | Goodwill | Goodwill | | 85,816 | | | 80,804 | Goodwill | | 84,230 | | | 86,034 | Other intangible assets, net | Other intangible assets, net | | 73,514 | | | 73,071 | Other intangible assets, net | | 67,650 | | | 71,603 | Investments in associated companies | Investments in associated companies | | 25,191 | | | 22,817 | Investments in associated companies | | 21,778 | | | 25,690 | Non-current deferred tax assets | Non-current deferred tax assets | | 22,229 | | | 24,382 | Non-current deferred tax assets | | 12,602 | | | 15,661 | Other assets | Other assets | | 29,644 | | | 28,752 | Other assets | | 32,075 | | | 30,049 | | | Total assets | $ | 764,527 | | $ | 692,028 | | Total assets | $ | 723,625 | | $ | 722,327 | | | | | | | | | | | | | | | | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | | | LIABILITIES AND EQUITY | | | | | | Current liabilities | Current liabilities | | | | | | Current liabilities | | | | | | | Short-term borrowings and current portion of long-term debt | $ | 700 | | $ | 707 | Short-term borrowings and current portion of long-term debt | $ | 5,689 | | $ | 5,736 | | Accounts and other payables | | 95,584 | | | 82,164 | Accounts and other payables | | 96,815 | | | 97,732 | | Accrued compensation | | 20,470 | | | 19,356 | Accrued compensation | | 17,648 | | | 22,846 | | Accrued restructuring | | — | | 670 | Other current liabilities | | 31,556 | | | 29,384 | | Other current liabilities | | 39,367 | | | 24,514 | | Total current liabilities | | 151,708 | | | 155,698 | | | Total current liabilities | | 156,121 | | | 127,411 | | Long-term debt | Long-term debt | | 72,374 | | | 65,769 | Long-term debt | | 58,397 | | | 61,068 | Non-current deferred tax liabilities | Non-current deferred tax liabilities | | 12,618 | | | 12,008 | Non-current deferred tax liabilities | | 8,302 | | | 9,653 | Other non-current liabilities | Other non-current liabilities | | 71,355 | | | 74,234 | Other non-current liabilities | | 82,541 | | | 87,044 | | | Total liabilities | | 312,468 | | | 279,422 | | Total liabilities | | 300,948 | | | 313,463 | Commitments and contingencies (Note 16) | | | | | | | Commitments and contingencies (Note 18) | | Commitments and contingencies (Note 18) | | | | | | Equity | Equity | | | | | | Equity | | | | | | | Common stock, $1 par value; authorized 30,000,000 shares; issued and | | | | | | Common stock, $1 par value; authorized 30,000,000 shares; issued and | | | | | | | | outstanding 2017 – 13,299,294 shares; 2016 – 13,277,832 shares | | 13,299 | | 13,278 | | outstanding 2018 – 13,330,845 shares; 2017 – 13,307,976 shares | | 13,331 | | 13,308 | | Capital in excess of par value | | 113,129 | | | 112,475 | Capital in excess of par value | | 94,984 | | | 93,528 | | Retained earnings | | 380,421 | | | 364,414 | Retained earnings | | 387,498 | | | 365,182 | | Accumulated other comprehensive loss | | (66,673) | | | (87,407) | Accumulated other comprehensive loss | | (74,351) | | | (65,100) | | | Total Quaker shareholders’ equity | | 440,176 | | | 402,760 | | Total Quaker shareholders’ equity | | 421,462 | | | 406,918 | Noncontrolling interest | Noncontrolling interest | | 11,883 | | | 9,846 | Noncontrolling interest | | 1,215 | | | 1,946 | Total equity | Total equity | | 452,059 | | | 412,606 | Total equity | | 422,677 | | | 408,864 | | | Total liabilities and equity | $ | 764,527 | | $ | 692,028 | | Total liabilities and equity | $ | 723,625 | | $ | 722,327 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation Condensed Consolidated Statements of Cash Flows (Dollars in thousands) | | | Unaudited | | | | | Nine Months Ended | | | Unaudited | | | | September 30, | | | Six Months Ended June 30, | | | | 2017 | | 2016 | | | 2018 | | 2017 | Cash flows from operating activities | Cash flows from operating activities | | | | | | Cash flows from operating activities | | | | | | | Net income | $ | 31,659 | | $ | 45,100 | Net income | $ | 32,157 | | $ | 19,955 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | Depreciation | | 9,464 | | | 9,469 | | Depreciation | | 6,330 | | | 6,333 | | | Amortization | | 5,490 | | | 5,319 | | Amortization | | 3,698 | | | 3,604 | | | Equity in undistributed earnings of associated companies, net of dividends | | (1,919) | | | (1,314) | | Equity in undistributed earnings of associated companies, net of dividends | | 3,352 | | | (1,301) | | | Deferred compensation and other, net | | (1,190) | | | 3,083 | | Deferred compensation and other, net | | 177 | | | 268 | | | Stock-based compensation | | 3,269 | | | 4,942 | | Share-based compensation | | 1,975 | | | 2,245 | | | (Gain) loss on disposal of property, plant, equipment and other assets | | (50) | | | 44 | | Gain on disposal of property, plant, equipment and other assets | | (599) | | | (28) | | | Insurance settlement realized | | (542) | | | (809) | | Insurance settlement realized | | (481) | | | (446) | | | Combination-related expenses, net of payments | | 10,367 | | | 1,157 | | Combination-related expenses, net of payments | | (1,445) | | | 3,306 | | | Pension and other postretirement benefits | | 608 | | | (3,373) | | Pension and other postretirement benefits | | (2,341) | | | (439) | | (Decrease) increase in cash from changes in current assets and current | | | | | (Decrease) increase in cash from changes in current assets and current | | | | | | | liabilities, net of acquisitions: | | | | | | | liabilities, net of acquisitions: | | | | | | | | Accounts receivable | | (12,946) | | | (5,926) | | Accounts receivable | | (10,873) | | | 790 | | | Inventories | | (9,272) | | | (3,741) | | Inventories | | (11,301) | | | (7,881) | | | Prepaid expenses and other current assets | | (5,217) | | | (868) | | Prepaid expenses and other current assets | | (2,323) | | | (4,686) | | | Accounts payable and accrued liabilities | | 11,755 | | | 4,088 | | Accounts payable and accrued liabilities | | 1,407 | | | (213) | | | Restructuring liabilities | | (675) | | | (4,194) | | Restructuring liabilities | | — | | | (675) | | | | Net cash provided by operating activities | | 40,801 | | | 52,977 | | | Net cash provided by operating activities | | 19,733 | | | 20,832 | | | | | | | | | | | | | | | | Cash flows from investing activities | Cash flows from investing activities | | | | | | Cash flows from investing activities | | | | | | | | Investments in property, plant and equipment | | (8,032) | | | (6,311) | | Investments in property, plant and equipment | | (5,622) | | | (5,242) | | | Payments related to acquisitions, net of cash acquired | | (5,363) | | | (3,244) | | Payments related to acquisitions, net of cash acquired | | (500) | | | (5,363) | | | Proceeds from disposition of assets | | 67 | | | 54 | | Proceeds from disposition of assets | | 668 | | | 43 | | | Insurance settlement interest earned | | 35 | | | 24 | | Insurance settlement interest earned | | 47 | | | 21 | | | Change in restricted cash, net | | 507 | | | 785 | | | Net cash used in investing activities | | (5,407) | | | (10,541) | | | | Net cash used in investing activities | | (12,786) | | | (8,692) | | | | | | | | | | | | | | | | | Cash flows from financing activities | Cash flows from financing activities | | | | | | Cash flows from financing activities | | | | | | | | Proceeds from long-term debt | | 4,472 | | | — | | Proceeds from long-term debt | | — | | | 6,753 | | | Repayments of long-term debt | | (488) | | | (6,842) | | Repayments of long-term debt | | (287) | | | (373) | | | Dividends paid | | (13,893) | | | (13,052) | | Dividends paid | | (9,453) | | | (9,167) | | | Stock options exercised, other | | (2,594) | | | 64 | | Stock options exercised, other | | (496) | | | (941) | | | Payments for repurchase of common stock | | — | | | (5,859) | | Distributions to noncontrolling affiliate shareholders | | (834) | | | — | | | Excess tax benefit related to stock option exercises | | — | | | 167 | | | Net cash used in financing activities | | (11,070) | | | (3,728) | | | | Net cash used in financing activities | | (12,503) | | | (25,522) | | | | | | | | Effect of foreign exchange rate changes on cash | | 4,758 | | | (792) | | | | Net increase in cash and cash equivalents | | 20,270 | | | 17,971 | | | Effect of foreign exchange rate changes on cash | | (3,346) | | | 3,015 | | | Cash and cash equivalents at beginning of period | | 88,818 | | | 81,053 | | | | | | | | | | Cash and cash equivalents at end of period | $ | 109,088 | | $ | 99,024 | | Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | | (90) | | | 9,578 | Cash, cash equivalents and restricted cash at the beginning of the period | | Cash, cash equivalents and restricted cash at the beginning of the period | | 111,050 | | | 110,701 | Cash, cash equivalents and restricted cash at the end of the period | | Cash, cash equivalents and restricted cash at the end of the period | $ | 110,960 | | $ | 120,279 |
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 share and per share amounts, unless otherwise stated) (Unaudited) Note 1 – Condensed Financial Information 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 SEC regulations. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments, except certain material adjustments, as discussed below) 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 ninesix months ended SeptemberJune 30, 2017,2018, respectively, 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, 2016.2017. During the first quarter of 2017,2018, the Company earlyadopted guidance regarding the accounting for and disclosure of net sales and revenue recognition. The Company’s adoption, using the modified retrospective adoption approach, resulted in certain adjustments to its Condensed Consolidated Balance Sheet as of December 31, 2017. In addition, during the first quarter of 2018, the Company adopted an accountingaccounting standard update regardingrequiring that the classificationstatement of pension costs.cash flows explain both the change in total cash and cash equivalents and also the amounts generally described as restricted cash or restricted cash equivalents. The guidance in this accounting standard update was required to be applied retrospectively which resulted in a reclassificationcertain adjustments to the Company’s Condensed Consolidated Statement of IncomeCash Flows for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2017. See Note 3 of Notes to Condensed Consolidated Financial Statements. Venezuela’s economy has been considered hyper inflationaryhyper-inflationary under U.S. GAAP since 2010, at which time the Company’s Venezuela equity affiliate, Kelko Quaker Chemical, S.A. (“Kelko Venezuela”), changed its functional currency from the bolivar fuerte (“BsF”) to the U.S. dollar. Accordingly, all gains and losses resulting from the remeasurement of Kelko Venezuela’s monetary assets and liabilities to published exchange rates are required to be recorded directly to the Condensed Consolidated Statements of Income. During the first quarter of 2016, the Venezuela government announced changes to its foreign exchange controls, including eliminating the CADIVI, SICAD and SIMADIThe current Venezuelan exchange rate mechanisms and replacing them withsystem is a dual exchange rate system, which consists of a protected DIPRO exchange rate, with a rate fixed at 10 BsF per U.S. dollars and, also, a floating exchange rate known as the DICOM. The DIPRO rate is only available for payment of certain imports of essential goods in the food and health sectors while the DICOM governs all other transactions not covered by the DIPRO. In light of these changes to the foreign exchange controls, during the first quarter of 2016 the Company re-assessed Kelko Venezuela’s access to U.S. dollars, the impact on the operations of Kelko Venezuela, and the impact on the Company’s equity investment and other related assets. The Company diddoes not believe it hadhas access to the DIPRO and, therefore, believedbelieves the DICOM to be the exchange rate system available to Kelko Venezuela, which resulted in a currency conversion charge of $0.1 million in the first quarter of 2016.Venezuela. Due to ongoing economic and political instability in Venezuela, the DICOM BsF per U.SU.S. dollar exchange rate has continued to devaluesignificantly declined during both the first six months of 2018 and 2017. This ongoing devaluation of the DICOM BsF per U.S. dollar resulted in the Company recording a currency conversion charge of less than $0.1 million and $0.4$0.2 million in the three and ninesix months ended SeptemberJune 30, 2018, respectively, and $0.3 million in both the three and six months ended June 30, 2017, respectively, to write down the Company’sremeasure its equity investment in Kelko Venezuela to the current DICOM BsF per U.S. dollar exchange rate. These currency conversion charges were recorded through equity in net income of associated companies in the Company’s Condensed Consolidated StatementStatements of Income for each period, respectively. period. AAss of SeptemberJune 30, 20172018, the Company’s equity investment in Kelko Venezuela was less than $0.1 million, valued at the current DICOM exchange rate of approximately 3,34196,000 BsF per U.S. dollar. As part ofBased 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 is now considered hyper-inflationary under U.S. GAAP. This determination had no impact on the Company’s chemical management services, certain third-party product sales to customers are managed by the Company. Where the Company actsresults of operations as a principal, revenue is recognized on a gross reporting basis at the selling price negotiated with customers. Where the Company acts as an agent, such revenue is recorded using net reporting of service revenue, at the amount of the administrative fee earned by the Company for ordering the goods. Third-party products transferred under arrangements resulting in net reporting totaled $11.2 million and $33.0 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. Comparatively, third-party products transferred under arrangements resulting in net reporting totaled $10.7 million and $32.8 million2018, but the Company does anticipate making the necessary functional currency changes for its Argentina affiliate, Quaker Chemical S.A., during the three and nine months ended September 30, 2016, respectively.third quarter of 2018. Note 2 – Houghton Combination On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton International, Inc. (“Houghton”) (herein referred to as “the Combination”). The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company’s assumption of Houghton’s net indebtedness as of the closing of the Combination, which was approximately $690 million at signing. At closing, the total aggregate purchase consideration is dependent on the Company’s stock price and the level of Houghton’s indebtedness. The Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the Combination and to provide additional liquidity, and has since replaced these commitments with a syndicated bank agreement (“the New Credit Facility”) with a group of lenders for $1.15 billion. The New Credit Facility is contingent upon and will not be effective until the closing of the Combination. The Company anticipates extending the bank commitment for the New Credit Facility currently includesthrough December 15, 2018 during the third quarter of 2018. The New Credit Facility is comprised of a $400.0 million multicurrency revolver, a $575.0$600.0 million USD term loan and a $150.0 million EUR equivalent term loan, each with a five-year term from the date
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) million USD term loan and a $175.0 million EUR equivalent term loan, each with a five year term from the date the New Credit Facility becomes effective. The maximum amount available under the New Credit Facility can be increased by $200.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the New Credit Facility will generally bear interest at a base rate or LIBOR rate plus a margin. The Company currently estimates the annual floating rate cost will be in the 3.0%3.50% to 3.5%3.75% range based on current market interest rates. The New Credit Facility will be subject to certain financial and other covenants, including covenants that the Company’s consolidated net debt to adjusted EBITDA ratio cannot initially exceed 4.25 to 1 and the Company’s consolidated adjusted EBITDA to interest expense ratio cannot be lowerless than 3.0 to 1. Both the USD and EUR equivalent term loans will have quarterly principal amortization during their respective five yearfive-year terms, with 5% amortization of the principal balance due in years 1 and 2, 7.5% in year 3, and 10% in years 4 and 5, with the remaining principal amounts due at maturity. Until closing, the Company will only incur certain interest costs paid to maintain the banks’ committed capital (“bank commitment (“ticking fees”), which began to accrue on September 29, 2017. The ticking fees will2017 and bear an interest rate of 0.30% per annum.
The Company received regulatory approval for the Combination from China and Australia in 2017. In addition, the issuance of the Company’s shares at closing of the Combination was subject to approval by Quaker’s shareholders under the rules of the New York Stock Exchange, and approval was received at a shareholder meeting of the Company’s shareholdersheld during the third quarter of 2017. Also,2017, the Company’s shareholders approved the issuance of the new shares of the Company’s common stock at closing of the Combination. Currently, the closing of the Combination is subject tocontingent upon customary closing conditions and the remaining regulatory approvalapprovals in the United States Europe, China and Australia.Europe. The Company receivedcontinues to be in productive discussions with the European Commission and Federal Trade Commission regarding the Combination as well as potential buyers for the product lines to be divested and intends to present a remedy that meets the needs of both regulatory authorities in the third quarter of 2018. Based on the information available to date, the Company expects to receive approval from China in July 2017the regulatory authorities and from Australia in October 2017. Depending onclose the remaining regulatory approvals and other customary terms and conditions set forth in the share purchase agreement, the Company currently estimates closing of the Combination to occur either late in the fourth quarter of 2017 or the first quarter of 2018. The Company incurred total costs of $9.7$4.5 million and $23.1$10.6 million during the three and ninesix months ending Septemberended June 30, 2017, respectively,2018, and $1.2$4.3 million and $13.4 million during the three and ninesix months ending Septemberended June 30, 2016,2017, respectively, for certainrelated to the Combination. These costs included legal, environmental, financial, and other advisory and consultant costs related to due diligence, regulatory and shareholder approvals as well asand integration planning associated with the Combination.Combination, as well as ticking fees and a gain on the sale of an available-for-sale asset specifically during the three and six months ended June 30, 2018. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company had current liabilities related to the Combination of $11.4$4.0 million and $0.5$5.5 million, respectively, primarily recorded within other current liabilities on its Condensed Consolidated Balance Sheets. In addition, the Company has made certain reclassifications to prior year disclosures regarding combination-related items to conform with the current period presentation. Note 3 – Recently Issued Accounting Standards The Financial Accounting Standards Board ("FASB"(“FASB”) issued an accounting standard update in August 2017June 2018 to increase transparencysimplify the accounting for share-based payment transactions with non-employees of the economics related to risk management activitiesCompany. The guidance within the financial statements and enhance transparency and understandability of hedge results. Thisthis accounting standard update eliminatesgenerally requires that share-based payment transactions for acquiring goods or services from non-employees of the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument toCompany be presented inaccounted for under the same income statement lineguidance and model as all other share-based payment transactions, including employees of the hedged item.Company. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2018. All transition requirements and elections should be applied to hedging relationships existing on the date of adoption. For cash flow and net investment hedges existing at the date of adoption, the Company should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts. The amended presentation and disclosure guidance is required only prospectively. Early adoption is permitted including adoption in any interim period for which financial statements have not been issued or made available for issuance.permitted. The Company does not currently use any derivative instruments designated as hedges, but may chooseelected to early adopt the guidance within this accounting standard updated in the future. The Company has not early adopted the guidance and will evaluate the potentialsecond quarter of 2018 with no impact of this guidance on future transactions, as applicable.to its financial statements. The FASB issued an accounting standard update in May 2017February 2018 that allows a reclassification from accumulated other comprehensive income (“AOCI”) to clarify when changes toretained earnings for stranded tax effects resulting from the terms or conditions of a share-based payment award must be accounted for as modifications. This accounting standard update will reduce diversityTax Cuts and Jobs Act enacted in practice and result in fewer changes to the terms of an award being accounted for as modifications. This accounting standard update will allow companies to make certain changes to awards without accounting for them as modifications and an entity is not required to estimate the value of the award immediately before and after the change if the change doesn’t affect any of the inputs to the model used to value the award.December 2017. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. The guidance within this accounting standard update2018, and should be applied prospectivelyeither in the period of adoption or retrospectively to awards modified on or aftereach period in which the adoption date.effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Early adoption is permitted including adoption in any interim period for which financial statements havepermitted. The Company has not been issued or made available for issuance. During the second quarter of 2017, the Company elected to early adopt this guidance with no impact to its financial statements. The FASB issued an accounting standard update in March 2017 to improve the presentation of net periodic pension and postretirement benefit cost. Defined benefit pension and postretirement benefit costs (“net benefit cost”) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. This accounting standard update requires that an employer disaggregate the service cost component from the other components of net benefit cost, provides explicit guidance on how to present the service cost component and the other components of
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts, unless otherwise stated)
(Unaudited)
net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance within this accounting standard update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic benefit in assets. This accounting standard update is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. During the first quarter of 2017, the Company elected to early adoptadopted the guidance within this accounting standard update, including the use of a practical expedient which allows the Company to use amounts previously disclosed in its pension and other postretirement benefits note for the prior period as the estimation basis for applying the required retrospective presentation. Adoption of this guidance resulted in a reclassification to the Company’s Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, as previously reported cost of goods sold (“COGS”) were reduced by $0.1 and $0.4 million, respectively, and selling, general and administrative expenses (“SG&A”) were reduced by $0.4 million and $1.3 million, respectively, with a corresponding increase to other expense, net, of $0.5 million and $1.7 million, respectively. In addition, these required retrospective reclassifications resulted in an immaterial adjustment to previously reported direct operating earnings within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2016, respectively. See Note 4, Note 7 and Note 8 of Notes to Condensed Consolidated Financial Statements.
