UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity
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$1.00 Par Value, as of January 31, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III.
1
QUAKER CHEMICAL CORPORATION
Table of Contents
Page
Part I
Item 1.
Business.
2
Item 1A.
Risk Factors.
7
Item 1B.
Unresolved Staff Comments.
19
Item 2.
Properties.
19
Item 3.
Legal Proceedings.
19
Item 4.
Mine Safety Disclosures.
19
Item 4(a).
Information about our Executive Officers.
20
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
22
Item 6.
Selected Financial Data.
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
41
Item 8.
Financial Statements and Supplementary Data.
43
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
100
Item 9A.
Controls and Procedures.
100
Item 9B.
Other Information.
102
Part III
Item 10.
Directors, Executive Officers and Corporate Governance.
103
Item 11.
Executive Compensation.
103
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
103
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
103
Item 14.
Principal Accountant Fees and Services.
103
Part IV
Item 15.
Exhibits and Financial Statement Schedules.
104
Item 16.
Form 10-K Summary.
107
2
PART I
As used in this Annual Report on Form 10-K (the “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. 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 year ended December 31, 2020;
and for the year ended December 31, 2019, the results of Legacy Quaker plus five months of Houghton’s operations post-closing of
the Combination on August 1, 2019; and for the year ended December 31, 2018, the results of only Legacy Quaker.
Item 1.
Business.
General Description
The Company was organized in 1918, incorporated as a Pennsylvania business corporation in 1930, and in August 2019
completed the Combination with Houghton to form Quaker Houghton. Quaker Houghton is a global leader in industrial process
fluids. With a presence around the world, including operations in over 25 countries, the Company’s customers include thousands of
the world’s most advanced and specialized steel, aluminum, automotive, aerospace, offshore, can, mining, and metalworking
companies. Quaker Houghton develops, produces, and markets a broad range of formulated chemical specialty products and offers
chemical management services (which we refer to as “Fluidcare
TM
”) for various heavy industrial and manufacturing applications
throughout its four segments: Americas; Europe, Middle East and Africa (“EMEA”); Asia/Pacific; and Global Specialty Businesses.
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 treatme nt chemicals. The following
are the respective contributions to consolidated net sales of each of our principal product lines representing more than 10% of
consolidated net sales for any of the past three years based on the Company’s current product line segmentation:
2020
2019
2018
Metal removal fluids
23.9
%
19.9
%
15.4
%
Rolling lubricants
21.8
%
21.9
%
25.5
%
Hydraulic fluids
13.3
%
13.0
%
13.0
%
Houghton Combination
On August 1, 2019, the Company completed the Combination and acquired all of the issued and outstanding shares of Houghton
from Gulf Houghton Lubricants, Ltd. (“Gulf”) 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 (the “Share Purchase
Agreement”). The shares were bought for an aggregate purchase consideration consisting of: (i) $170.8 million in cash; (ii) the
issuance of approximately 4.3 million shares of the Company’s common stock, $1.00 par value per share, comprising 24.5% of the
common stock outstanding upon the closing of the Combination; and (iii) the Company’s refinancing of Houghton’s net indebtedness
as of the closing of the Combination of approximately $702.6 million.
Houghton is a leading global provider of specialty chemicals and technical services for metalworking and other industrial
applications, and, the combination with Legacy Quaker created a leading global supplier of industrial process fluids. The
Combination expanded the Company’s addressable metalworking, metals and industrial end markets, including steel, aluminum,
aerospace, defense, transportation-original equipment manufacturer (“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.
Notable Recent Acquisition Activity
In December 2020, the Company completed its acquisition of Coral Chemical Company (“Coral”), a privately held, U.S.-based
provider of metal finishing fluid solutions, for approximately $53 million, net of cash acquired. Coral provides technical expertise and
product solutions for pre-treatment, metalworking and wastewater treatment applications to the beverage can and general industrial
end markets. In February 2021, the Company acquired certain assets related to tin-plating solutions primarily for steel end markets for
approximately $25 million.
Impact of COVID-19
During 2020, the global outbreak of COVID-19 and subsequent pandemic negatively impacted all locations where the Company
does business. Although the Company has now operated during several quarters in this COVID-19 environment, the full extent of the
pandemic and related business impacts remains uncertain and volatile, and therefore the full extent to which COVID-19 may impact
the Company’s future results of operations or financial condition is uncertain. The pandemic has disrupted the operations of the
Company and its suppliers and customers and, as a result, the Company experienced volume declines and lower net sales during 2020
as further described in Item 7 of this Report. The initial impact was at its China subsidiaries in the first quarter of 2020 and beginning
3
in late March continued throughout 2020 in the rest of the business as the pandemic led to a global economic slowdown. Management
continues to monitor the impact of the COVID-19 pandemic on the Company, the overall specialty chemical industry and the
economies and markets in which the Company operates.
Sales Revenue
A substantial portion of the Company’s sales worldwide are made directly through its own employees and its Fluidcare programs,
with the balance sold 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
utilizing the Company’s existing products or by applying new formulations developed in its laboratories.
The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive in exchange
for the goods or services transferred to its customers. To do this, the Company applies a five-step model that 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.
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 principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers.
Where the Company acts as an agent, revenue is recognized on a net reporting basis at the amount of the administrative fee earned by
the Company for ordering the goods. The Company transferred third-party products under arrangements resulting in net reporting of
$42.5 million, $48.0 million and $47.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Competition
The specialty chemical industry comprises a number of companies similar in size to the Company, as well as companies larger
and smaller than Quaker Houghton. The Company cannot readily determine its precise position in every industry it serves. However,
the Company estimates it holds a leading global position in the market for industrial process fluids including significant global
positions in the markets for process fluids in portions of the automotive and industrial markets, and a leading position in the market for
process fluids to produce sheet steel and aluminum. 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 more specialized product ranges. All
competitors provide different levels of technical services to individual customers. Competition in the industry is based primarily on
the ability to supply products that meet the needs of the customer and provide technical services and laboratory assistance to the
customer, and to a lesser extent, on price.
Major Customers and Markets
In 2020, Quaker Houghton’s five largest customers (each composed of multiple subsidiaries or divisions with semi-autonomous
purchasing authority) accounted for approximately 10% of consolidated net sales, with its largest customer accounting for
approximately 3% of consolidated net sales. 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,
Quaker Houghton 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
directly related to the financial performance of its customers. 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.
Raw Materials
Quaker Houghton uses approximately 3,000 raw materials, including animal fats, vegetable oils, mineral oils, oleochemicals,
ethylene, solvents, surfactant agents, various chemical compounds that act as additives to our base formulations, and a wide variety of
other organic and inorganic compounds and various derivatives of the foregoing. The price of mineral oil and its derivatives can be
affected by the price of crude oil and industry refining capacity. Animal fat and vegetable oil prices, as well as the prices of other raw
materials, are impacted by their own unique supply and demand factors, and by biodiesel consumption which is affected by the price
of crude oil. Accordingly, significant fluctuations in the price of crude oil can have a material impact on the cost of these raw
materials. In addition, many of the raw materials used by Quaker Houghton are commodity chemicals which can experience
significant price volatility. Accordingly, the Company’s earnings could be affected by market changes in raw material prices.
Reference is made to the disclosure contained in Item 7A of this Report.
Patents and Trademarks
Quaker Houghton has a limited number of patents and patent applications including patents issued, applied for, or acquired in the
U.S. and in various foreign countries, some of which may prove to be material to its business, with the earliest patent expiry in 2021.
The Company principally relies on its proprietary formulae and its applications know-how and experience to meet customer needs.
Quaker Houghton products are identified by numerous trademarks that are registered throughout its marketing area.
4
Research and Development—Laboratories
The Company maintains approximately thirty separate laboratory facilities worldwide that are primarily devoted to applied
research and development. In addition, the Company maintains quality control labs at each of its manufacturing facilities. Quaker
Houghton research and development is directed primarily toward applied technology since the nature of the Company’s business
requires continual modification and improvement of formulations to provide specialty chemicals to satisfy customer requirements. If
problems are encountered which cannot be resolved by local laboratories, the problem is referred to one of our ten principal
laboratories, located in Conshohocken, Pennsylvania; Valley Forge, Pennsylvania; Aurora, Illinois; Santa Fe Springs, California;
Uithoorn, the Netherlands; Coventry, United Kingdom; Dortmund, Germany; Barcelona, Spain; Turin, Italy or Qingpu, China.
Research and development costs are expensed as incurred. Research and development expenses during the years ended
December 31, 2020, 2019 and 2018 were $40.0 million, $32.1 million and $24.5 million, respectively.
Regulatory Matters
In order to facilitate compliance with applicable federal, state, and local statutes and regulations relating to occupational health
and safety and protection of the environment, the Company has an ongoing program of site assessment for the purpose of identifying
capital expenditures or other actions that may be necessary to comply with such requirements. The program includes periodic
inspections of each facility by the Company and/or independent experts, as well as ongoing inspections and training by on-site
personnel. Such inspections address operational matters, record keeping, reporting requirements and capital improvements. Capital
expenditures directed solely or primarily to regulatory compliance amounted to approximately $3.7
million, $4.4 million and $1.5
million during the years ended December 31, 2020, 2019 and 2018, respectively.
Company Segmentation
The Company’s operating segments, which are consistent with its reportable segments, reflect the structure of the Company’s
internal organization, the method by which the Company’s resources are allocated and the manner by which the Company and the
chief operating decision maker assess performance. The Company’s reportable segments are: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses. See Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Report,
incorporated herein by this reference.
Non-U.S. Activities
Since significant revenues and earnings are generated by non-U.S. operations, the Company’s financial results are affected by
currency fluctuations, particularly between the U.S. dollar and the euro, the British pound sterling, the Brazilian real, the Mexican
peso, the Chinese renminbi and the Indian rupee, and the impact of those currency fluctuations on the underlying economies.
Incorporated by reference is (i) the foreign exchange risk information contained in Item 7A of this Report, (ii) the geographic
information in Note 4 of Notes to Consolidated Financial Statements included in Item 8 of this Report, and (iii) information regarding
risks attendant to foreign operations included in Item 1A of this Report.
Number of Employees
On December 31, 2020, Quaker Houghton had approximately 4,200 full-time employees globally of whom approximately 900
were employed by the parent company and its U.S. subsidiaries, and approximately 3,300 were employed by its non -U.S. subsidiaries.
Associated companies of Quaker Houghton (in which it owns 50% or less and has significant influence) employed approximately 600
people on December 31, 2020.
Core Values
Quaker Houghton considers its employees as its greatest strength in differentiating our business and strengthening our market
positions. We have established core values that are inclusive of embracing diversity and creating a culture where we learn from and
are inspired by the many cultures, backgrounds and knowledge of our team members. The Company’s goal is to have an organization
that is inclusive of all its people and is representative of the communities in which we operate.
The Company’s core values are (i) live safe; (ii) act with integrity; (iii) drive results; (iv) exceed customer expectations; (v)
embrace diversity; and (vi) do great things together. Our core values embody who we are as a company, guide our decisions and
inspire us. Our commitment to these values, in words and actions, builds a safer, stronger Quaker Houghton , and these values guide
the Company’s internal conduct and its relationship with the outside world. By fostering a culture and environment that exemplifies
our core values, we gain, as a company, unique perspectives, backgrounds and varying experiences to ensure continued long-term
success. The Company respects and values all of its employees and believes inclusion, diversity and equality are essential pillars to
drive the Company’s success.
Workplace Safety
We are committed to maintaining a strong safety culture and to emphasizing the importance of our employees’ role in identifying,
mitigating and communicating safety risks. We maintain policies and operational practices that communicate a culture where all
levels of employees are responsible for safety. We believe that the achievement of superior safety performance is both an important
short-term and long-term strategic goal in managing our operations. We emphasize ten “lifesaving” rules which make a significant
5
difference in preventing serious injuries and fatalities. We also require all employees to regularly complete safety training.
Additionally, our senior management team is closely involved in our safety programs and conducts regular reviews of safety
performance metrics and reviews the Company’s safety performance during Company-wide meetings.
Talent Management and Retention
Maintaining a robust pipeline of talent is crucial to our continued success and is a key aspect of succession planning efforts across
the organization. Our leadership and human resources teams are responsible for attracting and retaining top talent by facilitating an
environment where employees want to show up to work and do great things together. To achieve sustained high performance,
management invests in the development, safety, and wellbeing of our employees. Additionally, we regularly evaluate our
compensation and benefits package, including health and wellness benefits, paid-time off policies, monetary compensation, and
educational reimbursements, to ensure that our total compensation and benefits packages are aligned with our business strategy,
organizational culture, and diversity and inclusion philosophy while ensuring that we remain competitive in the markets we serve
while following local and statutory wage and benefits laws and guidelines.
Sustainability Report
The Company publishes annual sustainability reports which are available free of charge on its corporate website under “Investors
- Commitment to Sustainability - Sustainability Report.” The Company’s 2019 Sustainability Report reflects the most recent available
data on a variety of topics, including specific information relating to: (i) the Company’s environmental footprint and climate change
initiatives; (ii) the Company’s diversity initiatives; (iii) certain safety metrics; and (iv) training courses our employees completed.
Information included in these sustainability reports is not intended to be incorporated into this Report.
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 periodi c 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 Securities
and Exchange Commission (“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.
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 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 operation, and financial condition, and our expectations that we will
maintain sufficient liquidity and remediate any of our material weaknesses in internal control over financial reporting on our current
expectations about future events.
These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, future performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19 pandemic and any projected global economic rebound or
anticipated positive results due to Company actions taken in response to the pandemic;
•
our current and future results and plans; and
•
statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities, operational matters, capital spending, and
financing sources. From time to time, forward-looking statements are also included in the Company’s other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to, or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s Annual Report to Shareholders for 2020 and in any
other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence
of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future
performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking
statements.
6
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, supply chain disruptions, customer financial instability, worldwide economic
and political disruptions, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist
attacks and other acts of violence, each of which is discussed in greater detail in Item 1A of this Report. Furthermore, the Company is
subject to the same business cycles as those experienced by our customers in the steel, automobile, aircraft, industrial equipment, and
durable goods industries. The ultimate significance of COVID-19 impacts on our business will depend on, among other things, the
extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the continued
uncertainty regarding availability, administration and long-term efficacy of a vaccine, or other treatments, including on new strands or
mutations of the virus, the longer term effects on the economy, including the resulting market volatility, and the measures taken by
governmental authorities and other third parties restricting day-to-day life and business operations and the length of time that such
measures remain in place, as well as laws and other governmental programs implemented to address the pandemic or assist impacted
businesses, such as fiscal stimulus and other legislation designed to deliver monetary aid and other relief. Other factors could also
adversely affect us, including those related to the Combination and other acquisitions and the integration of the 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 possibly
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 in Item 1A of this Report, 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.
7
Item 1A.
Risk Factors.
There are many factors that may affect our business and results of operations, including the following risks relating to: (1) the
demand for our products and services and our ability to grow our customer base; (2) our business operations, including internal and
external factors that may impact our operational continuity; (3) our international operations; (4) our supply chain ; (5) domestic and
foreign taxation and government regulation and oversight; and (6) more general risk factors that may impact our business.
Risks Related to the Demand for our Products and Services and our Customer Base
Changes to the industries and markets that we serve could have a material adverse effect on our liquidity, financial position and
results of operations.
As a leader in industrial process fluids, the Company is subject to the same business cycles as those experienced by our customers
that participate in the steel, automobile, aircraft, industrial equipment, aerospace, aluminum and durable goods industries. Because
demand for our products and services is largely derived from the global demand for their products, we are subject to uncertainties
related to downturns in our customers’ businesses and unanticipated shutdowns or curtailments of our customers’ production,
including as a result of adverse changes affecting national, regional and global economies or increased competitive pressure within our
customers’ industries. For example, our business was adversely affected by the production slowdown of the Boeing 737 Max aircraft
that occurred in 2020. Our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining
financing, leading them to delay or cancel plans to purchase products, and they may not be able to fulfill their obligations in a timely
fashion. We have limited ability to adjust our costs contemporaneously with changes in sales; thus, a significant sudden downturn in
sales due to reductions in global production within the industries we serve and/or weak end-user markets could have a material
adverse effect on our liquidity, financial position and results of operations. Further, our suppliers and other business partners may
experience similar conditions, which could impact their ability to fulfill their obligations to us and also result in material adverse
effects on our liquidity, financial position and results of operations.
Changes in competition in the industries and markets we serve could have a material adverse effect on our liquidity, financial
position and results of operations.
The specialty chemical industry is highly competitive and there are many companies with significant financial resources and/or
customer relationships that compete with us to provide similar products and services. Some competitors may be able to offer more
favorable or flexible pricing and service terms or, due to their larger size or greater access to resources, may be better able to adapt to
changes in conditions in our industries, fluctuations in the costs of raw materials or changes in global economic conditions, potentially
resulting in reduced profitability and/or a loss of market share for us. The pricing decisions of our competitors could lead us to
decrease our prices which could negatively affect our margins and profitability. In addition, our competitors could potentially
consolidate their businesses to gain scale to better position their product offerings, which could have a negative impact on our
profitability and market share. Competition in our industry historically has also been based on the ability to provide products that
meet the needs of the customer and render technical services and laboratory assistance, which our competitors may be able to
accomplish more effectively than we are able to do. Further, in connection with obtaining regulatory approval of the Combination, we
divested certain of Houghton’s products and related assets to a competitor which they may use to compete with us in certain areas
where we continue to sell those products. If we are unsuccessful with differentiating ourselves, it could have a material adverse effect
on our liquidity, financial position and results of operations and we could lose market share to our competitors.
Loss of a significant customer, bankruptcy of a major customer, or the closure of or significant reduction in production at a
customer site could have a material adverse effect on our liquidity, financial position and results of operations.
During 2020, the Company’s top five largest customers (each composed of multiple subsidiaries or divisions with semi-
autonomous purchasing authority) together accounted for approximately 10% of our consolidated net sales, with the largest customer
accounting for approximately 3% of our consolidated net sales. The loss of a significant customer could have a material adverse effect
on our liquidity, financial position and results of operations. Also, a significant portion of our revenues is derived from sales to
customers in the cyclical steel, aerospace, aluminum and automotive industries where bankruptcies have occurred in the past and
where companies have periodically experienced financial difficulties. If a significant customer experiences financial difficulties or
files for bankruptcy protection, we may be unable to collect on our receivables, and customer manufacturing sites may be closed or
contracts voided. The bankruptcy of a major customer could therefore have a material adverse effect on our liquidity, financial
position and results of operations. Also, some of our customers, primarily in the steel, aluminum and aerospace industries, often have
fewer manufacturing locations compared to other metalworking customers and generally use higher volumes of products at a single
location. The loss, closure or significant reduction in production at one or more of these locations or other major sites of a significant
customer could have a material adverse effect on our business.
We may not be able to timely develop, manufacture and gain market acceptance of new and enhanced products required to
maintain or expand our business, which could adversely affect our competitive position and our liquidity, financial position and
results of operations.
We believe that our continued success depends on our ability to continuously develop and manufacture new products and product
enhancements on a timely and cost-effective basis in response to customer demands for higher performance process chemicals and
other product offerings. Our competitors may develop new products or enhancements to their products that offer performance,
8
features and lower prices that may render our products less competitive or obsolete, and we may lose business and/or significant
market share. The development and commercialization of new products requires significant expenditures over an extended period of
time, and some products that we seek to develop may fail to gain traction or never become profitable. In any event, ongoing
investments in research and development for the future do not yield an immediate beneficial impact on our operating results and
therefore could result in higher costs without a proportional increase in revenues.
In addition, our customers use our specialty chemicals for a broad range of applications. Changes in our customers’ products or
processes or changes in regulatory, legislative or industry requirements may lead our customers to reduce consumption of the specialty
chemicals that we produce or make them unnecessary or less attractive. Customers may also adopt alternative materials or processes
that do not require our products. An example of such evolving customer demands and industry trends is the movement towards light
weighting of materials and electric vehicles. Should a customer decide to use a different material due to price, performance or other
considerations, we may not be able to supply a product that meets the customer’s new requirements. Consequently, it is important that
we develop new products to replace the products that mature and decline in use. Despite our efforts, we may not be able to develop
and introduce products incorporating new technologies in a timely manner that will satisfy our customers’ future needs or achieve
market acceptance. Moreover, new products may have lower margins than the products they replace. Our business, results of
operations, cash flows and margins could be materially adversely affected if we are unable to manage successfully the maturation or
obsolescence of our existing products and the introduction of new products.
Risks Related to Business Operations, Including Internal and External Factors that May Impact Our Operational Continuity
Our ability to profitably operate our consolidated company as anticipated requires us to effectively complete the integration of our
consolidated operations. An inability to appropriately capitalize on growth, including organic growth and future acquisitions,
could adversely affect our liquidity, financial position and results of operations.
Completing the integration of the combined Quaker Houghton presents the Company with significant risks, which may affect our
ability to achieve expected cost synergies or expand our combined business into new markets and geographies. These risks include,
among others:
●
the diversion of management time and focus from operating our business to address challenges that may arise in the
continued integration of Houghton;
●
the transition of further operations and customers of Houghton to the combined business, including across different cultures
and languages, and the need to address the particular economic, currency, political, and regulatory risks associated with
specific countries;
●
the failure to realize anticipated operational or financial synergies;
●
delays in the implementation or remediation of controls, procedures, and policies at Houghton;
●
possible liabilities for activities of Houghton before the acquisition, such as possible violations of laws, commercial disputes,
tax liabilities (as discussed in Note 26 of Notes to Consolidated Financial Statements included in Item 8 of this Report), and
other known and unknown liabilities that may not be sufficiently protected against in the Share Purchase Agreement.
In addition to the Combination, we have completed several other acquisitions over the past several years as discussed in Note 2 of
the Notes to the Consolidated Financial Statements included in Item 8 of this Report. Acquired companies may have significant latent
liabilities that may not be discovered before they are acquired and may not be reflected in the price we pay. Acquisitions also could
have a dilutive effect on our financial results and while they generally result in goodwill, goodwill could be impaired in the future
resulting in a charge to earnings.
Our ability to implement our growth strategy may be limited by our ability to identify appropriate acquisition or joint venture
candidates, our financial resources, including available cash and borrowing capacity, and our ability to negotiate and complete suitable
arrangements. Further, the success of our growth depends on our ability to navigate risks similar to those listed above and
successfully integrate acquisitions, including, but not limited to, our ability to:
●
successfully execute the integration or consolidation of the acquired or additional business into existing processes and
operations;
●
develop or modify financial reporting, information systems and other related financial tools to ensure overall financial
integrity and adequacy of internal control procedures;
●
identify and take advantage of potential synergies, including cost reduction opportunities, while retaining legacy business and
other related attributes;
●
adequately address challenges arising from the increased scope, geographic diversity and complexity of our operations; and
●
further penetrate existing, and expand into new, markets with the product capabilities acquired in acquisitions.
If we fail to successfully integrate acquisitions into our existing business, our financial condition and results of operations could
be adversely affected. We may fail to obtain the benefits we anticipate from the Combination or our other recently completed or
9
future acquisitions or joint ventures and we may not create the appropriate infrastructure to support such additional growth from
organic or acquired businesses, which could also have a material adverse effect on our liquidity, financial position and results of
operations.
Gulf and its wholly-owned subsidiary, QH Hungary Holdings Limited, have a significant minority stake in the Company and the
contractual ability to nominate certain directors of the Company, which may enable them to influence the direction of our business
and significant corporate decisions.
As a result of the Combination, Gulf and its wholly -owned subsidiary, QH Hungary Holdings Limited (together, the “Gulf
Affiliates”), have become our largest shareholders. Subject to certain restrictions over timing and amount of sales in the shareholders
agreement they have entered into with the Company, if they were to make available for sale a portion of their shares, that portion
could represent a significant amount of common stock of the Company being sold which could have an adverse impact on the
Company’s stock price.
In addition, the Gulf Affiliates currently have the right to designate three individuals for election to our board of directors (the
“Board”) and this right, together with their share ownership, gives them substantial influence over our business, including over matters
submitted to a vote of our shareholders, including the election of directors, amendment of our organizational documents, acquisitions
or other business combinations involving the Company, and potentially the ability to prevent extraordinary transactions such as a
takeover attempt or business combination. The concentration of ownership of our shares held by the Gulf Affiliates may make some
future actions more difficult without their support. The Gulf Affiliates, however, among other provisions in the shareholders
agreement, have agreed that for so long as any of their designees are on the Board, and for six months thereafter, they will vote all
Quaker Houghton shares consistent with the recommendations of the Board for each director nominee as reflected in each proxy
statement of the Company, including in support of any Quaker Houghton directors nominated for election or re-election to the Board
(except as would conflict with their rights to designees on the Board). Nevertheless, the interests of Gulf may conflict with our
interests or the interests of our other shareholders, though we are not aware of any such existing conflicts of interest at this time.
Failure to comply with any material provision of our principal credit facility or other debt agreements could have a material
adverse effect on our liquidity, financial position and results of operations.
We significantly increased our level of indebtedness in connection with the closing of the Combination. Our principal credit
facility requires the Company to comply with certain provisions and covenants, and, while we do not currently consider these
provisions and covenants to be overly restrictive, they could become more difficult to comply with as business or financial conditions
change. We will also be subject to interest rate risk due to the variable interest rates within the credit facility and if interest rates rise
significantly, these interest costs would increase as well.
Our principal credit facility contains provisions that are customary for facilities of its type, including affirmative and negative
covenants, financial covenants and events of default, including restrictions on (a) the incurrence of additional indebtedness, (b)
investments in and acquisitions of other businesses, lines of business and divisions, (c) the making of dividends or capital stock
purchases and (d) dispositions of assets. We may declare dividends and make share repurchases in annual amounts not exceeding the
greater of $50 million annually and 20% of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) if
we are otherwise in compliance with the credit facility and we may also distribute certain other amounts to our shareholders if we
satisfy a consolidated net leverage ratio. Other financial covenants contained in our principal credit facility include a consolidated
interest coverage test and a consolidated net leverage test. Customary events of default in the credit facility include, among others,
defaults for non-payment, breach of representations and warranties, non-performance of covenants, cross-defaults, insolvency, and a
change of control of the Company in certain circumstances. If we are unable to comply with the financial and other provisions of our
principal facility, we could become in default. The occurrence of an event of default under the credit facility could result in all loans
and other obligations becoming immediately due and payable and the facility being terminated. In addition, deterioration in the
Company’s results of operations or financial position could significantly increase borrowing costs.
Changes to the LIBOR calculation method or the replacement of LIBOR may have adverse consequences for the Company that
cannot yet reasonably be predicted.
The Company’s principal credit facility permits interest on certain borrowings to be calculated based on LIBOR. The LIBOR
benchmark has been subject of national, international, and other regulatory guidance and proposals for reform and is currently
expected to be discontinued after 2021. The transition away from LIBOR presents various risks and challenges, including with
respect to our borrowings and hedging arrangements that rely on the LIBOR benchmark. Further, the overall financial market may be
disrupted as a result of the phase-out or replacement of LIBOR. Various parties are working on industry wide and company specific
transition plans related to derivatives and cash markets exposed to LIBOR. The U.S. Federal Reserve, in conjunction with the
Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing
LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated using short-term repurchase agreements,
backed by Treasury securities. At this time, the future of LIBOR remains uncertain. It is not possible to predict whether SOFR will
attain market traction as a LIBOR replacement or to predict any other reforms to LIBOR that may be enacted. The potential effect of
the phase-out or replacement of LIBOR on the Company’s financial position or results of operations cannot yet be predicted, but we
do not believe it would have a material adverse impact on the financial results of the Company.
10
Risks Related to our International Operations
Our global presence subjects us to political and economic risks that could adversely affect our business, liquidity, financial
position and results of operations.
A significant portion of our revenues and earnings are generated by non-U.S. operations. Our success as a global business will
depend, in part, upon our ability to succeed across different legal, regulatory, economic, social and political conditions by developing,
implementing and maintaining policies and strategies that are effective in all of the locations where we do business. Risks inherent in
our global operations include:
●
increased transportation and logistics costs, or transportation may be restricted;
●
increased cost or decreased availability of raw materials;
●
trade protection measures including import and export controls, trade embargoes, and trade sanctions between countries or
regions we serve that could result in our losing access to customers and suppliers in those countries or regions;
●
unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining export licenses;
●
termination or substantial modification of international trade agreements that may adversely affect our access to raw
materials and to markets for our products;
●
our agreements with counterparties in countries outside the U.S. may be difficult for us to enforce and related receivables
may take longer or be difficult for us to collect;
●
difficulties of staffing and managing dispersed international operations;
●
less protective foreign intellectual property laws, and more generally, legal systems that may be less developed and
predictable than those in the U.S.;
●
limitations on ownership or participation in local enterprises as well as the potential for expropriation or nationalization of
enterprises;
●
the impact of widespread public health crises, such as the COVID-19 pandemic;
●
instability in or adverse changes to the economic, political , social, legal or regulatory conditions in a country or region where
we do business, including hyperinflationary conditions or as a result of terrorist activities; and
●
complex and dynamic local tax regulations, including changes in foreign laws and tax rates or U.S. laws and tax rates with
respect to foreign income that may unexpectedly increase the rate at which our income is taxed, impose new and additional
taxes on remittances, repatriation or other payments by subsidiaries, or cause the loss of previously recorded tax benefits.
The current global geopolitical and trade environment creates the potential for increased escalation of domestic and international
tariffs and retaliatory trade policies. Further changes in U.S. trade policy and additional retaliatory actions by U.S. trade partners
could result in a worsening of economic conditions. If we are unable to successfully manage these and other risks associated with our
international businesses, the risks could have a material adverse effect on our business, results of operations or financial condition.
Additionally, on January 31, 2020, the United Kingdom’s (“U.K.”) ended its membership in the European Union (“EU”)
(commonly referred to as “Brexit”). The U.K. and the EU entered into a trade and cooperation agreement effective January 1, 2021,
but uncertainty remains regarding its implications and implementation, and whether any new trade agreements with other countries or
territories will be agreed upon and implemented and how any such agreements may impact our business. The long-term economic,
legal, political and social implications of Brexit, including regarding data protection in the U.K. and the free movement of goods,
services, and people between the U.K., the EU, and elsewhere, also remains unclear. Brexit has caused and could cause further
disruptions to, and create uncertainty surrounding, our business in the U.K. and EU, including affecting our relationships with our
existing and future customers, suppliers and employees. Brexit could lead to legal uncertainty and potentially divergent national laws
and regulations as the U.K. determines which EU laws to replace or replicate. Brexit could also lead to calls for similar referendums
in other European jurisdictions which could cause increased economic volatility in the European and global markets. Uncertainty
around these and related issues could lead to adverse effects on the economy of the U.K. or in the other economies in which we
operate. There can be no assurance that any or all of these events will not have a material adverse effect on our business operations,
results of operations and financial condition.
The scope of our international operations subjects us to risks from currency fluctuations that could adversely affect our liquidity,
financial position and results of operations.
Our non-U.S. operations generate significant revenues and earnings. Fluctuations in foreign currency exchange rates may affect
product demand and may adversely affect the profitability in U.S. dollars of the products and services we provide in international
markets where payment for our products and services is made in the local currency. Our financial results are affected by currency
fluctuations, particularly between the U.S. dollar and the euro, the Brazilian real, the Mexican peso, the Chinese renminbi, and the
Indian rupee, and the impact of those currency fluctuations on the underlying economies. During the past three years, sales by our
11
non-U.S. subsidiaries, which use their local currencies as their functional currency, accounted for approximately 60% to 70% of our
consolidated net sales. We generally do not use financial instruments that expose us to significant risk involving foreign currency
transaction; however, the relative size of our non-U.S. activities has a significant impact on reported operating results and our net
assets. Therefore, as exchange rates change, our results can be materially affected. Incorporated by reference is the foreign exchange
risk information contained in Item 7A of this Report and the geographic information in Note 4 of Notes to Consolidated Financial
Statements included in Item 8 of this Report.
Also, we occasionally source inventory in a different country than that of the intended sale. This practice can give rise to foreign
exchange risk. We seek to mitigate this risk through local sourcing of raw materials in the majority of our locations.
Risks Relating to Our Supply Chain
If we are unable to obtain price increases or contract concessions sufficient to offset increases in the costs of raw materials, this
could result in a loss of sales, gross profit, and/or market share and could have a material adverse effect on our liquidity, financial
position and results of operations. Conversely, if we fail to adjust prices in a declining raw material cost environment, we could
lose sales, gross profit, and/or market share which could have a material adverse effect on our liquidity, financial position and
results of operations.
Quaker Houghton uses approximately 3,000 different raw materials, including animal fats, vegetable oils, mineral oils,
oleochemicals, ethylene, solvents, surfactant agents, various chemical compounds that act as additives to our base formulations, and a
wide variety of other organic and inorganic compounds, and various derivatives of the foregoing. The price of mineral oils and their
derivatives can be affected by the price of crude oil and industry refining capacity. Animal fat and vegetable oil prices, as well as the
prices of other raw materials, are impacted by their own specific supply and demand factors, as well as by biodiesel consumption
which is also affected by the price of crude oil. Accordingly, significant fluctuations in the price of crude oil in the past have had and
are expected to continue to have a material impact on the cost of our raw materials. In addition, many of the raw materials we use are
commodity chemicals, which can experience significant price volatility.
We generally attempt to pass through changes in the prices of raw materials to our customers, but we may be unable to do so (or
may be delayed in doing so). In addition, raising prices we charge to our customers in order to offset increases in the prices we pay
for raw materials could cause us to suffer a loss of sales volumes. Although we have been successful in the past in recovering a
substantial amount of raw material cost increases while retaining our customers, there can be no assurance that we will be able to
continue to offset higher raw material costs or retain customers in the future. A significant change in margin or the loss of customers
due to pricing actions could result in a material adverse effect on our liquidity, financial position, and results of operations.
Lack of availability of raw materials and issues associated with sourcing from single suppliers and suppliers in volatile economic
environments could have a material adverse effect on our liquidity, financial position, and results of operations.
The specialty chemical industry periodically experiences supply shortages for certain raw materials. In addition, we source some
materials from a single supplier or from suppliers in jurisdictions that have experienced political or economic instability. Even if we
have multiple suppliers of a particular raw material, there are occasionally shortages. Any significant disruption in supply could affect
our ability to obtain raw materials or satisfactory substitutes or could increase the cost of such raw materials or substitutes, which
could have a material adverse effect on our liquidity, financial position and results of operations. In addition, certain raw materials
that we use are subject to various regulatory laws, and a change in our ability to legally use such raw materials may impact the
products or services we are able to offer which could negatively affect our ability to compete and could adversely affect our liquidity,
financial position and results of operations.
