10-Q
Quaker Chemical Corp (KWR)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended
March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number
001-12019
QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania
23-0993790
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
19428 – 2380
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90
days.
Yes
☒
No
☐
Indicate by check mark whether the Registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,”
and “emerging growth company” in Rule 12b-2
of
the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
Indicate the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Number of Shares of Common Stock
Outstanding on April 30, 2021
17,873,331
1
QUAKER CHEMICAL CORPORATION
AND CONSOLIDATED
SUBSIDIARIES
Page
PART
I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and March 31, 2020
2
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and
March 31, 2020
3
Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020
4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and March 31, 2020
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
25
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
37
Item 4.
Controls and Procedures.
38
PART
II.
OTHER INFORMATION.
40
Item 1.
Legal Proceedings.
40
Item 1A.
Risk Factors.
40
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
40
Item 6.
Exhibits.
41
Signatures
41
2
PART
I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended March 31,
2021
2020
Net sales
$
429,783
$
378,561
Cost of goods sold (excluding amortization expense -
See Note 14)
273,589
244,710
Gross profit
156,194
133,851
Selling, general and administrative expenses
104,310
98,701
Indefinite-lived intangible asset impairment
—
38,000
Restructuring and related charges
1,175
1,716
Combination, integration and other acquisition-related
expenses
5,815
7,878
Operating income (loss)
44,894
(12,444)
Other income (expense), net
4,687
(21,175)
Interest expense, net
(5,470)
(8,461)
Income (loss) before taxes and equity in net income of associated companies
44,111
(42,080)
Taxes on income
(loss) before equity in net income of associated companies
10,689
(13,070)
Income (loss) before equity in net income of associated companies
33,422
(29,010)
Equity in net income of associated companies
5,210
666
Net income (loss)
38,632
(28,344)
Less: Net income attributable to noncontrolling interest
17
37
Net income (loss) attributable to Quaker Chemical Corporation
$
38,615
$
(28,381)
Earnings per common share data:
Net income (loss) attributable to Quaker Chemical Corporation
common
shareholders – basic
$
2.16
$
(1.60)
Net income (loss) attributable to Quaker Chemical Corporation
common
shareholders – diluted
$
2.15
$
(1.60)
Dividends declared
$
0.395
$
0.385
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive
Income
(Dollars in thousands)
Unaudited
Three Months Ended March 31,
2021
2020
Net income (loss)
$
38,632
$
(28,344)
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(25,461)
(54,751)
Defined benefit retirement plans
1,292
16,957
Current period change in fair value of derivatives
562
(3,981)
Unrealized loss on available-for-sale securities
(3,025)
(1,711)
Other comprehensive loss
(26,632)
(43,486)
Comprehensive income (loss)
12,000
(71,830)
Less: Comprehensive (income) loss attributable to noncontrolling
interest
(15)
95
Comprehensive income (loss) attributable to Quaker Chemical Corporation
$
11,985
$
(71,735)
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
Unaudited
March 31,
December 31,
2021
2020
ASSETS
Current assets
Cash and cash equivalents
$
163,455
$
181,833
Accounts receivable, net
411,523
372,974
Inventories
Raw materials and supplies
97,631
86,148
Work-in-process
and finished goods
110,147
101,616
Prepaid expenses and other current assets
48,285
50,156
Total current
assets
831,041
792,727
Property, plant and
equipment, at cost
416,514
423,253
Less accumulated depreciation
(220,724)
(219,370)
Property, plant and
equipment, net
195,790
203,883
Right of use lease assets
38,027
38,507
Goodwill
627,574
631,212
Other intangible assets, net
1,075,343
1,081,358
Investments in associated companies
96,213
95,785
Deferred tax assets
17,057
16,566
Other non-current assets
31,906
31,796
Total assets
$
2,912,951
$
2,891,834
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
43,330
$
38,967
Accounts and other payables
214,015
198,872
Accrued compensation
29,091
43,300
Accrued restructuring
5,970
8,248
Other current liabilities
104,029
93,573
Total current
liabilities
396,435
382,960
Long-term debt
859,433
849,068
Long-term lease liabilities
27,050
27,070
Deferred tax liabilities
186,031
192,763
Other non-current liabilities
114,549
119,059
Total liabilities
1,583,498
1,570,920
Commitments and contingencies (Note 19)
Equity
Common stock, $
1
par value; authorized
30,000,000
shares; issued and
outstanding 2021 –
17,875,076
shares; 2020 –
17,850,616
shares
17,875
17,851
Capital in excess of par value
908,748
905,171
Retained earnings
455,493
423,940
Accumulated other comprehensive loss
(53,228)
(26,598)
Total Quaker
shareholders’ equity
1,328,888
1,320,364
Noncontrolling interest
565
550
Total equity
1,329,453
1,320,914
Total liabilities and
equity
$
2,912,951
$
2,891,834
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Unaudited
Three Months Ended March 31,
2021
2020
Cash flows from operating activities
Net income (loss)
$
38,632
$
(28,344)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating
activities:
Amortization of debt issuance costs
1,187
1,187
Depreciation and amortization
22,145
21,197
Equity in undistributed earnings of associated companies,
net of dividends
(5,105)
4,285
Acquisition-related fair value adjustments related to inventory
801
—
Deferred compensation, deferred taxes and other,
net
(9,888)
(22,988)
Share-based compensation
3,779
4,682
Gain on disposal of property,
plant, equipment and other assets
(5,410)
(2)
Insurance settlement realized
—
(229)
Indefinite-lived intangible asset impairment
—
38,000
Combination and other acquisition-related expenses, net
of payments
(2,884)
(519)
Restructuring and related charges
1,175
1,716
Pension and other postretirement benefits
(1,034)
22,453
(Decrease) increase in cash from changes in current assets and
current
liabilities, net of acquisitions:
Accounts receivable
(46,270)
2,322
Inventories
(24,994)
(10,162)
Prepaid expenses and other current assets
(8,315)
(3,263)
Change in restructuring liabilities
(3,034)
(4,841)
Accounts payable and accrued liabilities
26,597
(5,275)
Net cash (used in) provided by operating activities
(12,618)
20,219
Cash flows from investing activities
Investments in property,
plant and equipment
(3,934)
(4,892)
Payments related to acquisitions, net of cash acquired
(26,655)
(3,160)
Proceeds from disposition of assets
14,744
—
Insurance settlement interest earned
—
31
Net cash used in investing activities
(15,845)
(8,021)
Cash flows from financing activities
Payments of long-term debt
(9,551)
(9,371)
Borrowings on revolving credit facilities, net
30,000
205,500
Repayments on other debt, net
(188)
(185)
Dividends paid
(7,052)
(6,828)
Stock options exercised, other
(178)
(696)
Purchase of noncontrolling interest in affiliates
—
(1,047)
Distributions to noncontrolling affiliate shareholders
—
(751)
Net cash provided by financing activities
13,031
186,622
Effect of foreign exchange rate changes on
cash
(3,008)
(6,424)
Net (decrease) increase in cash, cash equivalents and restricted
cash
(18,440)
192,396
Cash, cash equivalents and restricted cash at the beginning
of the period
181,895
143,555
Cash, cash equivalents and restricted cash at the end of
the period
$
163,455
$
335,951
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
6
Note 1 – Basis of Presentation and Description of Business
Basis of Presentation
As used in these Notes to Condensed Consolidated
Financial Statements, the terms “Quaker”, “Quaker Houghton”,
the
“Company”, “we”, and “our” refer to Quaker Chemical
Corporation (doing business as Quaker Houghton), its subsidiaries, and
associated companies, unless the context otherwise requires.
As used in these Notes to Condensed Consolidated
Financial Statements,
the term Legacy Quaker refers to the Company prior
to the closing of its combination with Houghton International,
Inc. (“Houghton”)
(herein referred to as the “Combination”).
The condensed consolidated financial statements included herein
are unaudited and have
been prepared in accordance with generally accepted
accounting principles in the United States (“U.S. GAAP”) for
interim financial
reporting and the United States Securities and Exchange Commission
(“SEC”) regulations.
Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with U.S. GAAP have been condensed or
omitted
pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect all
adjustments which are
necessary for a fair statement of the financial position,
results of operations and cash flows for the interim periods.
The results for the
three months ended March 31, 2021 are not necessarily
indicative of the results to be expected for the full year.
These financial
statements should be read in conjunction with the Company’s
Annual Report filed on Form 10-K for the year
ended December 31,
2020 (the “2020 Form 10-K”).
Description of Business
The Company was organized in 1918, incorporated
as a Pennsylvania business corporation in 1930, and in August
2019
completed the Combination with Houghton to form
Quaker Houghton.
Quaker Houghton is a 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, mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range
of formulated chemical specialty products and offers
chemical management services (which the Company refers
to as “Fluidcare”) for various heavy industrial and manufacturing
applications throughout its
four
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,
effective July 1, 2018, Argentina’s
economy was considered hyper-inflationary under U.S.
GAAP.
As a result, the Company began
applying hyper-inflationary accounting with respect
to the Company's wholly owned Argentine
subsidiary beginning July 1, 2018.
In
addition, Houghton has an Argentina
subsidiary to which hyper-inflationary accounting also is applied.
As of, and for the three
months ended March 31, 2021, the Company's Argentine
subsidiaries represented less than
1
% of the Company’s consolidated
total
assets and net sales, respectively.
During the three months ended March 31, 2021 and 2020,
the Company recorded $
0.2
million and
$
0.1
million, respectively, of
remeasurement losses associated with the applicable currency conversions
related to Argentina.
These
losses were recorded within foreign exchange (losses) gains,
net, which is a component of other income (expense),
net, in the
Company’s Condensed
Consolidated Statements of Operations.
COVID-19
Management continues to monitor the impact that the COVID-19
pandemic is having on the Company,
the overall specialty
chemical industry,
and the economies and markets in which the Company operates.
The full extent of the COVID-19 pandemic
related business and travel restrictions and changes to
business and consumer behavior intended to reduce its spread are
uncertain as of
the date of this Quarterly Report on Form 10-Q for the
period ended March 31, 2021 (the “Report”) as COVID-19
and the responses
of governmental authorities continue to evolve globally.
Further, management continues to
evaluate how COVID-19-related circumstances, such as remote
work arrangements, affect
financial reporting processes, internal control over financial
reporting, and disclosure controls and procedures.
While the
circumstances have presented and are expected to continue
to present challenges, at this time, Management does not believe that
COVID-19 has had a material impact on financial reporting
processes, internal control over financial reporting,
and disclosure
controls and procedures.
The Company cannot reasonably estimate the magnitude
of the effects these conditions will have on the Company’s
operations in
the future as they are subject to significant uncertainties
relating to the ultimate geographic spread of the virus,
the incidence and
severity of the symptoms, the duration or resurgence
of the outbreak, the global availability and acceptance of vaccines
as well as their
efficacy,
the length of the travel restrictions and business
closures imposed by governments of impacted countries,
and the economic
response by governments of impacted countries.
To the extent
that the Company’s customers and
suppliers continue to be significantly and adversely impacted by
COVID-19, this
could reduce the availability,
or result in delays, of materials or supplies to or from
the Company, which in
turn could significantly
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
7
interrupt the Company’s
business operations.
Such impacts could grow and become more significant to the
Company’s operations
and the Company’s liquidity
or financial position.
Therefore, given the speed and frequency of continuously
evolving developments
with respect to this pandemic, the Company cannot reasonably
estimate the magnitude or the full extent to which COVID-19
may
impact the Company’s results
of operations, liquidity or financial position.
Note 2 – Business Acquisitions
2021 Acquisitions
In February 2021, the Company acquired a tin-plating
solutions business for the steel end market for approximately $
25
million.
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.
As of March 31, 2021, the allocation of the
purchase price has not been finalized and the
one-year
measurement period has not ended.
Further adjustments may be necessary as a
result of the Company’s
on-going assessment of additional information related to the fair value
of assets acquired and liabilities
assumed.
Additionally, in
February 2021, the Company acquired a
38
% ownership interest in Grindaix-GmbH (“Grindaix”),
a privately
held, German-based, high-tech provider of coolant control
and delivery systems for approximately
1.4
million EUR or approximately
$
1.7
million.
Grindaix's solutions apply to a wide range of machining processes,
including grinding applications in the metalworking
sector.
The Company recorded the investment in Grindaix as an equity
method investment within the Condensed Consolidated
Financial Statements.
The results of operations of the acquired businesses subsequent
to the respective acquisition dates are included in
the Condensed
Consolidated Statements of Operations as of March
31, 2021.
Transaction expenses associated with these
acquisitions are included in
Combination, integration and other acquisition-related
expenses in the Company’s Condensed
Consolidated Statements of Operations.
Certain pro forma and other information is not presented,
as the operations of the acquired businesses are not considered material to
the overall operations of the Company for the periods presented.
Previous Acquisitions
In December 2020,
the Company completed its acquisition of Coral Chemical Company
(“Coral”), a privately held, U.S.-based
provider of metal finishing fluid solutions.
The acquisition provides technical expertise and product solutions
for pre-treatment,
metalworking and wastewater treatment applications
to the beverage cans and general industrial end markets.
The original purchase
price was approximately $
54.1
million, subject to routine and customary post-closing adjustments related
to working capital and net
indebtedness levels.
The Company anticipates finalizing its post-closing adjustments
for the Coral acquisition in the second quarter of
2021 and currently estimates it will receive approximately
$
0.4
million to settle such adjustments.
The following table presents the preliminary estimated fair
values of Coral net assets acquired:
Measurement
December 22,
December 22,
Period
2020
2020 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
958
$
—
$
958
Accounts receivable
8,473
—
8,473
Inventories
4,527
—
4,527
Prepaid expenses and other assets
181
—
181
Property, plant and
equipment
10,467
652
11,119
Intangible assets
30,300
(500)
29,800
Goodwill
2,814
53
2,867
Total assets purchased
57,720
205
57,925
Long-term debt including current portions and finance leases
183
556
739
Accounts payable, accrued expenses and other accrued
liabilities
3,482
—
3,482
Total liabilities assumed
3,665
556
4,221
Total consideration
paid for Coral
54,055
(351)
53,704
Less: estimated purchase price settlement
—
(351)
(351)
Less: cash acquired
958
—
958
Net cash paid for Coral
$
53,097
$
—
$
53,097
(1) As previously disclosed in the Company’s
2020 Form 10-K.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
8
Measurement period adjustments recorded during the first
quarter of 2021 include certain adjustments related to refining
original
estimates for assets and liabilities for certain acquired
finance leases, as well the adjustment to reflect the expected
settlement of post-
closing working capital and net indebtedness true ups to
the original purchase price.
As of March 31, 2021,
the allocation of the
purchase price for Coral has not been finalized and the
one-year
measurement period has not ended.
Further adjustments may be
necessary as a result of the Company’s
on-going assessment of additional information related to the
fair value of assets acquired and
liabilities assumed.
In May 2020, the Company acquired Tel
Nordic ApS (“TEL”), a company that specializes in lubricants and engineering
primarily
in high pressure aluminum die casting for its Europe,
Middle East and Africa (“EMEA”) reportable segment.
Consideration
paid was
in the form of a convertible promissory note in the amount
of
20.0
million DKK, or approximately $
2.9
million, which was
subsequently converted into shares of the Company’s
common stock.
An adjustment to the purchase price of approximately
0.4
million DKK, or less than $
0.1
million, was made as a result of finalizing a post-closing
settlement in the second quarter of 2020.
The
Company allocated approximately $
2.4
million of the purchase price to intangible assets to be amortized
over
17
years.
In addition,
the Company recorded approximately $
0.5
million of goodwill, related to expected value not allocated to
other acquired assets, none
of which will be tax deductible.
As of March 31, 2021, the allocation of the purchase price
of TEL has not been finalized and the
one-
measurement period has not ended.
Further adjustments may be necessary as a result of the Company’s
on-going assessment of
additional information related to the fair value of assets acquired
and liabilities assumed.
In March 2020, the Company acquired the remaining
49
% ownership interest in one of its South African affiliates,
Quaker
Chemical South Africa Limited (“QSA”) for
16.7
million ZAR, or approximately $
1.0
million, from its joint venture partner PQ
Holdings South Africa.
QSA is a part of the Company’s
Europe, Middle East and Africa (“EMEA”) reportable segment.
As this
acquisition was a change in an existing controlling ownership,
the Company recorded $
0.7
million of excess purchase price over the
carrying value of the non-controlling interest in Capital
in excess of par value.
In October 2019, the Company completed its acquisition
of the operating divisions of Norman Hay plc (“Norman
Hay”), a private
U.K. company that provides specialty chemicals, operating
equipment, and services to industrial end markets.
The acquisition adds
new technologies in automotive, original equipment
manufacturer, and aerospace, as well as engineering
expertise which is expected
to strengthen the Company’s
existing equipment solutions platform.
The original purchase price was
80.0
million GBP,
on a cash-free
and debt-free basis, subject to routine and customary
post-closing adjustments related to working capital and
net indebtedness levels.
The Company finalized its post-closing adjustments for the
Norman Hay acquisition and paid approximately
2.5
million GBP during
the first quarter of 2020 to settle such adjustments.
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards
Adopted
The Financial Accounting Standards Board (“FASB”)
issued Account Standards Update (“ASU”)
ASU 2019-12
, Income Taxes
(Topic
740): Simplifying the Accounting for Income Taxes
in December 2019 to simplify the accounting for income taxes.
The
guidance within this accounting standard update
removes certain exceptions, including the exception to the
incremental approach for
certain intra-period tax allocations, to the requirement
to recognize or not recognize certain deferred tax liabilities for
equity method
investments and foreign subsidiaries, and to the general
methodology for calculating income taxes in an interim period
when a year-to-
date loss exceeds the anticipated loss for the year.
Further, the guidance simplifies the accounting
related to franchise taxes, the step
up in tax basis for goodwill, current and deferred tax
expense, and codification improvements for income taxes related
to employee
stock ownership plans.
The guidance is effective for annual and interim
periods beginning after December 15, 2020.
The Company
adopted this standard on a prospective basis, effective
January 1, 2021.
There was no cumulative effect of adoption recorded
within
retained earnings on January 1, 2021.
The FASB issued
ASU 2020-04,
Reference Rate Reform (To
pic 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.
As of March 31, 2021, the
expedients provided in ASU 2020-04 do not presently
impact the Company; however, the Company
will continue to monitor for
potential impacts on its consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
9
Note 4 – Business Segments
The Company’s operating
segments, which are consistent with its reportable segments,
reflect the structure of the Company’s
internal organization, the method by which
the Company’s resources are allocated
and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has
four
reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
The three geographic segments are composed of the net
sales and operations in
each respective region, excluding net sales and operations
managed globally by the Global Specialty Businesses segment, which
includes the Company’s
container, metal finishing, mining,
offshore, specialty coatings, specialty grease and
Norman Hay businesses.
Segment operating earnings for each of the Company’s
reportable segments are comprised of the segment’s
net sales less directly
related cost of goods sold (“COGS”) and 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
income (expense),
net.
The following table presents information about the performance
of the Company’s reportable operating
segments for the three
months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
2021
2020
Net sales
Americas
$
134,871
$
129,896
EMEA
119,814
104,839
Asia/Pacific
96,706
73,552
Global Specialty Businesses
78,392
70,274
Total
net sales
$
429,783
$
378,561
Segment operating earnings
Americas
$
32,234
$
29,188
EMEA
25,244
18,359
Asia/Pacific
27,478
19,541
Global Specialty Businesses
24,169
20,560
Total
segment operating earnings
109,125
87,648
Combination, integration and other acquisition-related
expenses
(5,815)
(7,878)
Restructuring and related charges
(1,175)
(1,716)
Fair value step up of acquired inventory sold
(801)
—
Indefinite-lived intangible asset impairment
—
(38,000)
Non-operating and administrative expenses
(40,992)
(38,451)
Depreciation of corporate assets and amortization
(15,448)
(14,047)
Operating income (loss)
44,894
(12,444)
Other income (expense), net
4,687
(21,175)
Interest expense, net
(5,470)
(8,461)
Income (loss) before taxes and equity in net income of
associated companies
$
44,111
$
(42,080)
Inter-segment revenues for the three months ended
March 31, 2021 and 2020 were $
3.3
million and $
2.9
million for Americas,
$
8.8
million and $
5.5
million for EMEA, $
0.1
million and $
0.1
million for Asia/Pacific and $
2.0
million and $
1.3
million for Global
Specialty Businesses, respectively.