The FASB issued an accounting standard update in January 2017 simplifying the test for goodwill impairment by eliminating the Step 2 computation. The accounting standard update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The guidance removes the requirement to determine a goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The guidance within this accounting standard update should be applied on a prospective basis, and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. During the third quarter of 2017, in connection with the Company’s 2017 annual goodwill impairment test, the Company elected to early adopt this guidance with no impact tocurrently evaluating its financial statements.implementation.
The FASB issued an accounting standard update in January 2017 to clarify the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this accounting standard update provide a more robust framework to use in determining when a set of assets and activities is a business. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption iswas permitted in limited circumstances, and the amendments in this accounting standard update should be applied prospectively, with no disclosures required at transition. The Company does not currently meet the criteria for early application of the amendments and therefore has not early adopted the guidance. The Company will evaluateguidance in the potentialfirst quarter of 2018, as required, with no impact of this guidance on future transactions, as applicable. to its financial statements. The FASB issued an accounting standard update in November 2016 requiring that the statement of cash flows explain both the change in the total cash and cash equivalents, and also the amounts generally described as restricted cash or restricted cash equivalents. This will require amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption iswas permitted and the guidance requires application using a retrospective transition method to each period presented when adopted. While permitted, the The
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
Company has not early adopted the guidance and is currently evaluatingin the appropriate implementation strategy.first quarter of 2018, as required. Adoption of the guidance willdid not have an impact on the Company’s earnings or balance sheet but willdid result in changes to certain disclosures within the statement of cash flows, notablyincluding cash flows from investing activities.activities and total cash, cash equivalents and restricted cash. See Note 12 of Notes to Condensed Consolidated Financial Statements. The FASB issued an accounting standard update in October 2016 to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions in this update will allow an entity to recognize current and deferred income taxes of an intra-entity transfer of an asset other than inventory when the transfer occurs rather than when the asset has been sold to an outside party. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption was permitted and the guidance requires application on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the guidance in the first quarter of 2018, as required, with no impact to its financial statements. The FASB issued an accounting standard update in August 2016 to standardize how certain transactions are classified in the statement of cash flows. Specific transactions covered by the accounting standard update include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank owned life insurance policies, distributions received from equity method investments and beneficial interest in securitization transactions. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption iswas permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. While permitted, the Company has not early adopted the guidance and is currently evaluating the appropriate implementation strategy. Adoption of the guidance will not have an impact on the Company’s earnings or balance sheet but may result in certain reclassifications on the statement of cash flows, including reclassifications between cash flows from operating activities, investing activities and financing activities, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts, unless otherwise stated)
(Unaudited)
The FASB issued an accounting standard update in March 2016 involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, use of a forfeiture rate, and classification on the statement of cash flows. The guidance within this accounting standard update was effective for annual and interim periods beginning after December 15, 2016. When adopted, application of the guidance will vary based on each aspect of the update, including adoption under retrospective, modified retrospective or prospective approaches. Early adoption was permitted. During the first quarter of 2017, the Company adopted the guidance within the accounting standard update as required. The impact of adoption for the Company included the elimination of recording the tax effects of deductions in excess of compensation cost through equity as the guidance in this accounting standard update requires all tax effects related to share-based payments to now be recorded through the income statement. The tax effects of awards are required to be treated as discrete items in the interim reporting period in which the stock compensation-related tax benefits occur. In addition, when applying the treasury stock method for computing diluted earnings per share, there are no longer assumed proceeds from the stock compensation-related tax benefits and as a result, there are fewer shares considered to be repurchased in the calculation. This results in an assumption of more incremental shares being issued upon the exercise of share-based payment awards; therefore, equity awards will have a more dilutive effect on earnings per share. As required, the Company has applied these changes in the guidance prospectively, beginning in the first quarter of 2017. The result of these changes was a tax benefit of $0.6 million and $1.4 million recorded during the three and nine months ended September 30, 2017, respectively, and an immaterial number of dilutive shares added2018 as required, with no impact to the Company’s earnings per share calculation for the three and nine months ended September 30, 2017, respectively. In addition, all tax-related cash flows resulting from share-based payments are now required to be reported as operating activities in the statement of cash flows under this new guidance. Either prospective or retrospective transition of this provision was permitted, and the Company has elected to apply the cash flow classification guidance on a prospective basis, consistent with the prospective transition for the treatment of excess tax benefits in the income statement. Lastly, the accounting standard update permitted Companies to make an accounting policy election to account for forfeitures as they occur for service condition aspects of certain share-based awards, rather than estimating forfeitures each period. While permitted, the Company has decided not to elect this accounting policy change, and instead has elected to continue utilizing a forfeiture rate assumption. Based on historical experience, the Company has assumed a forfeiture rate of 13% on certain of its nonvested stock awards. See Note 6, Note 9 and Note 10 of Notes to Condensed Consolidated Financial Statements. financial statements. The FASB issued an accounting standard update in February 2016 regarding the accounting and disclosure for leases. Specifically, the update will require entities that lease assets to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet, in most instances. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2018, and should be applied on a modified retrospective basis for the reporting periods presented. Early adoption is permitted. Thepermitted, but the Company has not early adopted and is currently evaluatingadopted. As of June 30, 2018, the potential impact of this guidance and an appropriate implementation strategy. The Company has begun its impact assessment and implementation planning, including taking an inventory of its outstanding leases globally.globally, establishing a cross functional project team and evaluating software solutions that could potentially assist in facilitating the end-to-end leasing process, including adoption of this lease accounting guidance. While the Company’s evaluationimplementation of this guidance is in theits early stages, the Company currently expectsanticipates adoption of this guidance to have an impact on its balance sheet.sheet as it expects the majority of its operating leases will be recorded on its balance sheet by establishing right of use assets and associated lease liabilities. The FASB issued an accounting standard update in May 2014 regarding the accounting for and disclosure of revenue recognition. Specifically, the update outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which will be common to both U.S. GAAP and International Financial Reporting Standards. The guidance was effective for annual and interim periods beginning after December 15, 2016, and allowed for full retrospective adoption of prior period data or a modified retrospective adoption. Early adoption was not permitted. In August 2015, the FASB issued an accounting standard update to delay the effective date of the new revenue standard by one year, or, in other words, to be effective for annual and interim periods beginning after December 15, 2017. Entities arewere permitted to adopt the new revenue standard early but not before the original effective date. During 2016 and 2017, the FASB issued a series of accounting standard updates to clarify and expand on the implementation guidance, including principal versus agent considerations, identification of performance obligations, licensing, other technical corrections and adding certain practical expedients. The amendments in these 2016 and 2017 updates did not change the core principles of the guidance previously issued in May 2014. During 2016,As part of the Company’s impact assessment for the implementation of the new revenue recognition guidance, the Company reviewed its historical accounting policies and practices to identify potential differences with the requirements of the new revenue recognition standard as it related to the Company’s contracts and sales arrangements. As of September 30, 2017,In addition, the Company has substantially completed its impact assessment for the implementation of the new revenue recognition guidance. This impact assessment and work performed to date included global and cross functional interviews and questionnaires, sales agreement and other sales document reviews, as well as technical considerations for the Company’s future transactional accounting, financial reporting and disclosure requirements. The Company expectshas also begun a preliminary assessment of how the new revenue recognition guidance may impact Houghton, as it pertains to adoptthe pending Combination.
The Company adopted the guidance in the first quarter of 2018 as required, usingelecting to use a modified retrospective adoption approach applied to those contracts which willwere not be completed as of December 31, 2017.January 1, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. In addition, the Company will electelected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections including practical expedients aroundthose related to significant financing components, sales taxes and shipping and handling activities. Adoption of the revenue
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
recognition guidance did not have a material impact on the Company’s reported earnings or cash flows, however, adoption did increase the amount and level of disclosures concerning the Company’s net sales and did result in one adjustment to the Company’s balance sheet. As a result of the Company’s impact assessment and adoption using the modified retrospective adoption approach, the Company recorded an adjustment to its Condensed Consolidated Balance Sheet as of December 31, 2017 to adjust the Company’s estimate of variable consideration relating to customers’ expected rights to return product. This adjustment resulted in an increase to other current liabilities of $1.0 million, an increase to non-current deferred tax assets of $0.2 million and a decrease to retained earnings of $0.8 million. There were no other impacts recorded as a result of adopting the revenue recognition guidance. The impact of adoption of the new revenue recognition guidance was immaterial for the three and six months ended June 30, 2018 and the Company expects the impact to be immaterial on an ongoing basis. See Note 4 of Notes to Condensed Consolidated Financial Statements. Note 4 – 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 (“CMS”) for various heavy industrial and manufacturing applications in a global portfolio throughout its four regions: North America, Europe, Middle East and Africa (“EMEA”), Asia/Pacific and South America. The major product lines in the Company’s global portfolio include: (i) rolling lubricants (used by manufacturers of steel in the hot and cold rolling of steel and by manufacturers of aluminum in the hot rolling of aluminum); (ii) machining and grinding compounds (used by metalworking customers in cutting, shaping, and grinding metal parts which require special treatment to enable them to tolerate the manufacturing process, achieve closer tolerance, and improve tool life); (iii) corrosion preventives (used by steel and metalworking customers to protect metal during manufacture, storage, and shipment); (iv) hydraulic fluids (used by steel, metalworking, and other customers to operate hydraulic equipment); (v) specialty greases (used in automotive and aerospace production processes and applications, the manufacturing of steel, and various other applications); and (vi) metal finishing compounds (used to prepare metal surfaces for special treatments such as galvanizing and tin plating and to prepare metal for further processing). A substantial portion of the Company’s sales worldwide are made directly through its own employees and its CMS programs, with the balance being handled through distributors and agents. The Company’s employees visit the plants of customers regularly, work on site, and, through training and experience, identify production needs which can be resolved or alleviated either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The chemical specialty industry comprises many companies of similar size as well as companies larger and smaller than Quaker. The offerings of many of the Company’s competitors differ from those of Quaker; 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 CMS, 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 fulfilling the promise 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. Third-party products transferred under arrangements resulting in net reporting totaled $12.5 million and $24.1 million for the three and six months ended June 30, 2018, respectively, and $11.4 million and $21.8 million for the three and six months ended June 30, 2017, respectively. A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of steel, automobiles, aircraft, appliances, 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 financial performance of such industries. Furthermore, steel customers typically have limited manufacturing locations compared to other metalworking customers and generally use higher volumes of products at a single location. As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2017, during 2017 the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing authority) accounted for approximately 18% of consolidated net sales, with its largest customer accounting for approximately 8% of consolidated net sales.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) 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 which 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 promises 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. 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 service to the customer. The Company recognizes revenue over time whenever the customer simultaneously 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 a promised 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 CMS 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 CMS or other service work performed by the Company. Other Considerations The Company does not have standard payment terms for all customers globally, 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 income (expense), net, in its Condensed Consolidated Statement of Income, 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.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
Practical Expedients and Accounting Policy Elections The Company has begun preliminary considerationsmade 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 how the new revenue recognition guidance may impact Houghton,effects of a significant financing component as it pertainsthe Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the potential Combination. 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 anticipates usingrecognizes a contract asset or receivable on its Condensed Consolidated Balance Sheet when the remainderCompany performs a service or transfers a good in advance of receiving consideration. A receivable is the Company’s right to consideration that is unconditional and only the passage of time is required before payment of that consideration is due. A contract asset is the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. The Company had no contract assets recorded on its Condensed Consolidated Balance Sheets as of June 30, 2018 or December 31, 2017. 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 $1.6 million and $1.5 million of deferred revenue as of June 30, 2018 and December 31, 2017, respectively. During the three and six months ended June 30, 2018 the Company satisfied the associated performance obligations and recognized revenue of $1.3 million and $2.8 million, respectively, related to finalizeadvance customer payments previously received. Disaggregated Revenue The Company sells its impact assessmentvarious industrial process fluids, its chemical specialties and to further develop its considerationstechnical expertise as a global product portfolio. The Company generally manages and evaluates its performance by geography first, and then by customer industry, rather than by individual product lines. The Company has provided annual net sales information for its product lines greater than 10% in its previously filed Form 10-K for the potential Houghton Combination. Based on information reviewedyear ended December 31, 2017, and those annual percentages are generally consistent with the current year’s net sales by product line. Also, net sales of each of the Company’s major product lines are generally spread throughout all four of the Company’s regions, and in most cases, are relatively proportionate to date and the impact assessment conclusions reached so far, the Company does not expect the adoption of this revenue recognition guidance to have a material impact on its reported earnings, cash flows, or balance sheet; however, the Company does expect the adoption to increase the amount and level of disclosures concerningtotal sales in each region.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
The following disaggregates the Company’s net sales.sales by region, customer industry, and timing of revenue recognized for the three and six months ended June 30, 2018: | Three Months Ended June 30, 2018 | | North | | | | | | | | South | | Consolidated | | America | | EMEA | | Asia/Pacific | | America | | Total | Net sales | $ | 97,392 | | $ | 60,166 | | $ | 55,348 | | $ | 9,056 | | $ | 221,962 | | | | | | | | | | | | | | | | Customer Industries | | | | | | | | | | | | | | | Primary metals | $ | 35,453 | | $ | 26,187 | | $ | 35,040 | | $ | 5,035 | | $ | 101,715 | Metalworking | | 46,646 | | | 29,762 | | | 19,328 | | | 3,865 | | | 99,601 | Coatings and other | | 15,293 | | | 4,217 | | | 980 | | | 156 | | | 20,646 | | $ | 97,392 | | $ | 60,166 | | $ | 55,348 | | $ | 9,056 | | $ | 221,962 | | | | | | | | | | | | | | | | Timing of Revenue Recognized | | | | | | | | | | | | | | | Product sales at a point in time | $ | 94,562 | | $ | 60,110 | | $ | 53,017 | | $ | 8,987 | | $ | 216,676 | Services transferred over time | | 2,830 | | | 56 | | | 2,331 | | | 69 | | | 5,286 | | $ | 97,392 | | $ | 60,166 | | $ | 55,348 | | $ | 9,056 | | $ | 221,962 | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | | North | | | | | | | | South | | Consolidated | | America | | EMEA | | Asia/Pacific | | America | | Total | Net sales | $ | 189,212 | | $ | 122,221 | | $ | 104,125 | | $ | 18,459 | | $ | 434,017 | | | | | | | | | | | | | | | | Customer Industries | | | | | | | | | | | | | | | Primary metals | $ | 76,726 | | $ | 53,504 | | $ | 65,918 | | $ | 10,334 | | $ | 206,482 | Metalworking | | 83,520 | | | 60,923 | | | 36,901 | | | 7,648 | | | 188,992 | Coatings and other | | 28,966 | | | 7,794 | | | 1,306 | | | 477 | | | 38,543 | | $ | 189,212 | | $ | 122,221 | | $ | 104,125 | | $ | 18,459 | | $ | 434,017 | | | | | | | | | | | | | | | | Timing of Revenue Recognized | | | | | | | | | | | | | | | Product sales at a point in time | $ | 183,548 | | $ | 122,109 | | $ | 99,865 | | $ | 18,306 | | $ | 423,828 | Services transferred over time | | 5,664 | | | 112 | | | 4,260 | | | 153 | | | 10,189 | | $ | 189,212 | | $ | 122,221 | | $ | 104,125 | | $ | 18,459 | | $ | 434,017 |
Note 45 – Business Segments The Company’s reportable operating segments are organized by geography as follows: (i) North America, (ii) Europe, Middle East and Africa (“EMEA”),EMEA, (iii) Asia/Pacific and (iv) South America. Operating earnings, excluding indirect operating expenses, for the Company’s reportable operating segments is comprised of revenues less COGScost of goods sold (“COGS”) and selling, general and administrative expenses (“SG&A&A”) directly related to the respective region’s product sales. The indirect operating expenses consist of SG&A not directly attributable to the product sales of each respective reportable operating segment. Other items not specifically identified with the Company’s reportable operating segments include interest expense, interest income, license fees from non-consolidated affiliates, amortization expense and other income (expense), net. The following table presents information about the performance of the Company’s reportable operating segments for the three and nine months ended September 30, 2017 and 2016:
| | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2017 | | 2016 | | 2017 | | 2016 | Net sales | | | | | | | | | | | | | North America | $ | 90,450 | | $ | 86,126 | | $ | 268,122 | | $ | 251,586 | | EMEA | | 58,775 | | | 49,825 | | | 167,209 | | | 150,582 | | Asia/Pacific | | 54,200 | | | 45,892 | | | 147,074 | | | 130,555 | | South America | | 9,493 | | | 8,585 | | | 26,605 | | | 22,697 | Total net sales | $ | 212,918 | | $ | 190,428 | | $ | 609,010 | | $ | 555,420 | | | | | | | | | | | | | | Operating earnings, excluding indirect operating expenses | | | | | | | | | | | | | North America | $ | 18,888 | | $ | 20,397 | | $ | 59,146 | | $ | 59,334 | | EMEA | | 8,862 | | | 8,340 | | | 26,325 | | | 25,385 | | Asia/Pacific | | 13,963 | | | 11,737 | | | 36,018 | | | 33,865 | | South America | | 965 | | | 680 | | | 2,826 | | | 703 | Total operating earnings, excluding indirect operating expenses | | 42,678 | | | 41,154 | | | 124,315 | | | 119,287 | Combination-related expenses | | (9,675) | | | (1,157) | | | (23,088) | | | (1,157) | Nonoperating charges | | (17,108) | | | (16,404) | | | (50,067) | | | (48,409) | Amortization expense | | (1,886) | | | (1,730) | | | (5,490) | | | (5,319) | Consolidated operating income | | 14,009 | | | 21,863 | | | 45,670 | | | 64,402 | Other income (expense), net | | 249 | | | (10) | | | (1,427) | | | (245) | Interest expense | | (793) | | | (758) | | | (2,229) | | | (2,226) | Interest income | | 762 | | | 551 | | | 1,825 | | | 1,444 | Consolidated income before taxes and equity in net income of | | | | | | | | | | | | | associated companies | $ | 14,227 | | $ | 21,646 | | $ | 43,839 | | $ | 63,375 | | | | | | | | | | | | | |
Inter-segment revenues for the three and nine months ended September 30, 2017 were $2.8 million and $7.4 million for North America, $6.2 million and $16.0 million for EMEA, $0.2 million and $0.3 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods. Inter-segment revenues for the three and nine months ended September 30, 2016 were $2.5 million and $6.3 million for North America, $5.3 million and $13.2 million for EMEA, $0.1 million and $0.5 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods. However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) The following table presents information about the performance of the Company’s reportable operating segments for the three and six months ended June 30, 2018 and 2017: | | Three Months Ended | | Six Months Ended | | | June 30, | | June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | Net sales | | | | | | | | | | | | | North America | $ | 97,392 | | $ | 90,331 | | $ | 189,212 | | $ | 177,672 | | EMEA | | 60,166 | | | 54,507 | | | 122,221 | | | 108,434 | | Asia/Pacific | | 55,348 | | | 47,724 | | | 104,125 | | | 92,874 | | South America | | 9,056 | | | 8,621 | | | 18,459 | | | 17,112 | Total net sales | $ | 221,962 | | $ | 201,183 | | $ | 434,017 | | $ | 396,092 | | | | | | | | | | | | | | Operating earnings, excluding indirect operating expenses | | | | | | | | | | | | | North America | $ | 23,237 | | $ | 19,621 | | $ | 43,602 | | $ | 40,258 | | EMEA | | 9,096 | | | 8,217 | | | 19,389 | | | 17,463 | | Asia/Pacific | | 14,621 | | | 11,812 | | | 26,763 | | | 22,055 | | South America | | 1,114 | | | 1,064 | | | 1,749 | | | 1,861 | Total operating earnings, excluding indirect operating expenses | | 48,068 | | | 40,714 | | | 91,503 | | | 81,637 | Combination-related expenses | | (4,291) | | | (4,338) | | | (9,500) | | | (13,413) | Indirect operating expenses | | (19,369) | | | (16,642) | | | (35,511) | | | (32,959) | Amortization expense | | (1,845) | | | (1,831) | | | (3,698) | | | (3,604) | Consolidated operating income | | 22,563 | | | 17,903 | | | 42,794 | | | 31,661 | Other income (expense), net | | 261 | | | (1,571) | | | (108) | | | (1,676) | Interest expense | | (1,602) | | | (780) | | | (3,294) | | | (1,436) | Interest income | | 571 | | | 540 | | | 1,060 | | | 1,063 | Consolidated income before taxes and equity in net income of | | | | | | | | | | | | | associated companies | $ | 21,793 | | $ | 16,092 | | $ | 40,452 | | $ | 29,612 |
Inter-segment revenues for the three and six months ended June 30, 2018 were $1.8 million and $4.8 million for North America, $5.4 million and $11.0 million for EMEA, $0.1 million and $0.4 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods. Inter-segment revenues for the three and six months ended June 30, 2017 were $2.5 million and $4.6 million for North America, $5.0 million and $9.8 million for EMEA, less than $0.1 million and $0.1 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods. However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above. Note 56 – Restructuring and Related Activities DuringAs previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2017, in the fourth quarter of 2015 in response to weak economic conditions and market declines in many regions, Quaker’s management approved a global restructuring plan (the “2015 Program”) to reduce its operating costs. The 2015 Program included the re-organization of certain commercial functions, the consolidation of certain distribution, laboratory and administrative offices, and other related severance charges. The 2015 Program included provisions for the reduction of total headcount of approximately 65 employees globally. Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. The Company completed all of the remaining initiatives under the 2015 Program during the second quarterfirst half of 2017 and does not expect to incur further restructuring charges under this programprogram. .
