UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
 
 
 
 
FORM
10-Q
 
 
 
 
 
 
☒
QUARTERLY
 
REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
OF 1934
For the quarterly period ended
September 30, 2020March 31, 2021
 
OR
 
☐
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
For the transition period from
 
to
 
Commission file number
001-12019
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
Pennsylvania
 
23-0993790
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
 
19428 – 2380
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000
 
Not Applicable
Former name, former address and former fiscal year,
 
if changed since last report.
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
 
Indicate by check mark whether the Registrant (1) has filed all reports
 
required to be filed by Section 13 or 15(d) of the Securities Exchange
 
Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
 
to file such reports), and (2) has been subject to such filing requirements
 
for the past 90
days.
 
Yes
 
☒
 
No
 
☐
 
 
Indicate by check mark whether the Registrant has submitted electronically
every Interactive Data File required
to be submitted pursuant to Rule 405
of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter
 
period that the registrant was required to submit such files).
 
Yes
 
☒
 
No
 
☐
 
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smallerfiler,”
“smaller reporting company”, company,”
and “emerging growth company”
in Rule 12b-2
of
the Exchange Act.
 
Large accelerated filer
 
☒
Accelerated filer
 
☐
Non-accelerated filer
 
☐
Smaller reporting
company
☐
Emerging growth company
 
☐
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
 
for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange
 
Act.
 
☐
 
 
Indicate by check mark whether the Registrant is a shell company (as defined
 
in Rule 12b-2 of the Exchange Act).
 
Yes
 
☐
 
No
 
☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common
 
stock, as of the latest practicable date.
Number of Shares of Common Stock
Outstanding on October 31, 2020April 30, 2021
 
17,831,57617,873,331
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
PART
 
I
FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements (Unaudited).
 
Quaker Chemical Corporation
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
 
Unaudited
Three Months Ended March 31,
Nine Months Ended
September 30,
September 30,2021
2020
2019
2020
2019
Net sales
$
367,224429,783
$
325,130
$
1,031,825
$
742,209378,561
Cost of goods sold (
excluding(excluding amortization expense -
See Note 14
)14)
 
227,032273,589
 
220,073244,710
 
660,396
486,224
Gross profit
 
140,192156,194
 
105,057
371,429
255,985133,851
Selling, general and administrative expenses
 
97,037104,310
 
80,812
282,405
182,29398,701
Indefinite-lived intangible asset impairment
0
0
38,000
0
Restructuring and related charges
1,3831,175
24,045
3,585
24,0451,716
Combination, integration and other acquisition-related
 
expenses
6,9135,815
14,7027,878
22,786
23,789
Operating income (loss)
 
34,859
(14,502)44,894
 
24,653
25,858(12,444)
Other income (expense) income,, net
 
(239)4,687
 
203
(22,407)
(389)(21,175)
Interest expense, net
(6,837)
(6,102)(5,470)
(22,109)
(7,611)(8,461)
Income (loss) before taxes and equity in net income of
associated companies
 
27,78344,111
 
(20,401)
(19,863)
17,858(42,080)
Taxes on income
 
(loss) before equity in net income of associated
companies
 
2,24510,689
 
(5,633)(13,070)
 
(7,603)
4,096
Income (loss) before equity in net income of associated
companies
 
25,53833,422
 
(14,768)
(12,260)
13,762(29,010)
Equity in net income of associated companies
 
1,8045,210
 
1,787666
 
3,536
Net income (loss)
 
2,80638,632
Net income (loss)
27,342
(12,981)
(8,724)
16,568(28,344)
Less: Net income attributable to noncontrolling interest
3817
7237
88
186
Net income (loss) attributable to Quaker Chemical Corporation
$
27,30438,615
$
(13,053)(28,381)
$
(8,812)
$
16,382
PerEarnings per common share data:
 
 
Net income (loss) attributable to Quaker Chemical Corporation
common
common shareholders – basic
$
1.532.16
$
(0.80)
$
(0.50)
$
1.15(1.60)
Net income (loss) attributable to Quaker Chemical Corporation
 
common
common shareholders – diluted
$
1.532.15
$
(0.80)
$
(0.50)
$
1.14(1.60)
Dividends declared
$
0.395
$
0.385
$
1.165
$
1.140
 
The accompanying notes are an integral
part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
Income
(Dollars in thousands)
 
Unaudited
Three Months Ended March 31,
Nine Months Ended
September 30,
September 30,2021
2020
2019
2020
2019
Net income (loss)
$
27,34238,632
$
(12,981)
$
(8,724)
$
16,568(28,344)
Other comprehensive (loss) income, (loss), net of tax
Currency translation adjustments
33,618(25,461)
(28,305)
(10,582)
(29,256)(54,751)
Defined benefit retirement plans
(257)1,292
1,126
16,913
2,35416,957
Current period change in fair value of derivatives
354562
0
(3,738)
0(3,981)
Unrealized gain (loss)loss on available-for-sale securities
556(3,025)
(81)
453
1,499(1,711)
Other comprehensive income (loss)loss
34,271(26,632)
(27,260)(43,486)
3,046
(25,403)
Comprehensive income (loss)
61,61312,000
(40,241)
(5,678)
(8,835)(71,830)
Less: Comprehensive (income) loss attributable to noncontrolling
noncontrolling interest
(56)(15)
22
25
(115)95
Comprehensive income (loss) attributable to Quaker Chemical
Corporation
$
61,55711,985
$
(40,219)
$
(5,653)
$
(8,950)(71,735)
 
The accompanying notes are an integral
part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
Quaker Chemical Corporation
Condensed Consolidated Balance
Sheets
(Dollars in thousands, except par value and share amounts)
 
Unaudited
September 30,March 31,
December 31,
20202021
20192020
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
$
155,750163,455
$
123,524181,833
Accounts receivable, net
 
338,875411,523
 
375,982372,974
Inventories
Raw materials and supplies
97,631
77,893
82,05886,148
Work-in-process
 
and finished goods
110,147
93,434
92,892101,616
Prepaid expenses and other current assets
 
52,61248,285
 
41,51650,156
Total current
 
assets
 
718,564831,041
 
715,972792,727
Property, plant and
 
equipment, at cost
416,514
394,286
398,834423,253
Less accumulated depreciation
(220,724)
(206,406)
(185,365)(219,370)
Property, plant and
 
equipment, net
 
187,880195,790
 
213,469203,883
Right of use lease assets
39,78138,027
42,90538,507
Goodwill
 
612,144627,574
 
607,205631,212
Other intangible assets, net
 
1,045,0401,075,343
 
1,121,7651,081,358
Investments in associated companies
 
92,16396,213
 
93,82295,785
Deferred tax assets
 
13,08517,057
 
14,74516,566
Other non-current assets
 
44,53131,906
 
40,43331,796
Total assets
$
2,753,1882,912,951
$
2,850,3162,891,834
LIABILITIES AND EQUITY
 
 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
$
38,63043,330
$
38,33238,967
Accounts and other payables
 
165,582214,015
 
170,929198,872
Accrued compensation
 
36,99429,091
 
45,62043,300
Accrued restructuring
8,8935,970
18,0438,248
Other current liabilities
 
87,041104,029
 
87,01093,573
Total current
 
liabilities
 
337,140396,435
 
359,934382,960
Long-term debt
 
846,070859,433
 
882,437849,068
Long-term lease liabilities
28,06127,050
31,27327,070
Deferred tax liabilities
 
189,439186,031
 
211,094192,763
Other non-current liabilities
 
126,047114,549
 
123,212119,059
Total liabilities
 
1,526,7571,583,498
 
1,607,9501,570,920
Commitments and contingencies (Note 19)
Equity
 
 
Common stock, $
1
 
par value; authorized
30,000,000
 
shares; issued and
 
 
outstanding 20202021 –
17,830,54117,875,076
 
shares; 20192020 –
17,735,16217,850,616
 
shares
17,83117,875
17,73517,851
Capital in excess of par value
 
900,602908,748
 
888,218905,171
Retained earnings
 
382,521455,493
 
412,979423,940
Accumulated other comprehensive loss
 
(75,010)(53,228)
 
(78,170)(26,598)
Total Quaker
 
shareholders’ equity
 
1,225,9441,328,888
 
1,240,7621,320,364
Noncontrolling interest
 
487565
1,604550
Total equity
1,226,4311,329,453
1,242,3661,320,914
Total liabilities and
 
equity
$
2,753,1882,912,951
$
2,850,3162,891,834
 
The accompanying notes are an integral
part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
 
Unaudited
NineThree Months Ended March 31,
September 30,2021
2020
2019
Cash flows from operating activities
 
 
 
 
 
Net income (loss) income
 
$
(8,724)38,632
$
16,568(28,344)
Adjustments to reconcile net income (loss) income to net cash provided(used
 
in) provided by operating
activities:
 
 
Amortization of debt issuance costs
1,187
3,562
7921,187
Depreciation and amortization
 
62,81822,145
 
23,86821,197
Equity in undistributed earnings of associated companies,
 
net of dividends
 
1,415(5,105)
 
(129)4,285
Acquisition-related fair value adjustments related to inventory
229801
10,2140
Deferred compensation, deferred taxes and other,
 
net
(9,888)
(30,657)
(17,204)(22,988)
Share-based compensation
 
17,8203,779
 
3,0424,682
Loss (gain)Gain on disposal of property,
 
plant, equipment and other assets
 
105(5,410)
 
(111)(2)
Insurance settlement realized
 
(818)0
 
(624)(229)
Indefinite-lived intangible asset impairment
38,0000
038,000
Combination and other acquisition-related expenses, net of
 
of payments
2,498(2,884)
(14,218)(519)
Restructuring and related charges
3,5851,175
24,0451,716
Pension and other postretirement benefits
 
16,219(1,034)
 
43422,453
Increase (decrease)(Decrease) increase in cash from changes in current assets and
current
 
 
liabilities, net of acquisitions:
Accounts receivable
 
30,225(46,270)
 
2,6552,322
Inventories
 
2,137(24,994)
 
1,376(10,162)
Prepaid expenses and other current assets
 
(113)(8,315)
 
(10,931)(3,263)
Change in restructuring liabilities
(12,772)(3,034)
(4,645)(4,841)
Accounts payable and accrued liabilities
 
(13,481)26,597
 
344(5,275)
 
Net cash (used in) provided by operating activities
 
112,048(12,618)
 
35,47620,219
Cash flows from investing activities
 
 
Investments in property,
 
plant and equipment
 
(12,184)(3,934)
 
(10,112)(4,892)
Payments related to acquisitions, net of cash acquired
 
(3,132)(26,655)
 
(798,064)(3,160)
Proceeds from disposition of assets
1114,744
750
Insurance settlement interest earned
 
410
 
18531
 
Net cash used in investing activities
 
(15,264)(15,845)
 
(807,916)(8,021)
Cash flows from financing activities
 
 
Payments of term loanlong-term debt
 
(28,132)(9,551)
 
0(9,371)
Proceeds from long-term debt
0
750,000
(Repayments) borrowingsBorrowings on revolving credit facilities,
net
30,000
(16,485)205,500
85,966
(Repayments) borrowingsRepayments on other debt, net
(527)(188)
415
Financing-related debt issuance costs
0
(23,747)(185)
Dividends paid
 
(20,520)(7,052)
 
(15,003)(6,828)
Stock options exercised, other
 
2,385(178)
 
733(696)
Purchase of noncontrolling interest in affiliates
(1,047)0
0(1,047)
Distributions to noncontrolling affiliate shareholders
(751)0
0(751)
 
Net cash (used in) provided by financing activities
 
(65,077)13,031
 
798,364186,622
 
Effect of foreign exchange rate changes on
 
cash
 
(529)(3,008)
 
(1,889)(6,424)
Net (decrease) increase in cash, cash equivalents and restricted
cash
 
31,178(18,440)
 
24,035192,396
Cash, cash equivalents and restricted cash at the beginning
 
of the period
 
143,555181,895
 
124,425143,555
Cash, cash equivalents and restricted cash at the end of
 
the period
$
174,733163,455
$
148,460335,951
 
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
 
6
Note 1 – Condensed Financial InformationBasis of Presentation and Description of Business
Basis of Presentation
As used in these Notes to Condensed Consolidated
 
Financial Statements, the terms “Quaker”, “Quaker Houghton”,
 
the
“Company”, “we”, and “our” refer to Quaker Chemical
 
Corporation (doing business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires.
 
As used in these Notes to Condensed Consolidated
 
Financial Statements,
the term Legacy Quaker refers to the Company prior
 
to the closing of its combination with Houghton International,
 
Inc. (“Houghton”)
(herein referred to as the “Combination”).
 
The condensed consolidated financial statements included herein
 
herein are unaudited and have
been prepared in accordance with
generally accepted
accounting principles in the United
States (“U.S. GAAP”) for
interim financial
reporting and
the United States
Securities and Exchange Commission
(“SEC”) regulations.
 
Certain information and footnote
disclosures normally
included in
financial statements prepared
in accordance with U.S. GAAP have
been condensed or
omitted
pursuant to such rules and regulations.
 
In the opinion of management, the financial statements reflect all
 
adjustments which are
necessary for a fair statement of the financial position,
 
financial
position, results of operations and cash flows for the
interim periods.
 
The results for the
three and nine months ended September 30,
2020March 31, 2021 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,
31, 20192020 (the “2019“2020 Form 10-K”).
 
DuringDescription of Business
The Company was organized in 1918, incorporated
as a Pennsylvania business corporation in 1930, and in August
2019
completed the three months ended September 30, 2020,Combination with Houghton to form
 
the Company identified and corrected certain immaterial adjustmentsQuaker Houghton.
 
relatingQuaker Houghton is a global leader in industrial process
to the three months ended March 31, 2020 as well as thefluids.
 
three and six months ended June 30, 2020.With a presence around the world,
 
These adjustments related toincluding operations in over
25
countries, the Company’s customers
include thousands of
Company’s over-recognitionthe world’s most advanced
and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range
 
of cost of goods sold (“COGS”)formulated chemical specialty products and corresponding underoffers
chemical management services (which the Company refers
 
-recognition of inventory,
to as well as the“Fluidcare”) for various heavy industrial and manufacturing
associated tax impact of these adjustments, in the Company’s
previously issued interim financial statements for the
three monthsapplications throughout its
ended March 31, 2020 and the three and six months ended
June 30, 2020, respectively.
These adjustments impact the Company’s
Americas reportable segment.
The cumulative amount of reduction to COGS recorded
in the three and nine months ended September
30, 2020 was approximately $
1.74
 
million, with approximately $
0.7
segments: Americas; Europe, Middle East and Africa (“EMEA”);
 
million related to the three months ended March 31, 2020Asia/Pacific; and Global Specialty
approximately $
1.0
million related to the three months ended June 30, 2020.Businesses.
Hyper-inflationary economies
Economies that have a cumulative three-year rate of inflation
exceeding
100
% are considered hyper-inflationary in accordance
with U.S. GAAP.
A legal entity that operates within an economy deemed
to be hyper-inflationary is required to remeasure its
monetary assets and liabilities to the applicable published
exchange rates and record the associated gains or losses resulting
from the
remeasurement directly to the Condensed Consolidated
Statements of Operations.
Based on various indices or index compilations currentlybeing
 
being used to monitor inflation in Argentina as well as economic
 
recent economicinstability,
instability, effective
July 1, 2018, Argentina’s
 
economy was considered hyper-inflationary under U.S.
GAAP.
 
As a result, the
Company began
applying hyper-inflationary
accounting with respect
to the Company's wholly owned Argentine
 
Argentine subsidiary beginning
July 1, 2018.
 
In
addition, Houghton has an Argentina
subsidiary to
which hyper-inflationary accounting also is applied.
 
As of, and
for the three and nine
months ended September 30,
2020 and 2019,March 31, 2021, the Company's Argentine
subsidiaries represented
less than
1
% of
the Company’s consolidated
 
total
assets and net sales, respectively.
 
During the three and nine months ended September 30,March 31, 2021 and 2020,
 
the
Company recorded $
0.2
 
million and
$
0.30.1
 
million, respectively, of
 
of remeasurement losses associated with the applicable currency conversions
 
currency
conversions related to Argentina.
Comparatively, during
the three and nine months ended September 30, 2019,
the Company recorded
$
0.7
million and $
0.9
million of remeasurement losses associated with the applicable
currency conversion related to Argentina.
 
These
losses were recorded within foreign exchange (losses) gains,
 
net, which is a component of other income (expense) income,,
 
net, in the
Company’s Condensed
 
Consolidated Statements of Operations.
COVID-19
Note 2 – Business CombinationsManagement continues to monitor the impact that the COVID-19
 
Houghton
On
August 1, 2019
, the Company completed the Combination, wherebypandemic is having on the Company,
 
acquired allthe overall specialty
chemical industry,
and the economies and markets in which the Company operates.
The full extent of the issuedCOVID-19 pandemic
related business and outstandingtravel restrictions and changes to
business and consumer behavior intended to reduce its spread are
shares
uncertain as of
Houghtonthe date of this Quarterly Report on Form 10-Q for the
period ended March 31, 2021 (the “Report”) as COVID-19
and the responses
of governmental authorities continue to evolve globally.
Further, management continues to
evaluate how COVID-19-related circumstances, such as remote
work arrangements, affect
financial reporting processes, internal control over financial
reporting, and disclosure controls and procedures.
While the
circumstances have presented and are expected to continue
to present challenges, at this time, Management does not believe that
COVID-19 has had a material impact on financial reporting
processes, internal control over financial reporting,
and disclosure
controls and procedures.
from Gulf Houghton Lubricants, Ltd. and certain other selling
The Company cannot reasonably estimate the magnitude
 
shareholders in exchange for a combination of cash
and shares ofthe effects these conditions will have on the Company’s
 
common stockoperations in accordance with
the Share Purchase Agreement,future as they are subject to significant uncertainties
 
dated April 4, 2017.relating to the ultimate geographic spread of the virus,
 
Houghton is athe incidence and
leading global providerseverity of specialty chemicals and technicalthe symptoms, the duration or resurgence
 
services for metalworkingof the outbreak, the global availability and other industrial applications.acceptance of vaccines
 
Theas well as their
Company believes that combining efficacy,
the Legacy Quakerlength of the travel restrictions and business
closures imposed by governments of impacted countries,
 
and Houghton products and service offerings allows Quakerthe economic
response by governments of impacted countries.
To the extent
 
Houghtonthat the Company’s customers and
suppliers continue to better
serve its customers in its various end markets.be significantly and adversely impacted by
 
COVID-19, this
The Combination was subject to certain regulatorycould reduce the availability,
 
and shareholder approvals.
At a shareholder meeting held during 2017, the
Company’s shareholders
approved the issuanceor result in delays, of new shares of the Company’s
common stock at closing of the Combination.
Also
in 2017, the Company received regulatory approvals formaterials or supplies to or from
 
the Combination from China and Australia.Company, which in
 
The Company received
regulatory approvals from the European Commission
(“EC”) during the second quarter of 2019 and the U.S. Federal
Tradeturn could significantly
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
7
Commission (“FTC”) in July 2019.
The approvals from the FTC and the EC required the concurrent
divestiture of certain steel and
aluminum related product lines of Houghton, which
were sold by Houghton on August 1, 2019 for approximately
$
37
million in cash.
The final remedy agreed with the EC and the FTC was consistent
withinterrupt the Company’s
 
previous expectation that the total divested
product lines would be approximately
3
% of the combined company’sbusiness operations.
 
net sales.Such impacts could grow and become more significant to the
Company’s operations
and the Company’s liquidity
or financial position.
Therefore, given the speed and frequency of continuously
evolving developments
with respect to this pandemic, the Company cannot reasonably
estimate the magnitude or the full extent to which COVID-19
may
impact the Company’s results
of operations, liquidity or financial position.
The following table summarizesNote 2 – Business Acquisitions
2021 Acquisitions
In February 2021, the fair value of considerationCompany acquired a tin-plating
 
transferred insolutions business for the Combination:steel end market for approximately $
25
million.
Cash transferred to Houghton shareholders (a)
The Company allocated $
170,829
Cash paid to extinguish Houghton debt obligations
702,556
Fair value of common stock issued as consideration (b)
789,080
Total fair value
of consideration transferred
$
1,662,465
(
a)
A portion is held in escrow by a third party,
subject to indemnification rights that lapse upon the achievement
of certain
milestones.
(b)
Amount was determined based on approximately
4.319.6
 
million shares, comprising
24.5
% of the common stock of the Company
immediately after the closing, and the closingpurchase price per
share of Quaker Chemical Corporation common stockto intangible assets, comprised
 
of $
182.2718.3
 
onmillion of customer relationships,
August 1, 2019.
to be amortized over
19
The Company accounted for the Combination under the
 
acquisition methodyears; $
0.9
million of accounting.existing product technology to be amortized over
14
 
This method requiresyears; and $
0.4
million of a
licensed trademark to be amortized over
3
years.
In addition, the recordingCompany recorded $
5.0
million of goodwill related to expected
value not allocated to other acquired assets, including separately identifiableall of which
 
intangible assets, at their fair value onis expected to be tax deductible.
As of March 31, 2021, the acquisition date.
Any excessallocation of the
purchase price overhas not been finalized and the estimated fair value of
one-year
 
the identifiable net assets acquired is recorded as goodwill.measurement period has not ended.
 
The determinationFurther adjustments may be necessary as a
result of the Company’s
estimated fair valueon-going assessment of assets acquired,
including indefinite and definite-lived intangible assets,
requires management’s
judgment
and
often involves the use of significant estimates and assumptions,
including assumptions with respectadditional information related to future cash inflows and
outflows, discount rates, customer attrition rates, royalty
rates, asset lives and market multiples, among other items.
Fair values were
determined by management using a variety of methodologies
and resources, including external independent valuation
experts.
The
valuation methods included physical appraisals, discounted
cash flow analyses, excess earnings, relief from royal
ty, and other
appropriate valuation techniques to determine the fair value
 
of assets acquired and liabilities
assumed.
Additionally, in
February 2021, the Company acquired a
38
% ownership interest in Grindaix-GmbH (“Grindaix”),
a privately
held, German-based, high-tech provider of coolant control
and delivery systems for approximately
1.4
million EUR or approximately
$
1.7
million.
Grindaix's solutions apply to a wide range of machining processes,
including grinding applications in the metalworking
sector.
The Company recorded the investment in Grindaix as an equity
method investment within the Condensed Consolidated
Financial Statements.
The results of operations of the acquired businesses subsequent
to the respective acquisition dates are included in
the Condensed
Consolidated Statements of Operations as of March
31, 2021.
Transaction expenses associated with these
acquisitions are included in
Combination, integration and other acquisition-related
expenses in the Company’s Condensed
Consolidated Statements of Operations.
Certain pro forma and other information is not presented,
as the operations of the acquired businesses are not considered material to
the overall operations of the Company for the periods presented.
Previous Acquisitions
In December 2020,
the Company completed its acquisition of Coral Chemical Company
(“Coral”), a privately held, U.S.-based
provider of metal finishing fluid solutions.
The acquisition provides technical expertise and product solutions
for pre-treatment,
metalworking and wastewater treatment applications
to the beverage cans and general industrial end markets.
The original purchase
price was approximately $
54.1
million, subject to routine and customary post-closing adjustments related
to working capital and net
indebtedness levels.
The Company anticipates finalizing its post-closing adjustments
for the Coral acquisition in the second quarter of
2021 and currently estimates it will receive approximately
$
0.4
million to settle such adjustments.
The following table presents the finalpreliminary estimated fair
 
values of HoughtonCoral net assets acquired:
Measurement
August 1,December 22,
December 22,
Period
August 1, 20192020
20192020 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
75,821958
$
0
$
75,821958
Accounts receivable net
178,9228,473
0
178,9228,473
Inventories net
95,1934,527
0
95,1934,527
Prepaid expenses and other assets
10,652181
6660
11,318181
Property, plant and
 
equipment
115,52910,467
(66)652
115,463
Right of use lease assets
10,673
0
10,673
Investments in associated companies
66,447
0
66,447
Other non-current assets
4,710
1,553
6,26311,119
Intangible assets
1,028,40030,300
0(500)
1,028,40029,800
Goodwill
494,9152,814
4,62553
499,5402,867
Total assets purchased
2,081,26257,720
6,778205
2,088,04057,925
Short-term borrowings, not refinanced at closingLong-term debt including current portions and finance leases
9,297183
0556
9,297739
Accounts payable, accrued expenses and other accrued
liabilities
150,078
1,127
151,205
Deferred tax liabilities
205,082
4,098
209,180
Long-term lease liabilities
6,6073,482
0
6,607
Other non-current liabilities
47,733
1,553
49,2863,482
Total liabilities assumed
418,7973,665
6,778556
425,5754,221
Total consideration
 
paid for HoughtonCoral
1,662,46554,055
(351)
53,704
Less: estimated purchase price settlement
0
1,662,465(351)
(351)
Less: cash acquired
75,821958
0—
75,821
Less: fair value of common stock issued as consideration
789,080
0
789,080958
Net cash paid for HoughtonCoral
$
797,56453,097
$
0
$
797,56453,097
(1) As
previously disclosed in the Company’s
 
20192020 Form 10-K.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
8
Measurement period adjustments recorded during the first
quarter of 2021 include certain adjustments related to refining
original
estimates for assets and liabilities for certain acquired
finance leases, as well the adjustment to reflect the expected
settlement of post-
closing working capital and net indebtedness true ups to
the original purchase price.
As of September 30, 2020, March 31, 2021,
the allocation of the
purchase
price for the CombinationCoral has not been finalized and the
one-year
measurement period has not ended.
 
HoughtonFurther 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 have been assigned
to each of the Company’s
reportable segments on a specific identification or allocated
basis, as applicable.
Measurement period adjustments recorded during
2020 related primarily to increasing the valuation allowances
against the deferred tax assets associated with foreign
tax credits
acquired as part of the Combination as additional information
became available and was used to update the Company’s
initial
estimates of expenses allocated to foreign source income
and expected creditable foreign taxes.
In addition, measurement period
adjustments included
the recognition of additional other non-current assets and other non-current
liabilities based on additional
information
obtained regarding certain tax audits and associated rights to
indemnification, and certain non-income tax liabilities
payable upon closing of the Combination in certain
countries.assumed.
 
Commencing August 1, 2019, the Company’s
Consolidated Statements of Operations included the results of
Houghton.
Net sales
of Houghton subsequent to closing of the Combination
and included in the Company’s
Consolidated Statements of Operations for the
three and nine months ending September 30, 2019
were $
119.5
million.
The following unaudited pro forma consolidated financial
information has been prepared as if the Combination
had taken place on January 1, 2018.
The unaudited pro forma results include
certain adjustments to each company’s
historical actual results, including: (i) additional depreciation
and amortization expense based
on the initial estimates of fair value step up and estimated
useful lives of depreciable fixed assets, definite-lived intangible assets and
investment in associated companies acquired; (ii)
adoption of required accounting guidance and alignment of related
accounting
policies, (iii) elimination of transactions between Legacy
Quaker and Houghton; (iv) elimination of results associated with the
divested product lines; (v) adjustment to interest expense,
net, to reflect the impact of the financing and capital structure of
the
combined Company; and (vi) adjustment for certain
Combination, integration and other acquisition-related costs to
reflect such costs
as if they were incurred in the period immediately following
the pro-forma closing of the Combination on January
1, 2018.
The
adjustments described in (vi) include an expense recorded
in COGS associated with selling inventory acquired in the
Combination
which was adjusted to fair value as part of purchase accounting,
restructuring expense incurred associated with the Company’s
global
restructuring program initiated post-closing of the Combination
and certain other integration costs incurred post-closing included
in
combination and other acquisition-related expenses.
These costs have not been presented in the unaudited pro forma
table below as
these costs on a pro forma basis were incurred during the
three and nine months ended September 30, 2018.
Unaudited pro forma
results are not necessarily indicative of the results that would
have occurred if the acquisition had occurred on the
date indicated, or
that may result in the future for various reasons, including
the potential impact of revenue and cost synergies on
the business.
Three
Nine
Months Ended
Months Ended
Unaudited Pro Forma
September 30,
September 30,
(as if the Combination occurred on
January 1, 2018)
2019
2019
Net sales
$
386,396
$
1,170,981
Net income attributable to Quaker Chemical Corporation
22,491
70,533
Combination, integration and other acquisition-related
expenses have been and are expected to continue to be significant.
The
Company incurred total costs of approximately $
6.9
million and $
23.4
million for the three and nine months ended September 30,
2020,
respectively, primarily
for professional fees related to Houghton integration activities.
Comparatively,
the Company incurred
total costs of approximately $
15.1
million and $
25.9
million during the three and nine months ended September 30,
2019,
respectively, primarily
for various professional fees and integration planning and
regulatory approval as well as professional fees
associated with closing the Combination.
These costs also include $
0.8
million of accelerated depreciation charges during
the nine
months ended September 30, 2020 and $
0.4
million and $
2.1
million of interest costs to maintain the bank commitment
(“ticking
fees”) for the Combination during the three and nine
months ended September 30, 2019, respectively.
The Company had current
liabilities related to the Combination, integration and
other acquisition-related activities of $
9.1
million and $
6.6
million as of
September 30, 2020,
and December 31, 2019,
respectively, primarily recorded
within other accrued liabilities on its Condensed
Consolidated Balance Sheets.
Norman Hay
On
October 1, 2019
, the Company completed its acquisition of the operating divisions
of
Norman Hay plc
(“Norman Hay”), a
private U.K. company that provides specialty chemicals, operating
equipment, and services to industrial end markets.
The acquisition
adds new technologies in automotive, original equipment
manufacturer (“OEM”), and aerospace, as well as engineering expertise
which is expected to strengthen the Company’s
existing equipment solutions platform.
The acquired Norman Hay assets and
liabilities were assigned to the Global Specialty Businesses reportable
segment.
The original purchase price was
80.0
million GBP,
on
a cash-free and debt-free basis, subject to routine and customary
post-closing adjustments related to working capital and net
indebtedness levels.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
9
The following table presents the final estimated fair
values of Norman Hay net assets acquired:
Measurement
October 1,
Period
October 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
18,981
$
0
$
18,981
Accounts receivable, net
15,471
0
15,471
Inventories, net
8,213
(49)
8,164
Prepaid expenses and other assets
4,203
138
4,341
Property, plant and
equipment
14,981
0
14,981
Right of use lease assets
10,608
0
10,608
Intangible assets
51,088
0
51,088
Goodwill
29,384
(82)
29,302
Total assets purchased
152,929
7
152,936
Long-term debt included current portions
485
0
485
Accounts payable, accrued expenses and other accrued liabilities
13,488
(732)
12,756
Deferred tax liabilities
12,746
905
13,651
Long-term lease liabilities
8,594
0
8,594
Total liabilities assumed
35,313
173
35,486
Total consideration
paid for Norman Hay
117,616
(166)
117,450
Less: estimated purchase price settlement (2)
3,287
(3,287)
0
Less: cash acquired
18,981
0
18,981
Net cash paid for Norman Hay
$
95,348
$
3,121
$
98,469
(1)
As previously disclosed in the Company’s
2019 Form 10-K.
(2)
The Company finalized its post-closing adjustments for the
Norman Hay acquisition and paid approximately
2.5
million GBP
during the first quarter of 2020 to settle such adjustments.
As of September 30, 2020, the allocation of the purchase
price for Norman Hay has been finalized.
Other Acquisitions
In May 2020, the Company acquired Tel
 
Nordic ApS (“TEL”), a company that specializes in lubricants and engineering
 
primarily
in high pressure aluminum die casting for its Europe,
 
Middle East and Africa (“EMEA”) reportable segment.
 
Consideration
paid was
in the form of a convertible promissory note in the amount
 
of
20.0
 
million DKK, or approximately $
2.9
 
million, which was
subsequently converted into shares of the Company’s
 
common stock.
 
An adjustment to the purchase price of approximately
0.4
million DKK, or less than $
0.1
 
million, was made as a result of finalizing a post-closing
 
settlement in the second quarter of 2020.
 
The
Company allocated approximately $
2.4
 
million of the purchase price to intangible assets to be amortized
 
over
17
 
years.
 
In addition,
the Company recorded approximately $
0.5
 
million of goodwill, related to expected value not allocated to
 
other acquired assets, none
of which will be tax deductible.
 
TheAs of March 31, 2021, the allocation of the purchase price
of TEL has not been
finalized and the
one-yearone-
 
measurement
period has not ended.
 
Further adjustments may be necessary as a result of the Company’s
 
Company’s on-going assessment of
additional
additional information related to the fair value of assets acquired
 
and liabilities assumed.
In March 2020, the Company acquired the remaining
49
% ownership interest in one of its South African affiliates,
 
Quaker
Chemical South Africa Limited (“QSA”) for
16.7
 
million ZAR, or approximately $
1.0
 
million, from its joint venture partner PQ
Holdings South Africa.
 
QSA is a part of the Company’s
 
EMEAEurope, Middle East and Africa (“EMEA”) reportable segment.
 