However, 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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
10
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad
range of formulated chemical specialty products and offers
chemical
management services (“Fluidcare”) for various heavy
industrial and manufacturing applications throughout its four
segments.
A
significant portion of the Company’s
revenues are realized from the sale of process fluids and services
made directly to manufacturers
through its own employees and its Fluidcare programs,
with the balance being handled through distributors and
agents.
As part of the Company’s
Fluidcare business, certain third-party product sales to customers are
managed by the Company.
Where
the Company acts as a principal, revenues are recognized
on a gross reporting basis at the selling price negotiated with
its customers.
Where the Company acts as an agent, revenue is recognized on
a net reporting basis at the amount of the administrative fee earned
by
the Company for ordering the goods.
The Company transferred third-party products under arrangements recognized
on a net reporting
basis of $
17.8
million and $
12.5
million for the three months ended March 31, 2021 and 2020,
respectively.
As previously disclosed in the Company’s
2020 Form 10-K, during 2020,
the Company’s five largest
customers (each composed
of multiple subsidiaries or divisions with semiautonomous
purchasing authority) accounted for approximately
10
% of consolidated net
sales, with its largest customer accounting
for approximately
3
% of consolidated net sales.
Revenue Recognition Model
The Company applies the five-step model in the FASB’s
guidance, which requires the Company to: (i) identify
the contract with a
customer; (ii) identify the performance obligations in
the contract; (iii) determine the transaction price; (iv) allocate the
transaction
price to the performance obligations in the contract; and
(v) recognize revenue when, or as, the Company satisfies a performance
obligation.
Refer to the Company’s 2020
Form 10-K for additional information on the Company’s
revenue recognition policies,
including its practical expedients and accounting policy
elections.
Allowance for Doubtful Accounts
As previously disclosed in the Company’s
2020 Form 10-K, during 2020, the Company adopted, as required,
an accounting
standard update related to the accounting and disclosure
of credit losses effective January 1, 2020.
The Company recognizes an
allowance for credit losses, which represents the portion
of its trade accounts receivable that the Company does not expect
to collect
over the contractual life, considering past events
and reasonable and supportable forecasts of future economic
conditions.
The
Company’s allowance
for credit losses on its trade accounts receivables
is based on specific collectability facts and circumstances for
each outstanding receivable and customer,
the aging of outstanding receivables, and the associated collection
risk the Company
estimates for certain past due aging categories, and
also, the general risk to all outstanding accounts receivable based on historical
amounts determined to be uncollectible.
The Company does not have any off-balance-sheet
credit exposure related to its customers.
Contract Assets and Liabilities
The Company recognizes a contract asset or receivable
on its Condensed Consolidated Balance Sheet when the Company
performs a service or transfers a good in advance
of receiving consideration.
A receivable is the Company’s
right to consideration that
is unconditional and only the passage of time is required
before payment of that consideration is due.
A contract asset is the
Company’s right to consideration
in exchange for goods or services that the Company has transferred
to a customer.
The Company
had no material contract assets recorded on its Condensed
Consolidated Balance Sheets as of March 31, 2021 or December
31, 2020.
A contract liability is recognized when the Company
receives consideration, or if it has the unconditional right
to receive
consideration, in advance of performance.
A contract liability is the Company’s
obligation to transfer goods or services to a customer
for which the Company has received consideration,
or a specified amount of consideration is due, from the customer.
The Company’s
contract liabilities primarily represent deferred revenue
recorded for customer payments received by the Company
prior to the
Company satisfying the associated performance obligation.
Deferred revenues are presented within other current liabilities
in the
Company’s Condensed
Consolidated Balance Sheets.
The Company had approximately $
6.3
million and $
4.0
million of deferred
revenue as of March 31, 2021 and December 31, 2020,
respectively.
For three months ended March 31, 2021, the Company
satisfied
all of the associated performance obligations and recognized
into revenue the advance payments received and recorded
as of
December 31, 2020.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
11
Disaggregated Revenue
The following tables disaggregate the Company’s
net sales by segment, geographic region, customer industry,
and timing of
revenue recognized for the three months ended March 31,
2021 and 2020.
Three Months Ended March 31,
2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
46,793
$
34,274
$
49,743
$
130,810
Metalworking and other
88,078
85,540
46,963
220,581
134,871
119,814
96,706
351,391
Global Specialty Businesses
45,256
20,272
12,864
78,392
$
180,127
$
140,086
$
109,570
$
429,783
Timing of Revenue Recognized
Product sales at a point in time
$
171,594
$
131,162
$
106,399
$
409,155
Services transferred over time
8,533
8,924
3,171
20,628
$
180,127
$
140,086
$
109,570
$
429,783
Three Months Ended March 31,
2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
46,673
$
29,888
$
41,589
$
118,150
Metalworking and other
83,223
74,951
31,963
190,137
129,896
104,839
73,552
308,287
Global Specialty Businesses
44,231
16,605
9,438
70,274
$
174,127
$
121,444
$
82,990
$
378,561
Timing of Revenue Recognized
Product sales at a point in time
$
168,802
$
118,423
$
81,156
$
368,381
Services transferred over time
5,325
3,021
1,834
10,180
$
174,127
$
121,444
$
82,990
$
378,561
Note 6 - Leases
The Company determines if an arrangement is a lease
at its inception.
This determination generally depends on whether the
arrangement conveys the right to control the use of an
identified fixed asset explicitly or implicitly for a period of
time in exchange for
consideration.
Control of an underlying asset is conveyed if the Company
obtains the rights to direct the use of, and obtains
substantially all of the economic benefits from the use
of, the underlying asset.
Lease expense for variable leases and short-term
leases is recognized when the obligation is incurred.
The Company has operating leases for certain facilities, vehicles
and machinery and equipment with remaining lease terms up
to
10
years.
In addition, the Company has certain land use leases with remaining
lease terms up to
94
years.
The lease term for all of the
Company’s leases includes
the non-cancellable period of the lease plus any additional periods
covered by an option to extend the lease
that the Company is reasonably certain it will exercise.
Operating leases are included in right of use lease assets, other current
liabilities and long-term lease liabilities on the Condensed
Consolidated Balance Sheet.
Right of use lease assets and liabilities are
recognized at each lease’s
commencement date based on the present value of its lease payments
over its respective lease term.
The
Company uses the stated borrowing rate for a lease when
readily determinable.
When a stated borrowing rate is not available in a
lease agreement, the Company uses its incremental borrowing
rate based on information available at the lease’s
commencement date
to determine the present value of its lease payments.
In determining the incremental borrowing rate used to present
value each of its
leases, the Company considers certain information
including fully secured borrowing rates readily available to the Company
and its
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
12
subsidiaries.
The Company has immaterial finance leases, which are
included in property, plant
and equipment, current portion of
long-term debt and long-term debt on the Condensed Consolidated
Balance Sheet.
Operating lease expense is recognized on a straight-line
basis over the lease term.
Operating lease expense for the three months
ended March 31, 2021 and 2020 was $
3.6
million and $
3.4
million, respectively.
Short-term lease expense was $
0.3
million and $
0.5
million for the three months ended March 31, 2021
and 2020, respectively.
The Company has
no
material variable lease costs or
sublease income for the three months ended March 31, 2021 and
2020.
Cash paid for operating leases was $
3.6
million and $
3.4
million during the three months ended March 31, 2021
and 2020,
respectively.
The Company recorded new right of use lease assets
and associated lease liabilities of approximately $
3.1
million during the three months ended March 31, 2021.
Supplemental balance sheet information related to the Company’s
leases is as follows:
March 31,
December 31,
2021
2020
Right of use lease assets
$
38,027
$
38,507
Other current liabilities
10,419
10,901
Long-term lease liabilities
27,050
27,070
Total operating
lease liabilities
$
37,469
$
37,971
Weighted average
remaining lease term (years)
5.9
6.0
Weighted average
discount rate
4.26%
4.20%
Maturities of operating lease liabilities as of March 31,
2021 were as follows:
March 31,
2021
For the remainder of 2021
$
9,269
For the year ended December 31, 2022
9,042
For the year ended December 31, 2023
6,932
For the year ended December 31, 2024
5,194
For the year ended December 31, 2025
4,211
For the year ended December 31, 2026 and beyond
8,116
Total lease payments
42,764
Less: imputed interest
(5,295)
Present value of lease liabilities
$
37,469
Note 7 – Restructuring and Related Activities
The Company’s management approved a global restructuring plan (the “QH Program”) as part of its plan to realize certain cost
synergies associated with the Combination in the third quarter 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 with the QH Program
will depend on a
number of factors and is subject to change; however,
the Company currently expects reduction in headcount and
site closures to
continue to occur throughout 2021
under the QH Program and estimates that anticipated costs synergies
realized from the QH
Program will approximate one-times the restructuring costs
incurred.
Employee separation benefits will vary depending on local
regulations within certain foreign countries and will
include severance and other benefits.
All costs incurred to date relate to severance costs to reduce
headcount as well as costs to close certain facilities and are
recorded
in Restructuring and related charges in the
Company’s Condensed Statements
of Operations.
As described in Note 4 of Notes to
Condensed Consolidated Financial Statements, restructuring
and related charges are not included in
the Company’s calculation of
reportable segments’ measure of operating earnings
and therefore these costs are not reviewed by or recorded to
reportable segments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
13
Activity in the Company’s
accrual for restructuring under the QH Program for the three months
ended March 31, 2021 is as
follows:
QH Program
Accrued restructuring as of December 31, 2020
$
8,248
Restructuring and related charges
1,175
Cash payments
(3,034)
Currency translation adjustments
(419)
Accrued restructuring as of March 31, 2021
$
5,970
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation
expense in its Condensed Consolidated Statements of
Operations for the three months ended March 31, 2021
and 2020:
Three Months Ended
March 31,
2021
2020
Stock options
$
308
$
432
Non-vested stock awards and restricted stock units
1,396
1,264
Non-elective and elective 401(k) matching contribution in
stock
1,553
—
Director stock ownership plan
203
40
Performance stock units
319
—
Annual incentive plan
—
2,946
Total share-based
compensation expense
$
3,779
$
4,682
Share-based compensation expense is recorded in SG&A,
except for $
0.3
million and $
0.5
million during the three months ended
March 31, 2021 and 2020, respectively,
recorded within Combination, integration and other acquisition
-related expenses.
The change
in total share-based compensation expense for the three
months ended March 31, 2021 includes performance stock units
and non-
elective 401(k) matching contributions in stock but excludes annual
incentive plan costs as a component of share-based compensation
beginning in 2020, each described further below.
Stock Options
During the first quarter of 2021, 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:
Number of options granted
23,733
Dividend yield
0.85
%
Expected volatility
37.33
%
Risk-free interest rate
0.60
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight
-line basis over the vesting period.
As of March 31, 2021, unrecognized
compensation expense related to all stock options
granted was $
2.8
million, to be recognized over a weighted average remaining
period of
2.5
years.
Restricted Stock Awards
and Restricted Stock Units
During the first quarter of 2021, the Company granted
12,610
nonvested restricted shares and
2,791
nonvested restricted stock
units under its LTIP,
subject to time-based vesting, generally over a three-year
period.
The fair value of these grants is based on the
trading price of the Company’s
common stock on the date of grant.
The Company adjusts the grant date fair value of these awards for
expected forfeitures based on historical experience.
As of March 31, 2021, unrecognized compensation expense
related to the
nonvested restricted shares was $
6.3
million, to be recognized over a weighted average remaining period
of
2.1
years, and
unrecognized compensation expense related to nonvested
restricted stock units was $
1.3
million, to be recognized over a weighted
average remaining period of
2.3
years.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
14
Performance Stock Units
During the first quarter of 2021,
the Company granted performance-dependent stock awards (“PSUs”) as
a component of its
LTIP,
which will be settled in a certain number of shares subject to market
-based and time-based vesting conditions.
The number of
fully vested shares that may ultimately be issued as settlement
for each award may range from
0
% up to
200
% of the target award,
subject to the achievement of the Company’s
total shareholder return (“TSR”) relative to the performance
of the Company’s peer
group, the S&P Midcap 400 Materials group.
The service period required for the PSUs is three years and the
TSR measurement
period for the PSUs is from January 1 of the year of grant
through December 31 of the year prior to issuance.
Compensation expense for PSUs
is measured based on their grant date fair value and
is recognized on a straight-line basis over
the three-year vesting period.
The grant-date fair value of the PSUs granted during
the first quarter of 2021 was estimated using a
Monte Carlo simulation on the grant date and using the
following assumptions: (i) a risk-free rate of
0.29
%; (ii) an expected term of
3.0
years; and (iii) a three-year daily historical volatility for
each of the companies in the peer group, including Quaker
Houghton.
As of March 31, 2021, the Company estimates that it will issue
approximately
28,000
fully vested shares as of the applicable
settlement dates of all outstanding PSU awards, based
on the conditions of the PSUs and performance to date for each
award. As of
March 31, 2021, there was approximately $
4.8
million of total unrecognized compensation cost related to
PSUs, which the Company
expects to recognize over a weighted-average period
of
2.5
years.
Annual Incentive Plan
The Company maintains an Annual Incentive Plan
(“AIP”), which may be settled in cash or a certain number of
shares subject to
performance-based and time-based vesting conditions.
As of March 31, 2020, it was the Company’s
intention to settle the 2020 AIP
in shares, and therefore, expense associated with the AIP in 2020
was recorded as a component of share-based compensation expense.
In the fourth quarter of 2020, the Company determined
that it would settle the 2020 AIP in cash.
Therefore, the share-based
compensation associated with the AIP during the year
ended December 31, 2020 was reclassified from a component
of share-based
compensation expense to incentive compensation.
This determination and conclusion had no impact on the
classification of AIP
expense within the Company’s
Condensed Consolidated Statement of Operations for
the periods as both are a component of SG&A.
As of March 31, 2021, it is the Company’s
intention to settle the 2021 AIP in cash.
Defined Contribution Plan
The Company has a 401(k) plan with an employer
match covering a majority of its U.S. employees.
The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum
matching contribution of
3
% of compensation.
Additionally, the
plan provides for non-elective nondiscretionary contributions
on behalf of participants who have completed one year
of service equal to
3
% of the eligible participants’ compensation.
Beginning in April 2020 and continuing until April 2021, the
Company matched both non-elective and elective 401(k)
contributions in fully vested shares
of the Company’s common
stock rather
than cash.
Total Company contributions
were $
1.5
million for the three months ended March 31, 2021.
There were no similar
matching contributions in stock for the three months
ended March 31, 2020.
Note 9 – Pension and Other Postretirement
Benefits
The components of net periodic benefit cost for the
three months ended March 31, 2021 and 2020 are as follows:
Three Months Ended March 31,
Other
Pension Benefits
Postretirement Benefits
2021
2020
2021
2020
Service cost
$
316
$
1,174
$
1
$
2
Interest cost
1,090
1,769
11
26
Expected return on plan assets
(2,082)
(1,959)
—
—
Settlement loss
—
22,667
—
—
Actuarial loss amortization
855
1,047
—
15
Prior service (credit) cost amortization
2
(40)
—
—
Total net periodic
benefit cost
$
181
$
24,658
$
12
$
43
As disclosed in the Company’s
2020 Form 10-K, in the fourth quarter of 2018, the
Company began the process of terminating its
legacy Quaker non-contributory U.S. pension plan
(“Legacy Quaker U.S. Pension Plan”).
During the third quarter of 2019, the
Company received a favorable termination determination
letter from the Internal Revenue
Service (“I.R.S.”) and completed the
Legacy Quaker U.S. Pension Plan termination during the
first quarter of 2020.
In order to terminate the Legacy Quaker U.S. Pension
Plan in accordance with I.R.S. and Pension Benefit Guaranty Corporation
requirements, the Company was required to fully fund the
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
15
Legacy Quaker U.S. Pension Plan on a termination basis
and the amount necessary to do so was approximately $
1.8
million, subject to
final true up adjustments,
which were completed in the third quarter of 2020.
In addition, the Company recorded a non-cash pension
settlement charge at plan termination of
approximately $
22.7
million.
This settlement charge included the immediate recognition
into
expense of the related unrecognized losses within accumulated
other comprehensive (loss) income (“AOCI”) on the balance
sheet as
of the plan termination date.
Employer Contributions
The Company previously disclosed in its 2020 Form 10-K
that it expected to make minimum cash contributions of $
10.0
million
to its U.S. and foreign pension plans and approximately
$
0.3
million to its other postretirement benefit plans in 2021.
As of March 31,
2021, $
1.0
million and $
0.1
million of contributions have been made to the Company’s
U.S. and foreign pension plans and its other
postretirement benefit plans, respectively.
Note 10 – Other Income (Expense), Net
The components of other income (expense), net for
the three months ended March 31, 2021 and 2020 are as follows:
Three Months Ended
March 31,
2021
2020
Income from third party license fees
$
339
$
304
Foreign exchange (losses) gains, net
(1,478)
821
Gain on disposals of property,
plant, equipment and other assets, net
5,410
2
Non-income tax refunds and other related credits
97
1,299
Pension and postretirement benefit costs, non-service components
124
(23,525)
Other non-operating income (expense), net
195
(76)
Total other
income (expense), net
$
4,687
$
(21,175)
The Gain on disposals of property,
plant, equipment and other assets, net, during the three months
ended March 31, 2021,
includes the gain on the sale of certain held-for-sale
real property assets related to the Combination.
Pension and postretirement
benefit costs, non-service components during the three
months ended March 31, 2020 includes $
22.7
million related to the Legacy
Quaker U.S. Pension Plan non-cash settlement charge
described in Note 9 of Notes to Condensed Consolidated Financial Statements.
Note 11 – Income Taxes
and Uncertain Income Tax
Positions
The Company’s effective
tax rate for the three months ended March 31, 2021 was an expense of
24.2
% compared to a benefit of
31.1
% for the three months ended March 31, 2020.
The Company’s effective
tax rate for the three months ended March 31, 2021 was
largely impacted by the sale of certain held-for-sale
real property assets related to the Combination.
Comparatively, the prior
year first
quarter effective tax rate was impacted by the
tax effect of certain one-time pre-tax losses as well as certain tax
charges and benefits in
the prior year period including those related to changes
in foreign tax credit valuation
allowances, tax law changes in a foreign
jurisdiction, and the tax impacts of the Company’s
termination of its Legacy Quaker U.S. Pension Plan and the
Houghton indefinite-
lived trademarks and tradename intangible asset impairment.
As of December 31, 2020, the Company had a deferred tax liability of $5.9 million, which primarily represents the Company’s
estimate of non-U.S. taxes it will incur to repatriate certain foreign earnings to the U.S. The balance as of March 31, 2021 was $6.5
million.
As of March 31, 2021, the Company’s
cumulative liability for gross unrecognized tax benefits was $
23.5
million, an increase of
$
1.3
million from the cumulative liability accrued as of December 31, 2020.
The Company continues to recognize interest and penalties
associated with uncertain tax positions as a component of
taxes on
income (loss) before equity in net income of associated
companies in its Condensed Consolidated Statements of Operations.
The
Company recognized an expense of less than $
0.1
million for interest and a benefit of less than $
0.1
million for penalties in its
Condensed Consolidated Statement of Operations for the
three months ended March 31, 2021, and recognized an expense of
less than
$
0.1
million for interest and a benefit of less than $
0.1
million for penalties in its Condensed Consolidated Statement of
Operations for
the three months ended March 31, 2020.
As of March 31, 2021, the Company had accrued $
3.0
million for cumulative interest and
$
3.6
million for cumulative penalties in its Condensed Consolidated Balance
Sheets, compared to $
3.0
million for cumulative interest
and $
3.9
million for cumulative penalties accrued at December 31, 2020.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
16
During the three months ended March 31, 2021 and
2020, the Company recognized decreases of $
0.3
million and $
0.8
million,
respectively, in
its cumulative liability for gross unrecognized tax benefits due
to the expiration of the applicable statutes of limitations
for certain tax years.
The Company estimates that during the year ending December
31, 2021 it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
1.5
million due to the expiration of the statute of limitations with regard
to certain tax
positions.