Loss of a significant manufacturing facility or disruptions within our supply chain or in transportation could have a material
adverse effect on our liquidity, financial position and results of operations.
Our manufacturing facilities are located throughout the world. While we have some redundant capabilities, if one of our facilities
is forced to shut down or curtail operations because of damage or other factors, including natural disasters, labor difficulties or
widespread public health crises, such as the ongoing COVID-19 pandemic, we may not be able to timely supply our customers. This
could result in a loss of sales over an extended period or permanently. While the Company seeks to mitigate this risk through business
continuity and contingency planning and other measures, the loss of production in any one region over an extended period of time
could have a material adverse effect on our liquidity, financial position and results of operations. In addition, the coronavirus
pandemic has caused and may in the future cause significant travel disruptions, quarantines and/or closures, which could result in
disruptions to our manufacturing and production operations at our facilities, as well as those of our suppliers and customers. Any
losses due to these events may not be covered by our existing insurance policies or may be subject to certain deductibles.
We could be similarly adversely affected by disruptions to our supply chain and transportation network. The Company relies
heavily on railroads, ships, and over-the-road shipping methods to transport raw materials to its manufacturing facilities and to
transport finished products to customers. The costs of transporting our products could be negatively affected by factors outside of our
control, including shipping container shortages or global imbalances in shipping capabilities, rail service interruptions or rate
increases, extreme weather events, tariffs, rising fuel costs and capacity constraints. Significant delays or increased costs affecting our
supply chain could materially affect our financial condition and results of operations. Disruptions at our suppliers could lead to short
12
term or longer term increases in raw material or energy costs and/or reduced availability of materials or energy, potentially affecting
our financial condition and results of operations.
Risks Relating to Domestic and Foreign Taxation and Government Regulation and Oversight
Changes in tax laws could result in fluctuations in our effective tax rate and have a material effect on our liquidity, financial
position and results of operation.
We pay income taxes in the U.S. and various foreign jurisdictions. Our effective tax rate is derived from a combination of local
tax rates and tax attributes applicable to our operations in the various countries, states and other jurisdictions in which we operate.
Our effective tax rate and respective tax liabilities could therefore be materially affected by changes in the mix of earnings in countries
with differing statutory tax rates, changes in tax rates, expiration or lapses of tax credits or incentives, changes in uncertain tax
positions, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or in how they are interpreted or
enforced, including matters such as transfer pricing. One example is the impact of the U.S. Tax Cuts and Jobs Act, enacted in the U.S.
in 2017 (“U.S. Tax Reform”). We have made various interpretations and assumptions with regard to uncertainties and ambiguities in
the application of certain provisions of U.S. Tax Reform which could turn out to be incorrect. In addition, we are regularly under
audit by tax authorities, and the final decisions of such audits could materially affect our current tax estimates and tax positions. See
Note 10 and Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report for a discussion of certain income and
non-income tax audits and inspections. Any of these factors or similar tax-related risks could cause our effective tax rate and tax-
related payments, including any such payments related to tax liabilities of businesses we have acquired, to significantly differ from
previous periods and current or future expectations which could have a material effect on our liquidity, financial position and results
of operations.
Pending and future legal proceedings including environmental matters could have a material adverse effect on our liquidity,
financial position, and results of operations, as well as our reputation in the markets it serves.
The Company and its subsidiaries are routinely party to proceedings, cases, and requests for information from, and negotiations
with, various claimants and federal and state agencies relating to various legal matters, including tax and environmental matters. See
Note 10 and Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report, which describes uncertain tax positions
and tax audits and inspections, as well as certain information concerning pending asbestos-related litigation against an inactive
subsidiary, amounts accrued associated with certain environmental, non-capital remediation costs and other potential commitments or
contingencies. An adverse result in one or more pending or ongoing matters or any potential future matter of a similar nature could
materially and adversely affect our liquidity, financial position, and results of operations, as well as our reputation in the markets we
serve.
Failure to comply with the complex global regulatory environment in which we operate could have an adverse impact on our
reputation and/or a material adverse effect on our liquidity, financial position and results of operations.
environments in which we operate, particularly, but not limited to, the U.S., Mexico, Brazil, China, India, Thailand, Australia, the
U.K. and the EU, could lead to heightened regulatory compliance costs and scrutiny, could adversely impact our ability to continue
selling certain products in the U.S. or foreign markets, and/or could otherwise increase the cost of doing business. While we seek to
mitigate these risks through a variety of actions, including receiving Responsible Care Certification, ongoing employee training, and
employing a comprehensive environmental, health and safety program, there is no guarantee these actions will prevent all potential
regulatory compliance issues. For instance, failure to comply with the EU’s Registration, Evaluation, Authorization and Restriction of
Chemicals (“REACH”) regulations or other similar laws and regulations could result in our inability to sell certain products or we
could incur fines, ongoing monitoring obligations or other future business consequences, which could have a material adverse effect
on our liquidity, financial position and results of operations. In addition, the U.S. Toxic Substances Control Act (“TSCA”) requires
chemicals to be assessed against a risk-based safety standard and that unreasonable risks identified during risk evaluation be
eliminated. This regulation and other pending initiatives at the U.S. state level, as well as initiatives in Canada, Asia and other
regions, could potentially require toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used
or produced by us. These assessments may result in heightened concerns about the chemicals involved and additional requirements
being placed on their production, handling, labeling or use. These concerns and additional requirements could also increase the cost
incurred by our customers to use our chemical products and otherwise limit their use which could lead to a decrease in demand for
these products. A decrease in demand due to these issues could have an adverse impact on our business and results of operation.
corruption and anti-money laundering laws in jurisdictions around the world. The FCPA, the U.K. Bribery Act and similar laws
generally prohibit companies and their officers, directors, employees and third-party intermediaries, business partners and agents,
from making improper payments or providing other improper items of value to government officials or other persons. While we have
policies and procedures and internal controls designed to address compliance with such laws, we cannot guarantee that our employees
and third-party intermediaries, business partners and agents will not take, or be alleged to have taken, actions in violation of such
policies and laws for which we may be ultimately held responsible. Detecting, investigating and resolving actual or alleged violations
can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the
FCPA, the U.K. Bribery Act or other applicable anti-bribery, anti-corruption and anti-money laundering laws could result in
13
whistleblower complaints, adverse media coverage, investigations, loss of export privileges, and criminal or civil sanctions, penalties
and fines, any of which could adversely affect our business and financial condition.
Our import activities are governed by the unique customs laws and regulations in each of the countries where we operate. Moreover,
many countries, including the U.S., control the export and re-export of certain goods, services and technology and impose related
export record-keeping and reporting obligations. Governments may also impose economic sanctions against certain countries, persons
and entities that may restrict or prohibit transactions involving such countries, persons and entities, which may limit or prevent our
conduct of business in certain jurisdictions.
are complex and constantly changing. These laws and regulations can cause delays in shipments and unscheduled operational
downtime. Moreover, any failure to comply with applicable legal and regulatory trading obligations could result in criminal and civil
penalties and sanctions such as fines, imprisonment, debarment from governmental contracts, seizure of shipments and loss of import
and export privileges. In addition, investigations by governmental authorities as well as legal, social, economic and political issues in
these countries could have a material adverse effect on our business, results of operations and financial condition. We are also subject
to the risks that our employees, joint venture partners and agents outside of the U.S. may fail to comply with other applicable laws.
Uncertainty related to environmental regulation and industry standards relating to, as well as physical risks of, climate change and
biodiversity loss, could impact our results of operations and financial position.
Increased public and stakeholder awareness and concern regarding global climate change, biodiversity loss, and other
environmental risks may result in more extensive international, regional and/or federal requirements or industry standards to reduce or
mitigate the effects of these changes. These regulations could mandate even more restrictive standards or industry standards than the
voluntary goals that we have established or require changes to be adopted on a more accelerated time frame. There continues to be a
lack of consistent climate legislation, which creates economic and regulatory uncertainty. For example, the new U.S. presidential
administration has issued Executive Orders seeking to adopt new regulations and policies to address climate change and to suspend,
revise, or rescind prior agency actions that are identified as conflicting with the administration’s climate policies. The new
presidential administration also announced that in February 2021, the U.S. will formally re-join the Paris Agreement. The Paris
Agreement requires countries to review and “represent a progression” in their intended nationally determined contributions which set
greenhouse gas emission reduction goals every five years. Though we are closely following developments in this area and changes in
the regulatory landscape in the U.S., we cannot predict how or when those challenges may ultimately impact our business. While
certain climate change initiatives may result in new business opportunities for us in the area of alternative fuel technologies and
emissions control, compliance with these initiatives may also result in additional costs to us including, among other things, increased
production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations.
In addition, the potential physical impacts of climate change and biodiversity loss are highly uncertain and will be particular to the
circumstances developing in various geographical regions. These may include extreme weather events and long-term changes in
temperature levels and water availability as well as damaged ecosystems. The physical risks of climate change and biodiversity loss
may impact our facilities, our customers and suppliers, and the availability and costs of materials and natural resources, sources and
supply of energy, product demand and manufacturing. In particular, climate change serves as a risk multiplier increasing both the
frequency and severity of natural disasters that may affect our business operations.
If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational
restrictions and compliance requirements upon us or our products, or our operations are disrupted due to physical impacts of climate
change or biodiversity loss, our business, capital expenditures, results of operations, financial condition and competitive position could
be negatively impacted.
We are subject to stringent labor and employment laws in many jurisdictions in which we operate, and our relationship with our
employees could deteriorate which could adversely impact our operations.
A majority of our full-time employees are employed outside the U.S. In many jurisdictions where we operate, labor and
employment laws grant significant job protection to certain employees including rights on termination of employment. In addition, in
certain countries our employees are represented by works councils or are governed by collective bargaining agreements. We are often
required to consult with and seek the consent or advice of works councils or labor unions. These regulations and laws, together with
our obligations to seek consent or consult with the relevant unions or works councils, could have a significant impact on our flexibility
in managing costs and responding to market changes. While the Company believes it has generally positive relations with its labor
unions and employees, there is no guarantee the Company will be able to successfully negotiate new or renew labor agreements
without work stoppages, labor difficulties or unfavorable terms. If we were to experience any extended interruption of operations at
any of our facilities because of strikes or other work stoppages, our results of operations and financial condition could be materially
and adversely affected.
14
We may be unable to adequately protect our proprietary rights and trade brands, which may limit our ability to compete in our
markets and could adversely affect our liquidity, financial position and results of operations.
various foreign countries, some of which are material to our business. However, we rely principally on our proprietary formulae and
the applications know-how and experience to meet customer needs. Also, our products are identified by trademarks that are registered
throughout our marketing area. Despite our efforts to protect our proprietary information through patent and trademark filings, and
the use of appropriate trade secret protections, it is possible that competitors or other unauthorized third parties may obtain, copy, use,
disclose or replicate our formulae, products, and proces ses. Similarly, third parties may assert claims against us and our customers
and distributors alleging our products infringe upon third-party intellectual property rights. In addition, the laws and/or judicial
systems of foreign countries in which we design, manufacture, market and sell our products may afford little or no effective protection
of our proprietary technology or trade brands. Also, security over our global information technology structure is subject to increasing
risks associated with cyber-crime and other related cyber-security threats. These potential risks to our proprietary information, trade
brands and other intellectual property could subject us to increased competition and a failure to protect, defend or enforce our
intellectual property rights could negatively impact our liquidity, financial position and results of operations.
General Risk Factors
Our business could be adversely affected by environmental, health and safety laws and regulations or by potential product, service
or other related liability claims.
The development, manufacture and sale of specialty chemical products and other related services involve inherent exposure to
potential product liability claims, service level claims, product recalls and related adverse publicity. Some customers have and may in
the future require us to represent that our products conform to certain product specifications provided by them. Any failure to comply
with such specifications could result in claims or legal action against us. Any of the foregoing potential product or service risks could
also result in substantial and unexpected expenditures and affect customer confidence in our products and services, which could have a
material adverse effect on our liquidity, financial position and results of operations.
In addition, our business is subject to hazards associated with the manufacturing, handling, use, storage, and transportation of
chemical materials and products, including historical operations at our current and former facilities. These potential hazards could
cause personal injury and loss of life, severe damage to, or destruction of, property or equipment and environmental contamination or
other environmental damage, which could have an adverse effect on our business, financial condition or results of operations. In the
jurisdictions in which we operate, we are subject to numerous U.S. and non-U.S. national, federal, state and local environmental,
health and safety laws and regulations, including those governing the discharge of pollutants into the air and water, the management
and disposal of hazardous substances and wastes and the cleanup of contaminated properties. We currently use, and in the past have
used, hazardous substances at many of our facilities, and we have in the past been, and may in the future be, subject to claims relating
to exposure to hazardous materials. We also have generated, and continue to generate, hazardous wastes at a number of our facilities.
Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or
natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations
without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible
party may be held liable for more than its share of the losses involved, or even the entire loss). These liabilities may also be imposed
on many different entities, including, for example, current and prior property owners or operators, as well as entities that arranged for
the disposal of the hazardous substances. The liabilities may be material and can be difficult to identify or quantify. In addition, the
occurrence of disruptions, shutdowns or other material operating problems at our facilities or those of our customers due to any of
these risks could adversely affect our reputation and have a material adverse effect on our operations as a whole, including our results
of operations and cash flows, both during and after the period of operational difficulties.
Further, some of the raw materials we handle are subject to government regulation. These regulations affect the manufacturing
processes, handling, uses and applications of our products. In addition, our production facilities and a number of our distribution
centers require numerous operating permits. Due to the nature of these requirements and changes in our operations, our operations
may exceed limits under permits or we may not have the proper permits to conduct our operations.
Ongoing compliance with environmental laws, regulations and permits that impact registration/approval requirements,
transportation and storage of raw materials and finished products, and storage and disposal of wastes could require us to make changes
in manufacturing processes or product formulations and could have a material adverse effect on our results of operations. We may
incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our
operations, including as a result of revocation, non-renewal or modification of the Company’s operating permits and revocation of the
Company’s product registrations, for violations arising under these laws or permit requirements. Any such revocation, modification or
non-renewal may require the Company to cease or limit the manufacture and sale of its products at one or more of its facilities, which
may limit or prevent the Company’s ability to meet product demand or build new facilities and may have a material adverse effect on
the Company’s business, financial position, results of operations and cash flows. Additional information may arise in the future
concerning the nature or extent of our liability with respect to identified sites, and additional sites may be identified for which we are
alleged to be liable, that could cause us to materially increase our environmental accrual or the upper range of the costs we believe we
could reasonably incur for such matters. Increased compliance costs may not affect competitors in the same way that they affect us
15
due to differences in product formulations, manufacturing locations or other factors, and we could be at a competitive disadvantage,
which might adversely affect our financial performance.
We could be subject to indemnity claims and liable for other payments relating to properties or businesses we have divested.
In connection with the sale of certain properties and businesses, we agreed to indemnify the purchasers of such properties for
certain types of matters, such as certain breaches of representations and warranties, taxes and certain environmental matters. With
respect to environmental matters, the discovery of contamination arising from properties that we have divested may expose us to
indemnity obligations under the sale agreements with the buyers of such properties or cleanup obligations and other damages under
applicable environmental laws, even if we were not aware of the contamination. We may not have insurance coverage for such
indemnity obligations. Further, we cannot predict the nature of and the amount of any indemnity or other obligations we may have to
the applicable purchaser. These payments may be costly and may adversely affect our financial condition and results of operations.
Our insurance may not fully cover all potential exposures.
We maintain product, property, business interruption, casualty, and other general liability insurance, but this may not cover all
risks associated with the hazards of our business and these coverages are subject to limitations, including deductibles and coverage
limits. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for
environmental remediation. In addition, from time to time, various types of insurance for companies in the specialty chemical
industry have not been available on commercially acceptable terms and, in some cases, have not been available at all. We are
potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global
financial markets could adversely impact the ratings and survival of some of our insurers. Future downgrades in the ratings of enough
insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able
to obtain coverage at current levels, if at all, and our premiums may increase significantly on coverage that we maintain.
Impairment evaluations of goodwill, intangible assets, investments or other long-lived assets could result in a reduction in our
recorded asset values which could have a material adverse effect on our financial position and results of operation.
We perform reviews of goodwill and indefinite-lived intangible assets on an annual basis, or more frequently if triggering events
indicate a possible impairment. We test goodwill at the reporting unit level by comparing the carrying value of the net assets of the
reporting unit, including goodwill, to the reporting unit's fair value. Similarly, we test indefinite -lived intangible assets by comparing
the fair value of the assets to their carrying values. If the carrying values of goodwill or indefinite-lived intangible assets exceed their
fair value, the goodwill or indefinite-lived intangible assets would be considered impaired. In addition, we perform a review of a
definite-lived intangible asset or other long-lived asset when changes in circumstances or events indicate a possible impairment. If
any impairment or related charge is warranted, then our financial position and results of operations could be materially affected. See
Note 16 of Notes to Consolidated Financial Statements included in Item 8 of this Report.
Disruption of critical information systems or material breaches in the security of our systems could adversely affect our business
and our customer relationships, and subject us to fines or other regulatory actions.
We rely on information technology systems to obtain, process, analyze, manage, transmit, and store electronic information in our
day-to-day operations. We also rely on our technology infrastructure in all aspects of our business, including to interact with
customers and suppliers, fulfill orders and bill, collect and make payments, ship products, provide support to customers, and fulfill
contractual obligations. Our information technology systems are subject to potential disruptions, including significant network or
power outages, cyberattacks, computer viruses, other malicious codes, and/or unauthorized access attempts, any of which, if
successful, could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations.
Security breaches could result in unauthorized disclosure of confidential information or personal data belonging to our employees,
partners, customers or suppliers for which we may incur liability. Cybersecurity incidents, such as these, are becoming more
sophisticated and frequent, and there can be no assurance that our protective measures will prevent security breaches that could have a
significant impact on our business, reputation and financial results.
We are subject to the data privacy and protection laws and regulations adopted by federal, state and foreign legislatures and
governmental agencies in various countries in which we operate, including the EU General Data Protection Regulation. Implementing
and complying with these laws and regulations may be more costly or take longer than we anticipate, or could otherwise affect our
business operations.
privacy could result in legal claims or proceedings against us by governmental entities or individuals, significant fines, penalties or
judgements, disruption of our operations, remediation requirements, changes to our business practices, and damage to our reputation.
Therefore, a failure to monitor, mainta in or protect our information technology systems and data integrity effectively or to anticipate,
plan for and recover from significant disruptions to these systems could have a material adverse effect on our business, results of
operations or financial condition.
16
Our business depends on attracting and retaining qualified management and other key personnel.
Due to the specialized and technical nature of our business, our future performance is dependent on our ability to attract, develop
and retain qualified management, commercial, technical, and other key personnel. Competition for such personnel is intense, and we
may be unable to continue to attract or retain such personnel. In an effort to mitigate such risks, the Company utilizes retention
bonuses, offers competitive pay and maintains continuous succession planning, including for our senior executive officers. However,
there can be no assurance that these mitigating factors will be adequate to attract or retain qualified management or other key
personnel. Failure to retain key employees could also adversely affect our ability to complete the integration of the Combination.
Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social and governance
(“ESG”) practices may impose additional costs on us or expose us to new or additional risks.
Companies across all industries are facing increasing scrutiny from stakeholders related to their ESG practices. Investor
advocacy groups, certain institutional investors, investment funds, and other influential investors are also increasingly focused on ESG
practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of
the industry, investors’ increased focus and activism related to ESG and similar matters may impact access to capital, as investors may
decide to reallocate capital or to not commit capital as a result of their assessment of a company’s ESG practices.
We face pressures from certain stakeholders to prioritize and promote sustainable practices and reduce our carbon footprint. Our
stakeholders may pressure us to implement ESG procedures or standards beyond those we have in place in order to continue engaging
with us, to remain invested in us, or before they will make further investments in us. Additionally, we may face reputational
challenges in the event our ESG procedures or standards do not meet the standards set by certain constituencies. We have adopted
certain practices as highlighted in the Company’s Sustainability Report, including with respect to environmental stewardship.
Further, as we work to align with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial
Disclosures and the Sustainability Accounting Standards Board, we continue to expand our disclosures in these areas. This is
consistent with our commitment to executing on a strategy that reflects the economic, social, and environmental impact we have on
the world while advancing and complementing our business strategy. Our disclosures on these matters and standards we set for
ourselves or a failure to meet these standards, may influence our reputation and the value of our brand. It is possible that our
stakeholders might not be satisfied with our ESG efforts or the speed of their adoption. If we do not meet our stakeholders’
expectations, our business and/or our ability to access capital could be harmed. Any harm to our reputation resulting from setting
these standards or our failure or perceived failure to meet such standards could adversely affect our business, financial performance,
and growth.
Additionally, adverse effects upon our customers’ industries related to the worldwide social and political environment, including
uncertainty or instability resulting from climate change or biodiversity loss, changes in political leadership and environmental policies,
changes in geopolitical-social views toward fossil fuels and renewable energy, concern about the environmental impact of climate
change or biodiversity loss, and investors’ expectation s regarding ESG matters, may also adversely affect demand for our services.
Any long-term material adverse effect on our customers or their industries could have a significant financial and operational adverse
impact on our business.
Terrorist attacks, other acts of violence or war, natural disasters, widespread public health crises or other uncommon global events
may affect the markets in which we operate and our profitability which could adversely affect our liquidity, financial position and
results of operations.
Terrorist attacks, other acts of violence or war, natural disasters, widespread public health crises, including the ongoing COVID-
19 pandemic, or other uncommon global events may negatively affect our operations. There can be no assurance that there will not be
terrorist attacks against the U.S. or other locations where we do business. Also, other uncommon global events such as earthquakes,
hurricanes, fires and tsunamis cannot be predicted.
Terrorist attacks, other acts of violence or armed conflicts, and natural disasters, which may be amplified by ongoing global
climate change and biodiversity loss, may directly impact our physical facilities and/or those of our suppliers or customers. In
addition, terrorist attacks or natural disasters may disrupt the global insurance and reinsurance industries with the result that we may
not be able to obtain insurance at historical terms and levels, if at all, for all of our facilities. In addition, available insurance coverage
may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive. Widespread public health
crises could also disrupt operations of the Company, its suppliers and customers which could have a material adverse impact on our
results of operations.
For example, refer to “The COVID-19 pandemic and its impact on business and economic conditions have negatively affected our
business, results of operations and financial condi tion and the extent and duration of those effects is uncertain,” included in this “Risk
Factors” section. The consequences of terrorist attacks, other acts of violence or armed conflicts, natural disasters, widespread public
health crises or other uncommon global events can be unpredictable, and we may not be able to foresee or effectively plan for these
events, resulting in a material adverse effect on our business, results of operations or financial condition.
17
The COVID-19 pandemic 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.
The COVID-19 pandemic that began in the first quarter of 2020 and the resulting impacts significantly disrupted the global
economy and financial markets and adversely affected the Company’s operations as well as those of its suppliers and customers. The
pandemic and its impacts adversely affected the Company’s results of operations and financial condition in 2020 and the adverse
effects have continued into 2021. The Company initially experienced disruptions as a result of COVID-19 at its China subsidiaries
and subsequently throughout the rest of the business due to the global economic slowdown that ensued and continues. We have
experienced, and may experience in the future, temporary site or facility closures at our own facilities or those of our customers in
response to illness or government mandates in some of the jurisdictions in which we operate. Even in facilities that are not closed, we
could be affected by reductions in employee availability and productivity, changes in operating procedures, and increased costs. The
Company anticipates that its future results of operations may continue to be adversely impacted by COVID-19 until effective vaccines
have been widely administered. In particular, the spread of COVID-19 and efforts to contain the virus have:
●
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 estimated fair value of certain of the Company’s reporting units or other indefinite-lived or long-lived
assets, namely the Company’s Houghton and Fluidcare trademarks and tradename indefinite-lived intangible assets, such that
their estimated fair values were less than their carrying values and required adjustments.
These effects are likely to increase or become exacerbated the longer the crisis continues, and the pandemic in the future could
(or, in some instances, could further):
●
limit the availability and reduce the productivity of our employees;
●
challenge our financial reporting systems and processes, internal control over financial reporting, and disclosure controls and
procedures, including our ability to ensure that 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, to allow for timely decisions regarding required disclosure;
●
present challenges as a result of travel restrictions and remote work arrangements, including, as further described in Item 9A
of this Report, impacting the planning, execution and timing of the Company’s remediation and integration plan activities,
including the implementation of new or enhanced business process and information technology general controls, as
necessary, as well as impacting the timing of the Company’s on-going enterprise resource planning system implementations ;
●
increase our costs as a result of emergency measures that we may take or that may be imposed on us by regulatory
authorities;
●
cause a delay in customer payments or cause a deterioration of the credit quality of other counterparties that could result in
credit losses or force both customer and supplier bankruptcies;
●
cause delays and disruptions in the availability of and timely delivery of materials and components used in our operations;
●
cause us to breach 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 existing 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 estimated fair values of the Company’s reporting units or other indefinite-lived or long-lived assets; and
●
cause other risks to impact us, including the other risks described in this “Risk Factors” section.
Although we have implemented business continuity and emergency response plans as well as health and safety measures to
permit us to continue to provide services and products to customers and support our operations, 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, 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 continually
evolving developments with respect to this pandemic, the Company cannot, as of the date of this Report, reasonably estimate 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. A
further prolonged outbreak or resurgence and period of continued restrictions on day-to-day life and business operations would likely
result in volume declines and lower net sales into 2021 periods as well.
18
The ultimate significance of COVID-19 impacts 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 development and continued uncertainty
regarding availability, administration and long-term efficacy of a vaccine or other treatments, including on new strains or mutations of
the virus, the longer-term effects on the economy, including market volatility, and 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, as well as laws and other
governmental programs implemented to address the pandemic or assist impacted businesses, such as fiscal stimulus and other
legislation designed to deliver monetary aid and other relief.
Epidemic diseases could negatively affect various aspects of our business, make it more difficult to meet our obligations to our
customers, and could result in reduced demand from our customers. These could have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, similar to the COVID-19
impacts described above. A significant outbreak of contagious diseases in the human population could result in a widespread health
crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could
affect demand for our products and likely impact our operating results. To the extent that the Company’s customers and suppliers are
materially and adversely impacted by a widespread outbreak of contagious disease, this could reduce the availability, or result in
delays, of materials or supplies to or from the Company, which in turn could materially interrupt the Company’s business operations.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in
material misstatements in our financial statements and in the inability of our independent registered public accounting firm to
provide an unqualified audit opinion which could have a material adverse effect on us.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and
annual reports and provide an annual management report on the effectiveness of controls over financial reporting.
As disclosed under “Item 9A. Controls and Procedures” of this Report, during the course of preparing our audited financial
statements for the Company’s annual report on Form 10-K (the “2019 Form 10-K”), we, in conjunction with our independent
registered public accounting firm, identified certain material weaknesses as of December 31, 2019. 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 identified certain deficiencies in our application of the principles associated with the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013) that management
concluded constituted a material weakness. We did not design and maintain effective controls in response to the risks of material
misstatement. Specifically, changes to existing controls or the implementation of new controls were not sufficient to respond to
changes to the risks of material misstatement in financial reporting as a result of becoming a larger, more complex global organization
due to the Combination. This material weakness also contributed to an additional material weakness as we did not design and
maintain effective controls over the review of pricing, quantity and customer data to verify that revenue recognized was complete and
accurate.
During 2020, management began developing its full remediation plan and executing what will be a multi-step remediation process
to completely and fully remediate its identified material weaknesses as further described in Item 9A of this Report. However, the
Company has not yet remediated the previously identified material weakness over the review of pricing, quantity and customer data to
verify that revenue recognized was complete and accurate as of December 31, 2020, and as a result, the Company also did not
remediate the previously identified material weakness related to risk assessment. Until the remediation plans are deemed effective, we
cannot assure you that our actions will adequately remediate these material weaknesses or that additional material weaknesses in our
internal controls will not be identified in the future. Although the Company expects to be able to remedy these material weaknesses
during 2021, it may be unable to do so due to the impact of the COVID-19 pandemic or for other reasons, in which case we would
continue to be subject to the risk that a material misstatement of annual or interim financial statements will not be prevented or
detected on a timely basis. Any failure to identify and correct material weaknesses in a timely manner could have a material adverse
effect on the financial condition of the Company.
As a result of these material weaknesses, management determined that both our disclosure controls and procedures and internal
control over financial reporting were not effective as of December 31, 2020 and our independent registered public accounting firm
likewise issued an opinion indicating that we had not maintained effective internal control over financial reporting as of December 31,
2020.
19
Because these control deficiencies could have resulted in misstatements of interim or annual consolidated financial statements and
disclosures that could have resulted in a material misstatement that would not be prevented or detected, we performed additional
analysis and procedures to ensure that our consolidated financial statements presented in this Annual Report on Form 10-K were
prepared in accordance with GAAP and fairly reflected our financial position and results of operations as of and for the year ended
December 31, 2020. Subsequently, notwithstanding these material weaknesses, the Company has concluded that these control
deficiencies did not result in a misstatement to the related balances and disclosures for the year ended December 31, 2020.
Our management, including our chief executive officer and chief financial officer, does not expect that our internal control over
financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can
be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
controls. Over time, controls may become inadequate because of changes in circumstances or deterioration in the degree of
compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Quaker Houghton’s corporate headquarters and a laboratory facility are located in its Americas segment’s Conshohocken,
Pennsylvania location. The Company’s other principal facilities in its America’s segment are located in Detroit, Michigan;
Middletown, Ohio; Dayton, Ohio; Strongsville, Ohio; Carrollton, Georgia; Zion, Illinois; Waterloo, Ontario; Monterrey, N.L.,
Mexico; Rio de Janeiro, Brazil and Sao Paulo, Brazil. The Company’s EMEA segment has principal facilities in Uithoorn, The
Netherlands; Manchester, U.K.; Dortmund, Germany; Barcelona, Spain; Navarra, Spain; Karlshamn, Sweden; Tradate, Italy; and
Turin, Italy. The Company’s Asia/Pacific segment operates out of its principal facilities located in Qingpu, China; Songjiang, China;
Kolkata, India; Rayong, Thailand; Sydney, Australia; and Moorabbin, Australia. The Company’s Global Specialty Businesses
segment operates out of its principal facilities in Aurora, Illinois; Santa Fe Springs, California; Batavia, New York; Zion, Illinois; and
Coventry, U.K.. With the exception of the Conshohocken, Santa Fe Springs, Aurora, Karlshamn, Rayong, Coventry, and Sydney
sites, which are leased, the remaining principal facilities are owned by the Company and, as of December 31, 2020, were mortgage
free. Quaker Houghton also leases sales, laboratory, manufacturing, and warehouse facilities in other locations.
Quaker Houghton’s principal facilities consist of various manufacturing, administrative, warehouse, and laboratory buildings.
Substantially all of the buildings are of fire-resistant construction and are equipped with sprinkler systems. The Company has a
program to identify needed capital improvements that are implemented as management considers necessary or desirable. Most
locations have raw material storage tanks, ranging from 1 to 200 at each location with capacities ranging from 1,000 to 82,000 gallons,
and processing or manufacturing vessels ranging in capacity from 8 to 29,000 gallons.
Each of Quaker’s non-U.S. associated companies (in which it owns a 50% or less interest and has significant influence) owns or
leases a plant and/or sales facilities in various locations , with the exception of Primex, Ltd.
Item 3.
Legal Proceedings.
The Company is a party to proceedings, cases, and requests for information from, and negotiations with, various claimants and
Federal and state agencies relating to various matters, including environmental matters. For information concerning pending asbestos-
related litigation against an inactive subsidiary, certain environmental non-capital remediation costs and other legal-related matters,
reference is made to Note 26 of Notes to Consolidated Financial Statements, included in Item 8 of this Report, which is incorporated
herein by this reference. The Company is a party to other litigation which management currently believes will not have a material
adverse effect on the Company’s results of operations, cash flow or financial condition.
Item 4.
Mine Safety Disclosures.
Not Applicable.
20
Item 4(a).
Information about our
Executive Officers.
Set forth below is information regarding the executive officers of the Company, each of whom have been employed by the
Company or by Houghton for at least five years, including the respective positions and offices with the Company (or Houghton) held
by each over the respective periods indicated. Each of the executive officers, with the exception of Mr. Hostetter, is appointed
annually to a one-year term. Mr. Hostetter is considered an executive officer in his capacity as principal accounting officer for
purposes of this Item.
Name, Age, and Present
Position with the Company
Business Experience During the Past Five
Years and Period Served as an Officer
Michael F. Barry, 62
Chairman of the Board, Chief Executive
Officer, President and Director
Mr. Barry, who has been employed by the Company since 1998, has served as
Chairman of the Board since May 2009, in addition to his position as Chief
Executive Officer and President held since October 2008. He served as interim
Chief Financial Officer from October through November 2015. He served as Senior
Vice President and Managing Director – North America from January 2006 to
October 2008. He served as Senior Vice President and Global Industry Leader –
Metalworking and Coatings from July through December 2005. He served as Vice
President and Global Industry Leader – Industrial Metalworking and Coatings from
January 2004 through June 2005 and Vice President and Chief Financial Officer
from 1998 to August 2004.
Joseph A. Berquist, 49
Senior Vice President, Global Specialty
Businesses and Chief Strategy Officer
Mr. Berquist, who has been employed by the Company since 1997, has served as
Senior Vice President, Global Specialty Businesses and Chief Strategy Officer since
August 2019. He served as Vice President and Managing Director – North America
from April 2010 until July 2019.
Jeewat Bijlani, 44
Senior Vice President,
Managing Director - Americas
Mr. Bijlani has served as Senior Vice President, Managing Director - Americas
since he joined the Company in August 2019. Prior to joining the Company, Mr.
Bijlani served as President, Americas and Global Strategic Businesses of Houghton
from March 2015 until July 2019. Prior to that role, he served as Senior Vice
President M&A, Business Development and Strategic Planning to execute
Houghton’s growth initiatives with key customers and in business segments from
December 2011 to March 2015. Prior to joining Houghton, Mr. Bijlani served as a
Director in the Private Equity Group at Celerant Consulting from March 2006 to
November 2011 where he led strategic and business transformation engagements in
the Chemicals and Manufacturing sector.
Mary Dean Hall, 63
Senior Vice President, Chief Financial Officer
and Treasurer
Ms. Hall, who has been employed by the Company since November 2015, has
served as Senior Vice President, Chief Financial Officer and Treasurer since August
2019. She served as Vice President, Chief Financial Officer and Treasurer from
November 2015 until July 2019. Prior to joining the Company, Ms. Hall served as
the Vice President and Treasurer of Eastman Chemical Company from April 2009
until October 2015. Prior to that role, she held various senior-level financial
positions of increasing responsibility with Eastman from 1995 through 2009,
including Treasurer, Vice President and Controller, and Vice President, Finance.
