Net Sales and Revenue Recognition

9 Months Ended

Sep. 30, 2019

Revenue From Contract With Customer [Abstract]

Revenue From Contract With Customer [Text Block]

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, which include: steel, aluminum, aerospace and defense, transportation and OEM, transportation components, offshore, architectural aluminum, fire-resistant hydraulics, die casting, 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 and cleaning fluids, corrosion preventatives and cleaners, metal drawing and forming fluids, die cast mold releases, heat treatment and quenchants, metal forging fluids, hydraulic fluids, specialty greases, offshore control fluids, rolling lubricants, rod and wire drawing and surface treatments.

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 visit the plants of customers regularly, work on site, and, through training and experience, identify production needs which can be resolved or alleviated either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The chemical specialty industry comprises many companies similar in size to the Company, as well as companies larger and smaller than Quaker Houghton. The

offerings of many of the Company’s competitors differ from those of Quaker Houghton; some offer a broad portfolio of fluids, including general lubricants, while others have a more specialized product range. All competitors provide different levels of technical services to individual customers. Competition in the industry is based primarily on the ability to provide products that meet the needs of the customer, render technical services and laboratory assistance to the customer and, to a lesser extent, on price.

As part of the Company’s Fluidcare business, certain third-party product sales to customers are managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers. Where the Company acts as an agent, revenue is recognized on a net reporting basis generally at the amount of the administrative fee earned by the Company for ordering the goods. In determining whether the Company is acting as a principal or an agent in each arrangement, the Company considers whether it is primarily responsible for the obligation to provide the specified good, has inventory risk before the specified good has been transferred to the customer and has discretion in establishing the prices for the specified goods. The Company transferred third-party products under arrangements recognized on a net reporting basis of $13.6 million and $34.4 million for the three and nine months ended September 30, 2019, respectively, and $11.7 million and $35.8 million for the three and nine months ended September 30, 2018, respectively.

A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of steel, automobiles, aircraft, appliances, and durable goods, and, therefore, the Company is subject to the same business cycles as those experienced by these manufacturers and their customers. The Company’s financial performance is generally correlated to the volume of global production within the industries it serves, rather than discretely related to the financial performance of such industries. Furthermore, steel 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 Annual Report filed on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2018, during 2018 the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing authority) accounted for approximately 17% of consolidated net sales, with its largest customer accounting for approximately 8% of consolidated net sales.

Revenue Recognition Model

The Company applies the FASB’s guidance on revenue recognition which requires the Company to recognize revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services transferred to its customers. To do this, the Company applies the five-step model in the FASB’s guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company identifies a contract with a customer when a sales agreement indicates approval and commitment of the parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, the Company’s contract with a customer is the customer’s purchase order. For certain customers, the Company may also enter into a sales agreement which outlines a framework of terms and conditions which apply to all future and subsequent purchase orders for that customer. In these situations, the Company’s contract with the customer includes both the sales agreement and 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 whenever the customer simultaneously receives and consumes the benefits provided by the Company’s performance; the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the Company’s performance does not create an asset with an alternative use to the entity, and the entity has an

enforceable right to payment, including a profit margin, for performance completed to date. For performance obligations not satisfied over time, the Company determines the point in time at which a customer obtains control of an asset and the Company satisfies a performance obligation by considering when the Company has a right to payment for the asset; the customer has legal title to the asset; the Company has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset; or the customer has accepted the asset.

The Company typically satisfies its performance obligations and recognizes revenue at a point in time for product sales, generally when products are shipped or delivered to the customer, depending on the terms underlying each arrangement. In circumstances where the Company’s products are on consignment, revenue is generally recognized upon usage or consumption by the customer. For any Fluidcare or other services provided by the Company to the customer, the Company typically satisfies its performance obligations and recognizes revenue over time, as the promised services are performed. The Company uses input methods to recognize revenue over time related to these services, including labor costs and time incurred. The Company believes that these input methods represent the most indicative measure of the Fluidcare or other service work performed by the Company.

Other Considerations

The Company does not have standard payment terms for all customers globally, however the Company’s general payment terms require customers to pay for products or services provided after the performance obligation is satisfied. The Company does not have significant financing arrangements with its customers. The Company does not have significant amounts of variable consideration in its contracts with customers and where applicable, the Company’s estimates of variable consideration are not constrained. The Company records certain third-party license fees in other income (expense), net, in its Condensed Consolidated 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 not to adjust the promised amount of consideration for the effects of a significant financing component because the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. In addition, it is the Company’s policy to expense costs to obtain a contract as incurred when the expected period of benefit, and therefore the amortization period, is one year or less. It is also the Company’s accounting policy to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, value added, excise and various other taxes. Lastly, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfilment cost, rather than an additional promised service.