This estimated reduction in the cumulative liability for unrecogniz
ed tax benefits does not consider any increase in liability
for unrecognized tax benefits with regard to existing tax
positions or any increase in cumulative liability for unrecognized
tax benefits
with regard to new tax positions for the year ending December
31, 2021.
The
Company and its subsidiaries are subject to U.S. Federal income
tax, as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain
subject to examination by major tax jurisdictions include Italy
from
2006
, Brazil from
2011
,
the Netherlands and China from
2015
, Mexico, Spain, Germany and the United Kingdom from
2016
, Canada and the U.S. from
2017
,
India from fiscal year beginning April 1, 2018 and ending
March 31,
2019
, and various U.S. state tax jurisdictions from
2011
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years 2007 through 2015. The Company has filed for competent authority relief from these assessments under
the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except
- In 2020, the respective tax authorities in Italy, Spain and the Netherlands reached agreement with respect to the MAP
proceedings which the Company has accepted.
As of March 31, 2021, the Company has received $
1.6
million in refunds from the
Netherlands and Spain and expects to pay $
2.4
million due to Italy in the second quarter of 2021.
As of March 31, 2021, the
Company believes it has adequate reserves for the remaining
uncertain tax positions related to 2007.
Houghton Italia, S.r.l
is also involved in a corporate income tax audit with the Italian tax
authorities covering tax years 2014
through 2018.
As of March 31, 2021, the Company has a $
5.5
million reserve for uncertain tax positions relating to matters related
to
this audit.
Since the reserve relates to the tax periods prior to August
1, 2019, the tax liability was established through purchase
accounting related to the Combination.
The Company has also submitted an indemnification claim against
funds held in escrow
by
Houghton’s former owners
and as a result, a corresponding $
5.5
million indemnification receivable has also been established through
purchase accounting.
Houghton Deutschland GmbH is also under audit by
the German tax authorities for the tax years 2015-2017.
Based on
preliminary audit findings, primarily related to
transfer pricing, the Company has recorded reserves for $
0.9
million as of March 31,
2021.
Of this amount, $
0.8
million relates to tax periods prior to the Combination and
therefore the Company has submitted an
indemnification claim with Houghton’s
former owners for any tax liabilities arising pre-Combination.
As a result, a corresponding
$
0.8
million indemnification receivable has also been established to
offset the $
0.8
million tax liability.
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations
for the three months ended March 31, 2021 and 2020:
Three Months Ended
March 31,
2021
2020
Basic earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
38,615
$
(28,381)
Less: (income) loss allocated to participating securities
(154)
101
Net income (loss) available to common shareholders
$
38,461
$
(28,280)
Basic weighted average common shares outstanding
17,785,370
17,672,525
Basic earnings (loss) per common share
$
2.16
$
(1.60)
Diluted earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
38,615
$
(28,381)
Less: (income) loss allocated to participating securities
(154)
101
Net income (loss) available to common shareholders
$
38,461
$
(28,280)
Basic weighted average common shares outstanding
17,785,370
17,672,525
Effect of dilutive securities
70,607
—
Diluted weighted average common shares outstanding
17,855,977
17,672,525
Diluted earnings (loss) per common share
$
2.15
$
(1.60)
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
17
Certain stock options and restricted stock units are not included in the diluted earnings (loss) per share calculation when the effect
would have been anti-dilutive. The calculated amount of anti-diluted shares not included was 2,083 for the three months ended March
31, 2021. All of the Company’s potentially dilutive shares for the three months ended March 31, 2020 are anti-dilutive and not
included in the dilutive loss per share calculations because of the Company’s net loss during the period.
Note 13 – Restricted Cash
Prior to December 2020, the Company had restricted cash recorded in other assets related to proceeds from an inactive subsidiary
of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an
original total value of $35.0 million. The proceeds of both settlements were restricted and could only be used to pay claims and costs
of defense associated with the subsidiary’s asbestos litigation. The proceeds of the settlement and release agreements were deposited
into interest bearing accounts that earned less than $0.1 million offset by $0.2 million of net payments during the three months ended
March 31, 2020.
Due to the restricted nature of the proceeds, a corresponding
deferred credit was established in other non-current
liabilities for an equal and offsetting amount
that continued until the restrictions lapsed.
As disclosed in the Company’s
2020 Form
10-K, during December 2020, the restrictions ended
on these previously received insurance settlements and the
Company transferred
the cash into an operating account.
The following table provides a reconciliation of cash,
cash equivalents and restricted cash as of March 31, 2021 and
2020, as well
as December 31, 2020 and 2019:
March 31,
December 31,
2021
2020
2020
2019
Cash and cash equivalents
$
163,455
$
316,437
$
181,833
$
123,524
Restricted cash included in other current assets
—
34
62
353
Restricted cash included in other assets
—
19,480
—
19,678
Cash, cash equivalents and restricted cash
$
163,455
$
335,951
$
181,895
$
143,555
Note 14 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
three months ended March 31, 2020 were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2020
$
213,242
$
140,162
$
158,090
$
119,718
$
631,212
Goodwill additions
1,093
2,626
1,308
25
5,052
Currency translation adjustments
(731)
(3,925)
(956)
(3,078)
(8,690)
Balance as of March 31,
2021
$
213,604
$
138,863
$
158,442
$
116,665
$
627,574
Gross carrying amounts and accumulated amortization
for definite-lived intangible assets as of March 31, 2021 and
December 31,
2020 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2021
2020
2021
2020
Customer lists and rights to sell
$
846,052
$
839,551
$
110,997
$
99,806
Trademarks, formulations and product
technology
167,144
166,448
32,533
30,483
Other
6,320
6,372
5,743
5,824
Total definite
-lived intangible assets
$
1,019,516
$
1,012,371
$
149,273
$
136,113
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
18
The Company amortizes definite-lived intangible assets on
a straight-line basis over their useful lives.
The Company recorded
$
14.8
million and $
14.0
million of amortization expense for the three months ended
March 31, 2021 and 2020, respectively.
Estimated annual aggregate amortization expense for
the current year and subsequent five years is as follows:
For the year ended December 31, 2021
$
59,372
For the year ended December 31, 2022
59,096
For the year ended December 31, 2023
58,927
For the year ended December 31, 2024
58,427
For the year ended December 31, 2025
57,710
For the year ended December 31, 2026
57,484
The Company has four indefinite-lived intangible
assets totaling $
205.1
million as of both March 31, 2021 and December 31,
2020, including $
204.0
million of indefinite-lived intangible assets for trademarks and
tradename associated with the Combination.
Goodwill and intangible assets that have indefinite lives are
not amortized and are required to be assessed at least annually
for
impairment.
The Company completes its annual goodwill and indefinite-lived
intangible asset impairment test during the fourth
quarter of each year.
The Company continuously evaluates if triggering events indicate
a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
The Company previously disclosed in its 2020 Form 10-K
that as of March 31, 2020, the Company concluded that the
impact of
COVID-19 did not represent a triggering event with
regards to the Company’s
reporting units or indefinite-lived and long-lived assets,
except for the Company’s
Houghton and Fluidcare trademarks and tradename indefinite
-lived intangible assets.
The determination of
estimated fair value of the Houghton and Fluidcare
trademarks and tradename indefinite-lived assets was based on a relief
from
royalty valuation method,
which requires management’s judgment
and often involves the use of significant estimates and assumptions,
including assumptions with respect to the weighted average
cost of capital (“WACC”)
and royalty rates, as well as revenue growth
rates and terminal growth rates.
In the first quarter of 2020, as a result of the impact of
COVID-19 driving a decrease in projected
legacy Houghton net sales during that year and the impact
of the sales decline on projected future legacy Houghton
net sales as well as
an increase in the WACC
assumption utilized in the quantitative impairment
assessment, the Company concluded that the estimated
fair values of the Houghton and Fluidcare trademarks
and tradename intangible assets were less than their carrying values.
As a
result, an impairment charge of $
38.0
million was recorded in the first quarter of 2020 to write down
the carrying values of these
intangible assets to their estimated fair values.
As of March 31, 2021, the Company continued to evaluate
the on-going impact of COVID-19 on the Company’s
operations, and
the volatility and uncertainty in the economic outlook as a result of
COVID-19, to determine if this indicated it was more likely
than
not that the carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived intangible assets were
not
recoverable.
The Company concluded that the impact of COVID-19 did not represent
a triggering event as of March 31, 2021.
While
the Company concluded that the impact of COVID-19
did not represent a triggering event as of March 31, 2021,
the Company will
continue to evaluate the impact of COVID-19 on the Company’s
current and projected results.
If the current economic conditions
worsen or projections of the timeline for recovery are
significantly extended, then the Company may conclude in the
future that the
impact from COVID-19 requires the need to perform
further interim quantitative impairment tests, which could
result in additional
impairment charges in the future.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
19
Note 15 – Debt
Debt as of March 31, 2021 and December 31, 2020 includes
the following:
As of March 31, 2021
As of December 31, 2020
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.61%
$
190,000
1.65%
$
160,000
U.S. Term Loan
1.61%
562,500
1.65%
570,000
EURO Term Loan
1.50%
148,210
1.50%
157,062
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
2,377
Various
2,072
Total debt
$
913,087
$
899,134
Less: debt issuance costs
(10,324)
(11,099)
Less: short-term and current portion of long-term debts
(43,330)
(38,967)
Total long
-term debt
$
859,433
$
849,068
Credit facilities
The Company’s primary
credit facility (as amended, the “Credit Facility”) is comprised
of a $
400.0
million multicurrency
revolver (the “Revolver”), a $
600.0
million term loan (the “U.S. Term
Loan”), each with the Company as borrower,
and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the
“EURO Term Loan”
and together with the “U.S. Term
Loan”, the
“Term Loans”)
with Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a five-year term maturing in
August 2024.
Subject to the consent of the administrative agent and certain
other conditions, the Company may designate additional
borrowers.
The maximum amount available under the Credit Facility can be
increased by up to $
300.0
million at the Company’s
request if there are lenders who agree to accept additional
commitments and the Company has satisfied certain other
conditions.
Borrowings under the Credit Facility bear interest at a base
rate or LIBOR plus an applicable margin based upon
the Company’s
consolidated net leverage ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and when LIBOR
ceases to be reported.
The variable interest rate incurred on the outstanding borrowings under
the Credit Facility as of and during the
three months ended March 31, 2021 was approximately
1.6
%.
In addition to paying interest on outstanding principal under
the Credit
Facility, the Company
is required to pay a commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s
consolidated net
leverage ratio to the lenders under the Revolver in
respect of the unutilized commitments thereunder.
The Company has unused
capacity under the Revolver of approximately $
204
million, net of bank letters of credit of approximately $
6
million, as of March 31,
2021.
The Credit Facility is subject to certain financial and
other covenants.
The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio could not exceed 4.25 to 1, with step downs in the permitted ratio over the term of the Credit
Facility. As of March 31, 2021, the consolidated net debt to adjusted EBITDA may not exceed 4.00 to 1. The Company’s
consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1 over the term of the agreement. The Credit
Facility also prohibits the payment of cash dividends if the Company is in default or if the amount of the dividend paid annually
exceeds the greater of $50.0 million and 20% of consolidated adjusted EBITDA unless the ratio of consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount.
As of March 31, 2021 and
December 31, 2020, the Company was in compliance with all of the Credit Facility covenants
.
The Term Loans
have quarterly
principal amortization during their five-year terms,
with
5.0
% amortization of the principal balance due in years
1 and 2,
7.5
% in year
3, and
10.0
% in years 4 and 5, with the remaining principal amount due at
maturity.
During the three months ended March 31, 2021,
the Company made quarterly amortization payments
related to the Term Loans
totaling $
9.6
million.
The Credit Facility is guaranteed
by certain of the Company’s
domestic subsidiaries and is secured by first priority liens on substantially
all of the assets of the
Company and the domestic subsidiary guarantors,
subject to certain customary exclusions.
The obligations of the Dutch borrower are
guaranteed only by certain foreign subsidiaries on an unsecured
basis.
The Credit Facility required the Company to fix its variable
interest rates on at least 20% of its total Term
Loans.
In order to
satisfy this requirement as well as to manage the
Company’s exposure to variable
interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three-year interest rate swaps at a base
rate of
1.64
% plus an applicable margin as provided in the Credit
Facility, based on the Company’s
consolidated net leverage ratio.
At the
time the Company entered into the swaps, and as
of March 31, 2021, the aggregate interest rate on the swaps,
including the fixed base
rate plus an applicable margin, was
3.1
%.
See Note 18 of Notes to Condensed Consolidated Financial Statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
20
The Company capitalized $
23.7
million of certain third-party debt issuance costs in connection
with executing the Credit Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Term
Loans and recorded as a direct reduction of long-
term debt on the Company’s
Condensed Consolidated Balance Sheet.
Approximately $
8.3
million of the capitalized costs were
attributed to the Revolver and recorded within other assets on
the Company’s Condensed Consolidated
Balance Sheet.
These
capitalized costs are being amortized into interest expense
over the five-year term of the Credit Facility.
As of March 31, 2021 and
December 31, 2020, the Company had $
10.3
million and $
11.1
million, respectively,
of debt issuance costs recorded as a reduction of
long-term debt.
As of March 31, 2021 and December 31, 2020, the Company
had $
5.5
million and $
5.9
million, respectively,
of debt
issuance costs recorded within other assets.
Industrial development bonds
As of March 31, 2021 and December 31, 2020,
the Company had fixed rate, industrial development authority
bonds totaling
$
10.0
million in principal amount due in
2028
.
These bonds have similar covenants to the Credit Facility noted
above.
Bank lines of credit and other
debt obligations
The Company has certain unsecured bank lines of credit
and discounting facilities in certain foreign subsidiaries, which are
not
collateralized.
The Company’s other debt
obligations primarily consist of certain domestic and foreign
low interest rate or interest-
free municipality-related loans, local credit facilities of
certain foreign subsidiaries and capital lease obligations.
Total unused
capacity under these arrangements as of March 31,
2021 was approximately $
40
million.
In addition to the bank letters of credit described in
the “Credit facilities” subsection above, the Company’s
only other off-balance
sheet arrangements include certain financial and other
guarantees.
The Company’s total bank
letters of credit and guarantees
outstanding as of March 31, 2021 were approximately
$
9
million.
The Company incurred the following debt related expenses
included within Interest expense, net, in the Condensed
Consolidated
Statements of Operations:
Three Months Ended
March 31,
2021
2020
Interest expense
$
4,650
$
7,712
Amortization of debt issuance costs
1,187
1,187
Total
$
5,837
$
8,899
Based on the variable interest rates associated with the Credit
Facility, as of March
31, 2021 and December 31, 2020, the amounts
at which the Company’s
total debt were recorded are not materially different
from their fair market value.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
21
Note 16 – Equity
The following tables present the changes in equity,
net of tax, for the three months ended March 31, 2021 and 2020:
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2020
$
17,851
$
905,171
$
423,940
$
(26,598)
$
550
$
1,320,914
Net income
—
—
38,615
—
17
38,632
Amounts reported in other comprehensive
loss
—
—
—
(26,630)
(2)
(26,632)
Dividends ($
0.395
per share)
—
—
(7,062)
—
—
(7,062)
Share issuance and equity-based
compensation plans
24
3,577
—
—
—
3,601
Balance at March 31, 2021
$
17,875
$
908,748
$
455,493
$
(53,228)
$
565
$
1,329,453
Balance at December 31, 2019
$
17,735
$
888,218
$
412,979
$
(78,170)
$
1,604
$
1,242,366
Cumulative effect of an accounting change
—
—
(402)
—
—
(402)
Balance at January 1, 2020
17,735
888,218
412,577
(78,170)
1,604
1,241,964
Net (loss) income
—
—
(28,381)
—
37
(28,344)
Amounts reported in other comprehensive
loss
—
—
—
(43,354)
(132)
(43,486)
Dividends ($
0.385
per share)
—
—
(6,834)
—
—
(6,834)
Acquisition of noncontrolling interest
—
(707)
—
—
(340)
(1,047)
Distributions to noncontrolling affiliate
shareholders
—
—
—
—
(751)
(751)
Share issuance and equity-based
compensation plans
17
1,022
—
—
—
1,039
Balance at March 31, 2020
$
17,752
$
888,533
$
377,362
$
(121,524)
$
418
$
1,162,541
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
22
The following tables show the reclassifications from and
resulting balances of AOCI for the three months ended
March 31, 2021
and 2020:
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Retirement
Available-for
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income before
reclassifications
(25,459)
781
(745)
730
(24,693)
Amounts reclassified from AOCI
—
862
(3,085)
—
(2,223)
Current period other comprehensive (loss) income
(25,459)
1,643
(3,830)
730
(26,916)
Related tax amounts
—
(351)
805
(168)
286
Net current period other comprehensive (loss) income
(25,459)
1,292
(3,025)
562
(26,630)
Balance at March 31, 2021
$
(28,334)
$
(22,175)
$
317
$
(3,036)
$
(53,228)
Balance at December 31, 2019
$
(44,568)
$
(34,533)
$
1,251
$
(320)
$
(78,170)
Other comprehensive (loss) income before
reclassifications
(54,619)
828
(2,135)
(5,170)
(61,096)
Amounts reclassified from AOCI
—
24,366
(32)
—
24,334
Current period other comprehensive (loss) income
(54,619)
25,194
(2,167)
(5,170)
(36,762)
Related tax amounts
—
(8,237)
456
1,189
(6,592)
Net current period other comprehensive (loss) income
(54,619)
16,957
(1,711)
(3,981)
(43,354)
Balance at March 31, 2020
$
(99,187)
$
(17,576)
$
(460)
$
(4,301)
$
(121,524)
All reclassifications related to unrealized gain (loss) in
available-for-sale securities relate to the Company’s
equity interest in a
captive insurance company and are recorded in equity
in net income of associated companies.
The amounts reported in other
comprehensive income for non-controlling interest are
related to currency translation adjustments.
Note 17 – Fair Value
Measurements
The Company has valued its company-owned life insurance
policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at March 31, 2021
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,015
$
—
$
2,015
$
—
Total
$
2,015
$
—
$
2,015
$
—
Fair Value
Measurements at December 31, 2020
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,961
$
—
$
1,961
$
—
Total
$
1,961
$
—
$
1,961
$
—
The fair values of Company-owned life insurance assets are based
on quotes for like instruments with similar credit ratings and
terms.
The Company did not hold any Level 3 investments as of March
31, 2021 or December 31, 2020, respectively,
so related
disclosures have not been included.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
23
Note 18 – Hedging Activities
In order to satisfy certain requirements of the Credit
Facility as well as to manage the Company’s
exposure to variable interest
rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three-
year interest rate swaps.
See Note 15 of Notes to Condensed Consolidated Financial Statements.
These interest rate swaps are
designated as cash flow hedges and, as such, the contracts
are marked-to-market at each reporting date and any unrealized gains
or
losses are included in AOCI to the extent effective
and reclassified to interest expense in the period during which the
transaction
effects earnings or it becomes probable that
the forecasted transaction will not occur.
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
March 31,
December 31,
Balance Sheet Location
2021
2020
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
3,943
$
4,672
$
3,943
$
4,672
The following table presents the net unrealized loss deferred to
AOCI:
March 31,
December 31,
2021
2020
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
3,036
$
3,598
$
3,036
$
3,598
The following table presents the net gain reclassified from
AOCI to earnings:
Three Months Ended
March 31,
2021
2020
Amount and location of (expense) income reclassified
from AOCI into (expense) income (Effective Portion)
Interest expense, net
$
(643)
$
19
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 by
counterparty within the
Condensed Consolidated Balance Sheets.
Note 19 – Commitments and Contingencies
The Company previously disclosed in its 2020 Form 10-K
that AC Products, Inc. (“ACP”), a wholly owned subsidiary,
has been
operating a groundwater treatment system to hydraulically
contain groundwater contamination emanating from ACP’s
site, the
principal contaminant of which is perchloroethylene.
As of March 31, 2021, ACP believes it is close to meeting the conditions
for
closure of the groundwater treatment system, but continues
to operate this system while in discussions with the relevant
authorities.
As of March 31, 2021, 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 2020 Form 10-K
that an inactive subsidiary of the Company that was acquired
in 1978
sold certain products containing asbestos, primarily
on an installed basis, and is among the defendants in numerous
lawsuits alleging
injury due to exposure to asbestos.