Restructuring activity recognized by reportable operating segment in connection with the 2015 Program during the ninesix months ended SeptemberJune 30, 2017 is as follows: | | | North | | | | | | | | | | | America | | EMEA | | Total | | | Accrued restructuring as of December 31, 2016 | $ | 196 | | $ | 474 | | $ | 670 | | | | Restructuring charges and adjustments | | (126) | | | 126 | | | — | | | | Cash payments | | (70) | | | (605) | | | (675) | | | | Currency translation adjustments | | — | | | 5 | | | 5 | | | Accrued restructuring as of September 30, 2017 | $ | — | | $ | — | | $ | — | |
| | | North | | | | | | | | | | | America | | EMEA | | Total | | | Accrued restructuring as of December 31, 2016 | $ | 196 | | $ | 474 | | $ | 670 | | | | Restructuring charges and adjustments | | (126) | | | 126 | | | — | | | | Cash payments | | (70) | | | (605) | | | (675) | | | | Currency translation adjustments | | — | | | 5 | | | 5 | | | Accrued restructuring as of June 30, 2017 | $ | — | | $ | — | | $ | — | |
There were no accrued restructuring liabilities as of December 31, 2017 and no associated cash payments or other restructuring activity during the six months ended June 30, 2018.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
Note 67 – Stock-BasedShare-Based Compensation The Company recognized the following stock-basedshare-based compensation expense in SG&A in its Condensed Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017: | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | | | September 30, | | September 30, | | June 30, | | June 30, | | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | Stock options | Stock options | $ | 243 | | $ | 215 | | $ | 714 | | $ | 632 | Stock options | $ | 266 | | $ | 244 | | $ | 518 | | $ | 471 | Nonvested stock awards and restricted stock units | Nonvested stock awards and restricted stock units | | 717 | | 773 | | | 2,314 | | | 2,366 | Nonvested stock awards and restricted stock units | | 576 | | 795 | | | 1,351 | | | 1,597 | Employee stock purchase plan | Employee stock purchase plan | | 22 | | 21 | | | 66 | | | 64 | Employee stock purchase plan | | 22 | | 21 | | | 44 | | | 44 | Non-elective and elective 401(k) matching contribution in stock | Non-elective and elective 401(k) matching contribution in stock | | 8 | | 473 | | | 72 | | | 1,749 | Non-elective and elective 401(k) matching contribution in stock | | — | | — | | | — | | | 64 | Director stock ownership plan | Director stock ownership plan | | 34 | | | 37 | | | 103 | | | 131 | Director stock ownership plan | | 28 | | | 32 | | | 62 | | | 69 | Total stock-based compensation expense | $ | 1,024 | | $ | 1,519 | | $ | 3,269 | | $ | 4,942 | | Total share-based compensation expense | | Total share-based compensation expense | $ | 892 | | $ | 1,092 | | $ | 1,975 | | $ | 2,245 |
During the first quarter of 2017, the Company began matching non-elective and elective 401(k) contributions in cash rather than stock. Also, the Company’s estimated taxes payable as of September 30, 2016 was sufficient to fully recognize $0.2 million of excess tax benefits related to stock option exercises as cash inflows from financing activities in its Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016. During the first quarter of 2017,2018, the Company granted stock options under its long-term incentive plan (“LTIP”) that are subject only to time vesting over a three-year period. For the purposes of determining the fair value of stock option awards, the Company used the Black-Scholes option pricing model and the assumptions set forth in the table below:
| Number of options granted | 42,47735,842
| | | | Dividend yield | 1.491.37
| % | | | Expected volatility | 25.5224.73
| % | | | Risk-free interest rate | 1.672.54
| % | | | Expected term (years) | 4.0 | | |
The fair value of these options is amortized on a straight-line basis over the vesting period. As of SeptemberJune 30, 2017,2018, unrecognized compensation expense related to options granted was $1.5$1.8 million, to be recognized over a weighted average remaining period of 1.92.1 years. There were no stock options granted in the second or third quartersquarter of 2017, respectively.2018. During the first ninesix months of 2017,2018, the Company granted 17,31515,544 nonvested restricted shares and 1,3321,480 nonvested restricted stock units under its LTIP plan that are subject only to time vesting, generally over a three-year period. The fair value of these awards 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 SeptemberJune 30, 2017,2018, unrecognized compensation expense
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts, unless otherwise stated)
(Unaudited)
related to the nonvested restricted shares was $2.7$3.1 million, to be recognized over a weighted average remaining period of 1.71.9 years, and unrecognized compensation expense related to nonvested restricted stock units was $0.2$0.3 million, to be recognized over a weighted average remaining period of 2.02.2 years. Note 78 – Pension and Other Postretirement Benefits The components of net periodic benefit cost for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 are as follows: | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | | Other | | | | | | | Other | | | | | | | Other | | | | | | | Other | | | | | | | | Postretirement | | | | | | Postretirement | | | | | | | Postretirement | | | | | | Postretirement | | | Pension Benefits | | Benefits | | Pension Benefits | | Benefits | | Pension Benefits | | Benefits | | Pension Benefits | | Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | Service cost | Service cost | $ | 921 | | $ | 672 | | $ | 2 | | $ | — | | $ | 2,710 | | $ | 2,025 | | $ | 6 | | $ | 8 | Service cost | $ | 960 | | $ | 871 | | $ | 3 | | $ | 1 | | $ | 1,948 | | $ | 1,789 | | $ | 5 | | $ | 4 | Interest cost | Interest cost | | 994 | | 1,111 | | 36 | | 28 | | 3,005 | | 3,344 | | 108 | | 106 | Interest cost | | 1,032 | | 1,003 | | 33 | | 39 | | 2,081 | | 2,011 | | 66 | | 72 | Expected return on plan assets | Expected return on plan assets | | (1,276) | | (1,329) | | — | | — | | (3,857) | | (4,027) | | — | | — | Expected return on plan assets | | (1,274) | | (1,255) | | — | | — | | (2,564) | | (2,581) | | — | | — | Settlement charge | Settlement charge | | — | | — | | — | | — | | 1,860 | | — | | — | | — | Settlement charge | | — | | 1,860 | | — | | — | | — | | 1,860 | | — | | — | Actuarial loss (gain) amortization | | 798 | | 769 | | 13 | | (30) | | 2,459 | | 2,389 | | 40 | | — | | Actuarial loss amortization | | Actuarial loss amortization | | 793 | | 792 | | 14 | | 22 | | 1,593 | | 1,661 | | 29 | | 27 | Prior service cost amortization | Prior service cost amortization | | (28) | | | (25) | | | — | | | — | | | (76) | | | (76) | | | — | | | — | Prior service cost amortization | | (29) | | | (25) | | | — | | | — | | | (60) | | | (48) | | | — | | | — | Net periodic benefit cost | Net periodic benefit cost | $ | 1,409 | | $ | 1,198 | | $ | 51 | | $ | (2) | | $ | 6,101 | | $ | 3,655 | | $ | 154 | | $ | 114 | Net periodic benefit cost | $ | 1,482 | | $ | 3,246 | | $ | 50 | | $ | 62 | | $ | 2,998 | | $ | 4,692 | | $ | 100 | | $ | 103 |
During the second quarter of 2017, the Company’s U.S. pension plan offered a cash settlement to its vested terminated participants, which allowed them to receive the value of their pension benefits as a single lump sum payment. As payments from the U.S. pension plan for this cash out offering exceeded the service and interest cost components of the U.S. pension plan expense for 2017, the Company recorded a settlement charge of approximately $1.9 million. This settlement charge represented the immediate recognition into expense of a portion of the unrecognized loss within accumulated other comprehensive loss (“AOCI”) on the balance sheet in proportion to the share of the projected benefit obligation that was settled by these payments. The gross pension benefit obligation was reduced by approximately $4.0 million as a result of these payments. The settlement charge was recognized through other expense, net, on the Company’s Condensed Consolidated Statement of Income.
Employer Contributions
The Company previously disclosed in its financial statements for the year ended December 31, 2016, that it expected to make minimum cash contributions of $7.8 million to its pension plans and $0.5 million to its other postretirement benefit plans in 2017. As of September 30, 2017, $5.1 million and $0.3 million of contributions have been made to the Company’s pension plans and its postretirement benefit plans, respectively.
Note 8 – Other Income (Expense), Net
The components of other income (expense), net, for the three and nine months ended September 30, 2017 and 2016 are as follows:
| | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2017 | | 2016 | | 2017 | | 2016 | Income from third party license fees | $ | 141 | | $ | 264 | | $ | 612 | | $ | 713 | Foreign exchange gains, net | | 545 | | | 149 | | | 580 | | | 463 | Gain on fixed asset disposals, net | | 22 | | | 3 | | | 50 | | | 7 | Non-income tax refunds and other related credits | | 130 | | | 72 | | | 748 | | | 133 | Pension and postretirement benefit costs, non-service components | | (537) | | | (524) | | | (3,539) | | | (1,736) | Other non-operating income | | 47 | | | 54 | | | 288 | | | 265 | Other non-operating expense | | (99) | | | (28) | | | (166) | | | (90) | Other income (expense), net | $ | 249 | | $ | (10) | | $ | (1,427) | | $ | (245) |
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) During the second quarter of 2017, the Company’s U.S. pension plan offered a cash settlement to its vested terminated participants which allowed them to receive the value of their pension benefits as a single lump sum payment. As payments from the U.S. pension plan for this cash-out offering exceeded the service and interest cost components of the U.S. pension plan expense for 2017, the Company recorded a settlement charge of approximately $1.9 million. This settlement charge represents the immediate recognition into expense of a portion of the unrecognized loss within AOCI on the balance sheet in proportion to the share of the projected benefit obligation that was settled by these payments. The gross pension benefit obligation was reduced by approximately $4.0 million as a result of these payments. The settlement charge was recognized through other expense, net, on the Company’s Condensed Consolidated Statement of Income for the three and six months ended June 30, 2017. Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2017, that it expected to make minimum cash contributions of $9.9 million to its pension plans and $0.4 million to its other postretirement benefit plans in 2018. As of June 30, 2018, $4.9 million and $0.2 million of contributions have been made to the Company’s pension plans and its postretirement benefit plans, respectively. Note 9 – Other Income (Expense), Net The components of other income (expense), net, for the three and six months ended June 30, 2018 and 2017 are as follows: | | Three Months Ended | | Six Months Ended | | | June 30, | | June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | Income from third party license fees | $ | 189 | | $ | 202 | | $ | 439 | | $ | 471 | Foreign exchange (losses) gains, net | | (493) | | | 249 | | | (722) | | | 35 | Gain on fixed asset disposals, net | | 547 | | | 13 | | | 599 | | | 28 | Non-income tax refunds and other related credits | | 505 | | | 324 | | | 541 | | | 618 | Pension and postretirement benefit costs, non-service components | | (569) | | | (2,436) | | | (1,145) | | | (3,002) | Other non-operating income | | 102 | | | 110 | | | 259 | | | 241 | Other non-operating expense | | (20) | | | (33) | | | (79) | | | (67) | Total other income (expense), net | $ | 261 | | $ | (1,571) | | $ | (108) | | $ | (1,676) |
Gain on fixed asset disposals, net, during the three and six months ended June 30, 2018 includes a $0.6 million gain on the sale of an available-for-sale asset. Note 10 – Income Taxes and Uncertain Income Tax Positions The Company’s effective tax rate for the three and six months ended SeptemberJune 30, 2017 was 22.1%2018 were 16.8% and 22.8%, respectively, compared to 28.3% for the three months ended September 30, 2016. The Company’s effective tax rate for the nine months ended September 30, 2017 was 32.5% compared to 31.0% for the nine months ended September 30, 2016. The Company’s effective tax rates26.2% and 37.4%, respectively, for the three and ninesix months ended September 30, 2017, respectively, include the impact of certain non-deductible Houghton combination-related expenses, as well as tax benefits for deductions in excess of compensation cost associated with stock option exercises and restricted stock vesting. There were no comparable non-deductible combination-related expenses or stock compensation-related tax benefits recorded through tax expense during the three or nine months ended September 30, 2016. The Company’s effective tax rates for the three and nine months ended September 30, 2016, respectively, reflect earnings taxed at one of the Company’s subsidiaries at a statutory rate of 25% while awaiting recertification of a concessionary 15% tax rate, which the Company received and recorded the full year benefit of during the fourth quarter of 2016. This concessionary tax rate was available to the Company during the three and nine months ended SeptemberJune 30, 2017. The Company’s effective tax rates for botheach of the periods presented include the impact of certain non-deductible costs related to the pending Houghton Combination. The Company’s effective tax rate for the three and ninesix months ended SeptemberJune 30, 2018 includes a $1.2 million tax adjustment to decrease the Company’s initial fourth quarter of 2017 estimate of the one-time deemed repatriation of undistributed earnings (“Transition Tax”) as part of the Tax Cuts and September 30, 2016 includeJobs Act (“U.S. Tax Reform”), described below. In addition to these items, the tax benefit of changes in uncertain tax positions, which were more favorable to theCompany’s current year effective tax rate benefited from the decrease in the U.S. statutory tax rate from 35% in the prior year periodsto 21% in the current year as compareda result of U.S. Tax Reform. During the three and six months ended June 30, 2018, the Company recorded a $1.2 million tax adjustment to decrease its initial estimate of the Transition Tax on previously untaxed accumulated and current earnings and profits of certain of the Company’s foreign subsidiaries. The adjustment was specifically related to the current year. Company’s initial estimate of the U.S. state tax impact of the Transition Tax based on guidance recently issued during the second quarter of 2018 by various state taxing authorities. The Company has not to date made any other significant changes to its initial assessments made during the fourth quarter of 2017. As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform on December 22, 2017. U.S. Tax Reform includes multiple changes to the U.S. tax code with varying effects on the Company’s results for the six months ended June 30, 2018. The SEC staff issued guidance on accounting for the tax effects of U.S. Tax Reform and provided a one-year measurement period for companies to complete the accounting. Companies are required to reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
are incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. The Company has made reasonable interpretations and assumptions with regard to various uncertainties and ambiguities in the application of certain provisions of U.S. Tax Reform. The Company is continuing to evaluate all of the provisions of U.S. Tax Reform and expects to finalize its assessment during the one-year measurement period provided by the SEC to complete the accounting for U.S. Tax Reform. It is possible that the Internal Revenue Service or the U.S. Department of the Treasury could issue subsequent guidance or take positions on audit that differ from the Company’s interpretations and assumptions. As of SeptemberJune 30, 2018, the Company’s cumulative liability for gross unrecognized tax benefits was $7.2 million. As of December 31, 2017, the Company’s cumulative liability for gross unrecognized tax benefits was $7.0$6.8 million. As of December 31, 2016, the Company’s cumulative liability for gross unrecognized tax benefits was $6.2 million. The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on income before equity in net income of associated companies in its Condensed Consolidated Statements of Income. The Company recognized a creditan expense for interest of less than $0.1 million and $0.1 million and an expense for penalties of $0.1 million and $0.2 million for the three and six months ended June 30, 2018. Comparatively, the Company recognized an expense of $0.1 million and a credit of $0.1 million for interest, and an expense of $0.1 million and $0.2$0.1 million for penalties in its Condensed Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 2017, respectively. The Company recognized a credit of $0.7 million and $0.6 million for interest and a credit of $0.1 million and expense of $0.2 million for penalties in its Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively. As of SeptemberJune 30, 2017,2018, the Company had accrued $0.7 million for cumulative interest and $2.0$1.2 million for cumulative penalties in its Condensed Consolidated Balance Sheets, compared to $0.7$0.6 million for cumulative interest and $1.6$1.0 million for cumulative penalties accrued at December 31, 2016.2017. During the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized a decrease of $0.8$0.3 million and $1.5$0.4 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. During the nine months ended September 30, 2016, the Company recognized a decrease of $3.6 million in its cumulative liability for gross unrecognized tax benefits due to settlements with tax authorities. There were no similar settlements during the nine months ended September 30, 2017. The Company estimates that during the year ending December 31, 2017,2018 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1.2$1.0 to $1.3$1.1 million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2017.2018. 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 2000,2000; Italy from 2007,2007; the Netherlands and the United Kingdom from 2011,2012; Spain, China and Mexico from 2012, Spain2013; India from its fiscal year beginning April 1, 2013 and ending March 31, 2014; the United States from 2014, and various domestic state tax jurisdictions from 2007. 2008. As previously reported, thethe Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013. During the second quarter of 2018, the Italian tax authorities assessed additional tax due from Quaker Italia, S.r.l., relating to the tax years 2014 and 2015. The Company has filed a request for settlement for these additional assessments. If settlement discussions are not successful, the Company will file for competent authority relief from these assessments under the Mutual Agreement Procedures of the Organization for Economic Co-Operation and Development, consistent with the Company’s previous filings for all years except 2007.2008 through 2013. As of SeptemberJune 30, 2017,2018, the Company believes it has adequate reserves where merited, for uncertain tax positions with respect to these and all of theseother audits.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) Note 1011 – Earnings Per Share The following table summarizes earnings per share calculations for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017: | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | | | September 30, | | September 30, | | June 30, | | June 30, | | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | Basic earnings per common share | Basic earnings per common share | | | | | | | | | | | | Basic earnings per common share | | | | | | | | | | | | | Net income attributable to Quaker Chemical Corporation | $ | 11,142 | | $ | 16,008 | | $ | 30,040 | | $ | 43,969 | Net income attributable to Quaker Chemical Corporation | $ | 19,246 | | $ | 11,906 | | $ | 31,978 | | $ | 18,898 | | Less: income allocated to participating securities | | (76) | | | (130) | | | (222) | | | (373) | Less: income allocated to participating securities | | (83) | | | (82) | | | (147) | | | (145) | | Net income available to common shareholders | $ | 11,066 | | $ | 15,878 | | $ | 29,818 | | $ | 43,596 | Net income available to common shareholders | $ | 19,163 | | $ | 11,824 | | $ | 31,831 | | $ | 18,753 | | Basic weighted average common shares outstanding | | 13,217,165 | | | 13,143,884 | | | 13,196,255 | | | 13,128,996 | Basic weighted average common shares outstanding | | 13,267,504 | | | 13,195,053 | | | 13,256,327 | | | 13,185,627 | Basic earnings per common share | Basic earnings per common share | $ | 0.84 | | $ | 1.21 | | $ | 2.26 | | $ | 3.32 | Basic earnings per common share | $ | 1.44 | | $ | 0.90 | | $ | 2.40 | | $ | 1.42 | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per common share | Diluted earnings per common share | | | | | | | | | | | | Diluted earnings per common share | | | | | | | | | | | | | Net income attributable to Quaker Chemical Corporation | $ | 11,142 | | $ | 16,008 | | $ | 30,040 | | $ | 43,969 | Net income attributable to Quaker Chemical Corporation | $ | 19,246 | | $ | 11,906 | | $ | 31,978 | | $ | 18,898 | | Less: income allocated to participating securities | | (76) | | | (130) | | | (222) | | | (373) | Less: income allocated to participating securities | | (83) | | | (82) | | | (147) | | | (145) | | Net income available to common shareholders | $ | 11,066 | | $ | 15,878 | | $ | 29,818 | | $ | 43,596 | Net income available to common shareholders | $ | 19,163 | | $ | 11,824 | | $ | 31,831 | | $ | 18,753 | | Basic weighted average common shares outstanding | | 13,217,165 | | 13,143,884 | | | 13,196,255 | | | 13,128,996 | Basic weighted average common shares outstanding | | 13,267,504 | | 13,195,053 | | | 13,256,327 | | | 13,185,627 | | Effect of dilutive securities | | 34,528 | | | 29,960 | | | 41,818 | | | 18,829 | Effect of dilutive securities | | 29,884 | | | 45,226 | | | 31,619 | | | 45,310 | | Diluted weighted average common shares outstanding | | 13,251,693 | | | 13,173,844 | | | 13,238,073 | | | 13,147,825 | Diluted weighted average common shares outstanding | | 13,297,388 | | | 13,240,279 | | | 13,287,946 | | | 13,230,937 | Diluted earnings per common share | Diluted earnings per common share | $ | 0.83 | | $ | 1.21 | | $ | 2.25 | | $ | 3.32 | Diluted earnings per common share | $ | 1.44 | | $ | 0.89 | | $ | 2.40 | | $ | 1.42 |
