44
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of Registrant as specified in its charter)
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Pennsylvania |
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Registrant’s telephone number, including area code:
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 |
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 [X] 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).
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.
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Number of Shares of Common Stock Outstanding on April 30, 2020 |
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QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
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PART I. |
| FINANCIAL INFORMATION |
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Item 1. |
| Financial Statements (unaudited) |
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| Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 | 4 |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 28 |
Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds. | 43 |
Item 6. |
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Signatures | 44 |
1
PART I
FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
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| Three Months Ended March 31, | ||||
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Net sales | $ |
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Cost of goods sold (excluding amortization expense - See note 14) |
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Gross profit |
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Selling, general and administrative expenses |
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Indefinite-lived intangible asset impairment |
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Restructuring and related charges |
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Combination and other acquisition-related expenses |
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Operating (loss) income |
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Other expense, net |
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Interest expense, net |
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(Loss) income before taxes and equity in net income of associated companies |
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Taxes on (loss) income before equity in net income of associated companies |
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(Loss) income before equity in net income of associated companies |
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Equity in net income of associated companies |
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Net (loss) income |
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Less: Net income attributable to noncontrolling interest |
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Net (loss) income attributable to Quaker Chemical Corporation | $ | ( |
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Earnings per common share data: |
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| Net (loss) income attributable to Quaker Chemical Corporation common |
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| shareholders – basic | $ | ( |
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| Net (loss) income attributable to Quaker Chemical Corporation common |
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| shareholders – diluted | $ | ( |
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| Dividends declared | $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
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| Three Months Ended March 31, | ||||
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| 2020 |
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Net (loss) income | $ | ( |
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Other comprehensive (loss) income, net of tax |
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| Currency translation adjustments |
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| Defined benefit retirement plans |
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| Current period change in fair value of derivatives |
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| Unrealized (loss) gain on available-for-sale securities |
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| Other comprehensive (loss) income |
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Comprehensive (loss) income |
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Less: Comprehensive income (loss) attributable to noncontrolling interest |
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Comprehensive (loss) income attributable to Quaker Chemical Corporation | $ | ( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
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| March 31, |
| December 31, | ||
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ASSETS |
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Current assets |
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| Cash and cash equivalents | $ |
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| Accounts receivable, net |
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| Inventories |
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| Raw materials and supplies |
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| Work-in-process and finished goods |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, plant and equipment, at cost |
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| Less accumulated depreciation |
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| Property, plant and equipment, net |
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Right of use lease assets |
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Goodwill |
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Other intangible assets, net |
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Investments in associated companies |
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Deferred tax assets |
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Other non-current assets |
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| Total assets | $ |
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LIABILITIES AND EQUITY |
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Current liabilities |
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| Short-term borrowings and current portion of long-term debt | $ |
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| Accounts and other payables |
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| Accrued compensation |
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| Accrued restructuring |
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| Other current liabilities |
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| Total current liabilities |
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Long-term debt |
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Long-term lease liabilities |
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Deferred tax liabilities |
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Other non-current liabilities |
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| Total liabilities |
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Commitments and contingencies (Note 19) |
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Equity |
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| Common stock, $ |
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| Capital in excess of par value |
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| Retained earnings |
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| Accumulated other comprehensive loss |
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| Total Quaker shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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| Total liabilities and equity | $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
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| Three Months Ended March 31, | ||||
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Cash flows from operating activities |
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| Net (loss) income | $ | ( |
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| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Amortization of debt issuance costs |
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| Depreciation and amortization |
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| Equity in undistributed earnings of associated companies, net of dividends |
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| Deferred compensation, deferred taxes and other, net |
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| Gain on disposal of property, plant, equipment and other assets |
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| Insurance settlement realized |
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| Indefinite-lived intangible asset impairment |
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| Combination and other acquisition-related expenses, net of payments |
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| Restructuring and related charges |
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| Pension and other postretirement benefits |
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| Increase (decrease) in cash from changes in current assets and current |
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| liabilities, net of acquisitions: |
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| Accounts receivable |
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| Prepaid expenses and other current assets |
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| Change in restructuring liabilities |
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| Accounts payable and accrued liabilities |
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| Net cash provided by operating activities |
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Cash flows from investing activities |
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| Investments in property, plant and equipment |
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| Payments related to acquisitions, net of cash acquired |
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| Proceeds from disposition of assets |
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| Insurance settlement interest earned |
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| Net cash used in investing activities |
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Cash flows from financing activities |
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| Payments of long-term debt |
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| Borrowings (repayments) on revolving credit facilities, net |
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| (Repayments) borrowings on other debt, net |
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| Dividends paid |
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| Stock options exercised, other |
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| Purchase of noncontrolling interest in affiliates |
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| Effect of foreign exchange rate changes on cash |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at the beginning of the period |
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Cash, cash equivalents and restricted cash at the end of the period | $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Note 1 – Condensed Financial Information
As used in these Notes to Condensed Consolidated Financial Statements, the terms “Quaker”, “Quaker Houghton”, the “Company”, “we”, and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. As used in these Notes to Condensed Consolidated Financial Statements, the term Legacy Quaker refers to the Company prior to the closing of its combination with Houghton International, Inc. (“Houghton”) (herein referred to as the “Combination”).
Hyper-inflationary economies
Economies that have a cumulative three-year rate of inflation exceeding
Based on various indices or index compilations currently being used to monitor inflation in Argentina as well as recent economic instability, effective July 1, 2018, Argentina’s economy was considered hyper-inflationary under U.S. GAAP. As a result, the Company began applying hyper-inflationary accounting with respect to the Company's wholly owned Argentine subsidiary beginning July 1, 2018. In addition, Houghton has an Argentina subsidiary to which hyper-inflationary accounting also is applied. As of, and for the three months ended March 31, 2020, the Company's Argentine subsidiaries represented less than
Note 2 – Business Combinations
Houghton
On
The Combination was subject to certain regulatory and shareholder approvals. At a shareholder meeting held during 2017, the Company’s shareholders approved the issuance of new shares of the Company’s common stock at closing of the Combination. Also in 2017, the Company received regulatory approvals for the Combination from China and Australia. The Company received regulatory approvals from the European Commission (“EC”) during the second quarter of 2019 and the U.S. Federal Trade Commission (“FTC”) in July 2019. The approvals from the FTC and the EC required the concurrent divestiture of certain steel and aluminum related product lines of Houghton, which were sold by Houghton on August 1, 2019 for approximately $
6
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
| Cash transferred to Houghton shareholders (a) | $ |
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| Fair value of common stock issued as consideration (b) |
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| Total fair value of consideration transferred | $ |
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(a) A portion is held in escrow by a third party, subject to indemnification rights that lapse upon the achievement of certain milestones.
(b) Amount was determined based on approximately
The Company accounted for the Combination under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, at their fair value on the acquisition date. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of assets acquired, including indefinite and definite-lived intangible assets, requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. Fair values were determined by management, using a variety of methodologies and resources, including external independent valuation experts. The valuation methods included physical appraisals, discounted cash flow analyses, excess earnings, relief from royalty, and other appropriate valuation techniques to determine the fair value of assets acquired and liabilities assumed.
The following table presents the current preliminary estimated fair values of Houghton net assets acquired:
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| Measurement |
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| 2019 (1) |
| Adjustments |
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| Cash and cash equivalents | $ |
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| Prepaid expenses and other assets |
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| Property, plant and equipment |
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| Investments in associated companies |
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| Intangible assets |
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| Goodwill |
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| Short-term borrowings, not refinanced at closing |
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| Accounts payable, accrued expenses and other accrued liabilities |
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| Deferred tax liabilities |
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| Net cash paid for Houghton | $ |
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7
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Combination and other acquisition-related expenses have been and are expected to continue to be significant. The Company incurred total costs of $
Norman Hay
On
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| Cash and cash equivalents | $ |
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| Prepaid expenses and other assets |
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| Property, plant and equipment |
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| Intangible assets |
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| Goodwill |
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| Accounts payable, accrued expenses and other accrued liabilities |
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| Net cash paid for Norman Hay | $ |
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(1) As previously disclosed in the Company’s 2019 Form 10-K.
(2)
The Company finalized its post-closing adjustments for the Norman Hay acquisition and paid approximately
8
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Other Acquisitions
In March 2020, the Company acquired the remaining
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards Adopted
The Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract in August 2018 that clarifies the accounting for implementation costs incurred in a cloud computing arrangement under a service contract. This guidance generally aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement under a service contract with the requirements for capitalizing implementation costs related to internal-use software. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. There was no cumulative effect of adoption recorded within retained earnings on January 1, 2020.
The FASB issued ASU 2018-14, Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans in August 2018 that modifies certain disclosure requirements for fair value measurements. The guidance removes certain disclosure requirements regarding transfers between levels of the fair value hierarchy as well as certain disclosures related to the valuation processes for certain fair value measurements. Further, the guidance added certain disclosure requirements including unrealized gains and losses and significant unobservable inputs used to develop certain fair value measurements. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019, and should be applied prospectively in the initial year of adoption or prospectively to all periods presented, depending on the amended disclosure requirement. Early adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. ASU 2018-14 addresses disclosures only and will not have an impact on the Company’s consolidated financial statements.
The FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in June 2016 related to the accounting for and disclosure of credit losses. The FASB subsequently issued several additional accounting standard updates which amended and clarified the guidance, but did not materially change the guidance or its applicability to the Company. This accounting guidance introduces a new model for recognizing credit losses on financial instruments, including customer accounts receivable, based on an estimate of current expected credit losses. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019. Early adoption was permitted. The Company did not early adopt, but did adopt the guidance in this accounting standard update, including all applicable subsequent updates to this accounting guidance, as required, on a modified retrospective basis, effective January 1, 2020.
In accordance with this guidance, the Company recognizes an allowance for credit losses reflecting the net amount expected to be collected from its financial assets, primarily trade accounts receivable. This allowance represents the portion of the receivable that the Company does not expect to collect over its contractual life, considering past events and reasonable and supportable forecasts of future economic conditions. The Company’s allowance for credit losses on its trade accounts receivable is based on specific collectability facts and circumstances for each outstanding receivable and customer, the aging of outstanding receivables and the associated collection risk the Company estimates for certain past due aging categories, and also, the general risk to all outstanding accounts receivable based on historical amounts determined to be uncollectible.
9
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Recently Issued Accounting Standards Not Yet Adopted
The FASB issued Account Standards Update (“ASU”) 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 in January 2020 clarifying the interaction among the accounting standards related to equity securities, equity method investments, and certain derivatives. The new guidance, among other things, states that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting, for the purposes of applying the fair value measurement alternative immediately before applying or upon discontinuing the equity method. The new guidance also addresses the measurement of certain purchased options and forward contracts used to acquire investments. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2020 and is to be applied prospectively. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.
The FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in December 2019 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. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.
The FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement in August 2018 that modifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this accounting standard update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of certain disclosures, and add new disclosure requirements as relevant. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2020, and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.
Note 4 – Business Segments
Though the Company changed its reportable segments in the third quarter of 2019, the calculation of the reportable segments’ measures of earnings remains otherwise generally consistent with past practices. Segment operating earnings for the Company’s reportable segments are comprised of net sales less cost of goods sold (“COGS”) and selling, general and administrative expenses (“SG&A”) directly related to the respective segment’s product sales. Operating expenses not directly attributable to the net sales of each respective segment are not included in segment operating earnings, such as certain corporate and administrative costs, Combination and other acquisition-related expenses, and restructuring and related charges. Other items not specifically identified with the Company’s reportable segments include interest expense, net and other expense, net.
