UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2022 March 31, 2023
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number 001-12019
001-12019
QUAKER CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania23-0993790
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
Pennsylvania
23-0993790
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
901 E. Hector Street,
,
Conshohocken
,
Pennsylvania
19428 – 2380
(Address of principal executive offices)
Conshohocken, Pennsylvania
19428 – 2380
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000 610-832-4000
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 par valueKWRNew York Stock Exchange
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
Indicate by check mark whether the Registrantregistrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.     Yes    x     No    o
days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T
(§ (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required
to submit such files).
Yes
☒
xNo
☐
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and
“emerging “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filerxAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new
or revised
financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
o
☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
☐
oNo
☒x
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date.
Number of Shares of Common Stock
Outstanding on July 31, 2022
Number of Shares of Common Stock Outstanding on April 30, 202317,980,840
17,929,045
Table of Contents
Quaker Chemical Corporation
1
QUAKER CHEMICAL CORPORATION
AND CONSOLIDATED
SUBSIDIARIESTable of Contents
Page
2
Financial Statements (Unaudited)
2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and March 31, 2022
2
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and March 31, 2022
3
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022
4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and March 31, 2022
5
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and
6
Notes to Condensed Consolidated Financial Statements
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
Quantitative and Qualitative Disclosures about Market Risk.
32
Controls and Procedures.
32
OTHER INFORMATION.
Legal Proceedings.
33
Risk Factors.
33
Unregistered Sales of Equity Securities and Use of Proceeds.
33
Exhibits.
34
35
Page
PART
I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and June 30, 2021
2
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and June 30, 2021
3
Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and June 30, 2021
5
Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2022 and June 30, 2021
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
26
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
43
Item 4.
Controls and Procedures.
44
PART
II
OTHER INFORMATION.
Item 1.
Legal Proceedings.
45
Item 1A.
Risk Factors.
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
45
Item 6.
Exhibits.
46
Signatures
461
Table of Contents
2
PART
I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of IncomeOperations
(Unaudited; Dollars in thousands, except per share data)
Unaudited
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net sales
$
492,388
$
435,262
$
966,559
$
865,045
Cost of goods sold (
excluding amortization expense - See Note 13
)
342,824
280,811
670,924
554,400
Gross profit
149,564
154,451
295,635
310,645
Selling, general and administrative expenses
115,830
108,679
227,625
212,989
Restructuring and related (credits) charges, net
(1)
298
819
1,473
Combination, integration and other acquisition-related expenses
1,832
6,658
5,885
12,473
Operating income
31,903
38,816
61,306
83,710
Other (expense) income, net
(8,399)
14,010
(10,605)
18,697
Interest expense, net
(6,494)
(5,618)
(11,839)
(11,088)
Income before taxes and equity in net (loss) income of
associated companies
17,010
47,208
38,862
91,319
Taxes on income before
equity in net (loss) income of associated
companies
1,374
15,218
4,240
25,907
Income before equity in net (loss) income of associated
companies
15,636
31,990
34,622
65,412
Equity in net (loss) income of associated companies
(1,265)
1,610
(430)
6,820
Net income
14,371
33,600
34,192
72,232
Less: Net income attributable to noncontrolling interest
28
30
33
47
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Per share data:
Net income attributable to Quaker Chemical Corporation
common shareholders – basic
$
0.80
$
1.88
$
1.91
$
4.04
Net income attributable to Quaker Chemical Corporation
common shareholders – diluted
$
0.80
$
1.88
$
1.91
$
4.03
Dividends declared
$
0.415
$
0.395
$
0.830
$
0.790
Three Months Ended
March 31,
20232022
Net sales$500,148 $474,171 
Cost of goods sold (excluding amortization expense - See Note 13)326,698 328,100 
Gross profit173,450 146,071 
Selling, general and administrative expenses119,549 111,795 
Restructuring and related charges, net3,972 820 
Combination, integration and other acquisition-related expenses— 4,053 
Operating income49,929 29,403 
Other expense, net(2,239)(2,206)
Interest expense, net(13,242)(5,345)
Income before taxes and equity in net income of associated companies34,448 21,852 
Taxes on income before equity in net income of associated Companies9,533 2,866 
Income before equity in net income of associated Companies24,915 18,986 
Equity in net income of associated companies4,626 835 
Net income29,541 19,821 
Less: Net income attributable to noncontrolling interest7 5 
Net income attributable to Quaker Chemical Corporation$29,534 $19,816 
Per share data:
Net income attributable to Quaker Chemical Corporation common shareholders – basic$1.64 $1.11 
Net income attributable to Quaker Chemical Corporation common shareholders – diluted$1.64 $1.11 
Dividends declared$0.435 $0.415 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited; Dollars in thousands)
Unaudited
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net income
$
14,371
$
33,600
$
34,192
$
72,232
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(76,433)
16,165
(83,299)
(9,296)
Defined benefit retirement plans
1,407
397
1,903
1,689
Current period change in fair value of derivatives
575
452
1,675
1,014
Unrealized (loss) gain on available-for-sale securities
(567)
279
(1,567)
(2,746)
Other comprehensive (loss) income
(75,018)
17,293
(81,288)
(9,339)
Comprehensive (loss) income
(60,647)
50,893
(47,096)
62,893
Less: Comprehensive
income (loss) attributable to
noncontrolling interest
5
(38)
(1)
(53)
Comprehensive (loss) income attributable to Quaker Chemical
Corporation
$
(60,642)
$
50,855
$
(47,097)
$
62,840
Three Months Ended
March 31,
20232022
Net income$29,541 $19,821 
Other comprehensive income (loss), net of tax
Currency translation adjustments14,468 (6,866)
Defined benefit retirement plans(126)496 
Current period change in fair value of derivatives390 1,100 
Unrealized gain (loss) on available-for-sale securities334 (1,000)
Other comprehensive income (loss)15,066 (6,270)
Comprehensive income44,607 13,551 
Less: Comprehensive income attributable to noncontrolling interest(10)(6)
Comprehensive income attributable to Quaker Chemical Corporation$44,597 $13,545 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Unaudited; Dollars in thousands, except par value)
Unaudited
June 30,
December 31,
2022
2021
ASSETS
Current assets
Cash and cash equivalents
$
202,348
$
165,176
Accounts receivable, net
465,352
430,676
Inventories
Raw materials and supplies
163,055
129,382
Work-in-process
and finished goods
150,387
135,149
Prepaid expenses and other current assets
64,674
59,871
Total current
assets
1,045,816
920,254
Property, plant and equipment,
at cost
432,068
434,344
Less: Accumulated depreciation
(239,571)
(236,824)
Property, plant and equipment,
net
192,497
197,520
Right of use lease assets
36,317
36,635
Goodwill
610,167
631,194
Other intangible assets, net
962,580
1,027,782
Investments in associated companies
83,678
95,278
Deferred tax assets
10,897
16,138
Other non-current assets
28,804
30,959
Total assets
$
2,970,756
$
2,955,760
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
14,485
$
56,935
Accounts payable
246,345
226,656
Dividends payable
7,437
7,427
Accrued compensation
29,359
38,197
Accrued restructuring
3,812
4,087
Accrued pension and postretirement benefits
1,541
1,548
Other accrued liabilities
97,746
95,617
Total current
liabilities
400,725
430,467
Long-term debt
972,369
836,412
Long-term lease liabilities
25,695
26,335
Deferred tax liabilities
156,468
179,025
Non-current accrued pension and postretirement benefits
42,755
45,984
Other non-current liabilities
42,178
49,615
Total liabilities
1,640,190
1,567,838
Commitments and contingencies (Note 18)
Equity
Common stock $
1
par value; authorized
30,000,000
shares; issued and
outstanding 2022 –
17,919,750
shares; 2021 –
17,897,033
shares
17,920
17,897
Capital in excess of par value
921,642
917,053
Retained earnings
535,621
516,334
Accumulated other comprehensive loss
(145,246)
(63,990)
Total Quaker
shareholders’ equity
1,329,937
1,387,294
Noncontrolling interest
629
628
Total equity
1,330,566
1,387,922
Total liabilities and equity
$
2,970,756
$
2,955,760
March 31,
2023		December 31,
2022
ASSETS
Current assets
Cash and cash equivalents$189,872$180,963
Accounts receivable, net482,746472,888
Inventories
Raw materials and supplies148,119151,105
Work-in-process and finished goods145,375133,743
Prepaid expenses and other current assets63,18955,438
Total current assets1,029,301994,137
Property, plant and equipment, at cost439,367428,190
Less: Accumulated depreciation(236,279)(229,595)
Property, plant and equipment, net203,088198,595
Right of use lease assets43,34443,766
Goodwill517,206515,008
Other intangible assets, net936,345942,925
Investments in associated companies90,84188,234
Deferred tax assets10,42211,218
Other non-current assets27,91627,739
Total assets$2,858,463$2,821,622
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt$19,350$19,245
Accounts payable216,633193,983
Dividends payable7,8227,808
Accrued compensation26,71339,834
Accrued restructuring6,8095,483
Accrued pension and postretirement benefits1,5721,560
Other accrued liabilities90,51386,873
Total current liabilities369,412354,786
Long-term debt921,555933,561
Long-term lease liabilities26,08626,967
Deferred tax liabilities157,935160,294
Non-current accrued pension and postretirement benefits28,98528,765
Other non-current liabilities37,70238,664
Total liabilities1,541,6751,543,037
Commitments and contingencies (Note 18)
Equity
Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding March 31, 2023 – 17,981,822 shares; December 31, 2022 – 17,950,264 shares17,98217,950
Capital in excess of par value929,674928,288
Retained earnings491,632469,920
Accumulated other comprehensive loss(123,177)(138,240)
Total Quaker shareholders’ equity1,316,1111,277,918
Noncontrolling interest677667
Total equity1,316,7881,278,585
Total liabilities and equity$2,858,463$2,821,622
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited; Dollars in thousands)
Unaudited
Six Months Ended
June 30,
2022
2021
Cash flows from operating activities
Net income
$
34,192
$
72,232
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of debt issuance costs
2,236
2,375
Depreciation and amortization
41,036
44,188
Equity in undistributed earnings of associated companies, net of dividends
3,400
(6,715)
Acquisition-related fair value adjustments related to inventory
0
801
Deferred compensation, deferred taxes and other,
net
(10,223)
(13,849)
Share-based compensation
5,433
6,134
Loss on extinguishment of debt
5,246
0
Loss (gain) on disposal of property,
plant, equipment and other assets
15
(5,356)
Combination and other acquisition-related expenses, net of payments
(3,880)
(2,305)
Restructuring and related charges
819
1,473
Pension and other postretirement benefits
(2,269)
(2,223)
(Decrease) increase in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(51,944)
(47,252)
Inventories
(58,427)
(57,020)
Prepaid expenses and other current assets
(5,558)
(20,111)
Change in restructuring liabilities
(797)
(4,214)
Accounts payable and accrued liabilities
32,298
22,274
Net cash used in operating activities
(8,423)
(9,568)
Cash flows from investing activities
Investments in property,
plant and equipment
(15,138)
(6,974)
Payments related to acquisitions, net of cash acquired
(9,383)
(29,424)
Proceeds from disposition of assets
85
14,744
Net cash used in investing activities
(24,436)
(21,654)
Cash flows from financing activities
Payments of long-term debt
(668,500)
(19,065)
Proceeds from long-term debt
750,000
0
Borrowings on revolving credit facilities, net
16,703
29,433
Repayments on other debt, net
(155)
(219)
Financing-related debt issuance costs
(3,734)
0
Dividends paid
(14,862)
(14,113)
Stock options exercised, other
(821)
(416)
Net cash provided by (used in) financing activities
78,631
(4,380)
Effect of foreign exchange rate changes on cash
(8,600)
(683)
Net increase (decrease) in cash and cash equivalents
37,172
(36,285)
Cash and cash equivalents at the beginning of the period
165,176
181,895
Cash and cash equivalents at the end of the period
$
202,348
$
145,610
Three Months Ended
March 31,
20232022
Cash flows from operating activities
Net income$29,541 $19,821 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of debt issuance costs353 1,187 
Depreciation and amortization20,246 20,447 
Equity in undistributed earnings of associated companies, net of dividends(4,401)2,135 
Deferred compensation, deferred taxes and other, net(2,231)(3,801)
Share-based compensation3,527 2,462 
Combination and other acquisition-related expenses, net of payments— (4,246)
Restructuring and related charges3,972 820 
Pension and other postretirement benefits(415)(1,316)
(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions:
Accounts receivable(3,974)(26,270)
Inventories(5,792)(33,873)
Prepaid expenses and other current assets(6,765)(6,506)
Change in restructuring liabilities(2,747)(408)
Accounts payable and accrued liabilities6,468 23,249 
Net cash provided by (used in) operating activities37,782 (6,299)
Cash flows from investing activities
Investments in property, plant and equipment(6,161)(8,847)
Payments related to acquisitions, net of cash acquired— (9,383)
Net cash used in investing activities(6,161)(18,230)
Cash flows from financing activities
Payments of long-term debt(4,703)(14,112)
(Payments) borrowings on revolving credit facilities, net(9,776)43,000 
Payments on other debt, net(469)(102)
Dividends paid(7,809)(7,428)
Other stock related activity(2,109)(801)
Net cash (used in) provided by financing activities(24,866)20,557 
Effect of foreign exchange rate changes on cash2,154 348 
Net decrease in cash and cash equivalents8,909 (3,624)
Cash and cash equivalents at the beginning of the period180,963 165,176 
Cash and cash equivalents at the end of the period$189,872 $161,552 
The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Changes in Equity
(Unaudited; Dollars in thousands, except per share amounts)
(Unaudited)
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
Net income
0
0
33,570
0
30
33,600
Amounts reported in other
comprehensive gain
0
0
0
17,285
8
17,293
Dividends ($
0.395
per share)
0
0
(7,062)
0
0
(7,062)
Share issuance and equity-based
compensation plans
3
2,114
0
0
0
2,117
Balance at June 30, 2021
$
17,878
$
910,862
$
482,001
$
(35,943)
$
603
$
1,375,401
Balance at December 31, 2021
$
17,897
$
917,053
$
516,334
$
(63,990)
$
628
$
1,387,922
Net income
0
0
19,816
0
5
19,821
Amounts reported in other
comprehensive loss
0
0
0
(6,271)
1
(6,270)
Dividends ($
0.415
per share)
0
0
(7,434)
0
0
(7,434)
Share issuance and equity-based
compensation plans
15
1,646
0
0
0
1,661
Balance at March 31, 2022
$
17,912
$
918,699
$
528,716
$
(70,261)
$
634
$
1,395,700
Net income
0
0
14,343
0
28
14,371
Amounts reported in other
comprehensive loss
0
0
0
(74,985)
(33)
(75,018)
Dividends ($
0.415
per share)
0
0
(7,438)
0
0
(7,438)
Share issuance and equity-based
compensation plans
8
2,943
0
0
0
2,951
Balance at June 30, 2022
$
17,920
$
921,642
$
535,621
$
(145,246)
$
629
$
1,330,566
Common
Stock		Capital in
Excess of
Par Value		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Noncontrolling
Interest		Total
Balance as of December 31, 2021$17,897 $917,053 $516,334 $(63,990)$628 $1,387,922 
Net income— — 19,816 — 5 19,821 
Amounts reported in other comprehensive (loss) income— — — (6,271)1 (6,270)
Dividends ($0.415 per share)— — (7,434)— — (7,434)
Share issuance and equity-based compensation plans15 1,646 — — — 1,661 
Balance as of March 31, 2022$17,912 $918,699 $528,716 $(70,261)$634 $1,395,700 
Balance as of December 31, 2022$17,950 $928,288 $469,920 $(138,240)$667 $1,278,585 
Net income— — 29,534 — 7 29,541 
Amounts reported in other comprehensive income— — — 15,063 3 15,066 
Dividends ($0.435 per share)— — (7,822)— — (7,822)
Share issuance and equity-based compensation plans32 1,386 — — — 1,418 
Balance as of March 31, 2023$17,982 $929,674 $491,632 $(123,177)$677 $1,316,788 
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
6
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
7
Note 1 – Basis of Presentation and Description of Business
Basis of Presentation
As used in these Notes to Condensed Consolidated Financial Statements of
this Quarterly Report on Form 10-Q for the period
ended June 30, 2022March 31, 2023 (the “Report”),
the terms “Quaker Houghton,”
the “Company,”
“we, “we,” and “our” refer to Quaker Chemical
Corporation (doing business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires.
As used in these Notes to Condensed Consolidated Financial Statements,
the The “Combination” refers to the legacy Quaker combination
with Houghton International, Inc. (“Houghton”).
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited
and
have been prepared in accordance with generally accepted accounting principles
in the United States (“U.S. GAAP”) for interim
financial reporting and the United States Securities and Exchange Commission
(“SEC”) regulations.
Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect all adjustments
consisting only
of normal recurring adjustments, which are necessary for a fair statement of
the financial position, results of operations and cash flows
for the interim periods.
The results for the sixthree months ended June 30, 2022March 31, 2023 are not necessarily indicative of the
results to be expected
for the full year.
These financial statements should be read in conjunction with the Company’s
Annual Report filed on Form 10-K for
the year ended December 31, 20212022 (the “2021“2022 Form 10-K”).
During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The Company’s new structure includes three reportable segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia/Pacific. Prior to the Company’s reorganization, the Company’s historical reportable segments were: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. Prior period information has been recast to align with the Company’s business structure as of January 1, 2023, including reportable segments, customer industry disaggregation, and goodwill. See Notes 4, 5, and 13 of Notes to Condensed Consolidated Financial Statements.
Description of Business
The Company was organized in 1918 and incorporated as a Pennsylvania
business corporation in 1930, and in August 2019
completed the Combination with Houghton to form Quaker Houghton.
1930. Quaker Houghton is the global leader in industrial process
fluids.
With a presence around the world, including
operations in over
25
countries, the Company’s customers
include thousands of
the world’s most advanced and specialized
steel, aluminum, automotive, aerospace, offshore, can,
container, mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range of formulated
chemical specialty products and offers
chemical management services, (whichwhich the Company refers to as “Fluidcare
TM
”), for various heavy industrial and manufacturing applications.
applications throughout its
4
segments: Americas; Europe, Middle East and Africa (“EMEA”); Asia/Pacific; and
Global Specialty
Businesses.
Hyper-inflationary economies
Based on various indices or index compilations being used to monitor inflation
in Argentina as well as economic instability,
Argentina’s and Türkiye’s economies were considered hyper-inflationary under U.S. GAAP effective July 1, 2018 Argentina’s
economy was considered hyper-inflationary under U.S. GAAP.
and April 1, 2022, respectively. As of, and for the three and six
months ended June 30, 2022,March 31, 2023, the Company's Argentine
and Turkish subsidiaries represented less than
1
%a combined 1% and 2% of the Company’s consolidated
total
assets and net sales, respectively.
During the three and six months ended June 30,March 31, 2023, the Company recorded $0.5 million of remeasurement losses associated with the applicable currency conversions related to Argentina and Türkiye. Comparatively, during the three months ended March 31, 2022, the Company recorded less than $
0.1
$0.2 million
and $
0.2
million, respectively, of remeasurement
losses associated with the applicable currency conversions related to Argentina.
Comparatively,
during the three and six months ended June 30, 2021, the Company recorded
$
0.1
million and $
0.3
million,
respectively, of remeasurement
losses associated with the applicable currency conversions
related to Argentina.
These losses were
recorded within foreign exchange losses, net, which is a component of other
(expense) income,Other expense, net, in the Company’s Condensed
Consolidated Statements of Income.
Operations.
Note 2 – Business Acquisitions
2022Previous Acquisitions
In October 2022, the Company acquired a business that provides pickling and rinsing products and services, which is part of the EMEA reportable segment, for approximately 3.5 million EUR or approximately $3.5 million. This acquisition, along with the Company’s January 2022 acquisition in the Americas (described below), which had similar specializations and product offerings in pickling inhibitor technologies, strengthens Quaker Houghton’s position in pickling inhibitors and additives, enabling the Company to better support and optimize production processes for customers across the Metals industry. As of March 31, 2023, the allocation of the purchase of this acquisition in October 2022 has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s ongoing assessment of additional information related to the fair value of assets acquired and liabilities assumed.
7
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
In January 2022, the Company acquired a business that provides pickling
inhibitor technologies, for the steel industry,
drawing
lubricants and stamping oil, for metalworking, and various other lubrication,
rust preventative, and cleaner applications, for its
which is part of the Americas reportable segment for approximately $
8.0
$8.0 million.
This business broadens the Company’s
product offerings within its
existing metals and metalworking business in the Americas region.
The During the third quarter of 2022 the Company allocated $
5.6
finalized post-closing adjustments that resulted in the Company paying less than $0.1 million of theadditional purchase price to
intangible assets, comprised of $
5.1
million of customer relationships to be amortized over
14 years
; and $
0.5
million of existing
product technologies to be amortized over
14 years
.
In addition, the Company recorded $
1.8
million of goodwill related to expected
value not allocated to other acquired assets, all of which is expected to be tax deductible
consideration. Also in various jurisdictions in which the
Company operates.
In January 2022, the Company acquired a business related to the sealing and impregnation
of metal castings for the automotive
sector, as well as impregnation resin and
impregnation systems for metal parts, for its Global Specialty Businesseswhich is part of the EMEA reportable segment
for approximately
1.2
million EUR or approximately $
1.4
$1.4 million.
This business expands the Company's geographic presence in
Germany as well as broadens its product offerings and
service capabilities within its existing impregnation business.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
8
The results of operationsallocation of the purchase prices of both of these January 2022 acquisitions subsequent to the respective
acquisition dates are included in the unauditedhas been finalized.
Condensed Consolidated Statements of Income for the six month period ended
June 30, 2022.
Applicable transaction expenses
associated with these acquisitions are included in Combination,
integration and other acquisition-related expenses in the Company’s
unaudited Condensed Consolidated Statements of Income.
Certain pro forma and other information is not presented, as the operations
of the acquisitions are not considered material to the overall operations
of the Company for the periods presented.