Certain stock options and restricted stock units are not included in the diluted earnings per share calculation since the effect would have been anti-dilutive. The calculated amount of anti-diluted shares not included were 4,3006,189 and 4,8194,546 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and 05,278 and 3,4654,894 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. Note 12 – Restricted Cash The Company has restricted cash recorded in other assets related to proceeds from an inactive subsidiary of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an original total value of $35.0 million. The proceeds of both settlements are restricted and can only be used to pay claims and costs of defense associated with the subsidiary’s asbestos litigation. Due to the restricted nature of the proceeds, a corresponding deferred credit was established in other non-current liabilities for an equal and offsetting amount, 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 June 30, 2018 and 2017 and December 31, 2017 and 2016: | | June 30, | | December 31, | | | | 2018 | | 2017 | | 2017 | | 2016 | | | Cash and cash equivalents | $ | 90,220 | | $ | 98,821 | | $ | 89,879 | | $ | 88,818 | | | Restricted cash included in other assets | | 20,740 | | | 21,458 | | | 21,171 | | | 21,883 | | | Cash, cash equivalents and restricted cash | $ | 110,960 | | $ | 120,279 | | $ | 111,050 | | $ | 110,701 | |
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
Note 1113 – Goodwill and Other Intangible Assets The Company has historically completedcompletes its annual goodwill impairment test as ofduring the end of the thirdfourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test for one or more of its reporting units is necessary. The Company completed its annual impairment assessment as of the end of the third quarter of 2017 and no impairment charge was warranted. In addition, the Company has recorded no impairment charges in its past. Changes in the carrying amount of goodwill for the ninesix months ended SeptemberJune 30, 20172018 were as follows: | | North | | | | | | | | South | | | | | | America | | EMEA | | Asia/Pacific | | America | | Total | Balance as of December 31, 2016 | $ | 45,490 | | $ | 18,189 | | $ | 14,566 | | $ | 2,559 | | $ | 80,804 | | Goodwill additions | | 1,832 | | | — | | | — | | | — | | | 1,832 | | Currency translation adjustments | | 373 | | | 2,111 | | | 633 | | | 63 | | | 3,180 | Balance as of September 30, 2017 | $ | 47,695 | | $ | 20,300 | | $ | 15,199 | | $ | 2,622 | | $ | 85,816 |
| | North | | | | | | | | South | | | | | | America | | EMEA | | Asia/Pacific | | America | | Total | Balance as of December 31, 2017 | $ | 47,571 | | $ | 20,504 | | $ | 15,456 | | $ | 2,503 | | $ | 86,034 | | Currency translation adjustments | | (166) | | | (837) | | | (418) | | | (383) | | | (1,804) | Balance as of June 30, 2018 | $ | 47,405 | | $ | 19,667 | | $ | 15,038 | | $ | 2,120 | | $ | 84,230 |
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of SeptemberJune 30, 20172018 and December 31, 20162017 were as follows: | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | | Amount | | Amortization | | Amount | | Amortization | | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | Customer lists and rights to sell | Customer lists and rights to sell | $ | 76,671 | | $ | 71,454 | | $ | 24,176 | | $ | 20,043 | Customer lists and rights to sell | $ | 75,351 | | $ | 76,581 | | $ | 27,414 | | $ | 25,394 | Trademarks, formulations and product technology | Trademarks, formulations and product technology | | 33,022 | | | 31,436 | | | 13,782 | | | 11,748 | Trademarks, formulations and product technology | | 33,538 | | | 33,025 | | | 15,359 | | | 14,309 | Other | Other | | 6,142 | | | 6,023 | | | 5,463 | | | 5,151 | Other | | 5,990 | | | 6,114 | | | 5,556 | | | 5,514 | Total definite-lived intangible assets | Total definite-lived intangible assets | $ | 115,835 | | $ | 108,913 | | $ | 43,421 | | $ | 36,942 | Total definite-lived intangible assets | $ | 114,879 | | $ | 115,720 | | $ | 48,329 | | $ | 45,217 |
The Company recorded $1.8 million and $3.7 million of amortization expense for the three and six months ended June 30, 2018, respectively. Comparatively, the Company recorded $1.8 million and $3.6 million of amortization expense for the three and six months ended June 30, 2017, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows: | For the year ended December 31, 2018 | $ | 7,416 | | | For the year ended December 31, 2019 | | 7,212 | | | For the year ended December 31, 2020 | | 6,928 | | | For the year ended December 31, 2021 | | 6,564 | | | For the year ended December 31, 2022 | | 6,406 | | | For the year ended December 31, 2023 | | 6,184 | |
The Company has two indefinite-lived intangible assets totaling $1.1 million for trademarks as of June 30, 2018 and December 31, 2017. Note 14 – Debt The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders. The Credit Facility was amended and restated to extend the maturity date from June 2019 to October 2019 in the second quarter of 2018, and the Company anticipates further extending the Credit Facility maturity date through December 15, 2019 during the third quarter of 2018. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin. The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 3.50 to 1.As of June 30, 2018, and December 31, 2017, the Company’s net debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. As of June 30, 2018, and December 31, 2017, the Company had total credit facility borrowings of $46.2 million and $48.5 million, primarily under the Credit Facility. The Company’s other debt obligations were primarily industrial development bonds and municipality-related loans as of June 30, 2018 and December 31, 2017, which includes a $5.0 million industrial development bond that matures in December 2018. This bond is included within the caption Short-term borrowings and current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017. The Company expects to repay the amount due for this bond at its maturity.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) Note 15 – Equity The Company recorded $1.9 million and $5.5 millionfollowing tables present the changes in equity, net of amortization expensetax, for the three and ninesix months ended SeptemberJune 30, 2017, respectively. Comparatively, the Company recorded $1.7 million2018 and $5.3 million of amortization expense for the three and nine months ended September 30, 2016, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows: | For the year ended December 31, 2017 | $ | 7,342 | | | For the year ended December 31, 2018 | | 7,346 | | | For the year ended December 31, 2019 | | 7,243 | | | For the year ended December 31, 2020 | | 6,957 | | | For the year ended December 31, 2021 | | 6,578 | | | For the year ended December 31, 2022 | | 6,450 | |
The Company has two indefinite-lived intangible assets totaling $1.1 million for trademarks at September 30, 2017 and December 31, 2016.
Note 12 – Debt
The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders which matures in June 2019. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin. The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 3.50 to 1. As of September 30, 2017 and December 31, 2016, the Company’s consolidated net debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. As of September 30, 2017 and December 31, 2016, the Company had total credit facility borrowings of $54.7 million and $47.9 million, respectively, primarily under the Credit Facility. The Company’s other outstanding debt obligations as of September 30, 2017 and December 31, 2016 were primarily industrial development bonds and municipality-related loans. At September 30, 2017 and December 31, 2016, the amounts at which the Company’s debt is recorded are not materiality different from their fair market value.
Note 13 – Equity
In May 2015, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to $100.0 million of Quaker Chemical Corporation common stock (the “2015 Share Repurchase Program”). The 2015 Share Repurchase Program has no expiration date. The 2015 Share Repurchase Program provides a framework of conditions under which management can repurchase shares of the Company’s common stock. These purchases may be made in the open market or in private and negotiated transactions and will be in accordance with applicable laws, rules and regulations. In connection with the 2015 Share Repurchase Program, the Company acquired 83,879 shares of common stock for $5.9 million during the nine months ended September 30, 2016. There were no share repurchases under the 2015 Share Repurchase Program during the nine months ended September 30, 2017. The Company has elected not to hold treasury shares, and has retired the shares as they are repurchased. It is the Company’s accounting policy to record the excess paid over par value as a reduction in retained earnings for all shares repurchased.
Prior to September 7, 2017, the Company’s Articles of Incorporation included a time-based voting system that granted special ten-for-one-voting rights to shareholders who had beneficially owned their Quaker Chemical Corporation common stock continuously for a period of at least 36 consecutive calendar months (dating from the first day of the first full calendar month on or after the date the holder acquired beneficial ownership of such common stock) before the record date for a shareholder vote. At a meeting of the Company’s shareholders on September 7, 2017, the Company’s shareholders approved an amendment of the Company’s Articles of Incorporation that provides that every holder of Quaker Chemical Corporation common stock will be entitled to one vote for each share of common stock of the Company going forward.2017:
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Capital in | | | | | Other | | | | | | | | | | Common | | Excess of | | Retained | | Comprehensive | | Noncontrolling | | | | | | | Stock | | Par Value | | Earnings | | Loss | | Interest | | Total | Balance at March 31, 2018 | $ | 13,323 | | $ | 93,731 | | $ | 373,185 | | $ | (58,738) | | $ | 1,262 | | $ | 422,763 | | Net income | | — | | | — | | | 19,246 | | | — | | | 124 | | | 19,370 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | loss | | — | | | — | | | — | | | (15,613) | | | (171) | | | (15,784) | | Dividends ($0.37 per share) | | — | | | — | | | (4,933) | | | — | | | — | | | (4,933) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 8 | | | 1,253 | | | — | | | — | | | — | | | 1,261 | Balance at June 30, 2018 | $ | 13,331 | | $ | 94,984 | | $ | 387,498 | | $ | (74,351) | | $ | 1,215 | | $ | 422,677 | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2017 | $ | 13,291 | | $ | 112,838 | | $ | 366,819 | | $ | (81,961) | | $ | 10,988 | | $ | 421,975 | | Net income | | — | | | — | | | 11,906 | | | — | | | 435 | | | 12,341 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | income | | — | | | — | | | — | | | 9,023 | | | 51 | | | 9,074 | | Dividends ($0.355 per share) | | — | | | — | | | (4,724) | | | — | | | — | | | (4,724) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 19 | | | 909 | | | — | | | — | | | — | | | 928 | Balance at June 30, 2017 | $ | 13,310 | | $ | 113,747 | | $ | 374,001 | | $ | (72,938) | | $ | 11,474 | | $ | 439,594 |
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Capital in | | | | | Other | | | | | | | | | | Common | | Excess of | | Retained | | Comprehensive | | Noncontrolling | | | | | | | Stock | | Par Value | | Earnings | | Loss | | Interest | | Total | Balance at December 31, 2017 | $ | 13,308 | | $ | 93,528 | | $ | 365,182 | | $ | (65,100) | | $ | 1,946 | | $ | 408,864 | | Net income | | — | | | — | | | 31,978 | | | — | | | 179 | | | 32,157 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | loss | | — | | | — | | | — | | | (9,251) | | | (76) | | | (9,327) | | Dividends ($0.725 per share) | | — | | | — | | | (9,662) | | | — | | | — | | | (9,662) | | Distributions to noncontrolling affiliate | | — | | | — | | | — | | | — | | | (834) | | | (834) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 23 | | | 1,456 | | | — | | | — | | | — | | | 1,479 | Balance at June 30, 2018 | $ | 13,331 | | $ | 94,984 | | $ | 387,498 | | $ | (74,351) | | $ | 1,215 | | $ | 422,677 | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2016 | $ | 13,278 | | $ | 112,475 | | $ | 364,414 | | $ | (87,407) | | $ | 9,846 | | $ | 412,606 | | Net income | | — | | | — | | | 18,898 | | | — | | | 1,057 | | | 19,955 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | income | | — | | | — | | | — | | | 14,469 | | | 571 | | | 15,040 | | Dividends ($0.70 per share) | | — | | | — | | | (9,311) | | | — | | | — | | | (9,311) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 32 | | | 1,272 | | | — | | | — | | | — | | | 1,304 | Balance at June 30, 2017 | $ | 13,310 | | $ | 113,747 | | $ | 374,001 | | $ | (72,938) | | $ | 11,474 | | $ | 439,594 |
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited) The following tables present the changes in equity, net of tax, for the three and nine months ended September 30, 2017 and 2016: | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Capital in | | | | | Other | | | | | | | | | | Common | | Excess of | | Retained | | Comprehensive | | Noncontrolling | | | | | | | Stock | | Par Value | | Earnings | | Loss | | Interest | | Total | Balance at June 30, 2017 | $ | 13,310 | | $ | 113,747 | | $ | 374,001 | | $ | (72,938) | | $ | 11,474 | | $ | 439,594 | | Net income | | — | | | — | | | 11,142 | | | — | | | 562 | | | 11,704 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | income (loss) | | — | | | — | | | — | | | 6,265 | | | (153) | | | 6,112 | | Dividends ($0.355 per share) | | — | | | — | | | (4,722) | | | — | | | — | | | (4,722) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | (11) | | | (618) | | | — | | | — | | | — | | | (629) | Balance at September 30, 2017 | $ | 13,299 | | $ | 113,129 | | $ | 380,421 | | $ | (66,673) | | $ | 11,883 | | $ | 452,059 | | | | | | | | | | | | | | | | | | | | | Balance at June 30, 2016 | $ | 13,250 | | $ | 109,751 | | $ | 340,127 | | $ | (71,790) | | $ | 8,895 | | $ | 400,233 | | Net income | | — | | | — | | | 16,008 | | | — | | | 343 | | | 16,351 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | (loss) income | | — | | | — | | | — | | | (237) | | | 177 | | | (60) | | Dividends ($0.345 per share) | | — | | | — | | | (4,575) | | | — | | | — | | | (4,575) | | Acquisition of noncontrolling interest | | — | | | — | | | — | | | — | | | 40 | | | 40 | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 7 | | | 1,671 | | | — | | | — | | | — | | | 1,678 | | Excess tax benefit from stock option exercises | | — | | | 31 | | | — | | | — | | | — | | | 31 | Balance at September 30, 2016 | $ | 13,257 | | $ | 111,453 | | $ | 351,560 | | $ | (72,027) | | $ | 9,455 | | $ | 413,698 |
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Capital in | | | | | Other | | | | | | | | | | Common | | Excess of | | Retained | | Comprehensive | | Noncontrolling | | | | | | | Stock | | Par Value | | Earnings | | Loss | | Interest | | Total | Balance at December 31, 2016 | $ | 13,278 | | $ | 112,475 | | $ | 364,414 | | $ | (87,407) | | $ | 9,846 | | $ | 412,606 | | Net income | | — | | | — | | | 30,040 | | | — | | | 1,619 | | | 31,659 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | income | | — | | | — | | | — | | | 20,734 | | | 418 | | | 21,152 | | Dividends ($1.055 per share) | | — | | | — | | | (14,033) | | | — | | | — | | | (14,033) | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 21 | | | 654 | | | — | | | — | | | — | | | 675 | Balance at September 30, 2017 | $ | 13,299 | | $ | 113,129 | | $ | 380,421 | | $ | (66,673) | | $ | 11,883 | | $ | 452,059 | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2015 | $ | 13,288 | | $ | 106,333 | | $ | 326,740 | | $ | (73,316) | | $ | 8,198 | | $ | 381,243 | | Net income | | — | | | — | | | 43,969 | | | — | | | 1,131 | | | 45,100 | | Amounts reported in other comprehensive | | | | | | | | | | | | | | | | | | | | income | | — | | | — | | | — | | | 1,289 | | | 86 | | | 1,375 | | Repurchases of common stock | | (84) | | | — | | | (5,775) | | | — | | | — | | | (5,859) | | Dividends ($1.01 per share) | | — | | | — | | | (13,374) | | | — | | | — | | | (13,374) | | Acquisition of noncontrolling interest | | — | | | — | | | — | | | — | | | 40 | | | 40 | | Share issuance and equity-based | | | | | | | | | | | | | | | | | | | | compensation plans | | 53 | | | 4,953 | | | — | | | — | | | — | | | 5,006 | | Excess tax benefit from stock option exercises | | — | | | 167 | | | — | | | — | | | — | | | 167 | Balance at September 30, 2016 | $ | 13,257 | | $ | 111,453 | | $ | 351,560 | | $ | (72,027) | | $ | 9,455 | | $ | 413,698 |
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts, unless otherwise stated)
(Unaudited)
The following tables show the reclassifications from and resulting balances of AOCI for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017: | | | | | | | | | | Unrealized | | | | | | | | Currency | | Defined | | Gain (Loss) in | | | | | | | | Translation | | Benefit | | Available-for- | | | | | | | | Adjustments | | Pension Plans | | Sale Securities | | Total | Balance at June 30, 2017 | | $ | (40,062) | | $ | (34,059) | | $ | 1,183 | | $ | (72,938) | | Other comprehensive income (loss) before | | | | | | | | | | | | | | | reclassifications | | | 5,917 | | | (611) | | | 688 | | | 5,994 | | Amounts reclassified from AOCI | | | — | | | 784 | | | (254) | | | 530 | | Current period other comprehensive income | | | 5,917 | | | 173 | | | 434 | | | 6,524 | | Related tax amounts | | | — | | | (111) | | | (148) | | | (259) | | Net current period other comprehensive income | | | 5,917 | | | 62 | | | 286 | | | 6,265 | Balance at September 30, 2017 | | $ | (34,145) | | $ | (33,997) | | $ | 1,469 | | $ | (66,673) | | | | | | | | | | | | | | | | Balance at June 30, 2016 | | $ | (38,812) | | $ | (34,070) | | $ | 1,092 | | $ | (71,790) | | Other comprehensive (loss) income before | | | | | | | | | | | | | | | reclassifications | | | (892) | | | 3 | | | 575 | | | (314) | | Amounts reclassified from AOCI | | | — | | | 713 | | | (280) | | | 433 | | Current period other comprehensive (loss) income | | | (892) | | | 716 | | | 295 | | | 119 | | Related tax amounts | | | — | | | (256) | | | (100) | | | (356) | | Net current period other comprehensive (loss) income | | | (892) | | | 460 | | | 195 | | | (237) | Balance at September 30, 2016 | | $ | (39,704) | | $ | (33,610) | | $ | 1,287 | | $ | (72,027) |
| | | | | | | | | | Unrealized | | | | | | | | Currency | | Defined | | Gain (Loss) in | | | | | | | | Translation | | Benefit | | Available-for- | | | | | | | | Adjustments | | Pension Plans | | Sale Securities | | Total | Balance at March 31, 2018 | | $ | (25,129) | | $ | (34,009) | | $ | 400 | | $ | (58,738) | | Other comprehensive (loss) income before | | | | | | | | | | | | | | | reclassifications | | | (16,940) | | | 1,161 | | | (895) | | | (16,674) | | Amounts reclassified from AOCI | | | — | | | 779 | | | 681 | | | 1,460 | | Current period other comprehensive (loss) income | | | (16,940) | | | 1,940 | | | (214) | | | (15,214) | | Related tax amounts | | | — | | | (444) | | | 45 | | | (399) | | Net current period other comprehensive (loss) income | | | (16,940) | | | 1,496 | | | (169) | | | (15,613) | Balance at June 30, 2018 | | $ | (42,069) | | $ | (32,513) | | $ | 231 | | $ | (74,351) | | | | | | | | | | | | | | | | Balance at March 31, 2017 | | $ | (47,327) | | $ | (35,850) | | $ | 1,216 | | $ | (81,961) | | Other comprehensive income before | | | | | | | | | | | | | | | reclassifications | | | 7,265 | | | 268 | | | 225 | | | 7,758 | | Amounts reclassified from AOCI | | | — | | | 2,650 | | | (275) | | | 2,375 | | Current period other comprehensive income (loss) | | | 7,265 | | | 2,918 | | | (50) | | | 10,133 | | Related tax amounts | | | — | | | (1,127) | | | 17 | | | (1,110) | | Net current period other comprehensive income (loss) | | | 7,265 | | | 1,791 | | | (33) | | | 9,023 | Balance at June 30, 2017 | | $ | (40,062) | | $ | (34,059) | | $ | 1,183 | | $ | (72,938) |