As this
acquisition was a change in an existing
controlling ownership,
the Company recorded $
0.7
 
million of excess purchase price over the
carrying value of
the noncontrolling
non-controlling interest in Capital
in excess of par value.
 
In 2018October 2019, the Company purchased certain formulationscompleted its acquisition
of the operating divisions of Norman Hay plc (“Norman
Hay”), a private
U.K. company that provides specialty chemicals, operating
equipment, and productservices to industrial end markets.
 
technology forThe acquisition adds
new technologies in automotive, original equipment
manufacturer, and aerospace, as well as engineering
expertise which is expected
to strengthen the miningCompany’s
existing equipment solutions platform.
The original purchase price was
industry for $
1.080.0
 
million with $GBP,
on a cash-free
0.5and debt-free basis, subject to routine and customary
post-closing adjustments related to working capital and
net indebtedness levels.
The Company finalized its post-closing adjustments for the
Norman Hay acquisition and paid approximately
2.5
 
million of the purchase price paid at signing and the remaining
$GBP during
0.5
million of the purchase price
paid during the first quarter of 2019.
2020 to settle such adjustments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
10
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards
 
Adopted
The Financial Accounting Standards Board (“FASB”)
 
issued Account Standards Update (“ASU”)
 
2020-04,
Reference Rate
Reform (Topic
848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting
in March 2020.
The amendments
provide temporary optional expedients and exceptions for
applying GAAP to contract modifications, hedging relationships
and other
transactions to ease the potential accounting and financial
reporting burden associated with transitioning away from
reference rates
that are expected to be discontinued, including the London
Interbank Offered Rate (“LIBOR”).
ASU 2020-04 is effective for the
Company as of March 12, 2020 and generally can be
applied through December 31, 2022.
As of September 30, 2020, the expedients
provided in ASU 2020-04 do not impact the Company;
however, the Company will continue to
monitor for potential impacts on its
consolidated financial statements.
The FASB issued
ASU 2018-15
, Customer’s
Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement
That Is a Service Contract
in August 2018 that clarifies the accounting for implementation
costs incurred in a cloud computing
arrangement under a service contract.
This guidance generally aligns the requirements for capitalizing
implementation costs incurred
in a hosting arrangement under a service contract with the
requirements for capitalizing implementation costs related
to internal-use
software.
The guidance within this accounting standard update is effective
for annual periods beginning after December 15, 2019 and
should be applied either retrospectively or prospectively
to all implementation costs incurred after the date of
adoption.
Early
adoption was permitted.
The Company adopted this standard on a prospective basis, effective
January 1, 2020.
There was no
cumulative effect of adoption recorded within
retained earnings on January 1, 2020.
The FASB issued
ASU 2018-14,
Disclosure Framework — Changes to
the Disclosure Requirements
for Defined Benefit Plans
in
August 2018 that modifies certain disclosure requirements
for fair value measurements.
The guidance removes certain disclosure
requirements regarding transfers between levels of
the fair value hierarchy as well as certain disclosures related to
the valuation
processes for certain fair value measurements.
Further, the guidance added certain disclosure
requirements including unrealized gains
and losses and significant unobservable inputs used to
develop certain fair value measurements.
The guidance
within this accounting
standard update is effective for annual and interim
periods beginning after December 15, 2019, and should be applied
prospectively in
the initial year of adoption or prospectively to all periods
presented, depending on the amended disclosure requirement.
Early
adoption was permitted.
The Company adopted this standard on a prospective basis, effective
January 1, 2020.
ASU 2018-14
addresses disclosures only and will not have an impact
on the Company’s consolidated
financial statements.
The FASB issued
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial
Instruments
in June 2016 related to the accounting for and disclosure of
credit losses.
The FASB subsequently
issued several
additional accounting standard updates which amended
and clarified the guidance, but did not materially change
the guidance or its
applicability to the Company.
This accounting guidance introduces a new model for
recognizing credit losses on financial
instruments, including customer accounts receivable,
based on an estimate of current expected credit losses.
The guidance within this
accounting standard update is effective for annual
and interim periods beginning after December 15, 2019.
Early adoption was
permitted.
The Company did not early adopt, but did adopt the guidance in
this accounting standard update, including all applicable
subsequent updates to this accounting guidance, as required,
on a modified retrospective basis, effective January
1, 2020.
Adoption
did not have a material impact to the Company’s
financial statements as expected.
However, as a result of this adoption, the Company
recorded a cumulative effect of accounting change
that resulted in an increase to its allowance for doubtful accounts
of approximately
$
1.1
million, a decrease to deferred tax liabilities of $
0.2
million and a decrease to retained earnings of $
0.9
million.
In accordance with this guidance, the Company recognizes
an allowance for credit losses reflecting the net amount expected to
be
collected from its financial assets, primarily trade accounts
receivable.
This allowance represents the portion of the receivable that the
Company does not expect to collect over its contractual
life, considering past events and reasonable and supportable forecasts of
future
economic conditions.
The Company’s allowance for
credit losses on its trade accounts receivable is based on specific
collectability
facts and circumstances for each outstanding receivable and
customer, the aging of outstanding
receivables and the associated
collection risk the Company estimates for certain past due
aging categories, and also, the general risk to all outstanding accounts
receivable based on historical amounts determined to
be uncollectible.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
11
Recently Issued Accounting Standards
Not Yet Adopted
The FASB
issued ASU 2020-01,
Investments – Equity Securities (To
pic 321), Investments – Equity Method and Joint Ventures
(Topic
323), and Derivatives and Hedging (Topic
815) –Clarifying the Interactions between Topic
321, Topic
323, and Topic
815
in
January 2020 clarifying the interaction among the
accounting standards related to equity securities, equity method investments,
and
certain derivatives.
The new guidance, among other things, states that a company
should consider observable transactions that require
a company to either apply or discontinue the equity method
of accounting, for the purposes of applying the fair val
ue measurement
alternative immediately before applying or upon discontinuing
the equity method.
The new guidance also addresses the measurement
of certain purchased options and forward contracts used
to acquire investments.
The guidance within this accounting standard update
is effective for annual and interim periods beginning
after December 15, 2020 and is to be applied prospectively.
Early adoption is
permitted.
The Company has not early adopted the guidance and is currently
evaluating its implementation.
The FASB issued
ASU 2019-12
, Income Taxes
(Topic
 
740): Simplifying the Accounting for Income Taxes
 
in December 2019.2019 to simplify the accounting for income taxes.
 
The
The guidance within this accounting standard update
 
removes certain exceptions, including the exception to the incremental
 
incremental approach for
for certain intra-period tax allocations, to the requirement
 
to recognize or not recognize certain deferred tax liabilities for
 
equity method
method investments and foreign subsidiaries, and to the general
 
general methodology for calculating income taxes in an interim period
 
interim period when a year-to-
year-to-datedate loss exceeds the anticipated loss for the
year.
 
Further, the guidance simplifies the accounting
 
related to franchise taxes,
the step
up in tax basis for goodwill, current and deferred tax
 
tax expense, and codification improvements for income taxes related
 
related to employee
employee stock ownership plans.
 
The guidance is effective for annual and interi
minterim
 
periods beginning after December 15, 2020.
 
EarlyThe Company
adoption is permitted.adopted this standard on a prospective basis, effective
 
The Company has not early adopted the guidance and is currently evaluatingJanuary 1, 2021.
 
its implementation.There was no cumulative effect of adoption recorded
within
retained earnings on January 1, 2021.
The FASB issued
 
ASU 2018-132020-04,
, Fair ValueReference Rate Reform (To
 
Measurement (Topicpic 848): Facilitation of the Effects of Reference
 
820):
Disclosure Framework – Changes to the
DisclosureRate Reform on
Requirements for Fair Value
MeasurementFinancial Reporting
 
in August 2018 that modifies certain disclosure
requirements for employers that sponsor
defined benefit pension or other postretirement plans.March 2020.
 
The amendments in this accounting standard update removeFASB subsequently
 
disclosures that areissued ASU 2021-01,
no longer considered cost beneficial, clarify the specificReference Rate Reform (Topic
 
requirements of certain disclosures, and add new disclosure requirements848): Scope
 
asin
relevant.January 2021 which clarified the guidance but did
not materially change the guidance or its applicability to
the Company.
 
The guidance within this accounting standard update is effective
amendments provide temporary optional expedients and
 
exceptions for annual periods beginning after December 15, 2020,applying U.S. GAAP to contract modifications,
 
andhedging
shouldrelationships and other transactions to ease the potential
accounting and financial reporting burden associated with transitioning
away
from reference rates that are expected to be discontinued,
including the London Interbank Offered Rate (“LIBOR”).
ASU 2020-04 is
effective for the Company as of March 12,
2020 and generally can be applied retrospectivelythrough December 31, 2022.
As of March 31, 2021, the
expedients provided in ASU 2020-04 do not presently
impact the Company; however, the Company
will continue to all periods presented.
Early adoption is permitted.
The Company has not early adopted themonitor for
guidance and is currently evaluatingpotential impacts on its implementation.consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
9
Note 4 – Business Segments
The Company’s operating
 
segments, which are consistent with its reportable segments,
 
reflect the structure of the Company’s
internal organization, the method by which
 
the Company’s resources are allocated
 
and the manner by which the Company and the
chief operating
decision maker assess its performance.assesses the Company’s
 
During the third quarter of 2019 and in connection with the Combination,
the
Company reorganized its executive management
team to align with its new business structure, which reflects the
method by which the
chief operating decision maker of the Company assesses its performance
and allocates its resources.performance.
 
The Company’s current
reportable segment structure includesCompany has
4
 
reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv)
Global Specialty Businesses.
 
The three geographic segments are composed of the net
 
thesales and operations in
each respective region, excluding net sales and operations in each respective region, excluding
 
net sales and
operations managed globally by the Global Specialty
Businesses segment, which
includes the Company’s
 
container, metal finishing, mining,
mining, offshore, specialty coatings, specialty grease and
 
and Norman Hay businesses.
Although the Company changed its reportable segments in
the third quarter of 2019, the calculation of the reportable
segments’
measures of earnings remains otherwise generally
consistent with past practices.
Segment operating earnings for each of the Company’s
reportable segments are comprised of the segment’s
net sales less COGSdirectly
related cost of goods sold (“COGS”) and selling, general
 
selling, general and administrative expenses (“SG&A”) directly related
to the respective segment’s
product sales..
 
Operating expenses not directly
attributable to the net sales of
each respective segment
,
such as certain corporate and administrative costs, Combination,
 
integration
and other acquisition-related expenses, and restructuringRestructuring
and related charges,
are not included in
segment operating earnings.
 
Other
items not specifically identified with the Company’s
reportable segments include interest expense, net and other
 
otherincome (expense) income, ,
net.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
12
The following table presents information about the performance
 
of the Company’s reportable segmentsoperating
 
segments for the three and nine
months ended September 30, 2020March 31, 2021 and 2019.
Certain immaterial reclassifications within the segment disclosures
for the three and
nine months ended September 30, 2019 have been
made to conform with the Company’s
current customer industry segmentation.2020:
Three Months Ended
Nine Months EndedMarch 31,
September 30,
September 30,2021
2020
2019
2020
2019
Net sales
 
 
 
 
 
 
Americas
$
119,540134,871
$
116,691
$
330,012
$
260,663129,896
EMEA
 
94,005119,814
 
82,369
276,546
183,806104,839
Asia/Pacific
 
84,87796,706
 
74,266
226,850
165,23473,552
Global Specialty Businesses
 
68,80278,392
 
51,80470,274
Total
 
198,417
132,506
Total net sales
$
367,224429,783
$
325,130
$
1,031,825
$
742,209378,561
Segment operating earnings
Americas
$
31,09932,234
$
23,765
$
70,590
$
52,06929,188
EMEA
17,43925,244
13,303
46,269
31,03418,359
Asia/Pacific
27,30427,478
20,404
66,106
45,37519,541
Global Specialty Businesses
 
21,16124,169
 
15,24520,560
Total
 
58,114
36,819
Total segment operating
earnings
 
97,003109,125
 
72,717
241,079
165,29787,648
Combination, integration and other acquisition-related
 
expenses
(6,913)(5,815)
(14,702)
(22,786)
(23,789)(7,878)
Restructuring and related charges
(1,383)(1,175)
(24,045)
(3,585)
(24,045)(1,716)
Fair value step up of acquired inventory sold
(801)
0
(10,214)
(226)
(10,214)
Indefinite-lived intangible asset impairment
0
0
(38,000)
0
Non-operating and administrative expenses
(39,786)
(29,203)(40,992)
(110,282)
(68,621)(38,451)
Depreciation
of corporate assets and amortization
 
(14,062)(15,448)
 
(9,055)
(41,547)
(12,770)(14,047)
Operating income (loss)
34,85944,894
(14,502)
24,653
25,858(12,444)
Other income (expense) income,, net
(239)4,687
203
(22,407)
(389)(21,175)
Interest expense, net
 
(6,837)(5,470)
 
(6,102)
(22,109)
(7,611)(8,461)
Income (loss) before taxes and equity in net income of
associated companies
$
27,78344,111
$
(20,401)
$
(19,863)
$
17,858(42,080)
Inter-segment revenues for the three and ninemonths ended
 
months ended September 30,March 31, 2021 and 2020 were $
1.73.3
 
million and $
7.02.9
 
million for Americas,
$
5.38.8
 
million and $
16.15.5
 
million for EMEA, $
0.2
million and $
0.5
million for Asia/Pacific, and $
1.1
million and $
3.4
million for Global
Specialty Businesses, respectively.
Inter-segment revenues for the three and nine
months ended September 30, 2019 were $
2.1
million and $
4.8
million for Americas, $
5.3
million and $
15.4
million for EMEA, less than $
0.1
 
million and $
0.1
 
million for
Asia/Pacific and $
1.42.0
 
million and $
4.11.3
 
million for Global
Specialty Businesses, respectively.
 
However, all inter-segment transactions
 
transactions
have been eliminated from each reportable operating
segment’s
net sales and
earnings for all periods presented in the above tables.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
10
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad
 
range of formulated chemical specialty products and offers
 
chemical
management services (“Fluidcare”) for various heavy
 
industrial and manufacturing applications throughout its four
 
segments.
 
TheA
Combination increased the Company’s
addressable metalworking, metals and industrial end markets, including
steel, aluminum,
aerospace, defense, transportation-OEM, transportation
-components, offshore sub-sea energy,
architectural aluminum, construction,
tube and pipe, can and container,
mining, specialty coatings and specialty greases.
The Combination also strengthened the product
portfolio of the combined Company.
The major product lines of Quaker Houghton include metal removal
fluids, cleaning fluids,
corrosion inhibitors, metal drawing and forming fluids, die
cast mold releases, heat treatment and quenchants, metal forging
fluids,
hydraulic fluids, specialty greases, offshore
sub-sea energy control fluids, rolling lubricants, rod
and wire drawing fluids and surface
treatment chemicals.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
13
A substantialsignificant portion of the Company’s
 
sales worldwiderevenues are realized from the sale of process fluids and services
made directly to manufacturers
through its own employees
and its Fluidcare programs,
with the balance being handled through distributors and
 
agents.
The Company’s employees typically
visit the plants of customers
regularly, work
on site, and, through training and experience, identify production
needs,
which can be resolved or otherwise addressed
either by adapting the Company’s
existing products or by applying new formulations developed
in its laboratories.
The specialty
chemical industry comprises many companies similar in
size to the Company,
as well as companies larger and smaller than Quaker
Houghton.
The offerings of many of the Company’s
competitors differ from those of Quaker Houghton;
some offer a broad portfolio
of fluids, including general lubricants, while others have
a more specialized product range.
All competitors provide different levels of
technical services to individual customers.
Competition in the industry is based primarily on the ability to
provide products that meet
the needs of the customer, render
technical services and laboratory assistance to the customer and,
to a lesser extent, on price.
As part of the Company’s
 
Fluidcare business, certain third-party product sales to customers are
 
managed by the Company.
 
Where
the Company acts as a principal, revenues are recognized
 
on a gross reporting basis at the selling price negotiated with
 
its customers.
Where the Company acts as an agent, revenue is recognized on
 
a net reporting basis at the amount of the administrative fee earned
 
by
the Company for ordering the goods.
 
In determining whether the Company is acting as a principal
or an agent in each arrangement,
the Company considers whether it is primarily responsible
for the obligation to provide the specified good, has inventory
risk before
the specified good has been transferred to the customer
and has discretion in establishing the prices for the specified
goods.
The
Company transferred third-party products under arrangements recognized
 
recognized on a net reporting
basis of $
11.117.8
 
million and $
29.9
million
for the three and nine months ended September 30,
2020, respectively, and
$
13.6
million and $
34.412.5
 
million for the three and nine
months ended September 30, 2019,March 31, 2021 and 2020,
 
respectively.
A significant portion of the Company’s
 
revenues are realized from the sale of process fluids and services
to manufacturers of
steel, aluminum, automobiles, aircraft, industrial equipment,
and durable goods, and, therefore, the Company is subject
to the same
business cycles as those experienced by these manufacturers and
their customers.
The Company’s financial performance
is generally
correlated to the volume of global production within the
industries it serves, rather than discretely related to the financial performance
of such industries.
Furthermore, steel and aluminum customers typically have
limited manufacturing locations compared to
metalworking customers and generally use higher
volumes of products at a single location.
As previously disclosed in its 2019 Form
10-K, during 2019, the Company’s
 
2020 Form 10-K, during 2020,
the Company’s five largest
customers (each composed
of multiple
subsidiaries or divisions with semiautonomous
purchasing authority) accounted for approximately
1210
% of consolidated net
sales, with its largest customer accounting
 
accounting for
approximately
63
% of consolidated net sales.
Revenue Recognition Model
The Company applies the FASB’s
guidance on revenue recognition which requires the
Company to recognize revenue in an
amount that reflects the consideration to which the Company
expects to be entitled in exchange for goods or services transferred
to its
customers.
To do this, the Company
applies the five-step model in the FASB’s
 
guidance, which requires the Company to: (i) identify
the contract with a
customer; (ii) identify the performance obligations in
 
obligations in the contract; (iii) determine the transaction price; (iv) allocate the
 
(iv) allocatetransaction
the transaction price to the performance obligations in the contract; and
 
contract; and (v) recognize revenue when, or as, the Company satisfies a performance
obligation.
 
satisfies a
performance obligation.
The Company identifies a contract with a customer when aRefer to the Company’s 2020
 
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
exchangeForm 10-K for the goods or services that will be transferred to
the customer.
In
most instances,additional information on the Company’s
 
contract with a customer is the customer’srevenue recognition policies,
including its practical expedients and accounting policy
 
purchase order.elections.
 
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
subsequentAllowance for Doubtful Accounts
purchase orders for that customer.
In these situations,As previously disclosed in the Company’s
 
contract with2020 Form 10-K, during 2020, the customer is bothCompany adopted, as required,
an accounting
standard update related to 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 durationaccounting and disclosure
 
of the contract is almost always one year or less.credit losses effective January 1, 2020.
 
As a result,
The Company recognizes an
allowance for credit losses, which represents the portion
of its trade accounts receivable that the Company has elected to apply
certain practical expedients and omit certain disclosures ofdoes not expect
 
remaining performance obligations for contracts that have anto collect
over the contractual life, considering past events
 
initial termand reasonable and supportable forecasts of
one year or less as permitted by the FASB.
The Company identifies a performance obligation in a future economic
 
contract for each promised good or service that is separately identifiable
from other obligations in the contract and for which the
customer can benefit from the good or service either on its own or together
with other resources that are readily available to
the customer.
The Company determines the transaction price as the amount
of
consideration it expects to be entitled to in exchange
for fulfilling the performance obligations, including the
effects of any variable
consideration, significant financing elements, amounts
payable to the customer or noncash consideration.
For any contracts that have
more than one performance obligation, the Company
allocates the transaction price to each performance obligation
in an amount that
depicts the amount of consideration to which the Company
expects to be entitled in exchange for satisfying each performance
obligation.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
14
In accordance with the last step of the FASB’s
guidance, the Company recognizes revenue when,
or as, it satisfies the
performance obligation in a contract by transferring control
of a promised good or providing the service to the customer.conditions.
 
The
Company recognizes revenue over time as theCompany’s allowance
for credit losses on its trade accounts receivables
is based on specific collectability facts and circumstances for
each outstanding receivable and customer,
 
receives and consumes the benefits provided by the Company’s
performance;
the Company’s performance
creates or enhances an asset that the customer controls as the
asset is created or enhanced; or the
Company’s performance
does not create an asset with an alternative use to the entity,
aging of outstanding receivables, and the entity has an enforceable right to
payment, including a profit margin, for performanceassociated collection
 
completedrisk the Company
estimates for certain past due aging categories, and
also, the general risk to date.
For performance obligations not satisfied over time, theall outstanding accounts receivable based on historical
Company determines the point in time at which a customer
amounts determined to be uncollectible.
obtains control of an asset and the Company satisfies a performance
obligation by considering when the Company has a right
to payment for the asset; the customer has legal title to the
asset; the
Company has transferred physical possession of the asset; the
customer has the significant risks and rewards of ownership
of the asset;
or the customer has accepted the asset.
The Company typically satisfies its performance obligations
and recognizes revenue at a point in time for product
sales, generally
when products are shipped or delivered to the customer,
depending on the terms underlying each arrangement.
In circumstances
where the Company’s
products are on consignment, revenue is generally recognized
upon usage or consumption by the customer.
For
any Fluidcare or other services provided by the Company
to the customer, the Company typically satisfies its
performance obligations
and recognizes revenue over time, as the promised services
are performed.
The Company uses input methods to recognize revenue
over time related to these services, including labor costs
and time incurred.
The Company believes that these input methods represent
the most indicative measure of the Fluidcare or other service
work performed by the Company.
Other Considerations
The Company does not have standard payment terms for
all customers;
however the Company’s
general payment terms require
customers to pay for products or services provided after
the performance obligation is satisfied.
The Company does not have
significant financing arrangements with its customers.
 
The Company does not have significant amounts of variableany off-balance-sheet
 
consideration in
credit exposure related to its contracts with customers and where applicable,
customers.
the Company’s estimates of variable
consideration are not constrained.
The
Company records certain third-party license fees in
other (expense) income, net, in its Condensed Consolidated
Statements of
Operations,
which generally include sales-based royalties in exchange for
the license of intellectual property.
These license fees are
recognized in accordance with their agreed-upon
terms and when performance obligations are satisfied, which is generally
when the
third party has a subsequent sale.
Practical Expedients and Accounting Policy Elections
The Company has made certain accounting policy
elections and elected to use certain practical expedients as permitted
by the
FASB in applying
the guidance on revenue recognition.
It is the Company’s policy
to not adjust the promised amount of
consideration for the effects of a significant
financing component as the Company expects, at contract
inception, that the period
between when the Company transfers a promised good or service
to the customer and when the customer pays for that good
or service
will be one year or less.
In addition, it is the Company’s
policy to expense costs to obtain a contract as incurred when
the expected
period of benefit, and therefore the amortization period,
is one year or less.
It is also the Company’s accounting
policy to exclude
from the measurement of the transaction price all
taxes assessed by a governmental authority that are both imposed
on and concurrent
with a specific revenue-producing transaction and
collected by the entity from a customer, including
sales, use, value added, excise
and various other taxes.
Lastly, the Company
has elected to account for shipping and handling activities that occur
after the customer
has obtained control of a good as a fulfilment cost rather than
an additional promised service.
Contract Assets and Liabilities
The Company recognizes a contract asset or receivable
 
on its Condensed Consolidated Balance Sheet when the Company
providesperforms a service or transfers a good or service in advance
of receiving consideration.
 
A receivable is the Company’s
 
right to consideration that is
is unconditional and only the passage of time is required
 
before payment of that consideration is due.
 
A contract asset is the Company’s
Company’s right to consideration
in exchange for goods or services
that the Company has transferred
to a customer.
 
The Company had
0
had no material contract assets recorded on its Condensed Consolidated
 
Consolidated Balance Sheets as of September 30, 2020March 31, 2021 or December
 
31, 2019.
2020.
A contract liability is recognized when the Company
 
receives consideration, or if it has the unconditional right
 
to receive
consideration, in advance of performance.
 
A contract liability is the Company’s
 
obligation to transfer goods or services to a customer
for which the Company has received consideration,
 
or a specified amount of consideration is due, from the customer.
 
The Company’s
contract liabilities primarily represent deferred revenue
 
recorded for customer payments received by the Company
 
prior to the
Company satisfying the associated performance obligation.
 
Deferred revenues are presented within other current liabilities
 
in the
Company’s Condensed
 
Consolidated Balance Sheets.
 
The Company had approximately $
3.66.3
 
million and $
2.24.0
 
million of deferred
revenue as of September 30, 2020March 31, 2021 and December 31, 2019
,2020,
 
respectively.
 
During the nineFor three months ended September 30, 2020,March 31, 2021, the Company
 
thesatisfied
Company satisfied all of the associated performance
obligations and recognized
into revenue the advanced
advance payments received and recorded
recorded as of
December 31, 2019.2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
1511
Disaggregated Revenue
The Company sells its various industrial process fluids,
its specialty chemicals and its technical expertise as a global
product
portfolio.
The Company generally manages and evaluates its performance
by segment first, and then by customer industry,
rather than
by individual product lines.
The Company has provided annual net sales information by
major product lines that represent
approximately 10% or more of consolidated net sales in its 2019
Form 10-K, and those annual percentages are generally consistent
with the current quarter’s net sales by product
line.
Also, net sales of each of the Company’s
major product lines are generally spread
throughout all three of the Company’s
geographic regions, and in most cases, approximately proportionate
to the level of total sales in
each region.
The following tables disaggregate the Company’s
 
net sales by segment, geographic region, customer industry,
 
and timing of
revenue recognized for the three and nine months ended SeptemberMarch 31,
 
30, 20202021 and 2019.
Certain immaterial reclassifications within the
disaggregated customer industry disclosures for the
three and nine months ended September 30, 2019 have been
made to conform with
the Company’s current
customer industry segmentation.2020.
Three Months Ended September 30, March 31,
2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
46,793
$
34,274
$
49,743
$
130,810
Metalworking and other
88,078
85,540
46,963
220,581
134,871
119,814
96,706
351,391
Global Specialty Businesses
45,256
20,272
12,864
78,392
$
180,127
$
140,086
$
109,570
$
429,783
Timing of Revenue Recognized
Product sales at a point in time
$
171,594
$
131,162
$
106,399
$
409,155
Services transferred over time
8,533
8,924
3,171
20,628
$
180,127
$
140,086
$
109,570
$
429,783
Three Months Ended March 31,
2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
42,09846,673
$
25,36229,888
$
45,00141,589
$
112,461118,150
Metalworking and other
77,44283,223
68,64374,951
39,87631,963
185,961190,137
119,540129,896
94,005104,839
84,87773,552
298,422308,287
Global Specialty Businesses
39,19744,231
17,42916,605
12,1769,438
68,80270,274
$
158,737174,127
$
111,434121,444
$
97,05382,990
$
367,224378,561
Timing of Revenue Recognized
Product sales at a point in time
$
153,820168,802
$
107,093118,423
$
94,66081,156
$
355,573368,381
Services transferred over time
4,9175,325
4,3413,021
2,3931,834
11,65110,180
$
158,737174,127
$
111,434121,444
$
97,05382,990
$
367,224
Three Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
48,600
$
26,377
$
43,264
$
118,241
Metalworking and other
68,091
55,992
31,002
155,085
116,691
82,369
74,266
273,326
Global Specialty Businesses
38,834
5,169
7,801
51,804
$
155,525
$
87,538
$
82,067
$
325,130
Timing of Revenue Recognized
Product sales at a point in time
$
150,904
$
85,579
$
80,359
$
316,842
Services transferred over time
4,621
1,959
1,708
8,288
$
155,525
$
87,538
$
82,067
$
325,130
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
16
Nine Months Ended September 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
121,458
$
80,174
$
122,006
$
323,638
Metalworking and other
208,554
196,372
104,844
509,770
330,012
276,546
226,850
833,408
Global Specialty Businesses
115,722
49,603
33,092
198,417
$
445,734
$
326,149
$
259,942
$
1,031,825
Timing of Revenue Recognized
Product sales at a point in time
$
431,266
$
313,511
$
254,011
$
998,788
Services transferred over time
14,468
12,638
5,931
33,037
$
445,734
$
326,149
$
259,942
$
1,031,825
Nine Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
129,031
$
75,578
$
100,868
$
305,477
Metalworking and other
131,632
108,228
64,366
304,226
260,663
183,806
165,234
609,703
Global Specialty Businesses
102,149
13,170
17,187
132,506
$
362,812
$
196,976
$
182,421
$
742,209
Timing of Revenue Recognized
Product sales at a point in time
$
352,504
$
194,911
$
177,416
$
724,831
Services transferred over time
10,308
2,065
5,005
17,378
$
362,812
$
196,976
$
182,421
$
742,209378,561
Note 6 –- Leases
The Company determines if an arrangement is a lease
 
at its inception.
 
This determination generally depends on whether the
arrangement conveys the right to control the use of an
 
identified fixed asset explicitly or implicitly for a period of
 
time in exchange for
consideration.
 
Control of an underlying asset is conveyed if the Company obtains
 
obtains the rights to direct the use of, and obtains
substantially all of the economic benefits from the use
 
of, the underlying asset.
 
Lease expense for variable leases and short-term
leases is recognized when the obligation is incurred.
 
The Company has operating leases for certain facilities, vehicles
 
and machinery and equipment with remaining lease terms up
 
to
1110
 
years.
 
In addition, the Company has certain land use leases with remaining
 
lease terms up to
9594
 
years.
 
The lease term for all of the
Company’s leases includes
 
the non-cancellable period of the lease plus any additional periods
 
covered by an option to extend the lease
that the Company is reasonably
certain it will exercise.
 
Operating leases are included in right of use lease assets, other current
liabilities and long-term lease liabilities on the Condensed
 
Consolidated Balance Sheet.
 
Right of use lease assets and liabilities are
recognized at each lease’s
 
commencement date based on the present value of its lease payments
 
over its respective lease term.
 
The
Company uses the stated borrowing rate for a lease when
 
readily determinable.
 
When a stated borrowing rate is not available in a
lease agreement, the Company uses its incremental borrowing
 
rate based on information available at the lease’s
 
commencement date
to determine the present value of its lease payments.
 
In determining the incremental borrowing rate used to present
 
value each of its
leases, the Company considers certain information
 
including fully secured borrowing rates readily available to the Company
 
and its
subsidiaries.
The Company has immaterial finance leases, which are
included in property, plant
and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated
Balance Sheet.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
1712
subsidiaries.
The Company has immaterial finance leases, which are
included in property, plant
and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated
Balance Sheet.
Operating lease expense is recognized on a straight-line
 
basis over the lease term.
 
Operating lease expense for the three and ninemonths
months ended September 30,March 31, 2021 and 2020 was $
3.73.6
 
million and $
10.6
million, respectively.
Comparatively, operating lease
expense for the
three and nine months ended September 30, 2019 was
$
2.5
million and $
6.03.4
 
million, respectively.
 
Short-term lease expense for the
three and nine months ended September 30, 2020 was
$
0.20.3
 
million and $
1.10.5
million, respectively.
Comparatively, short-term
lease
expensemillion for the three and nine months ended SeptemberMarch 31, 2021
 
30, 2019 was $
0.5
million and $
0.8
million,2020, respectively.
 
The Company has
0
 
material variable lease costs or
sublease income for the three or
nine months ended September 30, 2020March 31, 2021 and 2019.
 
2020.
Cash paid for operating leases during the nine months ended September
30, 2020 and 2019 was $
10.53.6
 
million and $
5.93.4
million during the three months ended March 31, 2021
 
million,and 2020,
respectively.
 
The Company recorded new right of use lease assets
and associated lease liabilities
of approximately $
6.13.1
 
million during the nine
three months ended September 30, 2020.
March 31, 2021.
Supplemental balance sheet information related to the Company’s
 
leases is as follows:
September 30,March 31,
December 31,
20202021
20192020
Right of use lease assets
$
39,78138,027
$
42,90538,507
Other current liabilities
11,18510,419
11,17710,901
Long-term lease liabilities
28,06127,050
31,27327,070
Total operating
 
lease liabilities
$
39,24637,469
$
42,45037,971
Weighted average
 
remaining lease term (years)
6.05.9
6.26.0
Weighted average
 
discount rate
4.21%4.26%
4.21%4.20%
Maturities of operating lease liabilities as of SeptemberMarch 31,
 
30, 20202021 were as follows:
September 30,March 31,
20202021
For the remainder of 20202021
$
4,689
For the year ended December 31, 2021
11,5849,269
For the year ended December 31, 2022
8,0199,042
For the year ended December 31, 2023
5,9126,932
For the year ended December 31, 2024
4,3875,194
For the year ended December 31, 2025
4,211
For the year ended December 31, 2026 and beyond
11,5838,116
Total lease payments
46,17442,764
Less: imputed interest
(6,928)(5,295)
Present value of lease liabilities
$
39,24637,469
Note 7 – Restructuring and Related Activities
As previously disclosed in its 2019 Form 10-K, in the third quarter of 2019, theThe Company’s management approved a global
restructuring plan (the “QH Program”) as part of its plan to realize certain cost
synergies associated with the Combination.Combination in the third quarter of 2019. The QH
Program includes restructuring and associated
severance costs to reduce total headcount by approximately 350400 people globally, as well
as plans for the closure of certain
manufacturing and non-manufacturing facilities.
The exact timing and total costs associated with
the QH Program
will depend on a
number of factors and is subject to change; however,
the Company currently expects reduction in
headcount and
site closures to
continue to occur during 2020 and intothroughout 2021
under the QH Program and estimates that anticipated costcosts synergies
synergies realized from the QH
Program will approximate one-times the restructuring costs
incurred.
Employee separation benefits
will vary depending on local
regulations within certain foreign countries and will
include severance and other benefits.
All costs incurred to date relate to severance costs to reduce
 
headcount as well as costs to close certain facilities and are
 
recorded
in restructuringRestructuring and related charges in the
 
Company’s Condensed Statements
 
of Operations.
 