10
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
|
|
| Three Months Ended |
| ||||
|
|
| March 31, |
| ||||
|
|
| 2020 |
| 2019 |
| ||
| Net sales |
|
|
|
|
|
| |
|
| Americas | $ |
| $ |
| ||
|
| EMEA |
|
|
|
| ||
|
| Asia/Pacific |
|
|
|
| ||
|
| Global Specialty Businesses |
|
|
|
| ||
| Total net sales | $ |
| $ |
| |||
|
|
|
|
|
|
|
|
|
| Segment operating earnings |
|
|
|
|
|
| |
|
| Americas | $ |
| $ |
| ||
|
| EMEA |
|
|
|
| ||
|
| Asia/Pacific |
|
|
|
| ||
|
| Global Specialty Businesses |
|
|
|
| ||
| Total segment operating earnings |
|
|
|
| |||
| Combination and other acquisition-related expenses |
| ( |
|
| ( |
| |
| Restructuring and related charges |
| ( |
|
|
| ||
| Indefinite-lived intangible asset impairment |
| ( |
|
|
| ||
| Non-operating and administrative expenses |
| ( |
|
| ( |
| |
| Depreciation of corporate assets and amortization |
| ( |
|
| ( |
| |
| Operating (loss) income |
| ( |
|
|
| ||
| Other expense, net |
| ( |
|
| ( |
| |
| Interest expense, net |
| ( |
|
| ( |
| |
| (Loss) income before taxes and equity in net income of associated companies | $ | ( |
| $ |
|
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad range of formulated chemical specialty products and offers chemical management services (“Fluidcare”) for various heavy industrial and manufacturing applications throughout its four segments. The Combination increased the Company’s addressable metalworking, metals and industrial end markets, including steel, aluminum, aerospace, defense, transportation-OEM, transportation-components, offshore sub-sea energy, architectural aluminum, construction, tube and pipe, can and container, mining, specialty coatings and specialty greases. The Combination also strengthened the product portfolio of the combined Company. The major product lines of Quaker Houghton include metal removal fluids, cleaning fluids, corrosion inhibitors, metal drawing and forming fluids, die cast mold releases, heat treatment and quenchants, metal forging fluids, hydraulic fluids, specialty greases, offshore sub-sea energy control fluids, rolling lubricants, rod and wire drawing fluids and surface treatment chemicals.
A substantial portion of the Company’s sales worldwide are made directly through its own employees and its Fluidcare programs, with the balance being handled through distributors and agents. The Company’s employees typically visit the plants of customers regularly, work on site, and, through training and experience, identify production needs which can be resolved or otherwise addressed either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The specialty chemical industry comprises many companies similar in size to the Company, as well as companies larger and smaller than Quaker Houghton. The offerings of many of the Company’s competitors differ from those of Quaker Houghton; some offer a broad portfolio of fluids, including general lubricants, while others have a more specialized product range. All competitors provide different levels of technical services to individual customers. Competition in the industry is based primarily on the ability to provide products that meet the needs of the customer, render technical services and laboratory assistance to the customer and, to a lesser extent, on price.
11
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of steel, aluminum, automobiles, aircraft, industrial equipment, and durable goods, and, therefore, the Company is subject to the same business cycles as those experienced by these manufacturers and their customers. The Company’s financial performance is generally correlated to the volume of global production within the industries it serves, rather than discretely related to the financial performance of such industries. Furthermore, steel and aluminum customers typically have limited manufacturing locations compared to metalworking customers and generally use higher volumes of products at a single location. As previously disclosed in its 2019 Form 10-K, during 2019, the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing authority) accounted for approximately
Revenue Recognition Model
The Company identifies a contract with a customer when a sales agreement indicates approval and commitment of the parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, the Company’s contract with a customer is the customer’s purchase order. For certain customers, the Company may also enter into a sales agreement which outlines a framework of terms and conditions which apply to all future and subsequent purchase orders for that customer. In these situations, the Company’s contract with the customer is both the sales agreement as well as the specific customer purchase order. Because the Company’s contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is almost always one year or less. As a result, the Company has elected to apply certain practical expedients and omit certain disclosures of remaining performance obligations for contracts that have an initial term of one year or less as permitted by the FASB.
The Company identifies a performance obligation in a contract for each promised good or service that is separately identifiable from other obligations in the contract and for which the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, significant financing elements, amounts payable to the customer or noncash consideration. For any contracts that have more than one performance obligation, the Company allocates the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for satisfying each performance obligation.
In accordance with the last step of the FASB’s guidance, the Company recognizes revenue when, or as, it satisfies the performance obligation in a contract by transferring control of a promised good or providing the service to the customer. The Company recognizes revenue over time as the customer receives and consumes the benefits provided by the Company’s performance; the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the Company’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment, including a profit margin, for performance completed to date. For performance obligations not satisfied over time, the Company determines the point in time at which a customer obtains control of an asset and the Company satisfies a performance obligation by considering when the Company has a right to payment for the asset; the customer has legal title to the asset; the Company has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset; or the customer has accepted the asset.
12
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
The Company typically satisfies its performance obligations and recognizes revenue at a point in time for product sales, generally when products are shipped or delivered to the customer, depending on the terms underlying each arrangement. In circumstances where the Company’s products are on consignment, revenue is generally recognized upon usage or consumption by the customer. For any Fluidcare or other services provided by the Company to the customer, the Company typically satisfies its performance obligations and recognizes revenue over time, as the promised services are performed. The Company uses input methods to recognize revenue over time related to these services, including labor costs and time incurred. The Company believes that these input methods represent the most indicative measure of the Fluidcare or other service work performed by the Company.
Other Considerations
The Company does not have standard payment terms for all customers; however the Company’s general payment terms require customers to pay for products or services provided after the performance obligation is satisfied. The Company does not have significant financing arrangements with its customers. The Company does not have significant amounts of variable consideration in its contracts with customers and where applicable, the Company’s estimates of variable consideration are not constrained. The Company records certain third-party license fees in other expense, net, in its Condensed Consolidated Statements of Operations, which generally include sales-based royalties in exchange for the license of intellectual property. These license fees are recognized in accordance with their agreed-upon terms and when performance obligations are satisfied, which is generally when the third party has a subsequent sale.
Practical Expedients and Accounting Policy Elections
The Company has made certain accounting policy elections and elected to use certain practical expedients as permitted by the FASB in applying the guidance on revenue recognition. It is the Company’s policy to not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. In addition, it is the Company’s policy to expense costs to obtain a contract as incurred when the expected period of benefit, and therefore the amortization period, is one year or less. It is also the Company’s accounting policy to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, value added, excise and various other taxes. Lastly, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfilment cost rather than an additional promised service.
Contract Assets and Liabilities
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicals and its technical expertise as a global product portfolio. The Company generally manages and evaluates its performance by segment first, and then by customer industry, rather than by individual product lines. The Company has provided annual net sales information by major product lines that represent approximately 10% or more of consolidated net sales in its 2019 Form 10-K, and those annual percentages are generally consistent with the current quarter’s net sales by product line. Also, net sales of each of the Company’s major product lines are generally spread throughout all three of the Company’s geographic regions, and in most cases, approximately proportionate to the level of total sales in each region.
13
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
| Three Months Ended March 31, 2020 | ||||||||||
|
|
|
|
|
|
|
|
| Consolidated | ||
| Americas |
| EMEA |
| Asia/Pacific |
| Total | ||||
Customer Industries |
|
|
|
|
|
|
|
|
|
|
|
Metals | $ |
| $ |
| $ |
| $ | ||||
Metalworking and other |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
Global Specialty Businesses |
|
|
|
|
|
|
| ||||
| $ |
| $ |
| $ |
| $ | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognized |
|
|
|
|
|
|
|
|
|
|
|
Product sales at a point in time | $ |
| $ |
| $ |
| $ | ||||
Services transferred over time |
|
|
|
|
|
|
| ||||
| $ |
| $ |
| $ |
| $ |
| Three Months Ended March 31, 2019 | ||||||||||
|
|
|
|
|
|
|
|
| Consolidated | ||
| Americas |
| EMEA |
| Asia/Pacific |
| Total | ||||
Customer Industries |
|
|
|
|
|
|
|
|
|
|
|
Metals | $ |
| $ |
| $ |
| $ | ||||
Metalworking and other |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
Global Specialty Businesses |
|
|
|
|
|
|
| ||||
| $ |
| $ |
| $ |
| $ | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognized |
|
|
|
|
|
|
|
|
|
|
|
Product sales at a point in time | $ |
| $ |
| $ |
| $ | ||||
Services transferred over time |
|
|
|
|
|
|
| ||||
| $ |
| $ |
| $ |
| $ |
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machinery and equipment with remaining lease terms up to
14
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
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, 2020 and 2019 was $
Supplemental balance sheet information related to the Company’s leases is as follows:
|
|
| March 31, |
| December 31, |
| ||
|
| 2020 |
| 2019 |
| |||
| Right of use lease assets | $ |
| $ |
| |||
|
|
|
|
|
|
|
| |
| Other current liabilities |
|
|
|
| |||
| Long-term lease liabilities |
|
|
|
| |||
| Total operating lease liabilities | $ |
| $ |
| |||
|
|
|
|
|
|
|
|
|
| Weighted average remaining lease term (years) |
|
|
|
| |||
| Weighted average discount rate |
|
|
|
|
|
|
| March 31, |
| |
|
| 2020 |
| ||
| For the remainder of 2020 | $ |
| ||
| For the year ended December 31, 2021 |
|
| ||
| For the year ended December 31, 2022 |
|
| ||
| For the year ended December 31, 2023 |
|
| ||
| For the year ended December 31, 2024 |
|
| ||
| For the year ended December 31, 2025 and beyond |
|
| ||
| Total lease payments |
|
| ||
| Less: imputed interest |
| ( |
| |
| Present value of lease liabilities | $ |
|
Note 7 – Restructuring and Related Activities
All costs incurred to date relate specifically to severance costs to reduce headcount 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.
15
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
|
|
| QH Program |
| |
| Accrued restructuring as of December 31, 2019 | $ |
| ||
|
| Restructuring and related charges |
|
| |
|
| Cash payments |
| ( |
|
|
| Currency translation adjustments |
| ( |
|
| Accrued restructuring as of March 31, 2020 | $ |
|
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense in its Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019:
|
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
| Stock options | $ |
| $ |
| ||
| Nonvested restricted stock awards and restricted stock units |
|
|
|
| ||
| Employee stock purchase plan |
|
|
|
| ||
| Director stock ownership plan |
|
|
|
| ||
| Annual incentive plan |
|
|
|
| ||
| Total share-based compensation expense | $ |
| $ |
|
Share-based compensation expenses is recorded in SG&A, except for $
Stock Options
During the first quarter of 2020, 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 |
|
| |
| Dividend yield | % |
| |
| Expected volatility | % |
| |
| Risk-free interest rate | % |
| |
| Expected term (years) |
|
|
The fair value of these options is amortized on a straight-line basis over the vesting period. As of March 31, 2020, unrecognized compensation expense related to all stock options granted was $
Restricted Stock Awards and Restricted Stock Units
During the first quarter of 2020, the Company granted
16
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Performance Stock Units
In March 2020, the Company included performance-dependent stock awards (“PSUs”) as a component of its LTIP, which will be settled in a certain number of shares subject to market-based and time-based vesting conditions. The number of fully vested shares that may ultimately be issued as settlement for each award may range from
Compensation expense for PSUs is measured based on their grant date fair value and is recognized on a straight-line basis over the three-year vesting period. The grant-date fair value of the PSUs was estimated using a Monte Carlo simulation on the grant date and using the following assumptions: (i) a risk-free rate of
As of March 31, 2020, there was approximately $
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. It is the Company’s current intention to settle the 2020 AIP in shares, and therefore, expense associated with the AIP in 2020 will be recorded as a component of share-based compensation expense. The number of fully vested shares that may ultimately be issued as settlement for each award is subject to the achievement of the Company’s performance against certain internal financial and non-financial metrics and approval by the Company’s Compensation Committee.