| | | | | | | | | | Unrealized | | | | | | | | Currency | | Defined | | Gain (Loss) in | | | | | | | | Translation | | Benefit | | Available-for- | | | | | | | | Adjustments | | Pension Plans | | Sale Securities | | Total | Balance at December 31, 2016 | | $ | (52,255) | | $ | (36,168) | | $ | 1,016 | | $ | (87,407) | | Other comprehensive income (loss) before | | | | | | | | | | | | | | | reclassifications | | | 18,110 | | | (684) | | | 1,578 | | | 19,004 | | Amounts reclassified from AOCI | | | — | | | 4,284 | | | (889) | | | 3,395 | | Current period other comprehensive income | | | 18,110 | | | 3,600 | | | 689 | | | 22,399 | | Related tax amounts | | | — | | | (1,429) | | | (236) | | | (1,665) | | Net current period other comprehensive income | | | 18,110 | | | 2,171 | | | 453 | | | 20,734 | Balance at September 30, 2017 | | $ | (34,145) | | $ | (33,997) | | $ | 1,469 | | $ | (66,673) | | | | | | | | | | | | | | | | Balance at December 31, 2015 | | $ | (38,544) | | $ | (35,251) | | $ | 479 | | $ | (73,316) | | Other comprehensive (loss) income before | | | | | | | | | | | | | | | reclassifications | | | (1,160) | | | 116 | | | 1,087 | | | 43 | | Amounts reclassified from AOCI | | | — | | | 2,313 | | | 136 | | | 2,449 | | Current period other comprehensive (loss) income | | | (1,160) | | | 2,429 | | | 1,223 | | | 2,492 | | Related tax amounts | | | — | | | (788) | | | (415) | | | (1,203) | | Net current period other comprehensive (loss) income | | | (1,160) | | | 1,641 | | | 808 | | | 1,289 | Balance at September 30, 2016 | | $ | (39,704) | | $ | (33,610) | | $ | 1,287 | | $ | (72,027) |
| | | | | | | | | | Unrealized | | | | | | | | Currency | | Defined | | Gain (Loss) in | | | | | | | | Translation | | Benefit | | Available-for- | | | | | | | | Adjustments | | Pension Plans | | Sale Securities | | Total | Balance at December 31, 2017 | | $ | (31,893) | | $ | (34,093) | | $ | 886 | | $ | (65,100) | | Other comprehensive (loss) income before | | | | | | | | | | | | | | | reclassifications | | | (10,176) | | | 464 | | | (1,338) | | | (11,050) | | Amounts reclassified from AOCI | | | — | | | 1,562 | | | 509 | | | 2,071 | | Current period other comprehensive (loss) income | | | (10,176) | | | 2,026 | | | (829) | | | (8,979) | | Related tax amounts | | | — | | | (446) | | | 174 | | | (272) | | Net current period other comprehensive (loss) income | | | (10,176) | | | 1,580 | | | (655) | | | (9,251) | Balance at June 30, 2018 | | $ | (42,069) | | $ | (32,513) | | $ | 231 | | $ | (74,351) | | | | | | | | | | | | | | | | Balance at December 31, 2016 | | $ | (52,255) | | $ | (36,168) | | $ | 1,016 | | $ | (87,407) | | Other comprehensive income (loss) before | | | | | | | | | | | | | | | reclassifications | | | 12,193 | | | (73) | | | 890 | | | 13,010 | | Amounts reclassified from AOCI | | | — | | | 3,500 | | | (635) | | | 2,865 | | Current period other comprehensive income | | | 12,193 | | | 3,427 | | | 255 | | | 15,875 | | Related tax amounts | | | — | | | (1,318) | | | (88) | | | (1,406) | | Net current period other comprehensive income | | | 12,193 | | | 2,109 | | | 167 | | | 14,469 | Balance at June 30, 2017 | | $ | (40,062) | | $ | (34,059) | | $ | 1,183 | | $ | (72,938) |
Approximately 75% and 25% of the amounts reclassified from accumulated other comprehensive lossAOCI to the Condensed Consolidated Statements of Income for defined benefit retirement plans during the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 were recorded in SG&A and COGS, respectively. See Note 78 of Notes to Condensed Consolidated Financial Statements for further information. 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 non-controlling 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) Note 1416 – Business Acquisitions In March 2018, the Company purchased certain formulations and product technology for the mining industry for its North America reportable operating segment for $1.0 million. The Company allocated the entire purchase price to intangible assets representing formulations and product technology, to be amortized over 10 years. In accordance with the terms of the agreement, $0.5 million of the purchase price was paid at signing, with the remaining $0.5 million of the purchase price expected to be paid within the next 12 months and recorded as an other current liability on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2018. In December 2017, the Company acquired the remaining 45% ownership interest in its India affiliate, Quaker Chemical India Private Limited, for 2,025.0 million INR or approximately $31.8 million. In May 2017, the Company acquired assets associated with a business that markets, sells and manufactures certain metalworking fluids for its North America reportable operating segment for 7.3 million CAD or approximately $5.4 million. The Company allocated approximately $3.0 million of the purchase price to intangible assets, comprised of trademarks and formulations, to be amortized over 15 years; a non-competition agreement, to be amortized over 5 years; and customer relationships, to be amortized over 10 years. In addition, the Company recorded an other current asset of approximately $0.6 million acquired with the business, and approximately $1.8 million of goodwill related to expected value not allocated to other acquired assets, all of which will be tax deductible. In November 2016, the Company acquired Lubricor Inc. and its affiliated entities (“Lubricor”), a metalworking fluids manufacturer headquartered in Waterloo, Ontario, for its North America reportable operating segment for 16.0 million CAD or approximately $12.0 million. In May 2016, the Company acquired assets of a business that is associated with dust control products for the mining industry for its North America reportable operating segment for $1.9 million. During the first quarter of 2017, the Company identified and recorded an adjustment to the allocation of the purchase price for the Lubricor acquisition. The adjustment was the result of finalizing a post-closing settlement based on the Company’s assessment of additional information related to assets acquired and liabilities assumed. As of September 30,December 31, 2017, the allocation of the purchase price for the Lubricor acquisition 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. The following table presents the current allocations of the purchase price of the assets acquired and liabilities assumed in all of the Company’s 2016 and 2017 acquisitions in 2016:were finalized.
| 2016 Acquisitions | | | | | Current assets (includes cash acquired) | $ | 3,443 | | | Property, plant and equipment | | 2,574 | | | Intangibles | | | | | | Customer lists and rights to sell | | 5,041 | | | | Trademarks, formulations and | | | | | | product technology | | 2,543 | | | | Other intangibles | | 127 | | | Goodwill | | 3,355 | | | | Total assets purchased | | 17,083 | | | Current liabilities | | (1,198) | | | Other long-term liabilities | | (2,019) | | | | Total liabilities assumed | | (3,217) | | | | Gross cash paid for acquisitions | $ | 13,866 | | | | Less: cash acquired | | 105 | | | | Net cash paid for acquisitions | $ | 13,761 | |
In July 2015, the Company acquired Verkol, S.A.U., a leading specialty grease and other lubricants manufacturer based in northern Spain, included in its EMEA reportable operating segment, for 37.7 million EUR, or approximately $41.4 million. This included a post-closing adjustment of 1.3 million EUR, or approximately $1.4 million that was accrued as of December 31, 2015 and paid during the first quarter of 2016. The purchase included cash acquired of 14.1 million EUR, or approximately $15.4 million, and assumed long-term debt of 2.2 million EUR, or approximately $2.4 million.
The results of operations of the acquired businesses and assets are included in the Condensed Consolidated Statements of Income from their respective acquisition dates. Transaction expenses associated with these acquisitions are included in SG&A in the Company’s Condensed Consolidated Statements of Income. Certain pro forma and other information are not presented, as the operations of the acquired businesses are not material to the overall operations of the Company for the periods presented.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts, unless otherwise stated)
(Unaudited)
Note 1517 – Fair Value MeasurementsThe 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, 2017 | | | | | Fair Value Measurements at June 30, 2018 | | | | Total | | Using Fair Value Hierarchy | | | Total | | Using Fair Value Hierarchy | Assets | Assets | Fair Value | | Level 1 | | Level 2 | | Level 3 | Assets | Fair Value | | Level 1 | | Level 2 | | Level 3 | Company-owned life insurance | Company-owned life insurance | $ | 1,533 | | $ | — | | $ | 1,533 | | $ | — | Company-owned life insurance | $ | 1,591 | | $ | — | | $ | 1,591 | | $ | — | Total | Total | $ | 1,533 | | $ | — | | $ | 1,533 | | $ | — | Total | $ | 1,591 | | $ | — | | $ | 1,591 | | $ | — |
| | | | | Fair Value Measurements at December 31, 2016 | | | | | Fair Value Measurements at December 31, 2017 | | | | Total | | Using Fair Value Hierarchy | | | Total | | Using Fair Value Hierarchy | Assets | Assets | Fair Value | | Level 1 | | Level 2 | | Level 3 | Assets | Fair Value | | Level 1 | | Level 2 | | Level 3 | Company-owned life insurance | Company-owned life insurance | $ | 1,410 | | $ | — | | $ | 1,410 | | $ | — | Company-owned life insurance | $ | 1,594 | | $ | — | | $ | 1,594 | | $ | — | Total | Total | $ | 1,410 | | $ | — | | $ | 1,410 | | $ | — | Total | $ | 1,594 | | $ | — | | $ | 1,594 | | $ | — |
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 SeptemberJune 30, 20172018 or December 31, 2016,2017, respectively, so related disclosures have not been included. Note 1618 – Commitments and Contingencies The Company previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 20162017 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 (“PERC”). As of SeptemberJune 30, 2017,2018, 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 SeptemberJune 30, 2017,2018, the Company believes that the range of potential-known liabilities associated with the balance of the ACP water remediation program is approximately $0.1 million to $1.0 million. The low and high ends of the range are based on the length of operation of the treatment system as determined by groundwater modeling. Costs of operation include the operation and maintenance of the extraction well, groundwater monitoring and program management.
Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements - Continued (Dollars in thousands, except share and per share amounts, unless otherwise stated) (Unaudited)
The Company previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 20162017 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 ninethree and six months ended SeptemberJune 30, 2017,2018, there have been no significant changes to the facts or circumstances of this matter previously disclosed, 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 $2.2$1.9 million (excluding costs of defense). The Company believes, although there can be no assurance regarding the outcome of other unrelated environmental matters, that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $0.2 million was accrued at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, to provide for such anticipated 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.
Quaker Chemical Corporation Management’s Discussion and Analysis Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Executive Summary Quaker Chemical Corporation is a leading global provider of process fluids, chemical specialties, and technical expertise to a wide range of industries, including steel, aluminum, automotive, mining, aerospace, tube and pipe, cans, and others. For nearly 100 years, Quaker has helped customers around the world achieve production efficiency, improve product quality, and lower costs through a combination of innovative technology, process knowledge, and customized services. Headquartered in Conshohocken, Pennsylvania USA, Quaker serves businesses worldwide with a network of dedicated and experienced professionals whose mission is to make a difference. The Company haddelivered a solid operating performance in the thirdsecond quarter of 2017,2018, as strong volume growth and continued discipline in managing itsnet sales coupled with an increased gross margin offset higher selling, general and administrative expenses (“SG&A”) largely offset a decline in gross margin compared to the prior year.. Specifically, net sales increased 12%10% to $212.9$222.0 million in the thirdsecond quarter of 2018 compared to $201.2 million in the second quarter of 2017 compared to $190.4 million in the third quarter of 2016 driven by a 7%volume growth, in volumes, including acquisitions, a 3%an increase due to changes inselling price and product mix andas well as a 2% positive impact from foreign currency translation. Driven byThis increase in net sales, coupled with a higher gross margin of 36.5% in the strong volume levels,current quarter compared to 35.7% in the prior year quarter, drove an increase in the Company’s gross profit increased 5% quarter-over-quarter, despite a decline in gross margin to 35.1% in the third quarter of 2017 compared to 37.2% in the third quarter of 2016.13% quarter-over-quarter. The decreaseincrease in the Company’s gross margin quarter-over-quarter was primarily due to higher raw material costs compared to the prior yeardriven by pricing initiatives and a change in the mix of certain products sold.sold which more than offset raw material cost increases. In addition, the current quarter’squarter operating income benefitedas a percentage of sales continued to benefit from the Company’s abilitydiscipline in managing its costs. The Company’s second quarter of 2018 net income and earnings per diluted share were $19.2 million and $1.44, respectively, compared to significantly grow its net sales while only slightly increasing its SG&A.$11.9 million and $0.89 per diluted share, respectively, in the second quarter of 2017. During the thirdsecond quarter of 2017,2018, the Company incurred $9.7$4.5 million, or $0.52$0.29 per diluted share, of total costs associated with the Company’s previously announced combination with Houghton International, Inc. (“Houghton”) (herein referred to as “the Combination”). The Company incurred $1.2, compared to $4.3 million, or $0.08$0.27 per diluted share of similar combination-related costs during the second quarter of 2017. The Company also recorded a tax adjustment of $1.2 million, or $0.09 per diluted share, in the thirdsecond quarter of 2016. Including these combination-related expenses, the Company’s third2018 to decrease its initial fourth quarter of 2017 net incomeestimate of the one-time charge on deemed repatriation of undistributed earnings (“Transition Tax”) for the U.S. Tax Cuts and earnings per diluted share were $11.1 million and $0.83, respectively, compared to $16.0 million and $1.21 per diluted share, respectively,Jobs Act (“U.S. Tax Reform”). Excluding the combination-related expenses in the thirdcurrent and prior year quarters and the second quarter of 2016. Excluding these costs and2018 Transition Tax adjustment, noted above, as well as other non-core items in each period, the Company’s strong current quarter operating performance coupled with a lower currentsecond quarter of 2018 effective tax rate, the Company’sresulted in a 26% increase in its non-GAAP earnings per diluted share increased 6% to $1.32$1.56 in the thirdsecond quarter of 20172018 compared to $1.25$1.24 in the prior year.year quarter. The Company’s adjusted EBITDA was $29.4$32.2 million in the thirdsecond quarter of 2017,2018, an increase of 4%15% compared to $28.3 million in the prior year. year period. From a regional perspective, the Company’s thirdsecond quarter of 20172018 operating performance was highlighted by strong volume growth, and market share gains, higher gross margins and the positive impact of foreign exchange in threethe majority of its regions. Net sales increased in all four of the Company’s regions whichquarter-over-quarter. This increase was partially offsetdriven by decliningincreases in selling price and product mix in all regions, while North America, Asia/Pacific and South America also benefited from strong volume growth and EMEA and Asia/Pacific benefited from the positive impact of foreign currency translation. These increases in net sales coupled with a higher gross marginsmargin in each of the Company’s three largest regions. The Company’s Europe, Middle Eastregions and Africa (“EMEA”) region increased its operating earnings due to strong net sales growth on higher sales volumes and price and product mix, coupled with a relatively consistent level of SG&A, largely offset by lower gross margin quarter-over-quarter. In the Company’s Asia/Pacific region, operating earnings increased quarter-over-quarter asin South America, drove an increase in sales volumes and relatively consistent SG&A was partially offset by a slight decline in gross margin. In South America, the Company continued its positive results and was able to grow profitability through higher sales volumes, increases from price and product mix and an overall increase in gross margin, on relatively consistent levels of SG&A. The Company’s North American region experienced a decline in its operating earnings as contributions fromin all of the Company’s 2016 acquisition of Lubricor Inc. (“Lubricor”) and increases from price and product mix were more than offset by a decline in gross margin and slightly higher SG&A. regions quarter-over-quarter. See the Reportable Operating Segments Review, in the Operations section of this Item, below. The Company generated net operating cash flow of $20.0$17.0 million in the thirdsecond quarter of 2017,2018, increasing its year-to-date net operating cash flow to $40.8$19.7 million compared to $53.0$20.8 million in the first ninesix months of 2016.2017. The decrease in net operating cash flow year-over-year was primarily due to cash outflows related to certain Houghton combination-related expenses and higher levels of cash invested in the Company’s working capital during 2017primarily as a result of the Company’s increase in net sales and related accounts receivable, partially offset by the Company’s strong volume growth.current year operating performance and a second quarter of 2018 cash dividend received from the Company’s captive insurance company. 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 is pleased to deliver another strong quarter. The Company experienced good operating conditions in all of its regions with anotherbroad net sales growth, primarily driven by higher volumes on solid quarter. Specifically,production levels in the Company’s major end markets and overall market share gains. In addition, the Company’s gross margin improved for the second consecutive quarter as the benefit of recent pricing initiatives and the mix of product sold contributed to the highest quarterly gross margin for the Company was able to grow organic volumes by 5% on continued market share gains and increased production in some ofsince 2016. This operating performance coupled with the Company’s end markets. Also, the Company continued its disciplined approach todiscipline in managing SG&A which helped offsetdrove a decline in its gross margin in the third quarter of 2017. While the combination-related expenses incurred in the third quarter of 2017 led to a decrease in reported net income quarter-over-quarter, excluding these costs and other non-core items, the Company’s operating performance resulted in a 4%15% increase in its adjusted EBITDA quarter-over-quarter, and, coupled with a lower effective tax rate, resulted in the current period, drove a 6%26% increase in its non-GAAP earnings per diluted share compared to the thirdsecond quarter of 2016. Looking forward to the remainder of 2017 and into the early part of 2018, the Company believes its strong volumes will continue and is optimistic that its gross margin will begin to gradually rise and head back to its 37% target. The Company expects that market share gains, on-going discipline in managing SG&A and the benefits of past acquisitions will continue to help offset its gross margin and other market challenges. Overall, the Company remains confident in its future and still expects 2017 to be another good year for Quaker, as the Company continues to expect growth in net sales year-over-year, and increases in adjusted EBITDA and non-GAAP earnings per share for the eighth consecutive year.2017.
Quaker Chemical Corporation Management’s Discussion and Analysis RelatedLooking forward to the Houghton Combination,second half of 2018, the Company received shareholder approval atintends to present a meeting held in September 2017 and also received regulatory approval from China in July 2017 and from Australia in October 2017. The closing ofremedy for the Combination is still subject to regulatory approval inthat meets the needs of both the U.S. and EuropeEuropean regulatory authorities in the third quarter of 2018 and other customary closing conditions. The Company continuesexpects to expect closing ofreceive the required regulatory approvals and close the Combination to occur either late in the fourth quarter of 20172018. As previously disclosed, the Combination is expected to approximately double the Company’s annual sales and adjusted EBITDA, not including estimated synergies which are expected to meet or duringexceed $45 million once fully achieved by the third year after close. Depending upon the exact timing of the Combination’s close, the Company anticipates it will realize a portion of Houghton’s sales and adjusted EBITDA in 2018.