Shane W. Hostetter, 39
Vice President, Finance and Chief
Accounting Officer
Mr. Hostetter, who has been employed by the Company since July 2011, has served
as Vice President, Finance and Chief Accounting Officer since August 2019. He
served as Global Controller and Principal Accounting Officer from September 2014
until July 2019.
Kym Johnson, 50
Senior Vice President, Chief Human
Resources Officer
Ms. Johnson has served as Senior Vice President, Chief Human Resources Officer
since she joined the Company in August 2019. Prior to joining the Company,
Ms. Johnson served as Senior Vice President Global Human Resources of Houghton
from June 2015 until July 2019. Prior to joining Houghton, she served as Vice
President, Human Resources and Chief Human Resources Officer of FMC
Corporation from July 2013 to October 2014. Prior to that role, she held various
senior-level human resources roles with FMC from July 1992 to October 2014,
including Director, Global Talent Management and HR Director, Asia Pacific.
21
Name, Age, and Present
Position with the Company
Business Experience During the Past Five
Years and Period Served as an Officer
Dieter Laininger, 57
Senior Vice President, Managing
Director - Asia / Pacific
Mr. Laininger, who has been employed by the Company since 1991, has served as
Senior Vice Present, Managing Director – Asia / Pacific since August 2019. He
served as Vice President and Managing Director – Asia / Pacific from April 2018
until July 2019, in addition to his role as Vice President and Managing Director -
South America, a position he assumed in January 2013 and held until July 2019.
Mr. Laininger also served as Vice President and Global Leader – Primary Metals, a
position which he assumed in June 2011 and held until July 2019.
Wilbert Platzer, 59
Senior Vice President, Global Operations,
Environmental Health & Safety (“EHS”) and
Procurement
Mr. Platzer, who has been employed by the Company since 1995, has served as
Senior Vice President, Global Operations, EHS and Procurement since August
2019. He served as Vice President, Global Operations, EHS and Procurement from
April 2018 until July 2019. He served as Vice President and Managing Director –
EMEA from January 2006 through March 2018.
Dr. David Slinkman, 56
Senior Vice President, Chief Technology
Officer
Dr. Slinkman has served as Senior Vice President, Chief Technology Officer since
he joined the Company in August 2019. Prior to joining the Company,
Dr. Slinkman served as Vice President of Technology of Houghton from March
2012 until July 2019. Prior to joining Houghton, Dr. Slinkman served as Global
Technology Leader of Nalco Chemical Company from 2008 until 2012. Prior to
that role, he held various positions with Nalco from December 1990 until 2008
including Manager, Research and Development for the finishing technologies
group, which encompassed both metal working fluids and surface treatment
products, and Technical Director for the paper chemicals group.
Adrian Steeples, 60
Senior Vice President, Managing
Director – EMEA
Mr. Steeples, who has been employed by the Company since 2010, has served as
Senior Vice President, Managing Director – EMEA since August 2019. He served
as Vice President and Managing Director – EMEA from April 2018 until July 2019.
He served as Vice President and Managing Director - Asia/Pacific from July 2013
through March 2018.
Robert T. Traub, 56
Senior Vice President, General Counsel and
Corporate Secretary
Mr. Traub, who has been employed by the Company since 2000, has served as
Senior Vice President, General Counsel and Corporate Secretary since August 2019.
He served as Vice President, General Counsel and Corporate Secretary from April
2015 until July 2019. He served as the Corporation’s General Counsel from March
2012 through March 2015. He has also served as Director of Global Corporate
Compliance since January 2009.
22
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol KWR. Our Board
declared cash dividends that totaled $1.56 per share of outstanding common stock or $27.8 million during the year ended December
31, 2020 and $1.525 per share of outstanding common stock or $23.7 million during the year ended December 31, 2019. In February
and May 2020, our Board declared quarterly cash dividends of $0.385 per share of outstanding common stock, payable to shareholders
of record in April 2020 and July 2020, respectively. Subsequently, our Board declared quarterly dividends of $0.395 per share of
outstanding common stock in September and November 2020, respectively, payable to shareholders of record in October 2020 and
January 2021, respectively. We currently expect to continue to pay comparable cash dividends on a quarterly basis in the future.
Future declaration of dividends and the establishment of future record dates and payment dates are subject to the final determination of
our Board, and will be based on our future financial condition, results of operations, capital requirements, capital expenditure
requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors our
Board may deem relevant.
There are no restrictions that the Company believes are likely to materially limit the payment of future dividends. However,
under the Credit Facility there are certain restrictions, including a limit on dividends paid not to exceed the greater of $50.0 million
annually and 20% of consolidated EBITDA so long as there is no default under the Credit Facility. Reference is made to the
“Liquidity and Capital Resources” disclosure contained in Item 7 of this Report.
As of January 15, 2021, 17,853,463 shares of Quaker common stock were issued and outstanding and were held by 712
shareholders of record. Each share of common stock is entitled to one vote per share.
Reference is made to the information in Item 12 of this Report under the caption “Equity Compensation Plans,” which is
incorporated herein by this reference.
The following table sets forth information concerning shares of the Company’s common stock acquired by the Company during
the fourth quarter of 2020 for the period covered by this report:
Issuer Purchases of Equity Securities
(c)
(d)
Total Number of
Approximate Dollar
(a)
(b)
Shares Purchased
Value of Shares that
Total Number
Average
as part of Publicly
May Yet be
of Shares
Price Paid
Announced Plans
Purchased Under the
Period
Purchased (1)
Per Share (2)
or Programs
Plans or Programs (3)
October 1 - October 31, 2020
—
$
—
—
$
86,865,026
November 1 - November 30, 2020
—
$
—
—
$
86,865,026
December 1 - December 31, 2020
—
$
—
—
$
86,865,026
Total
—
$
—
—
$
86,865,026
(1)
The Company did not acquire any shares of the Company’s common stock from employees during the fourth quarter of 2020.
All shares that would be acquired from employees are related to the surrender of Quaker Chemical Corporation shares in
payment of the exercise price of employee stock options exercised or for the payment of taxes upon exercise of employee
stock options or the vesting of restricted stock.
(2)
The Company did not acquire any shares of the Company’s common stock from employees during the fourth quarter of 2020.
The price that would be paid for shares acquired from employees pursuant to employee benefit and share-based compensation
plans is based on the closing price of the Company’s common stock on the date of exercise or vesting as specified by the plan
pursuant to which the applicable option 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”). The 2015 Share Repurchase Program has no expiration date. There
were no shares acquired by the Company pursuant to the 2015 Share Repurchase Program during the quarter ended
December 31, 2020.
23
Stock Performance Graph: The following graph compares the cumulative total return (assuming reinvestment of dividends) from
December 31, 2015 to December 31, 2020 for (i) Quaker’s common stock, (ii) the S&P MidCap 400 Index (the “MidCap Index”), (iii)
the S&P 400 Materials Group Index (the “Materials 400 Group Index”) and (iv) the S&P 600 Materials Group Index (the “Materials
600 Group Index”). The graph assumes the investment of $100 on December 31, 2015 in each of Quaker’s common stock, the stocks
comprising the MidCap Index and the Materials Group Index, respectively. The comparison of the Materials 400 Group Index was
added in 2020 to provide a closer comparison to the MidCap Index comparison.
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Quaker
$
100.00
$
168.15
$
200.14
$
237.98
$
222.13
$
345.21
MidCap Index
100.00
120.74
140.35
124.80
157.49
179.00
Materials 400 Group Index
100.00
137.25
166.82
132.84
160.57
177.66
Materials 600 Group Index
100.00
154.70
170.04
132.20
159.40
195.55
Item 6.
Selected Financial Data.
The Company has omitted the table for selected financial data pursuant to the SEC Final Rule Release Nos. 33 -10890, which
among other revisions, amends certain disclosure requirements required by Regulation S-K relating to selected financial data (Item
301) and supplementary financial information (Item 302). The Company has early adopted the guidance on an Item-by-Item basis and
eliminated Items 301 and 302 in its consolidated financial statements.
24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this Annual Report on Form 10-K (the “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. 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 year ended December 31, 2020,
for the year ended December 31, 2019 includes the result of Legacy Quaker plus five months of Houghton’s operations post-closing of
the Combination on August 1, 2019, and for the year ended December 31, 2018, the results only of Legacy Quaker.
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 U.S.
Overall, the Company’s 2020 performance, like most other companies in the world, was negatively impacted by the COVID-19
pandemic and its impact on the global economy, including most of the Company’s customers. However, the Company’s acquisition
activity in late 2019, including the Houghton Combination and the Norman Hay acquisition, drove a 25% increase in 2020 net sales to
$1,417.7 million compared to $1,133.5 million in 2019. Excluding net sales from acquisitions, current year net sales would have
declined approximately 11% primarily due to a 9% decrease in sales volumes associated with the negative impacts of COVID-19 on
global production levels throughout each of the Company’s segments. Similar to net sales, the Company’s gross profit and selling,
general and administrative expenses (“SG&A”) also increased due to the full year inclusion of Houghton and Norman Hay, but both
also benefited from the realization of cost savings associated with synergies achieved with the Combination as well as the impact of
cost saving measures put in place to help offset the impacts of COVID-19. The Company’s 2020 reported operating income of $59.4
million increased compared to $46.1 million in 2019. Excluding all one-time costs and other non-core items that largely related to the
Combination and Norman Hay in each period, the Company’s non-GAAP operating income of $134.0 million increased 10%
compared to $122.0 million in 2019, primarily due to the net sales increases and cost synergies and savings mentioned above. Further
details of the Company’s consolidated operating performance are discussed in the Company’s Consolidated Operations Review, in the
Operations section of this Item, below.
The Company’s net income and earnings per diluted share of $39.7 million and $2.22 in 2020, respectively, increased compared
to $31.6 million and $2.08 per diluted share, respectively, in 2019. Excluding all one-time costs and other non-core items that largely
related to the Combination and Norman Hay in each period, the Company’s current year non-GAAP net income and non-GAAP
earnings per diluted share were $85.2 million and $4.78, respectively, compared to $88.7 million and $5.83, respectively, in 2019.
The increase in the Company’s current year reported earnings drove a 28% higher adjusted EBITDA of $222.0 million compared to
$173.1 million in 2019, primarily due to the Houghton and Norman Hay acquisitions as well as the benefit of costs savings associated
with the Combination, partially offset by the negative impacts of COVID-19. See the Non-GAAP Measures section of this Item,
below.
The Company’s 2020 operating performance in each of its four reportable segments: (i) Americas; (ii) Europe, Middle East and
Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty Businesses, reflect similar drivers to that of its consolidated
performance. Each segment’s net sales benefited from a full year of Houghton and the Company’s Global Specialty Businesses
segment also benefited from a full year of Norman Hay. 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 primarily due to the negative impacts of
COVID-19 on the Company’s end markets. As reported, all of the Company’s segment operating earnings were higher compared to
2019 because of the inclusion of a full year of Houghton and Norman Hay as well as cost synergies achieved with the Combination
and other cost savings actions taken due to COVID-19, partially offset by the negative impacts of COVID-19 on global sales volumes.
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 generated net operating cash flow of $178.4 million in 2020 compared to $82.4 million in 2019. The 117%
increase in net operating cash flow year-over -year was primarily driven by the inclusion of a full year of earnings from Houghton and
Norman Hay, as well as higher operating cash flow due to changes in working capital. The key drivers of the Company’s operating
cash flow and overall liquidity are further discussed in the Company’s Liquidity and Capital Resources section of this Item, below .
Overall, the Company’s 2020 results reflect the fact that the negative impacts of COVID-19 were partially offset by the positive
impacts of a full year of Houghton and Norman Hay performance , Combination synergies and cost savings actions . The Company’s
performance showed a good quarterly growth trend across the globe beginning after the second quarter of 2020, during which the
impacts of COVID-19 were most severe, indicating a gradual improvement in the Company’s end markets and continued market share
gains. Despite these challenges, the Company was able to generate significant net operating cash flow in 2020, continue to pay its
regular dividends, pay down its debt above its required commitments , and continue to execute its integration plans for the
Combination.
25
The global economic slowdown and other impacts due to COVID-19 posed an unprecedented challenge in 2020, but the
Company successfully navigated this downturn, demonstrating its ability to respond quickly to changing market conditions and deliver
on the benefits it anticipated from the Combination with Houghton. In 2020, the Company continued to service and supply its
customers despite very difficult economic conditions, it continued to gain share in the market, it completed a significant part of the
integration activities, and realized $58 million of cost synergies which exceeded the original estimate of $35 million. The Company
also made recent bolt-on acquisitions which are expected to contribute towards earnings growth in 2021 and, even with those
acquisitions, the Company reduced its net debt by 12% or $94 million during 2020. As the Company looks forward, it expects some
short-term headwinds from higher raw material costs and lower than expected volumes in the automotive market due to the
semiconductor shortage. However, the Company expects 2021 to result in a step change in its profitability from 2020 as the Company
completes its integration cost synergies, continues to take further share in the marketplace, benefits from a projected gradual rebound
in demand, and sees the positive impact of its recent acquisit ions.
Impact of COVID-19
In early 2020, the global outbreak of COVID-19 negatively impacted all locations where the Company does business. Although
the Company has now operated during several quarters in this COVID-19 environment, the full extent of the outbreak and related
business impacts remains uncertain and volatile, and therefore the full extent to which COVID-19 may impact the Company’s future
results of operations or financial condition is uncertain. This outbreak has significantly disrupted the operations of the Company and
those of its suppliers and customers. The Company has experienced significant volume declines and lower net sales as further
described in this section, initially at its China subsidiaries in the first quarter of 2020 and, beginning in late March continued
throughout the rest of its 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 and markets in which the Company operates.
Given the speed and frequency of the continuously evolving developments with respect to this pandemic, the Company cannot, as
of the date of this Report, reasonably estimate the magnitude or the full extent of the impact to its future results of operations or to the
ability of it or its customers to resume more normal operations, even as certain restrictions are lifted. The prolonged pandemic and a
resurgence of the outbreak, and continued restrictions on day-to-day life and business operations may result in volume declines and
lower net sales in future periods as compared to pre-COVID-19 levels. To the extent that the Company’s customers and suppliers
continue to be significantly and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials
or supplies to or from the Company, which in turn could significantly interrupt the Company’s business operations. Given this
ongoing uncertainty, the Company cautions that its future results of operations could be significantly adversely impacted by COVID-
19.
Further, management continues to evaluate how COVID-19-related circumstances, such as remote work arrangements, illness or
staffing shortages and travel restrictions have affected financial reporting processes and systems, internal control over financial
reporting, and disclosure controls and procedures. While the circumstances have presented and are expected to continue to present
challenges, and have necessitated additional time and resources to be deployed to sufficiently address the challenges brought on by the
pandemic, at this time, except as otherwise noted in Item 9A of this Report, management does not believe that COVID-19 has had a
material impact on financial reporting processes, internal controls over financial reporting, or disclosure controls and procedures. For
additional information regarding the potential impact of COVID-19, see Item 1A of Part I 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
actions, including enabling work at home where needed and possible, and employing social distancing standards,
implementing travel restrictions where applicable, enhancing onsite hygiene practices, and instituting visitation restrictions at
the Company’s facilities. The Company does not expect that it will incur material expenses implementing health and safety
policies for employees, contractors, and customers.
●
Our Operations
as essential businesses in the jurisdictions where they are operating. The Company believes that to date it has been able to
meet the needs of all its customers across the globe despite the current economic challenges.
●
Our Business Conditions
consistent with expectations that April and May would be the worst months of the year and that the Company would show
gradual quarterly improvement sequentially throughout the remainder of the year. However, demand still remained lower
than pre-COVID-19 levels as many customers maintained reduced production levels through the end of 2020. Excluding
Houghton and Norman Hay net sales, all four of the Company’s reportable segments showed declines in net sales due to
COVID-19 during 2020 compared to the prior year, with the Americas and EMEA being the most impacted and Asia/Pacific
being the least impacted. The Company currently expects that the impact from COVID-19 will gradually improve each
quarter in 2021 subject to the effective containment of the virus and successful distribution of a vaccine. However, the
incidence of reported cases of COVID-19 appears to be again increasing in several geographies where we have significant
26
operations and it remains highly uncertain as to how long the global pandemic and related economic challenges will last and
when our customers’ businesses will recover.
●
Our Actions
actions during 2020 included eliminating all discretionary expenditures, delaying or freezing salary increases where legally
permitted, reducing executives’ salaries for a period of time, lowering 2020 planned capital expenditures by approximately
30%, and accelerating and fine-tuning the Company’s integration plans. These temporary initiatives were designed and
implemented so that the Company could successfully manage through the challenging COVID-19 situation while continuing
to protect the health of its employees, meet customers’ needs, maintain the Company’s long-term competitive advantages and
above-market growth, and enable it to continue to effectively integrate Houghton. While the actions taken in 2020 to protect
our workforce, to continue to serve our customers with excellence and to conserve cash and reduce costs, have been effective
thus far, further actions to respond to the pandemic and its effects may be necessary as conditions continue to evolve.
Critical Accounting Policies and Estimates
Quaker Houghton’s discussion and analysis of its financial condition and results of operations are based upon its consolidated
financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to customer sales incentives, product returns, bad debts,
inventories, property, plant and equipment (“PP&E”), investments, goodwill, intangible assets, income taxes, business combinations,
restructuring, incentive compensation plans (including equity-based compensation), pensions and other postretirement benefits,
contingencies and litigation. Quaker Houghton bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under such circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. However, actual results may differ from these
estimates under different assumptions or conditions.
Quaker Houghton believes the following critical accounting policies describe the more significant judgments and estimates used
in the preparation of its consolidated financial statements:
Accounts receivable and inventory exposures:
losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As part of
our terms of trade, we may custom manufacture products for certain large customers and/or may ship products on a consignment basis.
Further, a significant portion of our revenue is derived from sales to customers in industries where companies have experienced past
financial difficulties. If a significant customer bankruptcy occurs, then we must judge the amount of proceeds, if any, that may
ultimately be received through the bankruptcy or liquidation process. These matters may increase the Company’s exposure should a
bankruptcy occur, and may require a write down or a disposal of certain inventory as well as the failure to collect receivables.
Reserves for customers filing for bankruptcy protection are established based on a percentage of the amount of receivables outstanding
at the bankruptcy filing date. However, initially establishing this reserve and the amount thereof is dependent on the Company’s
evaluation of likely proceeds to be received from the bankruptcy process, which could result in the Company recognizing minimal or
no reserve at the date of bankruptcy. We generally reserve for large and/or financially distressed customers on a specific review basis,
while a general reserve is maintained for other customers based on historical experience. The Company’s consolidated allowance for
doubtful accounts was $13.1 million and $11.7 million as of December 31, 2020 and 2019, respectively. The Company recorded
expense to increase its provision for doubtful accounts by $3.6 million, $1.9 million and $0.5 million for the years ended December
31, 2020, 2019 and 2018, respectively. Changing the amount of expense recorded to the Company’s provisions by 10% would have
increased or decreased the Company’s pre-tax earnings by $0.4 million, $0.2 million and $0.1 million for the years ended December
31, 2020, 2019 and 2018, respectively. See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Environmental and litigation reserves:
liability has been incurred and the amount of the liability can be reasonably estimated. Environmental costs and remediation costs are
capitalized if the costs extend the life, increase the capacity or improve the safety or efficiency of the property from the date acquired
or constructed, and/or mitigate or prevent contamination in the future. Estimates for accruals for environmental matters are based on a
variety of potential technical solutions, governmental regulations and other factors, and are subject to a wide range of potential costs
for remediation and other actions. A considerable amount of judgment is required in determining the most likely estimate within the
range of total costs, and the factors determining this judgment may vary over time. Similarly, reserves for litigation and similar
matters are based on a range of potential outcomes and require considerable judgment in determining the most probable outcome. If
no amount within the range is considered more probable than any other amount, the Company accrues the lowest amount in that range
in accordance with generally accepted accounting principles. See Note 26 of Notes to Consolidated Financial Statements in Item 8 of
this Report.
27
Realizability of equity investments:
ability to influence, but not control, the operations of the entity and its future results. The Company would record an impairment
charge to an investment if it concluded that a decline in value that was other than temporary occurred. Adverse changes in market
conditions, poor operating results of underlying investments, devaluation of foreign currencies or other events or circumstances could
result in losses or an inability to recover the carrying value of the investments, potentially leading to an impairment charge in the
future. The carrying amount of the Company’s equity investments as of December 31, 2020 was $95.8 million, which included four
investments: $19.4 million for a 32% interest in Primex, Ltd. (Barbados); $7.8 million for a 50% interest in Nippon Quaker Chemical,
Ltd. (Japan); $0.3 million for a 50% interest in Kelko Quaker Chemical, S.A. (Panama); and $68.3 million for a 50% interest in Korea
Houghton Corporation (Korea). The Company also has a 50% interest in a Venezuelan affiliate, Kelko Quaker Chemical, S.A
(Venezuela). Due to heightened foreign exchange controls, deteriorating economic circumstances and other restrictions in Venezuela,
during the third quarter of 2018 the Company concluded that it no longer had significant influence over this affiliate. Prior to this
determination, the Company historically accounted for this affiliate under the equity method. As of December 31, 2020 and 2019, the
Company had no remaining carrying value for its investment in Venezuela. See Note 17 of Notes to Consolidated Financial
Statements in Item 8 of this Report.
Tax exposures, uncertain tax positions and valuation allowances:
based on estimates of amounts that will be determined as deductible in tax returns filed in various jurisdictions. The filed tax returns
are subject to audit, which often occur several years subsequent to the date of the financial statements. Disputes or disagreements may
arise during audits over the timing or validity of certain items or deductions, which may not be resolved for extended periods of time.
The Company also evaluates uncertain tax positions on all income tax positions taken on previously filed tax returns or expected to be
taken on a future tax return in accordance with FIN 48, which prescribes the recognition threshold and measurement attributes for
financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return and, also, whether the
benefits of tax positions are probable or if they will be more likely than not to be sustained upon audit based upon the technical merits
of the tax position. For tax positions that are determined to be more likely than not to be sustained upon audit, the Company
recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial
statements. For tax positions that are not determined to be more likely than not sustained upon audit, the Company does not recognize
any portion of the benefit in its financial statements. In addition, the Company’s continuing practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. Also, the Company nets its liability for unrecognized tax benefits
against deferred tax assets related to net operating losses or other tax credit carryforward on the basis that the uncertain tax position is
settled for the presumed amount at the balance sheet date.
Quaker Houghton also records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more
likely than not to be realized. While the Company has considered future taxable income and assesses the need for a valuation
allowance, in the event Quaker Houghton were to determine that it would be able to realize its deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Both
determinations could have a material impact on the Company’s financial statements.
In 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as “U.S. Tax Reform” which
implemented significant changes, particularly impacting taxation for non-U.S. earnings and dividends from certain foreign
subsidiaries. Based on interpretations and assumptions the Company believes to be reasonable with regard to various uncertainties
and ambiguities in the application of certain provisions of U.S. Tax Reform and subsequent to numerous temporary regulations,
notices, and other formal guidance published by the Internal Revenue Service (“I.R.S.”), U.S. Treasury, and various state taxing
authorities in 2018, the Company completed its accounting for the tax effects of U.S. Tax Reform as of December 22, 2018. It is
possible that the I.R.S. could issue subsequent guidance or take positions on audit that differ from the Company’s interpretations and
assumptions. The Company currently believes that subsequent guidance or interpretations made by the I.R.S. will not be materially
different from the Company’s application of the provisions of U.S. Tax Reform and would not have a material adverse effect on the
Company’s tax liabilities, earnings, or financial condition.
Pursuant to U.S. Tax Reform, the Company recorded a $15.5 million transition tax liability for U.S. income taxes on the
undistributed earnings of non-U.S. subsidiaries. As of December 31, 2020, $7.0 million in installment have been paid with the
remaining $8.5 million to be paid through installments in future years. However, the Company may also be subject to other taxes,
such as withholding taxes and dividend distribution taxes, if these undistributed earnings are ultimately remitted to the U.S. As of
December 31, 2020, the Company has a deferred tax liability of $5.9 million, which primarily represents the estimate of the non-U.S.
taxes the Company will incur to remit certain previously taxed earnings to the U.S. It is the Company’s current intention to reinvest
its future undistributed earnings of non-U.S. subsidiaries to support working capital needs and certain other growth initiatives outside
of the U.S. The amount of such undistributed earnings at December 31, 2020 was approximately $322.6 million. Any tax liability
which might result from ultimate remittance of these earnings is expected to be substantially offset by foreign tax credits (subject to
certain limitations). It is currently impractical to estimate any such incremental tax expense. See Note 10 of Notes to Consolidated
Financial Statements in Item 8 of this Report.
28
Goodwill and other intangible assets:
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, or more
frequently if triggering events indicate a possible impairment. In completing a quantitative impairment test, the Company compares
the reporting units’ or indefinite lived intangible assets fair value to their carrying value, primarily based on future discounted cash
flows, in order to determine if an impairment charge is warranted. The estimates of future discounted cash flows involve considerable
management judgment and are based upon certain significant assumptions. These assumptions include the weighted average cost of
capital (“WACC”) as well as projected revenue growth rates and operating income, which result in estimated EBITDA and EBITDA
margins.
As of March 31, 2020, the Company evaluated the initial 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. The Company considered
the negative effect of COVID-19 on the Company’s operations and, at the time, the impact it expected to have on its 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 and, also,
the Company took into consideration the carrying value and estimated fair value for each of its assets. 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 indefinite-
lived and long-lived assets, except for the Company’s Houghton and Fluidcare trademarks and tradename indefinite-lived intangible
assets.
Given the relatively short period of time between the fair value determination of the acquired Houghton and Fluidcare trademarks
and tradename 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 trademarks and tradename intangible assets generally approximated fair value, with excess fair value of less
than 5%. Because of the previously concluded relatively narrow gap between its fair value and its 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 trademarks and tradename intangible 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 WACC and royalty rates, as well as revenue growth rates and terminal
growth rates. In completing the interim quantitative impairment assessment as of March 31, 2020, 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 decline in current year 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 warranted. This resulted in a first quarter of 2020 non-cash impairment charge of $38.0 million for these indefinite-lived
intangible assets, primarily related to the Houghton trademarks and tradename. The book value of these assets as of December 31,
2020 was $204.0 million.
The Company’s consolidated goodwill at December 31, 2020 and 2019 was $631.2 million and $607.2 million, respectively. The
Company completed its annual impairment assessment over goodwill during the fourth quarter of 2020, and no impairment charges
were warranted. Furthermore, the estimated fair value of each of the Company’s reporting units substantially exceeded their carrying
value, with none of the Company’s reporting units at risk for failing the goodwill impairment test. The Company used a WACC
assumption for each of its reporting units of approximately 9.5%, and this assumption would have had to increase by approximately
59%, or 6 percentage points, before any of the Company’s reporting units would be considered potentially impaired. Separately, the
Company’s assumption of future and projected EBITDA margins by reporting unit would have had to decrease by more than
approximately 75% before any of the Company’s reporting units would be considered potentially impaired. The Company’s
consolidated indefinite-lived intangible assets at December 31, 2020 and 2019 were $205.1 million and $243.1 million, respectively.
The Company completed its annual indefinite lived intangible asset impairment assessment during the fourth quarter of 2020, and
determined that no impairment charge was warranted. The Company’s impairment assessment concluded that the $204.0 million
carrying value of acquired Houghton and Fluidcare trademarks and tradename intangible assets exceeded fair value by approximately
18%. See Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report.
29
Pension and Postretirement benefits:
to current employees, former employees and retirees. Independent actuaries, in accordance with U.S. GAAP, perform the required
valuations to determine benefit expense and, if necessary, non-cash charges to equity for additional minimum pension liabilities.
Critical assumptions used in the actuarial valuation include the weighted average discount rate, which is based on applicable yield
curve data, including the use of a split discount rate (spot-rate approach) for the U.S. plans and certain foreign plans, rates of increase
in compensation levels, and expected long-term rates of return on assets. If different assumptions were used, additional pension
expense or charges to equity might be required.
The Company had two noncontributory U.S. pension plan s, one of which (the “Legacy Quaker U.S. Pension Plan”) had a
November 30 year-end and a measurement date of December 31. As previously disclosed, the Company began the process of
terminating the Legacy Quaker U.S. Pension Plan during the fourth quarter of 2018. During the third quarter of 2019, the Company
received a favorable termination determination letter from the Internal Revenue Service (“I.R.S.”) and completed the Legacy Quaker
U.S. Pension Plan termination during the first quarter of 2020. In order to terminate the Legacy Quaker U.S. Pension Plan in
accordance with I.R.S. and Pension Benefit Guaranty Corporation requirements, the Company was required to fully fund the 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. In the third quarter of 2020, the Company finalized the amount of the liability and related annuity payments and
received a refund in premium of approximately $1.6 million. In addition, the Company recorded a non-cash pension settlement charge
at plan termination of approximately $22.7 million. This settlement charge included the immediate recognition into expense of the
related unrecognized losses within accumulated other comprehensive income (loss) (“AOCI”) on the balance sheet as of the plan
termination date.
The following table highlights the potential impact on the Company’s pre -tax earnings due to changes in assumptions with respect
to the Company’s defined benefit pension and postretirement benefit plans, based on assets and liabilities as of December 31, 2020:
1/2 Percentage Point Increase
1/2 Percentage Point Decrease
(dollars in millions)
Foreign
U.S.
Total
Foreign
U.S.
Total
Discount rate (1)
$
0.4
$
0.2
$
0.6
$
(0.4)
$
(0.2)
$
(0.6)
Expected rate of return on plan
assets (2)
0.9
0.2
1.1
(1.0)
(0.2)
(1.2)
(1)
The weighted-average discount rate used to determine net periodic benefit costs for the year ended December 31, 2020 was
2.3% for Foreign plans and 3.1% for U.S. plans.
(2)
The weighted average expected rate of return on plan assets used to determine net periodic benefit costs for the year ended
December 31, 2020 was 2.2% for Foreign plans and 6.5% for U.S. plans.
Restructuring and other related liabilities:
rationalization of manufacturing facilities and other related expenses. To account for such, the Company applies the Financial
Accounting Standards Board’s guidance regarding exit or disposal cost obligations. This guidance requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred, is estimable, and payment is probable. See
Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Recently Issued Accounting Standards
See Note 3 of Notes to the Consolidated Financial Statements in Item 8 of this Report for a discussion regarding recently issued
accounting standards.
Liquidity and Capital Resources
At December 31, 2020, the Company had cash, cash equivalents and restricted cash of $181.9 million. Total cash, cash
equivalents and restricted cash was $143.6 million at December 31, 2019. The $38.3 million increase in cash, cash equivalents and
restricted cash was the net result of $178.4 million of cash provided by operating activities and $6.6 million of positive impacts due to
the effect of foreign currency translation on cash, partially offset by $75.3 million of cash used in financing activities and $71.4
million of cash used in investing activities.
Net cash flows provided by operating activities were $178.4 million in 2020 compared to $82.4 million in 2019. The Company’s
current year net operating cash flow increase was largely due to higher earnings from including a full year of Houghton and Norman
Hay, lower net cash outflows than in 2019 associated with restructuring and the Combination and other acquisition-related expenses,
higher cash dividends received from its equity affiliated companies year-over-year, and higher operating cashflow from changes in
working capital. The operating cashflow improvement due to working capital changes includes benefits from changes in accounts
payable and accrued liabilities due to more favorable negotiated vendor terms and other benefits from the Combination, impacts due to
volume declines related to COVID-19, and lower cash tax payments due to current year mix of earnings and deductibility of one-time
expenses.
Net cash flows used in investing activities were $71.4 million in 2020 compared to $908.6 million in 2019. This $837.2 million
decrease in cash outflows used in investing activities was largely due to a decrease in payments related to acquisitions as the prior year
$893.4 million outflow included the closing of the Combination on August 1, 2019, as further described below, compared to the
30
current year payments related to acquisitions of $56.2 million that were mainly driven by the acquisition of Coral for approximately
$53.1 million, net of cash acquired, further described below, and a post-closing adjustment related to Norman Hay of approximately
$3.2 million. In addition, the Company had higher investments in property, plant and equipment in the current year due to the
inclusion of a full year of both Houghton and Norman Hay, including higher expenditures related to integrating the companies during
2020. These higher outflows were partially offset by approximately $2.6 million of higher proceeds from disposition of assets in
2020, which was mainly driven by the sale of certain assets as part of its Combination integration plan.
Net cash flows used in financing activities were $75.3 million in 2020 compared to cash provided in financing activities of $844.1
million in 2019. The $919.4 million decrease in net cash flows from financing activities was due primarily to $897.1 million of
additional term loan and revolving credit facility borrowings in the prior year used to close the Combination compared to $49.1
million of current year debt repayments in accordance with its term loan agreements and other reductions in borrowings under its
revolving credit facilities. Also, as part of the Combination, the Company incurred and paid debt issuance costs of approximately
$23.7 million in the prior year. In addition, the Company paid $27.6 million of cash dividends during 2020, a $5.7 million or 26%
increase in cash dividends compared to the prior year, primarily due to the approximately 4.3 million shares issued at closing of the
Combination, as well as both the current year and prior year cash dividend per share increases. Finally, during 2020, the Company
used $1.0 million to purchase the remaining noncontrolling interest in one of its South African affiliates. Prior to this buyout, this
South African affiliate made a distribution to the prior noncontrolling affiliate shareholder of approximately $0.8 million in 2020.
There were no similar noncontrolling interest activities in 2019.
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
“Credit Facility”).
The Credit Facility is comprised of a $400.0 million multicurrency revolver (the “Revolver”), a $600.0 million term loan (the
“U.S. Term Loan”), each with the Company as borrower, and a $150.0 million (as of August 1, 2019) Euro equivalent term loan (the
“Euro Term Loan” and together with the “U.S. Term Loan”, the “Term Loans”) with Quaker Chemical B.V., a Dutch subsidiary of the
Company as borrower, each with a five-year term maturing in August 2024. Subject to the consent of the administrative agent and
certain other conditions, the Company may designate additional borrowers. The maximum amount available under the Credit Facility
can be increased by up to $300.0 million at the Company’s request if there are lenders who agree to accept additional commitments
and the Company has satisfied certain other conditions. Borrowings under the Credit Facility bear interest at a base rate or LIBOR
plus an applicable margin based upon the Company’s consolidated net leverage ratio. There are LIBOR replacement provisions that
contemplate a further amendment if and when LIBOR ceases to be reported. The interest rate incurred on the outstanding borrowings
under the Credit Facility during 2020 was approximately 2.1%. At December 31, 2020, the interest rate on the outstanding
borrowings under the Credit Facility was approximately 1.9%. In addition to paying interest on outstanding principal under the Credit
Facility, the Company is required to pay a commitment fee ranging from 0.2% to 0.3% depending on the Company’s consolidated net
leverage ratio to the lenders under the Revolver in respect of the unutilized commitments thereunder.