Compensation expense for the AIP is measured based on the estimated total value of the award. The number of shares that will ultimately be issued under the AIP award will be equal to final value of the award converted into a number of shares based on the trading price of the Company’s common stock on the date of settlement. As of March 31, 2020, the Company estimates that it will issue approximately
Note 9 – Pension and Other Postretirement Benefits
The components of net periodic benefit cost for the three months ended March 31, 2020 and 2019 are as follows:
|
| Three Months Ended March 31, |
| ||||||||||
|
|
|
|
|
|
|
| Other |
| ||||
|
| Pension Benefits |
| Postretirement Benefits |
| ||||||||
|
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| Service cost | $ |
| $ |
| $ |
| $ |
| ||||
| Interest cost |
|
|
|
|
|
|
|
| ||||
| Expected return on plan assets |
| ( |
|
| ( |
|
|
|
|
| ||
| Settlement loss |
|
|
|
|
|
|
|
| ||||
| Actuarial loss amortization |
|
|
|
|
|
|
|
| ||||
| Prior service (credit) cost amortization |
| ( |
|
| ( |
|
|
|
|
| ||
| Total net periodic benefit cost | $ |
| $ |
| $ |
| $ |
|
17
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Employer Contributions
The Company previously disclosed in its 2019 Form 10-K that it expected to make minimum cash contributions of $
Note 10 – Other Expense, Net
The components of other expense, net for the three months ended March 31, 2020 and 2019 are as follows:
|
|
| Three Months Ended |
| ||||
|
|
| March 31, |
| ||||
|
| 2020 |
| 2019 |
| |||
| Income from third party license fees | $ |
| $ |
| |||
| Foreign exchange gains (losses), net |
|
|
| ( |
| ||
| Gain on fixed asset disposals, net |
|
|
|
| |||
| Non-income tax refunds and other related credits |
|
|
|
| |||
| Pension and postretirement benefit costs, non-service components |
| ( |
|
| ( |
| |
| Other non-operating income |
|
|
|
| |||
| Other non-operating expense |
| ( |
|
| ( |
| |
| Total other expense, net | $ | ( |
| $ | ( |
|
Note 11 – Income Taxes and Uncertain Income Tax Positions
The Company’s effective tax rate for the three months ended March 31, 2020 was a benefit of
18
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
As of March 31, 2020, the Company’s cumulative liability for gross unrecognized tax benefits was $
The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on (loss) income before equity in net income of associated companies in its Condensed Consolidated Statements of Operations. The Company recognized an expense of less than $
During the three months ended March 31, 2020 and 2019, the Company recognized decreases of $
The Company estimates that during the year ending December 31, 2020 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from
19
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations for the three months ended March 31, 2020 and 2019:
|
|
| Three Months Ended |
| ||||
|
|
| March 31, |
| ||||
|
|
| 2020 |
| 2019 |
| ||
| Basic (loss) earnings per common share |
|
|
|
|
|
| |
|
| Net (loss) income attributable to Quaker Chemical Corporation | $ | ( |
| $ |
| |
|
| Less: loss (income) allocated to participating securities |
|
|
| ( |
| |
|
| Net (loss) income available to common shareholders | $ | ( |
| $ |
| |
|
| Basic weighted average common shares outstanding |
|
|
|
| ||
| Basic (loss) earnings per common share | $ | ( |
| $ |
| ||
|
|
|
|
|
|
|
|
|
| Diluted (loss) earnings per common share |
|
|
|
|
|
| |
|
| Net (loss) income attributable to Quaker Chemical Corporation | $ | ( |
| $ |
| |
|
| Less: loss (income) allocated to participating securities |
|
|
| ( |
| |
|
| Net (loss) income available to common shareholders | $ | ( |
| $ |
| |
|
| Basic weighted average common shares outstanding |
|
|
|
| ||
|
| Effect of dilutive securities |
|
|
|
| ||
|
| Diluted weighted average common shares outstanding |
|
|
|
| ||
| Diluted (loss) earnings per common share | $ | ( |
| $ |
|
Note 13 – Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash as of March 31, 2020 and 2019 and December 31, 2019 and 2018:
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 |
| 2019 |
| 2018 | ||||
Cash and cash equivalents | $ |
| $ |
| $ |
| $ | |||||
Restricted cash included in other current assets |
|
|
|
|
|
|
| |||||
Restricted cash included in other assets |
|
|
|
|
|
|
| |||||
Cash, cash equivalents and restricted cash | $ |
| $ |
| $ |
| $ |
20
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
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, 2019 | $ |
| $ |
| $ |
| $ |
| $ | ||||||
| Currency translation and other adjustments |
| ( |
|
| ( |
|
|
|
| ( |
|
| ( | |
Balance as of March 31, 2020 | $ |
| $ |
| $ |
| $ |
| $ |
Other adjustments in the table above include updates to the Company’s allocation of the Houghton purchase price and associated goodwill to each of the Company’s reportable segments during the first quarter of 2020.
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of March 31, 2020 and December 31, 2019 were as follows:
|
| Gross Carrying |
| Accumulated | ||||||||
|
| Amount |
| Amortization | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Customer lists and rights to sell | $ |
| $ |
| $ |
| $ | |||||
Trademarks, formulations and product technology |
|
|
|
|
|
|
| |||||
Other |
|
|
|
|
|
|
| |||||
Total definite-lived intangible assets | $ |
| $ |
| $ |
| $ |
| For the year ended December 31, 2020 | $ |
| |
| For the year ended December 31, 2021 |
|
| |
| For the year ended December 31, 2022 |
|
| |
| For the year ended December 31, 2023 |
|
| |
| For the year ended December 31, 2024 |
|
| |
| For the year ended December 31, 2025 |
|
|
As of March 31, 2020, the Company evaluated the current impact of COVID-19 on the Company’s operations, as well as the volatility and uncertainty in the economic outlook as a result of COVID-19, to determine if this indicated it was more likely than not that the carrying value of any of the Company’s reporting units or other 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, 2020 with regards to any of the Company’s reporting units or other indefinite-lived and long-lived intangible assets, except for the Company’s Houghton and Fluidcare trademark and tradename indefinite-lived intangible assets.
The Company determined that the expected impact from COVID-19 on current and future year projected net sales attributable to legacy Houghton represented a triggering event, and as a result of this conclusion, the Company completed an interim quantitative indefinite-lived intangible asset impairment assessment as of March 31, 2020. Driven by a decrease in projected legacy Houghton net sales in the current year and the impact of the current year decline on projected future legacy Houghton net sales as well as an increase in the weighted average cost of capital assumption utilized in the quantitative impairment assessment, the Company concluded that the estimated fair values of the Houghton and Fluidcare trademark and tradename intangible assets were less than their carrying values. As a result, an impairment charge of $
21
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
While the Company concluded that the impact of COVID-19 did not represent a triggering event as of March 31, 2020 for any of its other long-lived or indefinite-lived assets or reporting units, the Company will continue to evaluate the impact of COVID-19 on the Company’s current and projected results. If current economic conditions worsen or projections of the timeline for recovery are significantly extended, then the Company may conclude in the future that the impact from COVID-19 requires the need to perform further interim quantitative impairment tests, which could result in additional impairment charges in the future.
Note 15 – Debt
Debt as of March 31, 2020 and December 31, 2019 includes the following:
|
|
| As of March 31, 2020 |
| As of December 31, 2019 |
| |||||||
|
|
| Interest |
| Outstanding |
| Interest | Outstanding |
| ||||
|
|
| Rate |
| Balance |
| Rate | Balance |
| ||||
| Credit Facilities: |
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| |
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| Revolver |
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| $ |
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| $ |
| ||||
|
| U.S. Term Loan |
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| ||||
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| EURO Term Loan |
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| ||||
| Industrial development bonds |
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| |||||
| Bank lines of credit and other debt obligations |
| Various |
|
|
| Various |
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|
| |||
| Total debt |
|
|
| $ |
|
|
| $ |
| |||
| Less: debt issuance costs |
|
|
|
| ( |
|
|
|
| ( |
| |
| Less: short-term and current portion of long-term debts |
|
|
|
| ( |
|
|
|
| ( |
| |
| Total long-term debt |
|
|
| $ |
|
|
| $ |
|
Credit facilities
The Company’s primary credit facility (as amended, the “New Credit Facility”) is comprised of a $
The New Credit Facility is subject to certain financial and other covenants.
22
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
The New Credit Facility requires the Company to deliver to the administrative agent and each lender the audited consolidated financial statements of the Company for each fiscal year in a prescribed period of time. On March 17, 2020, the Company, the administrative agent, and all parties to the New Credit Facility entered into an amendment (the “Amendment”) which allowed the Company to deliver the annual audited consolidated financial statements for the year ended December 31, 2019 to the bank group no later than April 16, 2020 as compared to the initial deadline of March 17, 2020. The Company delivered its 2019 audited consolidated financial statements to the administrative agent and each lender on March 20, 2020 in compliance with the Amendment.