For Quaker’s current business, the Company anticipates it will continue its solid first quarterhalf of 2018 operating performance into the remaining two quarters of 2018. Specifically, the Company expects its solid product volume levels to continue and gross margin levels to be in the low to mid 36% range. The Company also expects that modestly growing global end markets, continued market share gains and the benefit of U.S. Tax Reform will continue to help offset various market challenges including potential foreign exchange headwinds and higher raw material costs. Overall, the Company remains confident in its future and expects 2018 to be another good year for the current Quaker business, and looks forward to the combined new company post-closing of the Combination. Liquidity and Capital Resources Quaker’sAt June 30, 2018, Quaker had cash, and cash equivalents increased to $109.1and restricted cash of $111.0 million, at September 30, 2017 from $88.8including $20.7 million of restricted cash. Total cash, cash equivalents and restricted cash was $111.1 million at December 31, 2016.2017, which included $21.2 million of restricted cash. The $20.3inclusion of restricted cash in total cash on the Company’s Condensed Consolidated Statements of Cash Flows is the result of a change in presentation required by the Financial Accounting Standards Board. See Note 3 of Notes to Condensed Consolidated Financial Statements. The $0.1 million increasedecrease was the net result of $40.8$19.7 million of cash provided by operating activities offset by $5.4 million of cash used in investing activities, $11.1 million of cash used in financing activities and a $4.8$3.3 million positivenegative impact due to the effect of foreign exchange ratesrate changes on cash, partially offset by $12.8 million of cash used in investing activities and $12.5 million of cash used in financing activities.cash.
Net cash provided by operating activities was $40.8$19.7 million in the first ninesix months of 20172018 compared to $53.0$20.8 million in the first ninesix months of 2016.2017. The $12.2$1.1 million decrease in net cash flows provided by operating activities was primarily the result of cash outflows of $12.7 million in the current year associated with payments related to the Combination, described below. There were no similar cash payments in the nine months ended September 30, 2016. In addition, the Company had higher cash invested in the Company’s working capital primarily due to highersupport the Company’s year-over-year sales and production volumes in the current quarter. Specifically, the increase, in net sales quarter-over-quarter drovespecifically higher levels of accounts receivablesreceivable and inventory associated with the Company re-stocked inventories that were seasonally low at year end. In addition, the Company had higher cash outflows due to its prepaid taxes, which increased due to improved results and timing of payments. Thesethe Company’s increased net sales and expected sales quarter-over-quarter. This decrease in net cash flows provided by operating cash outflows during the nine months ended September 30, 2017 wereactivities was partially offset by a second quarter of 2018 cash dividend received from the Company’s improvedcaptive insurance company as well as increased cash generation as a result of the Company’s strong current year operating performance year-over-year, benefits from lower pension-related funding due toperformance. The Company’s operating cash flows for both the first six months of 2018 and 2017, respectively, were also impacted by the timing and amount of contributionscombination-related expenses and lowerassociated cash payments, described below. Finally, the six months ended June 30, 2017 included restructuring payments made as part of the Company’s global restructuring program initiated in the fourth quarter of 2015 and completed during the first half of 2017, described below. Net cash used in investing activities increaseddecreased from $8.7$10.5 million in the first ninesix months of 20162017 to $12.8$5.4 million in the first ninesix months of 2017,2018, primarily due to higherlower payments for acquisitions and capital expenditures.in the current year. During the first ninesix months of 2017, the Company had cash outflows of $5.4 million for the acquisition of assets associated with a business that markets, sells and manufactures certain metalworking fluids, whereas during the first ninesix months of 2016,2018, the Company had cash outflowspaid $0.5 million for certain formulations and product technology in the mining industry for its North America reportable operating segment. In accordance with the terms of $3.2that acquisition agreement, an additional $0.5 million dueof the purchase price is expected to a post-closing adjustment to finalize its acquisition of Verkol, S.A.U.be paid within the next 12 months. In addition, the Company had higher cash proceeds from dispositions of assets during the first six months of 2018 as compared to the first six months of 2017, primarily as a result of $0.6 million of cash proceeds received during the second quarter of 2018 related to the sale of an available-for-sale asset. Lastly, the Company had slightly higher additions to property, plant and equipment during the first ninesix months of 20172018 as compared to the first ninesix months of 2016,2017, primarily due to timing ofhigher expenditures for several small projects, across all of its regions. Changesas well as an increase in the Company’s restricted cash, whichspending related to a new manufacturing facility in India that is dependent upon the timing of claims and payments associated with a subsidiary’s asbestos litigation, were relatively consistent year-over-year.expected to be completed during 2018. Net cash used in financing activities was $12.5$11.1 million in the first ninesix months of 20172018 compared to $25.5cash used in financing activities of $3.7 million in the first ninesix months of 2016.2017. The $13.0approximate $7.4 million decreaseincrease in net cash used in financing activities was primarily due to repayments of long-term debt of $0.3 million in the first six months of 2018 compared to proceeds from long-term debt net of repayments, of $4.0$6.4 million in the first ninesix months of 2017 compared to net repayments of long-term debt of $6.8 million in the first nine months of 2016. The current year proceeds from long-term debt coupled with cash on hand were primarily used to finance the higher cash payments for acquisitions year-over-year and cash payments associated with combination-related expenses, described below.2017. In addition, the Company paid $13.9 million in cash dividends of $9.5 million during the first ninesix months of 2017,2018, a $0.8$0.3 million increase in cash dividends compared to the prior year period. InFinally, during the first ninesix months of 2016,2018, one of the Company completed $5.9 million in share repurchases, withCompany’s less than 100% owned consolidated affiliates made a distribution to the noncontrolling affiliate shareholder of approximately $0.8 million. There were no comparable cash paymentssimilar distributions during the current year. first six months of 2017. The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders which matures inlenders. During the second quarter of 2018, the Credit Facility was amended and restated to extend the maturity date from June 2019.2019 to October 2019, and the Company anticipates further extending the Credit Facility maturity date to December 15, 2019 during the third quarter of 2018. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally
Quaker Chemical Corporation Management’s Discussion and Analysis
bear interest at a base rate or LIBOR rate plus a margin. The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 3.50 to 1.As of SeptemberJune 30, 20172018, and December 31, 2016,2017, the Company’s consolidated net debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. As of SeptemberJune 30, 20172018, and December 31, 2016,2017, the Company had total credit facility borrowings of $54.7$46.2 million and $47.9$48.5 million, respectively, primarily under the Credit Facility. The Company’s other debt obligations as of September 30, 2017 and December 31, 2016 were primarily industrial development bonds and municipality-related loans. loans as of June 30, 2018 and December 31, 2017, which includes a $5.0 million industrial development bond that matures in December 2018. The Company expects to repay the amount due for this bond at its maturity. Quaker’s management approved a global restructuring plan in the fourth quarter of 2015 (the “2015 Program”) to reduce its operating costs. The Company substantially completed all of the initiatives under the 2015 Program during 2016 and settlement of these charges primarily occurred in 2016, with only minimal settlements and cash payments remaining after 2016, which were completed during the first half of 2017. The Company has not incurred costs in 2018 and does not expect to incur further restructuring charges under this program. During the first ninesix months ofended June 30, 2017, and 2016, the Company utilizedcompany incurred $0.7 million and $4.2 million, respectively, of cash payments utilizing operating cash flowflows for the settlement of certainthese restructuring liabilities under the 2015 Program. The Company still projects full year pre-tax cost savings as a result of this program to approximate $5 million in 2017 compared to approximately half of this amount realized during 2016.
Quaker Chemical Corporationliabilities.
Management’s Discussion and Analysis
On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton. The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company’s assumption of Houghton’s net indebtedness as of the closing of the Combination, which was approximately $690 million at signing. See Note 2 of Notes to Condensed Consolidated Financial Statements. In connection with the Combination, the Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the purchase consideration and provide additional liquidity, and has since replaced these commitments with a syndicated bank agreement (“the New Credit Facility”) with a group of lenders for $1.15 billion. The New Credit Facility is contingent upon and will not be effective until the closing of the Combination. The Company anticipates extending the bank commitment through December 15, 2018 during the third quarter of 2018. The New Credit Facility currently includesis comprised of a $400.0 million multicurrency revolver, a $575.0$600.0 million USD term loan and a $175.0$150.0 million EUR equivalent term loan, each with a five yearfive-year term from the date the New Credit Facility becomes effective. The maximum amount available under the New Credit Facility can be increased by $200.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the New Credit Facility will generally bear interest at a base rate or LIBOR rate plus a margin, and the Company currently estimates the annual floating rate cost will be in the 3.0%3.50% to 3.5%3.75% range based on current market interest rates. The New Credit Facility will be subject to certain financial and other covenants, including covenants that the Company’s consolidated net debt to adjusted EBITDA ratio cannot initially exceed 4.25 to 1 and the Company’s consolidated adjusted EBITDA to interest expense ratio cannot be lowerless than 3.0 to 1. Both the USD and EUR equivalent term loans will have quarterly principal amortization during their respective five yearfive-year terms, with 5% amortization of the principal balance due in years 1 and 2, 7.5% in year 3, and 10% in years 4 and 5, with the remaining principal amounts due at maturity. Until closing, the Company will only incur certain interest costs paid to maintain the banks’ committed capitalbank commitment (“ticking fees”), which began to accrue on September 29, 2017. The ticking fees will bear an interest rate of 0.30% per annum. The Company incurred $23.1$10.6 million of total combination-related expenses during the first ninesix months of 2017,2018, which includes $1.7 million of ticking fees as well as a $0.6 million gain on the sale of an available-for-sale asset, described in the Non-GAAP measures section of this Item below, and madebelow. The Company had net cash payments of $12.7 millionoutflows related to these costs. Assuming an earlycosts of $12.1 million during the six months ended June 30, 2018. Comparatively, during the six months ended June 30, 2017, combination-related expenses totaled $13.4 million and cash payments made were $10.1 million. During 2018, closing, the Company currently estimates it will incur additional expenses and have associated cash outflows of approximately $5$30 to $10$35 million through closing of additionalthe Combination for similar combination-related expenses, including cash payments for bank fees which we expect to capitalize. In addition, post-closing of the combination, the Company expects it will incur additional costs and make comparable associated cash payments duringto integrate the fourth quarterCompany and Houghton and to begin realizing the Combination’s total anticipated cost synergies, which we currently estimate to meet or exceed $45 million. The timing and an accurate range of 2017, which primarily relatethese additional costs and cash payments post-closing are not estimable at this time. However, based on market precedent, the Company currently projects these costs and cash payments to integration planningapproximate one times anticipated synergies, and regulatory approvals associated with the Combination. Company expects them to be incurred over a three-year period post-close. The Company received regulatory approval for the Combination from China in July 2017 and from Australia in October 2017. In addition, at a shareholder meeting held during the third quarter of 2017, the Company’s shareholders overwhelmingly approved the issuance of the new shares of the Company’s common stock at closing of the Combination. Currently, the closing of the Combination is expected by the end of 2017 or early 2018, and is contingent upon customary closing conditions and the remaining regulatory approvals in the United States and Europe. The Company continues to be in productive discussions with the European Commission and Federal Trade Commission regarding the Combination and potential buyers for the product lines to be divested, and intends to present a remedy that meets the needs of both regulatory authorities in the third quarter of 2018. Based on the information available to date, the Company expects to receive approval from the regulatory
Quaker Chemical Corporation Management’s Discussion and Analysis
authorities and close the Combination in the fourth quarter of 2018. Given these contingencies and the overall timing of the Combination, the Company has not recorded any estimated costs for additional expenses that the Company expects, but had yet to incur as of SeptemberJune 30, 2017,2018, related to the Combination. In addition to approving the issuance of the Company’s shares at closing of the Combination, noted above, at the same third quarter of 2017 shareholders meeting, the Company’s shareholders approved an amendment of the Company’s Articles of Incorporation that provides that every holder of Quaker Chemical Corporation common stock will be entitled to one vote for each share of common stock of the Company going forward. Prior to this amendment, the Company’ Articles of Incorporation included a time-based voting system that granted special ten-for-one-voting rights to shareholders who had beneficially owned their Quaker Chemical Corporation common stock continuously for a period of at least 36 consecutive calendar months.
As of SeptemberJune 30, 2017,2018, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $9.7$9.2 million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $5.3$5.1 million as a result of offsetting benefits in other tax jurisdictions. The Company believes it is capable of supporting its operating requirements and funding its business objectives, including but not limited to, payments of dividends to shareholders, costs related to the Combination, pension plan contributions, capital expenditures, other business opportunities and other potential contingencies, through internally generated funds supplemented with debt or equity as needed. Critical Accounting Policies
The Company’s critical accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2016 remain materially consistent. However, the Company completed its annual goodwill impairment assessment during the third quarter of 2017. Based on this assessment, the following is an update to the Company’s related critical accounting policy:
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
Quaker Chemical Corporation
Management’s Discussion and Analysis
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 which have indefinite lives are not amortized and are required to be assessed at least annually for impairment. The Company compares the assets’ fair value to their carrying value, primarily based on future discounted cash flows, in order to determine if an impairment charge is warranted. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, but the actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.
The Company completed its annual impairment assessment as of the end of the third quarter of 2017 by performing a qualitative (“step 0”) assessment. Based on the assessment performed, the Company concluded that there was no evidence of events or circumstances that would indicate a material change from the Company’s prior year quantitative assessment by reporting unit. Therefore, the Company has concluded that no goodwill impairment exists in any of its reporting units as of September 30, 2017.
Non-GAAP Measures Included in this Form 10-Q filing are two non-GAAP (unaudited) financial measures: non-GAAP earnings per diluted share and adjusted EBITDA. 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 more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods, as the non-GAAP financial measures exclude items that are 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 following tables reconcile non-GAAP earnings per diluted share (unaudited) and adjusted EBITDA (unaudited) to their most directly comparable GAAP (unaudited) financial measures: | | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2017 | | 2016 | | 2017 | | 2016 | GAAP earnings per diluted share attributable to Quaker Chemical Corporation | | | | | | | | | | | | | common shareholders | $ | 0.83 | | $ | 1.21 | | $ | 2.25 | | $ | 3.32 | Equity income in a captive insurance company per diluted share (a) | | (0.03) | | | (0.04) | | | (0.11) | | | (0.07) | Houghton combination-related expenses per diluted share (b) | | 0.52 | | | 0.08 | | | 1.47 | | | 0.08 | U.S. pension plan settlement charge per diluted share (c) | | — | | | — | | | 0.09 | | | — | Cost streamlining initiative per diluted share (d) | | — | | | — | | | 0.01 | | | — | Currency conversion impacts of the Venezuelan bolivar fuerte per diluted share (e) | | 0.00 | | | — | | | 0.03 | | | 0.01 | Non-GAAP earnings per diluted share | $ | 1.32 | | $ | 1.25 | | $ | 3.74 | | $ | 3.34 |
| | Three Months Ended | | Six Months Ended | | | June 30, | | June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | GAAP earnings per diluted share attributable to Quaker Chemical Corporation | | | | | | | | | | | | | common shareholders | $ | 1.44 | | $ | 0.89 | | $ | 2.40 | | $ | 1.42 | Equity income in a captive insurance company per diluted share (a) | | (0.08) | | | (0.04) | | | (0.05) | | | (0.08) | Houghton combination-related expenses per diluted share (b) | | 0.29 | | | 0.27 | | | 0.66 | | | 0.95 | Transition Tax adjustment per diluted share (c) | | (0.09) | | | — | | | (0.09) | | | — | U.S. pension plan settlement charge per diluted share (d) | | — | | | 0.09 | | | — | | | 0.09 | Cost streamlining initiative per diluted share (e) | | — | | | — | | | — | | | 0.01 | Currency conversion impacts of the Venezuelan bolivar fuerte per diluted share (f) | | 0.00 | | | 0.03 | | | 0.02 | | | 0.03 | Non-GAAP earnings per diluted share (g) | $ | 1.56 | | $ | 1.24 | | $ | 2.94 | | $ | 2.42 |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | | | September 30, | | September 30, | | June 30, | | June 30, | | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | Net income attributable to Quaker Chemical Corporation | Net income attributable to Quaker Chemical Corporation | $ | 11,142 | | $ | 16,008 | | $ | 30,040 | | $ | 43,969 | Net income attributable to Quaker Chemical Corporation | $ | 19,246 | | $ | 11,906 | | $ | 31,978 | | $ | 18,898 | Depreciation and amortization | Depreciation and amortization | | 5,017 | | 4,868 | | | 14,954 | | 14,788 | Depreciation and amortization | | 4,981 | | 5,007 | | | 10,028 | | 9,937 | Interest expense(b) | Interest expense(b) | | 793 | | 758 | | | 2,229 | | 2,226 | Interest expense(b) | | 1,602 | | 780 | | | 3,294 | | 1,436 | Taxes on income before equity in net income of associated companies(c) | Taxes on income before equity in net income of associated companies(c) | | 3,140 | | 6,121 | | | 14,229 | | 19,664 | Taxes on income before equity in net income of associated companies(c) | | 3,668 | | 4,224 | | | 9,224 | | 11,089 | Equity income in a captive insurance company (a) | Equity income in a captive insurance company (a) | | (400) | | (597) | | | (1,427) | | (952) | Equity income in a captive insurance company (a) | | (1,015) | | (435) | | | (643) | | (1,027) | Houghton combination-related expenses (b) | Houghton combination-related expenses (b) | | 9,675 | | 1,157 | | | 23,088 | | 1,157 | Houghton combination-related expenses (b) | | 3,681 | | 4,338 | | | 8,890 | | 13,413 | U.S. pension plan settlement charge (c)(d) | U.S. pension plan settlement charge (c)(d) | | — | | — | | | 1,860 | | — | U.S. pension plan settlement charge (c)(d) | | — | | 1,860 | | | — | | 1,860 | Cost streamlining initiative (d)(e) | Cost streamlining initiative (d)(e) | | — | | — | | | 286 | | — | Cost streamlining initiative (d)(e) | | — | | — | | | — | | 286 | Currency conversion impacts of the Venezuelan bolivar fuerte (e)(f) | Currency conversion impacts of the Venezuelan bolivar fuerte (e)(f) | | 35 | | | — | | | 375 | | | 88 | Currency conversion impacts of the Venezuelan bolivar fuerte (e)(f) | | 26 | | | 340 | | | 244 | | | 340 | Adjusted EBITDA | Adjusted EBITDA | $ | 29,402 | | $ | 28,315 | | $ | 85,634 | | $ | 80,940 | Adjusted EBITDA | $ | 32,189 | | $ | 28,020 | | $ | 63,015 | | $ | 56,232 | Adjusted EBITDA margin (%) (f)(h) | Adjusted EBITDA margin (%) (f)(h) | | 13.8% | | | 14.9% | | | 14.1% | | | 14.6% | Adjusted EBITDA margin (%) (f)(h) | | 14.5% | | | 13.9% | | | 14.5% | | | 14.2% |
Quaker Chemical Corporation
Management’s Discussion and Analysis
(a) Equity income in a captive insurance company represents the after taxafter-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.
Quaker Chemical Corporation Management’s Discussion and Analysis
(b) Houghton combination-related expenses include certain legal, environmental, financial, and other advisory and consultant costs incurred in connection with the strategic evaluation of, diligence on, and execution of the definitive agreement to combine with Houghton, as well as regulatory and shareholder approvals and integration planning associated with the pending Combination. These costs are not indicative of the future operating performance of the Company. In addition, certainCertain of these costs were considered non-deductible for the purpose of determining the Company’s effective tax rate and, therefore, the earnings per diluted share amount reflects this impact. Also, included in the caption Houghton combination-related expenses for the three and six months ended June 30, 2018 is a $0.6 million gain on the sale of an available-for-sale asset. In addition, during the three and six months ended June 30, 2018, the Company incurred $0.9 million and $1.7 million of ticking fees, respectively, to maintain the bank commitment related to the pending Combination. There were no similar interest costs during the three or six months ended June 30, 2017. These interest costs are included in the caption Houghton combination-related expenses in the reconciliation of GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share above, but are included in the caption Interest expense in the reconciliation of Net income attributable to Quaker Chemical Corporation to Adjusted EBITDA above. See Note 2 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (c)Transition Tax adjustment represents the tax benefit recorded by the Company as a result of changes to the Company’s initial fourth quarter of 2017 estimate of the one-time charge on deemed repatriation of undistributed earnings associated with U.S. Tax Reform in December 2017. Specifically, the Company adjusted the amount estimated for the U.S. state impact of the gross deemed repatriation Transition Tax on previously untaxed accumulated and current earnings and profits of certain of the Company’s foreign subsidiaries. The Transition Tax adjustment was based on guidance issued during the second quarter of 2018 by various state taxing authorities and was the result of a specific one-time event and is not indicative of future operating performance of the Company. Transition Tax adjustment is included within Taxes on income before equity in net income of associated companies in the reconciliation of Net income attributable to Quaker Chemical Corporation to Adjusted EBITDA. See Note 10 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (c)(d) U.S. pension plan settlement charge represents the expense recorded related to the Company’s U.S. pension plan cash settlement to its vested terminated participants. This settlement charge represents the immediate recognition into expense of a portion of the unrecognized loss within accumulated other comprehensive loss (“AOCI”) on the balance sheet in proportion to the share of the projected benefit obligation that was settled by these payments. This charge was the result of a specific one-time event and is not indicative of the future operating performance of the Company. See Note 8 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(d)(e) Cost streamlining initiative represents expenses associated with certain actions taken to reorganize the Company’s corporate staff. Overall, these costs are non-core and are indirect operating expenses that are not attributable to the product sales of any respective reportable operating segment, and, therefore, are not indicative of the future operating performance of the Company.
