Business Combinations

9 Months Ended

Sep. 30, 2019

Business Combination Separately Recognized Transaction [Abstract]

Business Combination Disclosure [Text Block]

Note 2 – Business Combinations

Houghton

On August 1, 2019, the Company completed the Combination with Houghton, whereby the Company acquired all of the issued and outstanding shares of Houghton from Gulf Houghton Lubricants, Ltd. and certain other selling shareholders in exchange for a combination of cash and shares of the Company’s common stock in accordance with the share purchase agreement dated April 4, 2017. Houghton is a leading global provider of specialty chemicals and technical services for metalworking and other industrial applications. Combining Quaker and Houghton’s product and service offerings will allow Quaker Houghton to better serve its customers in its various end markets.

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 $37 million in cash. The final remedy agreed with the EC and the FTC was consistent with the Company’s previous expectation that the total divested product lines would be approximately 3% of the combined company’s net sales.

The following table summarizes the fair value of consideration transferred in the Combination:

Cash transferred to Houghton shareholders (a)		$	170,829
Cash paid to extinguish Houghton debt obligations			702,556
Fair value of common stock issued as consideration (b)			789,080
	Total fair value of consideration transferred	$	1,662,465

(a)A portion is held in escrow by a third party, subject to indemnification rights that lapse upon the achievement of certain milestones.

(b)Amount was determined based on 4.3 million shares, comprising 24.5% of the common stock of the Company at closing, and the closing price per share of Quaker Chemical Corporation common stock of $182.27 on August 1, 2019.

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 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. Fair values were determined by management, using a variety of methodologies and resources, including external independent valuation experts. The valuation methods consisted of 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 preliminary estimated fair values of Houghton net assets acquired:

Cash and cash equivalents		$	75,821
Accounts receivable, net			179,745
Inventories, net			95,193
Prepaid expenses and other assets			11,373
Deferred tax assets			8,703
Property, plant and equipment			125,099
Right of use lease assets			10,747
Investments in associated companies			69,683
Other non-current assets			1,368
Intangible assets			1,022,500
Goodwill			483,921
	Total assets purchased		2,084,153
Short-term borrowings, not refinanced at closing			9,297
Accounts payable, accrued expenses and other current liabilities			152,829
Deferred tax liabilities			213,779
Long-term lease liabilities			6,655
Other non-current liabilities			39,128
	Total liabilities assumed		421,688
	Total consideration paid for Houghton		1,662,465
	Less: cash acquired		75,821
	Less: fair value of common stock issued as consideration		789,080
	Net cash paid for Houghton	$	797,564

Investments in associated companies presented in the table above represents the Company’s initial fair value estimate of its 50% interest in a Houghton joint venture in Korea. The Company accounts for this interest under the equity method of accounting. The Company allocated $1,022.5 million of the purchase price to intangible assets, comprised of $242.0 million of trademarks and formulations, to which management has assigned indefinite lives; $671.4 million of customer relationships, to be amortized over 16 to 18 years; and $109.1 million of existing product technology, to be amortized over 20 years. In addition, the Company recorded $483.9 million of goodwill related to expected value not allocated to other acquired assets, none of which will be tax deductible. Factors contributing to the purchase price that resulted in goodwill included the acquisition of management, technology, intellectual property, business processes and personnel that will allow Quaker Houghton to better serve its customers. The expanded portfolio is expected to generate significant cross-selling opportunities and allow further expansion into growth markets such as India, Korea, Brazil and Mexico.

As of September 30, 2019, the allocation of the purchase price for the Combination has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed.

Commencing August 1, 2019, the Company’s Condensed Consolidated Statements of Operations included the results of Houghton. Net sales of Houghton subsequent to closing of the Combination and included in the Company’s Condensed Consolidated Statements of Operations were $119.5 million. The following unaudited pro forma consolidated financial information has been prepared as if the Combination had taken place on January 1, 2018. The unaudited pro forma results include certain adjustments to each company’s historical actual results, including: (i) additional depreciation and amortization expense based on the initial estimates of fair value step up and estimated useful lives of depreciable fixed assets, definite-lived intangible assets and investment in associated companies acquired; (ii) adoption of required accounting guidance and alignment of related accounting policies, (iii) elimination of transactions between Quaker and Houghton; (iv) elimination of results associated with the divested product lines; (v) adjustment to interest expense, net, to reflect the impact of the financing and capital structure of the combined Company; and (vi) adjustment for certain Combination and other acquisition-related costs to reflect such costs as if they were incurred in the period immediately following the pro-forma closing of the Combination on January 1, 2018. The adjustments described in (vi) include an expense recorded in costs of goods sold (“COGS”) associated with selling inventory acquired in the Combination which was adjusted to fair value as part of purchase accounting, restructuring expense incurred associated with the Company’s global restructuring program initiated post-closing of the Combination and certain other integration costs incurred post-closing included in combination and other acquisition-related expenses. These costs have been presented in the pro forma results as if they were incurred during the nine months ended September 30, 2018. Pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future for various reasons, including the potential impact of revenue and cost synergies on the business.

	Three Months Ended				Nine Months Ended
Unaudited Pro Forma	September 30,				September 30,
(as if the Combination occurred on January 1, 2018)	2019		2018		2019		2018
Net sales	$	386,396	$	417,460	$	1,170,981	$	1,255,242
Net income attributable to Quaker Chemical Corporation		22,491		28,459		70,533		41,322

Combination and other acquisition-related expenses have been and are expected to continue to be significant. The Company incurred total costs of $15.1 million and $25.9 million during the three and nine months ended September 30, 2019, and $3.8 million and $14.4 million during the three and nine months ended September 30, 2018, respectively, related to the Combination and other acquisition-related activities. These costs included certain legal, financial and other advisory and consultant costs related to due diligence, regulatory approvals and integration planning as well as professional fees associated with closing the Combination. These costs also include interest costs to maintain the bank commitment (“ticking fees”) for the Combination during each of three and nine months ended September 30, 2019 and 2018, and specifically during the nine months ended September 30, 2018, a gain on the sale of an available-for-sale asset. As of September 30, 2019 and December 31, 2018, the Company had current liabilities related to the Combination and other acquisition-related activities of $6.8 million and $8.2 million, respectively, primarily recorded within other current liabilities on its Condensed Consolidated Balance Sheets.

Norman Hay

On October 1, 2019, the Company completed its acquisition of the operating divisions of Norman Hay plc, a private U.K. company that provides specialty chemicals, operating equipment, and services to industrial end markets, for a purchase price of 80.0 million GBP or approximately $98 million, subject to certain normal and routine post-closing adjustments. The results of operations of the acquired operating divisions of Norman Hay plc are not included in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019, because the date of closing was after September 30, 2019. Transaction expenses associated with this acquisition that were incurred during the three and nine months ended September 30, 2019 are included in Combination and other acquisition-related expenses in the Company’s Condensed Consolidated Statements of Operations. A preliminary purchase price allocation of assets acquired and liabilities assumed has not been presented as that information is not available as of the date of these Condensed Consolidated Financial Statements.

Other Acquisitions

In March 2018, the Company purchased certain formulations and product technology for the mining industry for $1.0 million. The Company allocated the entire purchase price to intangible assets representing formulations and product technology, to be amortized over 10 years. In accordance with the terms of the applicable purchase agreement, $0.5 million of the purchase price was paid at signing, and the remaining $0.5 million of the purchase price was paid during the first quarter of 2019.