Previous Acquisitions
In November 2021, the Company acquired Baron Industries, (“Baron”),
a privately held Companycompany that provides vacuum
impregnation services of castings, powder metals and electrical components for
its Global Specialty BusinessesAmericas reportable segment for
$
11.0
$11.0 million, including an initial cash payment of $
7.1
$7.1 million, subject to post-closing adjustments as well as certain earn-out
provisions initially estimated at $
3.9
million that are payable at differentvarious times from 2022 through
2025.
The earn-out provisions
could total a maximum of $
4.5
$4.5 million.
The Company allocated $
8.0
million As of the purchase price to intangible assets, $
1.1
million of
property, plant and
equipment and $
1.5
million of other assets acquired net of liabilities assumed, which includes $
0.3
million of cash
acquired.
In addition,March 31, 2023, the Company has remaining earnout liabilities recorded $
0.4
millionon its Condensed Consolidated Balance Sheet of goodwill, all$1.6 million. Additionally, during the third quarter of which is expected to be tax deductible.
Intangible assets
comprised $
7.2
million of customer relationships to be amortized over
15 years
; and $
0.8
million of existing product technology to be
amortized over
13 years
.
In November 2021,2022 the Company acquired a businessfinalized post-closing adjustments that provides hydraulic
fluids, coolants, cleaners, and rust preventative oils
resulted in Turkey for its EMEA reportable segment for
3.2
million EUR or approximately $
3.7
million.
In September 2021, the Company acquired the remaining interest in Grindaix
-GmbH (“Grindaix”),receiving a Germany-based, high-tech
providerpayment of coolant control and delivery systems for its Global Specialty Businesses reportable
segment for
2.4
million EUR or
approximately $
2.9
million, which is gross of approximately $
0.3
million of cash acquired.
Previously, in February
2021, the
Company acquired a
38
% ownership interest in Grindaix for
1.4
million EUR or approximately $
1.7
million.
The Company recorded
its initial investment as an equity method investment within the Condensed Consolidated
Financial Statements and accounted for the
purchase of the remaining interest as a step acquisition whereby the Company
remeasured the previously held equity method
investment to its fair value.
In June 2021, the Company acquired certain assets for its chemical milling
maskants product line in the Global Specialty
Businesses reportable segment for
2.3
million EUR or approximately $
2.8
less than $0.1 million.
In February 2021, the Company acquired a tin-plating solutions business
for the steel end market for $
25.0
million.
This
acquisition is part of each of the Company’s
geographic reportable segments.
The Company allocated $
19.6
million of the purchase
price to intangible assets, comprised of $
18.3
million of customer relationships, to be amortized over
19 years
; $
0.9
million of existing
product technology to be amortized over
14 years
; and $
0.4
million of a licensed trademark to be amortized over
3 years
.
In addition,
the Company recorded $
5.0
million of goodwill related to expected value not allocated to other acquired
assets, all of which is
expected to be tax deductible in various jurisdictions in which we operate.
Factors contributing to the purchase price that resulted in
goodwill included the acquisition of business processes and personne
l
that will allow Quaker Houghton to better serve its customers.
As of June 30, 2022, the allocation of the purchase price of all of the Company’s
2022 acquisitions, Grindaix, the acquisition in
Turkey,
and Baron have not been finalized and the one-year measurement period has not ended.
Further adjustments may be
necessary as a result of the Company’s
on-going assessment of additional information related to the fair value of
assets acquired and
liabilities assumed.
In December 2020, the Company acquired Coral Chemical Corporation
Company, LLC (“Coral”), a privately held U.S.-based provider of metal
finishing fluid solutions.
Subsequent to the acquisition, the Company and the sellers of Coral (the “Sellers”) have worked
to finalize
certain post-closing adjustments.
During the second quarter of 2022, after failing to reach resolution,
the Sellers filed suit asserting
certain amounts owed related to tax attributes of the acquisition.
Based on During the first quarter of 2023, there have been no material changes to the facts and circumstances of the claim asserted by the
Sellers, and the Company believescontinues to believe the potential range of exposure for this claim is $$0 to $1.5 million.
0
to $
1.5
million.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
9
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards
Adopted
The FASBThere have been no recently issued ASU 2020
-04,accounting standards that will have a material impact on the Company’s condensed consolidated financial statements and related footnote disclosures.
Reference Rate Reform (Topic
848): Facilitation of the Effects of Reference Rate Reform
on
Financial Reporting
in March 2020.
The FASB subsequently
issued ASU 2021-01,
Reference Rate Reform (Topic
848): Scope
in
January 2021 which clarified the guidance but did not materially change
the guidance or its applicability to the Company.
The
amendments provide temporary optional expedients and exceptions
for applying U.S. GAAP to contract modifications, hedging
relationships and other transactions to ease the potential accounting
and financial reporting burden associated with transitioning away
from reference rates that are expected to be discontinued, including
the London Interbank Offered Rate (“LIBOR”).
ASU 2020-04 is
effective for the Company as of March 12, 2020 and generally can
be applied through December 31, 2022.
On June 17, 2022, the
Company entered into an amendment to its primary credit facility which,
among other things, provided for the use of a USD currency
LIBOR successor rate (the Secured Overnight Financing Rate (“SOFR”)).
See Note 14 of Notes to Condensed Consolidated Financial
Statements.
Note 4 – Business Segments
The Company’s operating
segments, which are consistent with its reportable segments, reflect the structure of the
Company’s
internal organization, the method by which the Company’s
resources are allocated and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has
4
three reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
(iii) Asia/Pacific. The three geographic segments are composed of the net sales and operations in
each respective region, excluding net sales and operations managed globally
byregion. All prior period information has been recast to reflect the Global Specialty Businesses segment.
The Global
Specialty Businesses segment includes the Company’s
container, metal finishing,
mining, offshore, specialty coatings, specialty
grease and Norman Hay businesses.
new reportable segments. See Note 1 of Notes to Condensed Consolidated Financial Statements.
Segment operating earnings for each of the Company’s
reportable segments are comprised of the segment’s
net sales less directly
related costCost of goods sold (“COGS”) and selling,Selling, general and administrative
expenses (“SG&A”).
Operating expenses not directly
attributable to the net sales of each respective segment, such as certain corporate
and administrative costs, Combination, integration
and other acquisition-related expenses, and Restructuring and related charges,
are not included in segment operating earnings.
Other
items not specifically identified with the Company’s
reportable segments include Interest expense, net and Other (expense) income,
expense, net.
8
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
10
The following table presents information about the performance of
the Company’s reportable segments for
the three and sixsegments:
months ended June 30, 2022 and 2021.
Three Months Ended
March 31,
20232022
Net sales
Americas$251,413 $212,091 
EMEA152,449 146,819 
Asia/Pacific96,286 115,261 
Total net sales$500,148 $474,171 
Segment operating earnings
Americas$66,125 $45,022 
EMEA27,571 23,247 
Asia/Pacific27,652 24,501 
Total segment operating earnings121,348 92,770 
Combination, integration and other acquisition-related expenses— (4,053)
Restructuring and related charges, net(3,972)(820)
Non-operating and administrative expenses(51,771)(43,305)
Depreciation of corporate assets and amortization(15,676)(15,189)
Operating income49,929 29,403 
Other expense, net(2,239)(2,206)
Interest expense, net(13,242)(5,345)
Income before taxes and equity in net income of associated companies$34,448 $21,852 
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net sales
Americas
$
172,747
$
139,673
$
326,891
$
274,544
EMEA
123,053
123,436
248,740
243,250
Asia/Pacific
99,828
91,559
204,062
188,265
Global Specialty Businesses
96,760
80,594
186,866
158,986
Total net sales
$
492,388
$
435,262
$
966,559
$
865,045
Segment operating earnings
Americas
$
33,785
$
33,648
$
63,005
$
65,882
EMEA
13,283
23,405
30,049
48,649
Asia/Pacific
22,226
23,227
44,133
50,705
Global Specialty Businesses
27,841
24,209
52,876
48,378
Total segment operating
earnings
97,135
104,489
190,063
213,614
Combination, integration and other acquisition-related expenses
(1,832)
(6,658)
(5,885)
(12,473)
Restructuring and related credits (charges), net
1
(298)
(819)
(1,473)
Fair value step up of acquired inventory sold
0
0
0
(801)
Non-operating and administrative expenses
(48,579)
(43,077)
(92,042)
(84,069)
Depreciation of corporate assets and amortization
(14,822)
(15,640)
(30,011)
(31,088)
Operating income
31,903
38,816
61,306
83,710
Other (expense) income, net
(8,399)
14,010
(10,605)
18,697
Interest expense, net
(6,494)
(5,618)
(11,839)
(11,088)
Income before taxes and equity in net (loss) income of
associated companies
$
17,010
$
47,208
$
38,862
$
91,319
Inter-segment revenues for the three and six months ended
June 30, 2022, were $
3.3
million and $
6.2
million for Americas, $
12.4
million and $
21.3
million for EMEA, $
0.1
million and $
0.4
million for Asia/Pacific, and $
2.0
million and $
3.7
million for Global
Specialty Businesses, respectively.
Inter-segment revenues for the three and six months ended
June 30, 2021, were $
2.4
million and
$
5.7
million for Americas, $
6.3
million and $
15.1
million for EMEA, $
0.4
million and $
0.5
million for Asia/Pacific, and $
2.1
million
and $
4.1
million for Global Specialty Businesses, respectively.
However, allThe following table summarizes inter-segment revenues. All inter-segment transactions
have been eliminated from
each reportable operating segment’s
net sales and earnings for all periods presented in the above tables.
Three Months Ended
March 31,
20232022
Americas2,827 3,056 
EMEA6,093 12,176 
Asia/Pacific59 297 
Note 5 – Net Sales and Revenue Recognition
Arrangements Resulting in Net Reporting
As part of the Company’s Fluidcare
TM
business, certain third-party product sales to customers are managed by the
Company.
The
Company transferred third-party products under arrangements recognized
on a net reporting basis of $
20.5
$20.7 million and $
40.3
million
for the three and six months ended June 30, 2022, respectively,
and $
16.7
million and $
34.5
$19.8 million for the three and six months ended March 31, 2023 and 2022, respectively.
June 30, 2021, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
11
Customer Concentration
A significant portion of the Company’s
revenues are realized from the sale of process fluids and services to manufacturers of
steel, aluminum, automobiles, aerospace,
industrial and agricultural equipment, and durable goods.
As previously disclosed in the
Company’s 20212022 Form 10-K, during
for the year ended December 31, 2021,2022, the Company’s
five largest customers (each composed of
multiple subsidiaries or divisions with semiautonomous purchasing authority)
accounted for approximately
10
% 11% of consolidated net
sales, with its largest customer accounting for approximately
3
% 3% of consolidated net sales.
Contract Assets and Liabilities
The Company had no material contract assets recorded on its Condensed
Consolidated Balance Sheets as of June 30, 2022March 31, 2023 or
December 31, 2021.2022.
9
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
The Company had approximately $
6.6
$3.5 million and $
7.0
$5.7 million of deferred revenue as of June 30, 2022March 31, 2023 and December 31, 2021,
2022, respectively.
For the sixthree months ended June 30, 2022,March 31, 2023, the Company satisfied all of the associated
performance obligations and
recognized into revenue the advance payments received and recorded
as of December 31, 2021.2022.
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicals
and its technical expertise as a global product
portfolio.
The Company generally manages and evaluates its performance by reportable segment first, and
then by customer industry,
rather than
by individual product lines.
Also, netindustries. Net sales of each of the Company’s major product
lines are generally spread throughout all three of
the Company’s geographic
regions, and in most cases, are approximately proportionate to the level of total
sales in each region.
The following tables disaggregate the Company’s
net sales by segment, geographic region, customer industry,
industries, and timing of
revenue recognized forrecognized. Prior period information has been recast to reflect the three and six months ended June 30, 2022
and 2021.
Three Months Ended June 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
63,373
$
37,586
$
55,596
$
156,555
Metalworking and other
109,374
85,467
44,232
239,073
172,747
123,053
99,828
395,628
Global Specialty Businesses
62,367
21,324
13,069
96,760
$
235,114
$
144,377
$
112,897
$
492,388
TimingCompany’s current period customer industry disaggregation. See Note 1 of Revenue Recognized
Product sales at a point in time
$
225,135
$
136,622
$
110,190
$
471,947
Services transferred over time
9,979
7,755
2,707
20,441
$
235,114
$
144,377
$
112,897
$
492,388
Three Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
51,799
$
35,634
$
48,207
$
135,640
Metalworking and other
87,874
87,802
43,352
219,028
139,673
123,436
91,559
354,668
Global Specialty Businesses
46,183
21,678
12,733
80,594
$
185,856
$
145,114
$
104,292
$
435,262
Timing of Revenue Recognized
Product sales at a point in time
$
177,227
$
137,838
$
101,264
$
416,329
Services transferred over time
8,629
7,276
3,028
18,933
$
185,856
$
145,114
$
104,292
$
435,262
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - ContinuedStatements.
(Dollars in thousands, except per share amounts,
unless otherwise stated)
Three Months Ended March 31, 2023
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$68,134 $39,103 $46,660 $153,897 
Metalworking and other183,279 113,346 49,626 346,251 
$251,413 $152,449 $96,286 $500,148 
Timing of Revenue Recognized
Product sales at a point in time$240,481 $141,506 $93,923 $475,910 
Services transferred over time10,932 10,943 2,363 24,238 
$251,413 $152,449 $96,286 $500,148 
(Unaudited)
Three Months Ended March 31, 2022
AmericasEMEAAsia/PacificConsolidated
Total
Customer Industries
Metals$55,317 $36,793 $55,682 $147,792 
Metalworking and other156,774 110,026 59,579 326,379 
$212,091 $146,819 $115,261 $474,171 
Timing of Revenue Recognized
Product sales at a point in time$201,775 $136,803 $112,548 $451,126 
Services transferred over time10,316 10,016 2,713 23,045 
$212,091 $146,819 $115,261 $474,171 
12
Six Months Ended June 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
119,533
$
74,425
$
110,883
$
304,841
Metalworking and other
207,358
174,315
93,179
474,852
326,891
248,740
204,062
779,693
Global Specialty Businesses
119,631
41,345
25,890
186,866
$
446,522
$
290,085
$
229,952
$
966,559
Timing of Revenue Recognized
Product sales at a point in time
$
426,419
$
273,825
$
224,815
$
925,059
Services transferred over time
20,103
16,260
5,137
41,500
$
446,522
$
290,085
$
229,952
$
966,559
Six Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
98,592
$
69,908
$
97,950
$
266,450
Metalworking and other
175,952
173,342
90,315
439,609
274,544
243,250
188,265
706,059
Global Specialty Businesses
91,439
41,950
25,597
158,986
$
365,983
$
285,200
$
213,862
$
865,045
Timing of Revenue Recognized
Product sales at a point in time
$
348,821
$
269,000
$
207,663
$
825,484
Services transferred over time
17,162
16,200
6,199
39,561
$
365,983
$
285,200
$
213,862
$
865,045
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machinery
and equipment with remaining lease terms up to
10 years
.
9 years. Operating lease expense is recognized on a straight-line basis over the lease term. In addition,
the Company has certain land
use leases with remaining lease terms up to
93 years
.
92 years.
The Company has
0
material variable lease costs, sublease income or finance leases for three and six months ended
June 30,
2022 and 2021. The following table sets forth the components of the Company’s
lease cost for three and six months ended June 30,
2022 and 2021:10
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Operating lease expense
$
3,519
$
3,548
$
6,928
$
7,160
Short-term lease expense
205
283
424
534
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
13The Company has no material variable lease costs, sublease income, or finance leases for the three months ended March 31, 2023 and 2022. The components of the Company’s lease expense are as follows:
Three Months Ended
March 31,
20232022
Operating lease expense$3,936 $3,409 
Short-term lease expense211 219 
Supplemental cash flow information related to the Company’s
leases is as follows:
Three Months Ended
March 31,
20232022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$3,857 $3,365 
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new operating lease liabilities2,833 4,689 
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating leases
$
3,442
$
3,489
$
6,807
$
7,068
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new
operating lease liabilities
3,385
825
8,074
3,875
Supplemental balance sheet information related to the Company’s
leases is as follows:
March 31,
2023		December 31,
2022
Right of use lease assets$43,344 $43,766 
Other current liabilities12,652 12,024 
Long-term lease liabilities26,086 26,967 
Total operating lease liabilities$38,738 $38,991 
Weighted average remaining lease term (years)4.965.10
Weighted average discount rate4.50 %4.36 %
June 30,
December 31,
2022
2021
Right of use lease assets
$
36,317
$
36,635
Other current liabilities
10,452
9,976
Long-term lease liabilities
25,695
26,335
Total operating lease liabilities
$
36,147
$
36,311
Weighted average
remaining lease term (years)
5.6
5.6
Weighted average
discount rate
4.14%
4.22%
Maturities of operating lease liabilities were as follows:
March 31,
2023
For the remainder of 2023$10,749 
For the year ended December 31, 202411,784 
For the year ended December 31, 20257,740 
For the year ended December 31, 20265,614 
For the year ended December 31, 20272,616 
For the year ended December 31, 2028 and beyond5,496 
Total lease payments43,999 
Less: imputed interest(5,261)
Present value of lease liabilities$38,738 
June 30,
2022
For the remainder of 2022
$
6,201
For the year ended December 31, 2023
10,076
For the year ended December 31, 2024
7,815
For the year ended December 31, 2025
5,749
For the year ended December 31, 2026
4,449
For the year ended December 31, 2027 and beyond
6,678
Total lease payments
40,968
Less: imputed interest
(4,821)
Present value of lease liabilities
$
36,147
Note 7 – Restructuring and Related Activities
TheIn the third quarter of 2019, the Company’s management approved a global restructuring plan (the “QH Program”) as part of its initial plan to realize certain cost
synergies associated with the Combination inCombination. As of December 31, 2022, the third quarterCompany substantially completed all of 2019. The QH Program includes restructuring and associated
severance costs to reduce total headcount by approximately 400 people globally, as well as plans for the closure of certain
manufacturing and non-manufacturing facilities. The exact timing and total costs associated withinitiatives under the QH Program depend on a
numberwith only an immaterial amount of factors and are subjectremaining severance still to change; however, the Company currently expects reduction in headcount and site closures under
the QH Programbe paid, which is expected to continue to occur throughout 2022 and intobe completed during 2023. 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,
including customary and routine adjustments to initial
estimates for employee separation costs, as well as costs to close certain facilities
and are recorded in Restructuring and related
charges in the Company’s
Condensed Consolidated Statements of Income.
As described in Note 4 of Notes to Condensed
Consolidated Financial Statements, restructuring and related charges
are not included in the Company’s
calculation of reportable
segments’ measure of operating earnings and therefore these costs are not reviewed
by or recorded to reportable segments.
11
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
14
ActivityIn the fourth quarter of 2022, the Company’s management initiated a global cost and optimization program to improve its cost structure and drive a more profitable and productive organization. As of March 31, 2023, the program included restructuring and associated severance costs to reduce headcount by approximately 75 positions globally. These headcount reductions began in the Company’s accrualfourth quarter of 2022 and are expected to continue throughout 2023. The exact timing to complete all actions and final costs associated will depend on a number of factors that are subject to change.
Employee separation benefits vary depending on local regulations within certain foreign countries and include severance and other benefits. Restructuring costs include severance costs to reduce headcount, including customary and routine adjustments to initial estimates for restructuringemployee separation costs, as well as costs to close certain facilities under the QH Program for the six months ended June 30, 2022
is as follows:
QH Program
Accrued restructuring as of December 31, 2021
$
4,087
Program. These costs are recorded in Restructuring and related charges in the Company’s Consolidated Statements of Operations. As described in Note 4 of Notes to Consolidated Financial Statements, Restructuring and related charges are not included in the Company’s calculation of reportable segments’ measure of operating earnings and therefore these costs are not reviewed by or recorded to reportable segments.
819Changes in the Company’s accruals for its restructuring programs are as follows:
Cash payments
Restructuring Programs
Accrued restructuring as of December 31, 2022$5,483
Restructuring and related charges, net3,972 
Cash payments(2,747)
Currency translation adjustments101 
Accrued restructuring as of March 31, 2023$6,809
(797)
Currency translation adjustments
(297)
Accrued restructuring as of June 30, 2022
$
3,812
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense
in its Condensed Consolidated Statements of IncomeOperations:
for the three and six months ended June 30, 2022 and 2021:
Three Months Ended
March 31,
20232022
Stock options$431$267
Non-vested stock awards and restricted stock units2,1711,548
Director stock ownership plan1024
Performance stock units915623
Total share-based compensation expense$3,527$2,462
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Stock options
$
469
$
332
$
736
$
640
Non-vested stock awards and restricted stock units
1,667
1,290
3,215
2,686
Non-elective and elective 401(k) matching contribution in stock
0
0
0
1,553
Director stock ownership plan
20
216
44
419
Performance stock units
815
517
1,438
836
Total share-based
compensation expense
$
2,971
$
2,355
$
5,433
$
6,134
Share-based compensation expense is recorded in SG&A, except for $
0.1
million and $
0.2
less than $0.1 million for the three and six months
ended June 30, 2022, respectively,
and $
0.2
million and $
0.5
million for the three and six months ended June 30, 2021, respectively,
March 31, 2022, recorded within Combination, integration and other acquisition-related
expenses.
Stock Options
During the first six months of 2022, the Company granted stock options under
its long-term incentive plan (“LTIP”)
that are
subject only to time vesting over a
three
year period.
For the purposes of determining the fair value of stock option awards, the
Company used a Black-Scholes option pricing model and the assumptions set forth
in the table below:
March 2022
Grant
Number of options granted
27,077
Dividend yield
0.80
%
Expected volatility
38.60
%
Risk-free interest rate
2.07
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight-line basis over the
vesting period.
As of June 30, 2022,March 31, 2023, unrecognized
compensation expense related to allunvested stock options granted
was $
2.4
million, to be recognized over a weighted average remaining
period of
1.6
years.
Restricted Stock Awards
and Restricted Stock Units
During the six months ended June 30, 2022, the Company granted
25,743
non-vested restricted shares and
4,490
non-vested
restricted stock units under its LTIP,
which are subject to time-based vesting, generally over a
three year
period.
The fair value of
these grants is based on the trading price of the Company’s
common stock on the date of grant.