(e)(f) Currency conversion impactsimpact of the Venezuelan bolivar fuerte represent after taxrepresents losses incurred at the Company’s Venezuelan affiliate as a result of changes in Venezuela’s foreign exchange markets and controls andleading to specific devaluations of the conversion ofVenezuelan bolivar fuerte to U.S. dollars. The losses were the result of changes to Venezuela’s market and foreign exchange controls andwhich are not indicative of the future operating performance of the Company.
(f)(g) Within the Company’s calculation of Non-GAAP earnings per diluted share above, each reconciling item includes the impact of any current and deferred income tax expense (benefit) as applicable. The income tax expense (benefit) related to these items was determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments occurred.
(h)The Company calculates Adjusted EBITDA margin as the percentage of Adjusted EBITDA into consolidated net sales. Operations Consolidated Operations Review – Comparison of the ThirdSecond Quarter of 20172018 with the ThirdSecond Quarter of 20162017 Net sales grew $20.8 million or 10% in the thirdsecond quarter of 2017 of $212.92018, increasing to $222.0 million increased 12% from $190.4compared to $201.2 million in the thirdsecond quarter of 2016.2017. The $22.5 million increase inCompany’s second quarter of 2018 net sales was driven by abenefited from increases in volume of 5% increase in organic volumes, a 2%, or $2.9 million increase from sales primarily attributable to the Company’s fourth quarter of 2016 acquisition of Lubricor, a 3% increase due to changes inselling price and product mix of approximately 3%, and thea positive impact offrom foreign currency translation of $3.8 million,2% or 2%.$4.5 million. Costs of goods sold (“COGS”) in the thirdsecond quarter of 20172018 of $138.1$141.0 million increased 16%9% from $119.5$129.3 million in the thirdsecond quarter of 2016.2017. The increase in COGS was primarily due to the increase in product volumes, noted above, as well as additional COGS attributed to the Company’s 2016 acquisition of Lubricor, the impact of certain raw material cost increases, changes in product mix and the negative impact of foreign currency translation and changes in product mix quarter-over-quarter. In addition, the third quarters of 2017 and 2016 COGS include reclassifications related to the Company’s first quarter of 2017 adoption and retrospective application of an accounting standard update regarding the classification of certain pension costs on the income statement. See Note 3 of Notes to Condensed Consolidated Financial Statements. Gross profit in the thirdsecond quarter of 20172018 increased $3.9$9.1 million or 5%,13% from the thirdsecond quarter of 2016.2017. The increase in gross profit was primarily due to the increase in net sales and product volumes, noted above, largely offset byas well as a lowerhigher gross margin of 35.1%36.5% in the thirdsecond quarter of 20172018 compared to 37.2%35.7% in the thirdsecond quarter of 2016.2017. The decreaseincrease in the Company’s gross margin quarter-over-quarter was primarily due to higher raw material costs compared to the prior year quarterdriven by pricing initiatives and a change in the mix of certain products sold. SG&A in the third quarter of 2017 increased $3.2 million compared to the third quarter of 2016 due to the net impact of several factors. Specifically, the Company’s SG&A increased as a result of higher labor-related costs, primarily due to annual compensation increases and the timing of certain incentive compensation accruals, and additional SG&A associated with the Company’s 2016 Lubricor acquisition, as well as increases due to foreign currency translation. These were partiallysold which more than offset by decreases to SG&A as a result of certainraw material cost savings efforts, including the 2015 global restructuring program. In addition, the third quarters of 2017 and 2016 SG&A includes reclassifications related to the Company’s first quarter of 2017 adoption of the pension accounting standard update, noted above.
During the third quarter of 2017, the Company incurred $9.7 million of costs related to its previously announced combination with Houghton, described in the Non-GAAP measures section of this Item, above. The Company incurred $1.2 million of similar combination-related expenses in the third quarter of 2016.increases.
Quaker Chemical Corporation Management’s Discussion and Analysis Operating incomeSG&A in the thirdsecond quarter of 2018 increased $4.5 million compared to the second quarter of 2017 was $14.0 million compared to $21.9 million in the third quarter of 2016. The decrease in operating income was primarily due to increases from foreign currency translation and higher combination-related expenses along with slightly higher levels of SG&A notlabor-related costs, primarily related to annual merit increases as well as the Houghton combination, which more than offset gross profit increases on strong volume growth, noted above.
Other income (expense), net, increased $0.3 million quarter-over-quarter primarily due to higher foreign currency transaction gains realized in the third quarteramount and timing of 2017 compared to the third quarter of 2016. In addition, the third quarters of 2017 and 2016 other income (expense), net, includes reclassificationsincentive based compensation accruals related to the Company’s firststrong operating performance.
During the second quarter of 2018, the Company incurred $4.3 million of legal, financial, and other advisory and consultant expenses for integration planning and regulatory approvals related to the pending combination with Houghton. Comparatively, the Company incurred $4.3 million of combination-related expenses during the second quarter of 2017 adoption of the pension accounting standard update, noted above. The Company had a relatively consistent level of interest expense in both the third quarters of 2017 and 2016, respectively. Interest income increased $0.2 million quarter-over-quarter primarily duerelated to an increase in the level of the Company’s invested cash in certain regions with higher returns.
The Company’s effective tax rates for the third quarters of 2017 and 2016 were 22.1% and 28.3%, respectively. The Company’s relatively low third quarter of 2017 effective tax rate was primarily driven by a tax benefit for deductions in excess of compensation cost associated with stock option exercises and restricted stock vesting incosts similar to the current quarter as a result of the Company’s first quarter of 2017 adoption of an accounting standard update regarding the tax impact of certain stock-based compensation. See Note 3 of Notes to Condensed Consolidated Financial Statements. There were no comparable stock compensation-related tax benefits during the third quarter of 2016. Comparatively, the third quarter of 2016 effective tax rate was elevated, as it reflected earnings taxed at one of the Company’s subsidiaries at a statutory rate of 25% while awaiting recertification of a concessionary 15% tax rate, which the Company received and recorded the full year benefit of during the fourth quarter of 2016. This concessionary tax rate was available to the Company throughout 2017. Both the third quarters of 2017 and 2016 effective tax rates included the tax benefit of changes in uncertain tax positions, which were more favorable to the effective tax rate in the prior year quarter as compared to the current quarter.
Equity in net income of associated companies (“equity income”) decreased $0.2 million quarter-over-quarter, primarily due to the lower earnings from the Company’s interest in a captive insurance company in the current quarter. In addition, the Company recorded an immaterial currency conversion charge in the third quarter of 2017 associated with the Company’s Venezuela affiliate due to the on-going devaluation of the Venezuelan bolivar fuerte. diligence-related costs. See the Non-GAAP Measures section of this Item, above.
The Company had a $0.2 million increase in netOperating income attributable to noncontrolling interest in the thirdsecond quarter of 20172018 was $22.6 million compared to the third quarter of 2016, primarily due to an increase in performance from certain consolidated affiliates in the Company’s Asia/Pacific region.
In addition to both the foreign currency transaction gains realized in other income and the currency conversion charge associated with the Company’s Venezuelan affiliate recorded in equity income, noted above, the impacts from foreign currency translation positively impacted the Company’s third quarter of 2017 results by approximately 1%, or $0.02 per diluted share.
Consolidated Operations Review – Comparison of the First Nine Months of 2017 with the First Nine Months of 2016
Net sales for the first nine months of 2017 of $609.0 million increased 10% compared to net sales of $555.4 million for the first nine months of 2016. The $53.6 million increase in net sales was the result of a 6% increase in organic volumes, a 2%, or $8.5 million increase from sales attributable to the Company’s 2016 acquisition of Lubricor and a 2% increase due to changes in price and product mix, partially offset by the negative impact of foreign currency translation of $1.2 million, or less than 1%.
COGS in the first nine months of 2017 of $391.5 million increased 13% from $345.1$17.9 million in the first nine monthssecond quarter of 2016.2017. The increase in COGSoperating income was primarily due to the increase in product volumes, noted above, as well as additional COGS attributed to the Company’s 2016 acquisition of Lubricor, the impact of certain raw material coststrong net sales and gross profit increases, and changes in product mix, partially offset by the positive impact of foreign currency translation year-over-year. In addition, the first nine months of 2017 and 2016 COGS include reclassifications related to the Company’s first quarter of 2017 adoption of the pension accounting standard update, noted above.
Gross profit for the first nine months of 2017 increased $7.2 million, or 3%, from the first nine months of 2016, primarily driven by the increase in sales volumes, noted above, partially offset by a lower gross marginan increase in SG&A not related to the pending Houghton combination.
The Company had other income, net, of 35.7%$0.3 million in the first nine monthssecond quarter of 20172018 compared to 37.9%other expense, net, of $1.6 million in the first nine monthssecond quarter of 2016. Similar to the discussion of2017. The quarter-over-quarter changes in gross margin above, the decrease in the Company’s gross margin for the first nine months of 2017change was primarily due to higher raw material costs compared to the prior year and a change in the mix of certain products sold. SG&A for the first nine months of 2017 increased $4.0 million compared to the first nine months of 2016 primarily due to the same factors noted in the quarter-over-quarter discussion, above, including additional SG&A associated with the Company’s prior year Lubricor acquisition and an increase in labor-related costs primarily due to annual compensation increases and the timing of certain incentive compensation accruals, as well as a firstsecond quarter of 2017 cost streamlining initiative,U.S. pension plan settlement charge of $1.9 million described in the Non-GAAP measures section of this Item, above. These increases to SG&A were partially offset by decreases due toIn addition, the Company incurred higher foreign currency translation, and decreases as a result of certain cost savings efforts, including the impact of the 2015 global restructuring programtransaction losses in the current
Quaker Chemical Corporation
Management’s Discussion and Analysis
year. In addition, the first nine months of 2017 and 2016 SG&A include reclassifications relatedquarter as compared to the Company’s firstsecond quarter of 2017, adoptionhowever this was generally offset by a second quarter of 2018 gain on the pension accounting standard update, notedsale of an available-for-sale asset of $0.6 million, included in the Non-GAAP measures section of this Item, above.
DuringInterest expense increased $0.8 million in the first nine monthssecond quarter of 2018 compared to the second quarter of 2017, primarily due to current quarter costs incurred to maintain the Company incurred $23.1 million of costs related to its previously announced combination withbank commitment for the pending Houghton Combination, described in the Non-GAAP measures section of this Item, above. The Company incurred $1.2 million ofdid not incur similar combination-related expensesinterest costs in the first nine monthssecond quarter of 2016.
Operating income in the first nine months of 2017 was $45.7 million compared to $64.4 million in the first nine months of 2016. The decrease in operating income was primarily due to the Houghton combination expenses along with slightly higher levels of SG&A not related to the Houghton combination, which more than offset gross profit increases on strong volume growth, noted above.
2017. The Company had other expensea relatively consistent level of $1.4 millioninterest income in both the first nine monthssecond quarters of 2018 and 2017, compared to $0.2 million inrespectively. The Company’s effective tax rates for the first nine monthssecond quarters of 2016. The increase in other expense was primarily driven by a2018 and 2017 were 16.8% and 26.2%, respectively. Both the Company’s second quarters of 2018 and 2017 effective tax rates include the impact of Houghton combination-related expenses, noted above, certain of which were considered non-deductible for the purpose of determining the Company’s effective tax rate. In addition, the Company’s second quarter of 2017 U.S. pension plan settlement charge, 2018 effective tax rate includes a $1.2 million Transition Tax adjustment, described in the Non-GAAP measures section of this Item, above partially offset by slightly higher foreign currency transaction gains realized. Excluding the current quarter Transition Tax adjustment and the impact of combination-related expenses in both quarters, the first nine monthsCompany estimates that its second quarters of 2018 and 2017 compared to the first nine months of 2016effective tax rates would have been approximately 22% and an increase in receipts of local municipality-related grants in one of the Company’s regions year-over-year. In addition, the first nine months of 2017 and 2016 other expense includes reclassifications related to the Company’s first quarter of 2017 adoption of the pension accounting standard update, noted above. Interest expense27%, respectively. This decrease quarter-over-quarter was relatively consistent year-over-year. Interest income increased $0.4 million in the first nine months of 2017 compared to the first nine months of 2016, primarily due to an increasethe decrease in the level of the Company’s invested cash in certain regions with higher returns.
The Company’s effective tax rates for the first nine months of 2017 and 2016 were 32.5% and 31.0%, respectively. The Company’s first nine months of 2017 effective tax rate was elevated due to the impact of certain non-deductible Houghton combination-related expenses, which were partially offset by the favorable impact of tax benefits for deductions in excess of compensation cost associated with stock option exercises and restricted stock vesting, noted above. There were no comparable non-deductible combination-related expenses or stock compensation-related tax benefits during the first nine months of 2016. Comparatively, the first nine months of 2016 effective tax rate was elevated, as it reflected earnings taxed at one of the Company’s subsidiaries at aU.S. statutory tax rate of 25% while awaiting recertification of a concessionary 15% tax rate, whichfrom 35% in the Company received and recordedprior period to 21% in the full year benefit of during the fourth quarter of 2016. This concessionary tax rate was available to the Company throughout 2017. Thecurrent quarter. The Company has experienced and expects to continue to experience 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 stockshare-based compensation-related tax benefits, among other factors.
Equity in net income of associated companies (“equity income”) increased $0.7$0.8 million in the first nine monthssecond quarter of 20172018 compared to the first nine monthssecond quarter of 2016.2017. The primary driver of the increase in equity income was primarily due to higher earnings from the Company’s interest in a captive insurance company in the current year.quarter. In addition, the Company recorded a lower currency conversion charge quarter-over-quarter to write down the Company’s equity investment in bothits Venezuelan affiliate due to the on-going devaluation of the Venezuelan bolivar fuerte in each period. See the Non-GAAP Measures section of this Item, above. Net income attributable to noncontrolling interest decreased $0.3 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the Company’s purchase of the remaining interest in its India joint venture in December 2017. Foreign exchange negatively impacted the Company’s second quarter of 2018 earnings by less than 1% or $0.01 per diluted share, including the positive impact from foreign currency translation net of higher foreign currency transaction losses quarter-over-quarter. Consolidated Operations Review – Comparison of the First Six Months of 2018 with the First Six Months of 2017 Net sales for the first ninesix months of 2018 of $434.0 million increased 10% compared to net sales of $396.1 million for the first six months of 2017. The $37.9 million increase in net sales was the result of a 3% increase in volumes, a 3% increase due to selling price and product mix and a positive impact from foreign currency translation of 4% or $15.5 million. COGS in the first six months of 2018 of $277.6 million increased 10% from $253.4 million in the first six months of 2017. The increase in COGS was primarily due to the increase in product volumes, noted above and the impact of foreign currency translation. Gross profit for the first six months of 2018 increased $13.7 million or 10% from the first six months of 2017, primarily driven by the increase in net sales and 2016, respectively, associated with the Company’s Venezuela affiliate.product volumes, noted above. The Company’s interestgross margin of 36.0% in the first six months of 2018 was consistent with its gross margin in the first six months of 2017.
Quaker Chemical Corporation Management’s Discussion and Analysis
SG&A for the first six months of 2018 increased $6.4 million compared to the first six months of 2017 primarily due to the same factors noted in the quarter-over-quarter discussion, above, including the impact of foreign currency translation and higher labor-related costs. These increases in SG&A year-over-year were partially offset by a captive insurance company and the currency conversion charges recorded arefirst quarter of 2017 cost streamlining initiative described in the Non-GAAP measures section of this Item, above. During the first six months of 2018, the Company incurred $9.5 million of legal, financial, and other advisory and consultant expenses for integration planning and regulatory approvals related to the pending combination with Houghton. Comparatively, the Company incurred $13.4 million of combination-related expenses during the first six months of 2017 related to costs similar to the current year and due diligence-related costs. See the Non-GAAP Measures section of this Item, above. Operating income in the first six months of 2018 was $42.8 million compared to $31.7 million in the first six months of 2017. The increase in operating income was due to strong net sales and gross profit increases as well as lower Houghton combination-related expenses, noted above, partially offset by an increase in SG&A not related to the Houghton combination. The Company had other expense, net, of $0.1 million in the first six months of 2018 compared to $1.7 million in the first six months of 2017. The decrease in other expense, net, was primarily due to the prior year U.S. pension plan settlement charge and a current year gain on the sale of an available-for-sale asset, both of which are included in the Non-GAAP measures section of this Item, above, partially offset by higher foreign currency transaction losses in the current year. Interest expense increased $1.9 million during the first six months of 2018 compared to the first six months of 2017, primarily due to current year costs incurred to maintain the bank commitment for the pending Houghton combination, described in the Non-GAAP measures section of this Item, above. The Company did not incur similar interest costs in the first six months of 2017. Interest income was consistent at $1.1 million in both the first six months of 2018 and 2017. The Company’s effective tax rates for the first six months of 2018 and 2017 were 22.8% and 37.4%, respectively. Similar to the quarter-over-quarter discussion, above, the Company’s first six months of 2018 and 2017 effective tax rates include the impact of Houghton combination-related expenses in both periods, certain of which were considered non-deductible for the purpose of determining the Company’s effective tax rate, as well as the current year Transition Tax adjustment, described in the Non-GAAP measures section of this Item, above. Excluding the current year Transition Tax adjustment and the impact of non-deductible combination-related expenses in each period, the Company estimates that its first six months of 2018 and 2017 effective tax rates would have been approximately 24% and 27%, respectively. The decrease in the Company’s effective tax rate year-over-year was primarily due to a lower U.S. statutory tax rate of 21% in the current year compared to 35% in the prior year. Equity income decreased $0.5 million in the first six months of 2018 compared to the first six months of 2017. The decrease was primarily due to lower earnings from the Company’s interest in a captive insurance company in the current year, partially offset by higher currency conversion charges in the prior year to write down the Company’s equity investment in its Venezuelan affiliate, both described in the Non-GAAP measures section of this Item, above. The Company had a $0.5$0.9 million increasedecrease in net income attributable to noncontrolling interest in the first ninesix months of 20172018 compared to the first ninesix months of 2016, 2017, primarily due to an increasethe purchase of the remaining interest in performance from certain consolidated affiliates inits India joint venture during December 2017. Foreign exchange positively impacted the Company’s Asia/Pacific region. The impactsfirst six months of 2018 earnings by approximately 2% or $0.06 per diluted share, including the positive impact from foreign currency translation negatively impacted the Company’s first nine monthsnet of 2017 results by approximately 1%, or $0.04 per diluted share, which does not include thehigher foreign currency transaction gains realized in other income or the currency conversion charge associated with the Company’s Venezuelan affiliate recorded in equity income, noted above.losses year-over-year.