As described in Note 4 of Notes to
Condensed Consolidated Financial Statements, restructuring
 
and related charges are not included in
 
the Company’s calculation of
reportable segments’ measure of operating earnings
 
and therefore these costs are not reviewed by or recorded to reportable
 
reportable segments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
1813
Activity in the Company’s
 
accrual for restructuring under the QH Program for the ninethree months ended
 
September 30, 2020ended March 31, 2021 is as
follows:
QH Program
Accrued restructuring as of December 31, 20192020
$
18,0438,248
Restructuring and related charges
3,5851,175
Cash payments
(12,772)(3,034)
Currency translation adjustments
37(419)
Accrued restructuring as of September 30, 2020March 31, 2021
$
8,8935,970
In connection with the plans for closure of certain
manufacturing and non-manufacturing facilities, the Company
made a decision
to make available for sale certain facilities during the second
quarter of 2020.
As a result, certain buildings and land with an aggregate
book value of approximately $
12.8
million have been reclassified to other current assets from property,
plant and equipment as of
September 30, 2020.
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation
 
expense in its Condensed Consolidated Statements of
Operations for the three and nine months ended March 31, 2021
 
September 30, 2020 and 2019:2020:
Three Months Ended
Nine Months EndedMarch 31,
September 30,
September 30,2021
2020
2019
2020
2019
Stock options
$
353308
$
455
$
1,138
$
888432
Non-vested restricted stock awards and restricted stock
units
1,2591,396
867
3,782
2,0051,264
Non-elective and elective 401(k) matching contribution in
 
stock
9101,553
0
2,072
0
Employee stock purchase plan
0
21
0
68
Director stock ownership plan
243203
27
337
8140
Performance stock units
280
0
560319
0
Annual incentive plan
7,102
0
9,931
02,946
Total share-based
 
compensation expense
$
10,1473,779
$
1,370
$
17,820
$
3,0424,682
Share-based compensation expense is recorded in SG&A,
 
except for approximately $
0.4
million and $
1.2
million for the three
and nine months ended September 30, 2020, respectively,
and $
0.3
 
million and $
0.40.5
 
million forduring the three and nine months ended
September 30, 2019,March 31, 2021 and 2020, respectively,
 
respectively, recorded
within Combination, integration and other acquisition-relatedacquisition
-related expenses.
 
The increase inchange
in total share-based compensation expense for the nine monthsthree
 
months ended September 30, 2020March 31, 2021 includes performance stock unitunits
 
s, annualand non-
incentive
plan accruals, and non-elective and elective 401(k) matching
contributions
in stock as componentsbut excludes annual
 
incentive plan costs as a component of share-based compensation
compensation beginning in 2020, each described further
below.
Stock Options
During the first quarter of 2020,2021, the Company granted
 
stock options under its long-term incentive plan (“LTIP”)LTIP
 
”) that are subject
only to time-basedtime vesting over a
three
-year three-year period.
 
For the purposes of determining the fair value of stock option awards,
 
awards, the Company
Company used a Black-Scholes option pricing model and the assumptions
 
the assumptions set forth in the table below:
Number of options granted
49,11523,733
Dividend yield
0.990.85
%
Expected volatility
31.5737.33
%
Risk-free interest rate
0.360.60
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight
 
-line basis over the vesting period.
 
As of September 30, 2020,March 31, 2021, unrecognized
unrecognized compensation expense related to all stock options
 
granted was $
1.8
million, to be recognized over a weighted average
remaining period of
2.0
years.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
19
Restricted Stock Awards
and Restricted Stock Units
During the nine months ended September 30, 2020, the
Company granted
27,841
non-vested restricted shares and
6,030
non-
vested restricted stock units under its LTIP
,
subject to time-based vesting, generally over a three-year period.
The fair value of these
grants is based on the trading price of the Company’s
common stock on the date of grant. The Company adjusts the
grant date fair
value of these awards for expected forfeitures based
on historical experience.
As of September 30, 2020, unrecognized compensation
expense related to the non-vested restricted shares was $
5.72.8
 
million, to be recognized over a weighted average remaining
period of
1.7
years, and unrecognized compensation expense
related to non-vested restricted stock units was $
1.0
million, to be recognized over a
weighted average remaining period of
2.1
years.
Performance Stock Units
In March 2020, the Company included performance
-dependent stock awards (“PSUs”) as a component of its LTIP,
which will be
settled in a certain number of shares subject to market
-based and time-based vesting conditions.
The number of fully vested shares
that may ultimately be issued as settlement for each
award may range from
0
% up to
200
% of the target award, subject to the
achievement of the Company’s
total shareholder return (“TSR”) relative to the performance
of the Company’s peer
group, the S&P
Midcap 400 Materials group.
The service period required for the PSUs is three years and
the TSR measurement period for the PSUs is
from January 1, 2020 through December 31, 2022.
Compensation expense for PSUs is measured based on
their grant date fair value and is recognized on a straight-line basis over
the three-year vesting period.
The grant-date fair value of the PSUs was estimated using a
Monte Carlo simulation on the grant date
and using the following assumptions: (i) a risk-free
rate of
0.28
%; (ii) an expected term of
3.0
years; and (iii) a three-year daily
historical volatility for each of the companies in the
peer group, including Quaker Houghton.
As of September 30, 2020, the Company estimates that it will
issue approximately
28,000
fully vested shares as of the settlement
date of the award based on the conditions of the
PSUs and Company’s closing
stock price on September 30, 2020.
As of September
30, 2020, there was approximately $
2.8
million of total unrecognized compensation cost related to PSUs which
the Company expects
to recognize over a weighted-average period of
2.5
 
years.
Restricted Stock Awards
and Restricted Stock Units
During the first quarter of 2021, the Company granted
12,610
Annual Incentive Plan
nonvested restricted shares and
The Company maintains an Annual Incentive Plan2,791
 
(“AIP”), which may be settled in cash or a certain number ofnonvested restricted stock
units under its LTIP,
 
shares subject to
performance-based and time-based vesting, conditions.generally over a three-year
 
It is the Company’s current
intention to settle the 2020 AIP in shares, and
therefore, expense associated with the AIP in 2020 is recorded
as a component of share-based compensation expense.period.
 
The numberfair value of
fully vested shares that may ultimately be issued as settlement
for each award these grants is subject to the achievement of the Company’s
performance against certain internal financial and non-financial
metrics and approval by the Company’s
Compensation Committee.
Compensation expense for the AIP is measured based on the estimated
total value of the award.
The number of shares that will
ultimately be issued under the AIP award will be equal
to the final value of the award converted into a number of shares based on
the
trading price of the Company’s
 
common stock on the date of settlement.grant.
The Company adjusts the grant date fair value of these awards for
expected forfeitures based on historical experience.
 
As of September 30, 2020, the Company estimates that it
will issue approximately
74,000
March 31, 2021, unrecognized compensation expense
 
fully vestedrelated to the
nonvested restricted shares as of the settlement date of the award
based on the conditions of the AIP,
the
Company’s projected
performance against its performance metrics and Company’s
closing stock price on September 30, 2020.
Defined Contribution Plan
The Company has a 401(k) plan with an employer
match covering a majority of its U.S. employees.
The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum
matching contribution of
3
% of compensation.
Additionally, the
plan provides for non-elective nondiscretionary contributions
on behalf of participants who have completed one year
of service equal to
3
% of the eligible participant's compensation.
The Company’s matching contributions
and non-elective
contributions may be made in cash or in fully vested shares
of the Company’s common
stock.
Beginning in April 2020,
the Company
began matching both non-elective and elective 401(k)
contributions in fully vested shares of its common stock rather than
cash.
For
the three and nine months ended September 30, 2020,
total contributions werewas $
0.96.3
 
million, and $to be recognized over a weighted average remaining period
of
2.1
 
years, and
unrecognized compensation expense related to nonvested
restricted stock units was $
1.3
million, respectively.to be recognized over a weighted
average remaining period of
2.3
years.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
2014
Performance Stock Units
During the first quarter of 2021,
the Company granted performance-dependent stock awards (“PSUs”) as
a component of its
LTIP,
which will be settled in a certain number of shares subject to market
-based and time-based vesting conditions.
The number of
fully vested shares that may ultimately be issued as settlement
for each award may range from
0
% up to
200
% of the target award,
subject to the achievement of the Company’s
total shareholder return (“TSR”) relative to the performance
of the Company’s peer
group, the S&P Midcap 400 Materials group.
The service period required for the PSUs is three years and the
TSR measurement
period for the PSUs is from January 1 of the year of grant
through December 31 of the year prior to issuance.
Compensation expense for PSUs
is measured based on their grant date fair value and
is recognized on a straight-line basis over
the three-year vesting period.
The grant-date fair value of the PSUs granted during
the first quarter of 2021 was estimated using a
Monte Carlo simulation on the grant date and using the
following assumptions: (i) a risk-free rate of
0.29
%; (ii) an expected term of
3.0
years; and (iii) a three-year daily historical volatility for
each of the companies in the peer group, including Quaker
Houghton.
As of March 31, 2021, the Company estimates that it will issue
approximately
28,000
fully vested shares as of the applicable
settlement dates of all outstanding PSU awards, based
on the conditions of the PSUs and performance to date for each
award. As of
March 31, 2021, there was approximately $
4.8
million of total unrecognized compensation cost related to
PSUs, which the Company
expects to recognize over a weighted-average period
of
2.5
years.
Annual Incentive Plan
The Company maintains an Annual Incentive Plan
(“AIP”), which may be settled in cash or a certain number of
shares subject to
performance-based and time-based vesting conditions.
As of March 31, 2020, it was the Company’s
intention to settle the 2020 AIP
in shares, and therefore, expense associated with the AIP in 2020
was recorded as a component of share-based compensation expense.
In the fourth quarter of 2020, the Company determined
that it would settle the 2020 AIP in cash.
Therefore, the share-based
compensation associated with the AIP during the year
ended December 31, 2020 was reclassified from a component
of share-based
compensation expense to incentive compensation.
This determination and conclusion had no impact on the
classification of AIP
expense within the Company’s
Condensed Consolidated Statement of Operations for
the periods as both are a component of SG&A.
As of March 31, 2021, it is the Company’s
intention to settle the 2021 AIP in cash.
Defined Contribution Plan
The Company has a 401(k) plan with an employer
match covering a majority of its U.S. employees.
The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum
matching contribution of
3
% of compensation.
Additionally, the
plan provides for non-elective nondiscretionary contributions
on behalf of participants who have completed one year
of service equal to
3
% of the eligible participants’ compensation.
Beginning in April 2020 and continuing until April 2021, the
Company matched both non-elective and elective 401(k)
contributions in fully vested shares
of the Company’s common
stock rather
than cash.
Total Company contributions
were $
1.5
million for the three months ended March 31, 2021.
There were no similar
matching contributions in stock for the three months
ended March 31, 2020.
Note 9 – Pension and Other Postretirement
 
Benefits
The components of net periodic benefit (income) cost for the
 
the three and nine months ended September 30,March 31, 2021 and 2020 and
2019 are as
follows:
Three Months Ended September 30,March 31,
Nine Months Ended September 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Postretirement Benefits
Pension Benefits
Benefits2021
2020
20192021
2020
2019
2020
2019
2020
2019
Service cost
$
1,227316
$
9931,174
$
1
$
2
$
2
$
3,565
$
2,956
$
5
$
5
Interest cost
1,5271,090
1,8521,769
2511
36
4,782
4,068
77
10726
Expected return on plan assets
(3,526)(2,082)
(2,140)
0
0
(7,246)
(4,102)(1,959)
0
0
Settlement charge
0
0
0loss
0
22,667
0
0
0
Actuarial loss amortization
626855
799
151,047
0
2,288
2,348
46
015
Prior service (credit) cost amortization
(42)2
(34)(40)
0
0
(123)Total net periodic
(117)
0
0
Net periodic benefit (income)
cost
$
(188)181
$
1,47024,658
$
4212
$
38
$
25,933
$
5,153
$
128
$
11243
InAs disclosed in the Company’s
2020 Form 10-K, in the fourth quarter of 2018, the
Company began the process of terminating its Legacy
legacy Quaker non-contributory U.S. pension plan
plan (“(“Legacy Quaker U.S. Pension Plan”).
During the third quarter of 2019, the
Company received a favorable termination determination
determination letter from the Internal Revenue
Service (“I.R.S.”) and amended the Legacy Quaker U.S. Pension Plan to comply with
final regulations of the Internal Revenue Code. The Company completed the
Legacy Quaker U.S. Pension Plan termination during the
first quarter of 2020.
In order to terminate the Legacy Quaker U.S. Pension
Plan in accordance with I.R.S. and Pension Benefit
Guaranty Corporation
requirements, the Company was required to fully fund the Legacy Quaker U.S. Pension Plan on a termination
basis and the amount necessary to do so was approximately $1.8 million, subject to final true up adjustments. In the third quarter of
2020, the Company finalized the amount of the liability and related annuity payments and received a refund in premium of
approximately $1.6 million. In addition, the Company recorded a non-cash pension settlement charge at plan termination of
approximately $22.7 million. This settlement charge included the immediate recognition into expense of the related unrecognized
losses within accumulated other comprehensive income (loss) (“AOCI”) on the balance sheet as of the plan termination date.
Employer Contributions
The Company previously disclosed in its 2019 Form 10-K
that it expected to make minimum cash contributions of $
10.0
million
to its U.S. and foreign pension plans and approximately
$
0.4
million to its other postretirement benefit plans in 2020.
As of
September 30, 2020, $
6.9
million and $
0.2
million of contributions have been made to the Company’s
U.S. and foreign pension plans
and its other postretirement benefit plans, respectively.
This excludes the $
1.8
million of additional funding made in the first quarter
of 2020, as required, to terminate the Legacy Quaker U.S.
Pension Plan, noted above.
Note 10 – Other (Expense) Income, Net
The components of other (expense) income, net, for the
three and nine months ended September 30, 2020 and 2019 are
as
follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Income from third party license fees
$
190
$
242
$
702
$
655
Foreign exchange (losses) gains, net
(1,897)
376
(3,080)
(5)
(Loss) gain on fixed asset disposals, net
(24)
72
(105)
111
Non-income tax refunds and other related credits
0
82
2,131
1,047
Pension and postretirement benefit income (costs),
non-service components
1,375
(513)
(22,491)
(2,304)
Other non-operating income, net
117
(56)
436
107
Total other
(expense) income, net
$
(239)
$
203
$
(22,407)
$
(389)
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
21
Pension and postretirement benefit income (costs), non-service
components during both the three and nine months
ended
September 30, 2020 includes the $
1.6
million refund in premium described in Note 9 of Notes to Condensed
Consolidated Financial
Statements.
In addition, this line also includes $
22.7
million related to the Legacy Quaker U.S. Pension Plan non-cash
settlement
charge during the nine months ended September
30, 2020, also described in Note 9 of Notes to Condensed Consolidated
Financial
Statements.
Note 11 – Income Taxes
and Uncertain Income Tax
Positions
The Company’s effective
tax rate for the three and nine months ended September 30, 2020
was an expense of
8.1
% and a benefit
of
38.3
%, respectively, compared
to a benefit of
27.6
% and an expense of
22.9
%, respectively, for the
three and nine months ended
September 30, 2019.
The Company’s effective
tax rate for the three and nine months ended September 30,
2020 was impacted by the
pre-tax loss for the nine months ended September
30, 2020, the tax effect of certain one-time pre
-tax costs as well as certain tax
charges and benefits in the current period related
to the impact of recently issued tax regulations and other changes
in foreign tax
credit valuation allowances, discussed below,
tax law changes in foreign jurisdictions, and the tax impact
of the Company’s
termination of its Legacy Quaker U.S. Pension Plan.
Applying the recently issued tax regulations resulted in a $
5.0
million discrete
benefit on the foreign tax credit valuation allowance
and a $
2.1
million benefit on the 2019 return to provision adjustment,
both
recognized in the third quarter of 2020.
Comparatively, the
three and nine months ended September 30, 2019 effectiv
e
tax rates were
impacted by certain non-deductible costs associated with the
Combination and withholding tax expense associated with the
assumed
repatriation of previously untaxed current earnings and profits of
certain of the Company’s foreign
subsidiaries, partially offset by
favorable return to provision adjustments in the current
year and certain share-based compensation-related tax benefits for
deductions
in excess of compensation costs associated with stock option exercises.
Additionally, in the third
quarter of 2019, the Company
recorded a cumulative year-to-date tax benefit
as a result of one of its subsidiaries receiving approval
for the renewal of the
concessionary
15
% tax rate compared to its
25
% statutory tax rate.
On March 27, 2020, in response to COVID-19 and its detrimental
impact to the global economy,
the Coronavirus Aid, Relief and
Economic Security Act (the “CARES Act”) was enacted into
law, providing a stimulus
to the U.S. economy in the form of various
individual and business assistance programs as well as temporary
changes to existing tax law.
The changes include a postponement of
certain tax payments, deferral of the employer’s
portion of the social security tax and certain other payroll-related
incentives, and an
increase in the interest expense limitation under Section
163(j) of the Internal Revenue Code from
30
% to
50
% for the 2019 and 2020
tax years.
ASC 740 requires the tax effects of changes in tax laws or
rates to be recorded in the period of enactment.
Under the
CARES Act, the Company has the option to use its 2019
adjusted taxable income in determining its interest expense
limitation under
Section 163(j).
While the Company is still considering whether to make this election
for 2020, the current year tax provision takes
into account this potential election and associated tax
benefit, which offsets an increase to the Company’s
foreign tax credit valuation
allowance recognized during the current quarter primarily
driven by changes in current year projected taxable income
due to the
negative impacts from COVID-19.
In addition, the Company reviewed its existing deferred tax assets in
light of COVID-19 and
determined that, at this time, no change in valuation
allowance is required except with regard to its foreign tax credits as
noted below.
While the ultimate impact of COVID-19 on the Company’s
results of operations is still uncertain, the Company will continue
to assess
future changes in projected taxable income to determine
if they result in additional changes to any of the Company’s
valuation
allowances.
As previously disclosed in its 2019 Form 10-K, the Company
had a deferred tax liability of $
8.2
million at December 31, 2019,
which primarily represents the Company’s
estimate of non-U.S. taxes it will incur to repatriate certain foreign
earnings to the U.S.
During the first nine months of 2020, the Company
made certain adjustments to the deferred tax liability to
take into account a tax law
change enacted in the first quarter in a certain foreign
jurisdiction, the inclusion of other earnings to be repatriated,
and the actual
repatriation of earnings, resulting in a deferred tax liability
of $
6.4
million as of September 30, 2020.
As previously disclosed in its 2019 Form 10-K, in conjunction with the Combination, the Company acquired foreign tax credit
deferred tax assets of $41.8 million expiring between 2019 and 2028. Foreign tax credits may be carried forward for 10 years. The
Company analyzes the expected impact of the utilization of foreign tax credits based on projected U.S. taxable income, overall
domestic loss recapture, annual limitations due to the ownership change limitations provided by the Internal Revenue Code, and
enacted tax law amongst other factors.
As of December 31, 2019, the Company had net realizable foreign
tax credits of $
32.7
million
on its balance sheet expected to be utilized between
2020 and 2026
.
As of September 30, 2020, the Company had net realizable
foreign tax credits of $
26.0
million on its balance sheet expected to be utilized between
2020 and 2026
.
The change in net realizable
foreign tax credits during the first nine months of 2020
was primarily driven by the Company's update to its initial opening balance
sheet estimate with respect to acquired Houghton foreign
tax credit deferred tax assets, described in Note 2 of Notes
to Condensed
Consolidated Financial Statements, as well as approximately
$
0.5
million of tax benefit for the nine months ended September 30, 2020
based on revised taxable income projections and changes
to the interest expense limitation under the CARES Act amongst
other
factors.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
22
The Company continues to recognize interest and penaltie
s
associated with uncertain tax positions as a component of
taxes on
income (loss) before equity in net income of associated
companies in its Condensed Consolidated Statements of Operations.
The
Company recognized a credit for interest of $
0.2
million and an expense of $
0.4
million and an expense for penalties of less than $
0.1
million and $
0.5
million in its Condensed Consolidated Statement of Operations for
the three and nine months ended September 30,
2020, respectively.
Comparatively, the Company
recognized an expense for interest of $
0.1
million and $
0.4
million and an expense
for penalties of less than $
0.1
million and $
0.1
million for the three and nine months ended September 30,
2019, respectively.
As of
September 30, 2020, the Company had accrued $
2.7
million for cumulative interest and $
4.2
million for cumulative penalties in its
Condensed Consolidated Balance Sheets, compared
to $
2.3
million for cumulative interest and $
3.1
million for cumulative penalties
accrued at December 31, 2019.
As of September 30, 2020, the Company’s
cumulative liability for gross unrecognized tax benefits was $
21.7
million, an increase
of $
2.6
million from the $
19.1
million cumulative liability accrued as of December
31, 2019.
During the nine months ended September 30, 2020
and 2019, the Company recognized a decrease of $
1.9
million and $
1.5
million, respectively,
in its cumulative liability for gross unrecognized tax benefits due
to the expiration of the applicable statutes of
limitations for certain tax years.
The Company estimates that during the year ending December
31, 2020 it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
2.3
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, 2020.
The Company and its subsidiaries are subject to U.S. Federal income
tax, as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain
subject to examination by major tax jurisdictions include Brazil from
2000
, Italy from
2006
,
China from
2010
, Canada from
2011
, the Netherlands and the United Kingdom from
2014
, Spain from
2015
, Mexico, Germany,
and
the U.S. from
2016
, India from fiscal year beginning April 1, 2017 and ending
March 31,
2018
, and various U.S. state tax jurisdictions
from
2009
.
As previously reported, the Italian tax authorities have
assessed additional tax due from the Company’s
subsidiary, Quaker Italia
S.r.l., relating to the tax
years
2007 through 2015
.
The Company has filed for competent authority relief related to
these assessments
under the Mutual Agreement Procedures (“MAP”) of the
Organization for Economic Co-Operation and Development
(“OECD”) for
all years except
2007.
During the second quarter of 2020, the Company received notification
that the Italian and Dutch competent
authorities reached an agreement as part of the MAP involving
tax years 2008 through 2015.
The Company has tentatively agreed to
the reduced tax assessments and has recorded $
1.3
million of additional reserves for uncertain tax positions for the
open tax years that
is consistent with the tentative agreement reached involving
tax years 2008 through 2015.
As of September 30, 2020, the Company
believes it has adequate reserves for uncertain tax
positions with respect to this matter.
Houghton Italia, S.r.l
is also currently involved in a corporate income tax audit with the
Italian tax authorities covering tax years
2014 through 2018.
As part of the purchase accounting related to the Combination,
the Company has established a $
5.4
million
reserve for uncertain tax positions relating to this audit.
Since this reserve relates to tax periods prior to the Combination,
the
Company has submitted an indemnification claim
against funds held in escrow by Houghton’s
former owners for certain tax liabilities
arising pre-Combination.
As a result, a corresponding $
5.4
million indemnification receivable has also been established
through
purchase accounting that would offset the
$
5.4
million in tax liabilities booked through purchase accounting.
These amounts relate to
the 2014 to 2018 audit periods as well as the seven-month
period in 2019 prior to the Combination.
As of September 30, 2020, the
Company believes it has adequate reserves for uncertain
tax positions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
Legacy Quaker U.S. Pension Plan on a termination basis
and the amount necessary to do so was approximately $
1.8
million, subject to
final true up adjustments,
which were completed in the third quarter of 2020.
In addition, the Company recorded a non-cash pension
settlement charge at plan termination of
approximately $
22.7
million.
This settlement charge included the immediate recognition
into
expense of the related unrecognized losses within accumulated
other comprehensive (loss) income (“AOCI”) on the balance
sheet as
of the plan termination date.
Employer Contributions
The Company previously disclosed in its 2020 Form 10-K
that it expected to make minimum cash contributions of $
10.0
million
to its U.S. and foreign pension plans and approximately
$
0.3
million to its other postretirement benefit plans in 2021.
As of March 31,
2021, $
1.0
million and $
0.1
million of contributions have been made to the Company’s
U.S. and foreign pension plans and its other
postretirement benefit plans, respectively.
 
 
Note 10 – Other Income (Expense), Net
 
The components of other income (expense), net for
 
the three months ended March 31, 2021 and 2020 are as follows:
Three Months Ended
 
March 31,
2021
2020
Income from third party license fees
$
339
$
304
Foreign exchange (losses) gains, net
(1,478)
821
Gain on disposals of property,
 
plant, equipment and other assets, net
5,410
2
Non-income tax refunds and other related credits
97
1,299
Pension and postretirement benefit costs, non-service components
124
(23,525)
Other non-operating income (expense), net
195
(76)
Total other
 
income (expense), net
$
4,687
$
(21,175)
The Gain on disposals of property,
 
plant, equipment and other assets, net, during the three months
 
ended March 31, 2021,
includes the gain on the sale of certain held-for-sale
 
real property assets related to the Combination.
 
Pension and postretirement
benefit costs, non-service components during the three
 
months ended March 31, 2020 includes $
22.7
 
million related to the Legacy
Quaker U.S. Pension Plan non-cash settlement charge
 
described in Note 9 of Notes to Condensed Consolidated Financial Statements.
Note 11 – Income Taxes
 
and Uncertain Income Tax
 
Positions
The Company’s effective
 
tax rate for the three months ended March 31, 2021 was an expense of
24.2
% compared to a benefit of
31.1
% for the three months ended March 31, 2020.
 
The Company’s effective
 
tax rate for the three months ended March 31, 2021 was
largely impacted by the sale of certain held-for-sale
 
real property assets related to the Combination.
 
Comparatively, the prior
 
year first
quarter effective tax rate was impacted by the
tax effect of certain one-time pre-tax losses as well as certain tax
charges and benefits in
the prior year period including those related to changes
in foreign tax credit valuation
allowances, tax law changes in a foreign
jurisdiction, and the tax impacts of the Company’s
termination of its Legacy Quaker U.S. Pension Plan and the
Houghton indefinite-
lived trademarks and tradename intangible asset impairment.
As of December 31, 2020, the Company had a deferred tax liability of $5.9 million, which primarily represents the Company’s
estimate of non-U.S. taxes it will incur to repatriate certain foreign earnings to the U.S. The balance as of March 31, 2021 was $6.5
million.
As of March 31, 2021, the Company’s
cumulative liability for gross unrecognized tax benefits was $
23.5
million, an increase of
$
1.3
million from the cumulative liability accrued as of December 31, 2020.
The Company continues to recognize interest and penalties
associated with uncertain tax positions as a component of
taxes on
income (loss) before equity in net income of associated
companies in its Condensed Consolidated Statements of Operations.
The
Company recognized an expense of less than $
0.1
million for interest and a benefit of less than $
0.1
million for penalties in its
Condensed Consolidated Statement of Operations for the
three months ended March 31, 2021, and recognized an expense of
less than
$
0.1
million for interest and a benefit of less than $
0.1
million for penalties in its Condensed Consolidated Statement of
Operations for
the three months ended March 31, 2020.
As of March 31, 2021, the Company had accrued $
3.0
million for cumulative interest and
$
3.6
million for cumulative penalties in its Condensed Consolidated Balance
Sheets, compared to $
3.0
million for cumulative interest
and $
3.9
million for cumulative penalties accrued at December 31, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
2316
During the three months ended March 31, 2021 and
2020, the Company recognized decreases of $
0.3
million and $
0.8
million,
respectively, in
its cumulative liability for gross unrecognized tax benefits due
to the expiration of the applicable statutes of limitations
for certain tax years.
The Company estimates that during the year ending December
31, 2021 it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
1.5
million due to the expiration of the statute of limitations with regard
to certain tax
positions.
This estimated reduction in the cumulative liability for unrecogniz
ed 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, 2021.
The
Company and its subsidiaries are subject to U.S. Federal income
tax, as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain
subject to examination by major tax jurisdictions include Italy
from
2006
, Brazil from
2011
,
the Netherlands and China from
2015
, Mexico, Spain, Germany and the United Kingdom from
2016
, Canada and the U.S. from
2017
,
India from fiscal year beginning April 1, 2018 and ending
March 31,
2019
, and various U.S. state tax jurisdictions from
2011
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years 2007 through 2015. The Company has filed for competent authority relief from these assessments under
the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except
2007. In 2020, the respective tax authorities in Italy, Spain and the Netherlands reached agreement with respect to the MAP
proceedings which the Company has accepted.
As of March 31, 2021, the Company has received $
1.6
million in refunds from the
Netherlands and Spain and expects to pay $
2.4
million due to Italy in the second quarter of 2021.
As of March 31, 2021, the
Company believes it has adequate reserves for the remaining
uncertain tax positions related to 2007.
Houghton Italia, S.r.l
is also involved in a corporate income tax audit with the Italian tax
authorities covering tax years 2014
through 2018.
As of March 31, 2021, the Company has a $
5.5
million reserve for uncertain tax positions relating to matters related
to
this audit.
Since the reserve relates to the tax periods prior to August
1, 2019, the tax liability was established through purchase
accounting related to the Combination.
The Company has also submitted an indemnification claim against
funds held in escrow
by
Houghton’s former owners
and as a result, a corresponding $
5.5
million indemnification receivable has also been established through
purchase accounting.
Houghton Deutschland GmbH is also under audit by
the German tax authorities for the tax years 2015-2017.
Based on
preliminary audit findings, primarily related to
transfer pricing, the Company has recorded reserves for $
0.9
million as of March 31,
2021.
Of this amount, $
0.8
million relates to tax periods prior to the Combination and
therefore the Company has submitted an
indemnification claim with Houghton’s
former owners for any tax liabilities arising pre-Combination.
As a result, a corresponding
$
0.8
million indemnification receivable has also been established to
offset the $
0.8
million tax liability.
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations
 
for the three and nine months ended September 30, 2020March 31, 2021 and
2019: 2020:
Three Months Ended
March 31,
 
Nine Months Ended
September 30,
September 30,2021
2020
2019
2020
2019
Basic earnings (loss) per common share
 
Net income (loss) attributable to Quaker Chemical Corporation
$
27,30438,615
$
(13,053)
$
(8,812)
$
16,382(28,381)
Less: (income) loss allocated to participating securities
 
(113)(154)
 