The New Credit Facility required the Company to fix its variable interest rates on at least
The Company capitalized $
Industrial development bonds
As of March 31, 2020 and December 31, 2019, the Company had fixed rate, industrial development authority bonds totaling $
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discounting facilities in one of its foreign subsidiaries, which are not collateralized. The Company’s other debt obligations primarily consist of certain domestic and foreign low interest rate or interest-free municipality-related loans, local credit facilities of certain foreign subsidiaries and capital lease obligations. Total unused capacity under these arrangements as of March 31, 2020 was approximately $
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, 2020 were approximately $
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, |
| ||||
|
| 2020 |
| 2019 |
| ||
| Interest expense | $ |
| $ |
| ||
| Amortization of debt issuance costs |
|
|
|
| ||
| Total | $ |
| $ |
|
23
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
|
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|
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| Accumulated |
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| |
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| Capital in |
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| Other |
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| ||
|
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| Common |
| Excess of |
| Retained |
| Comprehensive |
| Noncontrolling |
|
|
| |||||
|
|
| Stock |
| Par Value |
| Earnings |
| Loss |
| Interest |
| Total | ||||||
Balance at December 31, 2019 | $ |
| $ |
| $ |
| $ | ( |
| $ |
| $ | |||||||
| Cumulative effect of an accounting change |
|
|
|
|
| ( |
|
|
|
|
|
| ( | |||||
Balance at January 1, 2020 |
|
|
|
|
|
|
| ( |
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| |||||||
| Net (loss) income |
|
|
|
|
| ( |
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|
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|
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| ( | |||||
| Amounts reported in other comprehensive |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
| |
|
| loss |
|
|
|
|
|
|
| ( |
|
| ( |
|
| ( | |||
| Dividends ($ |
|
|
|
|
| ( |
|
|
|
|
|
| ( | |||||
| Acquisition of noncontrolling interest |
|
|
| ( |
|
|
|
|
|
| ( |
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| ( | ||||
| Distribution to noncontrolling interest |
|
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|
|
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| |
|
| affiliate shareholders |
|
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| ( |
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| ( | ||||
| Share issuance and equity-based |
|
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|
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|
|
| |
|
| compensation plans |
|
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| ||||||
Balance at March 31, 2020 | $ |
| $ |
| $ |
| $ | ( |
| $ |
| $ | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Balance at December 31, 2018 | $ |
| $ |
| $ |
| $ | ( |
| $ |
| $ | |||||||
| Cumulative effect of an accounting change |
|
|
|
|
| ( |
|
|
|
|
|
| ( | |||||
Balance at January 1, 2019 |
|
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| ( |
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| |||||||
| Net income |
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| |||||||
| Amounts reported in other comprehensive |
|
|
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|
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|
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|
|
|
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|
|
|
|
| |
|
| income (loss) |
|
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|
|
|
|
|
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| ( |
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| |||||
| Dividends ($ |
|
|
|
|
| ( |
|
|
|
|
|
| ( | |||||
| Share issuance and equity-based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| compensation plans |
| ( |
|
| ( |
|
|
|
|
|
|
|
| ( | |||
Balance at March 31, 2019 | $ |
| $ |
| $ |
| $ | ( |
| $ |
| $ |
24
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
|
|
|
|
|
| Defined |
| Unrealized |
|
|
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| |||
|
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| Currency |
| Benefit |
| Gain (Loss) in |
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|
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| ||||
|
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| Translation |
| Retirement |
| Available-for- |
| Derivative |
|
|
| ||||
|
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| Adjustments |
| Plans |
| Sale Securities |
| Instruments |
| Total | |||||
Balance at December 31, 2019 | $ | ( |
| $ | ( |
| $ |
| $ | ( |
| $ | ( | |||
| Other comprehensive (loss) income before |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| reclassifications |
| ( |
|
|
|
| ( |
|
| ( |
|
| ( | |
| Amounts reclassified from AOCI |
|
|
|
|
| ( |
|
|
|
| |||||
| Current period other comprehensive (loss) income |
| ( |
|
|
|
| ( |
|
| ( |
|
| ( | ||
| Related tax amounts |
|
|
| ( |
|
|
|
|
|
| ( | ||||
| Net current period other comprehensive (loss) income |
| ( |
|
|
|
| ( |
|
| ( |
|
| ( | ||
Balance at March 31, 2020 | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 | $ | ( |
| $ | ( |
| $ | ( |
| $ |
| $ | ( | |||
| Other comprehensive (loss) income before |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| reclassifications |
| ( |
|
|
|
|
|
|
|
| ||||
| Amounts reclassified from AOCI |
|
|
|
|
| ( |
|
|
|
| |||||
| Current period other comprehensive (loss) income |
| ( |
|
|
|
|
|
|
|
| |||||
| Related tax amounts |
|
|
| ( |
|
| ( |
|
|
|
| ( | |||
| Net current period other comprehensive (loss) income |
| ( |
|
|
|
|
|
|
|
| |||||
Balance at March 31, 2019 | $ | ( |
| $ | ( |
| $ |
| $ |
| $ | ( |
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, 2020 | ||||||||
|
|
| Total |
| Using Fair Value Hierarchy | ||||||||
Assets | Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Company-owned life insurance | $ |
| $ |
| $ |
| $ | ||||||
Total | $ |
| $ |
| $ |
| $ |
|
|
|
|
| Fair Value Measurements at December 31, 2019 | ||||||||
|
|
| Total |
| Using Fair Value Hierarchy | ||||||||
Assets | Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||
Company-owned life insurance | $ |
| $ |
| $ |
| $ | ||||||
Total | $ |
| $ |
| $ |
| $ |
25
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
Note 18 – Hedging Activities
As previously disclosed in its 2019 Form 10-K, in order to satisfy certain requirements of the New Credit Facility as well as to manage the Company’s exposure to variable interest rate risk associated with the New Credit Facility, in November 2019, the Company entered into $
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 |
| 2020 |
| 2019 |
| |||
| Derivatives designated as cash flow hedges: |
|
|
|
|
|
|
|
|
| |
|
| Interest rate swaps | Other non-current liabilities |
| $ |
| $ |
| |||
|
|
|
|
|
| $ |
| $ |
|
|
|
|
|
|
| March 31, |
| December 31, |
| ||
|
|
|
|
|
| 2020 |
| 2019 |
| ||
| Derivatives designated as cash flow hedges: |
|
|
|
|
|
|
|
|
| |
|
| Interest rate swaps |
| AOCI |
| $ |
| $ |
| ||
|
|
|
|
|
| $ |
| $ |
|
|
|
|
| Three Months Ended |
| ||||
|
|
|
| March 31, |
| ||||
|
|
|
| 2020 |
| 2019 |
| ||
| Amount and location of income reclassified from |
|
|
|
|
|
|
|
|
| AOCI into Income (Effective Portion) |
| Interest expense, net | $ |
| $ |
|
Note 19 – Commitments and Contingencies
The Company previously disclosed in its 2019 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, 2020, 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, 2020, the Company believes that the range of potential-known liabilities associated with the balance of the ACP water remediation program is approximately $
The Company previously disclosed in its 2019 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, 2020, 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 $
26
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts, unless otherwise stated)
(Unaudited)
The Company previously disclosed in its 2019 Form 10-K that as a result of the closing of the Combination, the Company is now party to Houghton environmental matters related to certain domestic and foreign properties currently or previously owned. 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, 2020, 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 $
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 $
The Company is party to other litigation which management currently believes will not have a material adverse effect on the Company’s results of operations, cash flows or financial condition. In addition, the Company has an immaterial amount of contractual purchase obligations.
Note 20 – COVID-19 Global Pandemic
Beginning in early 2020, there has been an outbreak of COVID-19, initially in China and which has spread globally, including generally all locations where the Company does business. In March 2020, the World Health Organization formally identified the COVID-19 outbreak as a pandemic. In an effort to halt the outbreak of COVID-19, the governments of impacted countries, including but not limited to the United States, the European Union, and China, have placed significant restrictions on travel within their respective borders, leading to extended business closures in some instances. This outbreak and associated travel restrictions and business closures or temporary shutdowns have had a significant disruption on the operations of the Company and its suppliers and customers. The Company has experienced disruptions as a result of COVID-19, including volume declines and lower net sales first at its China subsidiaries and subsequently, particularly beginning in the second half of March, throughout the rest of the business due to the global economic slowdown brought on by 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 in which the Company operates. The Company anticipates that its future results of operations, including the results for the remainder of 2020 and particularly for the second quarter of 2020, will be significantly adversely impacted by COVID-19. Further, management continues to evaluate how COVID-19-related circumstances, such as remote work arrangements, have affected financial reporting processes, internal control over financial reporting, and disclosure controls and procedures. At this time, management does not believe that COVID-19 has had a material impact on financial reporting processes, internal controls over financial reporting, and disclosure controls and procedures.
The full extent of the COVID-19 pandemic related business and travel restrictions and changes to business and consumer behavior intended to reduce its spread are uncertain as of the date of this Report as COVID-19 and the responses of governmental authorities continue to rapidly evolve globally. The Company cannot reasonably estimate the magnitude of the effects these conditions will have on the Company’s operations as they are subject to significant uncertainties relating to the ultimate geographic spread of the virus, the incidence and severity of the disease, the duration of the outbreak, the length of the travel restrictions and business closures imposed by governments of impacted countries, and the economic response by governments of impacted countries. The Company expects that there will be volume declines and lower net sales in the second quarter compared to the first quarter and prior year. A prolonged outbreak and continued restrictions on day-to-day life would likely result in volume declines and lower net sales for later periods in 2020 as well, when compared to the prior year. To the extent that the Company’s customers and suppliers continue to be significantly and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from the Company, which in turn could significantly interrupt the Company’s business operations. Such impacts could grow and become more significant to the Company’s operations and the Company’s liquidity or financial position. Therefore, given the speed and frequency of continuously evolving developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude or the full extent to which COVID-19 may impact the Company’s results of operations, liquidity or financial position.
27
Quaker Chemical Corporation
Management’s Discussion and Analysis
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, 2020 and Legacy Quaker for the three months ended March 31, 2019.
Executive Summary
Quaker Houghton is a global leader in industrial process fluids. With a presence around the world, including operations in over 25 countries, our customers include thousands of the world’s most advanced and specialized steel, aluminum, automotive, aerospace, offshore, can, mining, and metalworking companies. Our high-performing, innovative and sustainable solutions are backed by best-in-class technology, deep process knowledge, and customized services. Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the United States.
The first quarter of 2020 performance was consistent with the Company’s expectations given the full quarter impact in China related to COVID-19, the full quarter impact of Boeing temporarily stopping production of the 737 Max airplane, negative impacts from foreign currency translation and the broader global economic slowdown related to COVID-19 that began in the second half of March. Specifically, net sales of $378.6 million in the first quarter of 2020 increased 79% compared to $211.2 million in the first quarter of 2019, due primarily to the inclusion of $190.3 million of Houghton and Norman Hay plc (“Norman Hay”) net sales. Excluding Houghton and Norman Hay net sales, the Company’s net sales would have decreased 11% quarter-over-quarter, primarily due to a decrease in sales volumes of 5%, a negative impact from foreign exchange of 3% and a decline from price and product mix of 3%. The Company’s gross profit and selling, general and administrative expenses (“SG&A”) also increased due to the inclusion of Houghton and Norman Hay quarter-over-quarter, but both were also impacted by foreign exchange and the realization of cost savings associated with the Combination as well as the impact of lower SG&A due to the sales decline and further cost saving measures put in place to help offset the impacts of COVID-19.
The Company reported a first quarter of 2020 net loss of $28.4 million or $1.60 per diluted share compared to the first quarter of 2019 net income of $13.8 million or $1.03 per diluted share. The first quarter of 2020 net loss as reported was primarily due to a current quarter non-cash impairment charge of $38.0 million for certain indefinite-lived intangible assets and a $22.7 million non-cash settlement charge related to the termination of a legacy Quaker U.S. defined benefit pension plan. Excluding these non-recurring items in the current quarter and costs associated with the Combination as well as all other non-core items in each period, the Company’s non-GAAP earnings per diluted share were $1.38 in the first quarter of 2020 compared to $1.41 in the prior year first quarter. Prior year earnings per share do not reflect the additional 4.3 million shares issued as part of the consideration for the Combination. The Company’s adjusted EBITDA increased to $60.5 million in the first quarter of 2020 compared to $29.6 million in the prior year quarter largely due to the Combination, the inclusion of Norman Hay and the benefits of cost savings realized from the Combination. 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.
During the third quarter of 2019 and in connection with the Combination, the Company established a new reportable segment structure that consists of four segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty Businesses. The Company’s first quarter 2020 operating performance by reportable segment reflected the positive impact of three months of Houghton’s performance in all of its segments and three months of Norman Hay in its Global Specialty Businesses segment. Without the inclusion of Houghton and Norman Hay, net sales would have been lower in all segments compared to the prior year, primarily driven by declines in volume due to the negative impacts of COVID-19 on the Company’s end markets and negative foreign currency translation in all segments due to a strong US dollar. As reported, segment operating earnings were higher in all segments compared to 2019, which also reflects the inclusion of Houghton and Norman Hay net sales and gross profit, partially offset by higher SG&A as a result of the Combination and Norman Hay acquisition. 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.