Reportable Operating Segments Review - Comparison of the Second Quarter of 2018 with the Second Quarter of 2017 The Company sells its industrial process fluids, chemical specialties and technical expertise to a wide range of industries in a global product portfolio throughout its four segments: (i) North America, (ii) EMEA, (iii) Asia/Pacific and (iv) South America. Comparison of the Third Quarter of 2017 with the Third Quarter of 2016
North America North America represented approximately 43%44% of the Company’s consolidated net sales in the thirdsecond quarter of 2017.2018. The segment’s net sales were $90.5$97.4 million, an increase of $4.3$7.1 million or 5%8% compared to the thirdsecond quarter of 2016.2017. The increase in net sales was primarily due to higher volumes of 4% and an increase in selling price and product mix of 4%. The impact of foreign currency translation was less than 1%. This segment’s operating earnings, excluding indirect expenses, were $23.2 million, an increase of $3.6 million or 18% compared to the second quarter of 2017. The increase in operating earnings quarter-over-quarter was the result of higher gross profit on the higher net sales noted above, coupled with an increase in gross margin due to changes in product mix and athe impact of past pricing initiatives. The segment’s current quarter operating earnings were slightly impacted by higher SG&A, primarily due to higher labor costs associated with annual merit increases and improved segment performance.
Quaker Chemical Corporation Management’s Discussion and Analysis
EMEA EMEA represented approximately 27% of the Company’s consolidated net sales in the second quarter of 2018. The segment’s net sales were $60.2 million, an increase of $5.7 million or 10% compared to the second quarter of 2017. The increase in net sales was primarily due to the positive impact of foreign currency translation of 8% and increases in selling price and product mix of approximately 2%, with volumes relatively consistent quarter-over-quarter. The foreign exchange impact was primarily due to the strengthening of the euro against the U.S. dollar as this exchange rate averaged 1.19 in the second quarter of 2018 compared to 1.10 in the second quarter of 2017. This segment’s operating earnings, excluding indirect expenses, were $9.1 million, an increase of $0.9 million or 11% compared to the second quarter of 2017. The increase in operating earnings quarter-over-quarter was driven by higher gross profit, on the higher net sales, noted above, as well as a slightly higher gross margin in the current quarter. Partially offsetting the increase in gross profit was higher SG&A in the second quarter of 2018 compared to the prior year quarter, which was primarily due to the impact of foreign currency translation as well as higher labor costs associated with annual merit increases. Asia/Pacific Asia/Pacific represented approximately 25% of the Company’s consolidated net sales in the second quarter of 2018. The segment’s net sales were $55.3 million, an increase of $7.6 million or 16% compared to the second quarter of 2017. The increase in net sales was primarily due to higher volumes of 10%, an increase in selling price and product mix of approximately 2% and the positive impact of foreign currency translation of 4%. The foreign exchange impact was primarily due to the strengthening of the Chinese renminbi against the U.S. dollar as this exchange rate averaged 6.38 in the second quarter of 2018 compared to 6.86 in the second quarter of 2017. This segment’s operating earnings, excluding indirect expenses, were $14.6 million, an increase of $2.8 million or 24% compared to the second quarter of 2017. The increase in operating earnings was primarily driven by higher gross profit on the increased net sales, noted above, as well as a slightly higher gross margin in the current quarter. Partially offsetting the increase in gross profit was higher SG&A in the second quarter of 2018 compared to the prior year quarter, which was primarily due to the impact of foreign currency translation as well as higher labor costs associated with annual merit increases and improved segment performance. South America South America represented approximately 4% of the Company’s consolidated net sales in the second quarter of 2018. The segment’s net sales were $9.1 million, an increase of $0.4 million or 5% compared to the second quarter of 2017. The increase in net sales was primarily due to higher volumes of 8% and an increase in selling price and product mix of 16%, partially offset by the negative impact of foreign currency translation of approximately 19%. The foreign exchange impact was primarily due to the weakening of the Brazilian real and Argentinian peso against the U.S. dollar as these exchange rates averaged 3.60 and 23.38 in the second quarter of 2018 compared to 3.21 and 15.70 in the second quarter of 2017, respectively. This segment’s operating earnings, excluding indirect expenses, were $1.1 million, an increase of $0.1 million or 5% compared to the second quarter of 2017. The increase in operating earnings was driven by higher gross profit on the increased net sales, noted above. The segment’s gross margin in each period was relatively consistent. Partially offsetting the increase in gross profit was higher SG&A in the second quarter of 2018 compared to the prior year quarter, which was primarily due to higher labor costs associated with annual merit increases partially offset by the impact of foreign currency translation. Reportable Operating Segments Review - Comparison of the First Six Months of 2018 with the First Six Months of 2017 North America North America represented approximately 44% of the Company’s consolidated net sales in the first six months of 2018. The segment’s net sales were $189.2 million, an increase of $11.5 million or approximately 7% compared to the first six months of 2017. The increase in net sales was primarily due to higher volumes of 3% and an increase in selling price and product mix of 4%. The impact of foreign currency translation was less than 1%. Volumes including acquisitionsThis reportable segment’s operating earnings, excluding indirect expenses, were $43.6 million, an increase of $3.3 million or 8% compared to the first six months of 2017. The increase during the first six months of 2018 was mainly driven by higher gross profit on the increased net sales, noted above, on a relatively consistent quarter-over-quarter.gross margin in each period. Partially offsetting the increase in gross profit was higher SG&A in the first six months of 2018 compared to the prior year, which was primarily due to higher labor costs associated with annual merit increases and improved segment performance. EMEA EMEA represented approximately 28% of the Company’s consolidated net sales in the first six months of 2018. The segment’s net sales were $122.2 million, an increase of $13.8 million or 13% compared to the first six months of 2017. The increase in net sales was primarily due to the positive impact of foreign currency translation of 11% and increases in selling price and product mix of 5%, partially offset by lower volumes of 3%. The year-to-date volume comparison is impacted by an atypically high sales pattern in EMEA during the first quarter of 2017. The foreign exchange impact was primarily due to a strengthening of the Mexican pesoeuro against the U.S. dollar as this exchange rate averaged 17.811.21 in the third quarterfirst six months of 20172018 compared to 1.08 in the first six months of 2017. This
Quaker Chemical Corporation Management’s Discussion and Analysis to 18.74 in the third quarter of 2016. Thisreportable segment’s operating earnings, excluding indirect expenses, were $18.9 million, a decrease of $1.5 million or 7% compared to the third quarter of 2016. The decrease in operating earnings quarter-over-quarter was primarily the result of lower gross profit on a decline in gross margin due to increases in certain raw material costs and changes in product mix. Operating earnings were also negatively impacted by higher SG&A, primarily due to increases in labor costs associated with annual merit increases.
EMEA
EMEA represented approximately 28% of the Company’s consolidated net sales in the third quarter of 2017. The segment’s net sales were $58.8$19.4 million, an increase of $9.0$1.9 million or 18%11% compared to the third quarter of 2016. The increase in net sales was primarily due to higher volumes of 8%, increases in selling price and product mix of 4% and the positive impact of foreign currency translation of 6%. The foreign exchange impact was primarily due to a strengthening of the euro against the U.S. dollar, as this exchange rate averaged 1.18 in the third quarter of 2017 compared to 1.12 in the third quarter of 2016. This segment’s operating earnings, excluding indirect expenses, were $8.9 million, an increase of $0.5 million or 6% compared to the third quarter of 2016. The increase in operating earnings quarter-over-quarter was due to higher gross profit, driven by the increased net sales, noted above, partially offset by a decline in gross margin due to increases in certain raw material costs and changes in product mix. Also, EMEA’s SG&A increased in the third quarter of 2017 compared to the prior year quarter due to the region’s improved performance and the impact of foreign currency translation, partially offset by the Company’s past cost savings efforts.
Asia/Pacific
Asia/Pacific represented approximately 25% of the Company’s consolidated net sales in the third quarterfirst six months of 2017. The segment’s net sales were $54.2 million, an increase during the first six months of $8.3 million or 18% compared to2018 was the third quarterresult of 2016. The increase in net sales was primarily due to higher volumes of 20% partially offset by decreases in selling price and product mix of 2%. This segment’s operating earnings, excluding indirect expenses, were $14.0 million, an increase of $2.2 million or 19% compared to the third quarter of 2016. The increase in operating earnings was primarily driven by higher gross profit on the increased net sales, noted above, partially offset byon a declinerelatively consistent gross margin in each period. Partially offsetting the increase in gross margin due to increases in certain raw material costs and changes in product mix andprofit was higher levels of SG&A on improved segment performance.
South America
South America represented approximately 4% of the Company’s consolidated net sales in the third quarterfirst six months of 2017. The segment’s net sales were $9.5 million, an increase $0.9 million or 11%2018 compared to the third quarter of 2016. The increase in net salesprior year, which was primarily due to higher volumes of 3%, an increase in selling price and product mix of 7% and the positive impact of foreign currency translation of approximately 1%. The foreign exchange impact was primarily due to the strengthening of the Brazilian real against the U.S. dollar, as this exchange rate averaged 3.16 in the third quarter of 2017 compared to 3.24 in the third quarter of 2016. This segment’s operating earnings, excluding indirect expenses, were $1.0 million, an increase of $0.3 million or 42% compared to the third quarter of 2016. The increase in operating earnings was driven by higher gross profit on the increased net sales, noted above, as well as higher gross margin on raw material cost changes and impacts from foreign exchange. These increases to operating earnings were partially offset by an increase in the segment’s SG&A quarter-over-quarter primarily due to improved segment performance and the impact of foreign currency translation.
Comparison of the First Nine Months of 2017 with the First Nine Months of 2016
North America
North America represented approximately 44% of the Company’s consolidated net sales in the first nine months of 2017. The segment’s net sales were $268.1 million, an increase of $16.5 million or 7% compared to the first nine months of 2016. The increase in net sales was primarily due to higher volumes of 3%, including acquisitions, and an increase in selling price and product mix of 4%, partially offset by the negative impact of foreign currency translation of less than 1%. The foreign exchange impact was primarily due to a weakening of the Mexican peso against the U.S. dollar, as this exchange rate averaged 18.82 in the first nine months of 2017 compared to 18.28 in the first nine months of 2016. This reportable segment’s operating earnings, excluding indirect expenses, were $59.1 million, a decrease of $0.2 million compared to the first nine months of 2016. The decrease during the first nine months of 2017 was the result of a decline in gross margin due to increases in certain raw material costs and changes in product mix, and higher SG&A, primarily due to higher labor costs associated with annual merit increases, which offset higher gross profit on increased sales volumes, noted above.
EMEAincreases.
EMEA represented approximately 28% of the Company’s consolidated net sales in the first nine months of 2017. The segment’s net sales were $167.2 million, an increase of $16.6 million or 11% compared to the first nine months of 2016. The increase in net sales was primarily due to higher volumes of 8% and increases in selling price and product mix of 3%, partially offset by the negative impact of foreign currency translation of less than 1%. The foreign exchange impact was primarily due to a weakening of the euro
Quaker Chemical Corporation
Management’s Discussion and Analysis
against the U.S. dollar, as this exchange rate averaged 1.11 in the first nine months of 2017 compared to 1.12 in the first nine months of 2016. This reportable segment’s operating earnings, excluding indirect expenses, were $26.3 million, an increase of $0.9 million, or 4% compared to the first nine months of 2016. The increase in operating earnings was primarily driven by higher gross profit on the increased net sales, noted above, partially offset by a decline in gross margin due to increases in certain raw material costs and changes in product mix. EMEA benefitted from a relatively consistent level of SG&A in the first nine months of 2017 compared to the first nine months of 2016, which was the net result of the Company’s past cost savings efforts and the impact of foreign currency translation offset by the improved segment performance year-over-year.
Asia/Pacific Asia/Pacific represented approximately 24% of the Company’s consolidated net sales in the first ninesix months of 2017.2018. The segment’s net sales were $147.1$104.1 million, an increase of $16.5$11.3 million or 13%12% compared to the first ninesix months of 2016.2017. The increase in net sales was primarily due to higher volumes of 17%,9% and the positive impact of foreign currency translation of 5% partially offset by decreases in selling price and product mix of 3% and the negative impact of foreign currency translation of 1%2%. The foreign exchange impact was primarily due to the weakeningstrengthening of the Chinese renminbi against the U.S. dollar as this exchange rate averaged 6.806.37 in the first ninesix months of 20172018 compared to 6.586.87 in the first ninesix months of 2016.2017. This reportable segment’s operating earnings, excluding indirect expenses, were $36.0$26.8 million, an increase of $2.2$4.7 million or 6%21% compared to the first ninesix months of 2016.2017. The increase during the first ninesix months of 20172018 was the result of higher gross profit on the increased net sales, noted above, coupled with a slightly higher gross margin. Partially offsetting the increase in gross profit was higher SG&A in the first six months of 2018 compared to the prior year, which was primarily due to the impact of foreign currency translation as well as higher gross profit partially offset by an increase in the segment’s SG&A. Gross profitlabor costs associated with annual merit increases were driven by the increases in net sales, noted above, partially offset by a gross margin decline due to increases in certain raw material costs and changes in product mix. The region’s higher levels of SG&A were primarily driven by the improved segment performance year-over-year. performance. South America South America represented approximately 4% of the Company’s consolidated net sales in the first ninesix months of 2017.2018. The segment’s net sales were $26.6$18.5 million, an increase of $3.9$1.3 million or 17%8% compared to the first ninesix months of 2016.2017. The increase in net sales was primarily due to higher volumes of 3%,10% and an increase in selling price and product mix of 6% and a positive10% partially offset by the negative impact of foreign currency translation of 8%approximately 12%. The foreign exchange impact was primarily due to the strengtheningweakening of the Brazilian real and Argentinian peso against the U.S. dollar as thisthese exchange raterates averaged 3.173.41 and 21.24 in the first ninesix months of 2018 compared to 3.18 and 15.68 in the first six months of 2017, compared to 3.53 in the first nine months of 2016.respectively. This reportable segment’s operating earnings, excluding indirect expenses, were $2.8$1.7 million, which increased $2.1a decrease of $0.1 million compared to the first ninesix months of 2016.2017. The increase duringsegment’s lower operating earnings in the first ninesix months of 20172018 was mainly driven by higher gross profit on the increase in net sales, noted above, as well as higherresult of a lower gross margin on selling price and product mix, raw material changes and impacts from foreign exchange.currency translation, partially offset by the increase in net sales, noted above. In addition, the segment’s SG&A declinedincreased slightly year-over-year, primarily due to the positive effects of various cost savings efforts which offset higher SG&A from improved segment performance and the impact of foreign currency translation.annual merit increases. Factors That May Affect Our Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) Certain information included in this Report and other materials filed or to be filed by Quaker with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. 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: ·
- statements relating to our business strategy;
·
- our current and future results and plans; and
·
- statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or other 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 Quaker’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 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 Quaker’s subsequent reports on Forms 10-K, 10-Q, 8-K and other related filings should be consulted. Our forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A
Quaker Chemical Corporation Management’s Discussion and Analysis about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that demand for the Company’s products and services is largely derived from the demand for its 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, significant increases in raw material costs, 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. Other factors could also adversely affect us, including factors related to the previously announced pending Houghton combination and the risk that the transaction may not receive regulatory approval or that regulatory approval may include conditions or other terms not acceptable to us. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed in this Report, including those related to the Combination, could also adversely affect us including, but not limited to:
· the risk that a required regulatory approval will not be obtained or is subject to conditions that are not anticipated or acceptable to us; ·the potential for regulatory authorities to require divestitures in connection with the Combination, which would result in a smaller than anticipated combined business;
·the risk that a closing condition to the Combination may not be satisfied in a timely manner;
·risks associated with the financing of the Combination;
·the occurrence of any event, change or other circumstance that could give rise to the termination of the share purchase agreement;
·potential adverse effects on Quaker Chemical’s business, properties or operations caused by the implementation of the Combination;
·Quaker Chemical’s ability to promptly, efficiently and effectively integrate the operations of Houghton International and Quaker Chemical;
·risks related to each company’s distraction from ongoing business operations due to the Combination; and,
·the outcome of any legal proceedings that may be instituted against the companies following announcement of the share purchase agreement and transactions contemplated therein.
| ·the potential that regulatory authorities may require that we make divestitures in connection with the Combination of a greater amount than we anticipated, which would result in a smaller than anticipated combined business; | ·the risk that a closing condition to the Combination may not be satisfied in a timely manner; | ·risks associated with the financing of the Combination; | ·the occurrence of any event, change or other circumstance that could give rise to the termination of the share purchase agreement; | ·potential adverse effects on Quaker Chemical’s business, properties or operations caused by the implementation of the Combination; | ·Quaker Chemical’s ability to promptly, efficiently and effectively integrate the operations of Houghton and Quaker Chemical; | ·risks related to each company’s distraction from ongoing business operations due to the Combination; and, | ·the outcome of any legal proceedings that may be instituted against the companies related to the Combination. |
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, you should refer to the Risk Factors detailed in Item 1A of our Form 10-K for the year ended December 31, 2016,2017, as well as the proxy statement the Company filed on July 31, 2017 and in our quarterly and other reports filed from time to time with the Commission.SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. We have evaluated the information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2016,2017, and we believe there has been no material change to that information.
Item 4. Controls and Procedures. Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as 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 effective. Changes in internal control over financial reporting. As required by Rule 13a-15(d) under the Exchange Act, our management, including our principal executive officer and principal financial officer, has evaluated our internal control over financial reporting to determine whether any changes to our internal control over financial reporting occurred during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, no such changes to our internal control over financial reporting occurred during the quarter ended SeptemberJune 30, 2017.2018.
PART II. OTHER INFORMATION Items 1A, 3, 4 and 45 of Part II are inapplicable and have been omitted. Item 1. Legal Proceedings. Incorporated by reference is the information in Note 1618 of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1, of this Report. Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds. 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 | | 1,643 | | $ | 146.53 | | — | | $ | 86,865,026 | August 1 - August 31 | | 12,702 | | $ | 135.41 | | — | | $ | 86,865,026 | September 1 - September 30 | | — | | $ | — | | — | | $ | 86,865,026 | Total | | 14,345 | | $ | 136.68 | | — | | $ | 86,865,026 |
| | | | | | | (c) | | | (d) | | | | | | | | Total Number of | | | Approximate Dollar | | | (a) | | | (b) | | Shares Purchased | | | Value of Shares that | | | Total Number | | | Average | | as part of | | | May Yet be | | | of Shares | | | Price Paid | | Publicly Announced | | | Purchased Under the | Period | | Purchased (1) | | | Per Share (2) | | Plans or Programs | | | Plans or Programs (3) | April 1 - April 30 | | 307 | | $ | 150.31 | | — | | $ | 86,865,026 | May 1 - May 31 | | — | | $ | — | | — | | $ | 86,865,026 | June 1 - June 30 | | 2,137 | | $ | 156.17 | | — | | $ | 86,865,026 | Total | | 2,444 | | $ | 155.44 | | — | | $ | 86,865,026 |
(1) All of these shares were acquired from employees upon their surrender of Quaker 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 new 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”). The 2015 Share Repurchase Program, which replaced the Company’s other share repurchase plans then in effect, has no expiration date. There were no shares acquired by the Company pursuant to the 2015 Share Repurchase Program during the quarter ended SeptemberJune 30, 2017.2018. Item 5. Other Information.
As part of the Company’s integration planning for its combination with Houghton International, Inc., the Company intends to restructure its senior management reporting structure. In connection with that restructuring, it was determined that the position currently held by Mr. Jeffry Benoliel (Vice President and Global Leader of Metalworking, Can and Mining), would likely be restructured if the transaction is consummated. Following mutually agreeable discussions with Mr. Benoliel, it has been decided that, subject to the closing of the combination, his current position will be restructured and he will not be re-assigned to another senior position with the Company. Instead, Mr. Benoliel will receive severance and other benefits that will be substantially similar to those he would have received in connection with a termination of employment following a change in control of the Company pursuant to his existing Change in Control Agreement with the Company, dated November 19, 2008 (the “Agreement”). Separately, the amounts due to Mr. Benoliel under his existing supplemental retirement income program will be paid in accordance with the terms of that program. As contemplated by the Agreement, payment to Mr. Benoliel of severance and other benefits is subject to his execution and non-revocation of a Release in a form satisfactory to the Company. For additional information, see “Severance and Change in Control Benefits” and “Potential Payments Upon Termination or Change in Control”, in the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on March 31, 2017 for additional information.
Item 6. ExhibitsExhibits. ********* Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | QUAKER CHEMICAL CORPORATION (Registrant) | | | | | | | | | Date: October 26, 2017July 30, 2018 | | | | Mary Dean Hall, Vice President, Chief Financial Officer and Treasurer (officer duly authorized on behalf of, and principal financial officer of, the Registrant) |
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