46
44
(40)101
Net income (loss) available to common shareholders
$
 
27,19138,461
$
(13,007)
$
(8,768)
$
16,342(28,280)
Basic weighted average common shares outstanding
17,743,53817,785,370
16,185,724
17,704,662
14,271,12117,672,525
Basic earnings (loss) per common share
$
1.532.16
$
(0.80)
$
(0.50)
$
1.15(1.60)
Diluted earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
27,30438,615
$
(13,053)
$
(8,812)
$
16,382(28,381)
Less: (income) loss allocated to participating securities
(113)(154)
46
44
(40)101
Net income (loss) available to common shareholders
$
27,19138,461
$
(13,007)
$
(8,768)
$
16,342(28,280)
Basic weighted average common shares outstanding
17,743,53817,785,370
16,185,724
17,704,662
14,271,12117,672,525
Effect of dilutive securities
57,32770,607
0
0
42,850
Diluted weighted average common shares outstanding
17,800,86517,855,977
16,185,724
17,704,662
14,313,97117,672,525
Diluted earnings (loss) per common share
$
1.532.15
$
(0.80)
$
(0.50)
$
1.14(1.60)
During the third quarter of 2019, the Company issued
approximately
4.3
million shares of common stock, comprising
24.5
% of
the common stock of the Company immediately after
the closing, as a component of the consideration transferred in the Combination.
Certain stock options and restricted stock units are not included
in the diluted earnings (loss) per share calculation because
the effect
would have been anti-dilutive.
All of the Company’s potentially
dilutive shares for the nine months ended September
30, 2020 and
the three months ended September 30, 2019 are anti-dilutive
and not included in the dilutive earnings (loss) per share
calculations
because of the Company’s
net loss for the periods.
There were
0
anti-dilutive shares excluded from the diluted earnings per share
calculations for the three months ending September 30,
2020 and the nine months ended September 30, 2019.
Note 13 – 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.
The proceeds of the settlement and release agreements
have been deposited into interest bearing
accounts that earned less than $
0.1
million in the nine months ended September 30, 2020, compared
to $
0.2
million in the nine months
ended September 30, 2019.
The interest was offset by $
0.8
million of payments during the nine months ended September
30, 2020,
compared to $
0.6
million of payments in the nine months ended September 30, 2019.
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 September 30, 2020 and
2019,
and December 31, 2019 and 2018:
September 30,
December 31,
2020
2019
2019
2018
Cash and cash equivalents
$
155,750
$
128,161
$
123,524
$
104,147
Restricted cash included in other current assets
82
460
353
0
Restricted cash included in other assets
18,901
19,839
19,678
20,278
Cash, cash equivalents and restricted cash
$
174,733
$
148,460
$
143,555
$
124,425
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
24
Note 14 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
nine months ended September 30, 2020 were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2019
$
216,385
$
133,018
$
141,727
$
116,075
$
607,205
Goodwill acquired
0
531
0
0
531
Currency translation and other adjustments
(7,262)
725
10,907
38
4,408
Balance as of September 30, 2020
$
209,123
$
134,274
$
152,634
$
116,113
$
612,144
Other adjustments in the table above include updates
to the Company’s allocation
of the Houghton purchase price and associated
goodwill to each of the Company’s
reportable segments during the first nine months of 2020, including
a $
2.6
million decrease in the
Americas, a $
1.4
million decrease in EMEA, a $
8.0
million increase in Asia/Pacific and a $
0.5
million increase in Global Specialty
Business.
Gross carrying amounts and accumulated amortization
for definite-lived intangible assets as of September 30, 2020 and
December 31, 2019 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2020
2019
2020
2019
Customer lists and rights to sell
$
796,163
$
792,362
$
85,751
$
49,932
Trademarks, formulations and product
technology
156,837
157,049
27,872
21,299
Other
6,288
6,261
5,725
5,776
Total definite
-lived intangible assets
$
959,288
$
955,672
$
119,348
$
77,007
The Company amortizes definite-lived intangible assets on
a straight-line basis over their useful lives.
The Company recorded
$
14.0
million and $
41.7
million of amortization expense for the three and nine
months ended September 30, 2020, respectively.
Comparatively,
the Company recorded $
9.2
million and $
12.8
million of amortization expense for the three and nine months
ended
September 30, 2019, respectively.
Estimated annual aggregate amortization expense for
the current year and subsequent five years is as follows:
For the year ended December 31, 2020
$
55,447
For the year ended December 31, 2021
55,830
For the year ended December 31, 2022
55,673
For the year ended December 31, 2023
55,451
For the year ended December 31, 2024
55,025
For the year ended December 31, 2025
54,354
Goodwill and intangible assets that have indefinite lives are
not amortized and are required to be assessed at least annually
for
impairment.
The Company completes its annual goodwill and indefinite-lived
intangible asset impairment test during the fourth
quarter of each year.
The Company continuously evaluates if triggering events indicate
a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
As of March 31, 2020, the Company evaluated the initial impact
of COVID-19 on the Company’s
operations, and the volatility
and uncertainty in the economic outlook as a result of
COVID-19 to determine if they indicated it was more likely
than not that the
carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived assets was not recoverable.
The Company
concluded that the impact of COVID-19 did not represent
a triggering event as of March 31, 2020 with regards to the Company’s
reporting units or indefinite-lived and long-lived assets, except
for the Company’s Houghton
and Fluidcare trademark and tradename
indefinite-lived intangible assets.
The determination of estimated fair value of the Houghton
and Fluidcare trademark and tradename indefinite-lived assets was
based on a relief from royalty valuation method which
requires management’s
judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect
to the weighted average cost of capital (“WACC”)
as well as projected
net sales.
In the first quarter of 2020, as a result of the impact of
COVID-19 driving a decrease in projected legacy Houghton
net sales
in the current year and the impact of the current year
decline on projected future legacy Houghton net sales as well as an increase
in
the WACC
assumption utilized in the quantitative impairment assessment, the
Company concluded that the estimated fair values of
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
25
the Houghton and Fluidcare trademark and tradename
intangible assets were less than their carrying values.
As a result, an
impairment charge of $
38.0
million to write down the carrying values of these intangible
assets to their estimated fair values was
recorded in the first quarter of 2020.
The Company’s estimate of fair
value and the carrying value of these Houghton and Fluidcare
trademark and tradename indefinite-lived intangible assets as of
September 30, 2020 was $
204.0
million.
Comparatively, these
indefinite-lived intangible assets totaled $
242.0
million as of December 31, 2019.
In addition, the Company has other indefinite-lived
intangible assets totaling $
1.1
million as of both September 30, 2020 and December 31,
2019.
As of September 30, 2020, the Company continued to
evaluate the on-going impact of COVID-19 on the Company’s
operations,
and the volatility and uncertainty in the economic outlook
as a result of COVID-19, to determine if this indicated it was more
likely
than not that the carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived intangible
assets were not
recoverable.
The Company concluded that the impact of COVID-19 did not represent
a triggering event as of September 30, 2020
with regards to any of the Company’s
reporting units or indefinite-lived and long-lived intangible
assets.
While the Company concluded that the impact of COVID-19
did not represent a triggering event as of September 30,
2020 for
any of its other long-lived or indefinite-lived assets or reporting
units, the Company will continue to evaluate the impact of COVID-19
on the Company’s current
and projected results.
If the current economic conditions worsen or projections
of the timeline for recovery
are significantly extended, then the Company may conclude
in the future that the impact from COVID-19 requires
the need to perform
further interim quantitative impairment tests, which could
result in additional impairment charges in the future.
Note 15 – Debt
Debt as of September 30, 2020 and December 31,
2019 includes the following:
As of September 30, 2020
As of December 31, 2019
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.65%
$
155,000
3.20%
$
171,169
U.S. Term Loan
1.65%
577,500
3.20%
600,000
EURO Term Loan
1.50%
152,123
1.50%
151,188
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
1,950
Various
2,608
Total debt
$
896,573
$
934,965
Less: debt issuance costs
(11,873)
(14,196)
Less: short-term and current portion of long-term debts
(38,630)
(38,332)
Total long
-term debt
$
846,070
$
882,437
Credit facilities
The Company’s primary
credit facility (as amended, the “New Credit Facility”) is comprised
of a $
400.0
million multicurrency
revolver (the “Revolver”), a $
600.0
million term loan (the “U.S. Term
Loan”), each with the Company as borrower,
and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the
“EURO Term Loan”
and together with the “U.S. Term
Loan”, the
“Term Loans”
)
with Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a five-year term maturing in
August 2024.
Subject to the consent of the administrative agent and certain other
conditions, the Company may designate additional
borrowers.
The maximum amount available under the New Credit Facility can be
increased by up to $
300.0
million at the Company’s
request if there are lenders who agree to accept additional
commitments and the Company has satisfied certain other
conditions.
Borrowings under the New Credit Facility bear interest at a
base rate or LIBOR plus an applicable margin
based upon the Company’s
consolidated net leverage ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and when LIBOR
ceases to be reported.
The interest rate incurred on the outstanding borrowings under
the New Credit Facility during the nine months
ended September 30, 2020 was approximately
2.2
%.
As of September 30, 2020, the interest rate on the outstanding borrowings
under
the New Credit Facility was approximately
1.9
%.
In addition to paying interest on outstanding principal under
the New Credit
Facility, the Company
is required to pay a commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s
consolidated net
leverage ratio to the lenders under the Revolver in
respect of the unutilized commitments thereunder.
The Company has unused
capacity under the Revolver of approximately $
239
million, net of bank letters of credit of approximately $
6
million, as of September
30, 2020.
The New Credit Facility is subject to certain financial
and other covenants.
The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio cannot exceed 4.25 to 1, with step downs in the permitted ratio over the course of the New Credit
Facility. The Company’s consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1. The New Credit
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
26
Facility also prohibits the payment of cash dividends if the Company is in default or if the amount of the dividend paid annually
exceeds the greater of $50.0 million and 20% of consolidated adjusted EBITDA unless the ratio of consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount.
As of September 30, 2020
and December 31, 2019, the Company was in compliance with all of the New Credit Facility covenants.
The Term Loans have
quarterly principal amortization during their respective
five-year maturities, with
5.0
% amortization of the principal balance due in
years 1 and 2,
7.5
% in year 3, and
10.0
% in years 4 and 5, with the remaining principal amount due
at maturity.
During the nine
months ended September 30, 2020,
the Company made three quarterly amortization payments
related to the Ter
m
Loans totaling
$
28.1
million.
The New Credit Facility is guaranteed by certain of the Company’s
domestic subsidiaries and is secured by first
priority liens on substantially all of the assets of the Company
and the domestic subsidiary guarantors, subject to certain
customary
exclusions.
The obligations of the Dutch borrower are guaranteed only
by certain foreign subsidiaries on an unsecured basis.
The New Credit Facility required the Company to fix its variable
interest rates on at least
20
% of its total Term
Loans.
In order to
satisfy this requirement as well as to manage the
Company’s exposure to variable
interest rate risk associated with the New Credit
Facility, in November
2019, the Company entered into $
170.0
million notional amounts of three-year interest rate swaps at a base
rate
of
1.64
% plus an applicable margin as provided in the
New Credit Facility, based on
the Company’s consolidated
net leverage ratio.
At the time the Company entered into the swaps, and
as of September 30, 2020, the aggregate interest rate on the
swaps, including the
fixed base rate plus an applicable margin, was
3.1
%.
See Note 18 of Notes to Condensed Consolidated Financial Statements.
The Company capitalized $
23.7
million of certain third-party debt issuance costs in connection
with executing the New Credit
Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Term
Loans and recorded as a direct reduction of
long-term debt on the Company’s
Condensed Consolidated Balance Sheet.
Approximately $
8.3
million of the capitalized costs were
attributed to the Revolver and recorded within other assets on
the Company’s Condensed Consolidated
Balance Sheet.
These
capitalized costs are being amortized into interest expense
over the five-year term of the New Credit Facility.
As of September 30,
2020 and December 31, 2019, the Company had $
11.9
million and $
14.2
million, respectively, of debt
issuance costs recorded as a
reduction of long-term debt.
As of September 30, 2020 and December 31, 2019, the
Company had $
6.3
million and $
7.6
million,
respectively, of
debt issuance costs recorded within other assets.
Industrial development bonds
As of September 30, 2020 and December 31, 2019
,
the Company had fixed rate, industrial development authority
bonds totaling
$
10.0
million in principal amount due in 2028.
These bonds have similar covenants to the New Credit Facility noted
above.
Bank lines of credit and other
debt obligations
The Company has certain unsecured bank lines of credit
and discounting facilities in one of its foreign subsidiaries, which
are not
collateralized.
The Company’s other debt
obligations primarily consist of certain domestic and foreign
low interest rate or interest-
free municipality-related loans, local credit facilities of
certain foreign subsidiaries and capital lease obligations.
Total unused
capacity under these arrangements as of September
30, 2020 was approximately $
38
million.
In addition to the bank letters of credit described in the “Credit facilities” subsection above, the Company’s only other off-balance
sheet arrangements include certain financial and other guarantees. The Company’s total bank letters of credit and guarantees
outstanding as of September 30, 2020 were approximately $12 million.
For the three and nine months ended September 30, 2020
,
the Company incurred the following debt related expenses included
within Interest expense, net, in the Condensed Consolidated
Statements of Operations:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest expense
$
5,957
$
5,761
$
19,621
$
8,258
Amortization of debt issuance costs
1,188
792
3,562
792
Total
$
7,145
$
6,553
$
23,183
$
9,050
Based on the variable interest rates associated with the New
Credit Facility, as of September
30, 2020 and December 31, 2019,
the amounts at which the Company’s
total debt were recorded are not materially different
from their fair market value.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
2717
Certain stock options and restricted stock units are not included in the diluted earnings (loss) per share calculation when the effect
would have been anti-dilutive. The calculated amount of anti-diluted shares not included was 2,083 for the three months ended March
31, 2021. All of the Company’s potentially dilutive shares for the three months ended March 31, 2020 are anti-dilutive and not
included in the dilutive loss per share calculations because of the Company’s net loss during the period.
Note 1613 – EquityRestricted Cash
Prior to December 2020, the Company had 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 were restricted and could only be used to pay claims and costs
of defense associated with the subsidiary’s asbestos litigation. The proceeds of the settlement and release agreements were deposited
into interest bearing accounts that earned less than $0.1 million offset by $0.2 million of net payments during the three months ended
March 31, 2020.
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
that continued until the restrictions lapsed.
As disclosed in the Company’s
2020 Form
10-K, during December 2020, the restrictions ended
on these previously received insurance settlements and the
Company transferred
the cash into an operating account.
The following tables present the changes in equity,table provides a reconciliation of cash,
 
netcash equivalents and restricted cash as of tax, for the threeMarch 31, 2021 and nine months ended September 30,
 
2020, as well
as December 31, 2020 and 2019:
AccumulatedMarch 31,
CapitalDecember 31,
2021
2020
2020
2019
Cash and cash equivalents
$
163,455
$
316,437
$
181,833
$
123,524
Restricted cash included in other current assets
Other0
Common34
Excess62
353
Restricted cash included in other assets
0
19,480
0
19,678
Cash, cash equivalents and restricted cash
$
163,455
$
335,951
$
181,895
$
143,555
Note 14 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
three months ended March 31, 2020 were as follows:
Retained
Comprehensive
Global
NoncontrollingSpecialty
StockAmericas
Par ValueEMEA
EarningsAsia/Pacific
Loss
InterestBusinesses
Total
Balance at June 30,as of December 31, 2020
$
17,800213,242
$
896,108140,162
$
362,265158,090
$
(109,264)119,718
$
432631,212
Goodwill additions
1,093
2,626
1,308
25
5,052
Currency translation adjustments
(731)
(3,925)
(956)
(3,078)
(8,690)
Balance as of March 31,
2021
$
1,167,341213,604
Net income (loss)$
0138,863
0$
27,304158,442
0$
38116,665
27,342
Amounts reported in other comprehensive
 
income
0
0
0
34,254
17
34,271
Dividends ($
0.395
per share)
0
0
(7,048)
0
0
(7,048)
Share issuance and equity-based
compensation plans
31
4,494
0
0
0
4,525
Balance at September 30, 2020
$
17,831
$
900,602
$
382,521
$
(75,010)
$
487
$
1,226,431
Balance at June 30, 2019
$
13,338
$
97,602
$
424,448
$
(78,881)
$
1,454
$
457,961
Net (loss) income
0
0
(13,053)
0
72
(12,981)
Amounts reported in other comprehensive
loss
0
0
0
(27,166)
(94)
(27,260)
Dividends ($
0.385
per share)
0
0
(6,826)
0
0
(6,826)
Shares issued related to the Combination
4,329
784,751
0
0
0
789,080
Share issuance and equity-based
compensation plans
64
3,412
0
0
0
3,476
Balance at September 30, 2019
$
17,731
$
885,765
$
404,569
$
(106,047)
$
1,432
$
1,203,450627,574
Gross carrying amounts and accumulated amortization
for definite-lived intangible assets as of March 31, 2021 and
December 31,
2020 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2021
2020
2021
2020
Customer lists and rights to sell
$
846,052
$
839,551
$
110,997
$
99,806
Trademarks, formulations and product
technology
167,144
166,448
32,533
30,483
Other
6,320
6,372
5,743
5,824
Total definite
-lived intangible assets
$
1,019,516
$
1,012,371
$
149,273
$
136,113
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18
The Company amortizes definite-lived intangible assets on
a straight-line basis over their useful lives.
The Company recorded
$
14.8
million and $
14.0
million of amortization expense for the three months ended
March 31, 2021 and 2020, respectively.
Estimated annual aggregate amortization expense for
the current year and subsequent five years is as follows:
For the year ended December 31, 2021
$
59,372
For the year ended December 31, 2022
59,096
For the year ended December 31, 2023
58,927
For the year ended December 31, 2024
58,427
For the year ended December 31, 2025
57,710
For the year ended December 31, 2026
57,484
The Company has four indefinite-lived intangible
assets totaling $
205.1
million as of both March 31, 2021 and December 31,
2020, including $
204.0
million of indefinite-lived intangible assets for trademarks and
tradename associated with the Combination.
Goodwill and intangible assets that have indefinite lives are
not amortized and are required to be assessed at least annually
for
impairment.
The Company completes its annual goodwill and indefinite-lived
intangible asset impairment test during the fourth
quarter of each year.
The Company continuously evaluates if triggering events indicate
a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
The Company previously disclosed in its 2020 Form 10-K
that as of March 31, 2020, the Company concluded that the
impact of
COVID-19 did not represent a triggering event with
regards to the Company’s
reporting units or indefinite-lived and long-lived assets,
except for the Company’s
Houghton and Fluidcare trademarks and tradename indefinite
-lived intangible assets.
The determination of
estimated fair value of the Houghton and Fluidcare
trademarks and tradename indefinite-lived assets was based on a relief
from
royalty valuation method,
which requires management’s judgment
and often involves the use of significant estimates and assumptions,
including assumptions with respect to the weighted average
cost of capital (“WACC”)
and royalty rates, as well as revenue growth
rates and terminal growth rates.
In the first quarter of 2020, as a result of the impact of
COVID-19 driving a decrease in projected
legacy Houghton net sales during that year and the impact
of the sales decline on projected future legacy Houghton
net sales as well as
an increase in the WACC
assumption utilized in the quantitative impairment
assessment, the Company concluded that the estimated
fair values of the Houghton and Fluidcare trademarks
and tradename intangible assets were less than their carrying values.
As a
result, an impairment charge of $
38.0
million was recorded in the first quarter of 2020 to write down
the carrying values of these
intangible assets to their estimated fair values.
As of March 31, 2021, the Company continued to evaluate
the on-going impact of COVID-19 on the Company’s
operations, and
the volatility and uncertainty in the economic outlook as a result of
COVID-19, to determine if this indicated it was more likely
than
not that the carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived intangible assets were
not
recoverable.
The Company concluded that the impact of COVID-19 did not represent
a triggering event as of March 31, 2021.
While
the Company concluded that the impact of COVID-19
did not represent a triggering event as of March 31, 2021,
the Company will
continue to evaluate the impact of COVID-19 on the Company’s
current and projected results.
If the current economic conditions
worsen or projections of the timeline for recovery are
significantly extended, then the Company may conclude in the
future that the
impact from COVID-19 requires the need to perform
further interim quantitative impairment tests, which could
result in additional
impairment charges in the future.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19
Note 15 – Debt
Debt as of March 31, 2021 and December 31, 2020 includes
the following:
As of March 31, 2021
As of December 31, 2020
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.61%
$
190,000
1.65%
$
160,000
U.S. Term Loan
1.61%
562,500
1.65%
570,000
EURO Term Loan
1.50%
148,210
1.50%
157,062
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
2,377
Various
2,072
Total debt
$
913,087
$
899,134
Less: debt issuance costs
(10,324)
(11,099)
Less: short-term and current portion of long-term debts
(43,330)
(38,967)
Total long
-term debt
$
859,433
$
849,068
Credit facilities
The Company’s primary
credit facility (as amended, the “Credit Facility”) is comprised
of a $
400.0
million multicurrency
revolver (the “Revolver”), a $
600.0
million term loan (the “U.S. Term
Loan”), each with the Company as borrower,
and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the
“EURO Term Loan”
and together with the “U.S. Term
Loan”, the
“Term Loans”)
with Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a five-year term maturing in
August 2024.
Subject to the consent of the administrative agent and certain
other conditions, the Company may designate additional
borrowers.
The maximum amount available under the Credit Facility can be
increased by up to $
300.0
million at the Company’s
request if there are lenders who agree to accept additional
commitments and the Company has satisfied certain other
conditions.
Borrowings under the Credit Facility bear interest at a base
rate or LIBOR plus an applicable margin based upon
the Company’s
consolidated net leverage ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and when LIBOR
ceases to be reported.
The variable interest rate incurred on the outstanding borrowings under
the Credit Facility as of and during the
three months ended March 31, 2021 was approximately
1.6
%.
In addition to paying interest on outstanding principal under
the Credit
Facility, the Company
is required to pay a commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s
consolidated net
leverage ratio to the lenders under the Revolver in
respect of the unutilized commitments thereunder.
The Company has unused
capacity under the Revolver of approximately $
204
million, net of bank letters of credit of approximately $
6
million, as of March 31,
2021.
The Credit Facility is subject to certain financial and
other covenants.
The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio could not exceed 4.25 to 1, with step downs in the permitted ratio over the term of the Credit
Facility. As of March 31, 2021, the consolidated net debt to adjusted EBITDA may not exceed 4.00 to 1. The Company’s
consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1 over the term of the agreement. The Credit
Facility also prohibits the payment of cash dividends if the Company is in default or if the amount of the dividend paid annually
exceeds the greater of $50.0 million and 20% of consolidated adjusted EBITDA unless the ratio of consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount.
As of March 31, 2021 and
December 31, 2020, the Company was in compliance with all of the Credit Facility covenants
.
The Term Loans
have quarterly
principal amortization during their five-year terms,
with
5.0
% amortization of the principal balance due in years
1 and 2,
7.5
% in year
3, and
10.0
% in years 4 and 5, with the remaining principal amount due at
maturity.
During the three months ended March 31, 2021,
the Company made quarterly amortization payments
related to the Term Loans
totaling $
9.6
million.
The Credit Facility is guaranteed
by certain of the Company’s
domestic subsidiaries and is secured by first priority liens on substantially
all of the assets of the
Company and the domestic subsidiary guarantors,
subject to certain customary exclusions.
The obligations of the Dutch borrower are
guaranteed only by certain foreign subsidiaries on an unsecured
basis.
The Credit Facility required the Company to fix its variable
interest rates on at least 20% of its total Term
Loans.
In order to
satisfy this requirement as well as to manage the
Company’s exposure to variable
interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three-year interest rate swaps at a base
rate of
1.64
% plus an applicable margin as provided in the Credit
Facility, based on the Company’s
consolidated net leverage ratio.
At the
time the Company entered into the swaps, and as
of March 31, 2021, the aggregate interest rate on the swaps,
including the fixed base
rate plus an applicable margin, was
3.1
%.
See Note 18 of Notes to Condensed Consolidated Financial Statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
20
The Company capitalized $
23.7
million of certain third-party debt issuance costs in connection
with executing the Credit Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Term
Loans and recorded as a direct reduction of long-
term debt on the Company’s
Condensed Consolidated Balance Sheet.
Approximately $
8.3
million of the capitalized costs were
attributed to the Revolver and recorded within other assets on
the Company’s Condensed Consolidated
Balance Sheet.
These
capitalized costs are being amortized into interest expense
over the five-year term of the Credit Facility.
As of March 31, 2021 and
December 31, 2020, the Company had $
10.3
million and $
11.1
million, respectively,
of debt issuance costs recorded as a reduction of
long-term debt.
As of March 31, 2021 and December 31, 2020, the Company
had $
5.5
million and $
5.9
million, respectively,
of debt
issuance costs recorded within other assets.
Industrial development bonds
As of March 31, 2021 and December 31, 2020,
the Company had fixed rate, industrial development authority
bonds totaling
$
10.0
million in principal amount due in
2028
.
These bonds have similar covenants to the Credit Facility noted
above.
Bank lines of credit and other
debt obligations
The Company has certain unsecured bank lines of credit
and discounting facilities in certain foreign subsidiaries, which are
not
collateralized.
The Company’s other debt
obligations primarily consist of certain domestic and foreign
low interest rate or interest-
free municipality-related loans, local credit facilities of
certain foreign subsidiaries and capital lease obligations.
Total unused
capacity under these arrangements as of March 31,
2021 was approximately $
40
million.
In addition to the bank letters of credit described in
the “Credit facilities” subsection above, the Company’s
only other off-balance
sheet arrangements include certain financial and other
guarantees.
The Company’s total bank
letters of credit and guarantees
outstanding as of March 31, 2021 were approximately
$
9
million.
The Company incurred the following debt related expenses
included within Interest expense, net, in the Condensed
Consolidated
Statements of Operations:
Three Months Ended
March 31,
2021
2020
Interest expense
$
4,650
$
7,712
Amortization of debt issuance costs
1,187
1,187
Total
$
5,837
$
8,899
Based on the variable interest rates associated with the Credit
Facility, as of March
31, 2021 and December 31, 2020, the amounts
at which the Company’s
total debt were recorded are not materially different
from their fair market value.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
2821
Note 16 – Equity
The following tables present the changes in equity,
net of tax, for the three months ended March 31, 2021 and 2020:
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2020
$
17,851
$
905,171
$
423,940
$
(26,598)
$
550
$
1,320,914
Net income
0
0
38,615
0
17
38,632
Amounts reported in other comprehensive
loss
0
0
0
(26,630)
(2)
(26,632)
Dividends ($
0.395
per share)
0
0
(7,062)
0
0
(7,062)
Share issuance and equity-based
compensation plans
24
3,577
0
0
0
3,601
Balance at March 31, 2021
$
17,875
$
908,748
$
455,493
$
(53,228)
$
565
$
1,329,453
Balance at December 31, 2019
$
17,735
$
888,218
$
412,979
$
(78,170)
$
1,604
$
1,242,366
Cumulative effect of an accounting change
0
0
(911)(402)
0
0
(911)(402)
Balance at January 1, 2020
17,735
888,218
412,068412,577
(78,170)
1,604
1,241,4551,241,964
Net (loss) income
0
0
(8,812)(28,381)
0
8837
(8,724)(28,344)
Amounts reported in other comprehensive
 
income (loss)
loss
0
0
0
3,160(43,354)
(114)(132)
3,046(43,486)
Dividends ($
1.1650.385
 
per share)
0
0
(20,735)(6,834)
0
0
(20,735)(6,834)
Acquisition of noncontrolling interest
0
(707)
0
0
(340)
(1,047)
DistributionDistributions to noncontrolling interestaffiliate
affiliate shareholders
0
0
0
0
(751)
(751)
Share issuance and equity-based
compensation plans
9617
13,0911,022
0
0
0
13,1871,039
Balance at September 30,March 31, 2020
$
17,83117,752
$
900,602888,533
$
382,521377,362
$
(75,010)(121,524)
$
487418
$
1,226,431
Balance at December 31, 2018
$
13,338
$
97,304
$
405,125
$
(80,715)
$
1,317
$
436,369
Cumulative effect of an accounting change
0
0
(44)
0
0
(44)
Balance at January 1, 2019
13,338
97,304
405,081
(80,715)
1,317
436,325
Net income
0
0
16,382
0
186
16,568
Amounts reported in other comprehensive
loss
0
0
0
(25,332)
(71)
(25,403)
Dividends ($
1.140
0 per share)
0
0
(16,894)
0
0
(16,894)
Shares issued related to the Combination
4,329
784,751
0
0
0
789,080
Share issuance and equity-based
compensation plans
64
3,710
0
0
0
3,774
Balance at September 30, 2019
$
17,731
$
885,765
$
404,569
$
(106,047)
$
1,432
$
1,203,4501,162,541
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
2922
The following tables show the reclassifications from and
 
resulting balances of AOCI for the three and nine months ended
 
endedMarch 31, 2021
September 30, 2020 and 2019:2020:
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
 
Translation
PensionRetirement
Available-for
 
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at June 30,December 31, 2020
$
(88,637)(2,875)
$
(17,363)(23,467)
$
1,1483,342
$
(4,412)(3,598)
$
(109,264)
Other comprehensive income (loss) before
reclassifications
33,601
(901)
810
460
33,970
Amounts reclassified from AOCI
0
584
(104)
0
480
Current period other comprehensive income (loss)
33,601
(317)
706
460
34,450
Related tax amounts
0
60
(150)
(106)
(196)
Net current period other comprehensive income (loss)
33,601
(257)
556
354
34,254
Balance at September 30, 2020
$
(55,036)
$
(17,620)
$
1,704
$
(4,058)
$
(75,010)
Balance at June 30, 2019
$
(50,296)
$
(29,323)
$
738
$
0
$
(78,881)(26,598)
Other comprehensive (loss) income before
reclassifications
(28,211)(25,459)
679781
(6)(745)
0730
(27,538)(24,693)
Amounts reclassified from AOCI
0
728862
(96)(3,085)
0
632(2,223)
Current period other comprehensive (loss) income
(28,211)(25,459)
1,4071,643
(102)(3,830)
0730
(26,906)(26,916)
Related tax amounts
0
(281)(351)
21805
0(168)
(260)286
Net current period other comprehensive (loss) income
(28,211)(25,459)
1,1261,292
(81)(3,025)
0562
(27,166)(26,630)
Balance at September 30, 2019March 31, 2021
$
(78,507)(28,334)
$
(28,197)(22,175)
$
657317
$
0(3,036)
$
(106,047)
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total(53,228)
Balance at December 31, 2019
$
(44,568)
$
(34,533)
$
1,251
$
(320)
$
(78,170)
Other comprehensive (loss) income before
reclassifications
(10,468)(54,619)
(409)828
802(2,135)
(4,855)(5,170)
(14,930)(61,096)
Amounts reclassified from AOCI
0
25,55024,366
(229)(32)
0
25,32124,334
Current period other comprehensive (loss) income
(10,468)(54,619)
25,14125,194
573(2,167)
(4,855)(5,170)
10,391(36,762)
Related tax amounts
0
(8,228)(8,237)
(120)456
1,1171,189
(7,231)(6,592)
Net current period other comprehensive (loss) income
(10,468)(54,619)
16,91316,957
453(1,711)
(3,738)(3,981)
3,160(43,354)
Balance at September 30,March 31, 2020
$
(55,036)(99,187)
$
(17,620)(17,576)
$
1,704(460)
$
(4,058)(4,301)
$
(75,010)
Balance at December 31, 2018
$
(49,322)
$
(30,551)
$
(842)
$
0
$
(80,715)
Other comprehensive (loss) income before
reclassifications
(29,185)
760
2,133
0
(26,292)
Amounts reclassified from AOCI
0
2,192
(235)
0
1,957
Current period other comprehensive (loss) income
(29,185)
2,952
1,898
0
(24,335)
Related tax amounts
0
(598)
(399)
0
(997)
Net current period other comprehensive (loss) income
(29,185)
2,354
1,499
0
(25,332)
Balance at September 30, 2019
$
(78,507)
$
(28,197)
$
657
$
0
$
(106,047)(121,524)
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 noncontrollingnon-controlling interest are
 
related to currency translation adjustments.
Note 17 – Fair Value
Measurements
The Company has valued its company-owned life insurance
policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at March 31, 2021
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,015
$
0
$
2,015
$
0
Total
$
2,015
$
0
$
2,015
$
0
Fair Value
Measurements at December 31, 2020
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,961
$
0
$
1,961
$
0
Total
$
1,961
$
0
$
1,961
$
0
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 March
31, 2021 or December 31, 2020, respectively,
so related
disclosures have not been included.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts,
,
 
unless otherwise stated)
(Unaudited)
 
3023
Note 17 – Fair Value
Measurements
The Company has valued its company-owned life insurance
policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at September 30, 2020
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,803
$
0
$
1,803
$
0
Total
$
1,803
$
0
$
1,803
$
0
Fair Value
Measurements at December 31, 2019
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,782
$
0
$
1,782
$
0
Total
$
1,782
$
0
$
1,782
$
0
The fair values of Company-owned life insurance assets are based
on quotes for like instruments with similar credit ratings and
terms.
The Company did not hold any Level 3 investments as of
September 30, 2020 or December 31, 2019, respectively,
so related
disclosures have not been included.
Note 18 – Hedging Activities
As previously disclosed in its 2019 Form 10-K, inIn order to
satisfy certain requirements of the New Credit
Facility as well as to
manage the Company’s exposure
 
exposure to variable interest
rate risk associated with the New Credit Facility,
 
in November 2019, the
Company entered into $
170.0
 
million notional amounts of three-yearthree-
year interest rate swaps.
 
See Note 15 of Notes to Condensed
Consolidated Financial Statements.
 
These interest rate swaps are
designated as cash flow
hedges and, as such, the contracts
are
marked-to-market at each reporting date and any unrealized gains
 
or
losses are included in AOCI to the extent effective
 
and
reclassified to interest expense in the period during which the
 
which the transaction affects
effects earnings or it becomes probable that
 
probable that the forecasted
transaction will not occur.
The Company has previously used derivative financial instruments primarily
for the purposes of hedging
exposures to fluctuations in interest rates.
The Company did not utilize derivatives designated as cash
flow hedges during the three
and nine months ended September 30, 2019.
 