The Company had net operating cash flow of $20.2 million in the first quarter of 2020 compared to less than $0.1 million in the first quarter of 2019. The increase in net operating cash flow quarter-over-quarter was driven by the inclusion of Houghton and Norman Hay earnings, partially offset by higher cash outflows due to working capital changes in the current year. The key drivers of the Company’s operating cash flow and working capital are further discussed in the Company’s Liquidity and Capital Resources section of this Item, below.
Overall, the Company’s first quarter results were generally consistent with its expectations as the Company saw volume declines in China due to COVID-19, certain domestic volume weakness due to the temporary production stoppage of Boeing’s 737 Max and COVID-19 impacts that largely started in the second half of March. Despite these impacts and other macroeconomic headwinds, including a stronger U.S. dollar, the Company had good first quarter results, driven by estimated share gains, continued progress with
28
Quaker Chemical Corporation
Management’s Discussion and Analysis
the integration of Houghton and associated cost synergies, cost savings measures put in place due to COVID-19 and the benefit of Norman Hay. The Company now expects to realize Combination cost synergies on a pro forma combined company basis of $53 million in 2020, $65 million in 2021 and $75 million in 2022, which are increases from the Company’s previous expectations of $35 million, $50 million, and $60 million, respectively.
The current global economy and impacts due to COVID-19 pose a challenging situation, but the Company expects to successfully exit this downturn as the Company has demonstrated the ability in the past to respond quickly to changing market conditions and expects to maintain sufficient liquidity even in difficult economic times. The Company expects that its increased integration synergies, additional cost savings actions, continuing to take share in the marketplace and improvement in gross margins will continue to help the Company during these challenging times, and coupled with the benefit of a projected gradual rebound in demand in its end markets will help drive significant adjusted EBITDA growth in 2021 and 2022.
Impact of COVID-19
Beginning in early 2020, there has been an outbreak of COVID-19, initially in China and which has spread globally, including generally all locations where the Company does business. The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread remains uncertain. Therefore, the full extent to which COVID-19 may impact the Company’s results of operations or financial condition is uncertain. This outbreak has had a significant disruption on the operations of the Company and its suppliers and customers. The Company has experienced disruptions as a result of COVID-19, including volume declines and lower net sales as further described in this section, first at its China subsidiaries and subsequently, particularly beginning in the second half of March, throughout the rest of the business due to the global economic slowdown brought on by COVID-19. The Company anticipates that its future results of operations, including the results for the remainder of 2020, particularly for the second quarter of 2020, will be significantly adversely impacted by 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 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. The Company expects that there will be volume declines and lower net sales in the second quarter compared to the first quarter and prior year. A prolonged outbreak and period of continued restrictions on day-to-day life would likely result in volume declines and lower net sales for later periods in 2020 as well, as compared to the prior year. 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. Further, management continues to evaluate how COVID-19-related circumstances, such as remote work arrangements, have affected financial reporting processes and systems, internal control over financial reporting, and disclosure controls and procedures. At this time, management does not believe that COVID-19 has had a material impact on financial reporting processes, internal controls over financial reporting, and disclosure controls and procedures. For additional information regarding the potential impact of COVID-19, see Item 1A of Part II of this Report.
The Company’s top priority is, and especially during this pandemic remains, to protect the health and safety of its employees and customers, while working to ensure business continuity to meet customers’ needs:
Our People – The Company has taken 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, enhancing onsite hygiene practices, and instituting visitation restrictions at the Company’s facilities.
Our Operations – Currently, all of the Company’s 34 production facilities worldwide are open and operating and are deemed as essential businesses in the jurisdictions where they are operating. The Company believes it has been able to meet the needs of all its customers across the globe despite the current economic challenges.
Our Business Conditions – The Company’s first quarter of 2020 results were consistent with expectations as the Company saw weakness in China due to COVID-19 in the first quarter, with the rest of the Company’s businesses globally impacted by the pandemic beginning in the second half of March. Since then, many customers have reduced production levels, and in some cases, temporarily shut down their facilities. Therefore, the Company currently expects to experience the most severe impact related to COVID-19 in the second quarter of 2020, but then expects a gradual quarterly improvement sequentially throughout the remainder of the year depending on the containment of the virus and its effects. However, it remains highly uncertain as to how long the global pandemic and related economic challenges will last.
Our Actions – The Company has taken actions to conserve cash and reduce costs. Some of the actions taken include eliminating all discretionary expenditures, delaying or freezing salary increases where legally permitted, reducing executives’ salaries, lowering targeted capital expenditures by approximately 30%, and accelerating and fine-tuning the Company’s
29
Quaker Chemical Corporation
Management’s Discussion and Analysis
integration plan. These initiatives have been designed and actioned so that the Company can successfully manage through this challenging 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 with Houghton. While the Company has taken a number of actions to protect our workforce, to continue to serve our customers with excellence and to conserve cash and reduce costs, 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, 2020, the Company had cash, cash equivalents and restricted cash of $336.0 million, including $19.5 million of restricted cash. Total cash, cash equivalents and restricted cash was $143.6 million at December 31, 2019, which included $20.0 million of restricted cash. The $192.4 million increase in cash, cash equivalents and restricted cash was the net result of $186.6 million of cash provided by financing activities and $20.2 million of cash provided by operating activities, partially offset by $8.0 million of cash used in investing activities and a $6.4 million negative impact due to the effect of foreign currency translation on cash.
Net cash flows provided by operating activities were $20.2 million in the first three months of 2020 compared to less than $0.1 million in the first three months of 2019. The Company’s current quarter operating cash flow increase was largely due to the inclusion of Houghton and Norman Hay earnings, which were not included in the prior year, partially offset by higher outflows related to working capital in the current quarter. The higher current quarter cash outflows related to working capital were largely driven by inventory stocking to prepare for global impacts from COVID-19, current quarter cash payments related to the Company’s restructuring program, described below, and higher cash payments related to accounts payable and accruals, including annual incentive compensation payouts for the combined company, partially offset by higher cash receipts on accounts receivable due to the decrease in net sales in the current quarter. In addition, the Company had higher cash dividends received from its associated companies quarter-over-quarter, primarily due to $5.0 million received from the Company’s joint venture in Korea.
Net cash flows used in investing activities were $8.0 million in the first three months of 2020 compared to $3.0 million in the first three months of 2019. This increase in cash outflows was driven by higher investments in property, plant and equipment due to the inclusion of Houghton and Norman Hay expenditures as well as higher payments related to acquisitions during the three months ended March 31, 2020. In the current quarter, the Company finalized its post-closing adjustment related to Norman Hay for approximately $3.2 million, whereas the Company had a prior year payment of $0.5 million to finalize the acquisition of certain formulations and product technology in the mining industry.
Net cash flows provided by financing activities were $186.6 million in the first three months of 2020 compared to cash used in financing activities of $30.4 million in the first three months of 2019. The $217.0 million increase in net cash flows was due primarily to additional borrowings of $205.5 million on the Company’s revolving credit facility in the current quarter compared to payments of $24.0 million in the prior year first quarter. As a precautionary measure in response to the current economic uncertainty related to COVID-19, the Company drew down most of the available liquidity on its revolving credit facility during the first quarter of 2020, which drove the large change in borrowings compared to the prior year. This increase in borrowings was partially offset by $9.4 million of scheduled repayments under the Company’s term loan agreement. In addition, the Company paid $6.8 million of cash dividends during the first quarter of 2020, a $1.9 million or 38% increase in cash dividends compared to the prior year, primarily due to approximately 4.3 million shares issued at closing of the Combination, as well as the prior year cash dividend per share increase initiated in May 2019. Finally, during the first three months of 2020, the Company used $1.0 million to purchase the remaining noncontrolling interest in its 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 first quarter of 2020. There were no similar noncontrolling interest activities in the first quarter of 2019.
As previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), on August 1, 2019, the Company completed the Combination, whereby the Company acquired all of the issued and outstanding shares of Houghton from Gulf Houghton Lubricants, Ltd. in accordance with the Share Purchase Agreement dated April 4, 2017. The final purchase consideration was comprised of: (i) $170.8 million in cash; (ii) the issuance of approximately 4.3 million shares of common stock of the Company with par value of $1.00, comprising 24.5% of the common stock of the Company at closing; and (iii) the Company’s refinancing of $702.6 million of Houghton’s indebtedness at closing. Cash acquired in the Combination was $75.8 million. Prior to the Combination, the Company secured commitments from certain banks for a new credit facility (as amended, the “New Credit Facility”). Concurrent with the closing of the Combination on August 1, 2019, those banks, Bank of America, N.A. as administrative agent, the Company and certain other parties closed on the New Credit Facility, replacing the Company’s previous credit facility. See Note 2 and Note 15 of Notes to Condensed Consolidated Financial Statements.
As of March 31, 2020, the Company had New Credit Facility borrowings outstanding of $1,115.5 million. As of December 31, 2019, the Company had New Credit Facility borrowings outstanding of $922.4 million. The Company has unused capacity under the Revolver of approximately $15 million, net of bank letters of credit of approximately $8 million, as of March 31, 2020. As mentioned above, the Company drew down most of the available capacity on the Revolver during the first quarter of 2020 as a precautionary
30
Quaker Chemical Corporation
Management’s Discussion and Analysis
measure in response to the current economic uncertainty related to COVID-19. The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $12.3 million as of March 31, 2020 and $12.6 million as of December 31, 2019, respectively. Total unused capacity under these arrangements as of March 31, 2020 was approximately $36 million. The Company’s total net debt as of March 31, 2020 was $811.4 million. As of March 31, 2020 and December 31, 2019, the Company was in compliance with all of the New Credit Facility covenants.
The New Credit Facility requires the Company to deliver to the administrative agent and each lender the audited consolidated financial statements of the Company for each fiscal year in a prescribed period of time. On March 17, 2020, the Company, the administrative agent, and all parties to the New Credit Facility entered into an amendment (the “Amendment”) which allowed the Company to deliver the annual audited consolidated financial statements for the year ended December 31, 2019 to the bank group no later than April 16, 2020 as compared to the initial deadline of March 17, 2020. The Company delivered its 2019 audited consolidated financial statements to the administrative agent and each lender on March 20, 2020 in compliance with the Amendment.
The New Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Term Loans. In order to satisfy this requirement as well as to manage the Company’s exposure to variable interest rate risk associated with the New Credit Facility, in November 2019, the Company entered into $170.0 million notional amounts of three-year interest rate swaps at a base rate of 1.64% plus an applicable margin as provided in the New Credit Facility, based on the Company’s consolidated net leverage ratio. At the time the Company entered into the swaps, and as of March 31, 2020, this aggregate rate was 3.1%.
The Company now expects to realize Combination cost synergies on a pro forma combined company basis of $53 million in 2020, $65 million in 2021 and $75 million in 2022, which are increases from the Company’s previous expectations of $35 million, $50 million, and $60 million, respectively. The Company estimates that it realized approximately $10 million of cost savings during the first quarter of 2020 on a combined company pro forma basis, increasing its cumulative synergies realized in the eight months since closing of the Combination to approximately $17 million.