The Company adjusts the grant date
fair value of these awards for expected forfeitures based on historical experience.
As of June 30, 2022, unrecognized compensation
expense related to the non-vested restricted shares was $
6.2
$0.9 million, to be recognized over a weighted average remaining period
of 1.3 years.
1.8Restricted Stock Awards and Restricted Stock Units
During the three months ended March 31, 2023, the Company granted 29,862 non-vested restricted shares and 6,675 non-vested restricted stock units under its long-term incentive plan (“LTIP”), which are subject to time-based vesting, generally over one to three years. The fair value of these grants is based on the last sale price of the Company’s common stock on the date of grant. As of March 31, 2023, unrecognized compensation expense related to the non-vested restricted shares was $10.6 million, to be recognized over a weighted average remaining period of 2.6 years, and unrecognized compensation expense related to non-vested
restricted stock units was $
1.2
$2.5 million, to be recognized over a
weighted average remaining period of
2.1
1.8 years.
12
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
Performance Stock Units
TheAs a component of its LTIP, the Company grants performance-dependentperformance-based stock unit awards (“PSUs”) as a component
of its LTIP,
, which will be settled in a
certain number of shares subject to market-based or performance-based and time-based vesting conditions.
The number of fully vested shares that may
ultimately be issued as settlement for each award may range from
0
% 0% up to
200
% 200% of the target award, subject to the achievement of
the Company’s market-based total shareholder
return (“TSR”) metric relative to the performance of the Company’s
peer group, the S&P Midcap 400
Materials group.
group, and separately the achievement of a performance-based return on invested capital (“ROIC”) measure. The service period required for the PSUs is generally three years and the TSR measurement
period forof the PSUsmarket-based and performance objectives is generally
from January 1 of the year of grant through December 31 of the year prior
to issuance of the shares upon settlement.shares.
Compensation expense for PSUs is measured based on theirthe grant date fair value
and is recognized on a straight-line vesting method basis over
the three yearapplicable vesting period.
The fair value of PSUs granted with a ROIC condition is based on the trading price of the Company’s common stock on the date of grant. PSUs granted with a relative TSR condition are valued using a Monte Carlo simulation on the date of grant. The grant-date fair value of the PSUs was estimatedvalued using a Monte Carlo
simulation, on the grant date
and usingwhich included the following assumptions set forth in the table below:
2023
Grants
Number of PSUs granted15,707
Risk-free interest rate3.85%
Dividend yield0.96%
Expected term (years)3.0
March 2022
Grant
Number of PSUs granted
16,820
Risk-free interest rate
2.11
%
Dividend yield
0.93
%
Expected term (years)
3.0
As of June 30, 2022, basedBased on the conditions of the PSUs and performance to date for
each award,of the outstanding PSU awards as of March 31, 2023, the Company estimates that it
will
0
t issue any47,203 fully vested shares as of the applicable settlement date of allfor such outstanding PSUs awards.
As of June 30, 2022,March 31, 2023, there
was approximately $
5.5
$9.9 million of total unrecognized compensation cost related to PSUs, which the Company
expects to recognize
over a weighted-average period of 2.6 years.
2.1
years.
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 through March 2021, the
Company matched both non-elective and elective 401(k) contributions
in fully vested shares of the Company’s common
stock rather
than cash.
There were
0
matching contributions in stock for the three and six months ended June 30, 2022.
For the six months ended
June 30, 2021, total contributions were $
1.5
million.
Note 9 – Pension and Other Postretirement
Benefits
The components of net periodic benefit (income) cost for the three and
six months ended June 30, 2022 and 2021 are as follows:
Three Months Ended March 31,
Pension BenefitsOther Postretirement Benefits
2023202220232022
Service cost$104$180$—$(8)
Interest cost2,4551,360199 
Expected return on plan assets(1,997)(2,084)——
Actuarial loss (gain) amortization101257(30)(24)
Prior service cost (income) amortization82(4)1
Net periodic benefit (income) cost$671 $(285)$(15)$(22)
Three
Months Ended June 30,
Six Months Ended June 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2022
2021
2022
2021
2022
2021
2022
2021
Service cost
$
174
$
316
$
8
$
2
$
354
$
632
$
0
$
3
Interest cost
1,317
1,094
2
10
2,677
2,184
11
21
Expected return on plan assets
(2,012)
(2,093)
0
0
(4,097)
(4,175)
0
0
Actuarial loss amortization
248
857
(23)
0
505
1,712
(47)
0
Prior service cost amortization
2
3
(9)
0
5
5
(8)
0
Net periodic benefit (income)
cost
$
(271)
$
177
$
(22)
$
12
$
(556)
$
358
$
(44)
$
24
Employer Contributions
As of June 30, 2022, $
1.7
March 31, 2023, $1.0 million and $
0.1
less than $0.1 million of contributions have been made to the Company’s
U.S. and foreign pension
plans and its other postretirement benefit plans, respectively.
Taking into consideration
current minimum cash contribution
requirements, the Company currently expects to make full year cash contributions
of approximately $
6.6
$5.3 million to its U.S. and
foreign pension plans and approximately $
0.2
$0.2 million to its other postretirement benefit plans in 20222023.
13
.
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
16
Note 10 – Other (Expense) Income, Netexpense, net
The components of other (expense) income,Other expense, net for the three and six months ended June
30, 2022 and 2021 are as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Income from third party license fees
$
249
$
373
$
653
$
712
Foreign exchange losses, net
(2,026)
(838)
(3,931)
(2,316)
(Loss) gain on disposals of property,
plant, equipment and other
assets, net
(38)
(54)
(15)
5,356
Three Months Ended
March 31,
20232022
Income from third party license fees$325$404
Foreign exchange losses, net(3,326)(1,905)
Non-income tax refunds and other related credits (expense)360(1,322)
Pension and postretirement benefit (costs) income, non-service components(552)479
Facility remediation recovery, net827—
Other non-operating income, net127138
Total other expense, net$(2,239)$(2,206)
Non-income tax refunds and other related credits (expense) credits
(417)
14,295
(1,739)
14,392
Pension and postretirement benefit income,
non-service components
475
129
954
253
Loss on extinguishment of debt
(6,763)
0
(6,763)
0
Other non-operating income, net
121
105
236
300
Total other (expense)
income, net
$
(8,399)
$
14,010
$
(10,605)
$
18,697
Non-income tax refunds and other related (expense) credits during
the three and six months ended June 30,March 31, 2022, includes
adjustments to a Combination-related indemnification assetsasset associated with the
settlement of certain income tax audits at certainone of the
Company’s Italian and German
affiliates for tax periods prior to August 1, 2019.
See Note 11 of Notes to Condensed Consolidated
Financial Statements.
DuringFacility remediation recovery, net, during the second quarterthree months ended March 31, 2023, reflects a gain recorded on the payments received from insurers related to previously incurred costs from the remediation and restoration of 2022, the Company recorded a loss on extinguishment
of debt of approximately
$
6.8
million which includes the write-off of certain previously unamortized
deferred financing costs as well as a portion of the third
party and creditor debt issuance costs incurred to execute an amendment
to the Company’s primary credit facility.
property damage. See Note 1418 of
Notes to the Condensed Consolidated Financial Statements.
Loss (gain) on disposals of property,
plant, equipment and other assets, net, during the six months ended June 30, 2021,
includes a
gain on the sale of certain held-for-sale real property assets related
to the Combination.
Note 11 – Income Taxes
and Uncertain Income Tax Positions
Positions
The Company’s effective
tax rates for the three and six months ended June 30,March 31, 2023 and 2022 were
8.1
% 27.7% and
10.9
% 13.1%, respectively,
compared to
32.2
% and
28.4
%respectively. The Company’s effective tax rate for the three and six months ended June 30, 2021, respectively.
The Company’sMarch 31, 2023 was impacted by various items including foreign tax inclusions, withholding taxes, foreign tax credits, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments. Comparatively, the prior year effective
tax rate for
the six months ended June 30, 2022 was largely drivenimpacted by
state tax benefits, changes in the valuation allowance for foreign tax credits
due to recentlylegislative guidance issued legislative guidance,
the impact ofand audit settlements reached with German and Italian tax authorities, a deferred
tax benefit associated with an intercompany asset transfer,
a reduction in reserves for uncertain tax positions relating to management
fees, withholding taxes for increased forecasted dividends and the effects
of lower pre-tax earnings and the mix of such earnings.
authorities. In
addition, the Company incurred higher tax expense during the three and six months ended
June 30, March 31, 2022 atrelated to one of itsthe Company’s subsidiaries as it
accrued taxesrecording earnings at a statutory tax rate of
25
% 25% while it awaitsthe recertification of aits concessionary
15
% 15% tax rate which was available to thepending receipt.
Company during all of 2021.
Comparatively,
the prior year effective tax rates were largely impacted
by the sale of a subsidiary which
included certain held-for-sale real property assets related to the Combination
,
changes in foreign tax credit valuation allowances, tax
law changes in a foreign jurisdiction and the income tax impacts of certain
non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
As of December 31, 2021, the Company had a deferred tax liability of $
8.4
million on certain undistributed foreign earnings,
which primarily represents the Company’s
estimate of non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S.
As of June 30, 2022 this deferred tax liability balance was $
7.4
million.
As of June 30, 2022, the Company’s
cumulative liability for gross unrecognized tax benefits was $
17.8
million, a decrease of approximately $
4.7
million from the
cumulative liability accrued as of December 31, 2021.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17
The Company continues to recognize interest and penalties associated with uncertain
tax positions as a component of taxes on
income before equity in net income of associated companies in its Condensed
Consolidated Statements of Income.
The Company
recognized a benefit for interest of less than $
0.1
million and $
0.3
million and an expense of less than of $
0.1
million and a benefit of
$
1.5
million for penalties in its Condensed Consolidated Statement of Income for
the three and six months ended June 30, 2022,
respectively, and recognized
an expense for interest of approximately $
0.2
million and $
0.2
million and a benefit of less than $
0.1
million and $
0.2
million for penalties in its Condensed Consolidated Statement of Income for
the three and six months ended June 30,
2021, respectively.
As of June 30, 2022, the Company had accrued $
2.6
million for cumulative interest and $
1.5
million for
cumulative penalties in its Condensed Consolidated Balance Sheets, compared
to $
3.1
million for cumulative interest and $
3.1
million
for cumulative penalties accrued at December 31, 2021.
During the six months ended June 30, 2022 and 2021, the Company recognized
decreases of $
3.5
million and $
0.8
million,
respectively,
in its cumulative liability for gross unrecognized tax benefits due to the settlement
of income tax audits with both the
Italian and German tax authorities, as well as the expiration of the applicable
statutes of limitations for certain tax years.
The Company estimates that during the year ending December 31, 202
2
it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
4.2
million due to the settlement of income tax audits and the expiration of the statute of
limitations with regard to certain tax positions.
This estimated reduction in the cumulative liability for unrecognized
tax benefits does
not consider any increase in liability for unrecognized tax benefits with regard
to existing tax positions or any increase in cumulative
liability for unrecognized tax benefits with regard to new tax positions for
the year ending December 31, 2022.
The Company and its subsidiaries are subject to U.S. Federal income tax,
as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain subject
to examination by major tax jurisdictions include Italy from
2007
, Brazil from
2011
,
Germany from
2015
, the Netherlands and Mexico from
2016
, Canada, China, Spain and the U.S. from
2017
, the United Kingdom
from
2018
, India from fiscal year beginning April 1, 2017 and ending March 31,
2018
, and various U.S. state tax jurisdictions from
2011
.
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 and obtained 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 had accepted.
Asfirst quarter of June 30, 2022, the Company settled the $2.6 million assessment due to the Italian tax authorities, while having already received $
1.6
$1.6 million in refunds from the
Netherlands and Spain.
In February 2022, As of March 31, 2023, the Company received a settlement notice from the Italian taxing
authorities confirming the
amount due of $
2.6
million, having granted the Company’s request
to utilize its remaining net operating losses to partially offset
the
liability.
As of June 30, 2022, the Company has paid the full settlement, amount, of which approximately
$
0.1
$0.2 million may be
refundable.
was refunded.
Houghton Italia, S.r.l iswas also involved
in a corporate income tax audit with the Italian tax authorities covering tax years
2014
through
2018
.
During the fourth quarter of 2021, the Company settled a portion of the Houghton Italia,
S.r.l. corporate income tax
audit with the Italian tax authorities for the tax years 2014 and 2015.
During the six months ended June 30, 2022, thethrough 2018. The Company
settled tax years 2016 through 2018 for a total of $
2.1
million.
In total, the Company has now settled all years 2014 through 2018 for
$
3.7
million.
Accordingly, the Company has
$3.7 million and, accordingly, released all reserves relating to this audit for the settled tax years.
As a result of the
settlement and reserve release the Company recognized a net benefit
to the tax provision of $
2.0
millionyears during the first six monthsquarter of
2022.
The settlement is to be paid via installments through 2026 and, through March 31, 2023, the Company paid $1.1 million of such installments. The Company has an indemnification receivable of $
3.6
$3.9 million in connection with its claim against the former owners of
Houghton for any pre-Combination tax liabilities arising from this matter.matter, as well as other audit settlements and tax matters.
As previously reported, Houghton Deutschland GmbH is also under
auditIn the first quarter of 2023, the Company was notified by the GermanSpanish tax authorities of audits to commence for theseveral of its legal entities operating in Spain and spanning tax years
2015
2018 through
2017
.
In the second quarter of 2022 the 2021. The Company settled the corporate tax audit for the
tax years 2015-2017arranged introductory meetings with the German
taxtaxing authorities for a total of $
0.1
million.
and has begun to provide documentation in response to their inquiries. The Company has an indemnification receivable of $
0.3not established any reserves for this matter at this time.
million in connection with its claim
against the former owners of Houghton for any pre-Combination tax
liabilities arising from this matter.
14
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations for
the three and six months ended June 30, 2022 and 2021:
calculations:
Three Months Ended
Three Months Ended
March 31,
20232022
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation$29,534 $19,816 
Less: income allocated to participating securities(145)(78)
Net income available to common shareholders$29,389 $19,738 
Basic weighted average common shares outstanding17,866,67017,826,061
Basic earnings per common share$1.64 $1.11 
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation$29,534 $19,816 
Less: income allocated to participating securities(145)(78)
Net income available to common shareholders$29,389 $19,738 
Basic weighted average common shares outstanding17,866,67017,826,061
Effect of dilutive securities32,07625,798
Diluted weighted average common shares outstanding17,898,74617,851,859
Diluted earnings per common share$1.64 $1.11 
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Less: income allocated to participating securities
(58)
(134)
(136)
(287)
Net income available to common shareholders
$
14,285
$
33,436
$
34,023
$
71,898
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,830,218
17,793,915
Basic earnings per common share
$
0.80
$
1.88
$
1.91
$
4.04
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Less: income allocated to participating securities
(58)
(134)
(136)
(287)
Net income available to common shareholders
$
14,285
$
33,436
$
34,023
$
71,898
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,830,218
17,793,915
Effect of dilutive securities
7,048
47,155
17,186
52,095
Diluted weighted average common shares outstanding
17,841,377
17,849,521
17,847,404
17,846,010
Diluted earnings per common share
$
0.80
$
1.88
$
1.91
$
4.03
Certain stock options, restricted stock units, and PSUs are not included
in the diluted earnings per share calculation when the
effect would have been anti-dilutive.
The calculated amount of anti-diluted shares not included were
33,039
and
24,731
for the three
15,327 and six months ended June 30, 2022, respectively,
and
6,793
and
2,952
12,260 for the three and six months ended June 30, 2021,March 31, 2023 and 2022, respectively.
Note 13 – Goodwill and Other Intangible Assets
The Company completes its annual goodwill and indefinite-lived intangible asset impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment. The Company continually evaluates financial performance, economic conditions and other recent developments, including rising interest rates and the cost of capital among other factors, in assessing if a triggering event indicates that the carrying values of goodwill, indefinite-lived, or long-lived assets are impaired. The Company concluded that during the first quarter the ongoing financial, economic or geopolitical conditions did not represent a triggering event.
In connection with the Company’s reorganization and the associated change in reportable segments and reporting units during the first quarter of 2023, the Company performed the required impairment assessments directly before and immediately after the change in reporting units and concluded that it was not more likely than not that the fair values of any of the Company’s previous or new reporting units were less than its carrying amount.
Changes in the carrying amount of goodwill for the six months ended June 30, 2022
were as follows:follows. Prior period information has been recast to reflect the Company’s current period reportable segments. See Note 1 of Notes to Condensed Consolidated Financial Statements.
AmericasEMEAAsia/PacificGlobal
Specialty
Businesses		Total
Balance as of December 31, 2022$215,899$34,567$150,375$114,167$515,008
Reallocation of reporting units63,697 31,711 18,759 (114,167)—
Balance as of January 1, 2023279,596 66,278 169,134 — 515,008 
Goodwill additions (reductions)— — — — —
Currency translation adjustments1,773 (116)541 — 2,198
Balance as of March 31, 2023$281,369$66,162$169,675$—$517,206
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2021
$
214,023
$
135,520
$
162,458
$
119,193
$
631,194
Goodwill additions
1,752
0
0
32
1,784
Currency translation adjustments
237
(9,969)
(8,185)
(4,894)
(22,811)
Balance as of June 30, 2022
$
216,012
$
125,551
$
154,273
$
114,331
$
610,16715
Gross carrying amounts and accumulated amortization for definite-lived
intangible assets asTable of June 30, 2022 and December 31,
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19Gross carrying amounts and accumulated amortization for definite-lived intangible assets were as follows:
Gross Carrying
Amount		Accumulated
Amortization		Net Book Value
March 31, 2023December 31, 2022March 31, 2023December 31, 2022March 31, 2023December 31, 2022
Customer lists and rights to sell$839,280$831,600$205,800$191,286$633,480$640,314
Trademarks, formulations and product technology160,149158,56448,85646,281111,293112,283
Other6,1687,5765,8486,3903201,186
Total definite-lived intangible assets$1,005,597$997,740$260,504$243,957$745,093$753,783
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded amortization expense as follows:
Three Months Ended
March 31,
20232022
Amortization expense$14,513 $14,553 
Estimated annual aggregate amortization expense for the current year
and subsequent five years and beyond is as follows:
For the remainder of 2023$43,829
For the year ended December 31, 202457,734
For the year ended December 31, 202556,953
For the year ended December 31, 202656,708
For the year ended December 31, 202756,410
For the year endedAs of March 31, 2023 and December 31, 2022,
$
57,515
For the year ended December 31, 2023
57,349
For the year ended December 31, 2024
56,760
For the year ended December 31, 2025
55,970
For the year ended December 31, 2026
55,752
For the year ended December 31, 2027 and beyond
522,946
The Company had four indefinite-lived intangible assets totaling
$
186.1
million as of June 30, 2022, including $
185.0
million of
indefinite-lived intangible assets for trademarks and tradename associated
with the Combination.
Comparatively, the Company hadtradenames totaling $191.3 million and $189.1 million, respectively.
four indefinite-lived intangible assets for trademarks and tradename
totaling $
196.9
million as of December 31, 2021.
The Company completes its annual goodwill and indefinite-lived intangible
asset impairment test during the fourth quarter of
each year, or more frequently if triggering
events indicate a possible impairment.
The Company continually evaluates financial
performance, economic conditions and other relevant developments
in assessing if a triggering event indicates that it is more likely
than not that the carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived assets is not recoverable.
The
Company continues to monitor various financial, economic and
geopolitical conditions impacting the Company,
including the Russia-
Ukraine war and the Company’s decision
to cease operations in Russia, raw material, supply chain, and logistics cost escalation,
and
rising interest rates and cost of capital among other factors.
The Company concluded that these and other factors which have and
continue to impact the Company did not represent a triggering event as of June 30, 2022.
The Company continues to take action to
offset these headwinds including, but not limited to, implementing
selling price increases aimed at offsetting raw material costs and
ongoing inflationary pressures.
However, if the Company is unable to successfully
implement these actions and future or projected
financial performance declines, then it is possible any of these financial, economic
or geopolitical conditions could represent a
triggering event in the future and could lead to a potential impairment of the
Company’s reporting unit goodwill
or other indefinite-
lived or long-lived assets.
Note 14 – Debt
Debt as
The following table sets forth the components of June 30, 2022 and December 31, 2021 includes the following:Company’s debt:
As of March 31, 2023As of December 31, 2022
Interest
Rate		Outstanding
Balance		Interest
Rate		Outstanding
Balance
Credit Facilities:
Revolver6.0%$185,897 5.2%$195,673 
U.S. Term Loan6.3%592,500 5.7%596,250 
Euro Term Loan4.1%153,072 3.1%151,572 
Industrial development bonds5.3%10,000 5.3%10,000 
Bank lines of credit and other debt obligationsVarious1,317 Various1,303 
Total debt$942,786 $954,798 
Less: debt issuance costs(1,881)(1,992)
Less: short-term and current portion of long-term debts(19,350)(19,245)
Total long-term debt$921,555 $933,561 
16
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
21Credit facilities
assets attributableDuring June 2022, the Company, and its wholly owned subsidiary, Quaker Houghton B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing line lender and letter of credit issuer, Bank of America Europe Designated Active Company, as Euro Swing Line Lender, certain guarantors and other lenders entered into an amendment to its primary credit facility. The amended credit facility (the “Credit Facility”) established (A) a $150.0 million Euro equivalent senior secured term loan (the “Euro Term Loan”), (B) a $600.0 million senior secured term loan (the “U.S. Term Loan”), and (C) a $500.0 million senior secured revolving credit facility (the “Revolver”), each maturing in June 2027. The Company has the Original Credit Facility.
Priorright to executingincrease the Amendedamount of the Credit Facility by an aggregate amount not to exceed the greater of $300.0 million or 100% of Consolidated EBITDA, subject to certain conditions including the agreement to provide financing by any lender providing such increase.
As of March 31, 2023, the Company had $
6.6
millionwas in compliance with all of
debt issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $covenants. See Note 20 of Notes to Consolidated Financial Statements in the Company’s 2022 Form 10-K.