The Credit Facility is subject to certain financial and other covenants. The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio could not exceed 4.25 to 1, with step downs in the permitted ratio over the term of the Credit
Facility. As of December 31, 2020, the consolidated net debt to consolidated adjusted EBITDA ratio may not exceed 4.00 to 1. The
Company’s consolidated adjusted EBITDA to interest expense ratio may not be less than 3.0 to 1 over the term of the agreement. The
Credit Facility also prohibits the payment of cash dividend if the Company is in default or if the amount of the dividend paid annually
exceeds the greater of $50.0 million and 20% of consolidated adjusted EBITDA unless the ratio of consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount. As of December 31, 2020
and December 31, 2019, the Company was in compliance with all of the Credit Facility covenants. The Term Loans have quarterly
principal amortization during their five-year terms, with 5.0% amortization of the principal balance due in years 1 and 2, 7.5% in year
3, and 10.0% in years 4 and 5, with the remaining principal amount due at maturity. The Credit Facility is guaranteed by certain of the
Company’s domestic subsidiaries and is secured by first priority liens on substantially all of the assets of the Company and the
domestic subsidiary guarantors, subject to certain customary exclusions. The obligations of the Dutch borrower are guaranteed only
by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Term Loans. In order to
satisfy this requirement as well as to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $170.0 million notional amounts of three-year interest rate swaps at a base rate of
1.64% plus an applicable margin as provided in the Credit Facility, based on the Company’s consolidated net leverage ratio. At the
time the Company entered into the swaps, and as of December 31, 2020, the aggregate interest rate on the swaps, including the fixed
base rate plus an applicable margin, was 3.1%.
31
The Company capitalized $23.7 million of certain third-party debt issuance costs in connection with executing the Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed to the Term Loans and recorded as a direct reduction of long-
term debt on the Company’s Consolidated Balance Sheet. Approximately $8.3 million of the capitalized costs were attributed to the
Revolver and recorded within other assets on the Company’s Consolidated Balance Sheet. These capitalized costs are being
amortized into interest expense over the five-year term of the Credit Facility.
As of December 31, 2020, the Company had Credit Facility borrowings outstanding of $887.1 million. As of December 31, 2019,
the Company had Credit Facility borrowings outstandin g of $922.4 million. The Company has unused capacity under the Revolver of
approximately $234 million, net of bank letters of credit of approximately $6 million, as of December 31, 2020. The Company’s other
debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $12.1
million and $12.6 million as of December 31, 2020 and 2019, respectively. Total unused capacity under these arrangements as of
December 31, 2020 was approximately $40 million. The Company’s total net debt as of December 31, 2020 was $717.3 million.
The Company estimates that it realized full year cost synergies in 2020 of approximately $58 million compared to $7 million in
2019. The Company continues to expect to realize Combination cost synergies of approximately $75 million in 2021 and $80 million
in 2022.
The Company expects to continue to incur additional costs and make associated cash payments to integrate Quaker and Houghton
and continue realizing the Combination’s total anticipated cost synergies. The Company expects total cash payments, including those
pursuant to the QH Program, described below, but excluding incremental capital expenditures related to the Combination, will be in
the range of 1.3 times its total anticipated 2022 cost synergies of $80 million. A significant portion of these costs were already
incurred in 2019 and 2020, but the Company expects to continue to incur such costs through 2021. The Company incurred $30.3
million of total Combination, integration and other acquisition-related expenses in 2020, including $0.8 million of accelerated
depreciation, a $0.6 million loss on the sale of held-for-sale assets, and $0.8 million of other income related to an indemnification
asset, described in the Non-GAAP Measures section of this Item below. The Company had aggregate net cash outflows of
approximately $29.4 million related to the Combination, integration and other acquisition-related expenses during 2020.
Comparatively, in 2019, the Company incurred $38.0 million of total Combination, integration and other acquisition-related expenses,
including $2.1 million of ticking fees as well as $0.6 million of accelerated depreciation, and aggregate net cash outflows related to
these costs were approximately $52.4 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 and recorded $26.7 million in restructuring
and related charges in 2019. The Company recognized an additional $5.5 million of restructuring and related charges in 2020 as a
result of the QH Program. The QH Program includes restructuring and associated severance costs to reduce total headcount by
approximately 350 people globally and plans for the closure of certain manufacturing and non-manufacturing facilities. In connection
with the plans for closure of certain manufacturing and non-manufacturing facilities, the Company made a decision to make available
for sale certain facilities during the second quarter of 2020. During the fourth quarter of 2020, certain of these facilities were sold and
the Company recognized a loss on disposal of $0.6 million included within other expense, net on the Consolidated Statement of
Income. Additionally, certain buildings and land with an aggregate book value of approximately $10.0 million have been reclassified
to other current assets from property, plant and equipment as of December 31, 2020. The Company expects to receive amounts in
excess of net book value for the properties held for sale. 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 into 2021 under the QH Program and estimates that the anticipated cost synergies realized under this program will
approximate one-times restructuring costs incurred. The Company made cash payments related to the settlement of restructuring
liabilities under the QH Program during 2020 of approximately $15.7 million compared to $8.9 million in 2019.
As described above, in the first quarter of 2020, the Company completed the termination of the Legacy Quaker U.S. Pension Plan
and funded the plan on a termination basis with approximately $1.8 million, subject to final true up adjustments. In the third quarter
of 2020, the Company finalized the amount of liability and related annuity payments and received a refund in premium of $1.6
million. In addition, the Company recorded a non-cash pension settlement charge at plan termination of approximately $22.7 million
in the first quarter of 2020.
On December 22, 2020, the Company closed its acquisition of Coral Chemical Company (“Coral”), a privately held, U.S. based
provider of metal finishing fluid solutions. The purchase price was $54.1 million, on a cash-free and debt-free basis, subject to routine
and customary post-closing adjustments related to working capital and net indebtedness levels. The Company expects to finalize its
post-closing adjustments for the Coral acquisition in the first quarter of 2021. Cash paid for Coral in the fourth quarter of 2020 was
approximately $53.1 million, net of cash acquired. In February 2021, the Company acquired certain assets related to tin-plating
solutions primarily for steel end markets for approximately $25 million.
As of December 31, 2020, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $28.9
million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position
liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $7.5 million as a result of
offsetting benefits in other tax jurisdictions. During the fourth quarter of 2020, one of the Company’s subsidiaries received a notice of
inspection from a taxing authority in a country where certain of its subsidiaries operate, which related to a non-income (indirect) tax
32
that may be applicable to certain products the subsidiary sells. To date, the Company has not received any assessment from the
authority related to potential liabilities that may be due from the Company’s subsidiary. Consequently there is substantial uncertainty
with respect to the Company’s ultimate liability with respect to this indirect tax. See Note 26 of Notes to Consolidated Financial
Statements in Item 8 of this Report.
The Company believes that its existing cash, anticipated cash flows from operations and available additional liquidity will be
sufficient to support its operating requirements and fund its business objectives for at least the next twelve months, including but not
limited to, payments of dividends to shareholders, costs related to the Combination and integration, pension plan contributions, capital
expenditures, other business opportunities (including potential acquisitions) and other potential contingencies. The Company’s
liquidity is affected by many factors, some based on normal operations of our business and others related to the impact of the
pandemic on our business and on global economic conditions as well as industry uncertainties, which we cannot predict. We also
cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We may seek, as we
believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding,
additional liquidity needs or to fund future growth opportunities, including possible acquisitions and investments. The timing and
amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including the
actual and projected demand for our products, specialty chemical industry conditions, competitive factors, and the condition of
financial markets, among others.
The following table summarizes the Company’s contractual obligations as of December 31, 2020, and the effect such obligations
are expected to have on its liquidity and cash flows in future periods. Pension and postretirement plan contributions beyond 2021 are
not determinable since the amount of any contribution is heavily dependent on the future economic environment and investment
returns on pension trust assets. The timing of payments related to other long-term liabilities which consists primarily of deferred
compensation agreements and environmental reserves, also cannot be readily determined due to their uncertainty. Interest obligations
on the Company’s long-term debt and capital leases assume the current debt levels will be outstanding for the entire respective period
and apply the interest rates in effect as of December 31, 2020.
Payments due by period
(dollars in thousands)
2026 and
Contractual Obligations
Total
2021
2022
2023
2024
2025
Beyond
Long-term debt
$
898,789
$
38,686
$
57,754
$
76,856
$
715,155
$
172
$
10,166
Interest obligations
52,997
14,514
13,703
12,583
10,444
526
1,227
Capital lease obligations
439
109
96
87
72
59
16
Operating leases
43,544
12,342
8,395
6,220
4,610
3,836
8,141
Purchase obligations
2,377
2,279
92
6
-
-
-
Transition tax
8,500
-
-
1,529
3,099
3,872
-
Pension and other postretirement plan
contributions
10,280
10,280
-
-
-
-
-
Other long-term liabilities (See Note 22 of
Notes to Consolidated Financial Statements)
12,494
-
-
-
-
-
12,494
Total contractual cash obligations
$
1,029,420
$
78,210
$
80,040
$
97,281
$
733,380
$
8,465
$
32,044
Non-GAAP Measures
The information in this Form 10-K filing includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-
GAAP earnings per diluted share. The Company believes these non-GAAP financial measures provide meaningful supplemental
information as they enhance a reader’s understanding of the financial performance of the Company, are indicative of future operating
performance of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items
that are not considered indicative of future operating performance or not considered core to the Company’s operations. Non-GAAP
results are presented for supplemental informational purposes only and should not be considered a substitute for the financial
information presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income 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 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.
33
Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance
measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest
expense, net, and taxes on income before equity in net income of associated companies, in each case adjusted, as applicable, for any
depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income
attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non -GAAP net income per
diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-
GAAP earnings per diluted share provide transparent and useful information and are widely used by analysts, investors, and
competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable
GAAP financial measures (dollars in thousands, unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
For the years ended December 31,
2020
2019
2018
Operating income
$
59,360
$
46,134
$
87,781
Fair value step up of inventory sold (a)
226
11,714
—
Houghton combination, integration and other
acquisition-related expenses (b)
30,446
35,945
16,661
Restructuring and related charges (c)
5,541
26,678
—
Customer bankruptcy costs (d)
463
1,073
—
Charges related to the settlement of a non-core equipment sale (e)
—
384
—
Indefinite-lived intangible asset impairment (f)
38,000
—
—
Non-GAAP operating income
$
134,036
$
121,928
$
104,442
Non-GAAP operating margin (%) (o)
9.5%
10.8%
12.0%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and
Non-GAAP Net Income Reconciliations
For the years ended December 31,
2020
2019
2018
Net income attributable to Quaker Chemical Corporation
$
39,658
$
31,622
$
59,473
Depreciation and amortization (b)(m)
84,494
45,264
19,714
Interest expense, net (b)
26,603
16,976
4,041
Taxes on income before equity in net income of associated companies (n)
(5,296)
2,084
25,050
EBITDA
145,459
95,946
108,278
Equity income in a captive insurance company (g)
(1,151)
(1,822)
(966)
Fair value step up of inventory sold (a)
226
11,714
—
Houghton combination, integration and other
acquisition-related expenses (b)
29,538
35,361
16,051
Restructuring and related charges (c)
5,541
26,678
—
Customer bankruptcy costs (d)
463
1,073
—
Charges related to the settlement of a non-core equipment sale (e)
—
384
—
Indefinite-lived intangible asset impairment (f)
38,000
—
—
Pension and postretirement benefit costs, non-service components (h)
21,592
2,805
2,285
Gain on changes in insurance settlement restrictions of an inactive
subsidiary and related insurance insolvency recovery (i)
(18,144)
(60)
(90)
Gain on liquidation of an inactive legal entity (j)
—
—
(446)
Currency conversion impacts of hyper-inflationary economies (k)
450
1,033
664
Adjusted EBITDA
$
221,974
$
173,112
$
125,776
Adjusted EBITDA margin (%) (o)
15.7%
15.3%
14.5%
Adjusted EBITDA
$
221,974
$
173,112
$
125,776
Less: Depreciation and amortization - adjusted (b)
83,732
44,680
19,714
Less: Interest expense, net - adjusted (b)
26,603
14,896
593
Less: Taxes on income before equity in net income
26,488
24,825
22,978
Non-GAAP net income
$
85,151
$
88,711
$
82,491
34
Non-GAAP Earnings per Diluted Share Reconciliations
For the years ending December 31,
2020
2019
2018
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
2.22
$
2.08
$
4.45
Equity income in a captive insurance company per diluted share (g)
(0.07)
(0.12)
(0.07)
Fair value step up of inventory sold per diluted share (a)
0.01
0.58
—
Houghton combination, integration and other
1.31
2.05
1.21
Restructuring and related charges per diluted share (c)
0.23
1.34
—
Customer bankruptcy costs per diluted share (d)
0.02
0.05
—
Charges related to the settlement of a non-core equipment
—
0.02
—
Indefinite-lived intangible asset impairment per diluted share (f)
1.65
—
—
Pension and postretirement benefit costs, non-service
0.79
0.14
0.13
Gain on changes in insurance settlement restrictions of an inactive
(0.78)
(0.00)
(0.01)
Gain on liquidation of an inactive legal entity per diluted share (j)
—
—
(0.03)
Currency conversion impacts of hyper-inflationary economies
0.02
0.07
0.06
Impact of certain discrete tax items per diluted share (l)
(0.62)
(0.38)
0.43
Non-GAAP earnings per diluted share (p)
$
4.78
$
5.83
$
6.17
(a)
Fair value step up of inventory sold relates to expenses associated with selling inventory from acquired businesses which was
adjusted to fair value as part of purchase accounting. These increases to costs of goods sold (“COGS”) are not indicative of the
future operating performance of the Company.
(b)
Houghton combination, integration and other acquisition-related expenses include certain legal, financial, and other advisory and
consultant costs incurred in connection with due diligence, regulatory approvals and closing the Combination, as well as
integration planning and post-closing integration activities including internal control readiness and remediation. These cost also
include 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 $1.5 million, $9.4 million and $5.1 million for the years
ended December 31, 2020, 2019 and 2018, respectively, 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 2020 and 2019, the Company recorded $0.8 million and $0.6
million, respectively, of accelerated depreciation related to certain of the Company’s facilities, which is included in the caption
“Houghton combination, integration and other acquisition -related expenses” in the reconciliation of operating income 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 2019 and 2018, the Company
incurred $2.1 million and $3.5 million, respectively, 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 net income. During 2020, the Company recorded $0.8 million of other income related to an
indemnification asset. During 2020 and 2018, the Company recorded a loss of $0.6 million and a gain of $0.6 million,
respectively, on the sale of held-for-sale assets related to the Combination. Each of these items are included in the caption
“Houghton combination, integration and other acquisition expenses” in the reconciliation of GAAP earnings per diluted share
attributable to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share as well as the
reconciliation of Net Income attributable to Quaker Chemical Corporation to Adjusted EBITDA and Non-GAAP net income See
Note 2 and Note 9 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.
(c)
Restructuring and related charges represent 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
Consolidated Financial Statements, which appears in Item 8 of this Report.
(d)
Customer bankruptcy costs represent the cost 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. See
Note 13 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.
35
(e)
Charges related to the settlement of a non-core equipment sale represent the pre-tax charge related to a one-time, uncommon,
customer settlement associated with a prior sale of non -core equipment. These charges are not indicative of the future operating
performance of the Company.
(f)
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 16 of Notes to
Consolidated Financial Statements, which appears in Item 8 of this Report.
(g)
Equity income in a captive insurance company represents the after-tax income attributable to the Company’s interest in Primex,
Ltd. (“Primex”), a captive insurance company. The Company holds a 32% investment in and has significant influence over
Primex, and therefore accounts for this investment 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.
(h)
Pension and postretirement benefit costs, non-service components represent the pre-tax, non-service components 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 year ended December 31, 2020 includes a $22.7 million settlement charge for the
Company’s termination of the Legacy Quaker U.S. Pension Plan. See Note 21 of Notes to Consolidated Financial Statements,
which appears in Item 8 of this Report.
(i)
Gain on changes in insurance settlement restrictions of an inactive subsidiary and related insurance insolvency recovery
represents income associated with the gain on the termination of restrictions on insurance settlement reserves and the cash
receipts from an insolvent insurance carrier for previously submitted claims by an inactive subsidiary of the Company. This other
income is not indicative of the future operating performance of the Company. See Notes 9 and 26 of Notes to Consolidated
Financial Statements, which appears in Item 8 of this Report.
(j)
Gain on liquidation of an inactive legal entity represents the decrease in historical cumulative currency translation adjustments
associated with an inactive legal entity which was closed. These cumulative currency translation adjustments were the result of
remeasuring the legal entity’s monetary assets and liabilities to the applicable published exchange rates and were a component of
accumulated other comprehensive loss, which was included in total shareholder’s equity on the Company’s Consolidated Balance
Sheet. As required under U.S. GAAP, when a legal entity is liquidated, any amount attributable to that legal entity and
accumulated in the currency translation adjustment component of equity is required to be removed from equity and reported as
part of the gain or loss on liquidation of the legal entity during the period in which the liquidation occurs. This non-deductible
recognized gain is not indicative of the future operating performance of the Company. See Note 9 of Notes to Consolidated
Financial Statements, which appears in Item 8 of this Report.
(k)
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. An entity which
operates within an economy deemed to be hyper-inflationary under U.S. GAAP is required to remeasure its monetary assets and
liabilities to the applicable published exchange rates and record the associated gains or losses resulting from the remeasurement
directly to the Consolidated Statements of Income. Venezuela’s economy has been considered hyper-inflationary under U.S.
GAAP since 2010, while Argentina’s economy has been considered hyper-inflationary beginning July 1, 2018. In addition, the
Company acquired an Argentine Houghton subsidiary which also applies hyper-inflationary accounting. During 2020 and 2019,
the Company incurred non-deductible, pre-tax charges related to the Company’s Argentine affiliates. During 2018, the Company
incurred non-deductible, pre-tax charges related to the Company’s Legacy Quaker Argentine affiliate as well as after -tax charges
related to the Company’s Venezuela joint venture. The charges incurred related to the immediate recognition of foreign currency
remeasurement in the Consolidated Statements of Income associated with these entities are not indicative of the future operating
performance of the Company. See Notes 1, 9 and 17 of Notes to Consolidated Financial Statements, which appears in Item 8 of
this Report.
(l)
The impacts of certain discrete tax items included the impact of changes in the valuation allowance for foreign tax credits
acquired with the Combination, changes in withholding tax rates and the associated impact on previously accrued for distributions
at certain of the Company’s Asia/Pacific subsidiaries, additional reserves for uncertain tax positions related to tax audits at certain
of the Company’s EMEA subsidiaries. This line item also includes deferred tax benefits the Company recorded in 2020 and 2019
related to intercompany intangible asset transfers and the related amortization of these deferred tax benefits. Additionally, the
2019 and 2018 amounts include certain transition tax adjustments related to adjustments to adopt U.S. Tax Reform. See Note 10
of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.
(m)
Depreciation and amortization for the years ended December 31, 2020 and 2019 includes $1.2 million and $0.4 million,
respectively, of amortization expense recorded within equity in net income of associated companies in the Company’s
Consolidated Statements of Income, 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.
36
(n)
Taxes on income before equity in net income of associated companies – adjusted presents the impact of any current and deferred
income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of net income 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. Fair value step up of inventory sold described in (a) resulted in
incremental taxes of less than $0.1 million and $2.9 million for 2020 and 2019, respectively. Houghton combination, integration
and other acquisition-related expenses described in (b) resulted in incremental taxes of $6.9 million for 2020 , $6.7 million for
2019, and $3.1 million for 2018. Restructuring and related charges described in (c) resulted in incremental taxes of $1.4 million
for 2020 and $6.2 million for 2019. Customer bankruptcy costs described in (d) resulted in incremental taxes of $0.1 million in
2020 and $0.3 million in 2019. Charges related to the settlement of a non-core equipment sale described in (e) resulted in
incremental taxes of $0.1 million for 2019. Indefinite-lived intangible asset impairment described in (f) resulted in incremental
taxes of $8.7 million for 2020. Pension and postretirement benefit costs, non-service components described in (h) resulted in
incremental taxes of $7.5 million for 2020, $0.7 million for 2019, and $0.5 million for 2018. Gain on changes in insurance
settlement restrictions of an inactive subsidiary and related insurance insolvency recovery described in (i) resulted in a reduction
of taxes of $4.2 million in 2020 and less than $0.1 million in 2019 and 2018. Gain on liquidation of an inactive legal entity
described in (k) resulted in a reduction of taxes of $0.1 million in 2018. The impact of certain discrete items described in (m)
resulted in incremental taxes of $11.2 million for 2020, $5.7 million for 2019, and a reduction of taxes of $5.8 million in 2018.
(o)
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.
(p)
The Company calculates non-GAAP earnings per diluted share as non-GAAP net income attributable to the Company per
weighted average diluted shares outstanding using the “two-class share method” to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet items, as defined under Item 303(a)(4) of Regulation S-K as of December 31,
2020. The Company’s only off -balance sheet items outstanding as of December 31, 2020 represented approximately $10 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 20 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Operations
Consolidated Operations Review – Comparison of 2020 with 2019
Net sales were 1,417.7 million in 2020 compared to $1,133.5 million in 2019. The net sales increase of 25% year-over-year
includes additional net sales from acquisitions, primarily Houghton and Norman Hay, of $408.6 million. Excluding net sales related
to acquisitions, the Company’s current year net sales would have declined approximately 11% which reflects a decrease in sales
volumes of 9%, a negative impact from foreign currency translation of 1% and a decrease from selling price and product mix of 1%.
The primary driver of the volume decline in the current year was the negative impact of COVID-19 on global production levels.
COGS were $904.2 million in 2020 compared to $741.4 million in 2019. The increase in COGS of 22% was primarily due to the
inclusion of a full year of Houghton and Norman Hay COGS and $0.8 million of accelerated depreciation charges in the current year,
partially offset by lower current year COGS on the decline in net sales due to COVID-19 and prior year charges of $11.7 million to
increase acquired inventory to its fair value, described in the Non-GAAP Measures section of this Item above.
Gross profit in 2020 increased $121.3 million or 31% from 2019 due primarily to additional gross profit from Houghton and
Norman Hay. The Company’s reported gross margin in the current period was 36.2% compared to 34.6% in 2019, which included the
inventory fair value step up described above. Excluding one-time increases to COGS in both periods, the Company estimates that its
gross margins for 2020 and 2019 would have been 36.3% and 35.7%, respectively. The estimated increase in gross margin year-over-
year was primarily due to lower COGS as a result of the Company’s progress on Combination-related logistics, procurement and
manufacturing cost savings initiatives, partially offset by the lower current year sales volumes on certain fixed manufacturing costs.
SG&A in 2020 increased $96.9 million compared to 2019 due primarily to additional SG&A from Houghton and Norman Hay,
partially offset by the impact of COVID-19 cost savings actions, including lower travel expenses, and the benefits of realized costs
savings associated with the Combination.
During 2020, the Company incurred $29.8 million of Combination, integration and other acquisition-related expenses, primarily
for professional fees related to Houghton integration and other acquisition-related activities. Comparatively, the Company incurred
$35.5 million of similar expenses in the prior year, primarily due to various professional fees related to integration planning and
regulatory approval as well as professional fees associated with closing the Combination. 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 recorded additional restructuring and related charges of $5.5 million during 2020
compared to $26.7 million during 2019 under this program. See the Non-GAAP Measures section of this Item, above.
37
During the first quarter of 2020, the Company recorded a $38.0 million non-cash impairment charge to write down the value of
certain indefinite-lived intangible assets associated with the Combination. This non-cash impairment charge is related to certain
acquired Houghton trademarks and tradenames and is primarily the result of the current year negative impacts of COVID-19 on their
estimated fair values. There were no additional impairment charges in the remainder of 2020 or in the prior year. See the Critical
Accounting Policies and Estimates section as well as the Non -GAAP Measures section, of this Item, above.
Operating income in 2020 was $59.4 million compared to $46.1 million in 2019. Excluding Combination, integration and other
acquisition-related expenses, restructuring and related charges, the non-cash indefinite-lived intangible asset impairment charge, and
other expenses that are not indicative of the Company’s future operating performance, the Company’s current year non-GAAP
operating income of $134.0 million increased compared to $121.9 million in the prior year, primarily due to additional operating
income from Houghton and Norman Hay and the benefits from costs savings initiatives related to the Combination , partially offset by
the current year negative impact due to COVID-19.
The Company’s other expense, net, was $5.6 million in 2020 compared to $0.3 million in 2019. The year-over-year increase in
other expense, net was primarily due to the first quarter of 2020 non-cash settlement charge of $22.7 million associated with the
termination of the Legacy Quaker U.S. Pension Plan, partially offset by a fourth quarter of 2020 gain of $18.1 million related to the
lapsing of restrictions over certain cash that was previously designated solely for the settlement of asbestos claims at an inactive
subsidiary of the Company, which are both described in the Non-GAAP Measures section of this Item, above. Additionally, the
increase year-over-year in other expense, net, includes higher foreign currency transaction losses in the current year.
Interest expense, net, increased $9.6 million in 2020 compared to 2019 primarily due to a full year of borrowings under the
Company’s Credit Facility to finance the closing of the Combination on August 1, 2019, partially offset by lower overall interest rates
in the current year.
The Company’s effective tax rates for 2020 and 2019 were a benefit of 19.5% and an expense of 7.2%, respectively. The
Company’s current year effective tax rate was impacted by the tax effect of certain one-time tax charges and benefits in the current
period, including deferred tax benefits related to an intercompany intangible asset transfer, as well as changes in the valuation
allowance for foreign tax credits acquired with the Combination, additional charges for uncertain tax positions relating to certain
foreign tax audits, and the tax impact of the Company’s termination of its Legacy Quaker U.S. pension plan. Comparatively, the prior
year effective tax rate was primarily impacted by certain non-deductible costs associated with the Combination as well as a prior year
deferred tax benefit related to a separate intercompany intangible asset transfer. Excluding the impact of all non-core items in each
year, described in the Non-GAAP measures section of this Item, above, the Company estimates that its effective tax rates for 2020 and
2019 were approximately 25% and 22%, respectively. The year-over-year increase is driven primarily by higher U.S. income taxes
resulting from a change in certain deductions and the taxability of foreign earnings in the U.S., partially offset by a change in the mix
of earnings. The Company has experienced and expects to continue to experience 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, valuation allowances
necessary on certain of the Company’s tax positions, 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 $2.3
million in 2020 compared to 2019, primarily due to additional
earnings from our 50% interest in a joint venture in Korea partially offset by lower earnings as compared to the prior year period 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 $0.1 million in 2020 compared to $0.3 million in 2019 primarily a result of
the first quarter of 2020 acquisition of the remaining ownership interest in one of the Company’s South African affiliates.
Foreign exchange negatively impacted the Company’s 2020 results by approximately $0.38 per diluted share, primarily due to
higher foreign exchange transaction losses year-over-year and, to a lesser extent, an aggregate negative impact from foreign currency
translation on earnings.
Net sales were $1,133.5 million in 2019 compared to $867.5 million in 2018. The net sales increase of 31% year-over-year
includes additional net sales from Houghton and Norman Hay of $319.4 million. Excluding Houghton and Norman Hay net sales, the
Company’s 2019 net sales would have declined 6% compared to the prior year, reflecting a decrease in sales volumes of
approximately 3% and a negative impact from foreign currency translation of 3%.
COGS in 2019 of $741.4 million increased approximately $186.2 million or 34% from $555.2 million in 2018. The increase in
COGS was primarily due to the inclusion of Houghton and Norman Hay COGS, as well as the fair value inventory step up and
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.
Gross profit in 2019 increased $79.8 million from 2018 due primarily to Houghton and Norman Hay net sales noted above. The
Company’s reported gross margin in 2019 was 34.6%, which includes an aggregate $11.7 million of expense associated with selling
Houghton and Norman Hay acquired inventory adjusted to fair value as well as 2019 accelerated depreciation charges, both of which
38
are described in the Non-GAAP Measures section of this Item above. Excluding these one-time increases to COGS, the Company
estimates that its gross margin would have been approximately 35.7% in 2019 compared to 36.0% in 2018. The decrease in gross
margin year-over-year was primarily the result of price and product mix attributed to lower Houghton gross margin compared to
Legacy Quaker. SG&A in 2019 increased $76.0 million compared to 2018 driven by additional Houghton and Norman Hay SG&A as
well as charges related to the settlement of a non-core equipment sale and certain customer bankruptcy costs, both of which are
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 year-over-year base sales decline noted above on direct selling costs, and the benefits of realized cost savings
associated with the Combination.
During 2019, the Company incurred $35.5 million of Combination and other acquisition-related expenses, primarily for legal,
financial, and other advisory and consultant expenses for integration planning and regulatory approvals, fees associated with the
closing of the Combination and costs associated with various integration activities. Comparatively, the Company incurred $16.7
million of expenses in 2018, primarily due to various professional fees related to integration planning and regulatory approval. 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 occur over the next two years
under this program. The Company recorded restructuring expense during 2019 of $26.7 million related to this program. There were
no similar restructuring expenses recorded during the prior year. See the Non-GAAP Measures section of this Item, above.
Operating income in 2019 was $46.1 million compared to $87.8 million in 2018. Excluding the Combination and other
acquisition-related charges, restructuring expenses and other non-core items, described in the Non-GAAP Measures section of this
Item, above, the Company’s 2019 non-GAAP operating income increased to $121.9 million compared to $104.4 million in 2018,
primarily due to additional net sales and operating income from Houghton and Norman Hay.
The Company had other expense, net, of $0.3 million in 2019 compared to $0.6 million in 2018. The decrease in other expense,
net, was primarily driven by foreign currency transaction gains in 2019 compared to foreign currency transaction losses in 2018. The
Company’s 2019 and 2018 foreign currency transaction gains and losses included both recurring transactional activity as well as
foreign currency transaction losses of approximately $1.0 million and $0.4 million, respectively, related to the Company’s Argentine
subsidiaries and, in 2018, a foreign currency transaction gain of approximately $0.4 million related to the liquidation of an inactive
legal entity, both of which are described in the Non-GAAP measures section of this Item, above. In addition, the Company had an
increase in receipts of local municipality-related grants in one of the Company’s regions year -over-year, partially offset by an increase
in pension and postretirement benefit costs, non-service components, in 2019 compared to 2018. Lastly, in 2018, the Company
recorded a gain of $0.6 million for the sale of a held-for-sale asset.
Interest expense, net, increased $12.9 million in 2019 compared to 2018, primarily as a result of additional borrowings under the
Company’s Credit Facility to finance the closing of the Combination on August 1, 2019.
The Company’s effective tax rates for 2019 and 2018 were 7.2% and 30.1%, respectively. The Company’s low 2019 effective tax
rate was primarily driven by a one-time deferred tax benefit related to an intercompany intangible asset transfer, described in the Non-
GAAP measures section of this Item, above. Comparatively, the Company’s higher 2018 effective tax rate was largel y driven by
combination-related expenses incurred, certain of which were non-deductible for the purpose of determining the Company’s effective
tax rate, as well as tax charges related to an adjustment to the Company’s initial estimate of the impact from U.S. Tax Reform.
Excluding the impact of these and all other non-core items in each period, described in the Non-GAAP Measures section of this Item,
above, the Company estimates that its effective tax rates would have been approximately 22% in each year.
Equity in net income of associated companies increased $3.3 million in 2019 compared to 2018, primarily due to additional
earnings from the Company’s 50% interest in a Houghton joint venture in Korea and higher earnings from the Company’s interest in a
captive insurance company.
Net income attributable to noncontrolling interest was relatively consistent in both 2019 and 2018.
Foreign exchange negatively impacted the Company’s 2019 earnings by approximately 2% or $0.09 per diluted share, as the
negative impact from foreign currency translation of approximately 3% due to the strengthening of the U.S. dollar in 2019 was
partially offset by higher 2019 foreign exchange transaction gains.
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 assesses the Company’s 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.
39
Segment operating earnings for each of the Company’s reportable segments are comprised of the segment’s net sales less directly
related COGS and SG&A. 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, integration and other acquisition-related
expenses, Restructuring and related charges , and COGS related to acquired inventory sold, which is adjusted to fair value as part of
purchase accounting. Other items not specifically identified with the Company’s reportable segments include interest expense, net
and other expense, net. Certain immaterial reclassifications within the segment disclosures for the years ended December 31, 2019
have been made to conform with the Company’s current customer industry segmentation and reflected in the prior year comparisons
below.
Americas
Americas represented approximately 32% of the Company’s consolidated net sales in 2020. The segment’s net sales were $450.2
million, an increase of $58.0 million or 15% compared to 2019. The increase in net sales reflects additional net sales from
acquisitions of $120.4 million, primarily a result of the inclusion of seven additional months of Houghton net sales, as the
Combination closed on August 1 in the prior year. Excluding net sales from acquisitions, the segment’s net sales decreased year-over-
year by approximately 16% due to lower volumes of 12% and a negative impact of foreign currency translation of 4%. The current
year volume decline was driven by the economic slowdown that began in late March and continued throughout 2020 due to the
impacts of COVID-19. The foreign exchange impact was primarily due to the weakening of the Brazilian real and the Mexican peso
against the U.S. dollar, as these exchange rates averaged 5.10 and 21.34, respectively, in 2020 compared to 3.94 and 19.24,
respectively in 2019. This segment’s operating earnings were $96.4 million, an increase of $18.1 million or 23% compared to 2019.
The increase in segment operating earnings reflects the inclusion of a full year of Houghton net sales, noted, above, and the impacts on
gross margins and SG&A due to the Combination’s cost synergies and costs savings actions related to COVID-19 year-over-year,
partially offset by the impact of COVID-19 on current year sales volumes and higher COGS and SG&A due to seven additional
months of Houghton in the current year.
EMEA
EMEA represented approximately 27% of the Company’s consolidated net sales in 2020. The segment’s net sales were $383.2
million, an increase of $97.6 million or 34% compared to 2019. The increase in net sales reflects additional net sales from
acquisitions of $117.9 million, primarily a result of the inclusion of seven additional months of Houghton net sales, as the
Combination closed on August 1 in the prior year. Excluding net sales from acquisitions, the segment’s net sales decreased year-over-
year by approximately 7% due to lower volumes of 10%, partially offset by a positive impact of foreign currency translation of 2%
and increases in selling price and product mix of 1%. The current year volume decline was driven by the economic slowdown that
began in late March and continued throughout 2020 due to the impacts of COVID-19. The foreign exchange impact was primarily
due to the strengthening of the euro against the U.S. dollar as this exchange rate averaged 1.14 in 2020 compared to 1.12 in 2019.