The Company expects to incur additional costs and make associated cash payments to integrate Quaker and Houghton and continue realizing the Combinations total anticipated cost synergies. The Company expects cash payments, including those pursuant to the QH Program, described below, but excluding incremental capital expenditures related to the Combination, will generally approximate one-times its total anticipated cost synergies. The Company expects to incur these costs over a three-year period post-close, with a significant portion of these costs incurred or expected to be incurred in 2019 and the current year. The Company incurred $8.3 million of total Combination and other acquisition-related expenses in the first quarter of 2020, including $0.5 million of accelerated depreciation, described in the Non-GAAP measures of this Item below. The Company had aggregate net cash outflows of approximately $8.3 million related to the Combination and other acquisition-related expenses during the first quarter of 2020. Comparatively, during the first quarter of 2019, the Company incurred $5.3 million of total Combination and other acquisition-related expenses, including $0.9 million of ticking fees, described in the Non-GAAP Measures of this Item below, and aggregate net cash outflows related to these costs were $6.4 million.
Quaker Houghton’s management approved, and the Company initiated, a global restructuring plan (the “QH Program”) in the third quarter of 2019 as part of its planned cost synergies associated with the Combination. The QH Program includes restructuring and associated severance costs to reduce total headcount by approximately 325 people globally and plans for the closure of certain manufacturing and non-manufacturing facilities. As a result of the QH Program, the Company recognized $1.7 million of restructuring and related charges in the first quarter of 2020. 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 will continue to occur during 2020 and 2021 under the QH Program and estimates that total costs related to the QH Program will approximate one-times the anticipated cost synergies realized under this program. The Company made cash payments related to the settlement of restructuring liabilities under the QH Program during the first quarter of 2020 of approximately $4.9 million.
In the fourth quarter of 2018, the Company began the process of terminating its non-contributory U.S. pension plan (“the Legacy Quaker U.S. Pension Plan”). The Company completed the Legacy Quaker U.S. Pension Plan termination during the first quarter of 2020. In order to terminate the Legacy Quaker U.S. Pension Plan in accordance with I.R.S. and Pension Benefit Guaranty Corporation requirements, the Company was required to fully fund the Legacy Quaker U.S. Pension Plan on a termination basis and the amount necessary to do so was approximately $1.8 million, subject to final true up adjustments to be completed over the next several months. In addition, the Company recorded a non-cash pension settlement charge at plan termination of approximately $22.7 million.
As of March 31, 2020, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $24.5 million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $5.3 million as a result of offsetting benefits in other tax jurisdictions.
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
31
Quaker Chemical Corporation
Management’s Discussion and Analysis
not limited to, payments of dividends to shareholders, costs related to the Combination and integration, pension plan contributions, capital expenditures, other business opportunities 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 global economic conditions and 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 our actual and projected demand for our products, specialty chemical industry conditions, competitive factors, and the condition of financial markets, among others.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies and estimates, as set forth in its Annual Report on Form 10-K for the year ended December 31, 2019, remain materially consistent. However, due to the current impact as well as the volatility and uncertainty in the economic outlook as a result of COVID-19, the Company re-evaluated certain of its estimates, most notably its estimates and assumptions with regards to goodwill and other intangible assets.
Goodwill and other intangible assets: The Company accounts for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, at their acquisition date fair values. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of assets acquired requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, asset lives and market multiples, among other items. When necessary, the Company consults with external advisors to help determine fair value. For non-observable market values, the Company may determine fair value using acceptable valuation principles, including the excess earnings, relief from royalty, lost profit or cost methods.
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. Goodwill and intangible assets that have indefinite lives are not amortized and are required to be assessed at least annually for impairment. The Company completes its annual goodwill and indefinite-lived intangible asset impairment test during the fourth quarter of each year. The Company continuously evaluates if triggering events indicate a possible impairment in one or more of its indefinite-lived or long-lived assets.
As of March 31, 2020, the Company evaluated the current impact of COVID-19 on the Company’s operations, as well as the volatility and uncertainty in the economic outlook as a result of COVID-19 to determine if this indicated it was more likely than not that the carrying value of any of the Company’s indefinite-lived or long-lived assets was not recoverable. While the impact of COVID-19 has already had a negative effect on the Company’s operations and is expected to significantly impact the Company’s second quarter and full year 2020 results, in evaluating if a triggering event was present for one or more of the Company indefinite-lived or long-lived assets, the Company also considered the current carrying value and estimated fair value for each asset, as well as the Company’s expected impact from COVID-19 on each specific asset. The Company concluded that the impact of COVID-19 did not represent a triggering event as of March 31, 2020 with regards to the Company’s indefinite-lived and long-lived assets, except for the Company’s Houghton and Fluidcare trademark and tradename indefinite-lived intangible assets.
Given the relatively short period of time between the fair value determination for the acquired Houghton and Fluidcare trademark and tradename indefinite-lived intangible assets as of the closing of the Combination on August 1, 2019, and the 2019 annual impairment testing date of October 1, the Company’s 2019 annual impairment assessment concluded that the $242.0 million carrying value of acquired Houghton and Fluidcare indefinite-lived intangible assets generally approximated fair value, with excess fair value of less than 5%. Because of the previously concluded relatively narrow gap between fair value and carrying value, the Company concluded in the first quarter of 2020 that the expected current year impact from COVID-19 on the Company’s net sales represented a triggering event. As a result of the conclusion, the Company completed an interim quantitative indefinite-lived intangible asset impairment assessment as of March 31, 2020.
The determination of estimated fair value of the Houghton and Fluidcare trademark and tradename indefinite-lived assets was based on a relief from royalty valuation method which requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to the weighted average cost of capital (“WACC”) as well as projected net sales. In completing the interim quantitative impairment assessment, the Company used a WACC assumption of approximately 10% as well as current year forecasted net sales and management’s estimates with respect to future net sales growth rates specific to legacy Houghton’s net sales. As a result of an increase in the WACC assumption as of March 31, 2020, compared to the prior year fourth quarter annual impairment assessment, and the significant current year decline in projected legacy Houghton net sales due to the impact of COVID-19, the Company concluded that the estimated fair values of these intangible assets were less than their carrying values and that an impairment charge to write down their carrying values to their estimated fair values was required. The Company’s estimate of fair value of these assets as of March 31, 2020 was $204.0 million. This resulted in a first quarter of 2020 non-cash impairment charge of $38.0 million for certain indefinite-lived intangible assets.
32
Quaker Chemical Corporation
Management’s Discussion and Analysis
While the Company concluded that the impact of COVID-19 did not represent a triggering event as of March 31, 2020 for its other indefinite-lived and long-lived assets, including its goodwill, the Company will continue to evaluate the impact of COVID-19 on the Company’s current and projected results in the future. If 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 represents a triggering event for one or more of its other indefinite-lived or long-lived assets, including goodwill. This may result in the need to perform further interim quantitative impairment tests and could result in additional impairment charges in the future.
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 (loss) income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income 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 (loss) income plus or minus certain items that are not considered indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by 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 – adjusted, interest expense, net - adjusted, and taxes on income before equity in net income of associated companies - 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.
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, |
| ||||
|
|
| 2020 |
|
| 2019 |
|
Operating (loss) income |
| $ | (12,444) |
| $ | 19,829 |
|
Houghton combination and other acquisition-related expenses (a) |
|
| 8,276 |
|
| 4,483 |
|
Restructuring and related charges (b) |
|
| 1,716 |
|
| - |
|
Customer bankruptcy costs (c) |
|
| 463 |
|
| - |
|
Indefinite-lived intangible asset impairment (d) |
|
| 38,000 |
|
| - |
|
Non-GAAP operating income |
| $ | 36,011 |
| $ | 24,312 |
|
Non-GAAP operating margin (%) (j) |
|
| 9.5% |
|
| 11.5% |
|
33
Quaker Chemical Corporation
Management’s Discussion and Analysis
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and |
|
|
|
|
|
|
|
Non-GAAP Net Income Reconciliations |
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
|
| 2020 |
|
| 2019 |
|
Net (loss) income attributable to Quaker Chemical Corporation |
| $ | (28,381) |
| $ | 13,844 |
|
Depreciation and amortization (a) (i) |
|
| 21,584 |
|
| 4,859 |
|
Interest expense, net (a) |
|
| 8,461 |
|
| 776 |
|
Taxes on (loss) income before equity in net income of associated companies |
|
| (13,070) |
|
| 4,929 |
|
EBITDA |
| $ | (11,406) |
| $ | 24,408 |
|
Equity loss (income) in a captive insurance company (e) |
|
| 327 |
|
| (346) |
|
Houghton combination and other acquisition-related expenses (a) |
|
| 7,803 |
|
| 4,483 |
|
Restructuring and related charges (b) |
|
| 1,716 |
|
| — |
|
Customer bankruptcy costs (c) |
|
| 463 |
|
| — |
|
Indefinite-lived intangible asset impairment (d) |
|
| 38,000 |
|
| — |
|
Pension and postretirement benefit costs, non-service components (f) |
|
| 23,525 |
|
| 896 |
|
Currency conversion impacts of hyper-inflationary economies (g) |
|
| 51 |
|
| 194 |
|
Adjusted EBITDA |
| $ | 60,479 |
| $ | 29,635 |
|
Adjusted EBITDA margin (%) (j) |
|
| 16.0% |
|
| 14.0% |
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 60,479 |
| $ | 29,635 |
|
Less: Depreciation and amortization - adjusted (a) |
|
| 21,111 |
|
| 4,859 |
|
Less: Interest expense, net - adjusted (a) |
|
| 8,461 |
|
| (86) |
|
Less: Taxes on (loss) income before equity in net income of associated companies - adjusted (k) |
|
| 6,463 |
|
| 6,040 |
|
Non-GAAP net income |
| $ | 24,444 |
| $ | 18,822 |
|
|
|
|
|
|
|
|
|
Non-GAAP Earnings per Diluted Share Reconciliations |
| Three Months Ended |
| ||||
|
| March 31, |
| ||||
|
|
| 2020 |
|
| 2019 |
|
GAAP (loss) earnings per diluted share attributable to Quaker Chemical Corporation |
|
|
|
|
|
|
|
common shareholders |
| $ | (1.60) |
| $ | 1.03 |
|
Equity loss (income) in a captive insurance company per diluted share (e) |
|
| 0.02 |
|
| (0.03) |
|
Houghton combination and other acquisition-related expenses per diluted share (a) |
|
| 0.36 |
|
| 0.35 |
|
Restructuring and related charges per diluted share (b) |
|
| 0.07 |
|
| - |
|
Customer bankruptcy costs per diluted share (c) |
|
| 0.02 |
|
| - |
|
Indefinite-lived intangible asset impairment per diluted share (d) |
|
| 1.65 |
|
| - |
|
Pension and postretirement benefit costs, non-service components per diluted share (f) |
|
| 0.88 |
|
| 0.05 |
|
Currency conversion impacts of hyper-inflationary economies per diluted share (h) |
|
| 0.00 |
|
| 0.01 |
|
Impact of certain discrete tax items per diluted share (h) |
|
| (0.02) |
|
| - |
|
Non-GAAP earnings per diluted share (l) |
| $ | 1.38 |
| $ | 1.41 |
|
(a) Houghton combination and other acquisition-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with due diligence, regulatory approvals, integration planning, as well as certain one-time labor costs associated with the Company’s acquisition-related activities. These costs are not indicative of the future operating performance of the Company. Approximately $1.2 million for the three months ended March 31, 2019 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, 2020, the Company recorded $0.5 million of accelerated depreciation related to certain of the Company’s facilities, which is included in the caption “Houghton combination and other acquisition-related expenses” in the reconciliation of operating income to non-GAAP operating income and included in the caption “Depreciation and amortization” in the reconciliation of net income attributable to the Company to EBITDA, but excluded from the caption “Depreciation and amortization – adjusted” in the reconciliation of adjusted EBITDA to non-GAAP net income attributable to the Company. During the three months ended March 31, 2019, the Company incurred $0.9 million of ticking fees to maintain the bank commitment related to the Combination. These interest costs are included in the caption “Interest expense, net” in the reconciliation of net income attributable to the Company to EBITDA, but are excluded from the caption “Interest expense, net – adjusted” in the reconciliation of adjusted EBITDA to non-GAAP
34
Quaker Chemical Corporation
Management’s Discussion and Analysis
net income attributable to the Company. See Note 2 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.