During the three months ended March 31, 2021, there
have been no significant changes to the facts
or circumstances of this previously disclosed matter,
aside from on-going claims and routine payments associated with
this litigation.
Based on a continued analysis of the existing and anticipated
future claims against this subsidiary,
it is currently projected that the
subsidiary’s total liability
over the next 50 years for these claims is approximately
$
0.4
million (excluding costs of defense).
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
- Continued
(Dollars in thousands, except per share amounts,
unless otherwise stated)
(Unaudited)
24
The Company previously disclosed in its 2020 Form 10-K
that it is party to certain environmental matters related to certain
domestic and foreign properties currently or previously
owned by Houghton.
These environmental matters primarily require the
Company to perform long-term monitoring as well as operating
and maintenance at each of the applicable sites.
During the three
months ended March 31, 2021, there have been no
significant changes to the facts or circumstances of these previously
disclosed
matters, aside from on-going monitoring and maintenance
activities and routine payments associated with each of the
sites.
The
Company continually evaluates its obligations related to such
matters, and based on historical costs incurred and projected
costs to be
incurred over the next 28 years, has estimated the present
value range of costs for all of the Houghton
environmental matters, on a
discounted basis, to be between approximately $
5
million and $
6
million as of March 31, 2021, for which $
5.7
million was accrued
within other accrued liabilities and other non-current
liabilities on the Company’s Condensed
Consolidated Balance Sheet as of March
31, 2021.
Comparatively, as of December
31, 2020, the Company had $
6.0
million accrued for with respect to these matters.
The Company believes, although there can be no assurance
regarding the outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other
environmental problems of which it is aware.
Approximately $
0.1
million were accrued as of both March 31, 2021 and
December 31, 2020, to provide for such anticipated future
environmental
assessments and remediation costs.
The Company previously disclosed in its 2020 Form 10-K
that one of the Company’s subsidiaries
received a notice of inspection
from a taxing authority in a country where certain
of its subsidiaries operate which related to a non-income (indirect)
tax that may be
applicable to certain products the subsidiary sells.
To date, the Company
has not received any assessment from the authority related
to
potential liabilities that may be due from the Company’s
subsidiary.
Consequently, there is substantial uncertai
nty with respect to the
Company’s ultimate liability
with respect to this indirect tax, as the application of
this tax in its given market is ambiguous and
interpreted differently among other peer companies
and taxing authorities.
The Company, with assistance
from independent experts,
has performed an evaluation of the applicability of this
indirect tax to the Company’s
subsidiaries in this country.
Information
available to the Company at this time is only sufficient
to establish a range of probable liability,
and no amount within the range is
considered a better estimate than another.
During the three months ended March 31, 2021 and through the
date of this Report,
there
have been no significant changes to the facts or circumstances of
this previously disclosed matter, aside
from on-going discussions
between the Company and the taxing authority related
to this notice of inspection.
As of March 31, 2021, the Company has recorded a
liability of $
1.7
million in other accrued liabilities, which reflects the low end
of the range of probable indirect tax owed, including
interest and taking into account applicable statutes of limitations.
Because these amounts in part relate to a Houghton entity acquired
in the Combination and for periods prior to the Combination,
the Company has submitted an indemnification claim
with Houghton’s
former owners related to this potential indirect tax liability.
The Company recorded a receivable in other assets for approximately
$
1.1
million, which reflects the amount of the initial recorded liability
for which the Company anticipates being indemnified.
As
noted, the Company believes there is substantial uncertainty
with respect to its ultimate liability given the ambiguous
application of
this indirect tax.
At this time, the Company’s best estimate
of a potential range for possible assessments, including
additional amounts
that may be assessed under these indirect tax laws, would
be approximately $
0.6
million to $
38
million, which is net of approximately
$
10
million of estimated income tax deductions and approximately $
22
million of applicable rights to indemnification from
Houghton’s former owners.
The Company is party to other litigation which management
currently believes will not have a material adverse
effect on the
Company’s results of
operations, cash flows or financial condition.
In addition, the Company has an immaterial amount of contractual
purchase obligations.
Quaker Chemical Corporation
Management’s Discussion and Analysis
25
Item 2.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton”,
the “Company”, “we” and “our” refer to Quaker Chemical
Corporation
(doing business as Quaker Houghton),
its subsidiaries, and associated companies, unless the context otherwise
requires.
As used in
this Report, the term Legacy Quaker refers to the Company
prior to the closing of its combination with Houghton International,
Inc.
(“Houghton”) (herein referred to as the “Combination”)
on August 1, 2019.
Throughout the Report, all figures presented, unless
otherwise stated, reflect the results of operations of the
combined company for the three months ended March 31, 2021 and
2020.
Executive Summary
Quaker Houghton is a global leader in industrial process
fluids.
With a presence around the world,
including operations in over
25 countries, our customers include thousands of the world’s
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
companies.
Our high-performing, innovative and sustainable solutions are
backed by best-
in-class technology,
deep process knowledge, and customized services.
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the United States.
The Company had a very strong start to 2021, delivering
solid first quarter results which reflect the continued COVID-19
recovery in the Company’s
end-markets and customer demand as well as the on-going execution
of integration activities and synergy
realization.
Specifically, net sales of $429.8
million in the first quarter of 2021 increased 14% compared to
$378.6 million in the first
quarter of 2020, primarily due to higher volumes, which
included additional net sales from acquisitions of 3%, and the
positive impact
from foreign currency translation of 3%.
The increase in sales volumes compared to the first quarter
of 2020 was primarily due to
improved end market conditions and continued market
share gains.
Additional net sales from acquisitions primarily were attributable
to Coral Chemical (“Coral”), which the Company acquired
in December 2020.
The positive net impact from foreign currency
translation was primarily due to the strengthening of the
euro and Chinese renminbi against the U.S. dollar quarter-over-quarter,
partially offset by the ongoing weakening
of the Brazilian real.
The Company had net income in the first quarter
of 2021 of $38.6
million, or $2.15 per diluted share, compared to a first
quarter of 2020 net loss of $28.4 million, or $1.60 per diluted
share.
The
Company’s prior year
first quarter net loss was primarily driven by the first quarter
of 2020 non-cash impairment charge of $38.0
million for certain indefinite-lived intangible assets and
a non-cash $22.7 million settlement charge
related to the termination of a U.S.
defined benefit pension plan.
Excluding these non-recurring items as well as costs associated
with the Combination and other non-
core items in each period, the Company’s
first quarter of 2021 non-GAAP earnings per diluted share
were $2.11 compared to $1.38 in
the prior year first quarter.
The Company’s current
quarter adjusted EBITDA of $77.1 million increased
28% compared to $60.5
million in the first quarter of 2020 primarily due to
the significant increase in net sales quarter over quarter and
incremental realized
cost synergies from the Combination as compared
to the first quarter of 2020.
The Company estimates that it realized cost synergies
associated with the Combination of approximately
$18 million during the first quarter of 2021 compared to
approximately $10 million
during the first quarter of 2020.
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 first quarter
of 2021 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.
All four segments had higher net sales compared to the first quarter
of 2020.
The Company’s higher sales
volumes were driven by EMEA and Asia/Pacific, while additional
net sales from Coral benefited the Americas and the
Global
Specialty Businesses.
The growth in Asia/Pacific’s vol
umes compared to the prior year were partially due to
the initial impacts of
COVID-19 in China during the first quarter of 2020,
whereas all of the remaining segments weren’t impacted
as severely until the
second quarter of 2020.
The benefit of higher selling price and product mix positively
impacted most of the segments, and foreign
currency translation benefited all segments except the
Americas which was driven by the ongoing weakening of the Brazilian real
quarter over quarter.
As reported, all of the Company’s
segment operating earnings were higher compared to
the first quarter of 2020
which reflects higher current quarter net sales coupled
with a higher gross margin in all segments as compared
to the prior year first
quarter.
While the Company has experienced higher raw material costs
beginning in the fourth quarter of 2020 and
continuing into
2021, the higher gross margin as compared
to the prior year first quarter was primarily driven by the Company’s
continued execution
of Combination-related logistics, procurement and manufacturing
cost savings initiatives as well as the benefit of higher volumes
in
the current quarter and the related impact from fixed manufacturing
costs.
Direct Selling, general and administrative expenses
(“SG&A”) of each segment were relatively consistent with the
first quarter of 2020 with only Asia/Pacific up as a result of
the
segments strong current quarter performance compared
to the prior year which was negatively impacted by the
initial COVID-19
conditions in China.
In addition, the Company and all of its segments continued to
maintain strong cost control and benefit from
COVID-19 cost savings actions, including lower travel
expenses, as well as the benefits of realized cost savings associated
with the
Combination.
Additional details of each segment’s
operating performance are further discussed in the Company’s
Reportable
Segments Review, in
the Operations section of this Item, below.
Quaker Chemical Corporation
Management’s Discussion and Analysis
26
The Company had a net operating cash outflow of $12.6
million in the first quarter of 2021 as compared to a net operating
cash
inflow of $20.2 million in the first quarter of 2020.
The decrease in net operating cash flow quarter-over-quarter was
primarily driven
by a significant change in working capital, as the
Company’s significant increase in
net sales and volumes resulted in a large increase
in accounts receivable in the first quarter of 2021.
The key drivers of the Company’s
operating cash flow and working capital are
further discussed in the Company’s
Liquidity and Capital Resources section of this Item,
below.
Overall, the Company’s
first quarter results were strong with sequential and prior
year improvement in all segments primarily due
to the continued recovery in our end-markets and customer
demand increases from lower levels experienced during
2020 as a result of
COVID-19.
The results in the first quarter of 2021 reflected a strong
quarterly growth trend across the globe beginning after the
second quarter of 2020, during which the impacts of
COVID-19 were most severe.
Also, the strong demand in the first quarter of
2021 coupled with continued market share gains and
the on-going execution of integration activities and synergy
realization helped
offset negative impacts due to the on-going
global uncertainty brought on by COVID-19 and other macroeconomic
headwinds,
including rising raw material prices and overall supply
chain pressures.
The global economic slowdown and other impacts due
to COVID-19 experienced by almost all companies in 2020
posed an
unprecedented challenge, but the Company’s
first quarter of 2021 results continue to demonstrate that it can
successfully navigate
through market downturns by responding quickly to
changing market conditions and delivering on the benefits it anticipated
from the
Combination with Houghton.
As the Company looks forward, it expects to experience
continued short-term headwinds from higher
raw material costs and supply chain pressures, with the
magnitude of these raw material cost increases being considerably higher
than
the Company previously expected due to stress on global
supply chains, weather related shutdowns and unexpected supplier
shutdowns.
However, the Company does expect
to achieve additional selling price increases to offset
these rising raw material costs,
but there will be a lag effect on our gross margin
as these price increases catchup to our rising raw material costs.
Despite these near
term headwinds, the Company continues to expect 2021
to result in a step change in its profitability from 2020 as the Company
completes its integration cost synergies, continues
to take further share in the marketplace, benefits from the projected
gradual
rebound in demand, and sees the positive impact of its recent
acquisitions.
On-going impact of COVID-19
The global outbreak of COVID-19 has negatively impacted
all locations where the Company does business.
Although the
Company has now operated in this COVID-19 environment
for a year, the full extent of the outbreak
and related business impacts
remain uncertain and volatile, and therefore the full
extent to which COVID-19 may impact the Company’s
future results of
operations or financial condition is uncertain.
This outbreak has significantly disrupted the operations of the
Company and those of its
suppliers and customers.
The Company has experienced volume declines and lower
net sales as compared to pre-COVID-19 levels as
a result of the outbreak, as further described in this section.
Management continues to monitor the impact that the COVID-19
pandemic is having on the Company,
the overall specialty chemical industry and the economies and
markets in which the Company
operates.
Given the speed and frequency of the continuously evolving developments
with respect to this pandemic, the Company
cannot, as of the date of this Report, reasonably estimate
the magnitude or the full extent of the impact to its future results
of
operations or to the ability of it or its customers to resume
more normal operations, even as certain restrictions are lifted.
The
prolonged pandemic and a resurgence
of the outbreak, and continued restrictions on day-to-day
life and business operations may result
in volume declines and lower net sales in future periods
as compared to pre-COVID-19 levels.
To the extent that
the Company’s
customers and suppliers continue to be significantly and
adversely impacted by COVID-19, this could reduce the
availability, or result
in delays, of materials or supplies to or from the Company
,
which in turn could significantly interrupt the Company’s
business
operations.
Given this ongoing uncertainty,
the Company cautions that its future results of operations could
be significantly adversely
impacted by COVID-19.
Further, management continues to
evaluate how COVID-19-related circumstances, such
as remote work
arrangements, illness or staffing shortages
and travel restrictions have affected financial reporting
processes and systems, internal
control over financial reporting, and disclosure controls and
procedures.
While the circumstances have presented and are expected
to
continue to present challenges, and have necessitated
additional time and resources to be deployed to sufficiently
address the
challenges brought on by the pandemic, at this time, management
does not believe that COVID-19 has had a material impact on
financial reporting processes, internal controls over financial
reporting, or disclosure controls and procedures.
The Company’s top
priority is, and especially during this pandemic remains, to protect the health
and safety of its employees and
customers, while working to ensure business continuity
to meet customers’ needs.
The Company continues to take steps to protect the
health and wellbeing of its people in affected
areas through various actions, including enabling work at home
where needed and
possible, and employing social distancing standards,
implementing travel restrictions where applicable, enhancing onsite hygiene
practices, and instituting visitation restrictions at the Company’s
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 31
production facilities worldwide are open
and operating and are deemed as essential businesses
in the jurisdictions where they are operating.
The Company believes that to date
it has been able to meet the needs of all its customers across
the globe despite the current economic challenges.
The Company’s first
quarter of 2021 continued the trend of gradual sequential
quarterly improvement which began in the second half
of 2020.
However,
demand still remains uncertain as many customers maintained
reduced production levels into the first quarter of 2021.
The Company
continues to expect that the impact from COVID-19
will gradually improve subject to the effective containment
of the virus and its
Quaker Chemical Corporation
Management’s Discussion and Analysis
27
variants and successful distribution and acceptance
of the vaccines that have been developed.
However, the incidence of reported
cases of COVID-19 in several geographies where we have
significant operations remains high and it remains highly uncertain
as to
how long the global pandemic and related economic challenges
will last and when our customers’ businesses will recover
to pre-
COVID-19 levels.
The Company took various
actions to temporarily conserve cash and reduce costs during
and these temporary
initiatives were designed and implemented so that
the Company could successfully manage through the challenging COVID-19
situation while continuing to protect the health
of its employees, meet customers’ needs, maintain the Company’s
long-term
competitive advantages and above-market growth, and enable it to
continue to effectively integrate Houghton.
While the actions taken
to date to protect our workforce, to continue to serve
our customers with excellence and to conserve cash and
reduce costs, have been
effective thus far, further
actions to respond to the pandemic and its effects may
be necessary as conditions continue to evolve.
Liquidity and Capital Resources
At March 31, 2021, the Company had cash, cash equivalents
and restricted cash of $163.5 million.
Total cash, cash
equivalents
and restricted cash was $181.9 million at December
31, 2020.
The approximately $18.4 million decrease in cash, cash equivalents
and
restricted cash was the net result of $15.8 million of cash
used in investing activities, $12.6 million of cash used in
operating activities
and a $3.0 million negative impact due to the effect
of foreign currency translation partially offset by $13.0
million of cash provided
by financing activities.
Net cash flows used in operating activities were $12.6
million in the first three months of 2021 compared to net cash flows
provided by operating activities of $20.2 million in the
first three months of 2020.
The decrease in net operating cash flows of $32.8
million was primarily driven by a significant change in working
capital, as the significant increase in current quarter net
sales resulted
in a large increase in accounts receivable
in the first three months of 2021.
In addition, the Company had higher cash dividends
received from its associated companies in the first three
months of 2020, primarily due to $5.0 million received from
the Company’s
joint venture in Korea with no similar dividend received
in the first three months of 2021 related to the timing of dividends received.
Net cash flows used in investing activities were $15.8
million in the first three months of 2021 compared to $8.0 million
in the
first three months of 2020.
This increase in cash outflows was driven by increases in
higher cash payments related to acquisitions
during the three months ending March 31, 2021, including
$25.0 million for certain assets related to tin-plating solutions
primarily for
steel end markets.
These higher cash outflows were partially offset by
cash proceeds of approximately $14.7 million from the
disposition of assets, which includes the sale of certain
held-for-sale real property assets related to the Combination.
Net cash flows provided by financing activities were $13.0
million in the first three months of 2021 compared to
$186.6 million
in the first three months of 2020.
The decrease of $173.6 million in net cash flows was primarily related
to the prior year borrowings
of most of the available liquidity under the Company’s
revolving credit facility related to the economic uncertainty
brought on by
COVID-19.
In addition, the Company paid $7.1 million of cash dividends
during the first three months of 2021, a $0.2 million or 3%
increase in cash dividends compared to the prior year.
Finally, during the first three
months of 2020, the Company used $1.0 million
to purchase the remaining noncontrolling interest in a South
Africa affiliate.
Prior to this buyout, this South Africa affiliate made
a
distribution to the prior noncontrolling affiliate
shareholder of approximately $0.8 million in the three
months of 2020.
There were no
similar noncontrolling interest activities in the first three
months of 2021.
The Company’s primary
credit facility (the “Credit Facility”) is comprised of a $400.0
million multicurrency revolver (the
“Revolver”), a $600.0 million term loan (the “U.S. Term
Loan”), each with the Company as borrower,
and a $150.0 million (as of
August 1, 2019) Euro equivalent term loan (the “Euro
Term Loan” and together
with the U.S. Term Loan”,
the “Term Loans”) with
Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a five-year term maturing in August 2024.
Subject
to the consent of the administrative agent and certain other
conditions, the Company may designate additional borrowers.
The
maximum amount available under the Credit Facility
can be increased by up to $300.0 million at the Company’s
request if there are
lenders who agree to accept additional commitments and
the Company has satisfied certain other conditions.
Borrowings under the
Credit Facility bear interest at a base rate or LIBOR plus an
applicable margin based on the Company’s
consolidated net leverage
ratio.
There are LIBOR replacement provisions that contemplate a further
amendment if and when LIBOR ceases to be reported.
The
weighted average interest rate incurred on the outstanding
borrowings under the Credit Facility during both the first quarter of
2021
and as of March 31, 2021 was approximately 1.6%.
In addition to paying interest on outstanding principal under the
Credit Facility,
the Company is required to pay a commitment fee ranging
from 0.2% to 0.3% depending on the Company’s
consolidated net leverage
ratio to the lenders under the Revolver in respect
of the unutilized commitments thereunder.
The Credit Facility is subject to certain financial and
other covenants.
The Company’s initial consolidated
net debt to
consolidated adjusted EBITDA ratio could not exceed
4.25 to 1, with step downs in the permitted ratio over the
term of the Credit
Facility.
As of March 31, 2021, the consolidated net debt to consolidated
adjusted EBITDA ratio may not exceed 4.00 to 1.
The
Company’s consolidated
adjusted EBITDA to interest expense ratio may not be less than
3.0 to 1 over the term of the agreement.
The
Credit Facility also prohibits the payment of cash dividends
if the Company is in default or if the amount of the dividends
paid
annually exceeds the greater of $50.0 million and
20% of consolidated adjusted EBITDA unless the ratio of
consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1,
in which case there is no such limitation on amount.
As of March 31, 2021 and
Quaker Chemical Corporation
Management’s Discussion and Analysis
28
December 31, 2020, the Company was in compliance with
all of the Credit Facility covenants.
The Term Loans
have quarterly
principal amortization during their five-year terms,
with 5.0% amortization of the principal balance due in years 1 and
2, 7.5% in year
3, and 10.0% in years 4 and 5, with the remaining principal
amount due at maturity.
The Credit Facility is guaranteed by certain of the
Company’s domestic subsidiaries
and is secured by first priority liens on substantially all of
the assets of the Company and the
domestic subsidiary guarantors, subject to certain customary exclusions.
The obligations of the Dutch borrower are guaranteed only
by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable
interest rates on at least 20% of its total Term
Loans.
In order to
satisfy this requirement as well as to manage the
Company’s exposure to variable
interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $170.0
million notional amounts of three-year interest rate swaps at a base
rate of
1.64% plus an applicable margin as provided
in the Credit Facility, based on
the Company’s consolidated net
leverage ratio.