The balance sheet classification and fair values of the
 
Company’s derivative instruments,
 
which are Level 2 measurements, are as
follows:
Fair Value
Condensed Consolidated
September 30,March 31,
December 31,
Balance Sheet Location
20202021
20192020
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
5,2713,943
$
4154,672
$
5,2713,943
$
4154,672
The following table presents the net unrealized loss deferred to
 
AOCI:
September 30,March 31,
December 31,
20202021
20192020
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
4,0583,036
$
3203,598
$
4,0583,036
$
3203,598
The following table presents the net lossgain reclassified from
 
AOCI to earnings:
Three Months Ended
Nine Months EndedMarch 31,
September 30,
September 30,2021
2020
2019
2020
2019
Amount and location of expense(expense) income reclassified
from AOCI into Expense(expense) income (Effective Portion)
Interest expense, net
$
(640)(643)
$
0
$
(1,105)
$
019
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
31
Interest rate swaps are entered into with a limited number
 
of counterparties, each of which allows for net settlement
 
of all
contracts through a single payment in a single currency
 
in the event of a default on or termination of any one
contract.
 
As such, in
accordance with the Company’s
 
accounting policy,
 
these derivative instruments are recorded on a net basis withinby
 
counterparty within the Condensed
Condensed Consolidated Balance Sheets.
Note 19 – Commitments and Contingencies
The Company previously disclosed in its 20192020 Form 10-K
 
that AC Products, Inc. (“ACP”), a wholly owned subsidiary,
 
has been
operating a groundwater treatment system to hydraulically
 
contain groundwater contamination emanating from ACP’s
 
site, the
principal contaminant of which is perchloroethylene.
 
As of September 30, 2020,March 31, 2021, ACP believes it is close to meeting the conditions
 
the conditions for
closure of the groundwater treatment system, but continues
 
to operate
this system while in discussions with the relevant
authorities.
 
As of September 30, 2020,March 31, 2021, the Company believes that the range
 
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.
 
The Company previously disclosed in its 20192020 Form 10-K
 
that an inactive subsidiary of the Company that was acquired
 
in 1978
sold certain products containing asbestos, primarily
 
on an installed basis, and is among the defendants in numerous
 
lawsuits alleging
injury due to exposure to asbestos.
 
During the three and nine months ended SeptemberMarch 31, 2021, there
 
30, 2020,
there have been no significant
changes to the facts
or circumstances of this previously disclosed matter,
 
disclosed matter, aside from on-going
claims and routine payments associated with
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
 
total liability over the next 50 years for these claims is approximately
 
$
0.50.4
 
million (excluding costs of defense).
defense).
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
24
The Company previously disclosed in its 20192020 Form 10-K
 
that as a result of the closing of the Combination, the Company
it is now
party to Houghtoncertain environmental matters related to certain
domestic and foreign properties currently or previously
 
owned.owned by Houghton.
 
These
environmental matters primarily require the
Company
to perform long-term monitoring as well as operating
and maintenance
at each
of the applicable sites.
 
During the three and nine
months ended September 30,
2020,March 31, 2021, there have been no
significant changes to the
facts or circumstances of these previously disclosed matters,
 
disclosed
matters, aside from on-going monitoring and maintenance activities
 
activities and routine
payments associated with each of the
sites.
 
The
Company continually evaluates its obligations related to such
 
to such matters, and based on
historical costs incurred and projected
costs to be
incurred
over the next 28 years, has estimated the present value
 
value range of costs for all
of the Houghton
environmental matters, on a
discounted
basis, to be between approximately $
5
 
million and $
6
 
million as of
September 30, 2020, March 31, 2021, for which $
5.7
 
million was accrued
within other accrued liabilities and other non-current
 
liabilities on the
Company’s Condensed
 
Consolidated Balance Sheet as of September 30, 2020.March
31, 2021.
 
Comparatively, as of December
 
December 31, 2019,2020, the
Company had $
6.66.0
 
million accrued for with respect to these matters.
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 $
0.1
million and $
0.2
million were accrued as of September 30,both March 31, 2021 and
December 31, 2020, and December
31, 2019, respectively, to
provide for such anticipated future
environmental
future environmental assessments and remediation
costs.
 
The Company previously disclosed in its 2020 Form 10-K
that one of the Company’s subsidiaries
received a notice of inspection
from a taxing authority in a country where certain
of its subsidiaries operate which related to a non-income (indirect)
tax that may be
applicable to certain products the subsidiary sells.
To date, the Company
has not received any assessment from the authority related
to
potential liabilities that may be due from the Company’s
subsidiary.
Consequently, there is substantial uncertai
nty with respect to the
Company’s ultimate liability
with respect to this indirect tax, as the application of
this tax in its given market is ambiguous and
interpreted differently among other peer companies
and taxing authorities.
The Company, with assistance
from independent experts,
has performed an evaluation of the applicability of this
indirect tax to the Company’s
subsidiaries in this country.
Information
available to the Company at this time is only sufficient
to establish a range of probable liability,
and no amount within the range is
considered a better estimate than another.
During the three months ended March 31, 2021 and through the
date of this Report,
there
have been no significant changes to the facts or circumstances of
this previously disclosed matter, aside
from on-going discussions
between the Company and the taxing authority related
to this notice of inspection.
As of March 31, 2021, the Company has recorded a
liability of $
1.7
million in other accrued liabilities, which reflects the low end
of the range of probable indirect tax owed, including
interest and taking into account applicable statutes of limitations.
Because these amounts in part relate to a Houghton entity acquired
in the Combination and for periods prior to the Combination,
the Company has submitted an indemnification claim
with Houghton’s
former owners related to this potential indirect tax liability.
The Company recorded a receivable in other assets for approximately
$
1.1
million, which reflects the amount of the initial recorded liability
for which the Company anticipates being indemnified.
As
noted, the Company believes there is substantial uncertainty
with respect to its ultimate liability given the ambiguous
application of
this indirect tax.
At this time, the Company’s best estimate
of a potential range for possible assessments, including
additional amounts
that may be assessed under these indirect tax laws, would
be approximately $
0.6
million to $
38
million, which is net of approximately
$
10
million of estimated income tax deductions and approximately $
22
million of applicable rights to indemnification from
Houghton’s former owners.
The Company is party to other litigation which management
 
currently believes will not have a material adverse
 
effect on the
Company’s results of
 
operations, cash flows or financial condition.
 
In addition, the Company has an immaterial amount of contractual
purchase obligations.
Note 20 – COVID-19 Global Pandemic
In early 2020, a global outbreak of COVID-19 occurred
initially in China and then across all locations where the Company does
business, and which continued into the third quarter.
In March 2020, the World
Health Organization formally identified the COVID-
19 outbreak as a pandemic.
In an effort to halt the outbreak of COVID-19,
the governments of impacted countries, including but not
limited to the United States, the European Union, and China, have
taken various actions to reduce its spread, including travel
restrictions, shutdowns of businesses deemed nonessential,
and stay-at-home or similar orders.
This outbreak and associated
measures to reduce its spread have caused significant disruption
s
to the operations of the Company and its suppliers and customers.
The disruptions and negative impact to the Company
include significant volume declines and lower net sales initially at its China
subsidiaries in the first quarter of 2020 and subsequently,
beginning late March and continuing into the third quarter,
at almost all of
its other sites as the global economy slowed significantly
in response to the pandemic.
Management continues to monitor the impact
that the COVID-19 pandemic is having on the Company
,
the overall specialty chemical industry,
and the economies and markets in
which the Company operates.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except share and per share amounts
,
unless otherwise stated)
(Unaudited)
32
Further, management continues to
evaluate how COVID-19-related circumstances, such as remote
work arrangements, have
affected financial reporting processes, internal control
over financial reporting, and disclosure controls and procedures.
While the
circumstances have presented and are expected to continue
to present challenges, at this time, management does not believe
that
COVID-19 has had a material impact on financial reporting
processes, internal control over financial reporting, and
disclosure
controls and procedures.
The full extent of the COVID-19 pandemic related
business and travel restrictions and changes to business and
consumer
behavior intended to reduce its spread are uncertain as of
the date of this Report as COVID-19 and the responses of governmental
authorities continue to evolve globally.
The Company cannot reasonably estimate the magnitude of the effects
these conditions will
have on the Company’s
operations as they are subject to significant uncertainties relating
to the ultimate geographic spread of the
virus, the incidence and severity of the disease, the duration
or resurgence of the outbreak, the length of the
travel restrictions and
business closures imposed by governments of impacted
countries, and the economic response by governments of impacted countries.
To the extent
that the Company’s customers and
suppliers continue to be significantly and adversely impacted by
COVID-19, this
could reduce the availability,
or result in delays, of materials or supplies to or from
the Company, which in
turn could significantly
interrupt the Company’s
business operations.
Such impacts could grow and become more significant to the
Company’s operations
and the Company’s liquidity
or financial position.
Therefore, given the speed and frequency of continuously
evolving developments
with respect to this pandemic, the Company cannot reasonably
estimate the magnitude or the full extent to which COVID-19
may
impact the Company’s results
of operations, liquidity or financial position.
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
25
33
Item 2.
 
Management’s Discussion and Analysis
 
Analysis of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton”,
 
the “Company”, “we” and “our” refer to Quaker Chemical
 
Corporation
(doing business as Quaker Houghton),
its subsidiaries, and
associated companies, unless the context otherwise
requires.
 
The
As used in
this Report, the term
Legacy Quaker refers to the Company
prior to the closing
of its combination with Houghton International,
Inc.
(“Houghton”)
(herein
(herein referred to as the “Combination”)
on August 1, 2019.
 
Throughout this Quarterlythe Report, on Form 10-Q (the “Report”),
all figures
presented, unless
otherwise stated, reflect the results of
operations of the
combined company for the three months ended March 31, 2021 and nine
 
months ended2020.
September 30, 2020 and for the three and nine months
ended September 30, 2019 include the results of two months
of Houghton’s
operations post-closing of the Combination on August 1,
2019.
Executive Summary
Quaker Houghton is a global leader in industrial process
 
fluids.
 
With a presence around the world,
 
including operations in over
25 countries, our customers include thousands of the world’s
 
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
 
companies.
 
Our high-performing, innovative and sustainable solutions are
 
backed by best-
in-class technology,
 
deep process knowledge, and customized services. Quaker
 
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the United
States.
The Company had a very strong start to 2021, delivering
solid first quarter results which reflect the continued COVID-19
recovery in the Company’s third
end-markets and customer demand as well as the on-going execution
of integration activities and synergy
realization.
Specifically, net sales of $429.8
million in the first quarter of 2021 increased 14% compared to
$378.6 million in the first
quarter of 2020, primarily due to higher volumes, which
included additional net sales from acquisitions of 3%, and the
positive impact
from foreign currency translation of 3%.
The increase in sales volumes compared to the first quarter
of 2020 was primarily due to
improved end market conditions and continued market
share gains.
Additional net sales from acquisitions primarily were attributable
to Coral Chemical (“Coral”), which the Company acquired
in December 2020.
The positive net impact from foreign currency
translation was primarily due to the strengthening of the
euro and Chinese renminbi against the U.S. dollar quarter-over-quarter,
partially offset by the ongoing weakening
of the Brazilian real.
The Company had net income in the first quarter
of 2021 of $38.6
million, or $2.15 per diluted share, compared to a first
 
quarter of 2020 performance continued to be affectednet loss of $28.4 million, or $1.60 per diluted
 
by the COVID-19 pandemic and its impact on the
global economy,share.
 
including most of the The
Company’s prior year
 
end customers.
However, the Company is pleased with its third
quarter
performance as it showed 28% sequential growth in
net sales compared to the second quarter of 2020.
Compared to the prior year,
thirdfirst quarter net sales of $367.2 million increased 13% compared
to $325.1 million in the third quarter of 2019 due primarily to
the
inclusion of $74.6 million of Houghton and Norman Hay
plc (“Norman Hay”) net sales.
Excluding Houghton and Norman Hay net
sales, the Company’s net
sales would have declined approximately 10% quarter-over-quarter,
loss was primarily driven by the first quarter
of 2020 non-cash impairment charge of $38.0
million for certain indefinite-lived intangible assets and
a decrease in salesnon-cash $22.7 million settlement charge
volumes of 8% duerelated to the negative impactstermination of COVID-19a U.S.
defined benefit pension plan.
 
on global production levels in the current quarter.
The Company’s gross
profit and selling, general and administrative expenses (“SG&A”)
also increased due to the inclusion of Houghton and Norman
Hay,
but both also benefited from the realization of cost savings
associated with synergies achieved with the
CombinationExcluding these non-recurring items as well as the
impact of lower SG&A due to further cost saving measurescosts associated
 
put in place to help offset the impacts of COVID-19.
The Company reported third quarter of 2020 net
income of $27.3 million or $1.53 per diluted share compared
to third quarter of
2019 net loss of $13.1 million or $0.80 per diluted share.
The third quarter of 2019 net loss was impacted by initial
inventory fair
value adjustments, restructuring charges and
Combination costs that were high due to the Combination’s
August 1, 2019 completion.
Excluding costs associated with the Combination and other non-
other
non-corecore items in each period, the Company’s
 
first quarter of 2021 non-GAAP earnings per diluted share
were $2.11 compared to $1.38 in
the prior year first quarter.
The Company’s current
quarter adjusted EBITDA of $63.9$77.1 million increased
28% compared to $60.5
million in the thirdfirst quarter of 2020 increased 24%primarily due to
the significant increase in net sales quarter over quarter and
incremental realized
cost synergies from the Combination as compared
to the first quarter of 2020.
The Company estimates that it realized cost synergies
associated with the Combination of approximately
$18 million during the first quarter of 2021 compared to
 
$51.4approximately $10 million in
during the prior yearfirst quarter
primarily due to the
Combination, the inclusion of Norman Hay and the benefits of
cost savings realized from the Combination, which were
partially offset
by the current quarter negative impacts of COVID-19.
The Company’s non-GAAP earnings
per diluted share were $1.56 in both the
third quarters of 2020 and 2019, as higher net income was offset
by an additional 4.3 million shares issued as part of
the consideration
for the Combination.2020.
 
See the Non-GAAP Measures section of this Item below,
 
as well as other items discussed in the Company’s
Company’s Consolidated
Operations Review in the Operations
section of this Item,
below.
During the thirdThe Company’s first quarter of 2019 and in connection with the
 
Combination, the Company established a newof 2021 operating performance in each of its four reportable
 
segment
structure that consists of four segments: (i) Americas; (ii) Europe,
Europe, Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv)
 
Global Specialty Businesses, reflect similar drivers to that of
its
consolidated performance.
All four segments had higher net sales compared to the first quarter
of 2020.
The Company’s higher sales
volumes were driven by EMEA and (iv)Asia/Pacific, while additional
net sales from Coral benefited the Americas and the
Global
Global Specialty Businesses.
 
The Company’s 2020growth in Asia/Pacific’s vol
 
operating performance by reportable segment reflected the positive
impact of
Houghton’s performance
in all of its segments and Norman Hay in its Global Specialty
Businesses segment.
Without the inclusion of
Houghton and Norman Hay,
net sales would have been lower in all segmentsumes compared
to the prior year primarilywere partially due to
the initial impacts of
COVID-19 in China during the first quarter of 2020,
whereas all of the remaining segments weren’t impacted
as severely until the
second quarter of 2020.
The benefit of higher selling price and product mix positively
impacted most of the segments, and foreign
currency translation benefited all segments except the
Americas which was driven by declinesthe ongoing weakening of the Brazilian real
in volume due to the negative impacts of COVID-19 on
the Company’s end markets.quarter over quarter.
 
As reported, all of the Company’s
 
segment
operating earnings were higher compared to the third
 
the first quarter of 20192020
which reflects higher current quarter net sales coupled
with a higher gross margin in all segments as compared
to the prior year first
quarter.
While the Company has experienced higher raw material costs
beginning in the fourth quarter of 2020 and
continuing into
2021, the higher gross margin as compared
to the prior year first quarter was primarily driven by the inclusion of Houghton andCompany’s
 
Norman Haycontinued execution
of Combination-related logistics, procurement and manufacturing
cost savings initiatives as well as the benefit of higher volumes
in
synergies achievedthe current quarter and the related impact from fixed manufacturing
costs.
Direct Selling, general and administrative expenses
(“SG&A”) of each segment were relatively consistent with the Combination partially
 
offsetfirst quarter of 2020 with only Asia/Pacific up as a result of
the
segments strong current quarter performance compared
to the prior year which was negatively impacted by the negative impacts
initial COVID-19
conditions in China.
In addition, the Company and all of COVID-19.its segments continued to
maintain strong cost control and benefit from
COVID-19 cost savings actions, including lower travel
expenses, as well as the benefits of realized cost savings associated
with the
Combination.
 
Additional details of each segment’s
operating performance are further discussed in the Company’s
 
reportable segments review,Reportable
Segments Review, in
 
in the Operations section of this Item, below.
below.
Quaker Chemical Corporation
Management’s Discussion and Analysis
26
The Company had a net operating cash flowoutflow of approximately$12.6
 
$67.3 million in the third quarter of 2020 compared
to $13.1 million
in the third quarter of 2019, resulting in an increase in
its current year-to-date net operating cash flow to $112.0
million compared to
$35.5 million in the first nine monthsquarter of 2019.2021 as compared to a net operating
cash
inflow of $20.2 million in the first quarter of 2020.
 
The increasedecrease in net operating cash flow year-over-yearquarter-over-quarter was
 
wasprimarily driven
by the inclusion of
Houghton and Norman Hay earnings, releasesa significant change in working capital, as the
 
capital primarily due toCompany’s significant increase in
net sales and volumes resulted in a large increase
in accounts receivable in the volume declines related to COVID-19
and lower
cash outflows associated with the Combination.first quarter of 2021.
 
The key drivers of the Company’s
 
operating cash flow and working capital are
further discussed in the Company’s
 
Liquidity and Capital Resources section of this Item,
 
below.
Overall, the Company’s
 
thirdfirst quarter results were negatively impacted bystrong with sequential and prior
year improvement in all segments primarily due
to the continuingcontinued recovery in our end-markets and customer
 
effects of COVID-19, but the
Company’s performancedemand increases from lower levels experienced during
 
also showed good positive trends2020 as a result of
COVID-19.
The results in the first quarter of 2021 reflected a strong
quarterly growth trend across the globe when comparedbeginning after the
second quarter of 2020, during which the impacts of
 
sequentiallyCOVID-19 were most severe.
Also, the strong demand in the first quarter of
2021 coupled with continued market share gains and
the on-going execution of integration activities and synergy
realization helped
offset negative impacts due to the second quarter of
2020.on-going
 
Notably, the Companyglobal uncertainty brought on by COVID-19 and other macroeconomic
 
continues to see lower production in most of its end marketsheadwinds,
including rising raw material prices and overall supply
 
compared to the prior year with the most
significant reductions in the automotive and aerospace
industries.
Despite these challenges, the Company was able
to generate
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
significant net operating cash flow,
continue to pay its regular dividends, pay down its debt and continue
to execute its integration
plans for the Combination.chain pressures.
 
The current global economic slowdown and other impacts due
 
due to COVID-19 poseexperienced by almost all companies in 2020
posed an
unprecedented challenge, but the Company’s
 
Companyfirst quarter of 2021 results continue to demonstrate that it can
successfully navigate
through market downturns by responding quickly to
changing market conditions and delivering on the benefits it anticipated
from the
Combination with Houghton.
As the Company looks forward, it expects to successfully navigate this downturnexperience
continued short-term headwinds from higher
raw material costs and supply chain pressures, with the
magnitude of these raw material cost increases being considerably higher
than
the Company previously expected due to stress on global
supply chains, weather related shutdowns and unexpected supplier
shutdowns.
However, the Company does expect
to achieve additional selling price increases to offset
these rising raw material costs,
but there will be a lag effect on our gross margin
 
as these price increases catchup to our rising raw material costs.
Despite these near
term headwinds, the Company has demonstratedcontinues to expect 2021
to result in a step change in its profitability from 2020 as the ability,
now and in the past, to respond quicklyCompany
to changing market conditions.
The Company also expects to maintain sufficient
liquidity and to remain in compliance with all of its
debt covenants despite these difficult economic
times.
The Company expects thatcompletes its integration cost synergies, continues
 
and additional cost savings
actions as well as continuingto take further share gains in the marketplace, benefits from the projected
 
will help the Company during these challenging times.
These factors,gradual
coupled with the benefit of a projected gradual rebound
in demand, inand sees the Company’s endpositive impact of its recent
 
markets, are expected to drive significantacquisitions.
adjusted EBITDA growth in 2021 and 2022.
ImpactOn-going impact of COVID-19
In early 2020, theThe global outbreak of COVID-19 has negatively impacted
 
negatively impacted all locations where the Company does
business.
 
Although the
the Company has now operated during several quarters
in this COVID-19 environment
for a year, the full extent of the outbreak
 
and related
business impacts
remain uncertain and volatile, and
therefore the full
extent to which COVID-19 may impact the Company’s
 
future
results of
operations or financial condition is uncertain.
 
This outbreak has significantly disrupted the operations of the
 
the Company and those of its
its suppliers and customers.
 
The Company has experienced significant volume declines and lower
 
lower net sales as compared to pre-COVID-19 levels as
a result of the outbreak, as further described in this
section, initially at its China subsidiaries
in the first quarter of 2020 and, subsequently,
beginning in late March and continuing into the
third quarter, throughout the rest of
the business due to the global economic slowdown brought
on by COVID-19. section.
 
Management
continues to monitor the impact that the COVID-19
pandemic
is having on the Company,
 
the overall specialty chemical industry and
the economies and
markets in which the Company
operates.
 
Given the speed and frequency of the continuously evolving developments
 
with respect to this pandemic, the Company
cannot, as
of the date of this Report, reasonably estimate the
 
the magnitude or the full extent of the impact to its future results of
 
of
operations or to the
ability of it or its customers to resume
more normal
operations, even as certain restrictions are lifted. The prolonged
 
The
prolonged pandemic and a resurgence
resurgence inof the outbreak, and continued restrictions on day-to-day
 
on day-to-day life and business operations may result
in volume
declines and lower
net sales in future periods
as compared to pre-COVID-19
levels.
 
To the extent that
 
the Company’s
customers and
suppliers continue
to be significantly and
adversely impacted by COVID-19,
this could reduce the availability,
 
availability, or result
in delays, of materials or supplies
to or from the Company
,
 
which in turn could significantly interrupt the Company’s
 
business
operations.
 
Given this ongoing
uncertainty,
 
the Company cautions that its future results of operations includingcould
 
the results for the remainder of 2020, could be
significantly adversely
impacted by COVID-19.
 
Further, management continues to
 
evaluate how COVID-19-related circumstances, such
as remote work
arrangements, illness or staffing shortages
 
work arrangements,and travel restrictions have
affected financial reporting
processes and systems, internal
control over financial reporting, and disclosure controls and
 
procedures.
 
While the circumstances have presented and are expected
 
to
continue to present challenges, and have necessitated
additional time and resources to be deployed to sufficiently
address the
challenges brought on by the pandemic, at this time, management
 
does not believe
that COVID-19 has had a material impact on
financial
reporting processes, internal controls over financial reporting,
 
andreporting, or disclosure
controls and procedures.
 
For additional information regarding the potential impact of COVID-19,
see Item 1A of Part II of this
Report.
The Company’s top
 
priority is, and especially during this pandemic remains, to protect the health
 
and safety of its employees and
customers, while working to ensure business continuity
 
to meet customers’ needs:
needs.
 
●
Our People
– The Company has takencontinues to take steps to protect the
health and wellbeing
of its people in affected
areas through various
actions, including enabling work at home
where needed and
possible, and employing social distancing standards,
implementing travel restrictions where applicable, enhancing
onsite hygiene
practices, and instituting visitation restrictions at the Company’s
 
at
the Company’s facilities.
 
The Company has not and does not expect that it will incur
material
expenses implementing these health and safety
policies for employees, contractors, and customers.
 
policies.
 
●
Our Operations
– Currently, allAll of
the Company’s 34 production31
 
production facilities worldwide are open
and operating and are
deemed
as essential businesses
in the jurisdictions where they are
operating.
 
The Company believes that to date
it has been able to meet the
needs of all its customers across
the globe despite the
current economic challenges.
 
●
Our Business Conditions
– The Company’s thirdfirst
quarter of 2020 results showed solid2021 continued the trend of gradual sequential
quarterly improvement overwhich began in the second half
 
quarter
of 2020, which was consistent with expectations that
April and May would be the worst months of the year and
that the
Company would show gradual quarterly improvement
sequentially throughout the remainder of the year.2020.
 
However, demand
demand still remained somewhat deflated compared to pre-COVID-19
levelsremains uncertain as many customers maintained
reduced production
levels duringinto the thirdfirst quarter of 2020.
Excluding Houghton and Norman Hay net sales, all four of the
Company’s reportable
segments showed declines in net sales due to COVID-19
during the third quarter of 2020 compared to the prior year,
with the
Americas and EMEA being the most impacted and Asia/Pacific being
the least impacted.2021.
 
The Company currently still
expectscontinues to expect that the impact from COVID-19
will gradually
improve sequentially each quarter subject to the effective containment
 
containmentof the virus and its
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
27
35variants and successful distribution and acceptance
of the virus and its effects.vaccines that have been developed.
 
However, the incidence of reported
cases of
COVID-19 appears to be again increasing in several
geographies where we have
significant operations remains high and
it remains highly uncertain
as to
how long the global pandemic
and
related economic challenges
will last and when our customers’
businesses will recover.
recover
 
to pre-
COVID-19 levels.
 
●
Our Actions
– The Company has taken took various
actions to temporarily conserve cash and reduce costs during
 
reduce costs.
Some of the actions taken includeand these temporary
eliminating all discretionary expenditures, delaying or
freezing salary increases where legally permitted, reducing executives’
salaries, lowering targeted capital expenditures
by approximately 30%, and accelerating and fine-tuning the Company’s
integration plan.
These initiatives have beenwere designed and implemented so that
 
the Company cancould successfully manage through the challenging COVID-19
through this challenging situation while continuing
to protect the health
of its employees, meet customers’ needs, maintain the Company’s
 
maintainlong-term
the Company’s long
-term competitive advantages and above-market growth,
and enable it to
continue to effectively integrate
Houghton.
 
While the Company hasactions taken a number of actions
to date to protect
our workforce, to continue to serve
our customers
with excellence and to conserve cash and
reduce costs, which
have been
effective thus far, further
 
actions to respond to the
pandemic and its effects may
be necessary as
conditions continue to evolve.
Liquidity and Capital Resources
At September 30, 2020,March 31, 2021, the Company had cash, cash equivalents
 
and restricted cash of $174.7 million, including
approximately
$19.0 million of restricted cash.$163.5 million.
 
Total cash, cash
 
equivalents
and restricted cash was $143.6$181.9 million at December 31,
 
2019, which
included $20.0 million of restricted cash.31, 2020.
 
The $31.1approximately $18.4 million increasedecrease in cash, cash equivalents and restricted
 
and
restricted cash was the net result of
$
112.0
$15.8 million of cash provided by operating
used in investing activities, partially offset
by $
65.0
$12.6 million of cash used in financing activities and $15.3
million of cash used in investing activities as well as a $0.5
 
operating activities
and a $3.0 million negative impact due to the effect
of foreign
currency translation onpartially offset by $13.0
million of cash provided
cash.
by financing activities.
Net cash flows provided byused in operating activities were $112.0$12.6
 
million in the first ninethree months of 20202021 compared to $35.5net cash flows
provided by operating activities of $20.2 million in the
 
million in
the first ninethree months of 2019.2020.
 
The Company’s current
yeardecrease in net operating cash flowflows of $32.8
million was primarily driven by a significant change in working
capital, as the significant increase was largely due toin current quarter net
 
the inclusion ofsales resulted
Houghton and Norman Hay earnings, r
eleases in working capital primarily due to the volume declinesa large increase in accounts receivable
 
related to COVID-19, lower
cash outflows associated within the Combination
first three months of 2021.
 
andIn addition, the Company had higher cash dividends
received from its associated companies in the first three
 
year-over-year
including $
5.0
months of 2020, primarily due to $5.0 million received from
the Company’s
joint venture in Korea with no similar dividend received
in the first quarterthree months of 2020.
2021 related to the timing of dividends received.
Net cash flows used in investing activities were $
15.3
$15.8
 
million in the first ninethree months of 20202021 compared to $807.9$8.0 million
 
in the
first ninethree months of 2019.2020.
 
This significant decreaseincrease in cash outflows usedwas driven by increases in investing
higher cash payments related to acquisitions
during the three months ending March 31, 2021, including
$25.0 million for certain assets related to tin-plating solutions
primarily for
steel end markets.
These higher cash outflows were partially offset by
cash proceeds of approximately $14.7 million from the
disposition of assets, which includes the sale of certain
held-for-sale real property assets related to the Combination.
Net cash flows provided by financing activities were $13.0
million in the first three months of 2021 compared to
$186.6 million
in the first three months of 2020.
The decrease of $173.6 million in net cash flows was dueprimarily related
 
to the prior year payments
related to the closing of the Combination on August 1,
2019.
In addition, the Company had higher investments in property,
plant and
equipment due to the inclusion of Houghton and Norman
Hay capital expenditures in 2020 including higher expenditures related
to
integrating the companies during the nine months ended
September 30, 2020.
Also, in the current year, the Company
finalized the
post-closing adjustment related to Norman Hay and
made an additional payment of approximately $
3.2
million.
Net cash flows used in financing activities were $65.0
million in the first nine months of 2020 compared to cash provided in
financing activities of $798.4 million in the first nine
months of 2019.
The $863.4 million decrease in net cash flows was due
primarily to additional term loan and revolving credit facility
borrowings in the prior year to close the Combination compared
to $
28.1
million of current year debt repayments in accordance with
its term loan agreements and a net $16.5 million reduction
in borrowings
under the Company’s revolving
credit facilities in the current year.
The net reduction in borrowings in the current year includes the
drawdown in March 2020 of most of the available capacity
liquidity under the Revolver as a precautionary measureCompany’s
revolving credit facility related to supplementthe economic uncertainty
 
cashbrought on by
hand at the onset of the pandemic which was subsequently
repaid in September 2020.
Also, as part of the Combination, the Company
incurred and paid debt issuance costs of approximately
$23.7 million in the prior year.COVID-19.
 
In addition, the Company paid $
20.5
$7.1 million of cash dividends
 
million of
cash dividends during the first ninethree months of 2020,2021, a
$
5.5
$0.2 million or 3%
37
% increase in cash dividends compared to the prior year,
primarily due to the approximately 4.3 million shares issued
at closing of the Combination, as well as both the current
year and prior
year cash dividend per share increases.year.
 
Finally, during the first three
 
first nine months of 2020, the Company used $1.0 million
to purchase the
remaining noncontrolling interest in one of itsa South African
 
affiliates.Africa affiliate.
 
Prior to this buyout, this South AfricanAfrica affiliate made
 
made a
distribution to the prior noncontrolling affiliate
 
shareholder of approximately $0.8 million in the first ninethree
 
months of 2020.
 
There
were no
similar noncontrolling interest activities in the first three
 
nine months of 2019.2021.
The Company’s primary
 
As previously disclosed in its Annual Report on Form 10credit facility (the “Credit Facility”) is comprised of a $400.0
 
-K formillion multicurrency revolver (the
“Revolver”), a $600.0 million term loan (the “U.S. Term
Loan”), each with the year ended December 31, 2019 (the “2019 FormCompany as borrower,
 
10-K”), onand a $150.0 million (as of
August 1, 2019,2019) Euro equivalent term loan (the “Euro
Term Loan” and together
with the Company completed the Combination,
whereby the Company acquired all of the issued and
outstanding shares of
Houghton from Gulf Houghton Lubricants, Ltd. in accordance withU.S. Term Loan”,
 
the Share Purchase Agreement dated April 4, 2017.“Term Loans”) with
Quaker Chemical B.V.,
 
The final
purchase consideration was comprised of: (i) $170.8 million
in cash; (ii) the issuance of approximately 4.3 million shares of
common
stocka Dutch subsidiary of the Company with par value of $1.00, comprisingas borrower,
 
24.5%each with a five-year term maturing in August 2024.
Subject
to the consent of the common stock ofadministrative agent and certain other
conditions, the Company may designate additional borrowers.
 
at closing; and (iii)The
maximum amount available under the
Company’s refinancing Credit Facility
 
of $702.6can be increased by up to $300.0 million of Houghton’s
indebtedness at closing.
Cash acquired in the Combination was $75.8
million.
Prior to the Combination, the Company secured commitments
from certain banks for a new credit facility (as amended,
the
“New Credit Facility”).
Concurrent with the closing of the Combination on August
1, 2019, the New Credit Facility became effective,
replacing the Company’s
 
previous credit facility.request if there are
lenders who agree to accept additional commitments and
 
See Note 2the Company has satisfied certain other conditions.
Borrowings under the
Credit Facility bear interest at a base rate or LIBOR plus an
applicable margin based on the Company’s
consolidated net leverage
ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and Note 15 of Noteswhen LIBOR ceases to Condensed Consolidatedbe reported.
 