3.5The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three months ended March 31, 2023 was approximately 5.8%. As of March 31, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 5.9%. As part of the Credit Facility, in addition to paying interest on outstanding principal, the Company is also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on the Company’s consolidated net leverage ratio. The Company had unused capacity under the Revolver of approximately $311 million, which is net of bank letters of credit of approximately $3 million, as of March 31, 2023.
In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of debt
issuance costs recorded within Other assets attributablethree year interest rate swaps to convert a portion of the Original
Company’s variable rate borrowings to an average fixed rate of 3.64% plus an applicable margin as provided in the Credit Facility.Facility based on the Company’s consolidated net leverage ratio. As of March 31, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.2%. See Note 17 of Notes to Condensed Consolidated Financial Statements.
In connection with executing the Amendedoriginal credit facility in 2019 and the amended Credit Facility
the Company recorded a loss on extinguishment of debt of
approximately $
6.8
million which includes the write-off of certain previously
unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurred
to execute the Amended Credit Facility.
Also in connection with
executing the Amended Credit Facility,
during the second quarter of 2022, the Company capitalized $
2.2
an aggregate of $2.2 million of certain third-party
and creditor debt issuance costs.
Approximately $
0.7
$0.7 million of the capitalized costs were attributed to the Amended Euro Term
Loan
and Amended U.S. Term
Loan.
These costs were recorded as a direct reduction of Long-term debt on the
Condensed Consolidated
Balance Sheet.
Approximately $
1.5
$1.5 million of the capitalized costs were attributed to the Amended Revolver and
recorded within
Other assets on the Condensed Consolidated Balance Sheet.
These capitalized costs as well as the previously capitalized costs that
were not written off will collectively be amortized into Interest expense
over the five-yearfive year term of the Amended Credit Facility.
As of
June 30, 2022, March 31, 2023, the Company had $
2.2
$1.9 million of debt issuance costs recorded as a reduction of Long-term
debt on the Condensed
Consolidated Balance Sheet and $
4.8
$4.1 million of debt issuance costs recorded within Other assets on the Condensed Consolidated
Balance Sheet.
The Original Credit Facility required the Company to fix its variable interest
rates on at least
20
% of its total Original Term
Loans.
In order to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with
the Original Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three-year interest rate
swaps at a base rate of
1.64
% plus an applicable margin as provided in the Original Credit Facility,
based on the Company’s
consolidated net leverage ratio.
At the time the Company entered into the swaps, and Comparatively, as of June 30, 2022,
the aggregate interest rate
on the swaps, including the fixed base rate plus an applicable margin,
was
3.1
%.
The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.
As of June 30,December 31, 2022, the Company has not amended its
current interest rate swaps.
See Note 17had $2.0 million of Notes todebt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Financial Statements.
Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.
Industrial development bonds
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had fixed rate,
industrial development authority bonds totaling $
10.0
$10.0 million in principal amount due in
2028
.
2028. These bonds have similar covenants to the Amended Credit Facility noted above.
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discount
ingdiscounting facilities in certain foreign subsidiaries, which are not
collateralized.
The Company’s other debt obligations
primarily consist of certain domestic and foreign low interest rate or interest-
freeinterest-free municipality-related loans, local credit facilities of certain foreign subsidiaries,
and capital lease obligations.
Total unused
capacity under these arrangements as of June 30, 2022March 31, 2023 was approximately
$
28
$35 million.
In addition to the bank letters of credit described in the “Credit facilities” subsection above, the Company’s other off-balance
sheet arrangements include certain financial and other guarantees. The Company’s total bank letters of credit and guarantees
outstanding as of June 30, 2022March 31, 2023 were approximately $5 million.
The Company incurred the following debt related expenses included
within Interest expense, net, in the Condensed Consolidated
Statements of Income:17
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Interest expense
$
6,134
$
4,813
$
10,880
$
9,463
Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
22Interest expense, net
On June 30, 2022, annual maturitiesThe Company incurred the following debt related expenses included within Interest expense, net, in the Condensed Consolidated Statements of Operations:
Three Months Ended
March 31,
20232022
Interest expense$13,876 $4,746 
Amortization of debt issuance costs353 1,187 
Total$14,229 $5,933 
Based on the Amendedvariable interest rates associated with the Credit Facility, in the next
five fiscal years (excluding the reduction to
long-term debt attributed to capitalizedas of March 31, 2023 and unamortized debt issuance costs)
are as follows:
`
June 30,
2022
For the remainder of 2022
$
4,681
For the year ended December 31, 20232022, the amounts at which the Company’s total debt were recorded are not materially different from their fair market value.
18,723
For the year ended December 31, 2024
23,404
For the year ended December 31, 2025
37,446
For the year ended December 31, 2026
37,446
For the year ended December 31, 2027
855,875
Total payments
$
977,575
Note 15 – Accumulated Other Comprehensive Income
The following tables show the reclassifications from and resulting balances
of accumulated other comprehensive income
(“AOCI”):
Currency
Translation
Adjustments		Defined
Benefit
Pension
Plans		Unrealized
(Loss) Gain in
Available-for-
Sale Securities		Derivative
Instruments		Total
Balance as of December 31, 2022$(132,161)$(4,595)$(1,484)$— $(138,240)
Other comprehensive income (loss) before reclassifications14,465 (243)462 506 15,190 
Amounts reclassified from AOCI— 76 (40)— 36 
Related tax amounts— 41 (88)(116)(163)
Balance as of March 31, 2023$(117,696)$(4,721)$(1,150)$390 $(123,177)
Balance as of December 31, 2021$(49,843)$(13,172)$397 $(1,372)$(63,990)
Other comprehensive (loss) income before reclassifications(6,867)432 (1,277)1,429 (6,283)
Amounts reclassified from AOCI— 229 11 — 240 
Related tax amounts— (165)266 (329)(228)
Balance as of March 31, 2022$(56,710)$(12,676)$(603)$(272)$(70,261)
All reclassifications related to unrealized (loss) gain in available-for-sale securities relate to the Company’s equity interest in a captive insurance company and are recorded in equity in net income of associated companies. The amounts reported in other comprehensive income for the three and six months ended June 30, 2022 and 2021:noncontrolling interest are related to currency translation adjustments.
18
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at March 31, 2022
$
(56,710)
$
(12,676)
$
(603)
$
(272)
$
(70,261)
Other comprehensive (loss) income before
reclassifications
(76,400)
1,650
(1,043)
747
(75,046)
Amounts reclassified from AOCI
0
218
325
0
543
Related tax amounts
0
(461)
151
(172)
(482)
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Balance at March 31, 2021
$
(28,334)
$
(22,175)
$
317
$
(3,036)
$
(53,228)
Other comprehensive income (loss) before
reclassifications
16,157
(260)
341
586
16,824
Amounts reclassified from AOCI
0
852
2
0
854
Related tax amounts
0
(195)
(64)
(134)
(393)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
23
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2021
$
(49,843)
$
(13,172)
$
397
$
(1,372)
$
(63,990)
Other comprehensive (loss) income before
reclassifications
(83,267)
2,082
(2,320)
2,175
(81,330)
Amounts reclassified from AOCI
0
447
336
0
783
Related tax amounts
0
(626)
417
(500)
(709)
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income before
reclassifications
(9,302)
521
(404)
1,316
(7,869)
Amounts reclassified from AOCI
0
1,714
(3,083)
0
(1,369)
Related tax amounts
0
(546)
741
(302)
(107)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
All reclassifications related to unrealized gain (loss) in available-for-sale securities relate
to the Company’s equity
interest in a
captive insurance company and are recorded in equity in net income
of associated companies.
The amounts reported in other
comprehensive income for noncontrolling interest are related to currency
translation adjustments.
Note 16 – Fair Value
Measurements
The Company has valued its company-owned life insurance policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at June 30, 2022
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,112
$
0
$
2,112
$
0
Total
$
2,112
$
0
$
2,112
$
0
Fair Value
Measurements at December 31, 2021
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,533
$
0
$
2,533
$
0
Total
$
2,533
$
0
$
2,533
$
0
The fair values of Company-owned life insurance assets are based on quotes
for like instruments with similar credit ratings and terms. These assets are subject to fair value measurement as follows:
terms.
The Company did not hold any Level 3 investments as of June 30, 2022 or
December 31, 2021, respectively,
so related
Total
Fair Value		Fair Value Measurements as of March 31, 2023
Using Fair Value Hierarchy
AssetsLevel 1Level 2Level 3
Company-owned life insurance$2,204 $— $2,204 $— 
Total$2,204 $— $2,204 $— 
disclosures have not been included.
Total
Fair Value		Fair Value Measurements as of December 31, 2022
Using Fair Value Hierarchy
AssetsLevel 1Level 2Level 3
Company-owned life insurance$2,114 $— $2,114 $— 
Total$2,114 $— $2,114 $— 
Note 17 – Hedging Activities
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes.
Foreign Exchange Forward Contracts
A significant portion of the Company’s revenues and earnings are generated by its foreign operations. These foreign operations also represent a significant portion of the Company’s assets and liabilities. Generally, all of these foreign operations use the local currency as their functional currency and many have some operations in currencies other than their functional currency, which creates foreign exchange risk. The Company uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on certain assets and/or liabilities denominated in certain foreign currencies. These forward contracts are marked-to-market at each reporting date. Changes in the fair value of the underlying instrument and settlements are recognized in earnings. The fair value of the forward contract is determined from sources independent of the Company, including the financial institutions which are party to the derivative instruments.
During the three months ended March 31, 2023, the Company entered into and settled forward contracts with an aggregate notional amount totaling $16.0 million, resulting in cash proceeds of $0.3 million. The following table displays the notional amounts of the net foreign exchange hedge positions outstanding:
CurrencyMarch 31,
2023
Mexican Peso$18,000 
Interest Rate Swaps
In order to satisfy certain requirements of the Original Credit Facility as well as to manage
the Company’s exposure to variable
interest rate risk associated with the Original Credit Facility,
in November 2019,the first quarter of 2023, the Company entered into $
170.0
$300.0 million notional
amounts of
three year
interest rate swaps.
swaps to convert a portion of the Company’s variable rate borrowings into a fixed rate obligation. See Note 14 of Notes to Condensed Consolidated Financial Statements.
19
Table of Contents
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited; Dollars in thousands, except per share amounts, unless otherwise stated)
These interest rate
swaps are designated as cash flow hedges and, as such, the contracts are marked-to-market
at each reporting date and any unrealized
gains or losses are included in AOCI to the extent effective
and reclassified to interest expense in the period during which the
transaction affects earnings or it becomes probable
that the forecasted transaction will not occur.
In June 2022, the Company amended the Original Credit Facility.
See Note 14 of Notes to the Condensed Consolidated Financial
Statements.
The Amended Credit Facility does not require the Company to fix variable
interest rates on any portion of its borrowings.
The balance sheet classification and fair values of the Company’s
derivative instruments, which are Level 2 measurements, are as
follows:
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
24
Fair Value
Condensed Consolidated
June 30,
December 31,
Balance Sheet Location
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
Prepaid expenses and other current assets
$
394
$
0
Other accrued liabilities
0
1,782
$
394
$
1,782
The following table presents the net unrealized (gain) loss deferred to AOCI:
June 30,
December 31,
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
(303)
$
1,372
$
(303)
$
1,372
The following table presents the net loss reclassified from AOCI to earnings:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Amount and location of expense reclassified
from AOCI into expense (effective portion)
Interest expense, net
$
(378)
$
(659)
$
(1,015)
$
(1,302)
Interest rate swaps are entered into with a limited number of counterparties,
each of which allows for net settlement of all
contracts through a single payment in a single currency in the event of a default
on or termination of any one contract.
As such, in
accordance with the Company’s accounting
policy, these derivative instruments
are recorded on a net basis within the Condensed
Consolidated Balance Sheets.
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
Balance Sheet Location		March 31,
2023		December 31,
2022
Derivatives designated as cash flow hedges:
Interest rate swapsOther non-current Assets$506 $— 
The following table presents the net unrealized (gain) loss deferred to AOCI:
March 31,
2023		December 31,
2022
Derivatives designated as cash flow hedges:
Interest rate swapsAOCI$390 $— 
The following table presents the net gain (loss) reclassified from AOCI to earnings:
Location and Amount of Gain (Loss) Recognized in
Statements of Operations
Three Months Ended
March 31,
20232022
Interest rate swapsInterest expense, net$— $(637)
Foreign exchange forward contractsOther expense, net293 — 
$293 $(637)
Note 18 – Commitments and Contingencies
The Company previously disclosed in its 2021 Form 10-K that AC Products, Inc.
(“ACP”), a wholly owned subsidiary,
in 2007,
agreed to operate two groundwater treatment systems, so as to hydraulically
contain groundwater contamination emanating from
ACP’s site until such time as the concentrations
of contaminants are below the current Federal maximum contaminant
level for four
consecutive quarterly sampling events. In 2014, ACP ceased operation
at one of its two groundwater treatment systems, as it had met
the above condition for closure. As of June 30, 2022, ACP continues to operate
the second groundwater treatment system, while the
Company discusses with the relevant authorities whether the second groundwater
treatment system meets the conditions for closure.
In addition, the Santa Ana Regional Water
Quality Control Board requested that ACP conduct additional indoor
and outdoor soil
vapor testing on and near the ACP site to confirm that ACP continues to
meet the applicable local soil vapor standards.
As of June 30,
2022, ACP performed such testing and is awaiting the review of the results from
the Santa Ana Regional Water
Quality Control
Board.
As of June 30, 2022, the Company believes that the range of potential-known
liabilities associated with the balance of the ACP
water remediation program is approximately $
0.1
million to $
1.0
million.
The low and high ends of the range are based on the length
of operation of the treatment system as determined by groundwater modeling.
Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring and
program management.
The Company previously disclosed in its 20212022 Form 10-K that an inactive
subsidiarytwo of the Company’s locations suffered property damages as a result of flooding and electrical fire, respectively. The Company that was acquired in 1978
sold certain products containing asbestos, primarily on an installed basis,maintains property and
is among the defendants in numerous lawsuits alleging
injury due to exposure to asbestos.
flood insurance for all of its locations globally. During the three and six months ended June 30, 2022,March 31, 2023, there have been no
significant changes to
the facts or circumstances of this previously disclosed matter,
aside other than the ongoing work with the Company’s insurance adjuster and insurance carrier regarding the insurance claims submitted. Through March 31, 2023, the Company has received cumulative payments from on-going claims and routine paymentsits insurers of $5.7 million associated with thisthese events. During the three months ended March 31, 2023, the Company recognized a gain on insurance recoveries of $0.8 million. See Note 10 of Notes to the Condensed Consolidated Financial Statements.
litigation.
Based on a continued analysis of the existing and anticipated future claims against this subsidiary,
it is currently projected
that the subsidiary’s total liability over
the next 50 years for these claims is approximately $
0.3
million (excluding costs of defense).
The CompanyAs previously disclosed in its 20212022 Form 10-K, that itthe Company is party to certain environmental
matters relatedand other litigation. See Note 26 of Notes to certain
domestic and foreign properties.
These environmental matters primarily requireConsolidated Financial Statements in the Company
to perform long-term monitoring and
maintenance at each of the applicable sites.
Company’s 2022 Form 10-K. During the three and six months ended June 30, 2022,March 31, 2023, there have been no significant
changes to the facts or circumstances of theseany of the previously disclosed matters,
aside from on-going monitoring and maintenance
activities and routine payments associated with each ofmatters. In addition, during the sites.
The Company continually evaluates its obligations related to such
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
25
matters, and based on historical costs incurred and projected costs to be incurred
over the next approximately 30 years, has estimated
the range of costs for all of thesethree months ended March 31, 2023, there are no new environmental matters onor litigation that the Company believes will have a discounted
basis, to be between approximately $
5.0
million and $
6.0
million as of June 30, 2022, for which $
5.5
million was accrued within other accrued liabilities and other non-current
liabilitiesmaterial adverse effect on the
Company’s Condensed Consolidated
Balance Sheet asresults of June 30, 2022.
Comparatively, as of December
31, 2021, the Company had
$
5.6
million accrued for with respect to these matters.
operations, cash flows or financial condition. Although there can be no assurance regarding the outcome of other
unrelatedany of the ongoing environmental matters or litigation the Company is party to, the Company believes that it
has made adequate accruals for costs and liabilities associated with other environmental problems
matters or provisions for ongoing litigation for which it is aware, andaware. The Company has accrued $
0.4
approximately $6 million
as of both June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively,
to provide for such anticipated future environmental assessments and
remediation costs.
The Company previously disclosed in its 2021 Form 10-K that during the first six months
of 2021, one of the Company’s
Brazilian subsidiaries received a notice that it had prevailed on an existing
legal claim in regard to certain non-income (indirect) taxes
that had been previously charged and paid.
The matter specifically related to companies’ rights to exclude the state tax on goods
circulation (a valued-added-tax or VAT
equivalent, known in Brazil as “ICMS”) from the calculation of certain additional indirect
taxes (specifically the program of social integration (“PIS”) and contribution
for the financing of social security (“COFINS”)) levied
by the Brazilian States on the sale of goods.
In May 2021, the Brazilian Supreme Court concluded that ICMS should
not be included
in the tax base of PIS and COFINS, and confirmed the methodology for calculating the
PIS and COFINS tax credit claims to which
taxpayers are entitled.
The Company’s Brazilian entities had previously
filed legal or administrative disputes on this matter and are
entitled to receive tax credits and interest dating back five years preceding the
date of their legal claims.
As a result of these court
rulings in the first six months of 2021, the Company recognized non-income
tax credits of
67.0ongoing matters.
million BRL or approximately $
13.3
million, which includes approximately $
8.4
million for the PIS and COFINS tax credits as well as interest on these tax credits of $
4.9
million.
The tax credits to which the Company’s
Brazilian subsidiaries are entitled are claimable once registered with the Brazilian
tax authorities which the Company subsequently completed.
These tax credits can be used to offset future Brazilian federal taxes
and
the Company currently anticipates using the full amount of credits during the
five year period of time permitted.
In connection with obtaining regulatory approvals for the Combination,
certain steel and aluminum related product lines of
Houghton were divested in August 2019. The Company previously disclosed
in its 2021 Form 10-K that in July 2021, the entity that
acquired these divested product lines submitted an indemnification claim
for certain alleged breaches of representation made by
Houghton in the agreement pursuant to which such assets had been divested.
The Company responded to the subject matters of the
indemnification claim and during the first quarter of 2022, the
matter was resolved consistent with the Company’s
expectations and
position that there were no amounts owed by the Company.
The Company previously disclosed in its 2021 Form 10-K that two of the Company’s
locations suffered property damages as a
result of flooding and fire, respectively.
The Company maintains property insurance for all of its facilities globally.
During the six
months ended June 30, 2022, there have been no significant changes to
the facts or circumstances of these previously disclosed
matters, aside from the on-going restoration of both sites.
The Company, its insurance
adjuster and insurance carrier are actively
managing the remediation and restoration activities associated with these
events and at this time the Company has concluded, based on
all available information and discussions with its insurance adjuster and
insurance carrier, that the losses were covered under
the
Company’s property insurance
coverage, net of an aggregate deductible of $
2.0
million.
The Company has received payments from
its insurers of $
2.1
million and has recorded an insurance receivable associated with these events (and
a gain on insurance recoveries
for losses incurred) of $
0.9
million as of June 30, 2022.
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.
20
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
26
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton,”
the “Company,”
“we” “we” and “our” refer to Quaker Chemical Corporation
(doing (doing business as Quaker Houghton), its subsidiaries, and associated companies,
unless the context otherwise requires.
The term the
“Combination” “Combination” refers to the legacy Quaker combination with Houghton
International, Inc. (“Houghton”) on August 1, 2019.
Executive Summary
Quaker Houghton is the global leader in industrial process fluids.
With a presence around the world, including operations
in over
25 countries, our customers include thousands of the world’s
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, container,
mining, and metalworking companies.
Our high-performing, innovative and sustainable solutions are backed
by
best-in-class technology,
deep process knowledge, and customized services.
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the U.S.
Overall, the Company’s second
quarter of 2022 performance reflectedDespite continued progress navigating
through a myriad of
financial, economic and geopolitical headwinds, including persistent and
significant raw material cost escalation and overall
inflationary pressures, supply chain and logistics challenges,
production and distribution disruptions due to COVID-19 related actions
in China, the direct and indirect impactsCompany delivered a strong first quarter of the ongoing war in Ukraine
and foreign currency volatility.
Despite these challenges, net
2023 performance. Net sales in the secondfirst quarter of 20222023 were a record $492.4$500.1 million, representing
an increase of approximately 13%5% compared to $435.3
$474.2 million in the secondfirst quarter of 2021.
2022. This was primarily driven by an increase in selling price and product mix of approximately
22% and additional net sales from acquisitions of 1% 19%, partially offset
by a decline in organic sales volumes of 4%11% and thean unfavorable
impact from foreign currency translation of 6%3%.
The increase in selling price and product mix iswas primarily the result of
strategic price
increases value-based pricing initiatives implemented throughout 2022 to help offset the ongoing inflationary
pressures that began during 2021 and have continued into 2022.
pressures. The
decline in organic sales volumes was primarily attributable
to COVID-19 related disruptionssofter end market conditions, notably in China,EMEA and Asia/Pacific, the impact of the ongoing war in Ukraine, the wind-down of the tolling
agreement for products previously divested related to the Combination
the impact of the war in Ukraine and the Company’s
ongoing
value-based pricing initiatives.initiatives, partially offset by new business wins.
The Company generated net income in the secondfirst quarter of 20222023 of $14.3
$29.5 million, or $0.80$1.64 per diluted share, compared to net
income of $33.6$19.8 million, or $1.88$1.11 per diluted share in the secondfirst quarter of
2021.
2022. Excluding non-recurring and non-core items in each
period, the Company’s second
first quarter of 20222023 non-GAAP earnings per diluted share were $1.32$1.89 compared
to $1.82$1.42 in the prior year
quarter and the Company’s current
quarter adjusted EBITDA was $58.5$78.8 million compared to $70.1$60.4 million in
the secondfirst quarter of
2021.