This segment’s operating earnings were $69.2 million, an increase of $22.1 million or 47% compared to 2019. The increase in
segment operating earnings reflects the inclusion of a full year of Houghton net sales, noted, above, and the impacts on gross margins
and SG&A due to the Combination’s cost synergies and costs savings actions related to COVID-19 year-over-year, partially offset by
the impact of COVID-19 on current year sales volumes and higher COGS and SG&A due to seven additional months of Houghton in
the current year.
Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in 2020. The segment’s net sales were
$315.3 million, an increase of $67.5 million or 27% compared to 2019. The increase in net sales reflects the inclusion of seven
additional months of Houghton net sales of $79.7 million, as the Combination closed on August 1 in the prior year. Excluding
Houghton net sales, the segment’s net sales decreased by approximately 5% year-over-year was due to lower volumes of 3% and
decreases in selling price and product mix of 3% partially offset by the positive impact of foreign currency translation of 1%. The
current year volume decline was driven by the economic slowdown that began in the first quarter in China and in late March
throughout the rest of the region due to the impacts of COVID-19. The foreign exchange impact was primarily due to the
strengthening of the Chinese renminbi against the U.S. dollar. While this exchange rate averaged 6.90 in each of 2020 and 2019,
respectively, post the closing of the Combination, this exchange rate strengthened in the last 5 months of 2020 to average 6.72
compared to 7.06 in the last 5 months of 2019, partially offset by the weakening of the Indian rupee against the U.S. dollar as this
exchange rate averaged 73.95 in 2020 compared to 70.35 in 2019. This segment’s operating earnings were $88.4 million, an increase
of $20.8 million or 31% compared to 2019. The increase in segment operating earnings reflects the inclusion of incremental
Houghton net sales, noted, above, and the impacts on gross margins and SG&A due to the Combination’s cost synergies and costs
savings actions related to COVID-19 year-over-year, partially offset by the impact of COVID-19 on current year sales volumes and
higher COGS and SG&A due to seven additional months of Houghton in the current year.
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the Company’s consoli dated net sales in 2020. The segment’s net
sales were $269.0 million, an increase of $61.1 million or 29% compared to 2019. The increase in net sales reflects the inclusion of
seven additional months of Houghton net sales and nine additional months of Norman Hay net sales, totaling $90.6 million, as the
Combination closed on August 1 and the Norman Hay acquisition closed on October 1 in the prior year. Excluding Houghton and
40
Norman Hay net sales, the segment’s net sales decreased by approximately 14% year-over-year due to lower volumes of 7%,
decreases in selling price and product mix of 5% and a negative impact from foreign currency translation of 2%. The current year
volume decline was primarily due to a decrease in the Company’s specialty coatings business driven by Boeing’s decision to
temporarily stop production of the 737 Max aircraft and volume declines due to the economic slowdown resulting from COVID-19.
Partially offsetting these volume declines, and contributing to the decrease in selling price and product mix , were higher shipments of
a lower priced product in the Company’s mining business compared to the prior year. 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 $79.7 million, an increase of $20.8 million or 35% compared to 2019. The increase in segment operating earnings
reflects the inclusion of incremental Houghton and Norman Hay net sales, noted above, coupled with an increase in gross margin due
to the Company’s progress on Combination-related logistics, procurement and manufacturing cost savings initiatives, partially offset
by higher SG&A, including seven additional months of Houghton and nine additional months of Norman Hay SG&A in the current
year.
Reportable Segments Review – Comparison of 2019 with 2018
Americas
Americas represented approximately 35% of the Company’s consolidated net sales in 2019. The segment’s net sales were $392.1
million, an increase of $94.5 million or 32% compared to 2018. The increase in net sales reflects the inclusion of Houghton net sales
of $110.1 million. Excluding Houghton net sales, the segment’s net sales decrease year-over-year of 5% was due primarily to lower
volumes of 6% and a negative impact from foreign currency translation of 1% partially offset by a positive impact from selling price
and product mix of 2%. The decline in volumes compared to 2018 was driven by compounding conditions of weak automotive and
steel markets, a generally weaker overall industrial environment in the region and some customer inventory corrections. The
segment’s operating earnings were $78.3 million, an increase of $15.6 million or 25% compared to 2018. 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 margins compared to Legacy Quaker and higher SG&A, including Houghton SG&A.
EMEA
EMEA represented approximately 25% of the Company’s consolidated net sales in 2019. The segment’s net sales were $285.6
million, an increase of $68.6 million or 32% compared to 2018. The increase in net sales reflects the inclusion of Houghton net sales
of $92.5 million. Excluding Houghton net sales, the segment’s net sales decrease year-over-year of 11% was due to a negative impact
of foreign currency translation of 5%, lower volumes of approximately 5% and a decrease from selling price and product mix of 1%.
The foreign exchange impact was primarily due to the weakening of the euro against the U.S. dollar as this exchange rate averaged
1.12 in 2019 compared to 1.18 in 2018. The decline in volumes compared to 2018 was driven by a weak automotive market and the
challenging overall industrial environment in the region, as well as a decrease in volume associated with a specific piece of business
which the Company stopped selling during the second half of 2018 primarily due to its limited profitability. This segment’s operating
earnings were $47.0 million, an increase of $10.9 million or 30% compared to 2018. The increase in segment operating earnings
reflects the inclusion of Houghton net sales and a slightly higher gross margin, partially offset by higher SG&A, including Houghton
SG&A.
Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in 2019. The segment’s net sales were
$247.8 million, an increase of $55.3 million or 29% compared to 2018. The increase in net sales reflects the inclusion of Houghton
net sales of $67.4 million. Excluding Houghton net sales, the segment’s net sales decreased 6% year-over-year due primarily to the
negative impact of foreign currency translation of 3% and lower volumes of approximately 3%. The foreign exchange impact was
primarily due to the weakening of the Chinese renminbi and India rupee against the U.S. dollar as these exchange rates averaged 6.90
and 70.3, respectively, in 2019 compared to 6.60 and 68.18, respectively, in 2018. The decline in volumes was driven by weak
automotive and steel markets and the challenging overall industrial environment in the region. This segment’s operating earnings
were $67.5 million, an increase of $13.8 million or 26% compared to 2018. 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.
Global Specialty Businesses
Global Specialty Businesses represented approximately 18% of the Company’s consolidated net sales in 2019. The segment’s net
sales were $208.0 million, an increase of $47.5 million or 30% compared to 2018. The increase in net sales reflects the inclusion of
Houghton and Norman Hay net sales of $49.4 million. Excluding Houghton and Norman Hay net sales, the segment’s net sales
decreased 1% year-over-year driven by a decline in selling price and product mix of 5% and a negative impact from foreign currency
translation of less than 1% partially offset by an increase in volume of 4%. This segment’s operating earnings were $58.9 million, an
increase of approximately $15.9 million or 37% compared to 2018. The increase in segment operating earnings reflects the inclusion
of Houghton and Norman Hay net sales, and relatively consistent gross margins, partially offset by higher SG&A, including Houghton
and Norman Hay.
41
Environmental Clean-up Activities
The Company is involved in environmental clean-up activities in connection with an existing plant location and former waste
disposal sites. This includes certain soil and groundwater contamination the Company identified in 1992 at AC Products, Inc.
(“ACP”), a wholly owned subsidiary. In voluntary coordination with the Santa Ana California Regional Water Quality Board, ACP
has been remediating the contamination. In 2007, ACP agreed to operate two groundwater treatment systems, so as to hydraulically
contain groundwater contamination emanating from ACP’s site until such time as the concentrations of contaminants are below the
current Federal maximum contaminant level for four consecutive quarterly sampling events. In 2014, ACP ceased operation at one of
its two groundwater treatment systems, as it had met the above condition for closure. In 2020, the Santa Ana Regional Water Quality
Control Board asked that ACP conduct some additional indoor and outdoor soil vapor testing on and near the ACP site to confirm that
ACP continues to meet the applicable local standards and ACP has begun the testing program. As of December 31, 2020, ACP
believes it is close to meeting the conditions for closure of the remaining groundwater treatment system, but continues to operate this
system while in discussions with the relevant authorities. As of December 31, 2020, the Company believes that the range of potential-
known liabilities associated with the balance of the ACP water remediation program is approximately $0.1 million to $1.0 million.
The low and high ends of the range are based on the length of operation of the treatment system as determined by groundwater
modeling.
As a result of the closing of the Combination on August 1, 2019, the Company is party to environmental matters related to certain
Houghton domestic and foreign properties currently or previously owned. Houghton’s Sao Paulo, Brazil site was required under
Brazilian environmental, health and safety regulations to perform an environmental assessment as part of a permit renewal process.
Initial investigations identified soil and ground water contamination in select areas of the site. The site has conducted a multi-year soil
and groundwater investigation and corresponding risk assessments based on the result of the investigations. In 2017, the site had to
submit a new 5-year permit renewal request and was asked to complete additional investigations to further delineate the site based on
review of the technical data by the local regulatory agency, Companhia Ambiental do Estado de São Paulo (“CETESB”). Based on
review of the updated investigation data, CETESB issued a Technical Opinion regarding the investigation and remedial actions taken
to date. The site developed an action plan and submitted it to CETESB in 2018 based on CETESB requirements. The site
intervention plan primarily requires the site, among other actions, to conduct periodic monitoring for methane in soil vapors, source
zone delineation, groundwater plume delineation, bedrock aquifer assessment, update the human health risk assessment, develop a
current site conceptual model and conduct a remedial feasibility study and provide a revised intervention plan. In December 2019, the
site submitted a report on the activities completed including the revised site conceptual model and results of the remedial feasibility
study and recommended remedial strategy for the site. Other Houghton environmental matters include participation in certain
payments in connection with four currently active environmental consent orders related to certain hazardous waste cleanup activities
under the U.S. Federal Superfund statute. Houghton has been designated a potentially responsible party (“PRP”) by the
Environmental Protection Agency along with other PRPs depending on the site, and has other obligations to perform cleanup activities
at certain other foreign subsidiaries. These environmental matters primarily require the Company to perform long-term monitoring as
well as operating and maintenance at each of the applicable sites.
The Company continually evaluates its obligations related to such matters and, based on historical costs incurred and projected
costs to be incurred over the next 28 years, has estimated the present value range of costs for all of the Houghton environmental
matters, on a discounted basis, to be between approximately $5.5 million and $6.5 million as of December 31, 2020, for which $6.0
million is accrued within other accrued liabilities and other non-current liabilities on the Company’s Consolidated Balance Sheet as of
December 31, 2020. Comparatively, as of December 31, 2019, the Company had $6.6 million accrued with respect to these matters.
The Company believes, although there can be no assurance regarding the outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $0.1
million and $0.2 million were accrued as of December 31, 2020 and 2019, respectively, to provide for such anticipated future
environmental assessments and remediation costs.
Notwithstanding the foregoing, the Company cannot be certain that future liabilities in the form of remediation expenses and
damages will not exceed amounts reserved. See Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report
General
See Item 7A of this Report, below, for further discussion of certain quantitative and qualitative disclosures about market risk.
Item 7A.
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. See Item 1A. “Risk Factors.” of this Report for additional discussions of the current and potential risks
associated with the COVID-19 pandemic. Except as otherwise disclosed below, the market risks discussed below did not change
materially from December 31, 2019.
42
Interest Rate Risk.
The Company’s exposure to changes in interest rates relates primarily to its borrowings under the Credit
Facility as of December 31, 2020 and 2019. Borrowings under the Credit Facility bear interest at a base rate or LIBOR plus an
applicable margin based upon the Company’s consolidated net leverage ratio. As a result of the variable interest rates applicable
under the Credit Facility, if interest rates rise significantly, the cost of debt to the Company could increase as well. This could have an
adverse effect on the Company, depending on the extent of the Company’s borrowings outstanding throughout a given year. As of
December 31, 2020, the Company had outstanding borrowings under the Credit Facility of approximately $887.1 million. The
variable interest rate incurred on the outstanding borrowings under the Credit Facility during the year ended December 31, 2020 was
approximately 2.2%. If interest rates had changed by 10% during 2020, the Company’s interest expense for the period ended
December 31, 2020 on its credit facilities, including the Credit Facility borrowings outstanding post-closing of the Combination,
would have correspondingly increased or decreased by approximately $0.8 million.
The Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Term Loans. In order to
satisfy this requirement as well as to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $170.0 million notional amounts of three-year interest rate swaps at a base rate of
1.64% plus an applicable margin as provided in the Credit Facility, based on the Company’s consolidated net leverage ratio. At the
time the Company entered into the swaps and as of December 31, 2020, the aggregate interest rate on the swaps, including the fixed
base rate plus an applicable margin, was 3.1%. These interest rate swaps are designated and qualify as cash flow hedges. The
Company has previously used derivative financial instruments primarily for the purpose of hedging exposures to fluctuations in
interest rates.
Foreign Exchange Risk
. A significant portion of the Company’s revenues and earnings are generated by its foreign operations.
These foreign operations also represent a significant portion of Quaker Houghton’s assets and liabilities. Generally, all of these
foreign operations use the local currency as their functional currency. Accordingly, Quaker Houghton’s financial results are affected
by foreign currency fluctuations, particularly between the U.S. dollar and the euro, the British pound sterling, the Brazilian real, the
Mexican peso, the Chinese renminbi and the Indian rupee. Quaker Houghton’s results can be materially affected depending on the
volatility and magnitude of foreign exchange rate changes. If the euro, the British pound sterling, the Brazilian real, the Mexican
peso, the Chinese renminbi and the Indian rupee had all weakened or strengthened by 10% against the U.S. dollar, the Company’s
2020 revenues and pre-tax earnings would have correspondingly decreased or increased by approximately $78.9 million and $7.4
million, respectively.
The Company generally does not use financial instruments that expose it to significant risk involving foreign currency
transactions. However, the size of its non-U.S. activities has a significant impact on reported operating results and the attendant net
assets. During the past three years, sales by its non-U.S. subsidiaries accounted for approximately 60% to 70% of its consolidated net
sales. In addition, the Company occasionally sources inventory among its worldwide operations. This practice can give rise to
foreign exchange risk resulting from the varying cost of inventory to the receiving location, as well as from the revaluation of
intercompany balances. The Company primarily mitigates this risk through local sourcing efforts.
Commodity Price Risk
. Many of the raw materials used by Quaker Houghton are derivatives of commodity chemicals, which can
experience significant price volatility, and therefore Quaker Houghton’s earnings can be materially affected by market changes in raw
material prices. At times, the Company has entered into fixed-price purchase contracts to manage this risk. These contracts provide
protection to Quaker Houghton if the prices for the contracted raw materials rise; however, in certain circumstances, the Company
may not realize the benefit if such prices decline. A gross margin change of one percentage point, would correspondingly have
increased or decreased the Company’s pre-tax earnings by approximately $14.2 million.
Credit Risk
. Quaker Houghton establishes allowances for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of Quaker Houghton’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be required. Downturns in the overall economic climate
may also exacerbate specific customer financial issues. A significant portion of the Company’s revenues are derived from sales to
customers in the steel and automotive industries, including some of our larger customers, where bankruptcies have occurred in the past
and where companies have experienced past financial difficulties. Though infrequent, when a bankruptcy occurs, Quaker Houghton
must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. In addition,
as part of its terms of trade, Quaker Houghton may custom manufacture products for certain large customers and/or may ship product
on a consignment basis. These practices may increase the Company’s exposure should a bankruptcy occur and may require a write-
down or disposal of certain inventory due to its estimated obsolescence or limited marketability as well as of accounts receivable.
Customer returns of products or disputes may also result in similar issues related to the realizability of recorded accounts receivable or
returned inventory. The Company recorded expense to its provision for doubtful accounts by $3.6 million, $1.9 million and $0.5
million for the years ended December 31, 2020, 2019 and 2018, respectively. A change of 10% to the expense recorded to the
Company’s provision would have increased or decreased the Company’s pre-tax earnings by $0.4 million, $0.2 million and $0.1
million for the years ended December 31, 2020, 2019 and 2018, respectively.
43
Item 8.
Financial Statements and Supplementary Data.
QUAKER CHEMICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements:
44
47
48
49
50
51
52
44
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders of Quaker Chemical Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quaker Chemical Corporation and its subsidiaries (the
“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of
changes in equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO because
material weaknesses in internal control over financial reporting existed as of that date as the Company did not design and maintain
effective controls (i) in response to the risks of material misstatement and (ii) over the review of pricing, quantity and customer data to
verify that revenue recognized was complete and accurate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a
timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit
tests applied in our audit of the 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s
internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Change in Accounting Principle
As discussed in Note 6 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in
2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's
report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
45
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Tel Nordic ApS and
Coral Chemical Company from its assessment of internal control over financial reporting as of December 31, 2020, because they were
acquired by the Company in purchase business combinations during 2020. These excluded entities are wholly owned subsidiaries,
whose total assets represent less than 1% and approximately 2%, respectively, and whose total revenues each represent less than 1%,
of the related consolidated financial statement amounts as of and for the year ended December 31, 2020.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Houghton Trademarks and Tradename Impairment Assessments
As described in Note 16 to the consolidated financial statements, the Company’s consolidated Other intangible assets, net balance was
$1,081.4 million as of December 31, 2020, and the indefinite-lived intangible asset was $205.1 million, which substantially relates to
the Houghton trademarks and tradename. Management completes its annual indefinite-lived intangible asset impairment test during
the fourth quarter of each year, or more frequently if triggering events indicate a potential impairment. An impairment exists when it
is determined that it is more likely than not that the indefinite -lived intangible asset carrying value exceeds its fair value and is not
recoverable. In the first quarter of 2020, as a result of the impact of COVID-19 driving 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 (“WACC”) assumption utilized in the quantitative impairment assessment, the Company
concluded that the estimated fair value of the Houghton trademarks and tradename intangible asset was less than its carrying value.
As a result, an impairment charge of $38.0 million, primarily related to the Houghton trademarks and tradename, was recorded in the
first quarter of 2020. The Company completed its annual impairment assessment during the fourth quarter of 2020 for the Houghton
trademarks and tradename and concluded no impairment charge was warranted. The determination of estimated fair value of the
Houghton trademarks and tradename is based on a relief from royalty valuation method which requires management’s judgment and
often involves the use of significant estimates and assumptions with respect to the WACC and royalty rates, as well as revenue growth
rates and terminal growth rates.
The principal considerations for our determination that performing procedures relating to the Houghton trademarks and tradename
impairment assessments is a critical audit matter are (i) the significant judgment by management when determining the fair value
measurement of the Houghton trademarks and tradename; (ii) a high degree of auditor judgment, subjectivity, and effort in performing
procedures and evaluating management’s significant assumptions related to the WACC, royalty rates, revenue growth rates and
terminal growth rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
46
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements.
These procedures included testing the effectiveness of controls relating to management’s
indefinite-lived intangible assets impairment assessments, including controls over the valuation of the Houghton trademarks and
tradename. These procedures also included, among others (i) testing management’s process for determining the fair value estimate;
(ii) evaluating the appropriateness of the relief from royalty valuation method; (iii) testing the completeness and accuracy of
underlying data used in the estimate; and (iv) evaluating the reasonableness of significant assumptions related to the WACC, royalty
rates, revenue growth rates and terminal growth rates. Evaluating management’s assumptions related to the royalty rates, revenue
growth rates and terminal growth rates involved evaluating whether the assumptions used by management were reasonable
considering (i) the current and past performance of the legacy Houghton business; (ii) the consistency with external market and
industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals
with specialized skill and knowledge were used to assist in evaluating the appropriateness of the relief from royalty valuation method
and evaluating the reasonableness
of royalty rates and the WACC.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 1, 2021
We have served as the Company’s auditor since at least 1972. We have not been able to determine the specific year we began serving
as auditor of the Company.
47
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(
Dollars in thousands, except per share data
)
Year Ended December 31,
2020
2019
2018
Net sales
$
$
$
Cost of goods sold (excluding amortization expense - See Note 16)
Gross profit
Selling, general and administrative expenses
Indefinite-lived intangible asset impairment
Restructuring and related charges
Combination, integration and other acquisition-related expenses
Operating income
Other expense, net
(5,618 )
(254 )
(642 )
Interest expense, net
(26,603
(16,976
(4,041
Income before taxes and equity in net income of associated companies
Taxes on income before equity in net income of associated companies
(5,296 )
Income before equity in net income of associated companies
Equity in net income of associated companies
Net income
Less: Net income attributable to noncontrolling intere st
Net income attributable to Quaker Chemical Corporation
$
$
$
Per share data:
Net income attributable to Quaker Chemical Corporatio n common
shareholders – basic
$
$
$
Net income attributable to Quaker Chemical Corporation common
shareholders – diluted
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
48
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(
Dollars in thousands
)
Year Ended December 31,
2020
2019
2018
Net income
$
$
$
Other comprehensive income (loss), net of tax
Currency translation adjustments
(17,519 )
Defined benefit retirement plans
Net gain (loss) arising during the period, other
(6,289 )
Amortization of actuarial loss
Amortization of prior service gain
(69 )
(151 )
(84 )
Current period change in fair value of derivatives
(3,278 )
(320 )
Unrealized gain (loss) on available-for-sale securities
(1,728 )
Other comprehensive income (loss)
(15,705 )
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interest
(37 )
(287 )
(248 )
Comprehensive income attributable to Quaker Chemical Corporation
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
49
QUAKER CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(
Dollars in thousands, except par value and share amounts
)
December 31,
2020
2019
ASSETS
Current assets
Cash and cash equivalents
$
$
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Right of use lease assets
Goodwill
Other intangible assets, net
Investments in associated companies
Deferred tax assets
Other non-current assets
Total assets
$
$
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
$
Accounts payable
Dividends payable
Accrued compensation
Accrued restructuring
Accrued pension and postretirement benefits
Other accrued liabilities
Total current liabilities
Long-term debt
Long-term lease liabilities
Deferred tax liabilities
Non-current accrued pension and postretirement benefits
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 26)
Equity
Common stock, $
2020 –
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
(26,598 )
(78,170 )
Total Quaker shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
$
The accompanying notes are an integral part of these consolidated financial statements.
50
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(
Dollars in thousands
)
Year Ended December 31,
2020
2019
2018
Cash flows from operating activities
Net income
$
$
$
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs
Depreciation and amortization
Equity in undistributed earnings of associated companies, net of dividends
(2,115 )
Acquisition-related fair value adjustments related to inventory
Deferred income taxes
(38,281 )
(24,242 )
Uncertain tax positions (non-deferred portion)
(89 )
Non-current income taxes payable
(8,181 )
Deferred compensation and other, net
(471 )
(6,789 )
Share-based compensation
Loss (gain) on disposal of property, plant, equipment and other assets
(58 )
(657 )
Insurance settlement realized
(1,035 )
(822 )
(1,055 )
Indefinite-lived intangible asset impairment
Gain on inactive subsidiary litigation and settlement reserve
(18,144 )
Combination and other acquisition-related expenses, net of payments
(14,414 )
Restructuring and related charges
Pension and other postretirement benefits
(1,392 )
Increase (decrease) in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(2,822 )
Inventories
(3,854 )
(10,548 )
Prepaid expenses and other current assets
(4,640 )
(1,540 )
Change in restructuring liabilities
(15,745 )
(8,899 )
Accounts payable and accrued liabilities
(8,915 )
Estimated taxes on income
(1,373 )
Net cash provided by operating activities
Cash flows from investing activities
Investments in property, plant and equipment
(17,901 )
(15,545 )
(12,886 )
Payments related to acquisitions, net of cash acquired
(56,230 )
(893,412 )
(500 )
Proceeds from disposition of assets
Insurance settlement interest earned
Net cash used in investing activities
(71,385 )
(908,632 )
(12,358 )
Cash flows from financing activities
Payments of long-term debt
(37,615 )
Proceeds from term loan debt
(Repayments) borrowings on revolving credit facilities, net
(11,485 )
(21,120 )
Repayments on other debt, net
(661 )
(8,798 )
(5,671 )
Financing-related debt issuance costs
(23,747 )
Dividends paid
(27,563 )
(21,830 )
(19,319 )
Stock options exercised, other
Purchase of noncontrolling interest in affiliates
(1,047 )
Distributions to noncontrolling affiliate shareholders
(751 )
(877 )
Net cash (used in) provided by financing activities
(75,255 )
(46,905 )
Effect of foreign exchange rate changes on cash
(6,141 )
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the period
Cash, cash equivalents and restricted cash at the end of the period
$
$
$
Supplemental cash flow disclosures:
Cash paid during the year for:
Income taxes, net of refunds
$
$
$
Interest
Non-cash activities:
Change in accrued purchases of property, plant and equipment, net
$
(1,376 )
$
$
The accompanying notes are an integral part of these consolidated financial statements.
51
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(
Dollars in thousands, except per share amounts
)
Accumulated
Capital in
other
Common
excess of
Retained
comprehensive
Noncontrolling
stock
par value
earnings
loss
interest
Total
Balance as of December 31, 2017
$
(65,100 )
$
Cumulative effect of an accounting change
(754 )
(754 )
Balance as of January 1, 2018
(65,100 )
Net income
Amounts reported in other comprehensive loss
(15,615 )
(90 )
(15,705 )
Dividends declared ($
(19,530 )
(19,530 )
Distributions to noncontrolling affiliate
shareholders
(877 )
(877 )
Shares issued upon exercise of stock options
and other
(432 )
(423 )
Shares issued for employee stock purchase plan
Share-based compensation plans
Balance as of December 31, 2018
(80,715 )
Cumulative effect of an accounting change
(44 )
(44 )
Balance as of January 1, 2019
(80,715 )
Net income
Amounts reported in other comprehensive income
Dividends declared ($
(23,724 )
(23,724 )
Shares issued related to the Combination
Shares issued upon exercise of stock options
and other
Shares issued for employee stock purchase plan
Share-based compensation plans
Balance as of December 31, 2019
(78,170 )
Cumulative effect of an accounting change
(911 )
(911 )
Balance as of January 1, 2020
(78,170 )
Net income
Amounts reported in other comprehensive income
(92 )
Dividends declared ($
0 per share)
(27,786 )
(27,786 )
Acquisition of noncontrolling interest
(707 )
(340 )
(1,047 )
Distributions to noncontrolling affiliate
shareholders
(751 )
(751 )
Shares issued upon exercise of stock options
and other
Share-based compensation plans
Balance as of December 31, 2020
$
$
$
$
(26,598 )
$
$
The accompanying notes are an integral part of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
52
Note 1 – Significant Accounting Policies
As used in these Notes to 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 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”).
Principles of consolidation:
All majority-owned subsidiaries are included in the Company’s consolidated financial statements,
with appropriate elimination of intercompany balances and transactions.
Investments in associated companies (less than majority-
owned and in which the Company has significant influence) are accounted for under the equity method. The Company’s share of net
income or losses in these investments in associated companies is included in the Consolidated Statements of Income. The Company
periodically reviews these investments for impairments and, if necessary, would adjust these investments to their fair value when a
decline in market value or other impairment indicators are deemed to be other than temporary.
Financial Statements.
The Company is not the primary beneficiary of any variable interest entities (“VIEs”) and therefore the
Company’s consolidated financial statements do not include the accounts of any VIEs.
Translation of foreign currency:
Assets and liabilities of non-U.S. subsidiaries and associated comp anies are translated into
U.S. dollars at the respective rates of exchange prevailing at the end of the year. Income and expense accounts are translated at
average exchange rates prevailing during the year. Translation adjustments resulting from this process are recorded directly in equity
as accumulated other comprehensive (loss) income (“AOCI”) and will be included as income or expense only upon sale or liquidation
of the underlying entity or asset. Generally, all of the Company’s non-U.S. subsidiaries use their local currency as their functional
currency.
Cash and cash equivalents:
Inventories:
Inventories are valued at the lower of cost or net realizable value, and are valued using the first-in, first-out method.
See Note 14 of Notes to Consolidated Financial Statements.
Long-lived assets:
Property, plant and equipment (“PP&E”) are stated at gross cost, less accumulated depreciation. Depreciation
is computed using the straight-line method on an individual asset basis over the following estimated useful lives: building s and
improvements,
10
45
1
15
whenever changes in circumstances or current events indicate the carrying amount of such assets may not be recoverable. An estimate
of undiscounted cash flows produced by the asset, or the appropriate group of assets, is compared with the carrying value to determine
whether an impairment exists. If necessary, the Company recognizes an impairment loss for the difference between the carrying
amount of the assets and their estimated fair value. Fair value is based on current and anticipated future cash flows. Upon sale or
other dispositions of long-lived assets, the applicable amounts of asset cost and accumulated depreciation are removed from the
accounts and the net amount, less proceeds from disposals, is recorded in the Consolidated Statements of Income. Expenditures for
renewals or improvements that increase the estimated useful life or capacity of the assets are capitalized, whereas expenditures for
repairs and maintenance are expensed when incurred.
Capitalized software:
The Company capitalizes certain costs in connection with developing or obtaining software for internal
use, depending on the associated project. These costs are amortized over a period of
3
5
intended use.
related systems, approximately
$2.3
$2.6
Balance Sheets at December 31, 2020 and 2019, respectively.
Goodwill and other intangible assets:
The Company records goodwill, definite-lived intangible assets and indefinite-lived
intangible assets at fair value at the date of acquisition. Goodwill and indefinite-lived intangible assets are not amortized but tested for
impairment at least annually. These tests will be performed more frequently if triggering events indicate potential impairment.
Definite-lived intangible assets are amortized on a straight -line basis over their estimated useful lives, generally for periods ranging
from
4
20
discussion of long-lived assets, above.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
53
Revenue recognition:
The Company applies the Financial Accounting Standards Board’s (“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.
Financial Statements.
Accounts receivable and allowance for doubtful accounts:
Trade accounts receivable subject the Company to credit risk.
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful
accounts is the Company’s best estimate of the amount of expected credit losses with its existing accounts receivable.
adopted ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
on
a modified retrospective basis, effective January 1, 2020. See Note 3 of Notes to the Consolidated Financial Statements.
The Company recognizes an allowance for credit losses, which 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. The Company does not have any off-balance-sheet credit exposure related to its
customers.
Research and development costs
and administrative expenses (“SG&A”).
$40.0
$32.1
$24.5
the years ended December 31, 2020, 2019 and 2018, respectively.
Environmental liabilities and expenditures:
Accruals for environmental matters are recorded when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated. If there is a range of estimated liability and no amount
in that range is considered more probable than another, then the Company records the lowest amount in the range in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”). Environmental costs and remediation costs are
capitalized if the costs extend the life, increase the capacity or improve safety or efficiency of the property from the date acquired or
constructed, and/or mitigate or prevent contamination in the future.
Asset retirement obligations:
The Company follows the FASB’s guidance regarding asset retirement obligations, which
addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated
retirement costs. Also, the Company follows the FASB’s guidance for conditional asset retirement obligations (“CARO”), which
relates to legal obligations to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on
a future event that may or may not be within the control of the entity. In accordance with this guidance, the Company records a
liability when there is enough information regarding the timing of the CARO to perform a probability-weighted discounted cash flow
analysis.
recorded for such on its Consolidated Balance Sheets.
Pension and o
ther postretirement benefits:
The Company maintains various noncontributory retirement plans, covering a
portion of its employees in the U.S. and certain other countries, including the Netherlands, the United Kingdom (“U.K.”), Mexico,
Sweden, Germany and France. These retirement plans are subject to the provisions of FASB’s guidance regarding employers’
accounting for defined benefit pension plans. The plans of the remaining non-U.S. subsidiaries are, for the most part, either fully
insured or integrated with the local governments’ plans and are not subject to the provisions of the guidance. The guidance requires
that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on
their consolidated balance sheet and, also, recognize as a component of AOCI, net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net periodic benefit cost. In addition, the guidance
requires that an employer recognize a settlement charge in their consolidated statement of income when certain events occur,
including plan termination or the settlement of certain plan liabilities. A settlement charge represents the immediate recognition into
expense of a portion of the unrecognized loss within AOCI on the balance sheet in proportion to the share of the projected benefit
obligation that was settled. The Company’s Legacy Quaker U.S. pension plan year ends on November 30 and the measurement date is
December 31. The measurement date for the Company’s other postretirement benefits plan is December 31.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
54
The Company’s global pension investment policies are designed to ensure that pension assets are invested in a manner consistent
with meeting the future benefit obligations of the pension plans and maintaining compliance with various laws and regulations
including the Employee Retirement Income Security Act of 1974. The Company establishes strategic asset allocation percentage
targets and benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. The
Company’s investment horizon is generally long term, and, accordingly, the target asset allocations encompass a long-term
perspective of capital markets, expected risk and return and perceived future economic conditions while also considering the profile of
plan liabilities. To the extent feasible, the short-term investment portfolio is managed to match the short-term obligations, the
intermediate portfolio duration is matched to reduce the risk of volatility in intermediate plan distributions, and the total return
portfolio is managed to maximize the long-term real growth of plan assets. The critical investment principles of diversification,
assessment of risk and targeting the optimal expected returns for given levels of risk are applied. The Company’s investment
guidelines prohibit the use of securities such as letter stock and other unregistered securities, commodities or commodity contracts,
short sales, margin transactions, private placements (unless specifically addressed by addendum), or any derivatives, options or futures
for the purpose of portfolio leveraging.
The target asset allocation is reviewed periodically and is determined based on a long-term projection of capital market outcomes,
inflation rates, fixed income yields, returns, volatilities and correlation relationships. The interaction between plan assets and benefit
obligations is periodically studied to assist in establishing such strategic asset allocation targets. Asset performance is monitored with
an overall expectation that plan assets will meet or exceed benchmark performance over rolling five-year periods. The Company’s
pension committee, as authorized by the Company’s Board of Directors, has discretion to manage the assets within established asset
allocation ranges approved by senior management of the Company.
Comprehensive income (loss):
The Company presents other comprehensive income (loss) in its Statements of Comprehensive
Income. The Company follows the FASB’s guidance regarding the disclosure of reclassifications from AOCI which requires the
disclosure of significant amounts reclassified from each component of AOCI, the related tax amounts and the income statement line
items affected by such reclassifications.
Income taxes and uncertain tax positions:
The provision for income taxes is determined using the asset and liability approach
of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or
payable for the current year and the change in deferred taxes during the year. Deferred taxes result from differences between the
financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are
enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be
realized. The FASB’s guidance regarding accounting for uncertainty in income taxes prescribes the recognition threshold and
measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax
return. The guidance further requires the determination of whether the benefits of tax positions are probable or more likely than not
sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than
not sustained upon audit, a company recognizes the largest amount of benefit that is greater than
50
% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon
audit, a company does not recognize any portion of the benefit in the financial statements. Additionally, the Company monitors and
adjusts for derecognition, classification, and penalties and interest in interim periods, with appropriate disclosure and transition
thereto. Also, the amount of interest expense and income related to uncertain tax positions is computed by applying the applicable
statutory rate of interest to the difference between the tax position recognized, including timing differences, and the amount previously
taken or expected to be taken in a tax return. The Company recognizes interest and/or penalties related to income tax matters in
income tax expense. Finally, when applicable, the Company nets its liability for unrecognized tax benefits against deferred tax assets
related to net operating losses or other tax credit carryforwards that would apply if the uncertain tax position were settled for the
presumed amount at the balance sheet date.