At the
time the Company entered into the swaps, and as
of March 31, 2021, the aggregate interest rate on the swaps,
including the fixed base
rate plus an applicable margin, was 3.1%.
The Company capitalized $23.7 million of certain third-party
debt issuance costs in connection with executing the
Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed
to the Term Loans and
recorded as a direct reduction of long-
term debt on the Company’s
Consolidated Balance Sheet.
Approximately $8.3 million of the capitalized costs were
attributed to the
Revolver and recorded within other assets on the Company’s
Condensed Consolidated Balance Sheet.
These capitalized costs are
being amortized into interest expense over the five-year
term of the Credit Facility.
As of March 31, 2021, the Company had Credit Facility borrowings
outstanding of $900.7 million.
As of December 31, 2020, the
Company had Credit Facility borrowings outstanding
of $887.1 million.
The Company has unused capacity under the Revolver of
approximately $204 million, net of bank letters of
credit of approximately $6 million, as of March 31, 2021.
The Company’s other
debt obligations are primarily industrial development
bonds, bank lines of credit and municipality-related loans, which
totaled $12.4
million and $12.1 million as of March 31, 2021 and
December 31, 2020, respectively.
Total unused capacity
under these
arrangements as of March 31, 2021 was approximately
$40 million.
The Company’s total net debt
as of March 31, 2021 was $749.6
million.
The Company estimates that it realized cost synergies
in the first quarter of 2021 of approximately $18 million compared to
approximately $10 million in the first quarter of 2020.
The Company continues to expect to realize Combination cost synergies
of
approximately $75 million in 2021 and $80 million in
2022.
The Company continues to expect to incur additional costs
and make
associated cash payments to integrate Quaker and Houghton
and continue realizing the Combination’s
total anticipated cost synergies.
The Company expects total cash payments, including
those pursuant to the QH Program, described below,
but excluding incremental
capital expenditures related to the Combination,
will be approximately 1.3 times its total anticipated 2022 cost
synergies of $80
million.
A significant portion of these costs were already incurred
in 2019, 2020 and the first quarter of 2021, but the Company
expects to continue to incur such costs throughout
the remainder of 2021.
The Company incurred $0.8 million of total Combination,
integration and other acquisition-related expenses in the
first quarter of 2021, which includes $0.4 million of accelerated
depreciation
and is net of a $5.4 million gain on the sale of certain
held-for-sale real property assets, described in
the Non-GAAP Measures section
of this Item below.
Comparatively, in the first
quarter of 2020, the Company incurred $8.3 million of
total Combination, integration
and other acquisition-related expenses, including $0.5
million of accelerated depreciation.
The Company had aggregate net cash
outflows of approximately $8.7 million related to the
Combination, integration and other acquisition-related expenses during
the first
three months of 2021 as compared to $8.3 million during
the first three months of 2020.
Quaker Houghton’s management
approved, and the Company initiated, a global restructuring
plan (the “QH Program”) in the
third quarter of 2019 as part of its planned cost synergies
associated with the Combination.
The QH Program includes restructuring
and associated severance costs to reduce total headcount
by approximately 400 people globally and plans for the closure
of certain
manufacturing and non-manufacturing facilities.
In connection with the plans for closure of certain manufacturing
and non-
manufacturing facilities, the Company made a decision
to make available for sale certain facilities during the second
quarter of 2020.
During the first quarter of 2021, certain of these facilities were
sold and the Company recognized a gain on disposal of $5.4 million
included within other income (expense), net on the Condensed
Consolidated Statement of Operations.
The exact timing and total
costs associated with the QH Program will depend
on a number of factors and is subject to change; however,
reductions in headcount
and site closures have continued into 2021.
The Company currently expects additional headcount reductions and
site closures to occur
into 2022 and estimates that the anticipated cost synergies
realized under the QH Program will approximate one-times restructuring
costs incurred.
The Company made cash payments related to the settlement of
restructuring liabilities under the QH Program during
the first three months of 2021 of approximately $1.2 million
compared to $4.9 million in the first three months of
2020.
Quaker Chemical Corporation
Management’s Discussion and Analysis
29
As of March 31, 2021, the Company’s
gross liability for uncertain tax positions, including interest and
penalties, was $30.0
million.
The Company cannot determine a reliable estimate of the
timing of cash flows by period related to its uncertain tax position
liability.
However, should the entire liability
be paid, the amount of the payment may be reduced by up
to $7.5 million as a result of
offsetting benefits in other tax jurisdictions.
During the fourth quarter of 2020, one of the Company’s
subsidiaries received a notice of
inspection from a taxing authority in a country where certain
of its subsidiaries operate, which relate to a non-income
(indirect) tax
that may be applicable to certain products the subsidiary
sells.
To date, the Company
has not received any assessment from the
authority related to potential liabilities that may be due
from the Company’s subsidiary.
Consequently there is substantial uncertainty
with respect to the Company’s
ultimate liability with respect to this indirect tax.
See Note 19 of Notes to Condensed Consolidated
Financial Statements in Item 1 of this Report.
The Company believes that its existing cash, anticipated
cash flows from operations and available additional liquidity
will be
sufficient to support its operating requirements
and fund its business objectives for at least the next twelve
months, including but not
limited to, payments of dividends to shareholders, costs related
to the Combination and integration, pension plan contributions,
capital
expenditures, other business opportunities (including
potential acquisitions) and other potential contingencies.
The Company’s
liquidity is affected by many factors, some
based on normal operations of our business and others related
to the impact of the
pandemic on our business and on global economic
conditions as well as industry uncertainties, which we cannot
predict.
We also
cannot predict economic conditions and industry downturns
or the timing, strength or duration of recoveries.
We may seek,
as we
believe appropriate, additional debt or equity financing
which would provide capital for corporate purposes, working
capital funding,
additional liquidity needs or to fund future growth opportunities, including
possible acquisitions and investments.
The timing and
amount of potential capital requirements cannot be
determined at this time and will depend on a number of factors,
including the
actual and projected demand for our products, specialty
chemical industry conditions, competitive factors, and the
condition of
financial markets, among others.
Non-GAAP Measures
The information in this Form 10-Q filing includes non-GAAP (unaudited)
financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating
income, non-GAAP operating margin, non-GAAP
net income and non-
GAAP earnings per diluted share.
The Company believes these non-GAAP financial measures provide
meaningful supplemental
information as they enhance a reader’s understanding
of the financial performance of the Company,
are indicative of future operating
performance of the Company,
and facilitate a comparison among fiscal periods, as the
non-GAAP financial measures exclude items
that are not considered indicative of future operating performance
or not considered core to the Company’s
operations.
Non-GAAP
results are presented for supplemental informational
purposes only and should not be considered a substitute for the
financial
information presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income
(loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on income
(loss) before equity in net income of associated companies.
The Company
also presents adjusted EBITDA which is calculated as EBITDA
plus or minus certain items that are not considered indicative of
future
operating performance or not considered core to the Company’s
operations.
In addition, the Company presents non-GAAP operating
income which is calculated as operating income (loss) plus
or minus certain items that are not considered indicative of future operating
performance or not considered core to the Company’s
operations.
Adjusted EBITDA margin and non-GAAP operating
margin are
calculated as the percentage of adjusted EBITDA and
non-GAAP operating income to consolidated net sales, respectively.
The
Company believes these non-GAAP measures provide
transparent and useful information and are widely used by analysts, investors,
and competitors in our industry as well as by management
in assessing the operating performance of the Company on
a consistent
basis.
Additionally, the
Company presents non-GAAP net income and non-GAAP earnings
per diluted share as additional performance
measures.
Non-GAAP net income is calculated as adjusted EBITDA, defined
above, less depreciation and amortization, interest
expense, net, and taxes on income before equity in
net 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-
GAAP earnings per diluted share provide transparent
and useful information and are widely used by analysts, investors,
and
competitors in our industry as well as by management in
assessing the operating performance of the Company on a consistent
basis.
Quaker Chemical Corporation
Management’s Discussion and Analysis
30
The following tables reconcile the Company’s
non-GAAP financial measures (unaudited) to their most
directly comparable
GAAP (unaudited) financial measures (dollars in thousands unless
otherwise noted
except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
March 31,
2021
2020
Operating income (loss)
$
44,894
$
(12,444)
Houghton combination, integration and other acquisition
-related expenses (a)
6,230
8,276
Restructuring and related charges (b)
1,175
1,716
Fair value step up of acquired inventory sold (c)
801
—
CEO transition costs (d)
504
—
Inactive subsidiary's non-operating litigation costs (e)
51
—
Customer bankruptcy costs (f)
—
463
Indefinite-lived intangible asset impairment (g)
—
38,000
Non-GAAP operating income
$
53,655
$
36,011
Non-GAAP operating margin (%) (m)
12.5%
9.5%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and
Non-GAAP Net Income Reconciliations
Three Months Ended
March 31,
2021
2020
Net income (loss) attributable to Quaker Chemical Corporation
$
38,615
$
(28,381)
Depreciation and amortization (a) (l)
22,448
21,584
Interest expense, net
5,470
8,461
Taxes on income
(loss) before equity in net income of associated companies
10,689
(13,070)
EBITDA
$
77,222
$
(11,406)
Equity (income) loss in a captive insurance company
(h)
(3,080)
327
Houghton combination, integration and other acquisition
-related expenses (a)
427
7,803
Restructuring and related charges (b)
1,175
1,716
Fair value step up of acquired inventory sold (c)
801
—
CEO transition costs (d)
504
—
Inactive subsidiary's non-operating litigation costs (e)
51
—
Customer bankruptcy costs (f)
—
463
Indefinite-lived intangible asset impairment (g)
—
38,000
Pension and postretirement benefit costs, non-service components
(i)
(124)
23,525
Currency conversion impacts of hyper-inflationary economies (j)
172
51
Adjusted EBITDA
$
77,148
$
60,479
Adjusted EBITDA margin (%) (m)
18.0%
16.0%
Adjusted EBITDA
$
77,148
$
60,479
Less: Depreciation and amortization - adjusted (a)
22,033
21,111
Less: Interest expense, net
5,470
8,461
Less: Taxes on income
before equity in net income of associated companies - adjusted
(a)(n)
11,739
6,463
Non-GAAP net income
$
37,906
$
24,444
Quaker Chemical Corporation
Management’s Discussion and Analysis
31
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
March 31,
2021
2020
GAAP earnings (loss) per diluted share attributable to Quaker
Chemical Corporation
common shareholders
$
2.15
$
(1.60)
Equity (income) loss in a captive insurance company
per diluted share (h)
(0.17)
0.02
Houghton combination, integration and other acquisition
-related expenses per diluted share (a)
0.04
0.36
Restructuring and related charges per diluted
share (b)
0.05
0.07
Fair value step up of acquired inventory sold per diluted
share (c)
0.03
—
CEO transition costs per diluted share (d)
0.02
—
Inactive subsidiary's non-operating litigation costs per
diluted share (e)
0.00
—
Customer bankruptcy costs per diluted share (f)
—
0.02
Indefinite-lived intangible asset impairment per diluted
share (g)
—
1.65
Pension and postretirement benefit costs, non-service components
per diluted share (i)
(0.00)
0.88
Currency conversion impacts of hyper-inflationary economies per
diluted share (j)
0.01
0.00
Impact of certain discrete tax items per diluted share (k)
(0.02)
(0.02)
Non-GAAP earnings per diluted share (o)
$
2.11
$
1.38
(a)
Houghton combination, integration and other acquisition-related
expenses include certain legal, financial, and other advisory
and
consultant costs incurred in connection with post-closing
integration activities including
internal control readiness and
remediation.
These costs are not indicative of the future operating performance
of the Company.
Approximately $0.1 million for
the three months ended March 31, 2021 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 months ended March 31, 2021 and 2020,
the Company recorded $0.4 million
and $0.5 million, respectively,
of accelerated depreciation related to certain of the Company’s
facilities, which is included in the
caption “Houghton combination, integration and other
acquisition-related expenses” in the reconciliation of operating
income
(loss) to non-GAAP operating income and included
in the caption “Depreciation and amortization” in the reconciliation
of net
income (loss) attributable to the Company to EBITDA, but
excluded from the caption “Depreciation and amortization – adjusted”
in the reconciliation of adjusted EBITDA to non-GAAP net
income attributable to the Company.
During the three months ended
March 31, 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 “Houghton,
combination, integration and other acquisition-related expenses” in
the
reconciliation of GAAP earnings (loss) per diluted
share attributable to Quaker Chemical Corporation common
shareholders to
Non-GAAP earnings per diluted share as well as the reconciliation
of net income (loss) attributable to Quaker Chemical
Corporation to Adjusted EBITDA and Non-GAAP net
income.
(b)
Restructuring and related charges represents
the costs incurred by the Company associated with the QH
restructuring program
which was initiated in the third quarter of 2019 as part
of the Company’s plan
to realize cost synergies associated with the
Combination.
These costs are not indicative of the future operating performance
of the Company.
See Note 7 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(c)
Fair value step up of inventory sold relates to expenses associated
with selling inventory from acquired businesses which
was
adjusted to fair value as part of purchase accounting.
These increases in costs of goods sold (“COGS”) are not indicative
of the
future operating performance of the Company.
(d)
CEO transition costs represent the costs related to the
Company’s on-going search
for a new CEO in connection with the
previously announced executive transition planned for
the end of 2021.
These expenses are not indicative of the future operating
performance of the Company.
(e)
Inactive subsidiary’s
non-operating litigation costs represents the charges
incurred by an inactive subsidiary of the Company and
are a result of the termination of restrictions on insurance
settlement reserves as previously disclosed in the Company’s
2020
Form 10-K.
These charges are not indicative of the future operating
performance of the Company.
See Note 9 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(f)
Customer bankruptcy costs represent the costs associated with
a specific reserve for trade accounts receivable related to
a
customer who filed for bankruptcy protection. These expenses
are not indicative of the future operating performance
of the
Company.
Quaker Chemical Corporation
Management’s Discussion and Analysis
32
(g)
Indefinite-lived intangible asset impairment represents the
non-cash charge taken to write down the value
of certain indefinite-
lived intangible assets associated with the Houghton
Combination.
The Company has no prior history of goodwill or intangible
asset impairments and this charge is not indicative
of the future operating performance of the Company.
See Note 14 of Notes to
Condensed Consolidated Financial Statements, which appears
in Item 1 of this Report.
(h)
Equity (income) loss in a captive insurance company
represents the after-tax (income) loss 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 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.
(i)
Pension and postretirement benefit costs, non-service components
represent the pre-tax, non-service component of the Company’s
pension and postretirement net periodic benefit cost in
each period.
These costs are not indicative of the future operating
performance of the Company.
The amount in the three months ended March 31, 2020
includes the $22.7 million settlement
charge for the Company’s
termination of the Legacy Quaker U.S. Pension Plan.
See Note 9 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(j)
Currency conversion impacts of hyper-inflationary economies represents
the foreign currency remeasurement impacts associated
with the Company’s affiliates
whose local economies are designated as hyper-inflationary
under U.S. GAAP.
During both the
three months ended March 31, 2021 and 2020,
the Company incurred non-deductible, pre-tax charges
related to the Company’s
Argentine affiliates.
The charges incurred related to the immediate recognition
of foreign currency remeasurement in the
Condensed Consolidated Statements of Operations associated with
these entities are not indicative of the future operating
performance of the Company.
See Note 1 of Notes to Condensed Consolidated Financial
Statements, which appears in Item 1 of
this Report.
(k)
The impact of certain discrete tax items includes the impact
of changes in certain valuation allowances recorded on
certain of the
Company’s foreign
tax credits, changes in withholding rates and the associated impact
on previously accrued for distributions at
certain of the Company’s
Asia/Pacific subsidiaries as well as the offsetting
impact and amortization of a deferred tax benefit the
Company recorded in the fourth quarter of 2019 related
to an intercompany intangible asset transfer.
(l)
Depreciation and amortization for the three months
ended March 31, 2021 and 2020 included $0.3 million and
$0.4 million,
respectively, of
amortization expense recorded within equity in net income of
associated companies in the Company’s
Condensed
Consolidated Statement of Operations, which is attributable
to the amortization of the fair value step up for the Company’s
50%
interest in a Houghton joint venture in Korea as a result
of required purchase accounting.
(m)
The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage
of adjusted EBITDA and
non-GAAP operating income to consolidated net sales.
(n)
Taxes on income
before equity in net income of associated companies – adjusted
presents the impact of any current and deferred
income tax expense (benefit), as applicable, of
the reconciling items presented in the reconciliation of net income (loss)
attributable to Quaker Chemical Corporation to adjusted
EBITDA, and was determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject
to deductibility.
Houghton combination, integration and other
acquisition-related expenses described in (a) resulted in
incremental taxes of $0.1 million and $2.0 million during the three
months ended March 31, 2021 and 2020, respectively.
Restructuring and related charges described in (b) resulted
in incremental
taxes of $0.2 million and $0.4
million during the three months ended March 31, 2021
and 2020,
respectively.
Fair value step up
of inventory sold described in (c) resulted in incremental
taxes of $0.2 million during the three months ending March 31,
2021.
CEO transition expenses described in (d) resulted
in incremental taxes of $0.1 million during the three months ended
March 31,
2021.
Inactive subsidiary litigation described in (e) resulted in incremental
taxes of less than $0.1 million during the three months
ended March 31, 2021.
Customer bankruptcy costs described in (f) resulted in incremental
taxes of $0.1 million during the three
months ended March 31, 2020.
Indefinite-lived intangible asset impairment described in
(g) resulted in incremental taxes of $8.7
million during the three months ended March 31, 2020.
Pension and postretirement benefit costs, non-service components
described in (i) resulted in a tax benefit of less than
$0.1 million and incremental taxes of $7.9 million for the three
months ended
March 31, 2021 and 2020, respectively.
Tax impact of certain discrete
items described in (k) above resulted in a tax benefit of
$0.4 million during each of the three months ended March
31, 2021 and 2020.
(o)
The Company calculates non-GAAP earnings per diluted share
as non-GAAP net income attributable to the Company
per
weighted average diluted shares outstanding using the “two-class share
method” to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance
sheet items, as defined under Item 303(a)(4) of Regulation S-K as of
March 31, 2021.
The Company’s only
off-balance sheet items outstanding as of March 31,
2021 represented approximately $9 million of total bank
letters of credit and guarantees.
The bank letters of credit and guarantees are not significant to
the Company’s liquidity
or capital
resources.
See Note 15 of Notes to Condensed Consolidated Financial Statements
in Item 1 of this Report.
Quaker Chemical Corporation
Management’s Discussion and Analysis
33
Operations
Consolidated Operations Review – Comparison of the First Quarter
of 2021 with the First Quarter of 2020
Net sales were $429.8 million in the first quarter of 2021
compared to $378.6 million in the first quarter of 2020.
The net sales
increase of $51.2 million or 14% quarter-over-quarter
reflects a benefit from higher sales volumes of 5%, additional
net sales from
recent acquisitions of 3%, the positive impact from foreign
currency translation of 3% and increases in selling price and
product mix
of approximately 3%.
The increase in sales volumes compared to the first quarter
of 2020 was primarily due to improved end market
conditions and continued market share gains.
Additional net sales from acquisition primarily related to sales attributable
to Coral,
which the Company acquired in December 2020.
COGS were $273.6 million in the first quarter of 2021 compared
to $244.7 million in the first quarter of 2020.
The increase in
COGS of $28.9 million or 12% was driven by the associated
COGS on the increase in net sales as described above,
and, to a lesser
extent, an expense of $0.8 million associated with selling acquired
Coral inventory at its fair value described in the Non-GAAP
Measures section of this Item above.
Gross profit in the first quarter of 2021 increased $22.3
million or 17% from the first quarter of 2020, due primarily
to the
increase in net sales.
The Company’s reported gross margin
in the first quarter of 2021 was 36.3% compared to 35.4%
in the first
quarter of 2020.
The Company’s current
quarter gross margin includes the impact of the inventory
fair value step up described above.
Excluding this and other one-time increases to COGS including
accelerated depreciation in both periods, described in the Non-GAAP
Measures section of this Item above, the Company estimates that
its gross margins in the first quarters of 2021
and 2020 would have
been approximately 36.6% and 35.5%, respectively.