2022. These results were primarily driven by lower gross marginsthe higher net sales in
the current quarter, dueas described above, coupled with a recovery in gross margins compared to a significant increase in raw material
and other input costs as well as the direct and indirect impacts of global supply
chain disruptions, the unfavorable impact of foreign
currency, and to a lesser extent,
prior year quarter, partially offset by higher selling, general and administrative expenses (“SG&A”).
as a result of significant year-over-year inflationary pressures and higher labor-related costs. See the Non-GAAP Measures
section of this Item below,
as well as other items discussed in the Company’s
Consolidated Operations Review in the Operations
section of this Item, below.
The Company’s second quarter
of 2022 operating performance in each of its four reportable segments: (i) Americas;
(ii) Europe,
Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty
Businesses, reflect similar drivers to that of its
consolidated performance as each of the Company’s
reportable segments net sales benefitted year-over-year from double-digit
increases in selling price and product mix and additional net sales from
acquisitions, while those increases in net sales for most
segments were partially offset by lower organic
sales volumes and the unfavorable impact of foreign currency translation.
Organic
volumes for the Global Speciality Businesses increased in the second
quarter of 2022 compared to the prior year quarter due to strong
demand for this segment’s products
.
Operating earnings for the Global Specialty Businesses and Americas
increased compared to the
prior year quarter, whereas operating earnings
for Asia/Pacific and EMEA declined, due to the persistent and significant
inflationary
pressures on raw materials and other costs, the impact of COVID-19 disruptions
in China, and the negative impact of foreign currency
translation, partially offset by continued price
realization.
Sequentially, operating earnings increased
in Global Speciality Businesses
and the Americas driven by higher selling prices, and was relatively consistent
in Asia/Pacific.
Operating margins for the three
aforementioned segments increased sequentially,
as price realization was able to help offset the inflationary pressures
on each of the
segment’s gross margins.
Additional details of each segment’s operating performance
are further discussed in the Company’s
Reportable Segments Review,
in the Operations section of this Item, below.
During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The Company’s new structure includes three reportable segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia/Pacific. The Company’s first quarter of 2023 operating performance in each of its three reportable segments reflect similar drivers to that of its consolidated performance. Operating earnings for all segments increased compared to the prior year quarter, driven by higher net sales in the Americas and EMEA and an improvement in margins in all three segments. Additional details of each segment’s operating performance are further discussed in the Company’s Reportable Segments Review, in the Operations section of this Item, below.
Quaker Chemical Corporation
Management’s Discussion and Analysis
27
The Company had a netNet cash flows provided by operating cash outflow of $8.4activities were $37.8 million in the first sixthree months
of 2022 as2023 compared to a net cash flows used in operating cash
outflowactivities of $9.6$6.3 million in the first sixthree months of 2021.
The2022. The net operating cash outflowinflow year-over-year reflects higher operating performance in both periods reflects a significant working
capital investment primarily related2023 compared to higher accounts receivable due to
the increase in net sales2022 as well as higher inventory due
primarily to the rising cost of raw materials and to a lesser extent a build in certain
inventory stock in response to global supply chain
and logistics challenges.
lower working capital investments year-over-year. 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 delivered anothera strong quarter including a record level of strong net sales, growth,
driven by strong price realization and above market
growth.
The expected declinea recovery in gross margin in the current period. These factors contributed to the Company’s current quarter earnings was primarily driven bygrowth despite ongoing inflationary
pressures, COVID-19 disruptions in China,
unfavorable currency translation,macroeconomic and geopolitical issueschallenges and other disruptions
that impacted ourthe Company’s customers and end markets.
Notwithstanding, we delivered double-digit year-over-year
increases in selling price and largely stabilized the Company’s
gross
margins on a sequential basis despite continued increases
in our costs.
Looking at the remainder of 2022,2023, the Company’s
focus
Company remains focused on executing on items within its control.
control as it manages through a continued uneven and uncertain macroeconomic and end market environment. The Company is encouraged by its continued execution and the positive momentum in its businessof the first quarter of 2023 and resilience of its
end markets, with some regional differences.
The Company continues to work with its customers to get the needed pricing to
offset
the persistent inflationary pressures on its margin while
also exhibiting continued cost controls.
Despite significant uncertainty
caused by several macroeconomic factors, the Company
continues to expect to deliver sequential gross margin expansion
andhigher earnings
growth in the second half of 2022.
On-going impact of COVID-19
The global outbreak of COVID-19 in March of 2020 has negatively impacted
all locations where the Company does business.
Although the Company has now operated in this COVID-19 environment
for more than two years, the full extent of the outbreak and
related business impacts continue to remain uncertain and volatile, and
therefore the full extent to which COVID-19 may impact the
Company’s future results of operations
or financial condition is uncertain.
This outbreak has significantly disrupted the operations of
the Company and those of its suppliers and customers and, at times during
the pandemic, the Company has experienced volume
declines2023 as compared to pre-COVID-19 levels.
Management continues to monitor the impact that the COVID-19 pandemic is having2022.
on the Company,
the overall specialty chemical industryCritical Accounting Policies and the economiesEstimates
Our significant accounting policies are described in “Management’s Discussion and markets in which the Company
operates.
The
prolonged pandemicAnalysis” and resurgences of the outbreak
including as new variants continue to emerge, and continued restrictions on
day-
to-day life and business operations such as recent restrictions in China as well as border
controls or closures and transportation
disruptions may result in volume declines and lower net sales in future periods.
To the extent that the Company’s
customers and
suppliers are adversely impacted by COVID-19, this could reduce the
availability, or result in delays,
of materials or supplies to or
from the Company, which
in turn could significantly interrupt the Company’s
business operations.
Given this ongoing uncertainty,
the Company cautions that its future results of operations could be significantly
and adversely impacted by COVID-19.
While the
circumstances have presented and are expected to continue to present challenges
and have necessitated additional time and resources
to be deployed to sufficiently address the challenges
brought on by the pandemic at this time, Management does not believe that
COVID-19 has had a material impact on its financial reporting processes, internal
controls over financial reporting, or disclosure
controls and procedures.
The Company’s top priority
is to protect the health and safety of its employees and customers, while working to ensure business
continuity to meet customers’ needs.
During the pandemic, the Company has taken incremental steps to protect
the health and
wellbeing of its people in affected areas through various actions, including
enabling work at home where needed and practicable, and
employing social distancing standards, implementing travel restrictions where
applicable, enhancing onsite hygiene practices, and
instituting visitation restrictions at the Company’s
facilities.
The Company has not and does not expect that it will incur material
expenses implementing these health and safety policies.
All of the Company’s more than 30 production
facilities worldwide are open
and operating and are deemed as essential businesses in the jurisdictions where
they are operating.
The Company continues to expect
that the impacts from COVID-19 will gradually decline subject“Note 1 – Significant Accounting Policies” to the effective
containment of the virus and its variants and successful
distribution and acceptance of the available vaccines and treatments; however,
the incidence of reported cases of COVID-19 or a
variantConsolidated Financial Statements in several geographies where the Company has significant operations
remains relatively high.
Differing government responses
to these reported cases continues to evolve and it therefore remains highly uncertain
as to how long the global pandemic and related
economic challenges will last in each of the jurisdictions where the Company conducts
business and when our customers’ businesses
will recover to pre-COVID-19 levels.
Though the Company was able to supply customers with value added solutions,
as a result of
the government-imposed quarantine and lockdown measures implemented
at the end of March 2022 and continuing in effect until
early June 2022, the Company’s Shanghai,
China-based locations were significantly impacted.
The negative impact of those measures
on our operations and liquidity was experienced during the second quarter of 2022
and the ultimate impact will depend on how
quickly the Chinese economy recovers from the quarantine and lockdown
measures that were temporarily implemented.
While the
actions the Company has taken to date to protect our workforce, to continue to
serve our customers with excellence and to conserve
cash and reduce costs as applicable,Form 10-K. There have been effective thus far,
further actions to respondno material changes to the pandemiccritical accounting policies and estimates previously disclosed in its effects may
be2022 Form 10-K remain materially consistent.
necessary as conditions continue to evolve.
21
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
28
ImpactRecently Issued Accounting Standards
See Note 3 of Political Conflicts
A significant portion of the Company’s
revenues and earnings are generated by non-U.S. operations.
This subjects the Company
Notes to political and economic risks that could adversely affect the Company’s
business, liquidity, financial
position and results of
operations.
The existence of military conflicts, for example the Russian invasion of Ukraine,
bring inherent risks such as the potential
for supply chain disruptions, increased costs of resources including oil, decreased
trade activity and other consequences related to
economic or other sanctions.
The U.S. government and other nations have imposed significant restrictions
on most companies’ ability
to do businessCondensed Consolidated Financial Statements, in Russia as a result of the military conflict between Russia and Ukraine.
It is not possible to predict the broader or
longer-term consequencesPart I, Item 1, of this conflict, which could include further sanctions,
embargoes, regional instability,
geopolitical shiftsReport for a discussion regarding recently issued accounting standards.
and adverse effects on macroeconomic conditions,
security conditions, currency exchange rates and financial markets.
The military
conflict between Russia and Ukraine has had a negative impact on the Company’s
ability to sell to, ship products to collect payments
from, and support customers in certain regions based on trade restrictions,
embargoes and export control law restrictions, and
logistics
restrictions including closures of air space.
If this conflict continues or expands, it could increase the costs, risks and adverse impacts
from these new challenges.
The Company and its customers and suppliers may also be the subject of increased cyber-attacks.
During the second quarter of 2022, the Company decided to cease its operations
in Russia.
The Company’s operations
in the
conflict areas including Russia, Ukraine and Belarus historically represented
less than 2% of the Company’s consolidated net
sales
and less than 1% of the Company’s
consolidated total assets.
The Company’s primary exposure
in the conflict areas related to
outstanding customer accounts receivable.
The Company is actively monitoring its outstanding Russian receivables for collections
and has recorded incremental allowances
for doubtful accounts where warranted.
Liquidity and Capital Resources
At June 30, 2022, the CompanyAs of March 31, 2023, we had cash and cash equivalents of $202.3
$189.9 million.
Total cash and cash equivalents
was $165.2
$181.0 million atas of December 31, 2021.
2022. The $37.2$8.9 million increase in cash and cash equivalents was the net result of $78.6
$37.8 million of cash
provided by financingoperating activities and a positive impact due to the effect of foreign currency translation of $2.2 million partially offset by $8.4 million
of cash used in operating activities, $24.4$24.9 million of cash used in
investing financing activities and $8.6$6.2 million negative impact dueof cash used in investing activities.
Net cash flows provided by operating activities were $37.8 million in the first three months of 2023 compared to the effect
of foreign currency translation.
Netnet cash flows used in operating activities were $8.4of $6.3 million in the first six months
of 2022 compared to net cash flows used in
operating activities of $9.6 million in the first sixthree months of 2021.
2022. The increase in net operating cash outflow in both periodsflow year-over-year reflects working
capital investment primarily related to higher accounts receivable due to
the increase in net sales and higher inventory due primarily to
the rising costyear-over-year operating performance as well as lower levels of raw materials and to a lesser extent a build in certain inventory
in response to global supply chain and logistics
challenges.
The slight improvement in operating cash flow year-over-year
is a result of a lower working capital investment partially
offset by lower earnings in the first six months of 2022current year, reflecting a more stable period as compared
to the first six months of 2021.prior year and demonstrating the Company’s ongoing focus on cash conversion, including managing inventory levels.
Net cash flows used in investing activities were $24.4 million in the
first six months of 2022 compared to $21.7$6.2 million in the first
six three months of 2021.
This increase2023 compared to $18.2 million in the first three months of 2022. The lower level of cash outflows was aused in investing activities year-over-year is the result of slightly lower cash proceeds from the disposition of
assets which included
the sale of certain held-for-sale real property assets related
to the Combination in the prior year period, and higher capital expenditures
in the current year largely related to certain infrastructure
and sustainability-related spending.
These increases in cash used in
investing activities were partially offset by lower cash
the absence of payments related to acquisitions as a result of the level of acquisition activity in
each year.
acquisitions. See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of
this Report.
Net cash flows used in financing activities were $24.9 million in the first three months of 2023 compared to net cash flows provided by financing activities were $78.6of $20.6 million in the first
six three months of 2022 compared to net cash flows
used in financing activities of $4.4 million in the first six months of 2021.
2022. The increase in net cash flowsoutflows was primarily related to an
increase innet repayments of borrowings in the current yearfirst three months of 2023, primarily under the Company’s
credit facility, which was amended
and extended, Credit Facility, described further below, as further described
below,compared to net borrowings in the second
quarterfirst three months of 2022.
In addition, the Company paid $14.9$7.8 million of cash dividends during the first sixthree months
of
2022, 2023, a $0.7$0.4 million, or 5% increase, in cash dividends compared to the prior
year.
year quarter.
The Company, its wholly
owned subsidiary,
Quaker Chemical B.V.,
as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,
and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the “Original Credit Facility”).
During June 2022, the Company,
and its wholly owned subsidiary,
Quaker Houghton B.V.,
as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing
line lender and letter of
credit issuer, Bank of America Europe
Designated Active Company,
as Euro Swing Line Lender, certain guarantors
and other lenders
entered into an amendment to the Original Credit Facilityits primary credit facility. The amended credit facility (the “Amended
Credit“Credit Facility”).
The Company used the proceeds of the
Amended Credit Facility to repay all outstanding loans under the Original
Credit Facility, as well as accrued interest
established (A) a $150.0 million Euro equivalent senior secured term loan (the “Euro Term Loan”), (B) a $600.0 million senior secured term loan (the “U.S. Term Loan”), and fees, and to
terminate the revolving credit commitments under the Original Credit
Facility.
Quaker Chemical Corporation
Management’s Discussion and Analysis
29
The Company’s Amended Credit
Facility is comprised of(C) a $500.0 million multicurrency revolver,
a $600.0 million term loan and
a $150.0 million (as of June 17, 2022) Euro equivalent term loan (collectively,
the “Amended Term Loans”senior secured revolving credit facility (the “Revolver”)
with the Company and
Quaker Houghton B.V.,
as borrowers, each with a five-year term maturing in June 2027.
Subject to the consent of the Administrative
Agent and certain other conditions, the Company may designate additional
borrowers. The Company has the right to increase the
amount of the Amended Credit Facility by an aggregate amount not
to exceed the greater of (i) $300$300.0 million and (ii)or 100% of
Consolidated EBITDA, subject to certain conditions including
the agreement to provide financing by any Lenderlender providing any such increase.
increase. U.S. Dollar-denominated borrowings
under the Amended Credit Facility bear interest, at the Company’s
election, at the base
rate or term Secured Overnight Financing Rate (“SOFR”) plus an applicable
rate ranging from 1.00% to 1.75% for term SOFR loans
and from 0.00% to 0.75% for base rate loans, depending upon the
Company’s consolidated net leverage
ratio.
Loans based on term
SOFR also include a spread adjustment equal to 0.10% per annum.
Borrowings under the Amended Credit Facility denominated in
currencies other than U.S. Dollars bear interest at the alternative currency
term rate plus the applicable rate ranging from 1.00% to
1.75%. In addition to paying interest on outstanding principal under
the Amended Credit Facility, the Company
is required to pay a
commitment fee ranging from 0.15% to 0.275% depending on the
Company’s consolidated net leverage
ratio to the Lenders under the
Amended Revolver in respectAs of the unutilized commitments thereunder.
The Amended Credit Facility contains affirmative
and negative covenants, financial covenants and events of default that are
customary for agreements of this nature.
The Amended Credit Facility contains a number of customary business covenants,
including
without limitation restrictions on (a) the incurrence of additional
indebtedness byMarch 31, 2023, the Company or certain of its subsidiaries, (b)
investments in and acquisitions of other businesses, lines of business and
divisions by the Company or certain of its subsidiaries, (c)
the payment of dividends or capital stock purchases by the Company
or certain of its subsidiaries and (d) dispositions of assets by the
Company or certain of its subsidiaries.
Dividends and share repurchases are permitted in annual amounts
not exceeding the greater of
$75 million annually and 25% of Consolidated EBITDA if there is no default.
All restricted payments may be made if there is no
default and if the consolidated net leverage ratio is less than 2.50
to 1.00.
Financial covenants contained in the Amended Credit Facility include
a consolidated interest coverage ratio test and a
consolidated net leverage ratio test.
The consolidated net leverage ratio at the end of a quarter may not be
greater than 4.00 to 1.00,
subject to a permitted increase during a four quarter period
after certain acquisitions.
The Company has the option of replacing the
consolidated net leverage ratio test with a consolidated senior net leverage ratio
test if the Company issues certain types of unsecured
debt, subject to certain customary limitations. Customary events of
default in the Amended Credit Facility include without limitation
defaults for non-payment, breach of representations and warranties, non
-performance of covenants, cross-defaults, insolvency,
and a
change of control of the Company in certain circumstances.
The occurrence of an event of default under the Amended Credit Facility
could result in all loans and other obligations becoming immediately
due and payable and the Amended Credit Facility being
terminated.
The Original Credit Facility required the Company to fix its variable interest
rates on at least 20% of its total Original Term
Loans.
In order to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with
the Original Credit Facility,
in November 2019, the Company entered into $170.0 million notional
amounts of three year interest rate
swaps at a base rate of 1.64% plus an applicable margin as provided
in the Original Credit Facility, based
on the Company’s
consolidated net leverage ratio.
At the time the Company entered into the swaps, and as of June 30, 2022,
the aggregate interest rate
on the swaps, including the fixed base rate plus an applicable margin,
was 3.1%.
The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.
The Company previously capitalized $23.7 million of certain third-party
debt issuance costs in connection with the Original
Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed
to the Original Term Loans and recorded
as a
direct reduction of Long-term debt on the Condensed Consolidated
Balance Sheet.
Approximately $8.3 million of the capitalized
costs were attributed to the Original Revolver and recorded within Other
assets on the Condensed Consolidated Balance Sheet.
These
capitalized costs were being amortized into Interest expense over
the five-year term of the Original Credit Facility.
As of December
31, 2021, the Company had $8.0 million of debt issuance costs recorded
as a reduction of Long-term debt attributable to the Original
Credit Facility.
As of December 31, 2021, the Company had $4.3 million of debt issuance
costs recorded within Other assets
attributable to the Original Credit Facility.
Prior to executing the Amended Credit Facility,
the Company had $6.6 million of debt
issuance costs recorded as a reduction of Long-term debt attributable
to the Original Credit Facility and $3.5 million of debt issuance
costs recorded within Other assets attributable to the Original Credit Facility.
In connection with executing the Amended Credit
Facility, the Company
recorded a loss on extinguishment of debt of approximately $6.8 million which
includes the write-off of certain
previously unamortized deferred financing costs as well as a portion of
the third party and creditor debt issuance costs incurred to
execute the Amended Credit Facility.
Also in connection with executing the Amended Credit Facility,
during the second quarter of
2022, the Company capitalized $2.2 million of certain third-party
debt issuance costs.
Approximately $0.7 million of the capitalized
costs were attributed to the Amended Euro Term
Loan and Amended U.S. Term
Loan. These costs were recorded as a direct reduction
of Long-term debt on the Condensed Consolidated Balance Sheet.
Approximately $1.5 million of the capitalized costs were attributed
to the Amended Revolver and recorded within Other assets on the
Condensed Consolidated Balance Sheet.
These capitalized costs, as
well as the previously capitalized costs that were not written off
will collectively be amortized into Interest expense over the five-year
Quaker Chemical Corporation
Management’s Discussion and Analysis
30
term of the Amended Credit Facility.
As of June 30, 2022, the Company had $2.2 million of debt issuance
costs recorded as a
reduction of Long-term debt on the Condensed Consolidated Balance Sheet
and $4.8 million of debt issuance costs recorded within
Other assets on the Condensed Consolidated Balance Sheet.
As of June 30, 2022, the Company had Amended Credit Facility borrowings outstanding
of $977.6 million.
As of December 31,
2021,
the Company had Original Credit Facility borrowings outstanding of
$889.6 $931.5 million.
The As of December 31, 2022, the Company has unused capacity under
the Amended Revolverhad Credit Facility borrowings outstanding of approximately $268 million, net of bank letters of
credit of approximately $4 million, as June 30, 2022.
$943.5 million. The Company’s other debt
obligations are primarily industrial development bonds, bank lines of credit and municipality
-relatedmunicipality-related loans,
which totaled $11.5 million and $11.8
$11.3 million as of June 30, 2022both March 31, 2023 and December 31, 2021, respectively.
2022. Total unused capacity under
these arrangements as of June 30, 2022March 31, 2023 was approximately $28 million.
$35 million. The Company’s total net debt as of June
30,March 31, 2023, which consists of total borrowings of $942.8 million less cash and cash equivalents of $189.9, was $752.9 million. The Credit Facility contains affirmative and negative covenants, financial covenants and events of default. Financial covenants contained in the Credit Facility include a consolidated interest coverage ratio test and a consolidated net leverage ratio test. As of March 31, 2023, the Company was in compliance with all of the Credit Facility covenants. Refer to the description of the Company’s primary Credit Facility in Note 20 of Notes to Consolidated Financial Statements in its 2022 Form 10-K and in Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for more information about the covenants and events of default.
The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three months ended March 31, 2023 was $786.7
million.
approximately 5.8%. As of March 31, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 5.9%. As part of the Credit Facility, in addition to paying interest on the outstanding principal, the Company is also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on the Company’s consolidated net leverage ratio. The Company had unused capacity under the Revolver of approximately $311 million, which is net of bank letters of credit of approximately $3 million, as of March 31, 2023.
22
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of three-year interest rate swaps to convert a portion of the Company’s variable rate borrowings into an average fixed rate obligation of 3.64% plus an applicable margin as provided in the Credit Facility based on the Company’s consolidated net leverage ratio. As of March 31, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.2%. See Note 17 of Notes to Condensed Consolidated Financial Statements.
In connection with executing the original credit facility in 2019 and the amended Credit Facility during the second quarter of 2022, the Company capitalized certain third-party and creditor debt issuance costs. Costs attributed to the Euro Term Loan and U.S. Term Loan were recorded as a direct reduction of Long-term debt on the Condensed Consolidated Balance Sheet. Costs attributed to the Revolver were recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs will collectively be amortized into Interest expense over the five-year term of the Credit Facility. As of March 31, 2022, the Company had $1.9 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.1 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet. Comparatively, as of December 31, 2022, the Company had $2.0 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.