Pursuant to the Tax Cuts and Jobs Act (“U.S. Tax Reform”), specifically the one-time tax on deemed repatriation (the “Transition
Tax”), the Company has provided for U.S. income tax on its undistributed earnings of non-U.S. subsidiaries, however, the Company is
subject to and will incur other taxes, such as withholding taxes and dividend distribution taxes, if these undistributed earnings were
ultimately remitted to the U.S. The Company currently intends to reinvest its future undistributed earnings of non-U.S. subsidiaries to
support working capital needs and certain other growth initiatives of those subsidiaries. However, in certain cases the Company has
and may in the future change its indefinite reinvestment assertion for any or all of these undistributed earnings. In this case, the
Company would estimate and record a tax liability and corresponding tax expense for the amount of non-U.S. income taxes it would
incur to ultimately remit these earnings to the U.S. See Note 10 of Notes to Consolidated Financial Statements.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
55
Derivatives:
The Company is exposed to the impact of changes in interest rates, foreign currency fluctuations, changes in
commodity prices and credit risk. The Company utilizes interest rate swap agreements to enhance its ability to manage risk, including
exposure to variability in interest payments associated with its variable rate debt. Derivative instruments are entered into for periods
consistent with the related underlying exposures and do not constitute positions independent of those exposures. As of December 31,
2020 and 2019, the Company had certain interest rate swap agreements that were designated as cash flow hedges. Interest rate swaps
are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single
payment in a single currency in the event of a default on or termination of any one contract. The Company records these instruments
on a net basis within the Consolidated Balance Sheets. The effective portion of the change in fair value of the agreement is recorded
in AOCI and will be recognized in the Consolidated Statements of Income when the hedge item affects earnings or losses or it
becomes probable that the forecasted transaction will not occur.
Fair value measurements:
The Company utilizes the FASB’s guidance regarding fair value measurements, which establishes a
common definition for fair value to be applied to guidance requiring use of fair value, establishes a framework for measuring fair
value and expands disclosure about such fair value measurements. Specifically, the guidance utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
Consolidated Financial Statements. The following is a brief description of those three levels:
•
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
•
Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.
Share-based compensation:
The Company applies the FASB’s guidance regarding share-based payments, which requires the
recognition of the fair value of share-based compensation as a component of expense. The Company has a long-term incentive
program (“LTIP”) for key employees which provides for the granting of options to purchase stock at prices not less than its market
value on the date of the grant. Most options become exercisable within
three years
determined by the Company, but not to exceed
seven years
issued under the LTIP program are subject to time vesting generally over a
one
three-year
Company’s Annual Incentive Plan, nonvested shares may be issued to key employees, which generally would vest over a
two
five
-
year period.
In addition, while the FASB’s guidance permits the Company to make an accounting policy election to account for forfeitures as
they occur for service condition aspects of certain share-based awards, the Company has decided not to elect this accounting policy
and instead has elected to continue utilizing a forfeiture rate assumption. Based on historical experience, the Company has assumed a
forfeiture rate of
13
% on certain of its nonvested stock awards. The Company will record additional expense if the actual forfeiture
rate is lower than estimated and will record a recovery of prior expense if the actual forfeiture is higher than estimated.
The Company also issues performance-dependent stock awards as a component of its LTIP. The fair value of the performance-
dependent stock awards is based on their grant-date market value adjusted for the likelihood of attaining certain pre -determined
performance goals and is calculated by utilizing a Monte Carlo Simulation model. Compensation expense is recognized on a straight-
line basis over the vesting period, generally
three years
.
See Note 8 of the Notes to Consolidated Financial Statements.
Earnings per share:
The Company follows the FASB’s guidance regarding the calculation of earnings per share for nonvested
stock awards with rights to non-forfeitable dividends. The guidance requires nonvested stock awards with rights to non-forfeitable
dividends to be included as part of the basic weighted average share calculation under the two-class method.
Consolidated Financial Statements.
Segments:
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 Company and the chief operating decision maker assess its
performance
. See Note 4 of Notes to Consolidated Financial Statements.
Hyper-inflationary accounting:
Economies that have a cumulative three-year rate of inflation exceeding
% are considered
hyper-inflationary in accordance with U.S. GAAP. A legal entity that operates within an economy deemed to be hyper-inflationary is
required to remeasure its monetary assets and liabilities to the applicable published exchange rates and record the associated gains or
losses resulting from the remeasurement directly to the Consolidated Statements of Income.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
56
Venezuela’s economy has been considered hyper-inflationary under U.S. GAAP since 2010. The Company has a
% equity
interest in a Venezuelan affiliate, Kelko Quaker Chemical, S.A (“Kelko Venezuela”). Due to heightened foreign exchange controls
and restrictions currently present within Venezuela, during the third quarter of 2018 the Company concluded that it no longer had
significant influence over this affiliate. Prior to this determination, the Company historically accounted for this affiliate under the
equity method. As of December 31, 2020 and 2019, the Company had
Venezuela. See Note 17 of Notes to Consolidated Financial Statements.
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 Argentine subsidiary to which hyper-inflationary accounting also is applied. As of, and
for the year ended December 31, 2020, the Company's Argentine subsidiaries represented less than
% of the Company’s consolidated
total assets and net sales, respectively.
Business combinations:
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 and assumed liabilities at their
respective acquisition date estimated 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 and liabilities assumed
requires significant estimates and assumptions. Based on the assessment of additional information during the measurement period,
which may be up to one year from the acquisition date, the Company may record adjustments to the estimated fair value of assets
acquired and liabilities assumed.
Restructuring activities:
Restructuring programs consist of employee severance, rationalization of manufacturing or other
facilities and other related items. To account for such programs, the Company applies FASB’s guidance regarding exit or disposal
cost obligations. This guidance requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred, is estimable, and payment is probable.
Reclassifications:
Certain information has been reclassified to conform to the current year presentation.
Accounting estimates:
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of
contingencies at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.
Actual results could differ from such estimates.
Note 2 – Business Combinations
Houghton
On
, the Company completed the Combination, 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. The
Company believes that combining the Legacy Quaker and Houghton products and service offerings allows 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 $
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
% of the combined company’s net sales.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
57
The following table summarizes the fair value of consideration transferred in the Combination:
Cash transferred to Houghton shareholders (a)
$
Cash paid to extinguish Houghton debt obligations
Fair value of common stock issued as consideration (b)
Total fair value of consideration transferred
$
(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
% of the common stock of the Company
immediately after the closing, and the closing price per share of Quaker Chemical Corporation common stock of $
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, 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 final estimated fair values of Houghton net assets acquired:
Measurement
August 1,
Period
August 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
$
$
Accounts receivable
Inventories
Prepaid expenses and other assets
Property, plant and equipment
(66 )
Right of use lease assets
Investments in associated companies
Other non-current assets
Intangible assets
Goodwill
Total assets purchased
Short-term borrowings, not refinanced at closing
Accounts payable, accrued expenses and other accrued liabilities
Deferred tax liabilities
Long-term lease liabilities
Other non-current liabilities
Total liabilities assumed
Total consideration paid for Houghton
Less: cash acquired
Less: fair value of common stock issued as consideration
Net cash paid for Houghton
$
$
$
(1) As previously disclosed in the Company’s 2019 Form 10-K.
During 2020, the allocation of the purchase price for the Combination was finalized and the
one-year
ended. Houghton assets acquired and liabilities assumed were assigned to each of the Company’s reportable segments on a specific
identification or allocated basis, as applicable. Prior to finalizing the purchase price allocation, certain measurement period
adjustments were recorded during 2020 related primarily to increasing the valuation allowances against the deferred tax assets
associated with foreign tax credits acquired as part of the Combination as additional information became available and was used to
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
58
update the Company’s initial estimates of expenses allocated to foreign source income and expected creditable foreign taxes. In
addition, measurement period adjustments included the recognition of additional other non-current assets and other non-current
liabilities based on additional information obtained regarding certain tax audits and associated rights to indemnification, and certain
non-income tax liabilities payable upon closing of the Combination in certain countries.
adjustments, comprised of $
million of customer relationships, to be amortized over
amortized over
related to expected value not allocated to other acquired assets, none of which will be tax deductible. See Note 16 of Notes to
Consolidated Financial Statements. Factors contributing to the purchase price that resulted in goodwill included the acquisition of
management, 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 certain emerging growth markets.
Houghton subsequent to closing of the Combination and included in the Company’s Consolidated Statements of Income for the year
ended December 31, 2019 were $
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 amort ization 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 Legacy 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, integration 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 unaudited pro forma table below as these
costs on a pro forma basis were incurred during the year ended December 31, 2018. Unaudited 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.
For the years ending
Unaudited Pro Forma
(as if the Combination occurred on January 1, 2018)
2019
2018
Net sales
$
$
Net income attributable to Quaker Chemical Corporation
Combination, integration and other acquisition-related expenses have been and are expected to continue to be significant. The
Company incurred total costs of $
2018 related to the Combination, integration and other acquisition-related activities. These costs included certain legal, financial and
other advisory and consultant costs related to due diligence, regulatory approvals and closing the Combination, as well as integration
planning and post-closing integration activities including internal control readiness and remediation. These costs also include interest
costs to maintain the bank commitment (“ticking fees”) for the Combination during each of the years ended December 31, 2019 and
2018, accelerated depreciation charges during the year s ended December 31, 2020 and 2019, a loss on the sale of a held-for-sale asset
during the year ended December 31, 2020, and a gain on the sale of a held-for-sale asset during the year ended December 31, 2018.
As of December 31, 2020 and 2019, the Company had current liabilities related to the Combination and other acquisition-related
activities of $
Sheets.
Norman Hay
In
October 2019
, the Company completed its acquisition of the operating divisions of
U.K. company that provides specialty chemicals, operating equipment, and services to industrial end markets. The acquisition adds
new technologies in automotive, original equipment manufacturer (“OEM”), and aerospace, as well as engineering expertise which is
expected to strengthen the Company’s existing equipment solutions platform. The acquired Norman Hay assets and liabilities were
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
59
assigned to the Global Specialty Businesses reportable segment. The original purchase price was
and debt-free basis, subject to routine and customary post-closing adjustments related to working capital and net indebtedness levels.
The following table presents the final estimated fair values of Norman Hay net assets acquired:
Measurement
October 1,
Period
October 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
$
$
Accounts receivable
Inventories
(49 )
Prepaid expenses and other assets
Property, plant and equipment
Right of use lease assets
Intangible assets
Goodwill
(82 )
Total assets purchased
Long-term debt included current portions
Accounts payable, accrued expenses and other accrued liabilities
(732 )
Deferred tax liabilities
Long-term lease liabilities
Total liabilities assumed
Total consideration paid for Norman Hay
(166 )
Less: estimated purchase price settlement (2)
(3,287 )
Less: cash acquired
Net cash paid for Norman Hay
$
$
$
(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
during the first quarter of 2020 to settle such adjustments.
During 2020, the allocation of the purchase price for Norman Hay was finalized and the
one-year
The Company allocated $
to be amortized over
trademarks, to be amortized over
addition, the Company recorded $
which will be tax deductible. Factors contributing to the purchase price that resulted in goodwill included the acquisition of
management, business processes and personnel that will allow Quaker Houghton to better serve its customers.
The results of operations of Norman Hay are included in the Consolidated Statements of Income as of October 1, 2019.
Transaction expenses associated with this acquisition are included in Combination, integration and other acquisition-related expenses
in the Company’s Consolidated Statements of Income. Certain pro forma and other information is not presented, as the operations of
Norman Hay are not considered material to the overall operations of the Company for the periods presented.
Coral Chemical Company
In
December 2020
, the Company completed its acquisition of
provider of metal finishing fluid solutions. The acquisition provides technical expertise and product solutions for pre-treatment,
metalworking and wastewater treatment applications to the beverage cans and general industrial end markets. The acquired Coral
assets and liabilities were assigned to the Americas and Global Specialty Businesses reportable segments. The original purchase price
was approximately $
indebtedness levels.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
60
The following table presents the preliminary estimated fair values of Coral net assets acquired:
December 22,
2020
Cash and cash equivalents
$
Accounts receivable
Inventories
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Goodwill
Total assets purchased
Long-term debt included current portions
Accounts payable, accrued expenses and other accrued liabilities
Total liabilities assumed
Total consideration paid for Coral
Less: cash acquired
Net cash paid for Coral
$
The Company allocated $
relationships, to be amortized over
$
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, business processes and personnel that will allow Quaker Houghton
to better serve its customers.
As of December 31, 2020, the allocation of the purchase price for Coral has not been finalized and the
one-year
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. The preliminary purchase price allocations are based
upon the valuation of assets and these estimates and assumptions are subject to change as the Company obtains additional information
during the measurement period. These assets pending finalization include fixed assets and intangible assets which could also result in
adjustments to goodwill.
The results of operations of Coral subsequent to the acquisition date are included in the Consolidated Statements of Income as of
December 31, 2020. Transaction expenses associated with this acquisition are included in Combination, integration and other
acquisition-related expenses in the Company’s Consolidated Statements of Income. Certain pro forma and other information is not
presented, as the operations of Coral are not considered material to the overall operations of the Company for the periods presented.
Other Acquisitions
In February 2021, the Company acquired certain assets related to tin-plating solutions in the steel end market for approximately
$
date of closing was after December 31, 2020. Transaction expenses associated with this acquisition that were incurred during the year
ended December 31, 2020 are included in Combination, integration and other acquisition-related expenses in the Company’s
Consolidated Statements of Income. 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 Consolidated Financial Statements.
In May 2020, the Company acquired Tel Nordic ApS (“TEL”), a company that specializes in lubricants and engineering primarily
in high pressure aluminum die casting for its Europe, Middle East and Africa (“EMEA”) reportable segment. Consideration paid was
in the form of a convertible promissory note in the amount of
subsequently converted into shares of the Company’s common stock. An adjustment to the purchase price of approximately
million DKK, or less than $
Company allocated approximately $
the Company recorded approximately $
of which will be tax deductible. The allocation of the purchase price of TEL 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.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
61
In March 2020, the Company acquired the remaining
% ownership interest in one of its South African affiliates, Quaker
Chemical South Africa Limited (“QSA”) for
Holdings South Africa. QSA is a part of the Company’s EMEA reportable segment. As this acquisition was a change in an existing
controlling ownership, the Company recorded $
interest in Capital in excess of par value.
In March 2018, the Company purchased certain formulations and product technology for the mining industry for $
The Company allocated the entire purchase price to intangible assets representing formulations and product technology, to be
amortized over
paid at signing, and the remaining $
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards Adopted
The FASB issued Account Standards Update (“ASU”)
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting
exceptions for applying GAAP to contract modifications, hedging relationships and other transactions to ease the potential accounting
and financial reporting burden associated with transitioning away from reference rates that are expected to be discontinued, including
the London Interbank Offered Rate (“LIBOR”). ASU 2020-04 is effective for the Company as of March 12, 2020 and generally can
be applied through December 31, 2022. As of December 31, 2020, the expedients provided in ASU 2020-04 do not impact the
Company; however, the Company will continue to monitor for potential impacts on its consolidated financial statements.
The FASB issued ASU 2018-15
, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract
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 prospec tively 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
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 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 ASU 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, 2019, and should be
applied retrospectively to all periods presented. 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 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 Company adopted
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. Adoption did not have a material impact to the Company’s financial
statements as expected. However, as a result of this adoption, the Company recorded a cumulative effect of accounting change that
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
62
resulted in an increase to its allowance for doubtful accounts of approximately $
$
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. See Note 13 of Notes to the Consolidated Financial
Statements.
Recently Issued Accounting Standards Not Yet Adopted
The FASB issued ASU 2020-01,
(Topic 323), and Derivatives and Hedging (Topic 815) –Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
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 will adopt this standard, as required, on a prospective basis, effective January 1, 2021, and does not expect
adoption to have an impact to its financial statements.
The FASB issued ASU 2019-12
, Income Taxes (Topic 740): Simplifying 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 will adopt this standard, as required, effective January 1, 2021, and is currently evaluating its
implementation and any potential adoption impact.
Note 4 – Business Segments
The Company’s operating segments, which are consistent with its reportable segments, reflect the structure of the Company’s
internal organization, the method by which the Company’s resources are allocated and the manner by which the chief operating
decision maker assess the Company’s 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
chief operating decision maker assesses the Company’s 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.
Although 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 each of the
Company’s reportable segments are comprised of the segment’s net sales less directly related COGS and SG&A. Operating expenses
not directly attributable to the net sales of each respective segment, such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses, and Restructuring and related charges, are not included in segment operating
earnings. Other items not specifically identified with the Company’s reportable segments include interest expense, net and other
expense, net.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
63
The following tables present information about the performance of the Company’s reportable segments for the years ended
December 31, 2020, 2019 and 2018. Certain immaterial reclassifications within the segment disclosures for the years ended
December 31, 2019 and 2018 have been made to conform with the Company’s current customer industry segmentation.
2020
2019
2018
Net sales
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total net sales
$
$
$
2020
2019
2018
Segment operating earnings
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment operating earnings
Combination, integration and other acquisition-related expenses
(29,790 )
(35,477 )
(16,661 )
Restructuring and related charges
(5,541 )
(26,678 )
Fair value step up of inventory sold
(226 )
(11,714 )
Indefinite-lived intangible asset impairment
(38,000 )
Non-operating and administrative expenses
(143,202 )
(104,572 )
(83,515 )
Depreciation of corporate assets and amortization
(57,469 )
(27,129 )
(7,518 )
Operating income
Other expense, net
(5,618 )
(254 )
(642 )
Interest expense, net
(26,603 )
(16,976 )
(4,041 )
Income before taxes and equity in net income of
associated companies
$
$
$
The following tables present information regarding the Company’s reportable segments’ assets and long-lived assets, including
certain identifiable assets as well as an allocation of shared assets, of December 31, 2020, 2019 and 2018:
2020
2019
2018
Segment assets
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment assets
$
$
$
2020
2019
2018
Segment long-lived assets
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment long-lived assets
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
64
The following tables present information regarding the Company’s reportable segments’ capital expenditures and depreciation for
identifiable assets for the years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Capital expenditures
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment capital expenditures
$
$
$
2020
2019
2018
Depreciation
Americas
$
$
$
EMEA
Asia/Pacific
Global Specialty Businesses
Total segment depreciation
$
$
$
During the years ended December 31, 2020, 2019 and 2018, the Company had approximately
$963.2
$719.8
$534.6
had approximately
$176.6
$174.4
$60.8
operations.
Inter-segment revenue for the years ended December 31, 2020, 2019 and 2018 was
$9.1
$7.3
$8.3
Americas,
$22.0
$20.3
$21.9
$0.6
$0.2
$0.5
$4.7
$5.4
$5.3
have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented in the above tables.
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 typic ally 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.
As part of the Company’s Fluidcare business, certain third-party product sales to customers are managed by the Company. Where
the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers.
Where the Company acts as an agent, revenue is recognized on a net reporting basis at the amount of the administrative fee earned by
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
65
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 resulting in net reporting of $
million for the years ended December 31, 2020, 2019 and 2018, respectively.
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. During the year ended December 31,
2020, the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing
authority) accounted for approximately
% of consolidated net sales, with its largest customer accounting for approximately
% 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 transferr ed 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.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
66
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 income (expense), net, in its Consolidated Statement of Income, 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. The Company does not adjust the promised amount of consideration for the
effects of a significant financing compon ent 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, the Company expenses costs to obtain a contract as incurred when the expected period of benefit, and therefore the
amortization period, is one year or less. In addition, the Company excludes 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 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 Consolidated Balance Sheets as of December 31, 2020 and 2019.
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. The Company acquired and recorded an immaterial amount of deferred
revenue as of the respective opening balance sheet dates related to the Combination and Norman Hay acquisition. Deferred revenues
are presented within other accrued liabilities in the Company’s Consolidated Balance Sheets. The Company had approximately $
million and $
2020 and 2019, respectively, the Company satisfied all of the associated performance obligations and recognized into revenue the
advance payments received and recorded as of December 31, 2020, 2019 and 2018, respectively.
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. 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.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
67
The following tables present disaggregated information regarding the Company’s net sales, first by major product lines that
represent more than 10% of the Company’s consolidated net sales for any of the years ended December 31, 2020, 2019 and 2018, and
followed then by a disaggregation of the Company’s net sales by segment, geographic region, customer industry, and timing of
revenue recognized for the years ended December 31, 2020, 2019 and 2018.
2020
2019
2018
Metal removal fluids
%
%
%
Rolling lubricants
%
%
%
Hydraulic fluids
%
%
%
Net sales for the year ending December 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
$
$
$
$
Net sales for the year ending December 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
$
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
68
Net sales for the year ending December 31, 2018
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
As previously disclosed in the Company’s 2019 Form 10-K, during 2019, the Company adopted, as required, an accounting
standard update regarding the accounting and disclosure for leases which changed the manner in which it accounts for leases effective
January 1, 2019. The Company determines if an arrangement is a lease at its inception. This determination generally depends on
whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in
exchange for consideration. Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and
obtains substantially all of the economic benefits from the use of, the underlying asset. Lease expense for variable leases and short-
term leases is recognized when the obligation is incurred.
The Company has operating leases for certain facilities, vehicles and machinery and equipment with remaining lease terms up to
Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by an option to extend the lease
that the Company is reasonably certain it will exercise. Operating leases are included in
right of use lease assets
, other current
liabilities and long-term
lease liabilities
each lease’s commencement date based on the present value of its lease payments over its respective lease term. The Company uses
the stated borrowing rate for a lease when readily determinable. When a stated borrowing rate is not available in a lease agreement,
the Company uses its incremental borrowing rate based on information available at the lease’s commencement date to determine the
present value of its lease payments. In determining the incremental borrowing rate used to present value each of its leases, the
Company considers certain information including fully secured borrowing rates readily available to the Company and its subsidiaries.
The Company has immaterial finance leases, which are included in PP&E, current portion of long-term debt and long-term debt on the
Consolidated Balance Sheet.
Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease expense for the years ended
December 31, 2020 and 2019 was $
December 31, 2020 and 2019 was $
sublease income for the years ended December 31, 2020 and 2019.
Cash paid for operating leases during the years ended December 31, 2020 and 2019 was $
respectively. The Company recorded new right of use lease assets and associated lease liabilities of $
ended December 31, 2020.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
69
Supplemental balance sheet information related to the Company’s leases is as follows:
December 31,
December 31,
2020
2019
Right of use lease assets
$
$
Other accrued liabilities
Long-term lease liabilities
Total operating lease liabilities
$
$
Weighted average remaining lease term (years)
Weighted average discount rate
Maturities of operating lease liabilities as of December 31, 2020 were as follows:
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
For the year ended December 31, 2026 and beyond
Total lease payments
Less: imputed interest
(5,573 )
Present value of lease liabilities
$
Note 7 – Restructuring and Related Activities
The Company’s management approved a global restructuring plan (the “QH Program”) as part of its plan to realize certain cost
synergies associated with the Combination in the third quarter of 2019. The QH Program includes restructuring and associated
severance costs to reduce total headcount by approximately
manufacturing and non-manufacturing facilities. The exact timing and total costs associated with the QH Program will depend on a
number of factors and is subject to change; however, the Company currently expects reduction in headcount and site closures to
continue to occur into 2021 under the QH Program and estimates that anticipated cost synergies realized from the QH Program will
approximate one-times the restructuring costs incurred. Employee separation benefits will vary depending on local regulations within
certain foreign countries and will include severance and other benefits.
All costs incurred to date relate to severance costs to reduce headcount as well as costs to close certain facilities and are recorded
in restructuring and related charges in the Company’s Consolidated Statements of Income. As described in Note 4 of Notes to
Consolidated Financial Statements, restructuring and related charges are not included in the Company’s calculation of reportable
segments’ measure of operating earnings and therefore these costs are not reviewed by or recorded to reportable segments.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
70
Activity in the Company’s accrual for restructuring under the QH Program for the years ended December 31, 2020 and 2019 is as
follows:
QH Program
Accrued restructuring as of December 31, 2018
$
Restructuring and related charges
Cash payments
(8,899 )
Currency translation adjustments
Accrued restructuring as of December 31, 2019
Restructuring and related charges
Cash payments
(15,745 )
Currency translation adjustments
Accrued restructuring as of December 31, 2020
$
In connection with the plans for closure of certain manufacturing and non-manufacturing facilities, the Company made a decision
to make available for sale certain facilities. During the fourth quarter of 2020, certain of these facilities were sold and the Company
recognized a loss on disposal of approximately $
Income. Additionally, certain buildings and land with an aggregate book value of approximately $
for-sale as of December 31, 2020 and are recorded in other current assets on the Company’s Consolidated Balance Sheet.
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation expense in its Consolidated Statements of Income for the years
ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Stock options
$
$
$
Non-vested stock awards and restricted stock units
Non-elective and elective 401(k) matching contribution in stock
Employee stock purchase plan
Director stock ownership plan
Performance stock units
Annual incentive plan (1)
Total share-based compensation expense
$
$
$
(1) Refer to the section entitled
Annual Incentive Plan
Share-based compensation expense is recorded in SG&A, except for $
ended December 31, 2020, 2019 and 2018, respectively, recorded within Combination, integration and other acquisition-related
expenses. The increase in total share-based compensation expense for the year ended December 31, 2020 includes performance stock
units and non-elective and elective 401(k) matching contributions in stock as components of share-based compensation beginning in
2020, described further below.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
71
Stock Options
Stock option activity under all plans is as follows:
Weighted
Weighted
Average
Average
Exercise
Remaining
Aggregate
Number of
Price
Contractual
Intrinsic
Options
(per option)
Term (years)
Value
Options outstanding as of January 1, 2020
$
Options granted
Options exercised
(83,191 )
Options outstanding as of December 31, 2020
$
$
Options expected to vest after December 31, 2020
$
$
Options exercisable as of December 31, 2020
$
$
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was approximately
$6.5
million,
$2.5
$2.0
the underlying security and the strike price of a related option.
A summary of the Company’s outstanding stock options as of December 31, 2020 is as follows:
Weighted
Average
Weighted
Weighted
Number
Remaining
Average
Number
Average
Range of
of Options
Contractual
Exercise Price
of Options
Exercise Price
Exercise Prices
Outstanding
Term (years)
(per option)
Exercisable
(per option)
$
-
$
$
$
$
-
$
$
-
$
—
$
-
$
$
-
$
—
$
-
$
As of December 31, 2020, unrecognized compensation expense related to options granted in 2020, 2019 and 2018 was
$1.2
million,
$0.3
$0.1
The Company granted stock options under its LTIP plan that are subject only to time vesting generally over a three-year period
during 2020, 2019, 2018 and 2017. For the purposes of determining the fair value of stock option awards, the Company uses the
Black-Scholes option pricing model and the assumptions set forth in the table below:
2020
2019
2018
2017
Number of stock options granted
Dividend yield
%
%
%
%
Expected volatility
%
%
%
%
Risk-free interest rate
%
%
%
%
Expected term (years)
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
72
The fair value of these options is being amortized on a straight-line basis over the respective vesting period of each award. The
compensation expense recorded on each award during the years ended December 31, 2020, 2019 and 2018, respectively, is as follows:
2020
2019
2018
2020 Stock option awards
$
$
$
2019 Stock option awards
2018 Stock option awards
2017 Stock option awards
Restricted Stock Awards
Activity of non-vested restricted stock awards granted under the Company’s LTIP plan is shown below:
Number of
Weighted Average Grant
Shares
Date Fair Value (per share)
Nonvested awards, December 31, 2019
$
Granted
Vested
(19,195 )
Forfeited
(1,781 )
Nonvested awards, December 31, 2020
$
The fair value of the non-vested stock is based on the trading price of the Company’s common stock on the date of grant. The
Company adjusts the grant date fair value for expected forfeitures based on historical experience for similar awards. As of December
31, 2020, unrecognized compensation expense related to these awards was
$4.7
remaining period of
Restricted Stock Units
Activity of non-vested restricted stock units granted under the Company’s LTIP plan is shown below:
Number of
Weighted Average Grant
Units
Date Fair Value (per unit)
Nonvested awards, December 31, 2019
$
Granted
Vested
(1,791 )
Forfeited
(2,049 )
Nonvested awards, December 31, 2020
$
The fair value of the non-vested restricted stock units is based on the trading price of the Company’s common stock on the date of
grant. The Company adjusts the grant date fair value for expected forfeitures based on historical experience for similar awards. As of
December 31, 2020, unrecognized compensation expense related to these awards was
$0.8
average remaining period of
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
% up to
% of the target award, subject to the
achievement of the Company’s total shareholder return (“TSR”) relative to the performance of the Company’s peer group, the S&P
Midcap 400 Materials group. The service period required for the PSUs is three years and the TSR measurement period for the PSUs is
from January 1, 2020 through December 31, 2022.
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
%; (ii) an expected term of
historical volatility for each of the companies in the peer group, including Quaker Houghton.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
73
As of December 31, 2020, the Company estimates that it will issue approximately
date of the award based on the conditions of the PSUs and Company’s closing stock price on December 31, 2020. As of December
31, 2020, there was approximately $
to recognize over a weighted-average period of
Annual Incentive Plan
The Company maintains an Annual Incentive Plan (“AIP”), which may be settled in cash or a certain number of shares subject to
performance-based and time-based vesting conditions. As previously disclosed within the Company’s Form 10-Q for the first three
quarters of 2020, it was the Company’s intention at that time to settle the 2020 AIP in shares, and therefore, expense associated with
the AIP in 2020 was recorded as a component of share -based compensation expense during the first nine months of 2020.
In the fourth quarter of 2020, the Company determined that it would settle the current year AIP in cash. Therefore, the share-
based compensation associated with the AIP during the year ended December 31, 2020 was reclassified from a component of share-
based compensation expense to incentive compensation. This determination and conclusion had no impact on the classification of
AIP expense within the Company’s Consolidated Statement of Income for the year ended December 31, 2020 as both are a component
of SG&A.
As a result of the change, there was an immaterial impact on the Company’s calculation of diluted earnings per share for the year
ended December 31, 2020 as the Company no longer considers the estimated number of shares related to a hypothetical AIP
settlement in shares as a component of its diluted earnings per share calculation.
In addition, there was no impact on the Company’s Consolidated Balance Sheet as of December 31, 2020, as the AIP was and
continues to be classified as a liability and included within accrued compensation. Similarly, there was a reclassification on the
Company’s Consolidated Statement of Cash Flow between lines within Net cash provided by operating activities in the fourth quarter
of 2020. The expected cash flow impact of the AIP settled in cash is presented as a component of accounts payable and accrued
liabilities for the year ended December 31, 2020.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majority of its U.S. employees. The Company matches
%
of the first
% of compensation that is contributed to the plan, with a maximum matching contribution of
% of compensation.
Additionally, the plan provides for non-elective nondiscretionary contributions on behalf of participants who have completed one year
of service equal to
% of the eligible participant's compensation. The Company’s matching contributions and non-elective
contributions may be made in cash or in fully vested shares of the Company’s common stock. Beginning in April 2020, the Company
began matching both non-elective and elective 401(k) contributions in fully vested shares of its common stock rather than cash. For
the year ended December 31, 2020, total contributions were $
Employee Stock Purchase Plan
In 2000, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby employees may purchase Company stock
through a payroll deduction plan. Purchases were made from the plan and credited to each participant’s account on the last day of
each calendar month in which the organized securities trading markets in the U.S. were open for business (the “Investment Date”).
The purchase price of the stock was
% of the fair market value on the Investment Date. The plan was compensatory, and the
%
discount was expensed on the Investment Date. All employees, including officers, were eligible to participate in this plan. A
participant could withdraw all uninvested payment balances credited to a participant’s account at any time. An employee whose stock
ownership of the Company exceeds five percent of the outstanding common stock was not eligible to participate in this plan.
Effective January 1, 2020, the Company discontinued the ESPP.
2013 Director Stock Ownership Plan
In 2013, the Company adopted the 2013 Director Stock Ownership Plan (the “Plan”), to encourage the Directors to increase their
investment in the Company, which was approved at the Company’s May 2013 shareholders’ meeting. The Plan authorizes the
issuance of up to
annual cash retainer payable to each of the Company’s non-employee directors in 2013 and subsequent years during the term of the
Plan. Under the Plan, each director who, on May 1
of the applicable calendar year, owns less than
% of the annual cash retainer
for the applicable calendar year, divided by the average of the closing price of a share of Quaker Common Stock as reported by the
composite tape of the New York Stock Exchange for the previous calendar year (the “Threshold Amount”), is required to receive
%
of the annual cash retainer in Quaker common stock and
% of the retainer in cash, unless the director elects to receive a greater
percentage of Quaker common stock, up to
% of the annual cash retainer for the applicable year. Each director who owns more
than the Threshold Amount may elect to receive common stock in payment of a percentage (up to
%) of the annual cash retainer.
The annual retainer is $
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
74
Note 9 – Other Expense, net
Other expense, net, for the years ended December 31, 2020, 2019 and 2018 are as follows:
2020
2019
2018
Income from third party license fees
$
$
$
Foreign exchange (losses) gains, net
(6,082 )
(807 )
(Loss) gain on fixed asset disposals, net
(871 )
Non-income tax refunds and other related credits
Pension and postretirement benefit costs, non-service components
(21,592 )
(2,805 )
(2,285 )
Gain on changes in insurance settlement restrictions of an inactive
Other non-operating income, net
Total other expense, net
$
(5,618 )
$
(254 )
$
(642 )
Pension and postretirement benefit costs, non-service components during the year ended December 31, 2020 include a $
million refund in premium and a $
described in Note 21 of Notes to Consolidated Financial Statements. Gain on changes in insurance restrictions of an inactive
subsidiary and related insurance insolvency recovery relate to the termination of restrictions over certain cash that was previously
designated solely to be used for settlement of asbestos claims at an inactive subsidiary of the Company and cash proceeds from an
insolvent insurance carrier with respect to previously filed recovery claims. See Note 12, Note 19 and Note 26 of Notes to
Consolidated Financial Statements. Foreign exchange (losses) gains, net, during the years ended December 31, 2020, 2019 and 2018,
include foreign currency transaction losses of approximately $
hyper-inflationary accounting for the Company’s Argentine subsidiaries, and specific to 2018, a foreign currency transaction gain of
approximately $
Statements. (Loss) gain on fixed asset disposals, net, during the year ended December 31, 2020 and 2018, included $
and a $
Note 10 – Taxes on Income
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform.