While the Company has experienced higher raw material costs beginning
in the
fourth quarter of 2020 and continuing into 2021,
the higher gross margin as compared to the prior year
first quarter was primarily
driven by the Company’s
continued execution of Combination-related logistics, procurement
and manufacturing cost savings
initiatives as well as the benefit of higher volumes in the
current quarter and the related impact from fixed manufacturing
costs.
SG&A in the first quarter of 2021 increased $5.6
million or 6% compared to the first quarter of 2020 due
primarily to additional
SG&A from acquisitions, increases due to foreign
currency translation and $0.5 million of CEO transition costs described
in the Non-
GAAP Measures section of this Item, above, partially
offset by lower travel expenses and a decrease in the
service component of the
Company’s pension and
postretirement benefits as a result of the first quarter of 2020
termination of its Legacy Quaker U.S. pension
plan.
During the first quarter of 2021 the Company incurred
$5.8 million of Combination, integration and other acquisition-related
expenses primarily for professional fees related to Houghton integration
and other acquisition-related activities.
Comparatively, the
Company incurred $7.9 million of expenses in the prior
year first quarter, primarily due
to various professional fees related to legal,
financial and other advisory and consultant expenses for integration
activities.
See the Non-GAAP Measures
section of this Item,
above.
The Company initiated a restructuring program during
the third quarter of 2019 as part of its global plan to realize cost
synergies
associated with the Combination that occurred during
2019 and 2020 and are expected to continue throughout 2021.
The Company
incurred restructuring and related charges for
reductions in headcount and site closures under this program of $1.2
million and $1.7
million during the first quarters of 2021 and 2020,
respectively.
See the Non-GAAP Measures section of this Item, above.
During the first quarter of 2020, the Company recorded
a $38.0 million non-cash impairment charge to write
down the value of
certain indefinite-lived intangible assets associated with the
Combination.
This non-cash impairment charge was related to certain
acquired Houghton trademarks and tradenames and
was primarily the result of the projected negative impacts of COVID-19
as of
March 31, 2020 on their estimated fair values.
There was no similar impairment charges recorded
during the first quarter of 2021.
Operating income in the first quarter of 2021 was
$44.9 million compared to an operating loss of $12.4 million
in the first quarter
of 2020.
Excluding Combination, integration and other acquisition-related
expenses, restructuring and related charges,
the indefinite-
lived intangible asset impairment charge, and
other 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
quarter non-GAAP operating
income increased to $53.7 million compared to
$36.0 million in the prior year first quarter primarily due
to the increase in net sales
described above and the benefits from cost savings initiatives
related to the Combination.
The Company had other income, net, of $4.7 million
in the first quarter of 2021 compared to other expense, net of
$21.2 million
in the first quarter of 2020.
The quarter-over-quarter change was primarily due
to the first quarter of 2021 gain on the sale of certain
held-for-sale real property assets compared
to the first quarter of 2020 pension plan settlement charge
associated with the termination
of the Legacy Quaker U.S. Pension Plan.
See the Non-GAAP Measures section of this Item, above.
Partially offsetting these impacts
quarter-over-quarter were foreign currency transaction
losses of $1.5 million in the first quarter of 2021 compared
to foreign currency
transaction gains of $0.8 million in the first quarter of
2020.
Quaker Chemical Corporation
Management’s Discussion and Analysis
34
Interest expense, net,
decreased $3.0 million
compared to the first
quarter of 2020, due
to a decline in
interest rates in the
current
period over the
first quarter of
2020, as the
weighted average interest
rate incurred
on outstanding borrowings
under the Company’
s
credit facility was less than 2% during the first quarter
of 2021 compared to approximately 3% during the first quarter
of 2020.
The Company’s effective
tax rates for the first quarters of 2021 and 2020 were an expense of
24.2% and a benefit of 31.1%,
respectively.
The Company’s effective
tax rate for the three months ended March 31, 2021 was impacted
by the sale of certain held-
for-sale real property assets related to the Combination
as well as certain U.S. tax law changes.
Comparatively, the
prior year first
quarter effective tax rate was impacted by the
tax effect of certain one-time pre-tax losses as well as certain tax
charges and benefits in
the current period including those related to changes
in foreign tax credit valuation allowances, tax law changes in a foreign
jurisdiction, and the tax impacts of the Company’s
termination of its Legacy Quaker U.S. Pension Plan and the
Houghton indefinite-
lived trademarks and tradename intangible asset impairment.
Excluding the impact of these items as well as all other non-core
items
in each quarter, described in
the Non-GAAP Measures section of this Item, above, the Company
estimates that its effective tax rates
for the first quarter of 2021 and 2020 would have been
approximately 25% and 22%, respectively.
This quarter-over-quarter increase
was largely driven by the impact of higher
pre-tax income in the current quarter as compared to the prior year
quarter on certain tax
adjustments as well as increased withholding taxes on
expected current year repatriated earnings.
The Company expects continued
volatility in its effective tax rates due to several
factors, including the timing of tax audits and the expiration
of applicable statutes of
limitations as they relate to uncertain tax positions,
the unpredictability of the timing and amount of certain incentives in various
tax
jurisdictions, the treatment of certain acquisition-related
costs and the timing and amount of certain share-based compensation
-related
tax benefits, among other factors.
Equity in net income of associated companies increased $4.5 million
in the first quarter of 2021 compared to the first quarter of
2020, primarily due to current quarter income from
the Company’s interest in
a captive insurance company compared to losses in the
prior year first quarter.
See the Non-GAAP Measures section of this Item, above.
In addition, the Company had higher earnings
quarter-over-quarter from the Company’s
50% interest in its joint venture in Korea.
Net income attributable to noncontrolling interest was less than
$0.1 million in both the first quarters of 2021 and 2020.
Foreign exchange negatively impacted the Company’s
first quarter of 2021 results by approximately 1% as higher
foreign
exchange transaction losses quarter-over-quarter
were partially offset by an aggregate positive impact from
foreign currency
translation on earnings.
Reportable Segments Review - Comparison of the First Quarter
of 2021 with the First Quarter of 2020
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.
The Company has four reportable segments: (i) Americas;
(ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed of the net
sales and operations in each respective region, excluding net
sales and operations managed globally by the Global
Specialty Businesses segment, which includes the Company’s
container, metal
finishing, mining, offshore, specialty coatings,
specialty grease and Norman Hay businesses.
Segment operating earnings for each of the Company’s
reportable segments are comprised of net sales less directly related
COGS
and SG&A.
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 income (expense), net.
Americas
Americas represented approximately 31% of the Company’s
consolidated net sales in the first quarter of 2021.
The segment’s net
sales were $134.9 million, an increase of $5.0 million
or 4% compared to the first quarter of 2020.
The increase in net sales reflects
the inclusion of additional net sales from acquisitions, primarily
Coral.
Excluding net sales from acquisitions, the segment’s
net sales
were relatively flat compared to the prior year first quarter
as the increases from selling price and product mix of 2%
were offset by
the negative impacts of foreign currency transaction of
2%.
The foreign exchange impact was primarily due to the
weakening of the
Brazilian real against the U.S. dollar,
as this exchange rate averaged
5.46 in the first quarter of 2021 compared to 4.43 in the first
quarter of 2020.
This segment’s operating
earnings were $32.2 million, an increase of $3.0 million or 10%
compared to the first
quarter of 2020.
The increase in segment operating earnings reflects the higher net
sales described above coupled with a higher
current quarter gross margin, partially offset
by slightly higher SG&A, including SG&A from acquisitions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
35
EMEA
EMEA represented approximately 28% of the Company’s
consolidated net sales in the first quarter of 2021.
The segment’s net
sales were $119.8 million, an
increase of $15.0 million or 14% compared to the first quarter of 2020.
The increase in net sales was
driven by increases in volumes of 3%, a benefit from
selling price and product mix of 2%, additional set sales from acquisitions
of less
than 1% and a positive impact from foreign currency translation
of 8%.
The current quarter volume increase was driven by the
continued gradual economic rebound from the COVID-19
slowdown.
The foreign exchange impact was primarily due to the
strengthening of the euro against the U.S. dollar as this exchange
rate averaged 1.21 in the first quarter of 2021 compared to 1.10 in
the first quarter of 2020.
This segment’s operating earnings
were $25.2 million, an increase of $6.9 million or 38%
compared to the
first quarter of 2020.
The increase in segment operating earnings reflects the higher
net sales described above coupled with higher
current quarter gross margin and relatively
flat SG&A.
Asia/Pacific
Asia/Pacific represented approximately 23% of the
Company’s consolidated net
sales in the first quarter of 2021.
The segment’s
net sales were $96.7 million, an increase of $23.2 million
or 31% compared to the first quarter of 2020.
The increase in net sales
reflects increases in volumes of 28% and the positive impact
of foreign currency translation of 7% partially offset
by decreases in
selling price and product mix of 4%.
The increases in volume was primarily driven by the continued gradual
economic rebound from
the COVID-19 slowdown as the pandemic notably impacted
China during the first quarter of 2020.
The foreign exchange impact was
primarily due to the strengthening of the Chinese renminbi
against the U.S. dollar as this exchange rate averaged
6.48 in the first
quarter of 2021 compared to 6.98 in the first quarter of 2020.
This segment’s operating
earnings were $27.5 million, an increase of
$8.0 million or 41% compared to the first quarter of 2020.
The increase in segment operating earnings reflects the higher net
sales
described above on a relatively consistent gross margin
quarter-over-quarter.
These increases were partially offset by higher SG&A
which was driven by the segment’s
improved operating performance compared to the first quarter
of 2020.
Global Specialty Businesses
Global Specialty Businesses represented approximately
18% of the Company’s consolidated
net sales in the first quarter of 2021.
The segment’s net sales were
$78.4 million, an increase of $8.1 million or 12% compared
to the first quarter of 2020.
The increase in
net sales reflects the inclusion of additional net sales from
the Company’s Coral Chemical
acquisition.
Excluding net sales from
acquisitions, the segment’s
net sales would have increased 6% quarter-over-quarter
driven by increases in selling price and product
mix, including Norman Hay,
of approximately 20% and the positive impact from foreign
currency translation of 2%, partially offset
by decreases in volumes of 16%.
The foreign exchange impact was primarily due to the
strengthening of the euro against the U.S.
dollar described in the EMEA section above, partially
offset by the weakening of the Brazilian real against
the U.S. dollar described in
the Americas section, above.
Both the changes in selling price and product mix and
sales volume were primarily driven by higher
shipments of a lower priced product in the Company’s
mining business in the prior year,
without the impact of this mining business
item, this segment’s volumes
would have been relatively consistent quarter-over-quarter.
This segment’s operating
earnings were
$24.2 million, an increase of $3.6 million or 18% compared
to the first quarter of 2020.
The increase in segment operating earnings
reflects the higher net sales described above coupled
with higher current quarter gross margin and relatively
flat SG&A.
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities
Litigation Reform Act of 1995)
Certain information included in this Report and other
materials filed or to be filed by Quaker Chemical Corporation
with the
Securities and Exchange Commission (“SEC”) (as well as information
included in oral statements or other written statements made
or
to be made by us) contain or may contain forward-looking
statements within the meaning of Section 27A of the Securities Act
of
1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
These statements can be identified by the
fact that they do not relate strictly to historical or
current facts.
We have based
these forward-looking
statements, including statements
regarding the potential effects of the COVID-19
pandemic on the Company’s
business, results of operations, and financial condition
,
our expectation that we will maintain sufficient
liquidity and remediate any of our material weaknesses in internal
control over
financial reporting on our current expectations about
future events, and statements regarding the impact of increased
raw material
costs and pricing initiatives.
These forward-looking statements include statements with respect
to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations,
future performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19
pandemic and any projected global economic rebound
or
anticipated positive results due to Company actions taken
in response to the pandemic;
•
our current and future results and plans; and
•
statements that include the words “may,”
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Quaker Chemical Corporation
Management’s Discussion and Analysis
36
Such statements include information relating to current and
future business activities, operational matters, capital spending,
and
financing sources.
From time to time, forward-looking statements are also included in
the Company’s other periodic
reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released
to, or statements made to, the public.
Any or all of the forward-looking statements in this Report,
in the Company’s Annual
Report to Shareholders for 2020 and in any
other public statements we make may turn out to be wrong.
This can occur as a result of inaccurate assumptions
or as a consequence
of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining
our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated
from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements,
whether as a result of new information, future
events or otherwise.
However, any further disclosures made
on related subjects in the Company’s
subsequent reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’
products, which subjects the Company to uncertainties related
to downturns in a
customer’s business and unanticipated customer
production shutdowns,
including as is currently being experienced
by many
automotive industry companies.
Other major risks and uncertainties include, but
are not limited to, the primary and secondary impacts
of the COVID-19 pandemic, including actions taken
in response to the pandemic by various governments, which could
exacerbate
some or all of the other risks and uncertainties faced by the
Company, including
the potential for significant increases in raw material
costs, supply chain disruptions, customer financial instability,
worldwide economic and political disruptions,
foreign currency
fluctuations, significant changes in applicable tax
rates and regulations, future terrorist attacks and other acts of
violence.
Furthermore, the Company is subject to the same business
cycles as those experienced by our customers in the
steel, automobile,
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, 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 by the pandemic,
including the resulting market
volatility, and
by the measures taken by governmental authorities and other
third parties restricting day-to-day life and business
operations and the length of time that such measures
remain in place,
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 the Combination and other acquisitions and the
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 2020 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.
37
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, 2020, and we
believe there has been no material change to that information.
38
Item 4.
Controls and Procedures.
Evaluation of disclosure controls
and procedures.
As required by Rule 13a-15(b) under the Securities Exchange
Act of 1934, as
amended (the “Exchange Act”), our management,
including our principal executive officer and principal financial
officer, has
evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act ) as of the
end of the period covered by this Report.
Based on that evaluation, our principal executive officer
and our principal financial officer
have concluded that, as of the end of the period covered by
this Report, our disclosure controls and procedures (as defined
in Rule
13a-15(e) under the Exchange Act) were not effective
as of March 31, 2021 because of the material weaknesses in
our internal control
over financial reporting, as described below.
As previously disclosed in “Item 9A. Controls and Procedures.”
in the Company’s 2020
Form 10-K, through the process of
evaluating risks and corresponding changes to the
design of existing or the implementation of new controls
in light of the significant
non-recurring transactions that occurred during 2019,
including the Combination, the Company identified certain deficiencies in
its
application of the principles associated with the Committee
of Sponsoring Organization of the Treadway
Commission in Internal
Control – Integrated Framework (2013) that management
has concluded in the aggregate constitute a material weakness.
A material
weakness is a deficiency,
or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable
possibility that a material misstatement of annual or interim
financial statements
will not be prevented or detected on a timely basis.
We did not
design and maintain effective controls in response to the
risks of material misstatement.
Specifically, changes to existing
controls or the implementation of new controls were not
sufficient to respond to changes to the risks of material
misstatement in
financial reporting as a result of becoming a larger,
more complex global organization due to the Combination.
This material
weakness also contributed to an additional material weakness as we did
not design and maintain effective controls
over the review of
pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
These material weaknesses did not
result in material misstatements to the interim or annual
consolidated financial statements.
However, these material weaknesses could
result in misstatements to our account balances and disclosures
that could result in a material misstatement to the interim
or annual
consolidated financial statements that would not be
prevented or detected.
Notwithstanding these material weaknesses, the Company
has concluded that the unaudited condensed consolidated financial
statements included in this Report present fairly,
in all material respects, the financial position of the Company as of
March 31, 2021
and December 31, 2020, and that the results of its operations
and its cash flows and changes in equity for both the
three month periods
ended March 31, 2021 and March 31, 2020, are in conformity
with accounting principles generally accepted in the United States of
America.
Progress on Remediation
of Material Weaknesses
The Company and its Board of Directors, including the
Audit Committee of the Board of Directors, are committed to maintaining
a strong internal control environment.
Since identifying the material weaknesses, the Company
has dedicated a significant amount of
time and resources to remediate all of the previously identified
material weaknesses as quickly and effectively
as possible. In 2020, the
Company dedicated multiple internal resources and
supplemented those internal resources with various third-party specialists to
assist
with the formalization of a robust and detailed remediation
plan.
In undertaking remediation activities, the Company has hired
additional personnel dedicated to financial and information
technology compliance to further supplement its internal
resources.
In
addition, the Company has established a global network
of personnel to assist local management in understanding control performance
and documentation requirements.
In order to sustain this network, the Company conducts periodic
trainings and hosts discussions to
address questions on a current basis.
However, the impact of COVID-19,
including travel restrictions and remote work arrangements
required the Company to adapt and make changes to its internal
controls integration plans as well as its remediation
plans, and has
presented and is expected to continue to present challenges
with regards to the timing of the Company’s
remediation and integration
plan activities.
Despite the challenges brought on by COVID-19 and
driven by the Company’s
priority of creating a long-term sustainable control
structure to ensure stability for a company that has more
than doubled in size since August 2019, the Company continues
to make
substantial strides towards remediating the underlying
causes of the previously disclosed material weaknesses in our
risk assessment
process and within our revenue process, as further discussed
below.
Risk Assessment –
We previously determined
that our risk assessment process was not designed adequately
to respond to changes
to the risks of material misstatement to financial rep
orting.
In order to remediate this material weakness, we have designed
and
implemented an improved risk assessment process, including
identifying and assessing those risks attendant to the
significant changes
within the Company as a result of becoming a larger,
more complex global organization due to the
Combination.
During 2020, a full
review was performed of our processes and controls across
significant locations in order to identify and address potential
design gaps.
In addition to individual transactional-level control
enhancements, this review resulted in (i) an enhanced financial
statement risk
assessment, (ii) the standardization of existing legal entity
and newly implemented segment quarterly analytics and
quarterly closing
packages completed by key financial reporting personnel, (iii) a
global account reconciliation review program and (iv)
enhancements
to our quarterly identification and reassessment of new and
existing business and information technology risks that could
affect our
financial reporting.
Monitoring is also performed through our enhanced quarterly
controls certification process, whereby changes in
business or information technology processes or control
owners are identified and addressed timely.
Although we have implemented
39
and tested the additional controls as noted in our remediation
plan and found them to be effective, this material
weakness will not be
considered remediated due to the Revenue – Price and
Quantity material weakness, discussed below.
Once the Revenue – Price and
Quantity material weakness is remediated, we expect
the Risk Assessment material weakness will also be remediated.
Revenue – Price and Quantity –
We previously
determined that we did not design and maintain effective
controls over the review
of pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
In order to remediate this
material weakness, the Company made significant progress
in its redesign of certain aspects of its revenue process and related
controls.
The Company has identified and agreed upon design enhancements
and requirements for each revenue sub-process.
The
design includes enhancements to entity-level and transactional
-level manual controls as well as IT general and application
controls
and the Company is in the process of implementing
these design changes both centrally and locally.
However, because the additional
controls have not been fully implemented and tested, this
material weakness is not yet remediated.
This existing material weakness
will not be considered remediated until the applicable
remedial controls have been fully implemented and operate
for a sufficient
period of time and management has concluded, through
testing, that the controls are operating effectively.
Given the significant resources the Company has dedicated
to remediation of its material weaknesses, the Company is committed
to remediation and expects that in 2021 it will successfully implement
the enhanced design of its revenue processes and have a
sufficient operational effectiveness period
to evidence remediation over its price and quantity material weakness
and, concurrently,
evidence remediation over its risk assessment material weakness
in 2021 as well.
Changes in internal control over financial
reporting.
As required by Rule 13a-15(d) under the Exchange Act,
our
management, 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 March 31, 2021 that have materially affec
ted, or are reasonably likely to materially affect, our
internal control
over financial reporting.
Based on that evaluation, there were no changes that have materially
affected, or are reasonably
likely to materially affect, our internal control
over financial reporting during the quarter ended March
31, 2021.
40
PART
II.
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been
omitted.
Item 1.
Legal Proceedings.
Incorporated by reference is the information in Note
19 of the Notes to the Condensed Consolidated Financial
Statements in Part
I, Item 1, of this Report.
Item 1A.
Risk Factors.
In addition to the other information set forth in this Report,
you should carefully consider the risk factors previously disclosed
in
Part I, Item 1A of our 2020 Form 10-K, which includes the
on-going risk and uncertainty related to the outbreak of
COVID-19 and its
impact on business and economic conditions.