Financial Statements.The
weighted average interest rate incurred on the outstanding
borrowings under the Credit Facility during both the first quarter of
2021
and as of March 31, 2021 was approximately 1.6%.
In addition to paying interest on outstanding principal under the
Credit Facility,
the Company is required to pay a commitment fee ranging
from 0.2% to 0.3% depending on the Company’s
consolidated net leverage
ratio to the lenders under the Revolver in respect
of the unutilized commitments thereunder.
The Credit Facility is subject to certain financial and
other covenants.
The Company’s initial consolidated
net debt to
consolidated adjusted EBITDA ratio could not exceed
4.25 to 1, with step downs in the permitted ratio over the
term of the Credit
Facility.
As of March 31, 2021, the consolidated net debt to consolidated
adjusted EBITDA ratio may not exceed 4.00 to 1.
The
Company’s consolidated
adjusted EBITDA to interest expense ratio may not be less than
3.0 to 1 over the term of the agreement.
The
Credit Facility also prohibits the payment of cash dividends
if the Company is in default or if the amount of the dividends
paid
annually exceeds the greater of $50.0 million and
20% of consolidated adjusted EBITDA unless the ratio of
consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1,
in which case there is no such limitation on amount.
As of March 31, 2021 and
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
28
36
As of September 30,December 31, 2020, the Company had New Credit
Facility borrowings outstanding of $884.6 million.
As of December 31,
2019, the Company had New Credit Facility borrowings
outstanding of $922.4 million.
The Company has unused capacity under the
Revolver of approximately $239 million, net of bank letters
of credit of approximately $6 million, as of September 30,
2020.
The
Company’s other debt obl
igations are primarily industrial development bonds, bank lines of credit
and municipality-related loans,
which totaled $12.0 million as of September 30, 2020
and $12.6 million as of December 31, 2019, respectively.
Total unused capacity
under these arrangements as of September 30, 2020 was approximately
$38 million.
The Company’s total net debt as
of September
30, 2020 was $740.8 million.
As of September 30, 2020 and December 31, 2019, the
Company was in compliance with
all of its bank
covenants, including those under the New Credit Facility.
Facility covenants.
 
The Term Loans
have quarterly
principal amortization during their five-year terms,
with 5.0% amortization of the principal balance due in years 1 and
2, 7.5% in year
3, and 10.0% in years 4 and 5, with the remaining principal
amount due at maturity.
The Credit Facility is guaranteed by certain of the
Company’s domestic subsidiaries
and is secured by first priority liens on substantially all of
the assets of the Company and the
domestic subsidiary guarantors, subject to certain customary exclusions.
The obligations of the Dutch borrower are guaranteed only
by certain foreign subsidiaries on an unsecured basis.
The New Credit Facility required the Company to fix its variable
 
interest rates on at least 20% of its total Term
 
Loans.
In order to
satisfy this requirement as well as to manage the
 
Company’s exposure to variable
 
interest rate risk associated with the New Credit Facility,
Facility, in November
2019, the Company entered into $170.0
million notional
amounts of three-year interest rate swaps at a base
rate of
of 1.64% plus an applicable margin as provided
 
in the New Credit Facility, based on
 
on the Company’s consolidated net
 
net leverage ratio.
At the
time the Company entered into the swaps, and as
of March 31, 2021, the aggregate interest rate on the swaps,
including the fixed base
rate plus an applicable margin, was 3.1%.
The Company capitalized $23.7 million of certain third-party
debt issuance costs in connection with executing the
Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed
to the Term Loans and
recorded as a direct reduction of long-
term debt on the Company’s
Consolidated Balance Sheet.
Approximately $8.3 million of the capitalized costs were
attributed to the
Revolver and recorded within other assets on the Company’s
Condensed Consolidated Balance Sheet.
These capitalized costs are
being amortized into interest expense over the five-year
term of the Credit Facility.
As of March 31, 2021, the Company had Credit Facility borrowings
outstanding of $900.7 million.
As of December 31, 2020, the
Company had Credit Facility borrowings outstanding
of $887.1 million.
The Company has unused capacity under the Revolver of
approximately $204 million, net of bank letters of
credit of approximately $6 million, as of March 31, 2021.
The Company’s other
debt obligations are primarily industrial development
bonds, bank lines of credit and municipality-related loans, which
totaled $12.4
million and $12.1 million as of March 31, 2021 and
December 31, 2020, respectively.
Total unused capacity
under these
arrangements as of March 31, 2021 was approximately
$40 million.
The Company’s total net debt
 
as of September 30, 2020, this aggregate rateMarch 31, 2021 was 3.1%.$749.6
million.
The Company currently expectsestimates that it realized cost synergies
in the first quarter of 2021 of approximately $18 million compared to
approximately $10 million in the first quarter of 2020.
The Company continues to expect to realize Combination
cost synergies on a pro forma combined company basis
 
of $58 million in
2020,approximately $75 million in 2021 and $80 million in 2022, which
 
are increases from the Company’s2022.
 
previous expectations of $53 million,
$65 million and $75 million, respectively.
The Company estimates that it realized approximately $40 million
of cost savings during
the first nine months of 2020 on a combined company
pro forma basis.
The Company expectscontinues to expect to incur additional costs and
 
and make
associated cash payments to integrate Quaker and Houghton
 
Houghton and
continue realizing the Combination’s
 
total anticipated cost synergies.
 
The Company expects total cash payments, including
including those pursuant
to the QH Program, described below,
 
but excluding incremental
capital expenditures related to the Combination,
 
Combination, will be between
approximately 1.0 and 1.21.3 times its total anticipated 2022 cost
 
cost synergies of $80
million.
 
The Company expects to incur these costs
over a three-year period following the closing of the Combination,
with aA significant portion of these costs were already incurred or expected
 
to be
incurred in 2019, 2020 and the current year.first quarter of 2021, but the Company
expects to continue to incur such costs throughout
 
the remainder of 2021.
The Company incurred $23.4$0.8 million of total Combination,
integration and other acquisition-
relatedacquisition-related expenses in the first nine months of 2020, including
 
$0.8first quarter of 2021, which includes $0.4 million of accelerated
depreciation
and is net of a $5.4 million gain on the sale of certain
held-for-sale real property assets, described in
 
the Non-GAAP Measures section
measures of this Item below.
Comparatively, in the first
quarter of 2020, the Company incurred $8.3 million of
total Combination, integration
and other acquisition-related expenses, including $0.5
million of accelerated depreciation.
 
The Company had aggregate net cash
outflows of
approximately $20.9$8.7 million related to the
Combination, integration and other acquisition-related expenses during
 
expensesthe first
three months of 2021 as compared to $8.3 million during
the first ninethree months of 2020.
 
Comparatively, during
the first
nine months of 2019, the Company incurred $25.9
million of total Combination, integration and other acquisition
-related expenses,
including $2.1 million of ticking fees, described in the Non
-GAAP Measures of this Item below,
and aggregate net cash outflows
related to these costs were $40.1 million.
Quaker Houghton’s management
 
approved, and the Company initiated, a global restructuring
 
plan (the “QH Program”) in the
third quarter of 2019 as part of its planned cost synergies
 
associated with the Combination and recorded a $24.0
million charge.Combination.
 
The
QH Program includes restructuring
and associated
severance costs to reduce total headcount
by approximately
350 400 people globally
and plans for the closure
of certain
manufacturing and
non-manufacturing facilities.
 
In connection with the plans for closure of certain manufacturing
and non-
manufacturing and non-manufacturing facilities, the
Company made a decision
to make available for sale certain facilities during the second
 
facilities during
the
second quarter of 2020 resulting in the reclassification of
approximately $
12.8
million of buildings and land to other current assets
from property,
plant and equipment as of September 30, 2020.
 
The Company expects to receive amounts in excess
During the first quarter of net book2021, certain of these facilities were
 
value
for the properties held for sale.
Additionally, as a result
of the QH Program,sold and the Company recognized $a gain on disposal of $5.4 million
3.6
included within other income (expense), net on the Condensed
 
millionConsolidated Statement of restructuring
and related charges in the first nine months
of 2020.Operations.
 
The exact timing and total
costs associated with the QH Program will depend
 
will depend on
a number of factors and is subject to change; however,
 
thereductions in headcount
and site closures have continued into 2021.
The Company currently expects reduction inadditional headcount reductions and
 
site closures will
continue to occur during 2020 and
into 2021 under the QH Prog
ram2022 and estimates that the anticipated cost synergies
 
realized under
this program the QH Program will approximate one-times restructuring
costs
incurred.
 
The Company made cash payments related to the settlement of
restructuring liabilities under the QH Program during
the
first ninethree months of 20202021 of approximately $
12.8
$1.2 million
 
million compared to $4.6
$4.9 million in the first ninethree months of 2019.
2020.
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
In the fourth quarter of 2018, the Company began the
process of terminating its non-contributory U.S. pension plan (“the Legacy
Quaker U.S. Pension Plan”).
The Company completed the Legacy Quaker U.S. Pension
Plan termination during the first quarter of
2020.
In order to terminate the Legacy Quaker U.S. Pension Plan in accordance
with I.R.S. and Pension Benefit Guaranty
Corporation requirements, the Company was required
to fully fund the Legacy Quaker U.S. Pension Plan on a termination
basis and
the amount necessary to do so was approximately
$1.8 million, subject to final true up adjustments.
In the third quarter of 2020, the
Company finalized the amount of liability and related
annuity payments and received a refund in premium of $1.6 million.
In
addition, the Company recorded a non-cash pension settlement
charge at plan termination of approximately $22.7
million in the first
quarter of 2020.
29
As of September 30, 2020,March 31, 2021, the Company’s
 
gross liability for uncertain tax positions, including interest and
 
penalties, was $
28.6$30.0
million.
 
The Company cannot determine a reliable estimate of the
 
timing of cash flows by period related to its uncertain tax position
liability.
 
However, should the entire liability
 
be paid, the amount of the payment may be reduced by up
 
to $
8.3
$7.5 million as a result of
offsetting benefits in other tax jurisdictions.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
During the fourth quarter of 2020, one of the Company’s
 
subsidiaries received a notice of
inspection from a taxing authority in a country where certain
 
of its subsidiaries operate, which relate to a non-income
37
(indirect) tax
that may be applicable to certain products the subsidiary
sells.
To date, the Company
has not received any assessment from the
authority related to potential liabilities that may be due
from the Company’s subsidiary.
Consequently there is substantial uncertainty
with respect to the Company’s
ultimate liability with respect to this indirect tax.
See Note 19 of Notes to Condensed Consolidated
Financial Statements in Item 1 of this Report.
The Company believes that its existing cash, anticipated
 
cash flows from operations and available additional liquidity
 
will be
sufficient to support its operating requirements
 
and fund its business objectives for at least the next twelve months,
 
months, including but not
limited to, payments of dividends to shareholders, costs related
 
to the Combination and integration, pension plan contributions,
 
capital
expenditures, other business opportunities (including
potential acquisitions) and other
potential contingencies.
 
The Company’s
liquidity is affected
by many factors, some
some based on normal operations of our business and others related
 
others related to the impact of the
pandemic on our business
and on global economic
economic conditions as well as industry uncertainties, which we cannot
 
predict.
 
We also
cannot predict
economic conditions and
industry downturns
or the timing, strength or duration
of recoveries.
 
We may seek,
 
as we
believe appropriate, additional debt or
equity financing
which would provide capital for corporate purposes, working
 
purposes, working capital funding,
additional liquidity needs
or to fund
future growth opportunities, including
possible acquisitions
and investments.
 
The timing and
amount of potential capital requirements
cannot be
determined at this time and will depend
on a number of factors,
including the
actual and projected
demand for our products, specialty
specialty chemical industry conditions, competitive factors, and the
 
and the condition of
financial markets, among others.
 
Critical Accounting Policies and Estimates
The Company’s critical accounting
policies and estimates, as set forth in its 2019 Form 10-K remain
materially consistent.
However, due to the current impact
as well as the volatility and uncertainty in the economic outlook
as a result of COVID-19, the
Company re-evaluated certain of its estimates, most notably
its estimates and assumptions with regards to goodwill and
other
intangible assets during the first quarter of 2020.
Goodwill and other intangible assets:
The Company accounts for business combinations under
the acquisition method of
accounting.
This method requires the recording of acquired assets, including separately
identifiable intangible assets, at their
acquisition date fair values.
Any excess of the purchase price over the estimated fair value of
the identifiable net assets acquired is
recorded as goodwill.
The determination of the estimated fair value of assets acquired
requires management’s judgment
and often
involves the use of significant estimates and assumptions,
including assumptions with respect to future cash inflows
and outflows,
discount rates, royalty rates, asset lives and market multiples, among
other items.
When necessary, the Company
consults with
external advisors to help determine fair value.
For non-observable market values, the Company may determine
fair value using
acceptable valuation principles, including the excess earnings,
relief from royalty,
lost profit or cost methods.
The Company amortizes definite-lived intangible assets on
a straight-line basis over their useful lives.
Goodwill and intangible
assets that have indefinite lives are not amortized and are
required to be assessed at least annually for impairment.
The Company
completes its annual goodwill and indefinite-lived intangible asset impairment
test during the fourth quarter of each year.
The
Company continuously evaluates if triggering events indicate
a possible impairment in one or more of its indefinite
-lived or long-lived
assets.
As of March 31, 2020, the Company evaluated the initial impact
of COVID-19 on the Company’s
operations, as well as the
volatility and uncertainty in the economic outlook as a
result of COVID-19, to determine if this indicated it was more likely
than not
that the carrying value of any of the Company’s
indefinite-lived or long-lived assets was not recoverable.
While the impact of
COVID-19 has already had a negative effect
on the Company’s operations
and was expected to significantly impact the Company’s
full year 2020 results, in evaluating if a triggering
event was present for one or more of the Company indefinite-lived
or long-lived
assets, the Company also considered the carrying value
and estimated fair value for each asset, as well as the Company’s
expected
impact from COVID-19 on each specific asset.
The Company concluded that the impact of COVID-19
did not represent a triggering
event as of March 31, 2020 with regards to the Company’s
indefinite-lived and long-lived assets, except for the Company’s
Houghton
and Fluidcare trademark and tradename indefinite
-lived intangible assets.
Given the relatively short period of time between the
fair value determination for the acquired Houghton and
Fluidcare trademark
and tradename indefinite-lived intangible assets as of the
closing of the Combination on August 1, 2019, and the 2019 annual
impairment testing date of October 1, the Company’s
2019 annual impairment assessment concluded that the $242.0
million carrying
value of acquired Houghton and Fluidcare indefinite-lived
intangible assets generally approximated fair value, with excess fair value
of less than 5%.
Because of the previously concluded relatively narrow gap between
fair value and carrying value, the Company
concluded in the first quarter of 2020 that the expected
current year impact from COVID-19 on the Company’s
net sales represented a
triggering event.
As a result of the conclusion, the Company completed an interim
quantitative indefinite-lived intangible asset
impairment assessment as of March 31, 2020.
The determination of estimated fair value of the Houghton
and Fluidcare trademark and tradename indefinite-lived assets was
based on a relief from royalty valuation method which
requires management’s
judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect
to the weighted average cost of capital (“WACC”)
as well as projected
net sales.
In completing the interim quantitative impairment
assessment as of March 31, 2020, the Company used a WACC
assumption of approximately 10% as well as current year
forecasted net sales and management’s
estimates with respect to future net
sales growth rates specific to legacy Houghton’s
net sales.
As a result of an increase in the WACC
assumption as of March 31, 2020,
compared to the prior year fourth quarter annual impairment
assessment, and the significant current year decline in projected
legacy
Houghton net sales due to the impact of COVID-19,
the Company concluded that the estimated fair values of these intangible
assets
were less than their carrying values and that an
impairment charge to write down their carrying values
to their estimated fair values
Quaker Chemical Corporation
Management’s Discussion and Analysis
38
was warranted.
This resulted in a first quarter of 2020 non-cash impairment
charge of $38.0 million for these indefinite-lived
intangible assets.
The Company performed a qualitative assessment over these
indefinite-lived intangible assets as of September 30,
2020 and concluded that no further impairment indicators existed.
The book value of these assets as of September 30,
2020 was
$204.0 million.
As of September 30, 2020, the Company continued to
evaluate the on-going impact of COVID-19 on the Company’s
operations,
and the volatility and uncertainty in the economic outlook
as a result of COVID-19 to determine if again this indicated
it was more
likely than not that the carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived assets was not
recoverable.
The Company concluded that the impact of COVID-19 did not represent
a triggering event as of September 30, 2020
with regards to any of the Company’s
reporting units or indefinite-lived and long-lived assets.
If the current economic conditions
worsen or projections of the timeline for recovery are
significantly extended, then the Company may conclude in the
future that the
impact from COVID-19 requires
the need to perform further interim quantitative impairment tests, which
could result in additional
impairment charges in the future.
Non-GAAP Measures
The information in this ReportForm 10-Q filing includes non-GAAP (unaudited)
 
financial information that includes EBITDA, adjusted EBITDA,
EBITDA, adjusted EBITDA margin, non-GAAP operating
 
income, non-GAAP operating margin, non-GAAP
net income
and non-GAAPnon-
GAAP earnings per diluted share.
 
The Company believes these non-GAAP financial measures provide
 
provide meaningful supplemental information
information as they enhance a reader’s understanding
of the
financial performance of the Company,
 
are indicative of future operating performance
performance of the Company,
 
and facilitate a comparison among fiscal periods, as the
non-GAAP financial
measures exclude items
that are not
considered indicative of future operating performance
 
or not considered core to the Company’s
 
operations.
 
Non-GAAP
results are
presented for supplemental informational
purposes only
and should not be considered a substitute for the
financial information
information presented in accordance with GAAP.
 
The Company presents EBITDA which is calculated as net income
 
(loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on (loss) income
 
(loss) before equity in net income of associated companies.
 
The Company
also presents adjusted EBITDA which is calculated as EBITDA
 
plus or minus certain items that are not considered indicative of
 
future
operating performance or not considered core to the Company’s
 
operations.
 
In addition, the Company presents non-GAAP operating
income which is calculated as operating income (loss) plus
 
or minus certain items that are not considered indicative of future operating
performance or not considered core to the Company’s
 
operations.
 
Adjusted EBITDA margin and non-GAAP operating
 
margin are
calculated as the percentage of adjusted EBITDA and
 
non-GAAP operating income to consolidated net sales, respectively.
 
The
Company believes these non-GAAP measures provide
 
transparent and useful information and are widely used by analysts, investors,
and competitors in our industry as well as by management
 
in assessing the operating performance of the Company on
 
a consistent
basis.
Additionally, the
 
Company presents non-GAAP net income and non-GAAP earnings
 
per diluted share as additional performance
measures.
 
Non-GAAP net income is calculated as adjusted EBITDA, defined
 
above, less depreciation and amortization, interest
expense, net, and taxes on income (loss) before equity in
 
in net income of associated companies, in each cashcase adjusted,
 
as applicable, for any
any depreciation, amortization, interest or tax impacts resulting
 
from the non-core items identified in the reconciliation
 
of net income
(loss) attributable to the Company to adjusted EBITDA.
 
Non-GAAP earnings per diluted share is calculated as non
 
-GAAP net
income per
diluted share as accounted for under the “two-class share
 
“two-class share method.”
 
The Company believes that non-GAAP net income and non-
and non-GAAPGAAP earnings per diluted share provide transparent
 
transparent and useful information and are widely used by analysts, investors,
 
and
competitors in our industry as well as by management in
 
assessing the operating performance of the Company on a consistent
 
basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
3930
The following tables reconcile the Company’s
 
non-GAAP financial measures (unaudited) to their most
 
directly comparable
GAAP (unaudited) financial measures (dollars in thousands unless
 
otherwise noted
except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Nine Months EndedMarch 31,
September 30,
September 30,2021
2020
2019
2020
2019
Operating income (loss)
$
34,85944,894
$
(14,502)(12,444)
$Houghton combination, integration and other acquisition
-related expenses (a)
24,6536,230
$8,276
25,858Restructuring and related charges (b)
1,175
1,716
Fair value step up of acquired inventory sold (a)(c)
801
—
10,214CEO transition costs (d)
226504
10,214—
Houghton combination, integration and other
Inactive subsidiary's non-operating litigation costs (e)
acquisition-related expenses (b)51
6,913
14,702
23,442
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045—
Customer bankruptcy costs (d)
—(f)
—
463
—
Charges related to the settlement of a non-core
equipment sale (e)
—
—
—
384
Indefinite-lived intangible asset impairment (f)
—(g)
—
38,000
—
Non-GAAP operating income
$
43,15553,655
$
34,459
$
90,369
$
84,29036,011
Non-GAAP operating margin (%) (n)(m)
11.8%12.5%
10.6%
8.8%
11.4%9.5%
 
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and
and Non-GAAP Net Income Reconciliations
Three Months Ended
Nine Months Ended
September 30,March 31,
 
September 30,
2021
2020
2019
2020
2019
Net income (loss) attributable to Quaker Chemical Corporation
$
27,30438,615
$
(13,053)
$
(8,812)
$
16,382(28,381)
Depreciation and amortization (b)(a) (l)
21,02222,448
14,312
63,764
24,01421,584
Interest expense, net (b)
6,8375,470
6,102
22,109
7,6118,461
Taxes on income
 
(loss) before equity in net income
of associated companies (m)
2,24510,689
(5,633)
(7,603)
4,096(13,070)
EBITDA
57,408$
1,72877,222
69,458$
52,103(11,406)
Equity income(income) loss in a captive insurance company (g)
(h)
(542)(3,080)
(524)327
(697)Houghton combination, integration and other acquisition
-related expenses (a)
(1,260)427
7,803
Restructuring and related charges (b)
1,175
1,716
Fair value step up of acquired inventory sold (a)(c)
801
—
10,214CEO transition costs (d)
226504
10,214—
Houghton combination, integration and otherInactive subsidiary's non-operating litigation costs (e)
acquisition-related expenses (b)51
6,913
14,702
22,679
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045—
Customer bankruptcy costs (d)
—(f)
—
463
—
Charges related to the settlement of a non-core
equipment sale (e)
—
—
—
384
Indefinite-lived intangible asset impairment (f)
—(g)
—
38,000
—
Pension and postretirement benefit (income) costs,
non-service components
 
non-service components (h)(i)
(1,375)(124)
513
22,491
2,30423,525
Currency conversion impacts of hyper-inflationary economies (i)(j)
154172
728
278
89151
Adjusted EBITDA
$
63,94177,148
$
51,406
$
156,483
$
112,47060,479
Adjusted EBITDA margin (%) (n)(m)
17.4%18.0%
15.8%
15.2%
15.2%16.0%
Adjusted EBITDA
$
63,94177,148
$
51,406
$
156,483
$
112,47060,479
Less: Depreciation and amortization (b)- adjusted (a)
21,02222,033
14,312
63,002
24,01421,111
Less: Interest expense, net - adjusted (b)
6,8375,470
5,747
22,109
5,5318,461
Less: Taxes on income
 
(loss) before equity in net income
of associated companies - adjusted (j)(k)(m)
(a)(n)
8,33711,739
6,086
15,473
17,9136,463
Non-GAAP net income
$
27,74537,906
$
25,261
$
55,899
$
65,01224,444
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
4031
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Nine Months EndedMarch 31,
September 30,
September 30,2021
2020
2019
2020
2019
GAAP earnings (loss) per diluted share attributable to Quaker
Quaker Chemical Corporation
common shareholders
$
1.532.15
$
(0.80)
$
(0.50)
$
1.14(1.60)
Equity income(income) loss in a captive insurance company
 
per diluted share (g)(h)
(0.03)(0.17)
(0.03)
(0.04)
(0.09)
Fair value step up of inventory sold per diluted share (a)
—
0.47
0.01
0.530.02
Houghton combination, integration and other acquisition
 
acquisition-related-related expenses per diluted share (b)(a)
0.300.04
0.75
1.03
1.500.36
Restructuring and related charges per diluted
 
share (b)
0.05
0.07
Fair value step up of acquired inventory sold per diluted
share (c)
0.060.03
1.13—
0.15CEO transition costs per diluted share (d)
1.280.02
—
Inactive subsidiary's non-operating litigation costs per
diluted share (e)
0.00
—
Customer bankruptcy costs per diluted share (d)
—
—
0.02
—
Charges related to the settlement of a non-core
equipment
sale per diluted share (e)
—
—(f)
—
0.02
Indefinite-lived intangible asset impairment per diluted
 
share (f)
—(g)
—
1.65
—
Pension and postretirement benefit (income) costs,
non-service components
 
non-service components per diluted share (h)(i)
(0.06)(0.00)
0.02
0.83
0.120.88
Currency conversion impacts of hyper-inflationary economies per
 
economies per diluted share (i)(j)
0.01
0.05
0.02
0.06
Transition tax adjustments per diluted0.00
 
share (j)
—
(0.03)
—
(0.03)
Impact of certain discrete tax items per diluted share (k)
(0.25)
—(0.02)
(0.02)
—
Non-GAAP earnings per diluted share (o)
$
1.562.11
$
1.56
$
3.15
$
4.531.38
(a)
Fair value step up of inventory sold relates to expense
associated with selling inventory of acquired businesses which
was
adjusted to fair value as a part of purchase accounting.
This increase to COGS is not indicative of the future operating
performance of the Company.
(b)
 
Houghton combination, integration and other acquisition-related
 
expenses include certain legal, financial, and other advisory
 
and
consultant costs incurred in connection with due diligence,post-closing
 
regulatory approvals, integration planning, and closingactivities including
 
theinternal control readiness and
Combination, as well as certain one-time labor costs associated
with the Company’s acquisition-related
activities.remediation.
 
These costs are
not indicative of the future operating performance
of the
Company.
 
Approximately $0.3$0.1 million and $1.5 million in for
the three and
nine months ended September 30, 2020, respectively,
and approximately $3.4 million and $6.9 million in the three
and nine
months ended September 30, 2019, respectively,
March 31, 2021 of these pre-taxpre
-tax costs were considered non-deductible for the
 
the purpose of
determining the
Company’s effective
 
effective tax rate, and, therefore, taxes on income (loss)before equity
 
before equity in net income of associated
companies - adjusted
reflects the impact of these items.
 
During the ninethree months ended September 30,March 31, 2021 and 2020, the
 
the Company recorded $0.4 million
recordedand $0.5 million, respectively,
 
$0.8 million of accelerated depreciation related to certain of the Company’s
 
the Company’s facilities, which is included
in the caption
“Houghtoncaption “Houghton combination, integration and other acquisition
 
-relatedacquisition-related expenses” in the reconciliation of operating income
 
income
(loss) to
non-GAAP operating income and included
in the caption
“Depreciation “Depreciation and amortization” in the reconciliation of
 
of net income
income (loss) attributable to the Company to EBITDA, but excluded
 
excluded from the caption “Depreciation and amortization” amortization – adjusted”
in the
reconciliation of adjusted EBITDA to non-GAAP net
 
income attributable to the Company.
 
During the three and nine months ended
ended September 30, 2019,March 31, 2021, the Company incurred $0.4recorded a $5.4 million gain
 
million and $2.1 million, respectively,on the sale of certain held-for-sale real property
 
of ticking fees to maintain the bank
commitmentassets related to the Combination.
These interest costs areCombination which is included in the caption “Interest expense,“Houghton,
 
net”combination, integration and other acquisition-related expenses” in
the
reconciliation of GAAP earnings (loss) per diluted
share attributable to Quaker Chemical Corporation common
shareholders to
Non-GAAP earnings per diluted share as well as the reconciliation
of net income (loss) attributable to theQuaker Chemical
Corporation to Adjusted EBITDA and Non-GAAP net
 
Company to EBITDA, but are excluded from the caption “Interestincome.
 
expense,
net – adjusted” in the reconciliation of adjusted EBITDA
 
to non-GAAP net income.
See Note 2 of Notes to Condensed
Consolidated Financial Statements, which appears in Item
1 of this Report.
(c)(b)
 
Restructuring and related charges representrepresents
 
the costs incurred by the Company associated with the QH restructuring
 
restructuring program
which was initiated in the third quarter of 2019 as part
 
of the Company’s plan
 
to realize cost synergies associated with the
Combination.
 
These costs are not indicative of the future operating performance
 
of the Company.
 
See Note 7 of Notes to
Condensed Consolidated Financial Statements, which appears
 
in Item 1 of this Report.
 
(c)
Fair value step up of inventory sold relates to expenses associated
with selling inventory from acquired businesses which
was
adjusted to fair value as part of purchase accounting.
These increases in costs of goods sold (“COGS”) are not indicative
of the
future operating performance of the Company.
(d)
 
Customer bankruptcyCEO transition costs represent the cost associatedcosts related to the
 
with a specific reserve for trade accounts receivable relatedCompany’s on-going search
 
tofor a customernew CEO in connection with the
who filedpreviously announced executive transition planned for bankruptcy protection.
the end of 2021.
 
These expenses are not indicative of the future operating
performance of the Company.
(e)
Inactive subsidiary’s
non-operating litigation costs represents the charges
incurred by an inactive subsidiary of the Company and
are a result of the termination of restrictions on insurance
settlement reserves as previously disclosed in the Company’s
2020
Form 10-K.
These charges are not indicative of the future operating
 
performance of the Company.
See Note 9 of Notes to
(e)Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(f)
 
Charges related to the settlement of a non-core
equipment saleCustomer bankruptcy costs represent the pre-tax chargecosts associated with
a specific reserve for trade accounts receivable related to
 
a one-time, uncommon,
customer settlement associated with a prior sale of nonwho filed for bankruptcy protection. These expenses
 
-core equipment.
These charges are not indicative of the future operating performance
performance of the Company.
Company.
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
32
41
(f)(g)
 
Indefinite-lived intangible asset impairment represents the
 
non-cash charge taken to write down the value
 
the value of certain indefinite-
lived intangible assets associated with the Houghton
 
Combination.
 
The Company has no prior history of goodwill or intangible
asset impairments and this charge is not indicative
 
of the future operating performance of the Company.
 
See Note 14 of Notes to
Condensed Consolidated Financial Statements, which appears
 
in Item 1 of this Report.
(g)(h)
 
Equity income(income) loss in a captive insurance company
represents the after-tax (income) loss attributable to the
 
after-tax income attributable to the Company’s interest
interest in Primex,
Ltd. (“Primex”), a captive insurance company.
 
The Company holds a 33%32% investment in and has significant
 
influence over
over Primex, and therefore accounts for this interest under the
 
the equity method of accounting.
 
The income attributable to Primex is not
not indicative of the future operating performance of the
 
Company and is not considered core to the Company’s
 
operations.
(h)(i)
 
Pension and postretirement benefit (income) costs, non-service components
 
components represent the pre-tax, non-service component of
the Company’s
Company’s pension and
postretirement net periodic benefit cost in
each period.
 
These costs are not indicative of the future operating
operating performance of the Company.
 
The nineamount in the three months ended September 30,March 31, 2020
includes the
$22.7 $22.7 million settlement charge
charge for the Company’s termination
 
termination of the Legacy Quaker U.S. Pension Plan.
 
See Note 9 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(i)(j)
 
Currency conversion impacts of hyper-inflationary economies represents
 
the foreign currency remeasurement impacts associated
with the Company’s affiliates
 
whose local economies are designated as hyper-inflationary
 
under U.S. GAAP.
 
During both the three
and nine
three months ended September 30,March 31, 2021 and 2020, and 2019,
the Company
incurred non-deductible, pre-tax charges
related to the Company’s
Company’s Argentine
affiliates.
 
TheseThe charges incurred related to the immediate recognition
 
of foreign currency remeasurement in the
Condensed Consolidated Statements of Operations associated with
 
these entities are not indicative of the future operating
performance of the Company.
 