The Company uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on certain assets and/or liabilities denominated in certain foreign currencies. During the three months ended March 31, 2023, the Company entered into and settled forward contracts with an aggregate notional amount totaling $16.0 million, resulting in cash proceeds of $0.3 million. See Note 17 of Notes to Condensed Consolidated Financial Statements.
In the first three months of 2022, the Company incurred $8.3$6.0 million of total Combination, integration
and other acquisition-related expenses, which includes $2.0 million of other expenses related to indemnification assets, described in the Non-GAAP Measures section of this Item below. The Company had net cash outflows related to the Combination, integration and other acquisition-related expenses during the first three months of 2022 of $4.2 million. The Company had no Combination, integration and other acquisition-related expenses in the first six
three months of 2022, which includes $2.4 million of other expenses related to
indemnification assets, described in the Non-GAAP2023.
Measures section of this Item below.
Comparatively, inDuring the first sixthree months
of 2021,2023, the Company incurred $7.6$2.1 million of total
Combination, integration and other acquisition-relatedstrategic planning expenses which
was net of a $5.4 million gain onfor the sale of certain held-for-
sale real property assets and also included $0.5 million of accelerated depreciation.
The Company had aggregate net cash outflows of
approximately $9.2 million related to the Combination, integration and other acquisition
-related expenses during the first six months
of 2022planning phase as compared to $14.8$3.1 million during the first sixthree months of 2021.
During the first six months of 2022 the Company incurred
$6.2 million of strategic planning and transformation expenses.
. The Company expects that theseto incur additional operating costs and
associated cash flows, as well as higher capital expenditures related
to strategic planning, process optimization and the next phase of
the Company’s long-term integration
to further optimize its footprint, processes and other functions will continue
functions in 20222023 and thereafter.
potentially extend into the next several years.
Quaker Houghton’s Management
The Company’s management approved, and the Company initiated, a global restructuring plan (the
“QH “QH Program”) in the
third quarter of 2019 as part of its planned cost synergies associated
with the Combination.
The As of December 31, 2022, the Company has substantially completed all of the initiatives under the QH Program includes restructuring
with only an immaterial amount of remaining severance still to be paid, which is expected to continue into 2023. In the fourth quarter of 2022, the Company’s management initiated a global cost and associated severance costsoptimization program to reduce total headcount by approximately
400 people globallyimprove its cost structure and plans for the closure of certain
manufacturingdrive a more profitable and non-manufacturing facilities.
productive organization. The exact timing to complete all actions and totalfinal costs associated with the QH Program depe
ndswill depend on a
number of factors and isare subject to change; however,
reductions in headcountchange. The Company is continuing to evaluate and site closures have occurred,expects to implement further actions under this program, and the Company
currently expectsas a result, additional headcount reductions and site closuresrestructuring costs may be incurred in the future. The Company expects to occur
throughoutgenerate full run-rate cost savings from the global cost and optimization program of approximately $20 million by the end of 2024. The Company expects total cash costs of this program to be approximately 1 to 1.5 times savings. The Company recognized Restructuring and related charges of $4.0 million and $0.8 million in the first three months of 2023 and 2022, and into 2023.
respectively, as a result of these programs. The Company made cash
payments related to the settlement of restructuring liabilities under
the QH Programrestructuring programs during the first sixthree months of 20222023 of
approximately $0.8$2.7 million compared to $4.2$0.4 million in the first sixthree months
of 2021.2022. The Company has remaining restructuring accruals as of March 31, 2023, for these programs of $6.8 million, which the Company expects to settle over the next twelve months. See Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report.
As of June 30, 2022,March 31, 2023, the Company’s
gross liability for uncertain tax positions, including interest and penalties, was $21.9$20.2 million.
The Company cannot determine a reliable estimate of the timing of cash
flows by period
related to its uncertain tax position liability.
However, should the entire liability be paid,
the amount of the payment may be reduced by up to $6.9$6.3 million as a result of offsetting
benefits in other tax jurisdictions.
In 2021,
23
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
The Company previously disclosed in its 2022 Form 10-K that two of the Company’s locations
suffered significant property damagedamages as a result of flooding
and fire.
electrical fire, respectively. The Company
maintains property and flood insurance for all of its facilitieslocations globally.
The Company, its During the three months ended March 31, 2023, there have been no significant changes to the facts or circumstances of this previously disclosed matter, other than the ongoing work with the Company’s insurance
adjuster and insurance carrier are actively
managingregarding the remediation and restoration activities associated with both
of these events and at this timeinsurance claims submitted. Through March 31, 2023, the Company has concluded,
based on all available information and discussions with its insurance
adjuster and insurance carrier, that the losses incurred
during
2021 were covered under the Company’s
property insurance coverage, net of an aggregate deductible of $2.0
million.
The Company
has received cumulative payments from its insurers of $2.1$5.7 million and has recorded
an insurance receivable associated with these eventsevents. During the three months ended March 31, 2023, the Company recognized a gain on insurance recoveries of $0.9
million as of June 30, 2022.
$0.8 million. See NoteNotes 10 and 18 of Notes to the Condensed Consolidated Financial Statements, in Item
1 of this Report.
report.
The Company believes that its existing cash, anticipated cash flows from
operations and available additional liquidity will be
sufficient to support its operating requirements and fund
its business objectives for at least the next twelve months, including but not
limited to, payments of dividends to shareholders, costs related to ongoing
acquisition integration and optimization, pension plan
contributions, capital expenditures, other business opportunities (including
potential acquisitions), implementing actions to achieve the
Company’s sustainability
goals and other potential known or anticipated contingencies.
The Company believes it has sufficient
additional liquidity to support its operating requirements and to fund its business
obligations for the period beyond the next twelve
months as well, including the aforementioned items which are expected
to recur annually, as well as future principal
and interest
payments on the Company’s Amended
Credit Facility, tax obligations
and other long-term liabilities.
The Company’s liquidity
is
affected by many factors, some based on normal operations of
our business and others related to the impact of the pandemic and other
global events on our business and on global economic conditions as well as industry uncertainties,
which we cannot predict.
We also
cannot predict economic conditions and industry downturns or the
timing, strength or duration of recoveries.
We may seek,
as we
believe appropriate, additional debt or equity financing which would
provide capital for corporate purposes, working capital funding,
additional liquidity needs or to fund future growth opportunities, including
possible acquisitions and organic investments.
The timing
and amount of potential capital requirements cannot be determined
at this time and will depend on a number of factors, including the
Quaker Chemical Corporation
Management’s Discussion and Analysis
31
actual and projected demand for our products, specialty chemical indust
ryindustry conditions, competitive factors, and the condition of
financial markets, among others.
Non-GAAP Measures
The information in this Form 10-Q includes non-GAAP (unaudited)
financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating
income, non-GAAP operating margin, non-GAAP
net income and non-
GAAPnon-GAAP earnings per diluted share.
The Company believes these non-GAAP financial measures provide meaningful
supplemental
information as they enhance a reader’s understanding
of the financial performance of the Company,
are indicative of future operating
performance of the Company,
and facilitate a comparison among fiscal periods, as the non-GAAP financial
measures exclude items
that are not considered indicative of future operating performance or not
considered core to the Company’s operations.
Non-GAAP
results are presented for supplemental informational purposes only
and should not be considered a substitute for the financial
information presented in accordance with GAAP.
In addition, our definitions of EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per diluted share, as discussed and reconciled below to the most comparable respective GAAP measures, may not be comparable to similarly named measures reported by other companies.
The Company presents EBITDA which is calculated as net income attributable
to the Company before depreciation and
amortization, interest expense, net, and taxes on income before equity
in net (loss) income of associated companies.
The Company
also presents adjusted EBITDA which is calculated as EBITDA plus or
minus certain items that are not considered indicative of future
operating performance or not considered core to the Company’s
operations.
In addition, the Company presents non-GAAP operating
income, which is calculated as operating income plus or minus certain items that
are not considered indicative of future operating
performance or not considered core to the Company’s
operations.
Adjusted EBITDA margin and non-GAAP operating margin
are
calculated as the percentage of adjusted EBITDA and non-GAAP operating
income to consolidated net sales, respectively.
The
Company believes these non-GAAP measures provide transparent
and useful information and are widely used by investors, analysts,
and peers in our industry as well as by management in assessing the operating
performance of the Company on a consistent basis.
Additionally, the
Company presents non-GAAP net income and non-GAAP earnings per diluted share
as additional performance
measures.
Non-GAAP net income is calculated as adjusted EBITDA, defined above,
less depreciation and amortization, interest
expense, net, and taxes on income before equity in net (loss) income
of associated companies, in each case adjusted, as applicable, for
any depreciation, amortization, interest or tax impacts resulting from
the non-core items identified in the reconciliation of net income
attributable to the Company to adjusted EBITDA.
Non-GAAP earnings per diluted share is calculated as non-GAAP net income
per
diluted share as accounted for under the “two-class share method.”
The Company believes that non-GAAP net income and non-
GAAPnon-GAAP earnings per diluted share provide transparent and useful information
and are widely used by investors, analysts, and peers in
our industry as well as by management in assessing the operating performance
of the Company on a consistent basis.
24
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
Certain of the prior period non-GAAP financial measures presented
in the following tables have been adjusted to conform with
current period presentation.
The following tables reconcile the Company’s
non-GAAP financial measures (unaudited) to their most
directly comparable GAAP (unaudited) financial measures
(dollars (dollars in thousands unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Non-GAAP Operating Income and Margin ReconciliationsThree Months Ended
March 31,
20232022
Operating income$49,929 $29,403 
Combination, integration and other acquisition-related expenses (a)— 4,053 
Restructuring and related charges, net (b)3,972 820 
Strategic planning expenses (c)2,087 3,088 
Russia-Ukraine conflict related expenses (d)— 1,166 
Other charges (e)305 631 
Non-GAAP operating income$56,293 $39,161 
Non-GAAP operating margin (%) (j)11.3 %8.3 %
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Operating income
$
31,903
$
38,816
$
61,306
$
83,710
Combination, restructuring and other
acquisition-related expenses (a)
1,831
7,082
6,704
15,288
Strategic planning and transformation expenses (b)
3,112
—
6,200
—
Executive transition costs (c)
645
308
1,184
812
Russia-Ukraine conflict related expenses (d)
929
—
2,095
—
Other charges (e)
385
242
476
293
Non-GAAP operating income
$
38,805
$
46,448
$
77,965
$
100,103
Non-GAAP operating margin (%) (l)
7.9%
10.7%
8.1%
11.6%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income ReconciliationsThree Months Ended
March 31,
20232022
Net income attributable to Quaker Chemical Corporation$29,534 $19,816 
Depreciation and amortization (h)20,510 20,727 
Interest expense, net13,242 5,345 
Taxes on income before equity in net income of associated companies (i)9,533 2,866 
EBITDA72,819 48,754 
Equity (income) loss in a captive insurance company (f)(422)244 
Combination, integration and other acquisition-related expenses (a)— 6,032 
Restructuring and related charges, net (b)3,972 820 
Strategic planning expenses (c)2,087 3,088 
Russia-Ukraine conflict related expenses (d)— 1,166 
Other charges (e)335 340 
Adjusted EBITDA$78,791 $60,444 
Adjusted EBITDA margin (%) (j)15.8 %12.7 %
Adjusted EBITDA$78,791 $60,444 
Less: Depreciation and amortization (h)20,510 20,727 
Less: Interest expense, net13,242 5,345 
Less: Taxes on income before equity in net income of associated companies - adjusted (a)(i)11,047 8,902 
Non-GAAP net income$33,992 $25,470 
25
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Quaker Chemical Corporation
Management’s Discussion and Analysis
32
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
Non-GAAP Earnings per Diluted Share ReconciliationsThree Months Ended
March 31,
20232022
GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders$1.64 $1.11 
Equity (income) loss in a captive insurance company per diluted share (f)(0.02)0.01 
Combination, integration and other acquisition-related expenses per diluted share (a)— 0.25 
Restructuring and related charges, net per diluted share (b)0.17 0.03 
Strategic planning expenses per diluted share (c)0.10 0.14 
Russia-Ukraine conflict related expenses per diluted share (d)— 0.06 
Other charges per diluted share (e)0.01 0.01 
Impact of certain discrete tax items per diluted share (g)(0.01)(0.19)
Non-GAAP earnings per diluted share (k)$1.89 $1.42 
and Non-GAAP Net Income Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Depreciation and amortization (a)(j)
20,856
22,344
41,583
44,792
Interest expense, net
6,494
5,618
11,839
11,088
Taxes on income before
equity in net (loss) income
of associated companies (k)
1,374
15,218
4,240
25,907
EBITDA
43,067
76,750
91,821
153,972
Equity loss (income) in a captive insurance company (f)
1,781
(883)
2,025
(3,963)
Combination, restructuring and other
acquisition-related expenses (a)
2,248
6,956
9,100
9,359
Strategic planning and transformation expenses (b)
3,112
—
6,200
—
Executive transition costs (c)
645
308
1,184
812
Russia-Ukraine conflict related expenses (d)
929
—
2,095
—
Brazilian non-income tax credits (g)
—
(13,293)
—
(13,293)
Loss on extinguishment of debt (h)
6,763
—
6,763
—
Other charges (e)
(54)
219
(253)
318
Adjusted EBITDA
$
58,491
$
70,057
$
118,935
$
147,205
Adjusted EBITDA margin (%) (l)
11.9%
16.1%
12.3%
17.0%
Adjusted EBITDA
$
58,491
$
70,057
$
118,935
$
147,205
Less: Depreciation and amortization - adjusted (a)
20,856
22,218
41,583
44,251
Less: Interest expense, net
6,494
5,618
11,839
11,088
Less: Taxes on income
before equity in net income
of associated companies - adjusted (a)(k)
7,466
9,773
16,368
21,512
Non-GAAP net income
$
23,675
$
32,448
$
49,145
$
70,354
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
0.80
$
1.88
$
1.91
$
4.03
Equity loss (income) in a captive insurance company
per diluted share (f)
0.10
(0.05)
0.11
(0.22)
Combination, restructuring and other
acquisition-related expenses per diluted share (a)
0.13
0.30
0.41
0.42
Strategic planning and transformation expenses per
diluted share (b)
0.13
—
0.27
—
Executive transition costs per diluted share (c)
0.03
0.02
0.05
0.04
Russia-Ukraine conflict related expenses per diluted share (d)
0.04
—
0.10
—
Brazilian non-income tax credits per diluted share (g)
—
(0.44)
—
(0.44)
Loss on extinguishment of debt per diluted share (h)
0.29
—
0.29
—
Other charges per diluted share (e)
(0.00)
0.01
(0.01)
0.02
Impact of certain discrete tax items per diluted share (i)
(0.20)
0.10
(0.39)
0.08
Non-GAAP earnings per diluted share (m)
$
1.32
$
1.82
$
2.74
$
3.93
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
(a)
Combination, restructuringintegration and other acquisition-related expenses include
certain legal, financial, and other advisory and
consultant costs incurred in connection with the Combination integration
activities including internal control readiness and
remediation as well as costs incurred by the Company associated with the
QH restructuring program,
which was initiated in the
third quarter of 2019 as part of the Company’s
plan to realize cost synergies associated with the Combination
.
activities. These amounts
also include expense associated with the Company's other of the Company’s
recent acquisitions, including cost associatedcertain legal, financial, and other advisory and consultant costs incurred in connection with selling inventory from
acquired businesses which was adjusted to fair value as part of purchase
accounting.
due diligence. These costs are not indicative of the future
operating performance of the Company.
Approximately Less than $0.1 million and $0.2 million for the three and six months ended
June
30, 2022, respectively,
and approximately $0.4
million and $0.5 million in the three and six months ended June 30, 2021,
respectively,March 31, 2022 of
these pre-tax costs were considered non-deductible for the purpose of determining the Company’s
effective tax
rate, and, therefore, taxes on income before equity in net income of associated
companies - adjusted reflects the impact of these
items.
During the three and six months ended June 30,March 31, 2022, the Company recorded
$0.4 $2.0 million and $2.4
million, respectively,
of other expense related to an indemnification asset, which is included
in the caption “Combination, restructuringintegration and other
acquisition-related expenses” in the reconciliation of GAAP earnings per diluted
share attributed to Quaker Chemical Corporation
common shareholders to Non-GAAP earnings per diluted share as well as the reconciliation
of net income attributable to Quaker
Chemical Corporation to Adjusted EBITDA and Non-GAAP net income
.
During the
three and six months ended June 30, 2021,
the Company recorded $0.1 million $0.5 million, respectively,
of accelerated depreciation related to certain of the Company’s
facilities, which is included in the caption “Combination, restructuring
income. There were no Combination, integration and other acquisition-related expenses”expenses incurred in the
reconciliation first quarter of operating income to non-GAAP operating
income and included in the caption “Depreciation and amortization”
in the reconciliation of net income attributable to the Company to
EBITDA, but excluded from the caption “Depreciation and
amortization - adjusted” in the reconciliation of adjusted EBITDA to non
-GAAP net income attributable to the Company.
During
the six months ended June 30, 2021, the Company recorded a $5.4 million
gain on the sale of certain held-for-sale real property
assets related to the Combination which is included in the caption “Combination,
restructuring and other acquisition-related
expenses” in the reconciliation of GAAP earnings per diluted share attributed
to Quaker Chemical Corporation common
shareholders to Non-GAAP earnings per diluted share as well as the reconciliation
of net income attributable to Quaker Chemical
Corporation to Adjusted EBITDA and Non-GAAP net income.
During the three and six months ended June 30, 2022,
respectively,
the Company recorded restructuring and related charges
of less than $0.1 million and $0.8 million, respectively,
and
$0.3 million and $1.5 million during the three and six months ended
June 30, 2021, respectively.
During the six months ended
June 30, 2021, the Company recorded $0.8 million related to the sale
of inventory from acquired businesses which was adjusted
to fair value.
2023. See Notes 2, 7, 10, and 11 of Notes to Condensed Consolidated
Financial Statements, which appear in Item 1 of this Report.
Report.
(b)
Strategic planningRestructuring and transformation expenses include certain consultant
and advisory expenses forrelated charges represent the costs incurred by the Company associated with the Company’s
long-term
strategic planning, as well as process optimization and the next phase
of the Company’s long-term integration
to further optimize
its footprint, processes and other functions.
restructuring programs. These costs are not indicative of the future operating performance of the Company. See Note 7 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.
(c)
Executive transition costs represent the costs related toStrategic planning expenses include certain consultant and advisory expenses for the Company’s
search, hiring strategic planning phase of its long-term process optimization and transitionintegration projects to a new CEO in connection
with the executive transition that took place in 2021 as well as the search,
hiringfurther optimize its footprint, processes and transition for other officers during the first
six months of 2022.
functions. These expensesplanning phase costs are one-time in nature and not indicative of the future operating performance
of the Company.
Company.
(d)
Russia-Ukraine conflict related expenses represent the direct costs associated
with the Company’s
exit of operations in Russia
during the second quarter of 2022, primarily for employee separation
benefits, as well as costs associated with establishing
a specific reservesreserve or changes to existing reserves for trade accounts receivable
within the Company’s EMEA reportable segment
due related to the economic instability associated withcertain customers who filed for bankruptcy protection as well as costs related to specific reserves recorded for certain customer accounts receivables
which have beenin each case were directly impacted by the
current economic ongoing conflict between Russia and Ukraine or the Company’s
decision to end operations in Russia.
Ukraine. These expenses
are not indicative of the future operating performance of the Company.Company.
(e)
Other charges include executive transition costs, facility remediation insurance recoveries, net, charges incurred
by an inactive subsidiary of the Company as a result of the termination of restrictions on
insurance settlement reserves, non-service components of the Company’s
pension and postretirement net periodic benefit income,
and the foreign currency remeasurement impacts associated with the
Company’s affiliates whos
e
whose local economies are designated
as hyper-inflationary under U.S. GAAP.
These expenses are not indicative of the future operating performance
of the Company.
See Notes 1, 9 and 918 of Notes to Condensed Consolidated Financial Statements,
which appear in Item 1 of this Report.
(f)
Equity loss (income)income in a captive insurance company represents the after-tax
loss (income) income attributable to the Company’s
interest
in Primex, Ltd. (“Primex”), a captive insurance company.
The Company holds a 32% investment in and has significant influence
over Primex, and therefore accounts for this interest under the equity method
of accounting.
The loss (income)income attributable to
Primex is not indicative of the future operating performance of the
Company and is not considered core to the Company’s operations.
operations.
26
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Quaker Chemical Corporation
Management’s Discussion and Analysis
34
(g)
Brazilian non-income tax credits represent indirect tax credits related to certain
of the Company’s Brazilian subsidiaries
prevailing in a legal claim as well as the Brazilian Supreme Court ruling
on these non-income tax matters.
The non-income tax
credits arising from the claim and court ruling are non-recurring
and not indicative of the future operating performance of the
Company.
See Note 18 of Notes to Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(h)
In connection with executing the Amended Credit Facility,
the Company recorded a loss on extinguishment of debt of
approximately $6.8 million which includes the write-off
of certain previously unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurred
to execute the Amended Credit Facility.
These expenses are
not indicative of the future operating performance of the Company.
See Note 14 of Notes to Condensed Consolidated Financial
Statements, which appears
in Item 1 of this Report.
(i)
The impacts of certain discrete tax items include changes in valuation
allowances recorded on certain Brazilian branch foreign tax
credits and the recording of deferred taxes on Brazilian branch income.
Both of these discrete items related to tax law changes in
the U.S. due to the issuance of final foreign tax credit regulations during the
period.
period ended March 31, 2023. Additionally, the Company
has discrete
items related to the remeasurement of deferred taxes on the transfer of intellectual property and the release of the reserves for uncertain tax positions settled during
the quarterperiod and certain taxes, penalties, and
interest due as a result of the settlements.
See Note 11 of Notes to Condensed Consolidated
Financial Statements, which appears
in Item 1 of this Report.
(j)
(h)Depreciation and amortization for both the three and six months ended June 30,
March 31, 2023 and 2022 includesinclude approximately $0.2 million and $0.5
million, respectively,
and for the three and six months ended June 30, 2021 includes $0.3 million and $0.6 million,
respectively,
of amortization expense recorded within equity in net loss (income)
income of associated companies in the Company’s
Condensed
Consolidated Statements of income,Operations, which is attributable to the amortization
of the fair value step up for the Company’s
50%
interest in a joint venture in Korea as a result of required purchase accounting.