(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) 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.
(d) 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.
(e) Equity loss (income) 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 33% investment in and has significant influence over Primex, and therefore accounts for this interest under the equity method of accounting. The income attributable to Primex is not indicative of the future operating performance of the Company and is not considered core to the Company’s operations.
(f) 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.
(g) 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, 2020 and 2019, 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.
(h) 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.
(i) Depreciation and amortization for the three months ended March 31, 2020 included $0.4 million 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.
(j) The Company calculates adjusted EBITDA margin and non-GAAP operating margin as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales.
(k) 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 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 and other acquisition-related expenses described in (a) resulted in incremental taxes of $2.0 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. Restructuring and related charges described in (b) resulted in incremental taxes of $0.4 million during the three months ended March 31, 2020. Customer bankruptcy costs described in (c) resulted in incremental taxes of $0.1 million during the three months ended March 31, 2020. Indefinite-lived intangible asset impairment described in (d) 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 (f) resulted in incremental taxes of $7.9 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively. Tax impact of certain discrete items described in (h) above resulted in a tax benefit of $0.4 million during the three months ended March 31, 2020.
(l) 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.
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Quaker Chemical Corporation
Management’s Discussion and Analysis
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, 2020. The Company’s only off-balance sheet items outstanding as of March 31, 2020 represented approximately $14 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.
Operations
Consolidated Operations Review – Comparison of the First Quarter of 2020 with the First Quarter of 2019
Net sales were $378.6 million in the first quarter of 2020 compared to $211.2 million in the first quarter of 2019. The net sales increase of 79% quarter-over-quarter includes Houghton and Norman net sales of $190.3 million. Excluding Houghton and Norman Hay net sales, the Company’s current quarter net sales would have declined 11%, which reflects a decrease in sales volumes of 5%, a negative impact from foreign currency translation of 3% and a decline in selling price and product mix of 3%. The largest drivers of the volume decline in the current quarter were the negative impact of COVID-19, most notably on lower volumes in the Company’s Asia/Pacific reportable segment, as well as a decrease in volume driven by Boeing’s decision to temporarily stop production of the 737 Max aircraft.
Cost of goods sold (“COGS”) were $244.7 million in the first quarter of 2020 compared to $135.4 million in the first quarter of 2019. The increase in COGS of 81% was primarily due to the inclusion of Houghton and Norman Hay sales and associated COGS, as well as $0.5 million of accelerated depreciation charges described in the Non-GAAP Measures section of this Item above, partially offset by lower COGS on the decline in legacy Quaker net sales, described above.
Gross profit in the first quarter of 2020 increased $58.1 million or 77% from the first quarter of 2019, due primarily to the Houghton and Norman Hay net sales, noted above. The Company’s reported gross margin in the first quarter of 2020 was 35.4% compared to 35.9% in the first quarter of 2019. The decrease in gross margin quarter-over-quarter was the result of price and product mix largely due to lower gross margins in the legacy Houghton business, partially offset by certain COGS decreases as a result of the Company’s progress on initial Combination-related logistics and procurement cost savings initiatives.
SG&A in the first quarter of 2020 increased $47.2 million compared to the first quarter of 2019 due primarily to additional SG&A from Houghton and Norman Hay and $0.5 million of customer bankruptcy costs described in the Non-GAAP Measures section of this Item, above, partially offset by lower SG&A due to foreign currency translation, the impact of the sales decline, noted above, on direct selling costs, the impact of lower SG&A due to cost savings measures implemented in reaction to the impact of COVID-19 and the benefits of realized cost synergies associated with the Combination.
During the first quarter of 2020, the Company incurred $7.9 million of Combination and other acquisition-related expenses, primarily for legal, financial and other advisory and consultant expenses for integration activities. Comparatively, the Company incurred $4.5 million of expenses in the prior year first quarter, primarily due to various professional fees related to integration planning and regulatory approvals. See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during the third quarter of 2019 as part of its global plan to realize cost synergies associated with the Combination. The Company expects reductions in headcount and site closures to continue to occur during 2020 and 2021 under this program. The Company recorded additional restructuring and related charges of $1.7 million related to this program during the first quarter of 2020 and there were no similar restructuring charges recorded during the first quarter of 2019. See the Non-GAAP Measures section of this Item, above.
During the first quarter of 2020, the Company recorded a $38.0 million non-cash impairment charge related to certain acquired Houghton trademarks and tradenames, which was primarily the result of the current year negative impacts of COVID-19 on their estimated fair values. See the Critical Accounting Policies and Estimates section of this Item, above.
Operating loss in the first quarter of 2020 was $12.4 million compared to operating income of $19.8 million in the first quarter of 2019. Excluding the Combination and other acquisition-related charges, 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 $36.0 million compared to $24.3 million in the prior year first quarter, primarily due to additional net sales and operating income from Houghton and Norman Hay.
The Company had other expense, net, of $21.2 million in the first quarter of 2020 compared to $0.6 million in the first quarter of 2019. The quarter-over-quarter change was primarily due to the first quarter of 2020 pension plan settlement charge associated with the termination of the Legacy Quaker U.S. Pension Plan. Partially offsetting this pension settlement charge were foreign currency transaction gains of $0.8 million in the first quarter of 2020 compared to foreign currency transaction losses of $0.2 million in the first quarter of 2019, as well as an increase in receipts of local municipality-related grants primarily in the Company’s Asia/Pacific region quarter-over-quarter.
36
Quaker Chemical Corporation
Management’s Discussion and Analysis
Interest expense, net, increased $7.7 million compared to the first quarter of 2019, as a result of additional borrowings under the Company’s New Credit Facility to finance the closing of the Combination on August 1, 2019.
The Company’s effective tax rates for the first quarters of 2020 and 2019 were a benefit of 31.1% and expense of 26.8%, respectively. The Company’s effective tax rate for the three months ended March 31, 2020 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 impact of the Company’s termination of its Legacy Quaker U.S. Pension Plan. Comparatively, the prior year first quarter effective tax rate was impacted by certain non-deductible costs associated with the Combination. 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 2020 and 2019 would have been approximately 22% and 24%, respectively. This quarter-over-quarter decrease was largely driven by a larger positive impact from changes in uncertain tax positions in the current quarter as compared to the prior year. 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 $0.3 million in the first quarter of 2020 compared to the first quarter of 2019, primarily due to earnings from the Company’s 50% interest in its joint venture in Korea that was acquired in the Combination, partially offset by a current quarter loss compared to prior year first quarter income from the Company’s interest in a captive insurance company. See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was relatively consistent in both the first quarters of 2020 and 2019.
Foreign exchange positively impacted the Company’s first quarter of 2020 earnings by less than 1% as the current quarter foreign exchange transaction gains compared to prior year foreign exchange transaction losses were partially offset by the negative impact from foreign currency translation of approximately 2% due to the strengthening of the U.S. dollar in the current quarter.
Reportable Segments Review - Comparison of the First Quarter of 2020 with the First Quarter of 2019
The Company’s reportable segments reflect the structure of the Company’s internal organization, the method by which the Company’s resources are allocated and the manner by which the chief operating decision maker of the Company assesses its performance. During the third quarter of 2019 and in connection with the Combination, the Company reorganized its executive management team to align with its new business structure which reflects the method by which the Company assesses its performance and allocates its resources. The Company’s current reportable segment structure includes four segments: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which includes the Company’s container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses.
Segment operating earnings for the Company’s reportable segments are comprised of net sales less COGS and SG&A directly related to the respective segment’s product sales. Operating expenses not directly attributable to the net sales of each respective segment are not included in segment operating earnings, such as certain corporate and administrative costs, Combination and other acquisition-related expenses, and Restructuring and related charges. Other items not specifically identified with the Company’s reportable segments include interest expense, net and other expense, net.
Americas
Americas represented approximately 34% of the Company’s consolidated net sales in the first quarter of 2020. The segment’s net sales were $129.9 million, an increase of $57.7 million or 80% compared to the first quarter of 2019. The increase in net sales reflects the inclusion of Houghton net sales of $62.8 million. Excluding Houghton net sales, the segment’s net sales decrease quarter-over-quarter of 7% was due to lower volumes of 4% and a negative impact of foreign currency translation of 3%. The current quarter volume decline was driven by the economic slowdown that began in late March due to the impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the Brazilian real against the U.S. dollar, as this exchange rate averaged 4.43 in the first quarter of 2020 compared to 3.77 in the first quarter of 2019. This segment’s operating earnings were $29.2 million, an increase of $14.8 million or 104% compared to the first quarter of 2019. The increase in segment operating earnings reflects the inclusion of Houghton net sales, as well as a slightly higher gross margin, partially offset by higher SG&A, including Houghton SG&A.
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Quaker Chemical Corporation
Management’s Discussion and Analysis
EMEA
EMEA represented approximately 28% of the Company’s consolidated net sales in the first quarter of 2020. The segment’s net sales were $104.8 million, an increase of $52.4 million or 100% compared to the first quarter of 2019. The increase in net sales reflects the inclusion of Houghton net sales of $57.9 million. Excluding Houghton net sales, the segment’s net sales decrease quarter-over-quarter of 10% was due to lower volumes of 6%, a negative impact of foreign currency translation of 3%, and a decrease from selling price and product mix of 1%. The current quarter volume decline was driven by the economic slowdown that began in late March due to the impacts of COVID-19 and an overall reduced production in certain EMEA countries that began in the second half of 2019 and continued into the first quarter of 2020. The foreign exchange impact was primarily due to the weakening of the euro against the U.S. dollar as this exchange rate averaged 1.10 in the first quarter of 2020 compared to 1.14 in the first quarter of 2019. This segment’s operating earnings were $18.4 million, an increase of $9.6 million or 109% compared to the first quarter of 2019. The increase in segment operating earnings reflects the inclusion of Houghton net sales, and relatively consistent gross margins, partially offset by higher SG&A, including Houghton SG&A.
Asia/Pacific
Asia/Pacific represented approximately 19% of the Company’s consolidated net sales in the first quarter of 2020. The segment’s net sales were $73.6 million, an increase of $27.4 million or 59% compared to the first quarter of 2019. The increase in net sales reflects the inclusion of Houghton net sales of $33.7 million. Excluding Houghton net sales, the segment’s net sales decrease of 14% quarter-over-quarter was driven by lower volumes of 10%, a negative impact of foreign currency translation of approximately 3% and decreases in selling price and product mix of 1%. The decline in volume was primarily due to the negative impact of COVID-19 within the region, notably in China during the first quarter of 2020. The foreign exchange impact was primarily due to the weakening of the Chinese renminbi against the U.S. dollar as this exchange rate averaged 6.98 in the first quarter of 2020 compared to 6.75 in the first quarter of 2019. This segment’s operating earnings were $19.5 million, an increase of $6.7 million or 53% compared to the first quarter of 2019. The increase in segment operating earnings reflects the inclusion of Houghton net sales, partially offset by a lower gross margin due to price and product mix, including lower Houghton gross margin compared to Legacy Quaker and higher SG&A, including Houghton SG&A.