U.S. Tax Reform implemented a new system of taxation for non-U.S. earnings which eliminated U.S. federal income taxes on
dividends from certain foreign subsidiaries and imposed a one-time transition tax on the deemed repatriation of undistributed earnings
of certain foreign subsidiaries that is payable over eight years.
Following numerous regulations, notices, and other formal guidance published by the Internal Revenue Service (“I.R.S.”), U.S.
Department of Treasury, and various state taxing authorities, the Company has completed its accounting for the transition tax and has
elected to pay its $
31, 2020, $
As of December 31, 2020, the Company has a deferred tax liability of $
which primarily represents the Company’s estimate of the non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S. The Company’s reinvestment assertions are further explained below.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
75
Taxes on income before equity in net income of associated companies for the years ended December 31, 2020, 2019 and 2018 are
as follows:
2020
2019
2018
Current:
Federal
$
(1,359 )
$
(239 )
$
State
(1,844 )
Foreign
Deferred:
Federal
(28,437 )
(9,267 )
State
(3,087 )
(396 )
(173 )
Foreign
(6,757 )
(14,579 )
Total
$
(5,296 )
$
$
The components of earnings before income taxes for the years ended December 31, 2020, 2019 and 2018 are as follows:
2020
2019
2018
U.S.
$
(66,585 )
$
(46,697 )
$
Foreign
Total
$
$
$
Total deferred tax assets and liabilities are composed of the following as of December 31, 2020 and 2019:
2020
2019
Retirement benefits
$
$
Allowance for doubtful accounts
Insurance and litigation reserves
Performance incentives
Equity-based compensation
Prepaid expense
Insurance settlement
Operating loss carryforward
Foreign tax credit and other credits
Interest
Restructuring reserves
Right of use lease assets
Royalties and license fees
Inventory reserves
Research and development
Other
Valuation allowance
(21,511 )
(13,834 )
Total deferred tax assets, net
$
$
Depreciation
Foreign pension and other
Amortization and other
Lease liabilities
Outside basis in equity investment
Unremitted Earnings
Total deferred tax liabilities
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
76
The Company has $
million has been established against this amount resulting in a net $
expected impact of the reversal of existing taxable temporary differences, considered expiration dates, analyzed current state tax laws,
and determined that $
liabilities. These state net operating losses are subject to various carryforward periods of
carryforward period. An additional $
The Company has $
allowance of $
able to be utilized. These foreign net operating losses are subject to various carryforward periods with the majority having an
indefinite carryforward period. An additional partial valuation allowance of $
foreign deferred tax assets.
In conjunction with the Combination, the Company acquired foreign tax credit deferred tax assets of $
between 2019 and 2028. Foreign tax credits may be carried forward for
carry forward was $
analyzed the expected impact of the utilization of foreign tax credits based on certain assumptions such as projected U.S. taxable
income, overall domestic loss recapture, and annual limitations due to the ownership change under the Internal Revenue
Code. Consequently, as of December 31, 2020, the foreign tax credit carry forward was $
allowance reflecting the amount of credits that are not expected to be utilized before expiration.
The Company also acquired disallowed interest deferred tax assets of $
interest may be carried forward indefinitely. Management analyzed the expected impact of the utilization of disallowed interest
carryforwards based on projected US taxable income and determined that the Company will utilize all expected future benefits by
2022. As of December 31, 2020, the Company had a net realizable disallowed interest carryforward of $
sheet.
As of December 31, 2020, the Company had deferred tax liabilities of $
intangibles resulting from the Combination and Norman Hay acquisition.
As part of the Combination, the Company acquired a
% interest in the Korea Houghton Corporation joint venture and has
recorded a $
The following are the changes in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2020,
2019 and 2018:
Effect of
Balance at
Purchase
Additional
Allowance
Exchange
Balance
Beginning
Accounting
Valuation
Utilization
Rate
at End
of Period
Adjustments
Allowance
and Other
Changes
of Period
Valuation Allowance
Year ended December 31, 2020
$
$
$
$
(2,153 )
$
(56 )
$
Year ended December 31, 2019
$
$
$
$
(8,227 )
$
(43 )
$
Year ended December 31, 2018
$
$
$
$
(471 )
$
(60 )
$
The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2020
and 2019 as follows:
2020
2019
Non-current deferred tax assets
$
$
Non-current deferred tax liabilities
Net deferred tax liability
$
(176,197 )
$
(196,349 )
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
77
The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company for the
years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Income tax provision at the Federal statutory tax rate
$
$
$
Unremitted earnings
(2,308 )
(4,383 )
Tax law changes / reform
(1,059 )
(416 )
(3,118 )
Sub part F / Global intangible low taxed income
Pension settlement
(2,247 )
Foreign derived intangible income
(7,339 )
(1,699 )
(1,034 )
Non-deductible acquisition expenses
Withholding taxes
Foreign tax credits
(4,699 )
(3,787 )
(1,911 )
Share-based compensation
(540 )
Foreign tax rate differential
Research and development credit
(475 )
(306 )
(230 )
Uncertain tax positions
(79 )
State income tax provisions, net
(2,245 )
(117 )
Non-deductible meals and entertainment
Intercompany transfer of intangible assets
(4,384 )
(5,318 )
Miscellaneous items, net
(2,530 )
(495 )
(119 )
Taxes on income before equity in net income of associated companies
$
(5,296 )
$
$
Pursuant to U.S. Tax Reform, the Company recorded a $
undistributed earnings of non-U.S. subsidiaries. However, the Company may also be subject to other taxes, such as withholding taxes
and dividend distribution taxes, if these undistributed earnings are ultimately remitted to the U.S. As a result of the Combination,
additional third-party debt was incurred resulting in the Company re-evaluating its global cash strategy in order to meet its goal of
reducing leverage in upcoming years. As of December 31, 2020, the Company has a deferred tax liability $
primarily represents the estimate of the non-U.S. taxes the Company will incur to ultimately remit these earnings to the U.S. It is the
Company’s current inten tion to reinvest its additional undistributed earnings of non-U.S. subsidiaries to support working capital needs
and certain other growth initiatives outside of the U.S. The amount of such undistributed earnings at December 31, 2020 was
approximately $
substantially offset by foreign tax credits (subject to certain limitations). It is currently impractical to estimate any such incremental
tax expense.
As of December 31, 2020, the Company’s cumulative liability for gross unrecognized tax benefits was $
Company had accrued approximately $
3.9
3.0
31, 2020. As of December 31, 2019, the Company’s cumulative liability for gross unrecognized tax benefits was $
Company had accrued approximately $
3.1
2.3
31, 2019.
The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of tax expense
on income before equity in net income of associated companies in its Consolidated Statements of Income. The Company recognized
an expense of less than $
0.1
Statement of Income for the year ended December 31, 2020, a credit of $
0.2
interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2019, and a
credit of $
0.2
Statement of Income for the year ended December 31, 2018.
The Company estimates that during the year ending December 31, 2021, it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
1.5
positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability
for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits
with regard to new tax positions for the year ending December 31, 2021.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
78
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2020, 2019
and 2018, respectively, is as follows:
2020
2019
2018
Unrecognized tax benefits as of January 1
$
$
$
Increase (decrease) in unrecognized tax benefits taken in prior periods
(28 )
(183 )
Increase in unrecognized tax benefits taken in current period
Decrease in unrecognized tax benefits due to lapse of statute of limitations
(3,659 )
(1,029 )
(1,292 )
Increase in unrecognized tax benefits due to acquisition
Increase (decrease) due to foreign exchange rates
(132 )
(259 )
Unrecognized tax benefits as of December 31
$
$
$
The amount of net unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax
rate is $
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign
tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Italy from
, Brazil from
,
Mexico, the Netherlands and China from
, Spain, Germany and the United Kingdom from
, Canada and the U.S. from
,
India from fiscal year beginning April 1,
.
As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia
S.r.l., relating to the tax years 2007 through 2015. The Company filed for competent authority relief from these assessments under the
Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except 2007.
In 2020, the respective tax authorities in Italy, Spain, and Netherland reached agreement with respect to the MAP proceedings, which
the Company has accepted. As a result, the Company has recorded an estimated tax liability of $
proceedings, net of refunds expected to be received from the Spanish and Dutch tax authorities. As of December 31, 2020, the
Company believes it has adequate reserves for uncertain tax positions with respect to these and all other audits.
Houghton Italia, S.r.l is also currently involved in a corporate income tax audit with the Italian tax authorities covering tax years
2014 through 2018. As of December 31, 2020, the Company has a $
related to this audit. Since this reserve relates to the tax periods prior to August 1, 2019, the tax liability was established through
purchase accounting related to the Combination. The Company has also submitted an indemnification claim against funds held in
escrow by Houghton’s former owners and as a result, a corresponding $
established through purchase accounting.
Houghton Deutschland GmbH is also under audit by the German tax authorities for tax years 2015-2017. Based on preliminary
audit findings, primarily related to transfer pricing, the Company has recorded a reserve for $
this amount, $
claim with Houghton’s former owners for any tax liabilities arising pre-Combination. As a result, a corresponding $
indemnification receivable has also been established to offset the $
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
79
Note 11 – Earnings Per Share
The following table summarizes earnings per share calculations for the years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
$
$
Less: income allocated to participating securities
(148 )
(90 )
(253 )
Net income available to common shareholders
$
$
$
Basic weighted average common shares outstanding
Basic earnings per common share
$
$
$
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
$
$
Less: income allocated to participating securities
(148 )
(90 )
(252 )
Net income available to common shareholders
$
$
$
Basic weighted average common shares outstanding
Effect of dilutive securities
Diluted weighted average common shares outstanding
Diluted earnings per common share
$
$
$
The Company’s calculation of earnings per diluted share attributable to Quaker Chemical Corporation common shareholders for
the year ended December 31, 2019 was impacted by the variability of its reported earnings during the year and the approximately
million shares issued as a component of the consideration transferred in the Combination, comprising
% of the common stock of
the Company immediately after the closing. Certain stock options and restricted stock units are not included in the diluted earnings
per share calculation because the effect would have been anti-dilutive. The calculated amount of anti-diluted shares not included were
945
108
1,808
Note 12 – Restricted Cash
of defense associated with the subsidiary’s asbestos litigation.
The proceeds of the settlement and release agreements were deposited
into interest bearing accounts which earned less then $
respectively, offset by $
of the proceeds, a corresponding deferred credit was established in other non-current liabilities for an equal and offsetting amount.
During December 2020, the restrictions ended on these previously received insurance settlements and the Company transferred
the cash into an operating account. In connection with the termination in restrictions, the Company recognized an $
on its Consolidated Statement of Income in Other expense, net, for the amount of previously restricted cash, net of the estimated
liability to pay claims and associated with the inactive subsidiary’s asbestos litigation as of December 31, 2020. See Notes 18, 22 and
26 of Notes to Consolidated Financial Statements.
The following table provides a reconciliation of cash, cash equivalents and restricted cash as December 31, 2020, 2019, 2018 and
2017:
2020
2019
2018
2017
Cash and cash equivalents
$
$
$
$
Restricted cash included in other current assets
Restricted cash included in other assets
Cash, cash equivalents and restricted cash
$
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
80
Note 13 – Accounts Receivable and Allowance for Doubtful Accounts
As of December 31, 2020 and 2019, the Company had gross trade accounts receivable totaling
$386.1
$387.7
respectively.
The Company recognizes an allowance for credit losses, which 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 estimates credit losses for trade receivables by aggregating similar customer types, because they tend to
share similar credit risk characteristics. 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. Trade and other receivables are written off when
there is no reasonable expectation of recovery.
The following are changes in the allowance for doubtful accounts during the years ended December 31, 2020, 2019 and 2018:
Exchange Rate
Balance at
Changes
Write-Offs
Changes
Balance
Beginning
to Costs and
Charged to
and Other
at End
of Period
Expenses
Allowance
Adjustments
of Period
Allowance for Doubtful Accounts
Year ended December 31, 2020
$
$
$
(2,187 )
$
$
Year ended December 31, 2019
$
$
$
(322 )
$
$
Year ended December 31, 2018
$
$
$
(295 )
$
(468 )
$
Included in exchange rate changes and other adjustments for the year ended December 31, 2019 are the allowance for doubtful
accounts of $
Note 2 of Notes to Consolidated Financial Statements. Included in exchange rate changes and other adjustments for the year ended
December 31, 2018 is a reclassification of $
Note 14 – Inventories
Inventories, net, as of December 31, 2020 and 2019 were as follows:
2020
2019
Raw materials and supplies
$
$
Work in process, finished goods and reserves
Total inventories, net
$
$
Note 15 – Property, Plant and Equipment
Property, plant and equipment as of December 31, 2020 and 2019 were as follows:
2020
2019
Land
$
$
Building and improvements
Machinery and equipment
Construction in progress
Property, plant and equipment, at cost
Less: accumulated depreciation
(219,370 )
(185,365 )
Total property, plant and equipment, net
$
$
As of December 31, 2020, PP&E includes $
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
81
Note 16 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2018
$
$
$
$
$
Goodwill additions
Currency translation adjustments
(573 )
(1,513 )
(425 )
Balance as of December 31, 2019
Goodwill additions
Currency translation and other
(4,628 )
Balance as of December 31, 2020
$
$
$
$
$
Other adjustments in the table above includes updates to the Company’s allocation of the Houghton purchase price and associated
goodwill to each of the Company’s reportable segments during the year ended December 31, 2020, including a $
in the Americas, a $
Specialty Businesses.
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of December 31, 2020 and 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
$
$
$
$
The Company recorded $
31, 2020, 2019 and 2018, respectively. Amortization is recorded within SG&A in the Company’s Consolidated Statements of Income.
Estimated annual aggregate amortization expense for the subsequent five years is as follows:
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
The Company has four indefinite-lived intangible assets totaling $
million of indefinite-lived intangible assets for trademarks and tradename associated with the Combination. Comparatively, the
Company had four indefinite-lived intangible assets for trademarks and tradename totaling $
The Company completes its annual goodwill and indefinite -lived intangible asset impairment test during the fourth quarter of
each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. The Company
completed its annual impairment assessment during the fourth quarter of 2020 and concluded no impairment charge was warranted.
The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an
interim period impairment test for one or more of its reporting units is necessary.
As of March 31, 2020, the Company evaluated the initial impact of COVID-19 on the Company’s operations, and the volatility
and uncertainty in the economic outlook as a result of COVID-19 to determine if they indicated it was more likely than not that the
carrying value of any of the Company’s reporting units or indefinite-lived or long-lived assets was 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 the Company’s
reporting units or indefinite-lived and long-lived assets, except for the Company’s Houghton and Fluidcare trademarks and tradename
indefinite-lived intangible assets.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
82
The determination of estimated fair value of the Houghton and Fluidcare trademarks and tradename indefinite-lived assets was
based on a relief from royalty valuation method which requires management’s judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to the weighted average cost of capital (“WACC”) and royalty rates, as
well as revenue growth rates and terminal growth rates. In the first quarter of 2020, as a result of the impact of COVID-19 driving a
decrease in projected legacy Houghton net sales 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 WACC assumption utilized in the quantitative impairment assessment, the
Company concluded that the estimated fair values of the Houghton and Fluidcare trademarks and tradename intangible assets were
less than their carrying values. As a result, an impairment charge of $
tradename, to write down the carrying values of these intangible assets to their estimated fair values was recorded in the first quarter
of 2020.
As of December 31, 2020, the Company continued to evaluate the on-going impact of COVID-19 on the Company’s operations,
and the volatility and uncertainty in the economic outlook as a result of COVID-19, to determine if this indicated it was more likely
than not that the carrying value of any of the Company’s reporting units or indefinite-lived or long-lived intangible assets were not
recoverable. The Company concluded that the impact of COVID-19 did not represent a triggering event as of December 31, 2020
with regards to any of the Company’s reporting units or indefinite-lived and long-lived intangible assets.
While the Company concluded that the impact of COVID-19 did not represent a triggering event as of December 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 the current economic conditions worsen or projections of the timeline for recovery are
significantly extended, then the Company may conclude in the future that the impact from COVID-19 requires the need to perform
further interim quantitative impairment tests, which could result in additional impairment charges in the future.
Note 17 – Investments in Associated Companies
As of December 31, 2020, the Company held a
% investment in and had significant influence over Nippon Quaker Chemical,
Ltd. (“Nippon Japan”), Kelko Quaker Chemical, S.A. (“Kelko Panama”) and Houghton Korea acquired in 2019 in connection with the
Combination, and held a
% investment in and had significant influence over Primex, Ltd. (“Primex”). See Note 2 of Notes to
Consolidated Financial Statements.
The carrying amount of the Company’s equity investments as of December 31, 2020 was $
investments of $
Panama.
The Company also has a
% equity interest in Kelko Venezuela. Due to heightened foreign exchange controls, deteriorating
economic circumstances and other restrictions in Venezuela, during 2018 the Company concluded that it no longer had significant
influence over this affiliate. Prior to this determination, the Company historically accounted for this affiliate under the equity method.
As of December 31, 2020 and 2019, the Company had
The following table is a summary of equity income in associated companies by investment for the years ending December 31,
2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Houghton Korea
$
$
$
Nippon Japan
Kelko Panama
Kelko Venezuela
(138 )
Primex
Total equity in net income of associated companies
$
$
$
As the Combination closed on August 1, 2019, the Company included five months of equity income from Houghton Korea in its
December 31, 2019 Consolidated Statement of Income.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
83
Note 18 – Other Non-Current Assets
Other non-current assets as of December 31, 2020 and 2019 were as follows:
2020
2019
Uncertain tax positions
$
$
Pension assets
Debt issuance costs
Indemnification assets
Supplemental retirement income program
Restricted insurance settlement
Other
Total other assets
$
$
During December 2020, the restrictions lapsed over certain cash that was previously only designated to be used for settlement of
asbestos claims at an inactive subsidiary of the Company. As of December 31, 2020 and 2019, indemnification assets relates to
certain Houghton foreign subsidiaries for which the Company expects it will incur additional tax amounts which are subject to
indemnification under the terms of the Combination share and purchase agreement. These indemnification assets have a
corresponding uncertain tax position recorded in other non-current liabilities. As of December 31, 2020, one of the Company’s
foreign pension plan’s fair value of plan assets exceeded its gross benefit obligation and was therefore over-funded, which is
represented by the line Pension assets in the table above. See Notes 10, 12, 21 and 22 of Notes to Consolidated Financial Statements.
Note 19 – Other Accrued Liabilities
Other accrued liabilities as of December 31, 2020 and 2019 were as follows:
2020
2019
Non-income taxes
$
$
Current income taxes payable
Professional fees, legal, and acquisition-related accruals
Short-term lease liabilities
Selling expenses and freight accruals
Customer advances and sales return reserves
Other
Total other accrued liabilities
$
$
Note 20 – Debt
Debt as of December 31, 2020 and 2019 includes the following:
As of December 31, 2020
As of December 31, 2019
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
$
$
U.S. Term Loan
EURO Term Loan
Industrial development bonds
Bank lines of credit and other debt obligations
Various
Various
Total debt
$
$
Less: debt issuance costs
(11,099 )
(14,196 )
Less: short-term and current portion of long-term debts
(38,967 )
(38,332 )
Total long -term debt
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
84
Credit facilities
The Company’s primary credit facility (as amended, the “Credit Facility”) is comprised of a $
revolver (the “Revolver”), a $
million (as of August 1, 2019) Euro equivalent term loan (the “EURO Term Loan” and together with the “U.S. Term Loan”, the
“Term Loans” ) with Quaker Chemical B.V., a Dutch subsidiary of the Company as borrower, each with a five-year term maturing in
August 2024. Subject to the consent of the administrative agent and certain other conditions, the Company may designate additional
borrowers. The maximum amount available under the Credit Facility can be increased by up to $
request if there are lenders who agree to accept additional commitments and the Company has satisfied certain other conditions.
Borrowings under the Credit Facility bear interest at a base rate or LIBOR plus an applicable margin based upon the Company’s
consolidated net leverage ratio. There are LIBOR replacement provisions that contemplate a further amendment if and when LIBOR
ceases to be reported. The variable interest rate incurred on the outstanding borrowings under the Credit Facility during the year
ended December 31, 2020 was approximately
%. As of December 31, 2020, the variable interest rate on the outstanding
borrowings under the Credit Facility was approximately
%. In addition to paying interest on outstanding principal under the Credit
Facility, the Company is required to pay a commitment fee ranging from
% to
% depending on the Company’s consolidated net
leverage ratio to the lenders under the Revolver in respect of the unutilized commitments thereunder. The Company has unused
capacity under the Revolver of approximately $
31, 2020. Until closing of the Combination, the Company incurred ticking fees to maintain the bank commitment, which began to
accrue on September 29, 2017. Concurrent with the closing of the Combination and executing the Credit Facility on August 1, 2019,
the Company paid approximately $
The Credit Facility is subject to certain financial and other covenants.
principal amortization during their five-year terms, with
% amortization of the principal balance due in years 1 and 2,
% in year
3, and
% in years 4 and 5, with the remaining principal amount due at maturity. During the year ended December 31, 2020, the
Company made four quarterly amortization payments related to the Term Loans totaling $
guaranteed by certain of the Company’s domestic subsidiaries and is secured by first priority liens on substantially all of the assets of
the Company and the domestic subsidiary guarantors, subject to certain customary exclusions. The obligations of the Dutch borrower
are guaranteed only by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Term Loans. In order to
satisfy this requirement as well as to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
% plus an applicable margin as provided in the Credit Facility, based on the Company’s consolidated net leverage ratio. At the
time the Company entered into the swaps, and as of December 31, 2020, the aggregate interest rate on the swaps, including the fixed
base rate plus an applicable margin, was
%. See Note 25 of Notes to Consolidated Financial Statements.
The Company capitalized $
Approximately $
term debt on the Company’s Consolidated Balance Sheet. Approximately $
Revolver and recorded within other assets on the Company’s Consolidated Balance Sheet. These capitalized costs are being
amortized into interest expense over the five-year term of the Credit Facility. As of December 31, 2020 and 2019, the Company had
$
2020 and 2019, the Company had $
Industrial development bonds
As of December 31, 2020 and 2019, the Company had fixed rate, industrial development authority bonds totaling $
principal amount due in
2028
. These bonds have similar covenants to the Credit Facility noted above.
The Company also had a $
%, which matured
and was paid off during the fourth quarter of
2018
.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
85
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discounting facilities in certain foreign subsidiaries, which are not
collateralized. The Company’s other debt obligations primarily consist of certain domestic and foreign low interest rate or interest-
free municipality-related loans, local credit facilities of certain foreign subsidiaries and capital lease obligations. Total unused
capacity under these arrangements as of December 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 December 31, 2020 were approximately $
The Company incurred the following debt related expenses included within Interest expense, net, in the Consolidated Statements
of Income:
Year Ended December 31,
2020
2019
2018
Interest expense
$
$
$
Amortization of debt issuance costs
Total
$
$
$
Based on the variable interest rates associated with the Credit Facility, as of December 31, 2020 and 2019, the amounts at which
the Company’s total debt were recorded are not materially different from their fair market value.
At December 31, 2020, annual maturities on long-term borrowings maturing in the next five fiscal years (excluding the reduction
to long-term debt attributed to capitalized and unamortized debt issuance costs) are as follows:
2021
$
2022
2023
2024
2025
Note 21 – Pension and Other Postretirement Benefits
The following table shows the funded status of the Company’s plans’ reconciled with amounts reported in the Consolidated
Balance Sheets as of December 31, 2020 and 2019:
Other Post-
Pension Benefits
Retirement Benefits
2020
2019
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
U.S.
U.S.
Change in benefit obligation
Gross benefit obligation at beginning
of year
$
$
$
$
$
$
$
$
Service cost
Interest cost
Employee contributions
Effect of plan amendments
Curtailment gain
(2,324 )
(2,324 )
Plan settlements
(2,316 )
(53,494 )
(55,810 )
(1,087 )
(1,087 )
Benefits paid
(5,087 )
(6,138 )
(11,225 )
(3,832 )
(6,034 )
(9,866 )
(250 )
(384 )
Plan expenses and premiums paid
(135 )
(135 )
(129 )
(129 )
Transfer in of business acquisition
Actuarial loss (gain)
(864 )
Translation differences and other
Gross benefit obligation at end of year
$
$
$
$
$
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
86
Other Post-
Pension Benefits
Retirement Benefits
2020
2019
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
U.S.
U.S.
Change in plan assets
Fair value of plan assets at
beginning of year
$
$
$
$
$
$
$
$
Actual return on plan assets
Employer contributions
Employee contributions
Plan settlements
(2,316 )
(53,494 )
(55,810 )
(1,087)
(1,087 )
Benefits paid
(5,087 )
(6,138 )
(11,225 )
(3,832 )
(6,034 )
(9,866 )
(250 )
(384 )
Plan expenses and premiums paid
(135 )
(498 )
(633 )
(129 )
(500 )
(629 )
Transfer in of business acquisition
Translation differences
Fair value of plan assets at end of year
$
$
$
$
$
$
$
$
Net benefit obligation recognized
$
(18,886 )
$
(36,488 )
$
(55,374 )
$
(22,794 )
$
(33,173 )
$
(55,967 )
$
(3,234 )
$
(4,266 )
Amounts recognized in the balance
sheet consist of:
Non-current assets
$
$
$
$
$
$
$
$
Current liabilities
(568 )
(612 )
(1,180 )
(359 )
(2,620 )
(2,979 )
(286 )
(426 )
Non-current liabilities
(25,066 )
(35,876 )
(60,942 )
(22,435 )
(30,553 )
(52,988 )
(2,948 )
(3,840 )
Net benefit obligation recognized
$
(18,886 )
$
(36,488 )
$
(55,374 )
$
(22,794 )
$
(33,173 )
$
(55,967 )
$
(3,234 )
$
(4,266 )
Amounts not yet reflected in net
periodic benefit costs and included in
accumulated other comprehensive loss:
Prior service credit
(26 )
Accumulated loss
(21,976 )
(5,532 )
(27,508 )
(22,816 )
(46,560 )
(69,376 )
(734 )
AOCI
(22,002 )
(5,482 )
(27,484 )
(21,545 )
(46,560 )
(68,105 )
(734 )
Cumulative employer contributions
(below) or in excess of net periodic
benefit cost
(31,006 )
(27,890 )
(1,249 )
(3,358 )
(3,532 )
Net benefit obligation recognized
$
(18,886 )
$
(36,488 )
$
(55,374 )
$
(22,794 )
$
(33,173 )
$
(55,967 )
$
(3,234 )
$
(4,266 )
The accumulated benefit obligation for all defined benefit pension plans was
$344.4
($109.5
$234.9
million Foreign) and
$366.0
$152.9
$213.1
2019, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
$
$
$
$
$
Accumulated benefit obligation
Fair value of plan assets
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
87
Information for pension plans with a projected benefit obligation in excess of plan assets:
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
$
$
$
$
$
Fair value of plan assets
Components of net periodic benefit costs – pension plans:
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
Service cost
$
$
$
$
$
$
Interest cost
Expected return on plan assets
(4,262 )
(4,810 )
(9,072 )
(3,668 )
(3,227 )
(6,895 )
Settlement loss
(88 )
Curtailment charge
(1,155 )
(1,155 )
Actuarial loss amortization
Prior service (credit) cost
amortization
(167 )
(167 )
(165 )
(165 )
Net periodic benefit cost
$
$
$
$
$
$
2018
Foreign
U.S.
Total
Service cost
$
$
$
Interest cost
Expected return on plan assets
(2,228 )
(2,803 )
(5,031 )
Settlement loss
Actuarial loss amortization
Prior service (credit) cost amortization
(175 )
(116 )
Net periodic benefit cost
$
$
$
Other changes recognized in other comprehensive income – pension plans:
2020
2019
Foreign
U.S.
Total
Foreign
U.S.
Total
Net (gain) loss arising during
the period
$
(1,594 )
$
$
(58 )
$
$
$
Effect of plan amendment
Recognition of amortization in net
periodic benefit cost
Settlement (loss)
(39 )
(22,667 )
(22,706 )
Prior service credit (cost)
Actuarial loss
(758 )
(1,015 )
(2,347 )
(3,362 )
Curtailment Recognition
(3 )
(3 )
Effect of exchange rates on amounts
included in AOCI
(61 )
(61 )
Total recognized in other
comprehensive loss (income)
(17,114 )
(16,648 )
Total recognized in net periodic
benefit cost and other
comprehensive loss (income)
$
$
$
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
88
2018
Foreign
U.S.
Total
Net gain arising during period
$
(663
$
$
(210 )
Recognition of amortization in net periodic benefit
Prior service credit (cost)
(59
Actuarial loss
(883
(2,276
(3,159 )
Effect of exchange rates on amounts included
(890
(890 )
Total recognized in other comprehensive loss
(2,261 )
(1,882 )
(4,143 )
Total recognized in net periodic benefit cost and
other comprehensive loss
$
$
(120
$
Components of net periodic benefit costs – other postretirement plan:
2020
2019
2018
Service cost
$
$
$
Interest cost
Actuarial loss amortization
(5 )
Net periodic benefit costs
$
$
$
Other changes recognized in other comprehensive income – other postretirement benefit plans:
2020
2019
2018
Net (gain) loss arising during period
$
(864 )
$
$
(443 )
Amortization of actuarial loss in net periodic
benefit costs
(42 )
Total recognized in other comprehensive (income)
loss
(859 )
(485 )
Total recognized in net periodic benefit cost and
other comprehensive (income) loss
$
(782 )
$
$
(306 )
Weighted-average assumptions used to determine benefit obligations as of December 31, 2020 and 2019:
Other Postretirement
Pension Benefits
Benefits
2020
2019
2020
2019
U.S. Plans:
Discount rate
%
%
%
%
Rate of compensation increase
%
%
N/A
N/A
Foreign Plans:
Discount rate
%
%
N/A
N/A
Rate of compensation increase
%
%
N/A
N/A
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
89
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31, 2020 and
2019:
Other Postretirement
Pension Benefits
Benefits
2020
2019
2020
2019
U.S. Plans:
Discount rate
%
%
%
%
Expected long-term return on
plan assets
%
%
N/A
N/A
Rate of compensation increase
%
%
N/A
N/A
Foreign Plans:
Discount rate
%
%
N/A
N/A
Expected long-term return on
plan assets
%
%
N/A
N/A
Rate of compensation increase
%
%
N/A
N/A
The long-term rates of return on assets were selected from within the reasonable range of rates determined by (a) historical real
returns for the asset classes covered by the investment policy and (b) projections of inflation over the long-term period during which
benefits are payable to plan participants. See Note 1 of Notes to Consolidated Financial Statements for further information.
Assumed health care cost trend rates as of December 31, 2020 and 2019:
2020
2019
Health care cost trend rate for next year
%
%
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
%
%
Year that the rate reaches the ultimate trend rate
Plan Assets and Fair Value
The Company’s pension plan target asset allocation and the weighted-average asset allocations as of December 31, 2020 and 2019
by asset category were as follows:
Asset Category
Target
2020
2019
U.S. Plans
Equity securities
%
%
%
Debt securities
%
%
%
Other
%
%
%
Total
%
%
%
Foreign Plans
Equity securities
%
%
%
Debt securities
%
%
%
Other
%
%
%
Total
%
%
%
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
90
As of December 31, 2020 and 2019, “Other” consisted principally of cash and cash equivalents, and investments in real estate
funds.
The following is a description of the valuation methodologies used for the investments measured at fair value, including the
general classification of such instruments pursuant to the valuation hierarchy, where applicable:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds and are classified as Level 1 investments.
Commingled Funds
Investments in the U.S. pension plan and foreign pension plan commingled funds represent pooled institutional investments,
including primarily collective investment trusts. These commingled funds are not available on an exchange or in an active market
and these investments are valued using their net asset value (“NAV”), which is generally based on the underlying asset values of the
investments held in the trusts.
As of December 31, 2020, the foreign pension plan commingled funds included approximately
equity securities,
real estate.
Pooled Separate Accounts
Investments in the U.S. pension plan pooled separate accounts consist of annuity contracts and are valued based on the reported
unit value at year end. Units of the pooled separate account are not traded on an exchange or in an active market; however, valuation is
based on the underlying investments of each pooled separate account and are classified as Level 2 investments.
Fixed Income Government Securities
Investments in foreign pension plans fixed income government securities were valued using third party pricing services
which are based on a combination of quoted market prices on an exchange in an active market as well as proprietary pricing
models and inputs using observable market data and are classified as Level 2 investments.
Insurance Contract
Investments in the foreign pension plan insurance contract are valued at the highest value available for the Company at year
end, either the reported cash surrender value of the contract or the vested benefit obligation. Both the cash surrender value and
the vested benefit obligation are determined based on unobservable inputs, which are contractually or actuarially determined,
regarding returns, fees, the present value of the future cash flows of the contract and benefit obligations. The contract is classified
as a Level 3 investment.
Diversified Equity Securities - Registered Investment Companies
Investments in the foreign pension plans diversified equity securities of registered investment companies are based upon the
quoted redemption value of shares in the fund owned by the plan at year end. The shares of the fund are not available on an exchange
or in an active market; however, the fair value is determined based on the underlying investments in the fund as traded on an exchange
in an active market and are classified as Level 2 investments.
Fixed Income – Foreign Registered Investment Companies
Investments in the foreign pension plans fixed income securities of foreign registered investment companies are based upon the
quoted redemption value of shares in the fund owned by the plan at year end. The shares of the fund are not available on an exchange
or in an active market; however, the fair value is determined based on the underlying investments in the fund as traded on an exchange
in an active market and are classified as Level 2 investments.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
91
Diversified Investment Fund - Registered Investment Companies
Investments in the foreign pension plan diversified investment fund of registered investment companies are based upon the quoted
redemption value of shares in the fund owned by the plan at year end. This fund is not available on an exchange or in an active market
and this investment is valued using its NAV, which is generally based on the underlying asset values of the investments held. As of
December 31, 2020, the diversified investment funds included approximately
of investments in fixed income securities, and
Other – Alternative Investments
Investments in the foreign pension plans include certain other alternative investments such as inflation and interest rate swaps.
These investments are valued based on unobservable inputs, which are contractually or actuarially determined, regarding returns, fees,
the present value of future cash flows of the contract and benefit obligations. These alternative investments are classified as Level 3
investments.
Real Estate
The U.S. and foreign pension plans’ investment in real estate consists of investments in property funds. The funds’
underlying investments consist of real property which are valued using unobservable inputs. These property funds are classified
as a Level 3 investment.