(k)
(i)Taxes on income
before equity in net loss (income)income of associated companies – adjusted presents the impact
of any current and
deferred income tax expense (benefit), as applicable, of the reconciling
items presented in the reconciliation of net income
attributable to Quaker Chemical Corporation to adjusted EBITDA, and
was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject to deductibility.
Combination, restructuringintegration and other acquisition-
relatedacquisition-related expenses described in (a) resulted in a tax benefit of approximatel
y
$0.1 million and incremental taxes of $1.6 million for
the three and six months ended June 30, 2022, respectively,
compared to $1.6 million and $2.2 million for the three and six
months ended June 30, 2021, respectively.
Strategic planning and transformation expenses describes in (b) above resulted in
incremental taxes of $0.7 million andapproximately $1.4 million for the three and
six months ended June 30, 2022, respectively.
Executive
transition costsMarch 31, 2022. Restructuring and related charges, net described in (c)(b) above resulted in incremental taxes of $0.2
million and $0.3 million for the three and six months ended
June 30, 2022, respectively,
compared to $0.1$1.0 million and $0.2 million for the three and six months ended
June 30, 2021,
March 31, 2023 and 2022, respectively.
Strategic planning expenses described in (c) above resulted in incremental taxes of $0.5 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively. Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes
of $0.2 million and $0.5
$0.3 million for the three and six months ended June 30, 2022, respectively.
March 31, 2022. Other charges described in (e) resulted in incremental
taxes of less than $0.1 million and a net tax benefit of less than $0.1 million for
the three and six months ended June 30, 2022,
respectively, compared
to $0.1 million during each of the three and six months ended June 30, 2021.
Brazilian non-income tax
credits described in (g) resulted in incremental taxes of $5.3less than $0.1 million during
for the three and six months ended June 30, 2021.
Loss
on extinguishment of debt described in (h) resulted in incremental
taxes of $1.6 million during the threeMarch 31, 2023 and six months ended
June 30, 2022.
2022, respectively. The impact of certain discrete items described in (i)(g) resulted in aincremental tax benefitexpense of
$3.5 less than $0.1 million and $6.9 million for
the three and six months ended June 30, 2022, respectively,
compared to $1.9 million and $1.5$3.4 million for the three and six
months ended June 30, 2021,March 31, 2023 and 2022, respectively.
(l)
(j)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.
(m)
(k)The Company calculates non-GAAP earnings per diluted share as non
-GAAPnon-GAAP net income attributable to the Company per
weighted average diluted shares outstanding using the “two-class share method”
to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet commitments or
obligations as of June 30, 2022.
March 31, 2023. The Company’s off
-balance
off-balance sheet items outstanding as of June 30, 2022March 31, 2023 includes approximately $5
million of total bank letters of credit and guarantees.
The bank
letters of credit and guarantees are not significant to the Company’s
liquidity or capital resources.
See Note 14 of Notes to Condensed
Consolidated Financial Statements in Item 1 of this Report.
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
Operations
Consolidated Operations Review – Comparison of the SecondFirst Quarter of 2022
2023 with the SecondFirst Quarter of 20212022
Net sales were $492.4
$500.1 million in the secondfirst quarter of 20222023 compared to $435.3$474.2 million in the secondfirst quarter
of 2021.
2022. The net
sales increase of $57.1$25.9 million or 13%5% quarter-over-quarter reflects increases
an increase in selling price and product mix of approximately 22%
and additional net sales from acquisitions of 1%19%, partially offset
by the unfavorable impact from foreign currency translation
of 6% and
a decline in organic sales volumes of approximately 4%11% and the unfavorable impact from foreign currency translation of approximately 3%.
The increase in selling price and product mix iswas primarily driven by price
increasesyear-over-year impact of our value-based pricing initiatives implemented to help offset the significant
increases in raw material and other input costs that began during 2021 and
continued into 2022.
costs. The decline in organic sales volumes was primarily attributable
to COVID-19 related production disruptionssofter end market conditions, notably in
China, EMEA and Asia/Pacific, the impacts of the ongoing war in Ukraine, the wind-down of the tolling agreement for products previously divested related
to the Combination, the ongoing war in Ukraine and the
Company’s ongoing value
-basedvalue-based pricing initiatives.initiatives.
COGS were $342.8$326.7 million in the secondfirst quarter of 2023 compared to $328.1 million in the first quarter of 2022, compared
a decrease of $1.4 million. The relatively consistent level of COGS in both periods reflects lower spend on the decline in current year volumes, which more than offset higher costs due to $280.8 millioninflationary pressures in the second quarter of 2021.
The increase
in COGS of $62.0 million or 22% was driven by the continued increases in the
Company’s global raw material, manufacturing and
supply chain and
logistics costs compared to the prior year.
Gross profit was $173.5 million in the secondfirst quarter of 2023 compared to $146.1 million in the first quarter of 2022, decreased $4.9an increase of $27.4 million or 3%
from the second quarter of 2021.
19%. The Company’s
reported gross margin in the secondfirst quarter of 2023 was 34.7% compared to 30.8% in the first quarter of 2022 was 30.4%
comparedprimarily driven by the year-over-year impact of our value-based pricing initiatives implemented to 35.5% inoffset the second quarter of 2021.
The Company’s
current quarter gross margin reflects the continued significant
increase increases in raw material and other input costs experienced throughoutcosts.
27
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Quaker Chemical Corporation
Management’s Discussion and Analysis
SG&A was $119.5 million in the secondfirst quarter of 2023 compared to $111.8 million in the first quarter of 2022, and the impacts of constraints on the global
supply chain, partially offset by the Company’s
ongoing value-
based pricing initiatives.
SG&A in the second quarter of 2022 increased $7.2an increase $7.8 million or 7% compared
to the second quarter, driven by higher labor-related costs including year-over-year inflationary increases and higher levels of 2021 due primarily to the
impact of sales increasesincentive compensation on direct selling costs, inflation driven higher
operating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent acquisitions
improved Company performance, partially offset by lower SG&A due to foreign currency
translation compared to the prior year.
During the second quarter of 2022, theThe Company incurred $1.8$4.1 million
of Combination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $6.7 million of expenses in the prior year secondfirst quarter
of 2022, primarily due to various professional
fees related to legal, financial and other advisory and consultant expenses
for integration activities including internal control readiness
and remediation.
activities. There were no similar expenses incurred in the first quarter of 2023. 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.
The Company incurred Restructuring and related (credits) charges
for of $4.0 million and $0.8 million during the first quarters of 2023 and 2022, respectively, related to reductions in headcount and
site closures under this program, net of adjustments to initial estimates for severance
of a credit of less than $0.1 millionthe Company’s previous and a charge
of $0.3 million during the second quarters of 2022 and 2021, respectively.
current restructuring programs. See the Non-GAAP Measures section of this Item, above.
Operating income in the secondfirst quarter of 20222023 was $31.9$49.9 million compared
to $38.8$29.4 million in the secondfirst quarter of 2021.
2022. Excluding non-recurring and non-core expenses that are not indicat
iveindicative of the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company’s
current quarter non-GAAP operating income decreasedincreased to
$38.8 million compared to $46.4 $56.3 million in the prior year secondfirst quarter of 2023 as compared to $39.2 million in the first quarter of 2022 primarily
due to the lowerhigher gross profit andpartially offset by higher SG&A,
described above.
The Company had otherOther expense, net of $8.4$2.2 million in both the second quarter
of 2022 compared to other income, net of $14.0
million in the secondfirst quarter of 2021.
2023 and 2022. Both the first quarter of 2023 and 2022 included foreign exchange transaction losses. The secondfirst quarter of 2023 also included a gain on insurance recoveries, while the first quarter of 2022 includesincluded an expense related to a loss on extinguishment of debt of $6.8 million
associated
with the refinancing of the Original Credit Facility while the second quarter
of 2021 included $13.3 million of income related to
certain non-income tax credits recorded by the Company’s
Brazilian subsidiaries.
Combination-related indemnification asset. See the Non-GAAP Measures section of this Item, above.
above.Interest expense, net, was $13.2 million in the first quarter of 2023 compared to $5.3 million in the first quarter of 2022, an increase of $7.9 million as a result of an increase in interest rates quarter-over-quarter, as well as higher average borrowings outstanding during the current year quarter.
The Company’s effective tax rates for the first quarters of 2023 and 2022 were 27.7% and 13.1%, respectively. The Company’s effective tax rate for the three months ended March 31, 2023 was impacted by various items including foreign tax inclusions, withholding taxes, foreign tax credits, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments. Comparatively, the prior year effective tax rate was largely impacted by changes in the valuation allowance for foreign tax credits due to legislative guidance issued and audit settlements reached with Italian tax authorities. In addition, the Company incurred higher foreign exchange transaction
losses in the second quarter of 2022 compared to the
prior year quarter.
Interest expense, net, increased $0.9 million compared to the second
quarter of 2021 as a result of increases in the average
borrowings outstanding in the second quarter of 2022 compared
to the second quarter of 2021 coupled with an increase in interest
rates quarter-over-quarter.
The Company’s effective
tax rates for the second quarters of 2022 and 2021 were 8.1% and 32.2%, respectively.
The Company’s
effective tax rate for the second quarter of 2022 was largely
driven by state tax benefits, a reduction in reserves for uncertain tax
positions relating to management fees, a deferred tax benefit associated with
an intercompany asset transfer,
withholding taxes for
increased forecasted dividends, and the effects of
lower pre-tax earnings and the mix of such earnings.
In addition, the Company
incurred higher tax expense during the second quarter ofthree months ended March 31, 2022 primarily
related to one of the CompanyCompany’s subsidiaries recording earnings in one of its
subsidiaries at a statutory tax rate of 25% while it awaitsthe recertification of
a its concessionary 15% tax rate which was available to the
Company during all of 2021.
Comparatively,
the prior year quarter effective tax rate was impacted by changes
in foreign tax credit
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
valuation allowances, tax law changes in foreign jurisdictions as well as the tax impacts
of certain non-income tax credits recorded by
the Company’s Brazilian subsidiaries.
pending receipt. Excluding the impact of non-core items in each quarter,
described in the Non-GAAP Measures
section of this Item, above, the Company estimates that its effective
tax rates for both the secondfirst quarters of 2023 and 2022 and 2021 would
have been approximately 24%27%.
The Company expects continued volatility in its effective tax rates due
to several factors, including the
timing and scope of tax audits and the expiration of applicable statutes of limitations
as they relate to uncertain tax positions, the
unpredictability of the timing and amount of certain incentives in various
tax jurisdictions, including the high technology incentive at
one of our subsidiaries based in China which is currently up for triennial renewal,
the treatment of certain acquisition-related costs and
the timing and amount of certain share-based compensation-related
tax benefits, among other factors.
Equity in net income of associated companies decreased $2.9was $4.6 million
in the secondfirst quarter of 2023 compared to $0.8 million in the first quarter of 2022, compared to the second
quarteran increase of 2021,$3.8 million, primarily due to lowerhigher current year income from
the Company’s interest in a captive insurance
company andas well as from the
Company’s 50% interest in a joint venture
in Korea.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 million
in both the second quartersfirst quarter of 20222023 and 2021.
2022.
Foreign exchange unfavorably impacted the Company’s
second first quarter of 20222023 results by approximately 11%7% driven
by the
impact from foreign currency translation on earnings as well as higher
foreign exchange transaction losses in the current quarter as
compared to the prior year secondfirst quarter.
Consolidated Operations Review – Comparison of the First Six Months of 2022
with the First Six Months of 2021
Net sales were $966.6 million in the first six months of 2022 compared to
$865.0 million in the first six months of 2021.
The net
sales increase of $101.5 million or 12% year-over-year reflects increases in selling
price and product mix of approximately 19% and
additional net sales from acquisitions of 2% partially offset by a decline
in organic sales volumes of approximately 5% and the
unfavorable impact from foreign currency translation of 4%.
The increase in selling price and product mix is primarily driven by price
increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021 and
continued into 2022.
The decline in sales volumes was primarily attributable to the comparison to a very strong
first half of 2021, and
primarily the first quarter of 2021, where customers replenished
their supply chains, the impact of lower volumes related to the tolling
agreement for products previously divested related to the Combination,
the ongoing war in Ukraine, COVID-19 disruptions in China
and the Company’s ongoing
value-based pricing initiatives.
COGS were $670.9 million in the first six months of 2022 compared
to $554.4 million in the first six months of 2021.
The
increase in COGS of $116.5 million or
21% was driven by the continued increases in the Company’s
global raw material and supply
chain and logistics costs compared to the prior year.
Gross profit in the first six months of 2022 decreased $15.0 million or 5%
from the first six months of 2021.
The Company’s
reported gross margin in the first six months of 2022 was 30.6% compared
to 35.9% in the first six months of 2021.
The Company’s
current year gross margin reflects a significant increase in
raw material and other input costs and the impacts of constraints on the
global supply chain, partially offset by the Company’s
ongoing value-based pricing initiatives.
SG&A in the first six months of 2022 increased $14.6 million or 7% compared
to the first six months of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation driven higher
operating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section of
this Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currency
translation compared to the prior year.
In addition, SG&A was lower in the
prior year period as a result of continued temporary cost saving measures the
Company implemented in response to the onset of
COVID-19.
During the first six months of 2022, the Company incurred $5.9 million of
Combination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghton
integration and other acquisition-related activities.
Comparatively,
the Company incurred $12.5 million of expenses in the prior year’s
first six months, primarily due to various
professional fees related to legal, financial and other advisory and
consultant expenses for integration activities including internal
control readiness and remediation.
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.
The Company incurred Restructuring and related charges for reductions
in headcount and site
closures under this program, net of adjustments to initial estimates for severance
of $0.8 million and $1.5 million during the first six
months of 2022 and 2021, respectively.
See the Non-GAAP Measures section of this Item, above.
Operating income in the first six months of 2022 was $61.3 million compared
to $83.7 million in the first six months of 2021.
Excluding non-recurring and non-core expenses that are not indicative
of the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company’s
current year non-GAAP operating income decreased to $78.0
million for the first six months of 2022 compared to $100.1 million in
the prior year’s first six months primarily due to the lower gross
profit and higher SG&A described above.
Quaker Chemical Corporation
Management’s Discussion and Analysis
37
The Company had other expense, net, of $10.6 million in the first six months
of 2022 compared to other income, net of $18.7
million in the first six months of 2021.
The first six months of 2022’s results include
$6.8 million loss on extinguishment of debt
related to the Company’s
refinancing the Original Credit Facility and other expenses of $2.4 million related
to the impact of certain
adjustments to the Company’s
Combination related indemnification receivables, while the prior
year’s first six months of 2022 other
income includes $13.3 million of income related to certain non-income
tax credits recorded by the Company’s
Brazilian subsidiary as
well as a $5.4 million gain on the sale of certain held-for-sale
real property assets.
See the Non-GAAP Measures section of this Item,
above.
In addition, the Company incurred higher foreign exchange transaction
losses in the first six months of 2022 compared to the
prior year period.
Interest expense, net, increased $0.8 million compared to the first six months
of 2021, due to an increase in the average
borrowings outstanding in the first six months of 2022 coupled with an
increase in interest rates in the current year as compared to the
prior year.
The Company’s effective
tax rates for the first six months of 2022 and 2021 were 10.9% and 28.4%, respectively.
The
Company’s eff
ective tax rate for the six months ended June 30, 2022 was largely driven
by changes in the valuation allowance for
foreign tax credits due to recently issued legislative guidance, impacts due
to settlements reached on certain tax audits, state tax
benefits, a reduction in reserves for uncertain tax positions relating to management
fees, a deferred tax benefit associated with an
intercompany asset transfer, withholding
taxes for increased forecasted dividends and the effects of lower
pre-tax earnings and the mix
of such earnings.
Comparatively, the prior year six month
effective tax rate was impacted by the sale of a subsidiary which included
certain held-for-sale real property assets related to the
Combination, certain U.S. tax law changes and the tax impact of certain
non-
income tax credits recorded by the Company’s
Brazilian subsidiaries.
Excluding the impact of all other non-core items in each period,
described in the Non-GAAP Measures section of this Item, above,
the Company estimates that its effective
tax rates for the first six
months of 2022 and 2021 would have been approximately 26% and 24%,
respectively.
In addition, the Company incurred higher tax
expense during the six months ended June 30, 2022 primarily related to
the Company recording earnings in one of its subsidiaries at a
statutory tax rate of 25% while it awaits recertification of a concessionary
15% tax rate, which was available to the Company during
all of 2021.
Equity in net income of associated companies decreased $7.3 million
in the first six months of 2022 compared to the first six
months of 2021, primarily due to lower current year income from
the Company’s interest in a captive insurance
company and from the
Company’s 50% interest in a joint venture
in Korea.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 million
in both the first six months of 2022 and 2021.
Foreign exchange unfavorably impacted the Company’s
first six months of 2022 results by approximately 7% driven by the
impact from foreign currency translation on earnings as well as higher
foreign exchange transaction losses in the current year as
compared to the prior year’s first six months.
Reportable Segments Review - Comparison of the SecondFirst Quarter of 202
2
2023 with the SecondFirst Quarter of 20212022
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are allocated
and the manner by which the chief operating decision maker of the Company
assesses its
performance.
During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The Company has fourCompany’s new structure includes three reportable segments: (i) Americas; (ii) EMEA; and (iii) Asia/Pacific.
28
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Quaker Chemical Corporation
Management’s Discussion and Analysis
The three geographic segments are comprised of the assets and operations in each respective region, including assets and operations formerly included in the Global Specialty Businesses segment. Prior to the Company’s reorganization, the Company’s historical reportable segments were: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed ofAll prior period information has been recast to reflect 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.
new reportable segments.
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s product
sales.
Operating expenses not directly attributable to the net sales of each respective
segment,
such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses
and Restructuring and related charges, and COGS related
to acquired inventory sold, which is adjusted to fair value as part of purchase
accounting,
are not included in segment operating earnings.
charges. Other items not specifically identified with the Company’s
reportable
segments include interest expense, net, and other (expense) income,expense, net.
Quaker Chemical Corporation
Management’s Discussion and Analysis
38
Americas
Americas represented approximately 35%50% of the Company’s
consolidated net sales in the secondfirst quarter of 2022.
2023. The segment’s net
sales were $172.7$251.4 million, an increase of $33.1$39.3 million or 24%19%, compared
to the secondfirst quarter of 2021.
2022. The increase in net sales was
due to higher selling price and product mix of 28%, additional net sales from
acquisitions of 1%22% and athe favorable impact fromof foreign
currency translation of 1%, partially offset by a 6% decline
decrease in organic sales volumes.
volumes of 4%. The increase in selling price and product mix is
was primarily driven by the year-over-year impact of price increases implemented throughout 2022 to help offset
the significant increases in raw material and other input costs that
began during 2021 and continued through the second quarter of 2022.
costs. The current quarter decline in organic sales volumes was
primarily driven by softer market conditions, the wind-down of the tolling agreement for products previously divested products
related to the Combination and the Company’s
ongoing value-
basedvalue-based pricing initiatives and lower volumes into the automotive industry
due to the semiconductor supply constraints, partially offset
by net new business wins.
wins. This segment’s operating earnings were
$33.8 $66.1 million, an increase of $0.1$21.1 million or 47%, compared to the second
first quarter of 2021.2022 primarily driven by higher net sales coupled with a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures impacting the business.
EMEA
EMEA represented approximately 31% of the Company’s consolidated net sales in the first quarter of 2023. The segment’s net sales were $152.4 million, an increase of $5.6 million or 4%, compared to the first quarter of 2022. This was driven by higher selling price and product mix of 19%, partially offset by the unfavorable impact of foreign currency translation of 4% and a decrease in sales volumes of 11%. The increase in selling price and product mix was primarily driven by the year-over-year impact of price increases implemented throughout 2022 to offset the significant increases in raw material and other input costs. The decline in sales volumes was primarily driven by softer market conditions, including the direct and indirect impacts of the ongoing war in Ukraine, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives and the wind-down of the tolling agreement for products previously divested related to the Combination. The unfavorable foreign currency translation impact was primarily due to the strengthening of the U.S. dollar against the euro as this exchange rate averaged 1.07 U.S. dollar per euro in the first quarter of 2023 compared to 1.12 U.S. dollar per euro in the first quarter of 2022. This segment’s operating earnings were $27.6 million, an increase of $4.3 million or 19%, compared to the first quarter of 2022. The increase in segment operating earnings was primarily driven by higher net sales which
were partially offset by
on-goingcoupled with a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures on our business.impacting the business.
EMEAAsia/Pacific
EMEAAsia/Pacific represented approximately 25%19% of the Company’s
consolidated net sales in the secondfirst quarter of 2022.
2023. The segment’s
net sales were $123.1$96.3 million, a decrease of $0.4$19.0 million or 16%, compared
to the secondfirst quarter of 2021.
This2022. The decrease in net sales was driven by lower organic sales volumes of 22% and an unfavorable impact from foreign currency translation of 6%, partially offset by higher selling
price and product mix of 21% and additional net sales from acquisitions of
approximately 1%, partially offset by the unfavorable
impact of foreign currency translation of 15% and a decrease in organic
sales volumes of 7%12%.
The increase in selling price and
product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other
input costs that began during 2021 and continued through the second
quarter of 2022.
The decline in organic sales volumes was
primarily driven by the current geopolitical and macroeconomic pressures
softer market conditions, including the direct and indirect impacts of the ongoing war
in Ukraine and the impact of the economic and other sanctions by other
nations on RussiaCOVID-19 lockdown measures, primarily in response to the war,China, as well as lower
volumes associated with the Company’s
ongoing value-based pricing initiatives, the tolling agreement for products
previously
divested related to the Combination and softer economic conditions in the
region.
initiatives. The unfavorable foreign exchange impact was
primarily due to the strengthening of the U.S. dollar against the euro
as this exchange rate averaged 1.07 in the second quarter of 2022
compared to 1.20 in the second quarter of 2021.
This segment’s operating earnings were
$13.3 million, a decrease of $10.1 million or
43% compared to the second quarter of 2021.