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the Company’s consolidated net sales in the first quarter of 2020. The segment’s net sales were $70.3 million, an increase of $29.9 million or 74% compared to the first quarter of 2019. The increase in net sales reflects the inclusion of Houghton and Norman Hay net sales of $35.9 million. Excluding Houghton and Norman Hay net sales, the segment’s net sales would have decreased 15% quarter-over-quarter driven by declines from selling price and product mix of 19% and a negative impact from foreign currency translation of 2%, partially offset by higher volumes of 6%. Both the changes in selling price and product mix and volume were primarily driven by higher shipments of a lower priced product in the Company’s mining business compared to the prior year. Partially offsetting this specific mining business volume increase was a decrease in volume in the Company’s specialty coatings business driven by Boeing’s decision to temporarily stop production of the 737 Max aircraft and initial volume declines due to the economic slowdown that began in late March due to the impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the Brazilian real against the U.S. dollar described in the Americas section, above. This segment’s operating earnings were $20.6 million, an increase of $10.0 million or 94% compared to the first quarter of 2019. The increase in segment operating earnings reflects the inclusion of Houghton and Norman Hay net sales, as well as slightly higher gross margin due to price and product mix, including higher Houghton and Norman Hay gross margin compared to Legacy Quaker, partially offset by higher SG&A, including Houghton and Norman Hay.
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, or financial condition and our expectation to remain compliant with the terms of the Company’s credit facility on our current expectations about future events.
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Quaker Chemical Corporation
Management’s Discussion and Analysis
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; | |||
| • |
| the impacts on our business as a result of the COVID-19 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. |
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 2019 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. 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, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist attacks and other acts of violence. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, industrial equipment, and durable goods manufacturers. The ultimate significance 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 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 the length of time that such measures remain in place, and governmental programs implemented to assist businesses impacted by the COVID-19 pandemic. Other factors could also adversely affect us, including those related to the Combination and other acquisitions and the integration of the combined company as well as other acquired businesses. Our forward-looking statements are subject to risks, uncertainties 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 of this Report, as well as Item 1A in our 2019 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Quaker Houghton is exposed to the impact of interest rates, foreign currency fluctuations, changes in commodity prices and credit risk. The current economic environment associated with COVID-19 has led to significant volatility and uncertainty with each of these market risks. Other than the impact of the COVID-19 pandemic on market risks generally, we believe there has been no other material change to the information disclosed in Part II, Item 7A, of our 2019 Form 10-K. See Item 1A, “Risk Factors”, of this Report for additional discussion of the current and potential risks associated with the COVID-19 pandemic.
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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, 2020 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 2019 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 effectively design and maintain controls in response to the risks of material misstatement. Specifically, changes to existing controls or the implementation of new controls have not been sufficient to respond to changes to the risks of material misstatement to financial reporting. As a result of this deficiency in the design and implementation of an effective risk assessment, this material weakness contributed to certain control deficiencies that management has concluded result in the following additional material weaknesses: (i) we did not design and maintain effective controls over the review of pricing, quantity and customer data to verify that revenue recognized at certain smaller locations was complete and accurate, and (ii) we did not design and maintain effective controls over the reliability of data used to support the reasonableness of certain assumptions in the accounting for business combinations.
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, 2020 and December 31, 2019, and the results of its operations and its cash flows and changes in equity for both the three month periods ended March 31, 2020 and March 31, 2019, are in conformity with accounting principles generally accepted in the United States of America. However, these control deficiencies could have resulted in misstatements of interim condensed consolidated financial statements and disclosures that could have resulted in a material misstatement that would not be prevented or detected.
Remediation Plan Activities. As previously disclosed in “Item 9A. Controls and Procedures.” in the Company’s 2019 Form 10-K, the Company and its Board of Directors are committed to maintaining a strong internal control environment. During the first quarter of 2020, management has begun developing its full remediation plan and is in the early phase of what will be a multi-step remediation process to completely and fully remediate the material weaknesses identified and described above. The initial steps the Company has taken include identifying dedicated internal resources supplemented with third-party specialists to assist with formalizing a robust and detailed remediation plan and specifically completing an updated risk assessment, including identifying and assessing those risks attendant to the significant changes within the Company as a result of becoming a larger, more complex global organization as a result of the Combination. The Company plans to conduct a comprehensive review, and, as applicable, update its existing internal control framework to ensure that it has identified, developed and deployed the appropriate business process and information technology general controls to meet the objectives and address the risks identified through the updated risk assessment process.
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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2020.
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PART II.
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been omitted.
Item 1. Legal Proceedings.
Incorporated by reference is the information in Note 19 of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1, of this Report.
Item 1A. Risk Factors.
In addition to the other information set forth in this Report, you should carefully consider the risk set forth below, which updates the risk factors previously disclosed in Part I, Item 1A of our 2019 Form 10-K, as well as the other risk factors described in the 2019 Form 10-K, which could materially affect our business, financial condition or future results. The risk described below, and the risks described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
The outbreak of COVID-19 and its impact on business and economic conditions have negatively affected our business, results of operations and financial condition and the extent and duration of those effects is uncertain.
Beginning in early 2020, there has been an outbreak of COVID-19, initially in China and which has spread globally, including generally all locations where the Company does business. In March 2020, the World Health Organization formally identified the COVID-19 outbreak as a pandemic. The COVID-19 pandemic, including the fear of exposure to and the actual effects of the illness, together with the measures implemented to reduce its spread, which include restrictions on travel and large gatherings and requirements to shelter-in-place, have significantly impacted the global economy. The pandemic has disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, it has resulted in temporary closures of many businesses, which may continue for an unknown period.
The scale and scope of the COVID-19 outbreak, the resulting pandemic, and the primary and secondary impacts on the economy and financial markets have had a significant disruption on the operations of the Company and its suppliers and customers and have adversely affected the Company’s results of operations and financial condition during the first quarter of 2020 as further described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report. The Company has experienced disruptions as a result of COVID-19, first at its China subsidiaries and subsequently, particularly beginning in the first quarter of 2020, throughout the rest of the business due to the global economic slowdown. The Company anticipates that its future results of operations, including the results for the remainder of 2020, particularly for the second quarter of 2020, will be significantly adversely impacted by COVID-19. In particular, the spread of COVID-19 and efforts to contain the virus have had the following effects, which are likely to increase or become exacerbated the longer the crisis continues:
reduced the demand for our products and services as many customers have reduced production levels;
driven declines in volume and net sales across all reportable segments;
required us to adjust certain of our facility operating procedures and to take steps to reduce costs and preserve liquidity; and
negatively affected the carrying value of certain of the Company’s reporting units or other indefinite-lived or long-lived intangible assets, namely the Company’s Houghton and Fluidcare trademark and tradename indefinite-lived intangible assets, such that their estimated fair values were less than their carrying values.
The spread of COVID-19 and efforts to contain the virus could also:
limit the availability and reduce the productivity of our employees;
impact our financial reporting systems and processes, internal control over financial reporting, and disclosure controls and procedures, including our ability to ensure information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure;
increase our costs as a result of our emergency measures, delay customer payments and potentially increase uncollectable accounts;
cause delays and disruptions in the availability of and timely delivery of materials and components used in our operations;
cause a deterioration of the credit quality of our customers and other counterparties that could result in credit losses;
result in our inability to meet the requirements of the covenants in our existing credit facility, including covenants regarding our consolidated interest coverage ratio and consolidated net leverage ratio, or increase our cost of capital or make additional capital, including the refinancing of our credit facility, more difficult or available only on terms less favorable to us;
impact our liquidity position and cost of and ability to access funds from financial institutions and capital markets;
negatively affect the carrying values of other Company reporting units or other indefinite-lived or long-lived intangible assets; and
cause other risks to impact us, including the risks described in the “Risk Factors” section of the 2019 Form 10-K.
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While the Company has implemented business continuity and emergency response plans to permit it to continue to provide services and products to customers and support the Company’s operations, while also taking health and safety measures such as implementing worker distancing measures and using a remote workforce where possible, there can be no assurance that the continued spread of COVID-19 and efforts to contain the virus (including, but not limited to, voluntary and mandatory quarantines, restrictions on travel, limiting gatherings of people, and reduced operations and extended closures of many businesses and institutions) will not further impact our business, results of operations and financial condition. However, given the unprecedented and rapidly evolving developments with respect to this pandemic, the Company cannot, as of the date of this Report, reasonably estimate the magnitude or full extent of the impact to its future results of operations or to the ability of it or its customers to resume more normal operations. The Company expects that there will be significant volume declines and lower net sales in the second quarter of 2020 compared to the first quarter of 2020 and prior year. A prolonged outbreak and period of continued restrictions on day-today life would likely result in further volume declines and lower net sales for later periods of 2020, as compared to the prior year as well.
The ultimate significance 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 ultimate geographic spread of the virus, the effects on the economy by the pandemic, including market volatility, and by the measures taken by governmental authorities and other third parties restricting day-to-day life and the length of time that such measures remain in place, and laws or governmental programs implemented to assist businesses impacted by the COVID-19 pandemic, such as fiscal stimulus and other legislation designed to deliver monetary aid and other relief. The likelihood of a further impact on the Company that could be material increases the longer the virus impacts activity levels in the United States and across the world.
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 first quarter of 2020 for the period covered by this Report:
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| (c) |
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| (d) |
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| Total Number of |
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| Approximate Dollar |
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| (a) |
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| (b) |
| Shares Purchased |
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| Value of Shares that |
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| Total Number |
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| Average |
| as part of |
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| May Yet be |
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| of Shares |
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| Price Paid |
| Publicly Announced |
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| Purchased Under the |
Period |
| Purchased (1) |
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| Per Share (2) |
| Plans or Programs |
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| Plans or Programs (3) |
January 1 - January 31 |
| 268 |
| $ | 164.52 |
| — |
| $ | 86,865,026 |
February 1 - February 29 |
| 4,089 |
| $ | 165.60 |
| — |
| $ | 86,865,026 |
March 1 - March 31 |
| — |
| $ | — |
| — |
| $ | 86,865,026 |
Total |
| 4,357 |
| $ | 165.53 |
| — |
| $ | 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, 2020.
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.
43
Item 6. Exhibits.
(a) Exhibits |
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3.1 |
| – |
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3.2 |
| – |
| Restated By-laws (effective May 6, 2015, as amended through March 27, 2020).* |
10.1 |
| – |
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10.2 |
| – |
| Amendment No 1, effective March 1, 2020, to the Quaker Houghton Retirement Savings Plan.*† |
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*
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104 |
| – |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)*
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* 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.
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| QUAKER CHEMICAL CORPORATION (Registrant)
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| /s/ Mary Dean Hall________________________________ |
Date: May 11, 2020 |
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| Mary Dean Hall, Senior Vice President, Chief Financial Officer and Treasurer (officer duly authorized on behalf of, and principal financial officer of, the Registrant) |