Contract Assets and Liabilities

The Company recognizes a contract asset or receivable on its Condensed Consolidated Balance Sheet when the Company performs a service or transfers a good in advance of receiving consideration. A receivable is the Company’s right to consideration that is unconditional and only the passage of time is required before payment of that consideration is due. A contract asset is the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. The Company had no material contract assets recorded on its Condensed Consolidated Balance Sheets as of September 30, 2019 or December 31, 2018.

A contract liability is recognized when the Company receives consideration, or if it has the unconditional right to receive consideration, in advance of performance. A contract liability is the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration, or a specified amount of consideration is due, from the customer. The Company’s contract liabilities primarily represent deferred revenue recorded for customer payments received by the Company prior to the Company satisfying the associated performance obligation. Deferred revenues are presented within other current liabilities in the Company’s Condensed Consolidated Balance Sheets. The Company had approximately $2.4 million and $1.3 million of deferred revenue as of September 30, 2019 and December 31, 2018, respectively. During the nine months ended September 30, 2019, the Company satisfied the associated performance obligations and recognized revenue of $1.3 million related to advance customer payments.

Disaggregated Revenue

The Company sells its various industrial process fluids, its chemical specialties 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 for its product lines greater than 10% in its previously filed Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2018. Those annual percentages are generally consistent with the current year’s net sales by product line, excluding the Combination. Also, net sales of each of the Company’s major product lines are generally spread throughout all three of the Company’s geographic segments, and in most cases, approximately proportionate to the level of total sales in each region.

The following tables disaggregate the Company’s net sales by segment, region, customer industry, and timing of revenue recognized for the three and nine months ended September 30, 2019 and 2018. The Company has made certain reclassifications of disaggregated customer industry disclosures for the three and nine months ended September 30, 2018 to conform with the Company’s current period customer industry segmentation.

	Three Months Ended September 30, 2019
							Consolidated
	Americas		EMEA		Asia/Pacific		Total
Customer Industries
Metals	$	45,782	$	26,440	$	40,667	$	112,889
Metalworking and other		70,928		56,028		33,599		160,555
		116,710		82,468		74,266		273,444
Global Specialty Businesses		38,813		5,071		7,802		51,686
	$	155,523	$	87,539	$	82,068	$	325,130
Timing of Revenue Recognized
Product sales at a point in time	$	150,906	$	85,579	$	80,362	$	316,847
Services transferred over time		4,617		1,960		1,706		8,283
	$	155,523	$	87,539	$	82,068	$	325,130

	Three Months Ended September 30, 2018
							Consolidated
	Americas		EMEA		Asia/Pacific		Total
Customer Industries
Metals	$	42,052	$	23,998	$	31,553	$	97,603
Metalworking and other		35,322		27,348		18,375		81,045
		77,374		51,346		49,928		178,648
Global Specialty Businesses		33,392		4,153		5,829		43,374
	$	110,766	$	55,499	$	55,757	$	222,022
Timing of Revenue Recognized
Product sales at a point in time	$	107,957	$	55,437	$	53,998	$	217,392
Services transferred over time		2,809		62		1,759		4,630
	$	110,766	$	55,499	$	55,757	$	222,022

	Nine Months Ended September 30, 2019
							Consolidated
	Americas		EMEA		Asia/Pacific		Total
Customer Industries
Metals	$	126,145	$	75,330	$	98,230	$	299,705
Metalworking and other		134,537		108,950		67,004		310,491
		260,682		184,280		165,234		610,196
Global Specialty Businesses		102,130		12,696		17,187		132,013
	$	362,812	$	196,976	$	182,421	$	742,209
Timing of Revenue Recognized
Product sales at a point in time	$	352,504	$	194,911	$	177,416	$	724,831
Services transferred over time		10,308		2,065		5,005		17,378
	$	362,812	$	196,976	$	182,421	$	742,209

	Nine Months Ended September 30, 2018
							Consolidated
	Americas		EMEA		Asia/Pacific		Total
Customer Industries
Metals	$	123,618	$	77,047	$	90,310	$	290,975
Metalworking and other		101,497		87,706		53,078		242,281
		225,115		164,753		143,388		533,256
Global Specialty Businesses		93,323		12,967		16,493		122,783
	$	318,438	$	177,720	$	159,881	$	656,039
Timing of Revenue Recognized
Product sales at a point in time	$	309,810	$	177,548	$	153,861	$	641,219
Services transferred over time		8,628		172		6,020		14,820
	$	318,438	$	177,720	$	159,881	$	656,039