See Note 1 of Notes to Condensed Consolidated Financial
 
Statements, which appears in Item 1 of
this Report.
(j)(k)
 
The impactsimpact of certain discrete tax items includedincludes the impact of
 
of changes in thecertain valuation allowance forallowances recorded on
certain of the
Company’s foreign
tax credits,
acquired with the Combination, changes in withholding
tax rates and the associated impact
on previously accrued
for distributions at
at certain of the Company’s
 
Asia/Pacific subsidiaries additional reserves for uncertain
tax positions related to tax audits at certain
of the Company’s EMEA
subsidiaries, as well as the offsetting
impact and
amortization of a deferred tax benefit the Company
Company recorded in the fourth quarter of 2019 related
to an intercompany
intangible asset transfer.
See Note 11 of Notes to Condensed
Consolidated Financial Statements, which appears in Item
1 of this Report.
(k)
Transition tax adjustments include
certain tax adjustments recorded by the Company as a result of changes
to the Company’s
initial fourth quarter of 2017 estimates associated with U.S. Tax
Reform in December 2017.
Specifically, the
Company had
adjusted the initial amount estimated for the one-time charge
on the gross deemed repatriation on previously un
taxed accumulated
and current earnings and profits of certain of the Company’s
foreign subsidiaries.
In addition, the Company had adjusted its
initial estimate of the impact from certain internal revenue
code changes associated with the deductibility of certain executive
compensation.
These adjustments were based on guidance issued during 2018
and 2019 by the I.R.S., the U.S. Treasury and
various state taxing authorities and were the result of
specific one-time events that are not indicative of the future operating
performance of the Company.
See Note 11 of Notes to Condensed
Consolidated Financial Statements, which appears in Item 1
of
this Report.
(l)
 
Depreciation and amortization for the three and ninemonths
 
months ended September 30,March 31, 2021 and 2020 includes approximatelyincluded $0.3 million and
 
$0.20.4 million, and
$0.9 million, respectively, of
 
and for both the three and nine months ended September 30,
2019 includes $0.1 million of
amortization expense recorded within equity in net income of
 
of associated companies in the Company’s
 
Condensed Consolidated
StatementsConsolidated Statement of Operations, which is attributable
to the
amortization of the fair value step up for the Company’s
 
50%
interest in a
Houghton joint venture in Korea as a result
of required
purchase accounting.
(m)
The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage
of adjusted EBITDA and
non-GAAP operating income to consolidated net sales.
(n)
 
Taxes on income
 
(loss) before equity in net income of associated companies – adjusted
 
presents the impact of any current and deferred
deferred income tax expense (benefit), as applicable, of the
 
the reconciling items presented in the reconciliation of net income (loss)
attributable to Quaker Chemical Corporation to adjusted
 
EBITDA, and was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject
 
to deductibility.
 
Fair value step up of inventory sold described in (a)
resulted in incremental taxes of less than $0.1 million during
the nine months ended September 30, 2020 and $2.6 million
for both
the three and nine months ended September 30, 2019.
Houghton combination, integration and other acquisition-related
expenses
acquisition-related expenses described in (b)(a) resulted in
incremental taxes of approximately
$1.7$0.1 million and $5.1$2.0 million forduring the three and nine months ended
September 30, 2020, respectively,
and $2.8 million and $4.5 million for the three and nine
months ended September 30, 2019,
March 31, 2021 and 2020, respectively.
 
Restructuring and related charges described in (c)(b) resulted
 
in incremental
taxes of $0.4$0.2 million and $0.9 $0.4
million for
during the three and nine months ended September 30,March 31, 2021
and 2020,
 
respectively, and $5.6 millionrespectively.
 
for bothFair value step up
of inventory sold described in (c) resulted in incremental
taxes of $0.2 million during the three and nine months ended
September 30, 2019.ending March 31,
 
Customer bankruptcy costs2021.
CEO transition expenses described in (d) resulted in
 
in incremental taxes of $0.1 million during the nine
three months ended September 30, 2020.
 
Charges related to the settlement of a non-core equipment sale describedMarch 31,
2021.
 
Inactive subsidiary litigation described in (e) resulted in incremental
incremental taxes of less than $0.1 million forduring the ninethree months
ended March 31, 2021.
 
ended September 30, 2019.
Indefinite-lived intangible asset impairment
Customer bankruptcy costs described in (f) resulted in incremental taxes of $8.7 million
 
during the nine months ended September 30, 2020.
Pension and
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
postretirement benefit (income) costs, non-service components described
in (h) resulted in a reduction of taxes of $0.3 million for
the three months ended September 30, 2020 and incremental taxes
of $7.7 million for the nine months ended September 30,
2020,
and incremental taxes of $0.1 million and $0.5 million for
during the three and nine
months ended September 30, 2019, respectively.March 31, 2020.
 
Transition tax adjustmentsIndefinite-lived intangible asset impairment described in
 
in (k)(g) resulted in incremental taxes of $0.4 $8.7
million for both
during the three and nine months ended
September 30, 2019. March 31, 2020.
 
Tax impact of certainPension and postretirement benefit costs, non-service components
discrete items described in (j)(i) resulted in a tax benefit of $4.5less than
 
$0.1 million and $0.4incremental taxes of $7.9 million
for the three
months ended
March 31, 2021 and nine2020, respectively.
Tax impact of certain discrete
items described in (k) above resulted in a tax benefit of
$0.4 million during each of the three months ended September 30,March
 
2020.
(n)
The Company calculates adjusted EBITDA margin
31, 2021 and non-GAAP operating margin as the percentage
of adjusted EBITDA and
non-GAAP operating income to consolidated net sales.2020.
(o)
 
The Company calculates non-GAAP earnings per diluted share
 
as non-GAAP net income attributable to the Company
 
per
weighted average diluted shares outstanding using the “two-class share
 
method” to calculate such in each given period.
The
calculation of GAAP and non-GAAP earnings (loss) per
diluted share for the three and nine months ended September
30, 2019
was impacted by the 4.3 million share issuance in connection
with the Combination.
Therefore, the per diluted share result for
each of the first three quarters of 2019, as reported on
a standalone basis, may not sum to the per diluted share
result for the nine
months ended September 30, 2019.
Off-Balance Sheet Arrangements
The Company had no material off-balance
 
sheet items, as defined under Item 303(a)(4) of Regulation S-K as of
 
September 30,March 31, 2021.
2020.
The Company’s only off
 
-balanceoff-balance sheet items outstanding as of September 30,March 31,
 
20202021 represented approximately $
12
$9 million of
total bank
letters of credit and guarantees.
 
The bank letters of credit and guarantees are not significant to
 
the Company’s liquidity
or capital
capital resources.
 
See also Note 15 of Notes to Condensed Consolidated Financial Statements
 
Statements, which appears in Item 1 of this Report.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
Operations
Consolidated Operations Review – Comparison of the Third
Quarter of 2020 with the ThirdFirst Quarter
 
of 20192021 with the First Quarter of 2020
Net sales were $367.2$429.8 million in the thirdfirst quarter of 20202021
 
compared to $325.1$378.6 million in the thirdfirst quarter of 2019.2020.
 
The net sales
increase of 13%$51.2 million or 14% quarter-over-quarter includes
reflects a benefit from higher sales volumes of 5%, additional
 
net sales from
recent acquisitions primarily Houghtonof 3%, the positive impact from foreign
currency translation of 3% and Norman Hay,increases in selling price and
 
product mix
of $74.6 million.approximately 3%.
 
Excluding net sales related to acquisitions, the Company’s
current quarter net sales would have declined approximately
10%, which
reflects a decrease
The increase in sales volumes of 8%, a negative impact from foreign currencycompared to the first quarter
 
translation of 1%2020 was primarily due to improved end market
conditions and a decrease from selling
price and product mix of 1%.continued market share gains.
 
The primary driver ofAdditional net sales from acquisition primarily related to sales attributable
to Coral,
which the volume declineCompany acquired in the currentDecember 2020.
 
quarter was the negative impact of COVID-19
on global production levels.
COGS were $227.0$273.6 million in the thirdfirst quarter of 20202021 compared
 
to $220.1$244.7 million in the thirdfirst quarter of 2019.2020.
 
The increase in
COGS of 3%$28.9 million or 12% was primarily due todriven by the inclusion of Houghtonassociated
COGS on the increase in net sales as described above,
 
and, Norman Hay sales andto a lesser
extent, an expense of $0.8 million associated COGS, partially offsetwith selling acquired
 
by the
prior year charge of $10.2 million to increase
acquired HoughtonCoral inventory toat its fair value described in the Non
-GAAP MeasuresNon-GAAP
Measures section of this Item above, as well as lower COGS on the declineabove.
 
in Legacy Quaker net sales, described above.
Gross profit in the thirdfirst quarter of 2021 increased $22.3
million or 17% from the first quarter of 2020, of $140.2 milliondue primarily
 
increased $35.1 million or 33% fromto the third quarter of 2019, due
primarily to additional gross profit from Houghton and
Norman Hay.increase in net sales.
 
The Company’s reported gross margin
 
in the currentfirst quarter
of 2021 was 38.2%36.3% compared to 32.3% 35.4%
in the third first
quarter of 20192020.
 
whichThe Company’s current
quarter gross margin includes the impact of the inventory
fair value step up described
above.
Excluding thethis and other one-time increaseincreases to COGS including
accelerated depreciation in both periods, described in the priorNon-GAAP
year,Measures section of this Item above, the Company estimates that
its gross marginmargins in the first quarters of 2021
 
forand 2020 would have
been approximately 36.6% and 35.5%, respectively.
While the thirdCompany has experienced higher raw material costs beginning
in the
fourth quarter of 2019
would have been approximately 35.5%.2020 and continuing into 2021,
 
The estimated increase inthe higher gross margin quarteras compared to the prior year
 
-over-quarterfirst quarter was primarily due to lower
COGS as a result ofdriven by the Company’s
 
progress oncontinued execution of Combination-related logistics, procurement and
 
and manufacturing cost savings
initiatives as well as athe benefit from certain price and product mixof higher volumes in the
 
incurrent quarter and the Company’s rawrelated impact from fixed manufacturing
 
materials.costs.
SG&A in the thirdfirst quarter of 2021 increased $5.6
million or 6% compared to the first quarter of 2020 increased $16.2 milliondue
 
compared to the third quarter of 2019 due primarily
to additional
SG&A from Houghtonacquisitions, increases due to foreign
currency translation and Norman Hay.$0.5 million of CEO transition costs described
 
This increase wasin the Non-
GAAP Measures section of this Item, above, partially
offset by lower SG&A due
to the impact of COVID-19 cost
savings actions, including lower travel expenses and a decrease in the
 
service component of the
Company’s pension and
postretirement benefits as a result of the benefitsfirst quarter of realized cost savings associated with the Combination.2020
termination of its Legacy Quaker U.S. pension
plan.
During the thirdfirst quarter of 2020,2021 the Company incurred
 
$6.95.8 million of Combination, integration and other acquisition-related
expenses primarily for professional fees related to Houghton integration
 
integrationand other acquisition-related activities.
 
Comparatively, the
Company
incurred $14.7
$7.9 million of similar expenses in the prior year third
 
year first quarter, primarily due
to various professional
fees related to integration planning andlegal,
regulatory approval as well as professional fees associatedfinancial and other advisory and consultant expenses for integration
 
with closing the Combination.activities.
 
See the Non-GAAP Measures
section of
this Item,
above.
The Company initiated a restructuring program during
 
the third quarter of 2019 as part of its global plan to realize cost
 
synergies
associated with the Combination and recorded an initialthat occurred during
 
$24.0 million restructuring charge.2019 and 2020 and are expected to continue throughout 2021.
 
The Company expects
incurred restructuring and related charges for
reductions in
headcount and site closures under this program to continueof $1.2
 
during 2020million and into 2021.
The Company recorded additional$1.7
restructuring and related charges of $1.4 million
related to this program during the third quarter of 2020.
See the Non-GAAP
Measures section of this Item, above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
43
Operating income in the third quarter of 2020 was $34.9
million compared to an
operating loss of $14.5 million in the third
quarter of 2019.
Excluding Combination, integration and other acquisition-related
expenses, restructuring and related charges and
other
non-core items, the Company’s
current quarter non-GAAP operating income increased 25%
to $43.2 million compared to $34.5
million in the prior year quarter, primarily
due to additional operating income from Houghton and Norman Hay
and the benefits from
cost savings related to the Combination partially offset
by the negative impact of COVID-19.
The Company had other expense, net, of $0.2 million
in the third quarter of 2020 compared to other income, net,
of less than $0.2
million in the third quarter of 2019.
The quarter-over-quarter change was primarily driven
by higher foreign currency transaction
losses in the third quarter of 2020 as compared to the
prior year third quarter partially offset by lower
expenses from the non-service
components of pension and postretirement benefit costs in
the current quarter.
Interest expense, net, increased $0.7 million compared to
the third quarter of 2019 primarily due to an additional month
of
borrowings in the current quarter under the Company’s
term loans and revolving credit facility to finance the closing
of the
Combination on August 1, 2019, as well as higher
current quarter borrowings outstanding as a result of the additional
revolver
borrowings in March 2020 at the onset of the pandemic,
partially offset by a decline in overall interest rates during
the current quarter.
The Company’s effective
tax rates for the thirdfirst quarters of 20202021 and 2019 were an expense of 8.1%2020,
 
compared to a benefit of
27.6%, respectively.
The Company’s current
quarter effective tax rate was impacted by certain one
-time items including benefits
related to the impact of recently issued U.S. tax regulations
and other changes in foreign tax credit valuation allowances,
a change in a
foreign subsidiary’s statutory
rate and impacts related to the Combination.
Similarly, the prior year third
quarter tax rate was impacted
by the pre-tax losses driven by Combination costs, restructuring
charges and inventory fair value expense previously
mentioned.
Excluding the impact of these items as well as all other non-core
items in each quarter, described in
the Non-GAAP Measures section
of this Item, above, the Company estimates that its third quarters
of 2020 and 2019 effective tax rates would have
been approximately
24% and 20%, respectively.
The higher estimated current quarter tax rate was driven
by a change in the current quarter earnings
footprint to entities with higher statutory tax rates as well as a
cumulative year-to-date tax benefit recorded
during the third quarter of
2019 as a result of one of its subsidiaries receiving approval for
the renewal of a concessionary 15% tax rate compared to its 25%
statutory tax rate.
The concessionary tax rate was available to the Company’s
subsidiary during all quarters of 2020.
The Company
may experience continued volatility in its effective
tax rates due to several factors, including the timing
of tax audits and the expiration
of applicable statutes of limitations as they relate to uncertain
tax positions, the unpredictability of the timing and amount of
certain
incentives in various tax jurisdictions, the treatment of certain
acquisition-related costs and the timing and amount of certain share-
based compensation-related tax benefits, among other
factors.
In addition, the foreign tax credit valuation allowance
is based on a
number of variables, including forecasted earnings, which
may vary.
Equity in net income of associated companies was consistent
at $1.8 million in both the third quarters of 2020 and
2019.
Net income attributable to noncontrolling interest was consistent
at less than $0.1 million in both the third quarters of 2020 and
2019.
Foreign exchange negatively impacted the Company’s
third quarter results by approximately $0.18 per diluted share,
primarily
due to higher foreign exchange transaction losses quarter
-over-quarter and to a lesser extent, an aggregate negative
impact from
foreign currency translation on earnings.
Consolidated Operations Review – Comparison of the First Nine
Months of 2020 with the First Nine Months of 2019
Net sales were $1,031.8 million in the first nine months of
2020 compared to $742.2 million in the first nine months of 2019.
The
net sales increase of 39% year-over-year includes net
sales from acquisitions, primarily Houghton and Norman Hay,
of $407.4
million.
Excluding net sales related to acquisitions, the Company’s
current year net sales would have declined approximately 16%,
which reflects a decrease in sales volumes of 13%, a negative impact
from foreign currency translation of 2 % and a decrease from
selling price and product mix of 1%.
Consistent with the third quarter of 2020 description above, the primary
driver of the volume
decline in the current year was the negative impact of COVID-19
on global production levels.
COGS were $660.4 million in the first nine months of
2020 compared to $486.2 million in the first nine months
of 2019.
The
increase in COGS of 36%
was primarily due to the inclusion of Houghton and Norman
Hay sales and associated COGS and the
current year $0.8 million of accelerated depreciation
charges partially offset by the prior
year $10.2 million of an inventory fair value
step up charge described in the Non-GAAP Measures
section of this Item above, and lower COGS on the decline
in legacy Quaker net
sales, described above.
Gross profit in the first nine months of 2020 increased
$115.4 million or 45%
from the first nine months of 2019, due primarily to
additional gross profit from Houghton and Norman Hay.
The Company’s reported gross
margin in the current period was 36.0%
compared to 34.5% in the first nine months of 2019,
which included the inventory fair value step up described
above.
Excluding this
one-time increase to COGS in the prior year,
the Company estimates that its gross margin for
the first nine months of 2019 would
have been relatively consistent with the current year
at 35.9%.
Quaker Chemical Corporation
Management’s Discussion and Analysis
44
SG&A in the first nine months of 2020 increased
$100.1 million compared to the first nine months of 2019
due primarily to
additional SG&A from Houghton and Norman Hay,
partially offset by the same drivers described in
the third quarter description
above.
During the first nine months of 2020, the Company
incurred $22.8 million of Combination, integration and other acquisition-
related expenses, primarily for professional fees related
to Houghton integration activities.
Comparatively,
the Company incurred
$23.8 million of similar expenses in the prior year,
primarily due to various professional fees related to integration
planning and
regulatory approval as well as professional fees associated
with closing the Combination.
 
See the Non-GAAP Measures section of
this Item, above.
As described above,
the Company initiated
a restructuring program
during the third
quarter of 2019
as part of
its global plan
to
realize cost synergies
associated with
the Combination.
The Company recorded
additional restructuring
and related charges
of $3.6
million during
the first
nine months
of 2020
compared to
$24.0 million
first nine
months of
2019.
See the
Non-GAAP Measures
section of this Item, above.
During the first quarter of 2020, the Company recorded
 
a $38.0 million non-cash impairment charge to write
 
down the value of
certain indefinite-lived intangible assets associated with the
 
Combination.
 
This non-cash impairment charge iswas related to certain
acquired Houghton trademarks and tradenames and
 
iswas primarily the result of the current yearprojected negative impacts of COVID-19
 
COVID-19as of
March 31, 2020 on their
estimated fair values.
 
There werewas no similar impairment charges inrecorded
during the second or third
quartersfirst quarter of 2020 or in the prior year.
See the Critical
Accounting Policies and Estimates section as well as the Non
-GAAP Measures section, of this Item, above.2021.
Operating income in the first nine monthsquarter of 20202021 was $24.7
 
$44.9 million compared to $25.9an operating loss of $12.4 million
in the first nine months quarter
of 2020.
 
2019.
Excluding Combination, integration and other acquisitionacquisition-related
 
-related expenses, restructuring and related charges,
 
the non-cash indefinite-
lived intangible asset impairment charge, and
 
other non-core items,expenses that are not indicative of the Company’sfuture operating
 
performance of the
Company described in the Non-GAAP Measures section of
this Item,
above, the Company’s current year
quarter non-GAAP operating
income of $90.4
increased to $53.7 million increased compared to
 
to $84.3$36.0 million in the prior year first quarter primarily due
 
due to additional operating income from Houghton andthe increase in net sales
Norman Haydescribed above and the benefits from costscost savings initiatives
related to the Combination.
 
the Combination partially offset by the negative
impact of COVID-19.
The Company’sCompany had other income, net, of $4.7 million
 
expense, net, was $22.4 million in the first nine monthsquarter of 20202021 compared to other expense, net of
$21.2 million
in the first quarter of 2020.
The quarter-over-quarter change was primarily due
to the first quarter of 2021 gain on the sale of certain
held-for-sale real property assets compared
 
to $0.4 million in the prior year
period.
The year-over-year increase in other expense,
net was primarily due to the first quarter of 2020 non-cashpension plan settlement charge
 
settlement charge of
$22.7 million associated with the termination
of the
Legacy Quaker U.S. Pension Plan, described inPlan.
See the Non
-GAAPNon-GAAP Measures section
of this Item, above, as well as higherabove.
Partially offsetting these impacts
quarter-over-quarter were foreign currency transaction
 
transaction losses in the current year.
Interest expense, net, increased $14.5of $1.5 million in the first nine monthsquarter of 2021 compared
 
to foreign currency
transaction gains of 2020 $0.8 million in the first quarter of
2020.
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
Interest expense, net,
decreased $3.0 million
compared to the first nine months
quarter of 2019 primarily2020, due
to a decline in
interest rates in the
current
due to additionalperiod over the
first quarter of
2020, as the
weighted average interest
rate incurred
on outstanding borrowings
under the Company’sCompany’
 
term loans and revolving s
credit facility to financewas less than 2% during the closingfirst quarter
 
of 2021 compared to approximately 3% during the Combinationfirst quarter
on August 1, 2019.of 2020.
The Company’s effective
 
tax rates for the first nine monthsquarters of 2021 and 2020 were an expense of
24.2% and 2019 were a benefit of
38.3% and an expense of 22.9% 31.1%,
respectively.
 
The Company’s current yeareffective
 
tax rate for the three months ended March 31, 2021 was impacted
by the sale of certain held-
for-sale real property assets related to the Combination
as well as certain U.S. tax law changes.
Comparatively, the
prior year first
quarter effective tax rate was impacted by the pre-tax loss for
 
the nine months ended September
30, 2020, the tax effect of certain one-time
pre-tax costslosses as well as certain one-time tax
charges and
benefits in
the current period
including those mentioned in the three months analysis
above as well as those related to the impact of recently issued U.S.changes
in foreign tax
regulations and other credit valuation allowances, tax law changes in the valuation allowances
fora foreign tax credits acquired with the Combination, additional
charges
taken for uncertain tax positions related to certain
foreign tax audits,jurisdiction, and the tax impactimpacts of the Company’sCompany���s
 
termination of its Legacy
Quaker U.S. Pension Plan.Plan and the
 
Comparatively, the prior
year effective tax rate was primarily impacted by certain
non-deductible costsHoughton indefinite-
associated with the Combination.lived trademarks and tradename intangible asset impairment.
 
Excluding the impact of these items as well as all other non-core
 
items
in each year,quarter, described in
the Non-GAAP Measures section of this Item, above, the Company
 
Company estimates that its effective tax rates
for the first nine monthsquarter of 2021 and 2020 and 2019would have been
 
effective tax
rates were relatively consistent at approximately 23%
25% and 22%, respectively.
 
This quarter-over-quarter increase
was largely driven by the impact of higher
pre-tax income in the current quarter as compared to the prior year
quarter on certain tax
adjustments as well as increased withholding taxes on
expected current year repatriated earnings.
The Company expects continued
volatility in its effective tax rates due to several
factors, including the timing of tax audits and the expiration
of applicable statutes of
limitations as they relate to uncertain tax positions,
the unpredictability of the timing and amount of certain incentives in various
tax
jurisdictions, the treatment of certain acquisition-related
costs and the timing and amount of certain share-based compensation
-related
tax benefits, among other factors.
Equity in net income of associated companies increased $$4.5 million
0.7
million in the first nine monthsquarter of 20202021 compared to the
first ninequarter of
months of 2019,2020, primarily due to additional earnings
from Houghton’s 50% interest
in a joint venture in Korea partially offset by
lower earnings as compared to the prior year periodcurrent quarter income from
 
the Company’s interest in
 
a captive insurance company.company compared to losses in the
prior year first quarter.
 
See the Non-GAAP
Measures section of this Item, above.
In addition, the Company had higher earnings
quarter-over-quarter from the Company’s
50% interest in its joint venture in Korea.
Net income attributable to noncontrolling interest was $0.1less than
 
$0.1 million in both the first nine monthsquarters of 2020 compared to $0.22021 and 2020.
 
million in
the first nine months of 2019.
Foreign exchange negatively impacted the Company’s
 
first nine monthsquarter of 20202021 results by approximately $0.27 per diluted1% as higher
 
share,foreign
primarily due to higher foreign exchange transaction losses quarter-over-quarter
 
losses year-over-year and to a lesser extent,were partially offset by an aggregate positive impact from
 
negative impact from
foreign currency
translation on earnings.
Reportable Segments Review - Comparison of the ThirdFirst Quarter
 
of 2021 with the First Quarter of 2020 with the Third Quarter of 2019
The Company’s reportable
 
segments reflect the structure of the Company’s
 
internal organization, the method by which the
Company’s resources are
 
allocated and the manner by which the chief operating decision
 
maker of the Company assesses its
performance.
 
During the third quarter of 2019 and in connection with the Combination,The Company has four reportable segments: (i) Americas;
 
the Company reorganized its executive
Quaker Chemical Corporation
Management’s Discussion and Analysis
45
management team to align with its new business structure,
which reflects the method by which the Company assesses its performance
and allocates its resources.
The Company’s current
reportable segment structure includes four segments: (i)
Americas; (ii) EMEA;
(iii) Asia/Pacific; and (iv) Global Specialty
Businesses.
 
The three geographic segments are composed of the net
 
sales and operations
in each respective region, excluding net
sales and operations managed
globally by the Global
Specialty Businesses segment, which
includes the Company’s
 
container, metal
finishing, mining,
offshore, specialty coatings,
specialty grease and
Norman Hay businesses.
Segment operating earnings for each of the Company’s
 
reportable segments are comprised of net sales less directly related
COGS
and SG&A directly
related to the respective segment’s
product sales.&A.
 
Operating expenses not directly attributable to the net sales of
 
sales of each respective
segment, are not included in segment operating earnings,
 
such as certain corporate and
administrative costs, Combination, integration
and other
acquisition-related expenses, and Restructuring and related
 
related charges, and COGS related to acquired inventory
sold, which isare not
adjusted to fair value as part of purchase accounting.included in segment operating earnings.
 
Other items not specifically identified with the Company’s
 
reportable segments include
include interest expense, net and other income (expense) income,, net.
 
net.
Americas
Americas represented approximately 32% of the Company
’s consolidated net sales in the
third quarter of 2020.
The segment’s
net sales were $119.5 million,
an increase of $2.8 million or 2% compared to the third
quarter of 2019.
The increase in net sales
reflects the inclusion of one additional month of Houghton
net sales of $18.6 million, as the Combination closed on
August 1 in the
prior year.
Excluding Houghton net sales, the segment’s
net sales decrease quarter-over-quarter of approximately
13% was due to
lower volumes of 11% and a negative
impact of foreign currency translation of 4%, partially offset
by increases in selling price and
product mix of 2%.
The current quarter volume decline was driven by the economic slowdown
due to the impacts of COVID-19.
The
foreign exchange impact was primarily due to the weakening
of the Brazilian real and the Mexican peso against the U.S. dollar,
as
these exchange rates averaged 5.38 and 22.06, respectively,
in the third quarter of 2020 compared to 3.97 and 19.43,
respectively, in
the third quarter of 2019.
This segment’s operating
earnings were $31.1 million, an increase of $7.3 million or 31% compared
to the
third quarter of 2019.
The increase in segment operating earnings reflects the
higher net sales with the inclusion of Houghton, noted
above, as well as an increase in gross margin
due to the Company’s progress on
Combination-related logistics, procurement and
manufacturing cost savings initiatives, and lower SG&A
as a result of cost savings actions in response to COVID-19,
including lower
travel expenses, and the benefits of realized cost savings
associated with the Combination, partially offset by
the inclusion of one
additional month of Houghton SG&A.
EMEA
EMEA represented approximately 26% of the Company’s
 
consolidated net sales in the thirdfirst quarter of 2020.2021.
 
The segment’s net
sales were $94.0$134.9 million, an increase of $11.6$5.0 million
 
million or 14%4% compared to the thirdfirst quarter of 2019.2020.
 
The increase in net sales reflects
the inclusion of one additional month of Houghton net sales from acquisitions, primarily
 
sales of $19.1 million, as the Combination closed on August 1Coral.
 
in the prior year.
Excluding Houghton net sales from acquisitions, the segment’s
 
net sales decrease quarter-over-quarter of 9% was due
were relatively flat compared to lowerthe prior year first quarter
 
volumes of 15%,
partially offset by a positive impact of foreign
currency translation of 4% andas the increases infrom selling price and
product mix of 2%.
 
Thewere offset by
current quarter volume decline was driven by the economic
slowdown due to thenegative impacts of COVID-19.foreign currency transaction of
2%.
 
The foreign exchange impact
was primarily due to the
weakening of the
Brazilian real against the U.S. dollar,
as this exchange rate averaged
5.46 in the first quarter of 2021 compared to 4.43 in the first
quarter of 2020.
This segment’s operating
earnings were $32.2 million, an increase of $3.0 million or 10%
compared to the first
quarter of 2020.
The increase in segment operating earnings reflects the higher net
sales described above coupled with a higher
current quarter gross margin, partially offset
by slightly higher SG&A, including SG&A from acquisitions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
EMEA
EMEA represented approximately 28% of the Company’s
consolidated net sales in the first quarter of 2021.
The segment’s net
sales were $119.8 million, an
increase of $15.0 million or 14% compared to the first quarter of 2020.
The increase in net sales was
driven by increases in volumes of 3%, a benefit from
selling price and product mix of 2%, additional set sales from acquisitions
of less
than 1% and a positive impact from foreign currency translation
of 8%.
The current quarter volume increase was driven by the
continued gradual economic rebound from the COVID-19
slowdown.
The foreign exchange impact was primarily due to the
strengthening of the euro against
the U.S. dollar as this exchange
rate averaged 1.171.21 in the third
first quarter of
2020 2021 compared to 1.111.10 in
the
third first quarter of 2019.2020.
 
This segment’s operating earnings
 
were $17.4$25.2 million, an increase of $4.1$6.9 million
or 31% 38%
compared to the third
first quarter of 2019, which2020.
 
reflects the inclusion of Houghton net sales, noted above, coupled
with an
increase in gross margin due to the Company’s
progress on Combination-related logistics, procurement and
manufacturing cost
savings initiatives.
These drivers of theThe increase in segment operating earnings reflects the higher
 
earnings were partially offset bynet sales described above coupled with higher SG&A, including
current quarter gross margin and relatively
 
one
additional month of Houghtonflat SG&A, partially offset
by cost savings actions in response to COVID-19, including
lower travel
expenses, and the benefits of realized cost savings associated
with the Combination.&A.
Asia/Pacific
Asia/Pacific represented approximately 23% of the
 
Company’s consolidated net
 
sales in the thirdfirst quarter of 2020.2021.
 
The segment’s
net sales were $84.9$96.7 million, an increase of $10.6$23.2 million
 
or 14%31% compared to the thirdfirst quarter of 2019.2020.
 
The increase in net sales
reflects increases in volumes of 28% and the inclusion of one additional month of Houghtonpositive impact
 
net sales of $13.0 million, as the Combination closed on
August 1 in the
prior year.
Excluding Houghton net sales, the segment’s
net sales decreaseforeign currency translation of 3% quarter-over-quarter was driven7% partially offset
 
by a decreasedecreases in
selling price and product mix of 5%4%.
The increases in volume was primarily driven by the continued gradual
economic rebound from
the COVID-19 slowdown as the pandemic notably impacted
China during the first quarter of 2020.
The foreign exchange impact was
primarily due to the strengthening of the Chinese renminbi
against the U.S. dollar as this exchange rate averaged
6.48 in the first
quarter of 2021 compared to 6.98 in the first quarter of 2020.
This segment’s operating
earnings were $27.5 million, an increase of
$8.0 million or 41% compared to the first quarter of 2020.
The increase in segment operating earnings reflects the higher net
sales
described above on a relatively consistent gross margin
quarter-over-quarter.
These increases were partially offset by higher SG&A
which was driven by the segment’s
improved operating performance compared to the first quarter
of 2020.
Global Specialty Businesses
Global Specialty Businesses represented approximately
18% of the Company’s consolidated
net sales in the first quarter of 2021.
The segment’s net sales were
$78.4 million, an increase of $8.1 million or 12% compared
to the first quarter of 2020.
The increase in
net sales reflects the inclusion of additional net sales from
the Company’s Coral Chemical
acquisition.
Excluding net sales from
acquisitions, the segment’s
net sales would have increased 6% quarter-over-quarter
driven by increases in selling price and product
mix, including Norman Hay,
of approximately 20% and the positive impact from foreign
currency translation of 2%, partially offset
by higherdecreases in volumes of 1% and a positive impact of foreign currency
translation of
1%16%.
 
The foreign exchange impact was primarily due to the
 
strengthening of the Chinese renminbieuro against the U.S.
dollar as this
exchange rate averaged 6.92described in the third quarter of 2020
compared to 7.02 in the third quarter of 2019.
This segment’s operating
earnings were $27.3 million, an increase of $6.9 million
or 34% compared to the third quarter of 2019.
The increase in segment
operating earnings reflects the inclusion of Houghton
net sales notedEMEA section above, and an increase in gross margin
due to the Company’s
progress on Combination-related logistics and
procurement and manufacturing cost savings initiatives.
Segment SG&A was relatively
consistent quarter-over-quarter as increases from
one additional month of Houghton SG&A were largelypartially
 
offset by cost savings actions
in response to COVID-19, including lower travel expenses,
and the benefits of realized cost savings associated with the Combination.
Quaker Chemical Corporation
Management’s Discussion and Analysis
46
Global Specialty Businesses
Global Specialty Businesses represented approximately
19%weakening of the Company’s consolidatedBrazilian real against
 
net sales in the third quarter of 2020.
The segment’s net sales were
$68.8 million, an increase of $17.0 million or 33% compared
to the third quarter of 2019.
The increase
in net sales reflects the inclusion of one additional month
of Houghton net sales and the entire quarter of Norman
Hay net sales,
totaling $23.8 million, as the Combination closed on August
1 and the Norman Hay acquisition occurred on October
1 in the prior
year.
Excluding Houghton and Norman Hay net sales, the segment’s
net sales decrease of 13% quarter-over-quarter
was driven by
lower volumes of 5%, decreases in selling price and
product mix of 6% and a negative impact from foreign currency
translation of
2%.
The current quarter volume decline was primarily due
to a decrease in the Company’s specialty
coatings business driven by
Boeing’s decision to
temporarily stop production of the 737 Max aircraft and continued
volume declines due to the economic
slowdown due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the weakening of
the Brazilian real
against the U.S. dollar described in
the Americas section,
above.
 