The decrease in segment operating earnings was primarily a result of higher net sales
which were more than offset by lower gross margins
due to inflationary pressures on the Company’s
costs exceeding its value-based
pricing actions.
Operating earnings were also negatively impacted by foreign currency translation.
Asia/Pacific
Asia/Pacific represented approximately 20% of the Company’s
consolidated net sales in the second quarter of 2022.
The
segment’s net sales were $99.8
million, an increase of $8.3 million or 9% compared to the second quarter
of 2021.
The increase in net
sales was driven by higher selling price and product mix of 17% partially
offset by lower organic sales volumes of 4% and an
unfavorable impact from foreign currency translation of 4%.
The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021
and
continued through the second quarter of 2022, partially offset
by a net increase in volumes elsewhere in the region.
The decline in
organic sales volumes was primarily driven by lower
sales volumes in China as a result of the government imposed COVID-19
quarantine and related production disruptions implemented
at the end of March 2022 and continued throughout the second quarter of
2022.
The unfavorable foreign exchange impact was primarily due to the
strengthening of the U.S. dollar against the Chinese
renminbi as this exchange rate averaged 6.61 in the second quarter of 2022
compared to 6.46 in the second quarter of 2021.
This
segment’s operating earnings were
$22.2 million, a decrease of $1.0 million or 4% compared to the second quarter
of 2021.
The
decrease in segment operating earnings was primarily a result of higher
net sales which was more than offset by lower gross margins
due to inflationary pressures and higher costs as a result of the COVID-19 production
disruptions in China.
Global Specialty Businesses
Global Specialty Businesses represented approximately 20% of the
Company’s consolidated net sales in the
second quarter of
2022.
The segment’s net sales were $96.8
million, an increase of $16.2 million or 20% compared to the second quarter of 2021.
The
increase in net sales was driven by higher selling price and product
mix of 11%, additional net sales from acquisitions of 3% and
an
increase in organic sales volumes of 10%, partially offset
by the unfavorable impact from foreign currency translation
of 4%.
The
increase in selling price and product mix was primarily driven by price
increases implemented to help offset the significant increases
in raw material and other input costs that began during 2021 and continued
through the second quarter of 2022.
The increase in
organic sales volumes was primarily attributable
to a continued favorable demand environment for this segment’s
products.
The
unfavorable foreign exchange impact was primarily due to the strengthening
of the6.84 Chinese renminbi per U.S. dollar against the euro as described in the
EMEA section above.
This segment’s operating earnings
were $27.8 million, an increase of $3.6 million or 15% compared to the
second quarter of 2021.
The increase in segment operating earnings reflects the higher net sales partially offset
by lower gross
margins in the current year and slightly higher operating
expenses due to inflationary pressures.
Quaker Chemical Corporation
Management’s Discussion and Analysis
39
Reportable Segments Review - Comparison of the First Six months of 2022
with the First Six months of 2021
Americas
Americas represented approximately 34% of the Company’s
consolidated net sales in the first six monthsquarter of 2022.
The segment’s
net sales were $326.9 million, an increase of $52.4 million or 19% compared
to the first six months of 2021.
The increase in net sales
was due to higher selling price and product mix of 26%, additional net sales from
acquisitions of 1% and the favorable impacts of
foreign currency translation of 1%, partially offset by
a decrease in organic sales volumes of 9%.
The increase in selling price and
product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other
input costs that began during 2021 and have continued into 2022.
The current year decline in organic sales volumes was primarily
driven by lower sales volumes into the automotive end market, the tolling
agreement for previously divested products related to the
Combination, the prior year period comparison which included a
strong rebound from COVID-19 impacts and the Company’s
ongoing value-based pricing initiatives, partially offset
by net new business wins.
This segment’s operating earnings
were $63.0
million, a decrease of $2.9 million or 4%2023 compared to the first six months of
2021.
The decrease in segment operating earnings was
primarily a result of higher net sales which was more than offset by
lower gross margins driven by inflationary pressures.
EMEA
EMEA represented approximately 26% of the Company’s
consolidated net sales6.35 Chinese renminbi per U.S. dollar in the first six monthsquarter of 2022.
The segment’s
net sales were $248.7 million, an increase of $5.5 million or 2% compared
to the first six months of 2021.
The increase in net sales
was due to higher selling price and product mix of 19% and additional
net sales from acquisitions of 2%, partially offset by the
unfavorable impact of foreign currency translation of 12% and
a decrease in organic sales volumes of 7%.
The increase in selling
price and product mix was primarily driven by price increases implemented
to help offset the significant increases in raw material and
other input costs that began during 2021 and have continued into 2022.
The decline in organic sales volumes was primarily driven by
the current geopolitical and macroeconomic pressures including
the direct and indirect impacts of the ongoing war in Ukraine and the
impact of the economic and other sanctions by other nations on Russia in respons
e
to the war, lower volumes associated with the
Company’s ongoing value
-based pricing initiatives, the tolling agreement for products previously divested
related to the Combination,
the prior year period comparison which included a strong rebound from
COVID-19 impacts,
and softer economic conditions in the
region in the current period, partially offset by net new business wins.
The unfavorable foreign exchange impact was primarily due
to
the strengthening of the U.S. dollar against the euro as this exchange rate
averaged 1.09 in the first six months of 2022 compared to
1.21 in first six months of 2021.
This segment’s operating earnings were
$30.0 million, a decrease of $18.6 million or 38% compared
to the first six months of 2021.
The decrease in segment operating earnings was primarily a result of higher
net sales which was more
than offset by lower gross margins driven
by significant inflationary pressures and the negative impact of foreign
currency translation
year-over-year.
Asia/Pacific
Asia/Pacific represented approximately 21% of the Company’s
consolidated net sales in the first six months of 2022.
The
segment’s net sales were $204.1
million, an increase of $15.8 million or 8% compared to the first six months of 2021.
The increase in
net sales was driven by higher selling price and product mix of 14% partially
offset by lower organic sales volumes of 4% and the
unfavorable impacts of foreign currency translation of 2%.
The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significant
increases in raw material and other input costs that began during 2021
and
continued into 2022.
The current year decline in organic sales volumes was primarily driven by
lower sales volumes in China as a
result of the government imposed COVID-19 quarantine and related
production disruptions implemented at the end of March 2022
and which continued throughout the second quarter of 2022 and the prior
year comparison which included a strong rebound from
COVID-19 impacts as customers replenished their supply chains, partially
offset by net new business wins.
This segment’s operating
earnings were $44.1 million, a decrease of $6.6 million or 13% compared
to the first six months of 2021.
The decrease in segment
operating earnings was primarily a result of higher net sales which was more
than offset by lower gross margins driven by significant
inflationary pressures and the unfavorable impact of foreign currency
translation.
Quaker Chemical Corporation
Management’s Discussion and Analysis
40
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the
Company’s consolidated net sales in the
first six months of
2022.
The segment’s net sales were $186.9
million, an increase of $27.9 million or 18% compared to the first six months of 2021.
The increase in net sales was driven by higher selling price and product
mix of 11%, an increase in organic sales volumes
of 6% and
additional net sales from acquisitions of 4%, partially offset
by the unfavorable impact from foreign currency translation of
approximately 3%.
The increase in selling price and product mix was primarily driven by year-over-year impact of price increases
implemented throughout 2022 to help offset
the significant increases in raw material and other input costs that began during
2021 and continued into 2022.
The increase in
organic sales volumes was primarily attributable
to a continued favorable demand environment for this segment’s
products.
The
unfavorable foreign exchange impact was primarily
due to the strengthening of the U.S. dollar against the euro described in the EMEA
section above.
costs. This segment’s operating earnings
were $52.9$27.7 million, an increase of $4.5$3.2 million or 9%13% compared to the first six
monthsquarter of 2021.
2022. The increase in segment operating earnings reflects higher net sales partially offset
by lower gross marginswas primarily driven by
a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures andas well as slightly lower levels of SG&A, which more than offset the negative impact of foreign currencydecline in net sales.
translation year-over-year.
29
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
41
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation Reform
Act of 1995)
Certain information included in this Report and other materials filed or
to be filed by Quaker Chemical Corporationus with the SEC,
as well as information included in oral statements or other written statements made
or to be made by us, contain or may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
These statements can be identified by the fact that they do not relate strictly to
historical or current facts.
We have based
these forward-looking statements on our current expectations about future events, including statements regarding the potential
effects of the
COVID-19 pandemic, the Russia and Ukraine conflict, inflation, bank failures, higher interest rate environment, global supply chain constraints on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity, and
remediate anyremain in compliance with the terms of ourthe Company’s credit facility, expectations about future demand and raw material weaknesses in internal control over
financial reporting,costs and statements regarding the impact of increased
raw material costs and pricing initiatives on our current
expectations about future events.
initiatives.
These forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, future
performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19 pandemic;
•
the timing and extent of the projected impacts on our business as a result of the Ukrainian
and Russian conflict and
actions taken by various governments and governmental organizat
ionsorganizations in response;
•
inflationary pressures, cost increases and the impacts of constraints and disruptions in the global supply
chain;
•the potential benefits of acquisitions
•the potential for a variety of macroeconomic events, including the possibility of global
or regional recessions, inflation
generally, continued or accelerated cost increases in
prices of raw materials such as oil and increasing interest rates, to impact the value
of our
assets or result in asset impairments;impairments or otherwise adversely affect our business;
•
our current and future results and plans including our sustainability goals;
and
•
statements that include the words “may,”
“could, “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend, “intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities,
operational matters, capital spending, and
financing sources.
From time to time, forward-looking statements are also included in the Company’s
other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,
or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for 20212022 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 conseque
nce
consequence of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements, whether
as a result of new information, future
events or otherwise.
However, any further disclosures made on
related subjects in the Company’s subsequent
reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’ products,
which subjects the Company to uncertainties related to downturns in a
customer’s business and unanticipated customer production
slowdowns and shutdowns, including as is currently being experienced by
many automotive industry companies as a result of supply chain disruption.disruptions.
Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic,
including actions taken in response to the pandemic by
various governments, which could exacerbate some or all of the other
risks and uncertainties faced by the Company,
as well as
inflationary pressures, including the potential for continued significant increases
in raw material costs, supply chain disruptions, customer
financial instability,
rising interest rates and the possibility of economic recession, worldwide economic
and political disruptions
including the impacts of the military conflict between Russia and Ukraine,
the economic and other sanctions imposed by other nations
on Russia, suspensions of activities in Russia by many multinational companies
and the potential expansion of military activity,
foreign currency fluctuations, significant changes in applicable tax
rates and regulations, future terrorist attacks and other acts of violence.
violence.
Furthermore, the Company is subject to the same business cycles as those experienced
by our customers in the steel,
automobile, aircraft, industrial equipment, and durable goods industries.
The ultimate impact of COVID-19 on our business will
depend on, among other things, the extent and duration of the pandemic,
the severity of the disease and the number of people infected
with the virus including new variants, the continued uncertainty regarding
global availability, administration,
acceptance and long-
term efficacy of vaccines, or other treatments for COVID-19 or
its variants, the longer-term effects on the economy of
the pandemic,
including the resulting market volatility,
and by the measures taken by governmental authorities and other third 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, such as fiscal stimulus and other legislation designed to
deliver monetary aid and other relief.
Other factors could also adversely affect us, including those related
to acquisitions and the
integration of acquired businesses.
30
Table of Contents
Quaker Chemical Corporation
Management’s Discussion and Analysis
42
integration of acquired businesses.
Our forward-looking statements are subject to risks, uncertainties and
assumptions about the
Company and its operations that are subject to change based on various important
factors, some of which are beyond our control.
These risks, uncertainties, and possible inaccurate assumptions relevant
to our business could cause our actual results to differ
materially
from expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-looking
statements.
For more information regarding these
risks and uncertainties as well as certain additional risks that we face, refer
to the Risk Factors section, which appears in Item 1A in
our 20212022 Form 10-K and in our quarterly and other reports filed from time to
time with the SEC.
This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
Quaker Houghton on the Internet
Financial results, news and other information about Quaker Houghton
can be accessed from the Company’s
website at
https://www.quakerhoughton.com.
This site includes important information on the Company’s
locations, products and services,
financial reports, news releases and career opportunities.
The Company’s periodic and current reports
on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental schedules filed therewith,
and amendments to those reports, filed with the SEC are
available on the Company’s website,
free of charge, as soon as reasonably practicable after they
are electronically filed with or
furnished to the SEC.
Information contained on, or that may be accessed through, the Company’s
website is not incorporated by
reference in this Report and, accordingly,
you should not consider that information part of this Report.
31
43Table of Contents
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
We have evaluated
the information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report on
Form
10-K for the year ended December 31, 2021,2022, and we believe there has been
no material change to that information, except the interest
rate risk noted below.
Interest Rate Risk.
The Company’s exposure
to interest rate risk relates primarily to its outstanding borrowings under its credit facility.
During June
2022, the Company entered into an amendment to its primary credit facility
(the (the “Original Credit Facility”, or as amended, the
“Amended Credit “Credit Facility”).
SeeNote 20 of Notes to Consolidated Financial Statements included in Item 8 of our 2022 Form 10-K and Note 14 of Notes to Condensed Consolidated Financial Statements, which appears
in Item 1 of this
Report.
As of June 30,December 31, 2022, borrowings under the Amended Credit Facility bear interest at either
term SOFRSecured Overnight Financing Rate (“SOFR”) or a base rate, in each
case, plus an applicable margin based upon the Company’s
consolidated net leverage ratio, and, in the case of term SOFR, a spread
adjustment equal to 0.10% per annum.
As a result of the variable interest rates applicable under the Amended Credit Facility,
if
interest rates rise significantly,
the cost of debt to the Company will increase.
This canmay have an adverse effect on the Company,
depending on the extent of the Company’s
borrowings outstanding throughout a given year.
As of June 30,December 31, 2022, and March 31, 2023, the Company had outstanding borrowings under the
Amended Credit Facility of approximately $977.6
million.
$943.5 million and $931.5 million, respectively. The weighted average interest rate applicable on outstanding borrowings under the Amended
Credit Facility was approximately 2.8%4.9% and 5.9% as of
June 30, 2022.
As of December 31, 2021, the Company had outstanding borrowings under the
Original Credit Facility of
approximately $889.6 million.2022, and March 31, 2023, respectively. The variableweighted average interest rate incurredapplicable on the outstanding
borrowings under the Original Credit Facility
and the Credit Facility during the year ended December 31, 20212022 was approximately 1.6%3.0% and the three months ended March 31, 2023 was approximately 5.8%.
If An interest rates had changed by 10% during 2021, the
Company’srate change of 100 basis points would result in an approximate $9.4 million and $9.3 million increase or decrease to interest expense for
the periodyear ended December 31, 2021 on its credit facilities, including2022 and the Original
Credit Facilityyear ended December 31, 2023, respectively.
borrowings outstanding post-closing of the Combination, would have correspondingly
increased or decreased by approximately $1
million.
Likewise, if interest rates had changed by 10% during the six month period ended June
30, 2022, the Company’s interest
expense for the six month period ended June 30, 2022 on its credit facilities, including
the Amended Credit Facility borrowings
outstanding, would have correspondingly increased or decreased by approximately
$2 million.
The Original Credit Facility required the Company to fix its variable interest rates on
at least 20% of its total term loans.
In order
to satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Original
Credit Facility, in November
2019,the first quarter of 2023, the Company entered into $170.0$300.0 million notional amounts of
three year interest rate swaps atto convert a
base portion of the Company’s variable rate borrowings into an average fixed rate obligation of 1.64%3.64% plus an applicable margin as provided in
the Original Credit Facility based on
the Company’s consolidated
net
leverage ratio.
At As of March 31, 2023, the time the Company entered into the swaps, and as of June 30, 2022, the aggregate
interest rate on the swaps,
including the fixed base rate plus anthe applicable margin,
was 3.1%5.2%.
These interest rate swaps are designated and qualify as cash flow hedges. The Amended Credit Facility does not requireCompany has previously used derivative financial instruments primarily for the Companypurpose of hedging exposures to fixfluctuations in interest rates.
variable interest rates on any portion of its borrowings.
44
Item 4.
Controls and Procedures.
Evaluation of disclosure controls
and procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), our management, including our
principal executive officer and principal financial officer,
has
evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this Report.
Based on that evaluation, our principal executive officer and our principal
financial officer
have concluded that, as of June 30, 2022,March 31, 2023, the end of the period covered by this Report, our
disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) were effective.
Changes in internal control over financial reporting.
As required by Rule 13a-15(d) under the Exchange Act, our
management, including our principal executive officer
and principal financial officer, has evaluated
our internal control over
financial reporting to determine whether any changes to our internal control
over financial reporting occurred during the
quarter ended June 30, 2022March 31, 2023 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Based on that evaluation, there were no changes that have materially affected,
or are reasonably
likely to materially affect, our internal control over financial reporting
during the quarter ended June 30, 2022.March 31, 2023.
32
Table of Contents
45
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 18 of the Notes to
the Condensed Consolidated Financial Statements in Part
I, Item 1, of this Report.
Item 1A. Risk Factors.
The Company’s business, financial
condition, results of operations and cash flows are subject to various risks that
could cause
actual results to vary materially from recent results or from anticipated future
results.
In addition to the other information set forth in
this Report, you should carefully consider the risk factors previously disclosed
in Part I, Item 1A of our 20212022 Form 10-K.
While there
There have been no material changes to the risk factors described in our 2021 Form 10-K,
reference is made to the developments discussedtherein.
under the headings
On-going impact of COVID-19
and
Impact of Political Conflicts
within Part I, Item 2 of this Report.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information concerning shares of
the Company’s common stock acquired
by the Company during
the period covered by this Report:
(c)
Period(a)
Total Number
of Shares
Purchased (1)		(b)
Average
Price Paid
Per Share (2)		(c)
Total Number of
Shares Purchased as part of Publicly Announced Plans or Programs		(d)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (3)
January 1 - January 31103$196.87 —$86,865,026 
February 1 - February 2830,521$215.44 —$86,865,026 
March 1 - March 315,033$193.28 —$86,865,026 
Total35,657$201.86 —$86,865,026 
(d)
Total
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
Value of
Shares that
Total
Number
Average
as part of
May Yet
be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
April 1 - April 30
280
$
162.86
—
$
86,865,026
May 1 - May 31
729
$
147.04
—
$
86,865,026
June 1 - June 30
56
$
149.52
—
$
86,865,026
Total
1,065
$
151.33
—
$
86,865,026
(1)
All of these shares were acquired from employees related to the surrender
of Quaker Chemical Corporation shares in
payment of the exercise price of employee stock options exercised or
for the payment of taxes upon exercise of employee
stock options or the vesting of restricted stock awards or units.
(2)
The price paid for shares acquired from employees pursuant to employee
benefit and share-based compensation plans is
based on the closing price of the Company’s
common stock on the date of exercise or vesting as specified by the plan
pursuant to which the applicable option, restricted stock award, or restricted
stock unit was granted.
(3)
On May 6, 2015, the Board of Directors of the Company approved, and the
Company announced, a share repurchase
program, pursuant to which the Company is authorized to repurchase up to
$100,000,000 $100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”), and it has no expiration
date.
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program during the
quarter ended June 30, 2022.March 31, 2023.
Limitation on the Payment of Dividends
The Amended Credit Facility has certain limitations on the payment of
dividends and other so-called restricted payments.
payment covenants. See
Note 14 of Notes to Condensed Consolidated Financial Statements, in Part
I, Item 1, of this Report.
33
Table of Content
46
Item 6.
Exhibits.
(a) Exhibits
3.1
–
3.2
–
10.1
–
Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form
8-K filed on June 21, 2022.
10.2
–
10.3
–
10.4
–
10.5
–
31.1
–
31.2
–
32.1
–
32.2
–
101.INS
–
Inline XBRL Instance Document*
101.SCH
–
Inline XBRL Taxonomy
Schema Document*
101.CAL
–
Inline XBRL Taxonomy
Calculation Linkbase Document*
101.DEF
–
Inline XBRL Taxonomy
Definition Linkbase Document*
101.LAB
–
Inline XBRL Taxonomy
Label Linkbase Document*
101.PRE
–
Inline XBRL Taxonomy
Presentation Linkbase Document*
104
–
Cover Page Interactive Data File (formatted as Inline XBRL and contained
in Exhibit 101.INS)*
3.1–
Amended and Restated Articles of Incorporation (as amended through July 24, 2019). Incorporated by reference to Exhibit 3.1 as filed by the Registrant with its quarterly report on Form 10-Q filed on August 1, 2019.
3.2–
Amended and Restated By-laws (effective December 19, 2022). Incorporated by reference to Exhibit 3.1 as filed by the Registrant within its current report on Form 8-K on December 20, 2022.
 10.1–
Employment Agreement by and between the Registrant and Jeffrey Fleck dated January 23, 2023, effective February 27, 2023.*†
 10.2–
Form of Change of Control Agreement by and between the Registrant and certain executive officers (including Jeffrey Fleck).*†
 10.3–
31.1–
Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.*
31.2–
Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.*
32.1–
Certification of Chief Executive Officer of the Company Pursuant to 18 U.S. C. Section 1350.**
32.2–
Certification of Chief Financial Officer of the Company Pursuant to 18 U.S. C. Section 1350.**
101.INS–Inline XBRL Instance Document*
101.SCH–Inline XBRL Taxonomy Schema Document*
101.CAL–Inline XBRL Taxonomy Calculation Linkbase Document*
101.DEF–Inline XBRL Taxonomy Definition Linkbase Document*
101.LAB–Inline XBRL Taxonomy Label Linkbase Document*
101.PRE–Inline XBRL Taxonomy Presentation Linkbase Document*
104–Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)*
*Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
*********
34
Table of Content
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
QUAKER CHEMICAL CORPORATION
(Registrant)
/s/ Shane W. Hostetter
Date: May 4, 2023Shane W. Hostetter, Senior Vice President, Chief Financial Officer (officer duly authorized on behalf of, and principal financial officer of, the Registrant)
QUAKER CHEMICAL CORPORATION
(Registrant)
/s/ Shane W. Hostetter
Date: August 4, 2022
Shane W. Hostetter,
Senior Vice President, Chief Financial
Officer (officer duly authorized on behalf of, and principal
financial officer of, the Registrant)35