The risks associated with COVID-19 and the other risks described
in our 2020 Form
10-K are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to
be
immaterial may also materially and adversely affect
our business, financial condition or operating results.
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)
(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)
January 1 - January 31
—
$
—
—
$
86,865,026
February 1 - February 28
4,595
$
284.56
—
$
86,865,026
March 1 - March 31
45
$
240.55
—
$
86,865,026
Total
4,640
$
284.14
—
$
86,865,026
(1)
All of these shares were acquired from employees upon
their surrender of Quaker Chemical Corporation shares in payment
of
the exercise price of employee stock options exercised or
for the payment of taxes upon exercise of employee stock
options
or the vesting of restricted stock.
(2)
The price paid for shares acquired from employees pursuant
to employee benefit and share-based compensation
plans is, in
each case, based on the closing price of the Company’s
common stock on the date of exercise or vesting as specified by the
plan pursuant to which the applicable option or restricted
stock was granted.
(3)
On May 6, 2015, the Board of Directors of the Company
approved, and the Company announced, a share repurchase
program, pursuant to which the Company is authorized
to repurchase up to $100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”),
and it has no expiration date.
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program
during the quarter ended March 31, 2021.
Limitation on the Payment of Dividends
The New Credit Facility has certain limitations on the
payment of dividends and other so-called restricted
payments. See Note 15
of Notes to Condensed Consolidated Financial Statements,
in Part I, Item 1, of this Report.
41
Item 6.
Exhibits.
(a) Exhibits
3.1
–
3.2
–
3.2 as filed by the Registrant within its quarterly report on Form 10-Q filed on May 11, 2020.
10.1
–
10.2
–
filed by the Registrant with Form 10-Q, filed on November 12, 2019. †
10.3
–
10.4
–
Chief Executive Officer Transition Agreement dated April 22, 2021 effective December 31, 2021. *†
31.1
–
31.2
–
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
Extension 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.
*********
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 6, 2021
Shane W.
Hostetter,
Senior Vice President, Chief Financial
Officer (officer duly authorized on behalf of, and principal
financial officer of, the Registrant)
exhibit101
1
EXHIBIT 10.1
MEMORANDUM OF EMPLOYMENT
April 19, 2021
Shane W.
Hostetter
[ Redacted ]
The parties
to this
Memorandum of
Employment (“Agreement”)
are
Shane W.
Hostetter
and
Quaker Chemical
Corporation
, a Pennsylvania corporation, doing business as Quaker Houghton
(“Quaker Houghton” or the “Company”).
You
are appointed Quaker Houghton’s
Senior Vice President
and Chief Financial Officer
effective as of the
date listed above
and Quaker Houghton wishes to enter into this Agreement
containing certain covenants in connection with this appointment.
NOW THEREFORE
in consideration
of the
mutual promises
and covenants
herein contained
and intending
to be
legally
bound hereby the parties hereto agree as follows:
1.
Duties
Quaker Houghton
agrees to
employ you
and you
agree to
serve as
Quaker Houghton’s
Senior
Vice President
and Chief
Financial Officer,
located at our Conshohocken, PA
facility.
You
shall perform all duties
consistent with such position as well
as any
other duties that are assigned
to you from time to time
by Quaker Houghton’s
Chief Executive Officer.
You
agree that during the term
of your employment
with Quaker Houghton
to devote your knowledge,
skill, and working time
solely and exclusively
to the business
and interests of
Quaker Houghton and
its subsidiaries. Any
and all prior
employment or other
agreements, with the
exception of the
April
19, 2021 Change of Control agreement, are hereby terminated
and have no further legal effect.
-
Compensation
Your
base salary will be
determined from time to
time by the Compensation
and Human Resources Committee
of the Board
of Directors, in
consultation with the
Chief Executive Officer.
In addition, you
will be entitled to
participate, to the
extent eligible, in
any of Quaker Houghton’s
annual and long term
incentive plans, retirement savings plan
(401k plan), and will be
entitled to paid time
off, paid
holidays, and
medical, dental, and
other benefits as
are made
generally available
by Quaker
Houghton to
its full-time U.S.
employees.
-
Term
of Employment
.
Your
employment with
Quaker Houghton
may be
terminated on
thirty (30)
days' written
notice by
either party,
with or
without cause or reason whatsoever.
Within thirty (30) days after termination
of your employment, you will be given an accounting
of
all monies
due you.
Notwithstanding the
foregoing, Quaker
Houghton has
the right
to terminate
your employment
upon less
than
thirty (30) days’ notice for Cause (as defined below).
-
Covenant
Not to Disclose
a. You
acknowledge that the
identity of Quaker
Houghton's (and any
of Quaker Houghton's
affiliates’) customers,
the
requirements of such customers,
pricing and payment
terms quoted and charged
to such customers, the
identity of Quaker Houghton's
suppliers and
terms of
supply (and
the suppliers
and related
terms of
supply of
any of
Quaker Houghton's
customers for
which
management services are being
provided), information concerning
the method and conduct of
Quaker Houghton's (and any
affiliate’s)
business such
as formulae,
formulation information,
application technology,
manufacturing information,
marketing information,
strategic and
marketing plans,
financial information,
financial statements
(audited and
unaudited), budgets,
corporate practices
and
procedures, research and
development efforts, and
laboratory test methods
and all of Quaker
Houghton's (and its
affiliates’) manuals,
documents, notes,
letters, records,
and computer
programs are
Quaker Houghton's
confidential information
("Confidential
Information") and
are Quaker Houghton’s
(and/or any
of its affiliates’,
as the case
may be)
sole and exclusive
property.
You
agree
that at no
time during or
following your employment
with Quaker Houghton
will you appropriate
for your own
use, divulge or
pass
on, directly
or through
any other
individual or
entity or
to any
third party,
any Quaker
Houghton Confidential
Information. Upon
termination of your employment
with Quaker Houghton
and prior to final payment
of all monies due
to you under Section
2 or at any
other time
upon Quaker
Houghton's request,
you agree
to surrender
immediately to
Quaker Houghton
any and
all materials in
your
possession or control which include or contain any
Quaker Houghton Confidential Information.
b. You
acknowledge that,
by this Section
4(b), you
have been
notified in
accordance with
the Defend
Trade Secrets
Act that, notwithstanding the foregoing:
(i)
You
will not be
held criminally or
civilly liable under
any federal or
state trade secret
law or this
Agreement for the disclosure
of Confidential Information that:
(A) you make (1)
in confidence to a
federal, state, or local government
official, either
directly or
indirectly, or
to your
attorney; and
(2) solely
for the
purpose of
reporting or
investigating a
suspected
violation of law; or (B) you make in a complaint or other
document that is filed under seal in a lawsuit or other proceeding.
2
(ii)
If you file a lawsuit
for retaliation by Quaker
Houghton for reporting a
suspected violation of law,
you may disclose
Confidential Information
to your attorney
and use the
Confidential Information in
the court proceeding
if you: (A)
file any document containing Confidential
Information under seal and (B) do not disclose
Confidential Information, except pursuant
to
court order.
c. Additionally,
Quaker Houghton confirms
that nothing in
this Agreement is
intended to or
shall prevent, impede
or
interfere with
your right,
without prior
notice to
Quaker Houghton,
to provide
information to
the government,
participate in
any
government investigations, file a
court or administrative complaint,
testify in proceedings regarding
Quaker Houghton’s past
or future
conduct, or engage in any future activities protected
under any statute administered by any government agency.
-
Covenant
Not to Compete
In consideration of your new position with Quaker
Houghton and the training and Confidential Information
you are to receive
from Quaker
Houghton, you
agree that
during your
employment with
Quaker Houghton
and for
a period
of one (1)
year thereafter,
regardless of the reason for your termination, you will not:
a. directly
or indirectly,
together or separately
or with any
third party,
whether as an
employee, individual proprietor,
partner, stockholder,
officer, director,
or investor, or in a joint venture
or any other capacity whatsoever,
actively engage in business or
assist anyone or
any firm in
business as a manufacturer,
seller, or distributor
of specialty chemical
products which are
the same, like,
similar to, or which compete with Quaker Houghton’s
(or any of its affiliates’) products or services; and
b. directly
or indirectly
recruit, solicit
or encourage
any Quaker
Houghton (or
any of
its affiliates’)
employee or
otherwise induce such employee to leave Quaker
Houghton’s (or any
of its affiliates’) employ,
or to become an employee or otherwise
be associated with you or any firm, corporation, business, or
other entity with which you are or may become associated;
and
. solicit
or induce
any of
Quaker Houghton's suppliers
of products
and/or services
(or a
supplier of
products and/or
services of a customer
who is being provided
or solicited for the provision
of chemical management services
by Quaker Houghton) to
terminate or alter its contractual relationship with Quaker
Houghton (and/or any such customer).
The parties
consider these
restrictions reasonable,
including the
period of
time during
which the
restrictions are
effective.
However, if
any restriction
or the
period of
time specified
should be
found to
be unreasonable
in any
court proceeding,
then such
restriction shall be modified
or the period of time
shall be shortened as is
found to be reasonab
le so that the
foregoing covenant not to
compete may
be enforced.
You
agree that
in the event
of a breach
or threatened
breach by
you of
the provisions
of the restrictive
covenants contained in
Section 4 or in
this Section 5,
Quaker Houghton will
suffer irreparable harm,
and monetary damages
may not
be an
adequate remedy.
Therefore, if
any breach
occurs, or
is threatened,
in addition
to all
other remedies
available to
Quaker
Houghton, at
law or
in equity,
Quaker Houghton
shall be
entitled as
a matter
of right
to specific
performance of
the covenants
contained herein by
way of temporary or
permanent injunctive relief.
In the event of
any breach of the
restrictive covenant contained
in this Section
5, the term
of the restrictive
covenant shall be
extended by a
period of time
equal to that
period beginning on
the date
such violation commenced and ending when the activities
constituting such violation cease.
-
Contractual
Restrictions
You
represent and warrant to Quaker Houghton
that: (a) there are no restrictions, agreements, or
understandings to which you
are a
party that
would prevent
or make
unlawful your
employment with
Quaker Houghton
and (b)
your employment
by Quaker
Houghton shall
not constitute
a breach of
any contract,
agreement, or
understanding, oral
or written, to
which you
are a party
or by
which you are
bound.
You
further represent that
you will not
use any trade
secret, proprietary or
otherwise confidential information
belonging to a prior employer or other third party in connection
with your employment with Quaker Houghton.
-
Inventions
All improvements,
modifications, formulations,
processes, discoveries
or inventions
("Inventions"), whether
or not
patentable, which
were originated,
conceived or
developed by
you solely
or jointly
with others (a)
during your
working hours
or at
Quaker Houghton’s
expense or
at Quaker
Houghton's premises
or at
a customer’s
premises or
(b) during
your employment
with
Quaker Houghton and
additionally for a
period of one
year thereafter,
and which relate
to (i) Quaker
Houghton’s business
or (ii) any
research, products,
processes, devices, or
machines under actual
or anticipated development
or investigation by
Quaker Houghton at
the earlier
of (i)
that time
or (ii)
as the
date of
termination of
employment, shall
be Quaker
Houghton’s sole
property.
You
shall
promptly disclose to Quaker
Houghton all Inventions that you
conceive or become aware of
at any time during your
employment with
Quaker Houghton and
shall keep complete,
accurate, and authentic
notes, data and
records of all
Inventions and of
all work done
by
you solely or jointly with
others, in the manner directed
by Quaker Houghton. You
hereby transfer and assign to
Quaker Houghton all
of your right,
title, and interest
in and to
any and all
Inventions which may
be conceived or
developed by
you solely or
jointly with
others during your
employment with Quaker
Houghton.
You
shall assist Quaker Houghton
in applying, obtaining,
and enforcing any
United States Letters
Patent and Foreign
Letters Patent on
any such Inventions
and to take
such other actions
as may be necessary
or
desirable to
protect Quaker
Houghton's interests
therein.
Upon request,
you shall
execute any
and all
applications, assignments,
or
other documents
that Quaker
Houghton deems
necessary and
desirable for
such purposes.
You
have attached
hereto a
list of
unpatented inventions
that you have
made or conceived
prior to your
employment with Quaker
Houghton, and it
is agreed that
those
inventions shall be excluded from the terms of this Agreement.
3
8.
Termination
Quaker Houghton, in its sole
discretion, may terminate your
employment at any time and
for any reason, including
Cause (as
defined herein).
If you incur a
Separation from Service
by decision and
action of Quaker Houghton
for any reason
other than Cause,
death, or Disability (as defined below), Quaker Houghton
agrees to:
a. Provide
you with
reasonable outplacement
assistance, either
by providing
the services
in-kind, or
by reimbursing
reasonable expenses
actually incurred
by you in
connection with your
Separation from
Service.
The outplacement
services must be
provided during the
one-year period following
your Separation from Service.
If any expenses are
to be reimbursed, you
must request
the reimbursement within
eighteen months of
your Separation from
Service and reimbursement
will be made
within 30 days
of your
request.
b. Pay
you one
year's severance
in twenty
-four semi-monthly
installments commencing
on the
Payment Date
and
continuing on
Quaker Houghton's
normal semi-monthly
payroll dates
each month
thereafter, each
of which
is equal
to your
semi-
monthly base salary
at the time
of your Separation
from Service, provided
you sign a
Release within 45
days of the
later of the
date
you receive
the Release
or your
Separation from
Service. Continuation
of medical
and dental
coverage’s will
be consistent
with
current Quaker Houghton severance program in place
at the time of termination.
“Separation from Service”
means your separation
from service with Quaker
Houghton and its affiliates
within the meaning
of Treas. Reg. §1.409A-1(h) or any
successor thereto.
“Cause”
means your
employment with
Quaker Houghton
has been
terminated by
reason of
(i) your
willful and
material
breach of
this Agreement
(after hav
ing received
notice thereof
and a
reasonable opportunity
to cure
or correct)
or the
Company’s
policies, (ii) dishonesty,
fraud, willful malfeasance, gross
negligence, or other gross misconduct,
in each case relating to the
performance of your duties hereun
der which is materially injurious
to Quaker Houghton, or (iii)
conviction of or plea of guilty
or nolo
contendere to a felony.
“Payment Date”
means (x)
the 60th
day after
your Separation
from Service
or (y)
if you
are a
specified employee
(as
defined in Treas.
Reg. §1.409A-1(i)) as
of the date
of your Separation
from Service, and
the severance described
in subsection (b)
is
deferred compensation subject
to section 409A of
the Code, the first business
day of the seventh
month following the month
in which
your Separation
from Service
occurs.
If the
Payment Date
is described
in clause
(y), the
amount paid
on the
Payment Date
shall
include all monthly
installments that would
have been paid
earlier had clause
(y) not been
applicable, plus interest
at the Wall
Street
Journal Prime Rate
published in the
Wall Street
Journal on the
date of your
Separation from Service
(or the previous
business day if
such day
is not
a business
day), for
the period
from the
date payment
would have
been made
had clause
(y) not
been applicable
through the date payment is made.
“Release”
means a release
(in a form
satisfactory to Quaker
Houghton) of any
and all claims against
Quaker Houghton and
all related parties
with respect to
all matters arising
out of your
employment with Quaker
Houghton, or the
termination thereof (other
than for claims for any entitlements under the
terms of this Agreement or any plans or programs of
Quaker Houghton under which you
have accrued a benefit) that Quaker Houghton
provides to you no later than ten days after your
Separation from Service.
If a release is
not provided to you within this time period, the severance
shall be paid even if you do not sign a release.
“Disability”
means total and permanent
disability as defined
in the long-term disability
plan maintained by
Quaker
Houghton for employees
generally or,
if Quaker Houghton
does not maintain
such a plan, the
long-term disability plan
most recently
maintained by Quaker Houghton for employees generally.
-
Indemnification.
The Company
shall defend you
and hold you
harmless to
the fullest
extent permitted
by applicable
law in connection
with
any claim, action,
suit, investigation or
proceeding arising out
of or relating
to performance by
you of services
for, or
action of you,
director, officer
or employee
of the
Company or
any parent,
subsidiary or
affiliate of
the Company,
or of
any other
person or
enterprise at
the Company’s
request. Expenses
incurred by
you in
defending such
claim, action,
suit or
investigation or
criminal
proceeding shall
be paid
by the
Company in
advance of
the final
disposition thereof
upon the
receipt by
the Company
of an
undertaking by
or on
behalf of
you to
repay said
amount unless
it shall
ultimately be
determined that
you are
entitled to
be
indemnified hereunder;
provided, however,
that this
shall not
apply to
a nonderivative
action commenced
by the
Company against
you.
-
Governing
Law.
The provisions of this Agreement shall be construed in
accordance with the laws of the Commonwealth of
Pennsylvania without reference to principles of conflicts of
laws.
4
-
Miscellaneous
This Agreement and
any Change in
Control Agreement to
which you are
a party,
constitute the entire
integrated agreement
concerning the subjects
covered herein.
In case any
provision of this
Agreement shall be
invalid, illegal, or
otherwise unenforceable,
the validity, legality,
and enforceability of the remaining provisions shall not
thereby be affected or impaired.
You
may not assign any
of your rights
or obligations under
this Agreement without
Quaker Houghton’s
prior written consent.
Quaker Houghton may
assign
this Agreement
in its discretion,
including to
any affiliate
or upon
a sale
of assets
or equity,
merger or
other corporate
transaction;
provided that Quaker
Houghton obtains the
assignee’s written
commitment to honor
the terms and
conditions contained herein.
This
Agreement shall be governed
by, and
construed in accordance with, the
laws of the Commonwealth
of Pennsylvania without regard
to
any conflict
of laws.
This Agreement
shall be
binding upon
you, your
heirs, executors,
and administrators
and shall
inure to
the
benefit of
Quaker Houghton
as well
as its
successors and
assigns.
In the
event of
any overlap
in the
restrictions contained
herein,
including Sections 4 and/or 5
above, with similar restrictions contained
in any other agreement, such restrictions
shall be read together
so as to provide the broadest restriction possible.
IN WITNESS WHEREOF,
the parties hereto have executed this Agreement the
day and year first above written.
WITNESS:
QUAKER CHEMICAL CORPORATION
DBA
QUAKER HOUGHTON
/s/ Robert T. Traub
/s/ Michael F. Barry
Michael F. Barry
WITNESS:
/s/ Victoria K. Gehris
/s/ Shane W.
Hostetter
Shane W.
Hostetter
5
Shane W. Hostetter
ADDENDUM 1
Base Salary:
Your
salary will be
payable on a
bi-weekly basis at
an annualized rate
of $390,000.
You
will be eligible for your next salary increase in 2022.
Annual and Long-
Term Bonuses:
For your position, you are
eligible to participate in
the Annual Incentive Plan
(“AIP”) with target
and double target
award percentages
for 2021 under
the AIP of
60% and
120%, respectively,
of your
base salary,
dependent upon
Quaker
Houghton’s financial
results and other objectives to be determined.
You
were eligible to
participate in the 2021
-2023 Long Term
Incentive Plan (LTIP)
at a
target level
award of
$103,000.
In consideration
of accepting
your new
role,
you award will be increased by $200,000 for a total target
level award opportunity of
$303,000.
Your
award for the 2021
-2023 performance period
includes an even
mix
of time-based restricted stock, stock options, and target
performance stock units.
All incentive compensation
awards are made
at the Company’s
discretion, are
subject to change, and require the approval of the Compensation
Committee.
Benefits:
Quaker Houghton offers
a Flexible Benefits Program
that is subject to
change.
This
gives you the
opportunity to choose
from a variety of
options creating a
customized
benefits package.
The following benefits
are currently part
of the program.
In each
of these
areas, you
are offered
a range of
options so you
may choose
the ones that
make the most sense for your personal situation.
●
Medical
●
Dental
●
Life & AD&D Insurance
●
Long-term Disability
●
Health Care and Dependent Care Flexible Spending
Accounts (FSAs)
●
Retirement Savings Plan (401k)
PTO/Holidays:
You
will be
eligible for
the amount
of PTO
days per
calendar year
based on
your
tenure with
Quaker Houghton
per the
Company’s PTO
Plan.
In addition,
you will
continue to be
eligible to be
paid for regional
holidays.