This segment’s operating earnings
were $21.2 million, an increase of
$5.9 million or 39% compared toBoth the third quarter of 2019.
The increasechanges in segment operating earnings reflects the
inclusion of
incremental Houghton and Norman Hay net sales, noted
above, on relatively consistent gross margin levels, partially
offset by higher
SG&A, including one additional month of Houghton SG&A
and the entire quarter of Norman Hay SG&A.
Reportable Segments Review - Comparison of the First Nine Months
of 2020 with the First Nine Months of 2019
Americas
Americas represented approximately 32% of the Company’s
consolidated net sales in the first nine months of 2020.
The
segment’s net sales were $330.0
million, an increase of $69.3 million or 27% compared to the first
nine months of 2019.
The increase
in net sales reflects the inclusion of seven additional months
of Houghton net sales of $119.9 million,
as the Combination closed on
August 1 in the prior year.
Excluding Houghton net sales, the segment’s
net sales decrease year-over-year of 19% was
due to lower
volumes of 17% and a negative impact of foreign currency
translation of 4%, partially offset by increases in selling
price and product
mix of 2%.
The current year volume decline was driven by the economic
slowdown that began in late March and continued
into the
third quarter of 2020 due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the weakening
of the
Brazilian real and the Mexican peso against the
U.S. dollar, as these exchange rates averaged
5.01 and 21.62, respectively,
in the first
nine months of 2020 compared to 3.88 and 19.25, respectively
in the first nine months of 2019.
This segment’s operating earnings
were $70.6 million, an increase of $18.5 million or 36%
compared to the first nine months of 2019.
The increase in segment operating
earnings reflects the inclusion of incremental Houghton
net sales, noted, above, and relatively consistent gross margins
year-over-year,
partially offset by higher SG&A, including seven
additional months of Houghton SG&A in the current year.
EMEA
EMEA represented approximately 27% of the Company’s
consolidated net sales in the first nine months of 2020.
The segment’s
net sales were $276.5 million, an increase of $92.7
million or 50% compared to the first nine months of 2019.
The increase in net
sales reflects the inclusion of seven additional months
of Houghton net sales of $117.2 million,
as the Combination closed on August
1 in the prior year.
Excluding Houghton net sales, the segment’s
net sales decrease year-over-year of 13% was due
to lower volumes
of 15%, partially offset by a positive impact of
foreign currency translation of 1% and increases in selling price
and product mix of
1%.
The current year volume decline was driven by the economic
slowdown that began in late March due to the impacts of COVID-
19 and an overall reduced production in certain EMEA
countries that began in the second half of 2019 and continued
into the third
quarter of 2020 due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the strengthening
of the euro
against the U.S. dollar in the third quarter of 2020,
noted in the quarter-over-quarter comparison above,
which reflected the results of
Houghton in both the current and prior year reported
figures.
This segment’s operating
earnings were $46.3 million, an increase of
$15.2 million or 49% compared to the first nine months
of 2019.
The increase in segment operating earnings reflects the inclusion
of
incremental Houghton net sales, noted, above,
and relatively consistent gross margins year-over-year,
partially offset by higher
SG&A, including seven additional months of Houghton
SG&A in the current year.
Asia/Pacific
Asia/Pacific represented approximately 22% of the
Company’s consolidated net
sales in the first nine months of 2020.
The
segment’s net sales were $226.9
million, an increase of $61.6 million or 37% compared to the first
nine months of 2019.
The increase
in net sales reflects the inclusion of seven additional months
of Houghton net sales of $79.7 million, as the Combination
closed on
August 1 in the prior year.
Excluding Houghton net sales, the segment’s
net sales decrease of 11% year-over-year
was driven by
lower volumes of 8%, a negative impact of foreign currency
translation of 1% and decreases in selling price and
product mix of 2%.
The current year volume decline was driven by the
economic slowdown that began in the first quarter in China
and in late March
throughout the region due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the
weakening of the
Chinese renminbi and Indian rupee against the U.S.
dollar as these exchange rates averaged 6.99 and 74.01,
respectively, in the
first
nine months of 2020 compared to 6.86 and 70.11,
respectively, in the first nine
months of 2019.
This segment’s operating earnings
were $66.1 million, an increase of $20.7 million or 46%
compared to the first nine months of 2019.
The increase in segment operating
earnings reflects the inclusion of incremental Houghton
net sales, noted, above, and relatively consistent gross margins
year-over-year,
partially offset by higher SG&A, including seven
additional months of Houghton SG&A in the current year.
Quaker Chemical Corporation
Management’s Discussion and Analysis
47
Global Specialty Businesses
Global Specialty Businesses represented approximately
19% of the Company’s consolidated
net sales in the first nine months of
2020.
The segment’s net sales were $198.4
million, an increase of $65.9 million or 50% compared to the
first nine months of 2019.
The increase in net sales reflects the inclusion of seven
additional months of Houghton net sales and the full year-to-date
nine months
of Norman Hay net sales, totaling $90.6 million, as the
Combination closed on August 1 and the Norman Hay acquisition closed
on
October 1 in the prior year.
Excluding Houghton and Norman Hay net sales, the segment’s
net sales decrease of 19% year-over-year
was driven by lower volumes of 6%, decreases in selling price
and product mix of 10% and a negative impact from foreign
currency
translation of 3%.
The current year volume decline was primarily due to a decrease
in the Company’s specialty
coatings business
driven by Boeing’s decision
to temporarily stop production of the 737 Max aircraft and
continued volume declines due to the
economic slowdown due to the impacts of COVID-19.
Partially offsetting these volume declines, and contributing
to the decrease in
selling price and product mix were higher shipmentsand
 
sales volume were primarily driven by higher
shipments of a lower priced product in the Company’s
 
mining business compared toin the
prior year.year,
 
The foreign exchangewithout the impact was primarily due to the weakening of this mining business
item, this segment’s volumes
 
the Brazilian real against the U.S. dollar described in
the Americas section, above.would have been relatively consistent quarter-over-quarter.
 
This segment’s operating
 
earnings were $58.1
$24.2 million, an increase of $21.3$3.6 million or 18% compared
 
or 58% compared to
the first nine monthsquarter of 2019.2020.
 
The increase in segment operating earnings
reflects the inclusion
of incremental Houghton and Norman
Hayhigher net sales noted,described above partially offset bycoupled
 
with higher SG&A, including seven additional months of Houghtoncurrent quarter gross margin and relatively
 
and nine months of
Norman Hayflat SG&A in the current year.
&A.
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation
 
Litigation Reform Act of 1995)
Certain information included in this Report and other
 
materials filed or to be filed by Quaker Chemical Corporation
 
with the
Securities and Exchange Commission (“SEC”) (as well as information
 
included in oral statements or other written statements made
 
or
to be made by us) contain or may contain forward-looking
 
statements within the meaning of Section 27A of the Securities Act
 
of
1933, as amended, and Section 21E of the Securities Exchange
 
Act of 1934, as amended.
 
These statements can be identified by the
fact that they do not relate strictly to historical or
 
current facts.
 
We have based
 
these forward-looking
statements, including statements
regarding the potential effects of the COVID-19
 
pandemic on the Company’s
 
business, results of operations, orand financial condition
,
and our expectations toexpectation that we will maintain sufficient liquidity
 
liquidity and remain compliant with the termsremediate any of the Company’sour material weaknesses in internal
 
credit facilitycontrol over
financial reporting on our
current expectations about
future events.events, and statements regarding the impact of increased
raw material
costs and pricing initiatives.
 
These forward-looking statements include statements with respect
 
to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations,
 
future performance, and business, including:
 
•
 
the potential benefits of the Combination;Combination and other acquisitions;
 
•
 
the impacts on our business as a result of the COVID-19
 
pandemic and any projected global economic rebound
 
or
anticipated positive results due to Company actions taken
 
in response to the pandemic;
•
 
our current and future results and plans; and
 
•
 
statements that include the words “may,”
 
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
Such statements include information relating to current and
 
future business activities, operational matters, capital spending,
 
and
financing sources.
 
From time to time, forward-looking statements are also included in
 
the Company’s other periodic
 
reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released
 
to, or statements made to, the public.
Any or all of the forward-looking statements in this Report,
 
in the Company’s 2019Annual
 
Form 10-KReport to Shareholders for 2020 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
 
determining our future
performance.
 
Consequently,
actual results may
differ materially from those that might be anticipated
 
be anticipated from our forward-looking
statements.
We undertake
 
no obligation to publicly update any forward-looking statements,
 
whether as a result of new information, future
events or otherwise.
 
However, any further disclosures made
 
on related subjects in the Company’s
 
subsequent reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
 
A major risk is that demand for the Company’s
 
products and services is
largely derived from the demand for our customers’
 
products, which subjects the Company to uncertainties related
 
to downturns in a
customer’s business and unanticipated customer
 
production shutdowns.shutdowns,
including as is currently being experienced
by many
automotive industry companies.
 
Other major risks and uncertainties include, but
are not
limited to, the primary and secondary impacts
of the COVID-19
pandemic, including actions taken
in response to the pandemic by
various governments, which could exacerbate some
 
exacerbate
some or all of the other risks and uncertainties faced by the Company,
 
Company, including
the
potential for significant increases in raw material
costs, supply
chain disruptions, customer financial stability,instability,
 
worldwide economic
and political conditions, disruptions,
foreign currency
fluctuations,
significant changes in applicable tax
rates and regulations, future
terrorist
attacks and other acts of
violence.
 
Furthermore, the Company is subject to the same business
cycles as those
experienced by our customers in the
steel, automobile,
automobile, aircraft, industrial equipment, and durable
goods manufacturers.industries.
 
The ultimate significanceimpact of COVID-19 on our business
will depend
on,
among other things, the extent duration
and strength of resurgenceduration of the pandemic, the severity
 
severity of the disease and the
Quaker Chemical Corporation
Management’s Discussion and Analysis
48
number of people infected with
the
virus, the continued
uncertainty regarding widespread global
availability, administration
,
acceptance and long-term efficacy of a vaccine,vaccines, or other
treatments for
COVID-19 or its variants,
 
the longer-term effects on the
economy by the pandemic,
including the resulting market
volatility, and
 
market volatility, and by
the measures taken by governmental authorities and other
third parties restricting day-to-day life and business
operations
and the length of time that such measures
remain in place,
as well as laws and
other governmental programs implemented
to address the pandemic or assist impacted businesses, impactedsuch
 
by the COVID-19 pandemic.as fiscal stimulus and other legislation designed to deliver
monetary aid
and other relief.
 
Other factors could also adversely
affect us, including
those related to the Combination
and other acquisitions and the
integration of the combined
company as well as
other acquired businesses.
 
Our forward-looking statements are subject to risks, uncertainties
 
uncertainties and assumptions about the
Company and
its operations that are subject to change based
on various
important factors, some of which are beyond
our control.
 
These risks,
uncertainties, and possible inaccurate assumptions relevant
 
relevant to our business could cause our actual results
to differ
materially from
expected and historical results.
 
Therefore, we caution you not to place undue reliance
 
on our forward-looking statements.
 
For more information regarding these
risks and uncertainties as well as certain additional
 
risks that we face, refer to the Risk Factors section, which appears
 
in Item 1A ofin
this Report, as well as Item 1A in our 20192020 Form
10-K and in our quarterly and other reports
filed from
time to time with the SEC.
 
This discussion is provided as
permitted by the Private
Securities Litigation Reform Act
of 1995.
Quaker Houghton on the Internet
 
Financial results, news and other information about
 
Quaker Houghton can be accessed from the Company’s
 
website at
https://www.quakerhoughton.com
.
.
This site includes important information on the Company’s
 
locations, products and services,
financial reports, news releases and career opportunities.
 
The Company’s periodic
 
and current reports on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental
 
schedules filed therewith, and amendments to those reports, filed with
 
the SEC are
available on the Company’s
 
website, free of charge, as soon as reasonably
 
practicable after they are electronically filed with or
furnished to the SEC.
 
Information contained on, or that may be accessed through,
 
the Company’s website is not
 
incorporated by
reference in this Report and, accordingly,
 
you should not consider that information part of this Report.
 
4937
Item 3.
 
Quantitative and Qualitative Disclosures About Market
 
Risk.
 
Quaker Houghton is exposed to the impact of interestWe have evaluated
 
rates, foreign currency fluctuations, changes in commodity prices
and credit
risk.
The current economic environment associated with COVID-19
has led to significant volatility and uncertainty with each of
these
market risks.
Other than the impact of the COVID-19 pandemic on market risks
generally, we believe
there has been no other
material change to the information required under this Item that was disclosed in Part II,
 
Item 7A, of our 2019Annual Report on Form 10-K.
10-K for the year ended December 31, 2020, and we
 
See Item 1A, “Risk Factors”, of this Report
for additional discussion of the current and potential risks associated
with the COVID-19 pandemic.believe there has been no material change to that information.
 
50
38
Item 4.
 
Controls and Procedures.
 
Evaluation of disclosure controls
 
and procedures.
 
As required by Rule 13a-15(b) under the Securities Exchange
 
Act of 1934, as
amended (the “Exchange Act”), our management,
 
including our principal executive officer and principal financial
 
officer, has
evaluated the effectiveness of our disclosure
 
controls and procedures (as defined in Rule 13a-15(e) under the Exchange
 
Exchange Act ) as of the
end of the period covered by this Report.
 
Based on that evaluation, our principal executive officer
 
and our principal financial officer
have concluded that, as of the end of the period covered by
 
this Report, our disclosure controls and procedures (as defined
 
in Rule
13a-15(e) under the Exchange Act) were not effective
 
as of September 30, 2020March 31, 2021 because of the material weaknesses in
 
in our internal control
control over financial reporting, as described below.
As previously disclosed in “Item 9A. Controls and Procedures.”
 
in the Company’s 20192020
 
Form 10-K, through the process of
evaluating risks and corresponding changes to the
 
design of existing or the implementation of new controls in
 
in light of the significant
non-recurring transactions that occurred during 2019,
 
including the Combination, the Company identified certain deficiencies in
 
its
application of the principles associated with the Committee
 
of Sponsoring Organization of the Treadway
 
Commission in Internal
Control – Integrated Framework (2013) that management
 
has concluded in the aggregate constitute a material weakness.
 
A material
weakness is a deficiency,
 
or combination of deficiencies, in internal control over financial reporting,
 
such that there is a reasonable
possibility that a material misstatement of annual or interim
 
financial statements
will not be prevented or detected on
a timely basis.
 
Specifically, managementWe did not
 
concluded thatdesign and maintain effective controls in response to the
risks of material misstatement.
Specifically, changes to existing
controls or the implementation
of new controls were not
sufficient to
respond to changes to the risks of material misstatement to
 
misstatement in
financial reporting.
Asreporting as a result of this deficiency inbecoming a larger,
more complex global organization due to the design and
implementation of an effective risk assessment, this materialCombination.
 
This material
weakness also contributed to certain control deficiencies that
management
concluded result in the followingan additional material weaknesses: (i)weakness as we did
 
we did not design and maintain effective controls
 
controls over the review of
of pricing, quantity and customer data to verify that revenue
 
recognized at certain locations was complete and accurate,accurate.
 
and (ii) weThese material weaknesses did not
not design and maintain effective controls overresult in material misstatements to the interim or annual
 
the reliability of data used to support the reasonableness of certainconsolidated financial statements.
 
assumptionsHowever, these material weaknesses could
result in the
accounting for business combinations.misstatements to our account balances and disclosures
 
that could result in a material misstatement to the interim
or annual
consolidated financial statements that would not be
prevented or detected.
Notwithstanding these material weaknesses, the Company
 
has concluded that the unaudited condensed consolidated financial
statements included in this Report present fairly,
 
in all material respects, the financial position of the Company as of
 
September 30,March 31, 2021
2020 and December 31, 2019,2020, and that the results of its operations
 
and its cash flows and changes in equity for both the three and
 
nine
three month periods
ended September 30,March 31, 2021 and March 31, 2020, and 2019, are in conformity
 
conformity with accounting principles generally accepted in
the United
States of
America.
 
However, these control deficiencies
Progress on Remediation
 
could have resulted in misstatements of interim condensed consolidatedMaterial Weaknesses
financial statements and disclosures that could
have resulted in a material misstatement that would not
be prevented or detected.
Remediation Plan Activities.
As previously disclosed in “Item 9A. Controls and Procedures.”
in the Company’s 2019
Form 10-K,
theThe Company and its Board of Directors, including the
Audit Committee of the Board of Directors, are committed
to maintaining
a strong internal control environment.
 
During the first nine
months of 2020, management began developing its full remediation
plan and executing what will be a multi-step remediation process
to completely and fully remediateSince identifying the material weaknesses, the Company
has dedicated a significant amount of
time and resources to remediate all of the previously identified
 
material weaknesses as quickly and described above.effectively
 
The initial stepsas possible. In 2020, the
Company dedicated multiple internal resources and
supplemented those internal resources with various third-party specialists to
assist
with the formalization of a robust and detailed remediation
plan.
In undertaking remediation activities, the Company has takenhired
include identifying dedicated internal resources supplemented
with third-party specialists to assist with formalizing a robust and
detailed remediation plan, which is in the process of
being implemented, and specifically completing an updated
risk assessment,
including identifying and assessing those risks attendant to
the significant changes within the Company as a result of becoming
a
larger, more complex
global organization as a result of the Combination.
The Company is conducting a comprehensive review,
and,
as appropriate, is updating its existing internal control
framework to ensure that it has identified, developed and deployed the
appropriate business process and information technology
general controls to meet the objectives and address the risks identified
through the updated risk assessment process.
In undertaking this process and carrying out our remediation
plan, the Company has
further supplemented its internal resources that are
focused on internal control over financial reporting by
hiring additional personnel
dedicated to financial and information
technology compliance to further supplement its internal
 
during 2020.resources.
 
Further, the Company is identifying
and implementingIn
further modifications to strengthen its internal control
environment.
During the quarter ended September 30, 2020, as a result of
initial remediation activities related to the Company’s
previously identified material weaknesses,addition, the Company has modiestablished a global network
 
fied certainof personnel to assist local management in understanding control performance
existing controls, or designed and in some instances implementeddocumentation requirements.
 
new controls.In order to sustain this network, the Company conducts periodic
 
It is the Company’s goaltrainings and hosts discussions to remediate
address questions on a current basis.
 
all of the
previously identified material weaknesses as quickly and
effectively as possible, however,
However, the impact of COVID-19,
including travel
restrictions and remote work arrangements has
required
the Company to adapt and make changes to its internal controls
 
controls integration
plans as well as its remediation
plans, and has
presented
and is expected to continue to present challenges
with regards
to the timing of
the Company’s
remediation and integration
plan activities.
Despite the challenges brought on by COVID-19 and
driven by the Company’s
priority of creating a long-term sustainable control
structure to ensure stability for a company that has more
than doubled in size since August 2019, the Company continues
to make
substantial strides towards remediating the underlying
causes of the previously disclosed material weaknesses in our
risk assessment
process and within our revenue process, as further discussed
below.
Risk Assessment –
We previously determined
that our risk assessment process was not designed adequately
to respond to changes
to the risks of material misstatement to financial rep
orting.
In order to remediate this material weakness, we have designed
and
implemented an improved risk assessment process, including
identifying and assessing those risks attendant to the
significant changes
within the Company as a result of becoming a larger,
more complex global organization due to the
Combination.
During 2020, a full
review was performed of our processes and controls across
significant locations in order to identify and address potential
design gaps.
In addition to individual transactional-level control
enhancements, this review resulted in (i) an enhanced financial
statement risk
assessment, (ii) the standardization of existing legal entity
and newly implemented segment quarterly analytics and
quarterly closing
packages completed by key financial reporting personnel, (iii) a
global account reconciliation review program and (iv)
enhancements
to our quarterly identification and reassessment of new and
existing business and information technology risks that could
affect our
financial reporting.
Monitoring is also performed through our enhanced quarterly
controls certification process, whereby changes in
business or information technology processes or control
owners are identified and addressed timely.
Although we have implemented
39
and tested the additional controls as noted in our remediation
 
plan and integration plan activities.found them to be effective, this material
 
weakness will not be
considered remediated due to the Revenue – Price and
Quantity material weakness, discussed below.
Once the Revenue – Price and
Quantity material weakness is remediated, we expect
the Risk Assessment material weakness will also be remediated.
Revenue – Price and Quantity –
We previously
determined that we did not design and maintain effective
controls over the review
of pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
In order to remediate this
material weakness, the Company made significant progress
in its redesign of certain aspects of its revenue process and related
controls.
The Company has identified and agreed upon design enhancements
and requirements for each revenue sub-process.
The
design includes enhancements to entity-level and transactional
-level manual controls as well as IT general and application
controls
and the Company is in the process of implementing
these design changes both centrally and locally.
However, because the additional
controls have not been fully implemented and tested, this
material weakness is not yet remediated.
This existing material weakness
will not be considered remediated until the applicable
remedial controls have been fully implemented and operate
for a sufficient
period of time and management has concluded, through
testing, that the controls are operating effectively.
Given the significant resources the Company has dedicated
to remediation of its material weaknesses, the Company is committed
to remediation and expects that in 2021 it will successfully implement
the enhanced design of its revenue processes and have a
sufficient operational effectiveness period
to evidence remediation over its price and quantity material weakness
and, concurrently,
evidence remediation over its risk assessment material weakness
in 2021 as well.
Changes in internal control over financial
 
reporting.
 
As required by Rule 13a-15(d) under the Exchange Act,
 
our management,
management, including our principal executive officer
 
and principal financial officer, has evaluated
 
has evaluatedour internal control over
financial reporting to determine whether any changes
to our internal control over financial reporting to
determine whether any changes to our internal control overoccurred during
 
financial reporting occurred during the
quarter ended September 30,
2020
March 31, 2021 that have materially affec
ted, or are reasonably likely to materially affect, our
internal control
over financial reporting.
Based on that evaluation, there were no changes that have materially
affected, or are reasonably
likely to materially affect, our internal control over financial
 
reporting.
Based on that
evaluation,
other than the changes discussed above in connection with the
changes designed and implemented as a result of the
Company’s remediation
plan activities for the previously identified material weakne
sses,
there were no changes that have materially
affected, or are reasonably likely to materially
affect, our internal control over financial reporting during
the quarter ended SeptemberMarch
30, 2020.31, 2021.
 
51
40
PART
 
II.
 
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been
 
omitted.
Item 1.
 
Legal Proceedings.
 
Incorporated by reference is the information in Note
 
19 of the Notes to the Condensed Consolidated Financial
 
Statements in Part
I, Item 1, of this Report.
Item 1A.
Risk Factors.
In addition to the other information set forth in this Report,
 
you should carefully consider the risk set forth below,
which updates
the risk factors previously disclosed
in
Part I, Item 1A
of our 2019 Form 10-K, as well as the other risk factors
described in the 2019
2020 Form 10-K, which could materially affect ourincludes the
 
on-going risk and uncertainty related to the outbreak of
COVID-19 and its
impact on business financial condition or future results.and economic conditions.
 
The risk described below,
risks associated with COVID-19 and the other risks described
described in our 20192020 Form
10-K are not the only risks we
face.
Additional risks and
uncertainties not currently known
to us or that
we currently deem to be immaterial also may materially
 
be
immaterial may also materially and adversely affect
our business, financial condition
or operating results.
The outbreak of COVID-19 and its impact on business and
economic conditions have negatively affected our
business, results of
operations and financial condition and the extent and
duration of those effects is uncertain.
Beginning in early 2020, there has been an outbreak
of COVID-19, initially in China and which has spread
globally, including
generally all locations where the Company does business.
In March 2020, the World
Health Organization formally identified the
COVID-19 outbreak as a pandemic.
The COVID-19 pandemic, including the fear of exposure
to and the actual effects of the illness,
together with the measures implemented to reduce its spread,
including travel restrictions, shutdowns of businesses deemed
nonessential, and large gatherings and shelter
-in-place or similar orders, have significantly impacted the global
economy.
The
pandemic has disrupted global supply chains, lowered
equity market valuations, created significant volatility and disruption
in
financial markets, and increased unemployment levels.
In addition, it has resulted in temporary closures of many businesses, and
although many of the businesses have subsequently re-opened,
they may be operating at reduced capacity or subject to additional
temporary shutdowns, while other closures may be prolonged
or become permanent.
The scale and scope of the COVID-19 outbreak, the resulting
pandemic, and the primary and secondary impacts on
the economy
and financial markets have had a significant disruption
on the operations of the Company and its suppliers and
customers and have
adversely affected the Company’s
results of operations and financial condition during the first nine
months of 2020 as further
described in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations included in this Report.
The
Company has experienced disruptions as a result of COVID-19,
initially at its China subsidiaries in the first quarter of 2020
and,
subsequently,
beginning in late March and continuing into the third quarter
of 2020, throughout the rest of the business due to the
global economic slowdown.
We have experienced,
and may experience in the future, temporary site or facility closures
at our own
facilities or those of our customers in response to
government mandates in certain jurisdictions in which we operate.
We may also be
required to close certain of our facilities for the safety
of our employees in response to positive diagnoses for COVID-19.
Even in
facilities that are not closed, we could be affected
by reductions in employee availability and productivity,
changes in operating
procedures, and increased costs
.
The Company anticipates that its future results of
operations, including the results for the remainder
of 2020 may continue to be adversely impacted by
COVID-19.
In particular, the spread of COVID-19 and
efforts to contain the virus
have had the following additional effects, which
are likely to increase or become exacerbated the longer the
crisis continues:
●
reduced the demand for our products and services as many
customers have reduced production levels;
●
driven declines in volume and net sales across all reportable
segments;
●
required us to adjust certain of our facility operating procedures
and to take steps to reduce costs and preserve liquidity;
and
●
negatively affected the estimated fair value of
certain of the Company’s reporting
units or other indefinite-lived or long-lived
assets, namely the Company’s
Houghton and Fluidcare trademark and tradename indefinite-lived
intangible assets, such that
their estimated fair values were less than their carrying
values and required adjustments.
The spread of COVID-19, a further prolonged outbreak,
and efforts to contain the virus in some cases have already
or could in the
future also:
●
limit the availability and reduce the productivity of our
employees;
●
impact our financial reporting systems and processes, internal control
over financial reporting, and disclosure controls and
procedures, including our ability to ensure information
required to be disclosed in our reports under the Exchange Act
is
recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules
and forms and that such
information is accumulated and communicated to our
management, including our chief executive officer
and chief financial
officer, as appropriate,
to allow for timely decisions regarding required disclosure;
●
present challenges as a result of travel restrictions and remote work
arrangements, including impacting the timing of our ERP
system implementations which are an integral part of
our integration activities, the timing of the Company’s
remediation plan
activities as described in Item 4 Controls and Procedures, of
this Report, and the Company’s
first year assessment of internal
control over financial reporting for Houghton and Norman
Hay, including the
implementation of new or enhanced business
52
process and information technology general controls,
as necessary, to meet the
objectives and address the risks identified
once the Company completes its initial design assessment;
●
increase our costs as a result of emergency
measures that we may take or that may be imposed on us by regulatory
authorities;
●
cause a delay in customer payments or cause a deterioration
of the credit quality of other counterparties that could
result in
credit losses or force both customer and supplier bankruptcies;
●
cause delays and disruptions in the availability of and timely
delivery of materials and components used in our operations;
●
result in our inability to meet the requirements of the covenants
in our existing credit facility,
including covenants regarding
our consolidated interest coverage ratio and consolidated
net leverage ratio, or increase our cost of capital or make additional
capital, including the refinancing of our credit facility,
more difficult or available only on terms less favorable
to us;
●
impact our liquidity position and cost of and ability to access funds
from financial institutions and capital markets;
●
negatively affect the estimated fair values of the
Company’s reporting units or other
indefinite-lived or long-lived assets; and
●
cause other risks to impact us, including the risks described
in the “Risk Factors” section of the 2019 Form 10-K.
Although the Company has implemented business continuity
and emergency response plans to permit it to continue
to provide
services and products to customers and support the
Company’s operations, while also taking
health and safety measures such as
implementing worker distancing measures, enhancing
on-site hygiene measures, and using a remote workforce where
possible, there
can be no assurance that the continued spread of COVID-19 and
efforts to contain the virus (including, but not limited
to, voluntary
and mandatory quarantines, restrictions on travel, limiting
gatherings of people, and reduced operations and extended
closures of
many businesses and institutions) will not further impact
our business, results of operations and financial condition.
However, given
the unprecedented and continually evolving developments
with respect to this pandemic, the Company cannot, as of the
date of this
Report, reasonably estimate the magnitude or full extent
of the impact to its future results of operations or to the
ability of it or its
customers to resume more normal operations.
A further prolonged outbreak or resurgence and period
of continued restrictions on day-
to-day life and business operations would likely result in
volume declines and lower net sales into the fourth quarter
of 2020 as well,
when compared to the prior year.
The ultimate significance of COVID-19 on our business
will depend on, among other things, the extent, duration and
strength of
resurgence of the pandemic, the severity of the
disease and the number of people infected with the virus, the
ultimate geographic
spread of the virus, the continued uncertainty regarding
widespread availability of a vaccine, the effects on
the economy by the
pandemic, including market volatility,
and by the measures taken by governmental authorities and
other third parties restricting day-
to-day life and the length of time that such measures remain in
place, and laws or governmental programs implemented to assist
businesses impacted by the COVID-19 pandemic, such as fiscal
stimulus and other legislation designed to deliver
monetary aid and
other relief.
The likelihood of a further impact on the Company that could
be material increases the longer the virus impacts economic
activity levels in the United States and across the world.
53
Item 2.
 
Unregistered Sales of Equity Securities and Use of
 
Proceeds.
Purchases of Equity Securities by
the Company
The following table sets forth information concerning
 
shares of the Company’s
 
common stock acquired by the Company during
the period covered by this Report:
(c)
(d)
Total
 
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
 
Value of
 
Shares that
Total
 
Number
Average
as part of
May Yet
 
be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
JulyJanuary 1 - JulyJanuary 31
29,963
$
200.31
—
$
86,865,026
August 1 - August 31
514
$
194.00
—
$
86,865,026
September 1 - September 30
—
$
—
—
$
86,865,026
 
TotalFebruary 1 - February 28
30,4774,595
 
$
200.20284.56
—
$
86,865,026
March 1 - March 31
45
$
240.55
—
$
86,865,026
Total
4,640
$
284.14
 
—
$
86,865,026
 
 
(1)
 
All of these shares were acquired from employees upon
 
their surrender of Quaker Chemical Corporation shares in payment
 
of
the exercise price of employee stock options exercised or
 
for the payment of taxes upon exercise of employee stock
 
options
or the vesting of restricted stock.
(2)
 
The price paid for shares acquired from employees pursuant
 
to employee benefit and share-based compensation
 
plans is, in
each case, based on the closing price of the Company’s
 
common stock on the date of exercise or vesting as specified by the
plan pursuant to which the applicable option or restricted
 
stock was granted.
(3)
 
On May 6, 2015, the Board of Directors of the Company
 
approved, and the Company announced, a share repurchase
program, pursuant to which the Company is authorized
 
to repurchase up to $100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”),
 
and it has no expiration date.
 
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program
 
during the quarter ended September 30, 2020.March 31, 2021.
Limitation on the Payment of Dividends
The New Credit Facility has certain limitations on the payment
 
payment of dividends and other so-called restricted payments.
 
payments. See Note 15 of
of Notes to Condensed Consolidated Financial Statements, in
 
in Part I, Item I,1, of this Report.
 
 
 
54
41
Item 6.
 
Exhibits.
 
(a) Exhibits
3.1
–
3.2
–
10.1
–
10.2
–
10.3
–
10.4
–
31.1
–
31.2
–
32.1
–
.1350.**
32.2
–
.1350.**
101.INS
–
Inline XBRL Instance Document*
101.SCH
–
Inline XBRL Taxonomy
 
Extension Schema Document*
101.CAL
–
Inline XBRL Taxonomy
 
Extension Calculation Linkbase Document*
101.DEF
–
Inline XBRL Taxonomy
 
Extension Definition Linkbase Document*
101.LAB
–
Inline XBRL Taxonomy
 
Extension Label Linkbase Document*
101.PRE
–
Inline XBRL Taxonomy
 
Extension Presentation Linkbase Document*
104
–
Cover Page Interactive Data File (formatted as Inline XBRL and
 
contained in Exhibit 101.INS)*
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
 
 
*********
 
Pursuant to the requirements of the Securities Exchange Act
 
Act of 1934, the registrant has duly caused this report to be signed on
its
on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
(Registrant)
 
 
 
 
/s/ Mary Dean HallShane W.
Hostetter________________________________
Date: November 5, 2020May 6, 2021
 
 
 
Mary Dean Hall, Shane W.
Hostetter,
Senior Vice President,
Chief Financial
Officer and Treasurer
(officer(officer duly authorized on behalf
of, and principal
financial officer of, the Registrant)