As of December 31, 2020 and 2019, the U.S. and foreign plans’ investments measured at fair value on a recurring basis were as
follows:
Fair Value Measurements at December 31, 2020
Total
Using Fair Value Hierarchy
U.S. Pension Assets
Fair Value
Level 1
Level 2
Level 3
Pooled separate accounts
$
$
$
$
Real estate
Subtotal U.S. pension plan assets in fair value hierarch y
$
$
$
$
Total U.S. pension plan assets
$
Foreign Pension Assets
Cash and cash equivalents
$
$
$
$
Insurance contract
Diversified equity securities - registered investment companies
Fixed income – foreign registered investment companies
Fixed income government securities
Real estate
Other - alternative investments
Sub-total of foreign pension assets in fair value hierarchy
$
$
$
$
Commingled funds measured at NAV
Diversified investment fund - registered investment
companies measured at NAV
Total foreign pension assets
$
Total pension assets in fair value hierarchy
$
$
$
$
Total pension assets measured at NAV
Total pension assets
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
92
Fair Value Measurements at December 31, 2019
Total
Using Fair Value Hierarchy
U.S. Pension Assets
Fair Value
Level 1
Level 2
Level 3
Cash and cash equivalents
$
$
$
$
Pooled separate accounts
Real estate
Subtotal U.S. pension plan assets in fair value hierarch y
$
$
$
$
Commingled funds measured at NAV
Total U.S. pension plan assets
$
Foreign Pension Assets
Cash and cash equivalents
$
$
$
$
Insurance contract
Diversified equity securities - registered investment companies
Fixed income – foreign registered investment companies
Fixed income government securities
Real estate
Other - alternative investments
Sub-total of foreign pension assets in fair value hierarchy
$
$
$
$
Commingled funds measured at NAV
Diversified investment fund - registered investment
companies measured at NAV
Total foreign pension assets
$
Total pension assets in fair value hierarchy
$
$
$
$
Total pension assets measured at NAV
Total pension assets
$
Certain investments that are measured at fair value using the NAV per share (or its equivalent) have not been classified in the fair
value hierarchy. The fair value amounts presented for these investments in the preceding tables are intended to permit reconciliation
of the fair value hierarchies to the line items presented in the statements of net assets available for benefits.
Changes in the fair value of the plans’ Level 3 investments during the years ended December 31, 2020 and 2019 were as follows:
Insurance
Alternative
Contract
Real Estate
Investments
Total
Balance as of December 31, 2018
$
$
Purchases
Assets acquired in business combinations
Sales
(238 )
(278 )
(516 )
Settlements
(1,730 )
(1,730 )
Unrealized (losses) gains
(960 )
Currency translation adjustment
(1,576 )
(24 )
(869 )
Balance as of December 31, 2019
Purchases
Settlements
(2,027 )
(2,027 )
Unrealized gains (losses)
(16 )
(171 )
Currency translation adjustment
Balance as of December 31, 2020
$
$
$
$
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
93
In the fourth quarter of 2018, the Company began the process of terminating its Legacy Quaker noncontributory U.S. pension
plan (“Legacy Quaker U.S. Pension Plan”). During the third quarter of 2019, the Company received a favorable termination
determination letter from the Internal Revenue Service (“I.R.S.”) and completed the Legacy Quaker U.S. Pension Plan termination
during the first quarter of 2020. In order to terminate the Legacy Quaker U.S. Pension Plan in accordance with I.R.S. and Pension
Benefit Guaranty Corporation requirements, the Company was required to fully fund the Legacy Quaker U.S. Pension Plan on a
termination basis and the amount necessary to do so was approximately $
quarter of 2020, the Company finalized the amount of the liability and related annuity payments and received a refund in premium of
approximately $
approximately $
losses within AOCI on the balance sheet as of the plan termination date.
In connection with the Combination, the Company indirectly acquired all of Houghton’s defined benefit pension plans, which are
included in the tables set forth above. The pension plans cover certain U.S. salaried and hourly employees as well as certain
employees in the U.K., France and Germany. The Houghton U.S. plans provide benefits based on an employee’s years of service and
compensation received for the highest five consecutive years of earnings. The foreign plans provide benefits based on a formula of
years and service and a percentage of compensation which varies among the various countries.
The Company contributes to a multiemployer defined benefit pension plan under terms of a collective bargaining union contract
(the Cleveland Bakers and Teamsters Pension Fund, Employer Identification Number: 34-0904419 -001). The expiration date of the
collective bargaining contract is
. As of January 1, 2019, the last valuation date available for the multiemployer plan,
total plan liabilities were approximately $
of approximately $
bargaining union contract and contributions are made to the plan based on its union employee payroll. The Company contributed $
million during the year ended December 31, 2020. The Employee Retirement Income Security Act of 1974, as amended by the Multi-
Employer Pension Plan Amendments Act of 1980, imposes certain contingent liabilities upon an employer who is a contributor to a
multiemployer pension plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal.
While the Company may also have additional liabilities imposed by law as a result of its participation in the multiemployer defined
benefit pension plan, there is
The Pension Protection Act of 2006 (the “PPA”) also added special funding and operational rules generally applicable to plan
years beginning after 2007 for multiemployer plans with certain classifications based on a multitude of factors (including, for
example, the plan’s funded percentage, cash flow position and whether the plan is projected to experience a minimum funding
deficiency). The plan to which the Company contributes is in “critical” status. Plans in the “critical” status classification must adopt
measures to improve their funded status through a funding improvement or rehabilitation plan which may require additional
contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree
benefits. The amount of additional funds that the Company may be obligated to contribute to the plan in the future cannot be
estimated as such amounts will be likely based on future levels of work that require the specific use of those union employees covered
by the plan, and the amount of that future work and the number of affected employees that may be needed is not reasonably estimable.
Cash Flows
Contributions
The Company expects to make minimum cash contributions of approximately
$10.0
$5.9
$4.1
$0.3
Estimated Future Benefit Payments
Excluding any impact related to the PPA noted above, the following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Other Post-
Pension Benefits
Retirement
Foreign
U.S.
Total
Benefits
2021
$
$
$
$
2022
2023
2024
2025
2025 to 2029
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
94
The Company maintains a plan under which supplemental retirement benefits are provided to certain officers. Benefits payable
under the plan are based on a combination of years of service and existing postretirement benefits. Included in total pension costs are
charges of $
representing the annual accrued benefits under this plan.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majority of its U.S. employees. The plan allows for and the
Company previously paid a nonelective contribution on behalf of participants who have completed one year of service equal to 3% of
the eligible participants’ compensation in the form of Company common stock. During 2019 and 2018, the Company made both non-
elective and elective 401(k) matching contributions in cash, rather than stock. Beginning in April 2020, the Company began matching
both non-elective and elective 401(k) contributions in fully vested shared of the Company’s common stock rather than cash. See Note
8 of Notes to Consolidated Financial Statements. Total Company contributions were $
the years ended December 31, 2020, 2019 and 2018, respectively.
Note 22 – Other Non-Current Liabilities
Other non-current liabilities as of December 31, 2020 and 2019 were as follows:
2020
2019
Inactive subsidiary litigation and settlement reserve
$
$
Non-current income taxes payable
Uncertain tax positions (includes interest and penalties)
Fair value of interest rate swaps
Environmental reserves
Deferred and other long-term compensation
Other
Total other non-current liabilities
$
$
The line item Inactive subsidiary litigation and settlement reserve in the table above was previously titled Restricted insurance
settlement and has been updated in the current year related to the December 2020 termination of restrictions on the previously
restricted amounts, as described in Note 12 of Notes to Consolidated Financial Statements.
Note 23 – Equity and Accumulated Other Comprehensive Loss
The Company has
, and
issued and outstanding as of December 31, 2020 and 2019, respectively. The change in shares issued and outstanding during 2020
was primarily related to
49,906
65,548
options and other share activity.
The Company is authorized to issue
Directors. The Board of Directors may designate one or more series of preferred stock and the number of shares, rights, preferences,
and limitations of each series. As of December 31, 2020, no preferred stock had been issued.
The Company has a share repurchase program that was approved by its Board of Directors in 2015 for the repurchase of up to
$
the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020, there was approximately $
stock remaining to be purchased under this share repurchase program.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
95
The following table shows the reclassifications from and resulting balances of AOCI for the years ended December 31, 2020,
2019 and 2018:
Defined
Unrealized
Gain (Loss) in
Currency
Benefit
Translation
Pension
Available-for -
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance as of December 31, 2017
$
(31,893 )
$
(34,093 )
$
$
$
(65,100 )
Other comprehensive (loss) income before
(17,429 )
(2,622 )
(18,508 )
Amounts reclassified from AOCI
Related tax amounts
(1,086 )
(627 )
Balance as of December 31, 2018
(49,322 )
(30,551 )
(842 )
(80,715 )
Other comprehensive income (loss) before
(8,088 )
(415 )
(798 )
Amounts reclassified from AOCI
(301 )
Related tax amounts
(557 )
Balance as of December 31, 2019
(44,568 )
(34,533 )
(320 )
(78,170 )
Other comprehensive income (loss) before
(6,617 )
(4,257 )
Amounts reclassified from AOCI
(202 )
Related tax amounts
(6,458 )
(555 )
(6,034 )
Balance as of December 31, 2020
$
(2,875 )
$
(23,467 )
$
$
(3,598 )
$
(26,598 )
All reclassifications related to unrealized gain (loss) in available-for-sale securities relate to the Company’s equity interest in a
captive insurance company and are recorded in equity in net income of associated companies. The amounts reported in other
comprehensive income for non-controlling interest are related to currency translation adjustments.
Note 24 – Fair Value Measures
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 December 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
$
$
$
$
The fair values of Company-owned life insurance assets are based on quotes for like instruments with similar credit ratings and
terms. The Company did not hold any Level 3 investments as of December 31, 2020 or 2019, respectively, so related disclosures have
not been included.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
96
Note 25 – Hedging Activities
In order to satisfy certain requirements of the Credit Facility as well as to manage the Company’s exposure to variable interest
rate risk associated with the Credit Facility, in November 2019, the Company entered into $
year interest rate swaps. See Note 20 of Notes to Consolidated Financial Statements. These interest rate swaps are designated as cash
flow hedges and, as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in
AOCI to the extent effective and reclassified to interest expense in the period during which the transaction effects earnings or it
becomes probable that the forecasted transaction will not occur. The Company did not utilize derivatives designated as cash flow
hedges during the year ended December 31, 2018.
The balance sheet classification and fair values of the Company’s derivative instruments, which are Level 2 measurements, are as
follows:
Fair Value
Consolidated Balance Sheet
December 31,
Location
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
$
$
$
The following table presents the net unrealized loss deferred to AOCI:
December 31,
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
$
$
$
The following table presents the net loss reclassified from AOCI to earnings:
For the Years Ended
December 31,
2020
2019
2018
Amount and location of (expense) income reclassified
from AOCI into (expense) income (Effective Portion)
Interest expense, net
$
(1,754 )
$
$
Interest rate swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all
contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in
accordance with the Company’s accounting policy, these derivative instruments are recorded on a net basis within the Consolidated
Balance Sheets.
Note 26 – Commitments and Contingencies
In 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned
subsidiary. In voluntary coordination with the Santa Ana California Regional Water Quality Board, ACP has been remediating the
contamination, the principal contaminant of which is perchloroethylene (“PERC”). In 2004, the Orange County Water District
(“OCWD”) filed a civil complaint against ACP and other parties seeking to recover compensatory and other damages related to the
investigation and remediation of the contamination in the groundwater. Pursuant to a settlement agreement with OCWD, ACP agreed,
among other things, to operate the two groundwater treatment systems to hydraulically contain groundwater contamination emanating
from ACP’s site until the concentrations of PERC released by ACP fell below the current Federal maximum contaminant level for
four consecutive quarterly sampling events. In 2014, ACP ceased operation at one of its two groundwater treatment systems, as it had
met the above condition for closure. In 2020, the Santa Ana Regional Water Quality Control Board asked that ACP conduct some
additional indoor and outdoor soil vapor testing on and near the ACP site to confirm that ACP continues to meet the applicable local
standards and ACP has begun the testing program. As of December 31, 2020, ACP believes it is close to meeting the conditions for
closure of the remaining groundwater treatment system but continues to operate this system while in discussions with the relevant
authorities.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
97
As of December 31, 2020, the Company believes that the range of potential-known liabilities associated with the balance of ACP
water remediation program is approximately $
of operation of the treatment system as determined by groundwater modeling. Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring and program management.
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. The subsidiary
discontinued operations in 1991 and has no remaining assets other than proceeds received from insurance settlements. To date, the
overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the
subsidiary. 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 $
Although the Company has also been named as a defendant in certain of these cases, no claims have been actively pursued against the
Company, and the Company has not contributed to the defense or settlement of any of these cases pursued against the subsidiary.
These cases were handled by the subsidiary’s primary and excess insurers who had agreed in 1997 to pay all defense costs and be
responsible for all damages assessed against the subsidiary arising out of existing and future asbestos claims up to the aggregate limits
of their policies. A significant portion of this primary insurance coverage was provided by an insurer that is insolvent, and the other
primary insurers asserted that the aggregate limits of their policies had been exhausted. The subsidiary challenged the applicability of
these limits to the claims being brought against the subsidiary. In response, two of the three carriers entered into separate settlement
and release agreements with the subsidiary in 2005 and 2007 for $
15.0
20.0
The proceeds of both settlements were restricted and could only be used to pay claims and costs of defense associated with the
subsidiary’s asbestos litigation. In 2007, the subsidiary and the remaining primary insurance carrier entered into a Claim Handling
and Funding Agreement, under which the carrier is paying
% of defense and indemnity costs incurred by or on behalf of the
subsidiary in connection with asbestos bodily injury claims. The agreement continues until terminated and can only be terminated by
either party by providing a minimum of two years prior written notice. As of December 31, 2020, no notice of termination has been
given under this agreement.
At the end of the term of the agreement, the subsidiary may choose to again pursue its claim against this insurer regarding the
application of the policy limits. The Company believes that, if the coverage issues under the primary policies with the remaining
carrier are resolved adversely to the subsidiary and all settlement proceeds were used, the subsidiary may have limited additional
coverage from a state guarantee fund established following the insolvency of one of the subsidiary’s primary insurers. Nevertheless,
liabilities in respect of claims may exceed the assets and coverage available to the subsidiary.
If the subsidiary’s assets and insurance coverage were to be exhausted, claimants of the subsidiary may actively pursue claims
against the Company because of the parent-subsidiary relationship. The Company does not believe that such claims would have merit
or that the Company would be held to have liability for any unsatisfied obligations of the subsidiary as a result of such claims. After
evaluating the nature of the claims filed against the subsidiary and the small number of such claims that have resulted in any payment,
the potential availability of additional insurance coverage at the subsidiary level, the additional availability of the Company’s own
insurance and the Company’s strong defenses to claims that it should be held responsible for the subsidiary’s obligati ons because of
the parent-subsidiary relationship, the Company believes it is not probable that the Company will incur losses. The Company has
been successful to date having any claims naming it dismissed during initial proceedings. Since the Company may be in this stage of
litigation for some time, it is not possible to estimate additional losses or range of loss, if any.
As a result of the closing of the Combination on August 1, 2019, the Company is party to environmental matters related to certain
Houghton domestic and foreign properties currently or previously owned, described below. These environmental matters primarily
require the Company to perform long-term monitoring as well as operating and maintenance at each of the applicable 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 $
accrued within other accrued liabilities and other non-current liabilities on the Company’s Consolidated Balance Sheet as of
December 31, 2020. Comparatively, as of December 31, 2019, the Company had $
matters.
Houghton’s Sao Paulo, Brazil site was required under Brazilian environmental, health and safety regulations to perform an
environmental assessment as part of a permit renewal process. Initial investigations identified soil and ground water contamination in
select areas of the site. The site has conducted a multi-year soil and groundwater investigation and corresponding risk assessments
based on the result of the investigations. In 2017, the site had to submit a new 5-year permit renewal request and was asked to
complete additional investigations to further delineate the site based on review of the technical data by the local regulatory agency,
Companhia Ambiental do Estado de São Paulo (“CETESB”). Based on review of the updated investigation data, CETESB issued a
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
98
Technical Opinion regarding the investigation and remedial actions taken to date. The site developed an action plan and submitted it
to CETESB in 2018 based on CETESB requirements. The site intervention plan primarily requires the site, amongst other actions, to
conduct periodic monitoring for methane in soil vapors, source zone delineation, groundwater plume delineation, bedrock aquifer
assessment, update the human health risk assessment, develop a current site conceptual model and conduct a remedial feasibility study
and provide a revised intervention plan.
In December 2019, the site submitted a report on the activities completed including the revised site conceptual model and results
of the remedial feasibility study and recommended remedial strategy for the site. Other Houghton environmental matters include
participation in certain payments in connection with four currently active environmental consent orders related to certain hazardous
waste cleanup activities under the U.S. Federal Superfund statute. Houghton has been designated a potentially responsible party
(“PRP”) by the Environmental Protection Agency along with other PRPs depending on the site, and has other obligations to perform
cleanup activities at certain other foreign subsidiaries. These environmental matters primarily require the Company to perform long-
term monitoring as well as operating and maintenance at each of the applicable sites.
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 $
million and $
environmental assessments and remediation costs.
During the fourth quarter of 2020, one of the Company’s subsidiaries received a notice of inspection from a taxing authority in a
country where certain of its subsidiaries operate which related to a non-income (indirect) tax that may be applicable to certain products
the subsidiary sells. To date, the Company has not received any assessment from the authority related to potential liabilities that may
be due from the Company’s subsidiary. Consequently, there is substantial uncertainty with respect to the Company’s ultimate liability
with respect to this indirect tax, as the application of this tax in its given market is ambiguous and interpreted differently among other
peer companies and taxing authorities. The Company, with assistance from independent experts, has performed an evaluation of the
applicability of this indirect tax to the Company’s subsidiaries in this country. Information available to the Company at this time is
only sufficient to establish a range of probable liability, and no amount within the range is considered a better estimate than another.
Based on this evaluation, the Company recorded a liability of $
range of probable indirect tax owed, including interest and taking into account applicable statutes of limitations. Because these
amounts in part relate to a Houghton entity acquired in the Combination and for periods prior to the Combination, the Company has
submitted an indemnification claim with Houghton’s former owners related to this potential indirect tax liability. The Company
recorded a receivable in other assets for approximately $
for which the Company anticipates being indemnified. The impact of this indirect tax, net of the recorded indemnification asset, was
approximately $
believes there is substantial uncertainty with respect to its ultimate liability given the ambiguous application of this indirect tax. At
this time, the Company’s best estimate of a potential range for possible assessments, including additional amounts that may be
assessed under these indirect tax laws, would be approximately $
of estimated income tax deductions and approximately $
owners.
The Company is party to other litigation which management currently believes will not have a material adverse effect on the
Company’s results of operations, cash flows or financial condition. In addition, the Company has an immaterial amount of contractual
purchase obligations.
Note 27 – COVID-19 Global Pandemic
In early 2020, a global outbreak of COVID-19 occurred initially in China and then across all locations where the Company does
business, and which continued throughout the rest of the year. 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 U.S., the European Union, and China, have taken various actions to reduce its spread, including travel
restrictions, shutdowns of businesses deemed nonessential, and stay-at-home or similar orders.
This outbreak and associated
measures to reduce its spread have caused significant disruptions to the operations of the Company and its suppliers and customers.
The disruptions and negative impact to the Company include significant volume declines and lower net sales initially at its China
subsidiaries in the first quarter of 2020 and beginning in late March continued throughout the rest of 2020 at almost all of its other
sites as the global economy slowed significantly in response to the pandemic. Management continues to monitor the impact that the
COVID-19 pandemic is having on the Company, the overall specialty chemical industry, and the economies and markets in which the
Company operates.
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. While the
circumstances have presented and are expected to continue to present challenges, at this time, management does not believe that
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(
Dollars in thousands, except share and per share amounts, unless otherwise stated
)
99
COVID-19 has had a material impact on financial reporting processes, internal control 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 evolve globally. The Company cannot reasonably estimate the magnitude of the effects these conditions will
have on the Company’s operations in the future as they are subject to significant uncertainties relating to the ultimate geographic
spread of the virus, the incidence and severity of the symptoms, the duration or resurgence of the outbreak, the length of the travel
restrictions and business closures imposed by governments of impacted countries, and the economic response by governments of
impacted countries.
To the extent that the Company’s customers and suppliers continue to be significantly and adversely impacted by COVID-19, this
could reduce the availability, or result in delays, of materials or supplies to or from the Company, which in turn could significantly
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.
100
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A.
Controls and Procedures.
Conclusion Regarding the Effectiveness 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
December 31, 2020 because of the material weaknesses in our internal control over financial reporting, as described below.
Notwithstanding these material weaknesses, the Company has concluded that the audited consolidated financial statements
included in this Report present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and
2019, and the results of its operations and its cash flows and changes in equity for each of the years in the three -year period ended
December 31, 2020, in conformity with accounting principles generally accepted in the United States.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is
defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control—Integrated Framework (2013) (the “COSO framework”). 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 identified certain deficiencies in our
application of the principles associated with the COSO framework that management concluded constituted a material weakness. We
did not design and maintain effective controls in response to the risks of material misstatement. Specifically, changes to existing
controls or the implementation of new controls were not sufficient to respond to changes to the risks of material misstatement in
financial reporting as a result of becoming a larger, more complex global organization due to the Combination. This material
weakness also contributed to an additional material weakness as we did not design and maintain effective controls over the review of
pricing, quantity and customer data to verify that revenue recognized was complete and accurate. These material weaknesses did not
result in material misstatements to the interim or annual consolidated financial statements. However, these material weaknesses could
result in misstatements to our account balances and disclosures that could result in a material misstatement to the interim or annual
consolidated financial statements that would not be prevented or detected. Therefore, management concluded that the Company’s
internal control over financial reporting was not effective as of December 31, 2020.
Management has excluded the internal controls of Tel Nordic ApS and Coral Chemical Company from our assessment of internal
control over financial reporting as of December 31, 2020, because these entities were acquired by the Company in purchase business
combinations in May 2020 and December 2020, respectively. These excluded entities are wholly owned subsidiaries, whose total
assets represent less than 1% and approximately 2%, respectively, and whose total revenues each represent less than 1%, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included in “Item 8.
Financial Statements and Supplementary Data.”
Progress on Remediation of Material Weaknesses
The aforementioned material weaknesses, as well as the remediated business combination material weakness discussed below,
were 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. Since identifying the material weaknesses, the
Company has dedicated a significant amount of time and resources to remediate all of the previously identified material weaknesses as
quickly and effectively as possible. In 2020, the Company dedicated multiple internal resources and supplemented those internal
resources with various third-party specialists to assist with the formalization of a robust and detailed remediation plan. In undertaking
101
remediation activities, the Company has hired additional personnel dedicated to financial and information technology compliance to
further supplement its internal resources. In addition, the Company has established a global network of personnel to assist local
management in understanding control performance and documentation requirements. In order to sustain this network, the Company
conducts periodic trainings and hosts discussions to address questions on a current basis.
However, the impact of COVID-19,
including travel restrictions and remote work arrangements required the Company to adapt and make changes to its internal controls
integration plans as well as its remediation plans, and has presented and is expected to continue to present challenges with regards to
the timing of the Company’s remediation and integration plan activities. In addition, the Company was executing its plan of
remediation in the current year while also integrating its past Houghton and Norman Hay acquisitions into the Company’s control
framework.
Remediation of Business Combination Material Weakness
Through these efforts described above, the Company was able to implement its plan to remediate the previously identified
material weakness concerning the reliability of data used to support the reasonableness of certain assumptions in the accounting for
business combinations, including updating the Company’s design and documentation as well as implementing changes to certain
internal controls to specifically address this control deficiency. The Company was able to document, test and evaluate the updated
internal controls in the given year so as to successfully remediate this material weakness as of December 31, 2020.
Management’s Remediation Initiatives for the Risk Assessment and Revenue – Price and Quantity Material Weaknesses
Despite the challenges brought on by COVID-19 and driven by the Company’s priority of creating a long-term sustainable control
structure to ensure stability for a Company that has more than doubled in size since August 2019, the Company did make substantial
strides towards remediating the underlying causes of the previously disclosed material weaknesses in our risk assessment process and
within our revenue process in the current year, as further discussed below.
Risk Assessment –
Specific to the material weakness in our risk assessment process that was previously disclosed in
“Item 9A.
Controls and Procedures.”
in the Company’s 2019 Form 10-K , we previously determined that our risk assessment process was not
designed adequately to respond to changes to the risks of material misstatement to financial reporting. In order to remediate this
material weakness, we have designed and implemented an improved risk assessment process, including identifying and assessing
those risks attendant to the significant changes within the Company as a result of becoming a larger, more complex global
organization due to the Combination. During 2020, a full review was performed of our processes and controls across significant
locations in order to identify and address potential design gaps. In addition to individual transactional-level control enhancements,
this review resulted in (i) an enhanced financial statement risk assessment, (ii) the standardization of existing legal entity and newly
implemented segment quarterly analytics and quarterly closing packages completed by key financial reporting personnel, (iii) a global
account reconciliation review program and (iv) enhancements to our quarterly identification and reassessment of new and existing
business and information technology risks that could affect our financial reporting. Monitoring is also performed through our
enhanced quarterly controls certification process, whereby changes in business or information technology processes or control owners
are identified and addressed timely. Although we have implemented and tested the additional controls as noted in our remediation
plan and found them to be effective, this material weakness will not be considered remediated as of December 31, 2020 due to the
Revenue – Price and Quantity material weakness, discussed below. Once the Revenue – Price and Quantity material weakness is
remediated, we expect the Risk Assessment material weakness will also be remediated.
Revenue – Price and Quantity –
Specific to the material weakness in our revenue process that was previously disclosed in
“Item 9A.
Controls and Procedures.”
in the Company’s 2019 Form 10-K, we did not design and maintain effective controls over the review of
pricing, quantity and customer data to verify that revenue recognized was complete and accurate. In order to remediate this material
weakness, the Company has made significant progress in its redesign of certain aspects of its revenue process and related controls
during 2020. As of the date of this report on Form 10-K, the Company has identified and agreed upon design enhancements and
requirements for each revenue sub-process. The design includes enhancements to entity-level and transactional-level manual controls
as well as IT general and application controls and the Company is in the process of implementing these design changes both centrally
and locally. However, because the additional controls had not been implemented and tested as of December 31, 2020, this material
weakness is not yet remediated.
This existing material weakness will not be considered remediated until the applicable remedial
controls operate for a sufficient period of time and management has concluded, through testing, that the controls are operating
effectively.
Given the significant resources the Company has dedicated to remediation of its material weaknesses, the Company is committed
to remediation and expects that in 2021 it will successfully implement the enhanced design of its revenue processes and have a
sufficient operational effectiveness period to evidence material weakness remediation over its price and quantity material weakness
and, concurrently, evidence material weakness remediation over its risk assessment material weakness in 2021 as well.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our principal executive officer and principal
financial officer, has evaluated our internal control over financial reporting to determine whether any changes to our internal control
over financial reporting occurred during the fourth quarter of the year ended December 31, 2020 that have materially affected, or are
102
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
fourth quarter of the year ended December 31, 2020.
Item 9B.
Other Information.
As previously reported by the Company on February 25, 2021, Michael F. Barry on February 24, 2021 informed the Board of
Directors of the Company (the “Board”) that he plans to retire as President and Chief Executive Officer of Quaker Houghton on
December 31, 2021. Mr. Barry, who has been nominated for re-election as a director at the 2021 annual meeting of the Company’s
shareholders, is expected to serve his full three-year term as a director and will retain the role of Chairman of the Board following his
retirement. The Board is committed to a strong, orderly process and transition with a comprehensive search that will include internal
and external candidates.
103
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Incorporated by reference is (i) the information beginning with and including the caption “Proposal 1—Election of Directors and
Nominee Biographies” in Quaker Houghton’s definitive Proxy Statement relating to the 2021 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission no later than 120 days after the close of its fiscal year ended December 31, 2020
(the “2021 Proxy Statement”) to, but not including, the sub-caption “Governance Committee Procedures for Selecting Director
Nominees,” (ii) the information appearing in Item 4(a) of this Report, (iii) the information in the 2021 Proxy Statement beginning with
and including the caption, “Delinquent Section 16(a) Reports” to, but not including, the caption “Certain Relationships and Related
Transactions,” (iv) the information in the 2021 Proxy Statement beginning with and including the sub-caption “Code of Conduct” to,
but not including, the caption “Compensation Committee Interlocks and Insider Participation,” and (v) the information in the 2021
Proxy Statement beginning with and including the sub-caption “Shareholder Nominations and Recommendations” to, but not
including, the sub-caption “Board Oversight of Risk.” Information about our Executive Officers is included in Item 4(a) of this
Report.
Item 11.
Executive Compensation.
Incorporated by reference is (i) the information in the 2021 Proxy Statement beginning with and including the caption
“Compensation Committee Interlocks and Insider Participation” to, but not including the caption “Stock Ownership of Certain
Beneficial Owners and Management.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference is the information in the 2021 Proxy Statement beginning with and including the caption “Stock
Ownership of Certain Beneficial Owners and Management” to, but not including, the caption “Delinquent Section 16(a) Reports.”
Equity Compensation Plans
The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2020.
Each number of securities reflected in the table is a reference to shares of Quaker common stock.
Equity Compensation Plan Information
Number of securities
Number of securities
remaining available for
to be issued upon
Weighted-average
future issuance under
exercise of
exercise price of
equity compensation plans
outstanding options,
outstanding options,
(excluding securities
Plan Category
warrants and rights
warrants and rights
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved
by security holders
110,336
$
143.51
650,060
(1)
Equity compensation plans not approved
by security holders
—
—
—
Total
110,336
$
143.51
650,060
(1)
(1)
As of December 31, 2020, 304,900 of these shares were available for issuance as restricted stock awards under the Company’s
2001 Global Annual Incentive Plan, 283,508 shares were available for issuance upon the exercise of stock options and/or as
restricted stock awards and/or restricted stock unit awards under the Company’s 2016 Long-Term Performance Incentive Plan, and
61,652 shares were available for issuance under the 2013 Director Stock Ownership Plan.
Item 13.
Certain Relationships and Related Transact ions, and Director Independence.
Incorporated by reference is (i) the information in the 2021 Proxy Statement beginning with and including the caption “Certain
Relationships and Related Party Transactions” to, but not including, the caption “Proposal 2 — Ratification of Appointment of
Independent Registered Public Accounting Firm,” (ii) the information in the 2021 Proxy Statement beginning with and including the
sub-caption “Director Independence” to, but not including, the sub-caption “Governance Committee Procedures for Selecting Director
Nominees,” and (iii) the information in the 2021 Proxy Statement beginning with and including the caption “Meetings and
Committees of the Board” to, but not including, the caption “Compensation Committee Interlocks and Insider Participation.”
Item 14.
Principal Accountant Fees and Services.
Incorporated by reference is the information in the 2021 Proxy Statement beginning with and including the sub-caption “Audit
Fees” to, but not including, the statement recommending a vote for ratification of the appointment of PricewaterhouseCoopers LLP as
the Company’s independent registered public accounting firm for the year ending December 31, 2021.
104
PART IV
Item 15.
(a)
Exhibits and Financial Statement Schedules
1.
Financial Statements and Supplementary Data
Page
Financial Statements:
44
47
48
49
50
51
52
2.
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes
thereto. Financial statements of 50% or less owned companies have been omitted because none of the companies meets the criteria
requiring inclusion of such statements.
3. Exhibits - filed pursuant to, and numbered in accordance with Item 601 of Regulation S-K (all of which are under
Commission File number 001-12019, except as otherwise noted):
2.1 —
3.1 —
3.2 —
4.1 —
4.2 —
4.3 —
10.1 —
10.2 —
10.3 —
10.4 —
105
10.5 —
10.6 —
10.7 —
10.8 —
10.9 —
10.10 —
10.11 —
10.12 —
10.13 —
10.14 —
.†
10.15 —
.†
10.16 —
.†
10.17 —
.†
10.18 —
10.19 —
10.20 —
10.21 —
10.22 —
106
10.23 —
10.24 —
10.25 —
10.26 —
10.27 —
10.28 —
10.29 —
10.30 —
10.31 —
10.32 —
10.33 —
10.34 —
10.35 —
10.36 —
10.37 —
10.38 —
10.39 —
10.40 —
10.41 —
107
21 —
23 —
31.1 —
31.2 —
32.1 —
32.2 —
101.INS —
Inline XBRL Instance Document*
101.SCH —
Inline XBRL Taxonomy Extension Schema Document*
101.CAL —
Inline XBRL Taxonomy Calculation Linkbase Document*
101.DEF —
Inline XBRL Taxonomy Definition Linkbase Document*
101.LAB —
Inline XBRL Taxonomy Label Linkbase Document*
101.PRE —
Inline XBRL Taxonomy Presentation Linkbase Document*
104 —
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS) *
* Filed herewith.
** Furnished herewith.
*** Certain exhibits and schedules have been omitted, and the Company agrees to furnish supplementally to the Securities and
Exchange commission a copy of any omitted exhibits and schedules upon request.
† Management contract or compensatory plan
Item 16.
Form 10-K Summary.
The Company has elected not to include a Form 10-K summary under this Item 16.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUAKER CHEMICAL CORPORATION
Registrant
By:
/s/ MICHAEL F. BARRY
Michael F. Barry
Chairman of the Board, Chief Executive Officer and
President
Date: March 1, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Capacity
Date
/s/ MICHAEL F. BARRY
Principal Executive Officer and
March 1, 2021
Michael F. Barry
Director
Chairman of the Board, Chief Executive Officer and President
/s/ MARY DEAN HALL
Principal Financial Officer
March 1, 2021
Mary Dean Hall
Senior Vice President, Chief Financial Officer and Treasurer
/s/ SHANE W. HOSTETTER
Principal Accounting Officer
March 1, 2021
Shane W. Hostetter
Vice President, Finance and Chief Accounting Officer
/s/ DONALD R. CALDWELL
Director
March 1, 2021
Donald R. Caldwell
/s/ CHARLOTTE C. DECKER
Director
March 1, 2021
Charlotte C. Decker
/s/ MARK A. DOUGLAS
Director
March 1, 2021
Mark A. Douglas
/s/ JEFFRY D. FRISBY
Director
March 1, 2021
Jeffry D. Frisby
/s/ WILLIAM H. OSBORNE
Director
March 1, 2021
William H. Osborne
/s/ ROBERT H. ROCK
Director
March 1, 2021
Robert H. Rock
/s/ FAY WEST
Director
March 1, 2021
Fay West
/s/ SANJAY HINDUJA
Director
March 1, 2021
Sanjay Hinduja
/s/ RAMASWAMI SESHASAYEE
Director
March 1, 2021
Ramaswami Seshasayee
/s/ MICHAEL SHANNON
Director
March 1, 2021
Michael Shannon