Unused PTO days
will not
roll over from
year to year
(other than a
maximum of 5
days in 2021
as previously
announced by the Company).
exhibit103
1
EXHIBIT 10.3
March 22, 2021
David Will
Quaker Houghton
Dear David:
Congratulations!
I am pleased to
offer you this
promotion with Quaker
Houghton as VP,
Global Controller.
Your
tentative start date
for this
position is
April 19,
2021.
We believe
you can
make significant
contributions in
this role
and will
find this
opportunity
exciting and rewarding.
Please review the details of the offer below.
Salary
Your
new annualized salary
is $260,000 and
is inclusive of
your 2020 merit
increase and is
effective on April
19
,
2021.
You
will be
eligible for your next merit increase in April 2022, reflective of
performance year 2021.
Annual Incentive Plan
You
will be eligible to participate in our 2021 Annual Incentive Plan
(AIP), with an annual bonus target of 30% of
your base salary.
Long Term
Incentive Plan
You
will be eligible to
participate in our 2021
Long Term
Incentive Plan (LTIP)
at a level valued at
$70,000 which is inclusive
of the
$47,000 grant you
received on March
15
th
.
The $23,000 value
in the difference
will be reflected
in an additional
grant on your
start
date of April 19, 2021.
As a reminder, the grant will consist of Restricted
Stock (60%) and Performance Stock Units (40%).
The terms and conditions of your employment
as they existed remain in effect, except
as specifically set forth above and in restrictions
from what you signed previously.
Quaker Houghton reserves the right to modify
your job title, duties and compensation, as well as all
company rules, practices and other terms of employment.
We are
excited about this
opportunity for
you David and
look forward to
you accepting this
role with Quaker
Houghton.
After your
review of this offer,
please sign below to confirm your acceptance and return
to me with a copy to Rob Traub and Kym
Johnson.
Sincerely,
/s/ Shane Hostetter
Shane Hostetter
VP,
Finance and Chief Accounting Officer
Employee Offer Acceptance
I accept the terms and conditions outlined above:
/s/ David Will
4/7/2021
David Will
Date
exhibit104
1
EXHIBIT 10.4
TRANSITION AGREEMENT
This Transition Agreement (this “
Agreement
”), dated as of April 22, 2021 is made between Michael F.
Barry (“
Executive
”)
and Quaker Chemical Corporation (“
Quaker
” or the “
Company
”).
WHEREAS, Executive and Quaker are parties to the
Employment Agreement dated July 1, 2008 regarding Executive’s
employment as the Company’s
Chief
Executive Officer and President (the “
Employment Agreement
”);
WHEREAS, Executive and Quaker contemplate that
effective December 31, 2021, Executive will retire as the
Chief
Executive Officer and President and will continue
to serve on the Board of Directors of the Company (the “
Board
”) as a non-
executive director;
WHEREAS, as used in this Agreement, any reference
to Executive shall include Executive and, in their capacities as such,
Executive’s heirs, administrators,
representatives, executors, legatees, successors, agents and
assigns; and
WHEREAS, all capitalized terms used but not defined
in this Agreement shall have the meanings ascribed to such terms
in the
Employment Agreement;
In consideration of the mutual promises, agreements and
representations contained herein, the parties agree as follows:
1.
Transition
. Executive shall continue to serve as President and
Chief Executive Officer of the Company,
at his current level of
compensation (including the full amount of his Annual
Incentive
Plan (
“AIP”
) bonus earned with respect to calendar year 2021)
and benefits (with such increases as may be approved
by the Board) through December 31, 2021. Effective
January 1, 2022,
Executive shall resign as an employee of the Company,
and from such positions and from all positions as an officer
or director of
any Company subsidiary (but, for the sake of clarity,
he shall not be expected to resign as a director of the Company).
However,
with the approval
of the Board, Executive may resign from such positions
prior to January 1, 2022, and in that event may also, if
he desires, resign as an employee prior to January 1, 2022.
In either event, Executive shall make himself reasonably
available to
the Board to provide strategic advice and counsel through
December 31, 2021 and shall continue to receive, through December
31, 2021 the same level of compensation and benefits to
which he was entitled as of the date of his resignation as President
and
Chief Executive Officer (including the
full amount of his AIP bonus earned with respect to calendar
year 2021).
If the Board
requests, and Executive provides his written consent,
Executive’s employment may
be extended beyond December 31, 2021 at his
current level of compensation and benefits, or upon such
other terms and conditions that the Board and Executive
may mutually
agree. The date of Executive’s
resignation as President and Chief Executive Officer
of the Company is referred to in the
Agreement as the “
Resignation Date.
” Following his resignation as President and Chief Executive
Officer, Executive shall,
subject to further action by the Board, continue to
serve as Chair of the Board, in the capacity as non-executive
Chair.
2.
Compensation.
If the Resignation Date occurs before January 1, 2022, the
Company shall compensate Executive through
December 31, 2021 as provided in Section 1 above.
From and after January 1, 2022 and continuing for as long
as Executive
serves as a director, the Company
shall compensate Executive for his services as a director on the same
basis as it compensates
the non-management members of the Board and shall
pay him additional compensation of $100,000 per annum (or
such greater
amount as may be approved by the Board)
for his services as non-executive Chair.
Such compensation shall be paid on the same
basis as the compensation payable to the Lead Director
(if there is one, otherwise on the same basis as for those directors serving
as chairs of Board committees), pro-rated in the event of
a partial year; provided that Executive’s
compensation for serving as
non-executive Chair shall, if paid in cash, shall be paid in
monthly installments. The Company shall reimburse Executive for
all
reasonable business expenses incurred
by him in the performance of duties as a director and non-executive
Chair in accordance
with the Company’s business
expense reimbursement policies. While serving as non
-executive Chair, the Company shall provide
Executive with support services as Executive may reasonably
request, including computer and telephone access, IT support and
support from an administrative assistant.
3.
Non-Executive Chair of the Board.
As the non-executive Chair, it is contemplated
that Executive shall, when present, preside at
all meetings of the Board and at all meetings of shareholders of
the Company, and together
with the President and Chief
Executive Officer and (if there is one) the
Lead Director, set the agenda for meetings
of the Board. In addition, Executive shall,
upon request, provide his advice and counsel with respect
to the transition of management,
new business opportunities, strategic
planning, customer and investor relations and such
other matters as the Company’s
Chief Executive Officer or the Board may
reasonably request.
4.
No Termination
of Service
. Executive and the Company hereby acknowledge that the Compensation
and Human Resources
Committee of the Board (or such other committee described
in the LTIP)
has provided that Executive will not be considered to
have had a “
Termination
of Service
” as defined in the LTIP
for so long as Executive is a director or employee of
the Company.
2
Any further amendment to the interpretation of Termination
of Service will be considered an amendment to an outstanding
award
pursuant to section 2.6 of the LTIP
and may only be made with the Executive’s
consent.
5.
Company’s Obligations
.
a.
The Company will pay Executive for any amounts of Executive’s
accrued salary payable under the Employment Agreement
and reimbursement for any reasonable business expenses
and other amounts to which Executive is entitled thereunder.
Such
payment will be made in accordance with the Company’s
regular payroll practices.
b.
Executive shall receive
any incentive cash bonus amount accrued or earned by Executive
in accordance with the terms of an
award granted under the AIP or LTIP
prior January 1, 2022 in accordance with the terms of the AIP
or LTIP,
as applicable.
Any such amount shall be paid to Executive as provided
under the AIP or LTIP,
as applicable.
c.
Following the Resignation Date, Executive shall not be
eligible to participate in the Company’s
benefit plans except as
provided below with respect to Executive’s
participation in the Company’s
existing medical plan, as such plan may be
changed by the Company from time to time for its senior employees
generally (“
Medical Coverage
”) and the Company’s
existing short-term disability plan and long-term disability
plan as such plans may be changed by the Company
from time to
time for its senior employees generally (“
Disability Coverage
”):
i.
Subject to approval from the applicable insurance provider,
if any, the Company
shall, until April 30, 2023, permit
Executive to elect Medical Coverage (including medical,
vision and dental coverage) for himself and his family
as
follows:
1.
Executive shall pay the premium cost of the Medical Coverage
he elects at the rate provided to active employees of
the Company, and
on an after-tax basis. In addition, the Company will pay
the portion of the premium cost paid by
the Company for active employees for such Medical Coverage
and the portion of the premium cost paid by the
Company will be includable in Executive’s
taxable income.
2.
Upon the termination of the Medical Coverage, Executive
and if applicable, his family may be eligible to elect
COBRA continuation coverage in accordance with the
terms of the Medical Coverage and applicable law.
3.
If at any time during such period Executive is not eligible
to participate in the Medical Coverage, the Company will
pay to Executive additional compensation in an amount
necessary to purchase coverage similar to the Medical
Coverage.
ii.
For as long as Executive is entitled to elect Medical Coverage
from the Company,
Executive will continue to be eligible
for Disability Coverage under the same terms and conditions as
active employees, subject to approval from the applicable
insurance provider, if any.
d.
Executive’s outstanding
equity awards as of December 31, 2021 shall be administered
according to the terms of the
applicable award agreements (the “
Award Agreements
”) and the terms of the LTIP.
e.
In the event of the death of Executive, any payments due
to Executive under this Agreement or the Award
Agreements and
not paid prior to Executive’s
death shall be made to the personal representative of Executive’s
estate.
f.
The Company shall withhold from any payments under this
Agreement any federal, state and local taxes that the Company
is
required to withhold pursuant to any law or governmental
rule or regulation. Executive shall be responsible for all Executive
taxes applicable to amounts payable under this Agreement.
g.
Executive shall not be entitled to any severance amounts
under any severance plans of the Company or the
Employment
Agreement.
6.
Restrictive Covenants
. Executive shall comply with the Restrictive Covenants set forth
in Section 6 of the Employment
Agreement (the “
Restrictive Covenants
”) for the applicable periods set forth therein; provided
that, notwithstanding anything to
the contrary in the Employment Agreement, Executive
shall comply with the Restrictive Covenants set forth in Section
6.2 of the
Employment Agreement regarding non-competition
and non-solicitation for so long as he is a member of the Board,
and for a
period of 18 months following the end of Executive’s
Board service.
7.
Return of Property
.
Executive agrees to return all Company property to the Company
on or before the Resignation Date (other
than as relates to his services as a director,
including his computer, cellphone and
email access) and not retain any property of the
3
Company (other than his cellphone, computer and any
other items that the Company expressly permits Executive
to keep). To the
extent that Executive retains any such items, or if he made
use of his own personal
computing devices (e.g., cellphone, laptop,
thumb drive, etc.), Executive will, upon request, deliver such
items to the Company for review and will permit the
Company to
delete all Company property and information therefrom,
and/or permit the Company to remotely delete all Company property
and
information from such items. For the avoidance of doubt,
notwithstanding anything to the contrary,
Executive shall be permitted
to retain his contacts (in electronic and paper form).
The Company shall pack and ship at its expense the personal items of
Executive that are in his office at the Company following
the Resignation Date.
8.
Cooperation
. Executive agrees that, upon the Company’s
reasonable notice to Executive and taking into consideration
Executive’s other commitments and
obligations, Executive shall fully cooperate with the Company
in investigating, defending,
prosecuting, litigating, filing, initiating or asserting any actual or
potential claims or investigations that may be made
by or against
the Company to the extent that such claims or investigations relate
to any matter in which Executive was involved (or alleged to
have been involved) while employed with the Company,
or during his service as a director, of
which Executive has knowledge by
virtue of Executive’s employment
with the Company or Executive’s
capacity as a director of the Company.
The Company will
advance to Executive the reasonable out-of-pocket expenses incurred
in rendering such cooperation.
9.
Permitted Conduct
. Nothing in this Agreement or the Employment Agreement
shall prohibit or restrict Executive from initiating
communications directly with, or responding to any inquiry
from, or providing testimony before, the Equal Employment
Opportunity Commission, the Department of Justice, the
Securities and Exchange Commission, or any other federal,
state or local
regulatory authority.
To the extent permitted
by law, upon receipt of any
subpoena, court order, or other legal process
compelling
the disclosure of any confidential information and trade secrets of
the Company, Executive agrees
to give prompt written notice to
the Company so as to permit the Company to protect its interests
in confidentiality to the fullest extent possible. Please take
notice
that federal law provides criminal and civil immunity
to federal and state claims for trade secret misappropriation
to individuals
who disclose a trade secret to their attorney,
a court, or a government official in certain, confidential
circumstances that are set
forth at 18 U.S.C. §§ 1833(b)(1) and 1833(b)(2), related
to the reporting or investigation of a suspected violation of the law,
or in
connection with a lawsuit for retaliation for reporting
a suspected violation of the law.
10.
Indemnification.
The Company shall defend and hold Executive harmle
ss to the fullest extent permitted by applicable law in
connection with any claim, action, suit, investigation
or proceeding arising out of or relating to performance by Executive
of
services for, or action of Executive
hereunder or as a director, officer,
employee or executive of the Company or of any parent,
subsidiary or affiliate of the Company,
or of any other person or enterprise at the Company’s
request. Expenses incurred by
Executive in defending such a claim, action, suit or investigation
or criminal proceeding shall be paid by the Company in
advance
of the final disposition thereof upon the receipt by the Company
of an undertaking by or on behalf of Executive to repay said
amount unless it shall ultimately be determined that Executive
is entitled to be indemnified hereunder; provided, however,
that
this shall not apply to a nonderivative action commenced
by the Company against Executive. This indemnification
obligation is in
addition to the obligations of the Company pursuant to
its articles of incorporation and bylaws.
11.
Controlling Law
.
This Agreement and all matters arising out of, or relating
to it, shall be governed by,
and construed in
accordance with, the laws of the Commonwealth of Pennsylvania.
12.
Jurisdiction
.
Any action arising out of, or relating to, any breach
of the Restrictive Covenants shall be brought and prosecuted
only in the United States District Court for the Eastern
District of Pennsylvania, or if such court does not have jurisdiction
or will
not accept jurisdiction, in any court
of general jurisdiction in Philadelphia, Pennsylvania, and the
jurisdiction of such court in any
such proceeding shall be exclusive. Executive also irrevocably
and unconditionally consents to the service of any process,
pleadings, notices or other papers.
13.
Amendment
.
The parties agree that this Agreement may not be altered,
amended or modified, in any respect, except by a writing
duly executed by both Parties.
14.
Entire Agreement
.
The parties understand that no promise, inducement or
other agreement not expressly contained herein has
been made conferring any benefit upon them, and that
this Agreement contains the entire agreement between the parties with
respect to the subject matter hereof, and that the terms of
this Agreement are contractual and not recitals only.
Prior to the
Resignation Date, the Employment Agreemen
t
shall apply to any termination of Executive’s
employment with the Company,
provided, however, that in the
event of a Separation from Service prior to the Resignation
Date, by action of the Company for any
reason other than Cause or the death or Disability of the
Executive, Executive shall receive the same compensation and benefits
that he would receive in the event of a resignation
prior to January 1, 2022, as set forth in Section 1 of this Agreement,
in lieu of
any payment under Section 4.4 of the Employment
Agreement. Following the Resignation Date, the provisions of
this Agreement
shall govern Executive’s service
as a director other than those provisions of the Employment
Agreement that by their terms apply
following termination of Executive’s
employment
as Chief Executive Officer and President of the Company
(including without
limitation Section 6 and 7.7), which shall continue
to apply to Executive.
4
15.
Section 409A
.
a.
This Agreement is intended to comply with Code section
409A, or an exemption, and the provisions of this Subsection
shall
apply notwithstanding any provisions of this Agreement
to the contrary. For purposes of
section 409A of the Code, the right
to a series of payments under this Agreement shall be treated
as a right to a series of separate payments and each payment
shall be treated as a separate payment. With
respect to any payments that are subject to section 409A of
the Code, in no event
shall Executive, directly or indirectly,
designate the calendar year of a payment and if a payment could
be made in more than
one taxable year, based on timing
of the execution of this Agreement, payment shall be made in the
later taxable year. Any
reimbursements and in-kind benefits provided under
this Agreement shall be made or provided in accordance with
the
requirements of section 409A of the Code.
b.
Notwithstanding any provision of this Agreement to
the contrary, any payment
or benefit under this Agreement that
constitutes deferred compensation subject to section 409A
of the Code and for which the payment event is a Separation
from
Service shall not be made or provided before the date that
is six months after the date of Executive’s
Separation from Service.
Any payment or benefit that is delayed pursuant to this Subsection
shall be made or provided on the first business day of the
seventh month following the month in which Executive’s
Separation from Service occurs. With respect
to any cash payment
delayed pursuant to this Subsection, the first payment
shall include interest, at the Wall
Street Journal Prime Rate published
in the Wall Street
Journal on the date of Executive’s
Separation from Service (or the previous business day
if such date is not
a business day), for the period from the date the payment would
have been made but for this Subsection through the date
payment is made. The provisions of this Subsection shall
apply only to the extent required to avoid Executive’s
incurrence of
any additional tax or interest under section 409A of the
Code.
For purposes of this Subsection, a “
Separation from Service
”
shall mean Executive’s separation
from service with the Company and its affiliates within
the meaning of Treas. Reg.
§1.409A-1(h) or any successor thereto.
16.
Agreement Severability
.
If any provision of this Agreement is construed to be invalid,
unlawful or unenforceable, then the
remaining provisions hereof shall not be affected
thereby and shall be enforceable without regard thereto.
IN WITNESS WHEREOF,
and intending to be legally bound, the parties agree
to the terms of this Agreement.
Quaker Chemical
Corporation
Date: 4/22/2021
By:
/s/ Robert T. Traub
Name:
Robert T. Traub
Title:
Sr. VP,
General Counsel and Corporate Secretary
Date: 4/22/2021
By:
/s/ Michael F. Barry
Michael F. Barry
exhibit311
1
EXHIBIT 31.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER OF THE COMPANY
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Michael F.
Barry, certify that:
1.
I have reviewed this quarterly report on Form 10
-Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this report does not contain
any untrue statement of a material fact or omit to state a material
fact
necessary to make the statements made, in light of
the circumstances under which such statements were made,
not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all
material respects the financial condition, results of operations
and cash flows of the registrant as of, and for,
the periods presented
in this report;
4.
The registrant’s other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is
being prepared;
(b)
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report
our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent
fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely
to materially affect, the registrant’s
internal control over financial
reporting; and
5.
The registrant’s other certifying
officer and I have disclosed, based on our most recent
evaluation of internal control over financial
reporting, to the registrant’s
auditors and the audit committee of the registrant’s
board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record,
process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control
over financial reporting.
Date: May 6, 2021
/s/ Michael F. Barry
Michael F. Barry
Chief Executive Officer
exhibit312
1
EXHIBIT 31.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER OF THE COMPANY
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Shane Hostetter, certify that:
1.
I have reviewed this quarterly report on Form 10
-Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this report does not contain
any untrue statement of a material fact or omit to state a material
fact
necessary to make the statements made, in light of
the circumstances under which such statements were made,
not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all
material respects the financial condition, results of operations
and cash flows of the registrant as of, and for,
the periods presented
in this report;
4.
The registrant’s other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is
being prepared;
(b)
Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report
our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent
fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely
to materially affect, the registrant’s
internal control over financial
reporting; and
5.
The registrant’s other certifying
officer and I have disclosed, based on our most recent
evaluation of internal control over financial
reporting, to the registrant’s
auditors and the audit committee of the registrant’s
board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record,
process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control
over financial reporting.
Date: May 6, 2021
/s/ Shane W.
Hostetter
Shane W.
Hostetter
Chief Financial Officer
exhibit321
1
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned hereby certifies that the Form 10-Q Quarterly
Report of Quaker Chemical Corporation (the “Company”)
for the
quarterly period ended March 31, 2021 filed with
the Securities and Exchange Commission (the “Report”) fully
complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: May 6, 2021
/s/ Michael F. Barry
Michael F. Barry
Chief Executive Officer of Quaker Chemical
Corporation
exhibit322
1
EXHIBIT 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned hereby certifies that the Form 10-Q Quarterly
Report of Quaker Chemical Corporation (the “Company”)
for the
quarterly period ended March 31, 2021 filed with
the Securities and Exchange Commission (the “Report”) fully
complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: May 6, 2021
/s/ Shane W.
Hostetter
Shane W.
Hostetter
Chief Financial Officer of Quaker Chemical Corporation