Quaker Chemical Corporation
Management’s Discussion and Analysis
26
The Company had a net operating cash outflow of $12.6
million in the first quarter of 2021 as compared to a net operating
cash
inflow of $20.2 million in the first quarter of 2020.
The decrease in net operating cash flow quarter-over-quarter was
primarily driven
by a significant change in working capital, as the
Company’s significant increase in
net sales and volumes resulted in a large increase
in accounts receivable in the first quarter of 2021.
The key drivers of the Company’s
operating cash flow and working capital are
further discussed in the Company’s
Liquidity and Capital Resources section of this Item,
below.
Overall, the Company’s
first quarter results were strong with sequential and prior
year improvement in all segments primarily due
to the continued recovery in our end-markets and customer
demand increases from lower levels experienced during
2020 as a result of
COVID-19.
The results in the first quarter of 2021 reflected a strong
quarterly growth trend across the globe beginning after the
second quarter of 2020, during which the impacts of
COVID-19 were most severe.
Also, the strong demand in the first quarter of
2021 coupled with continued market share gains and
the on-going execution of integration activities and synergy
realization helped
offset negative impacts due to the on-going
global uncertainty brought on by COVID-19 and other macroeconomic
headwinds,
including rising raw material prices and overall supply
chain pressures.
The global economic slowdown and other impacts due
to COVID-19 experienced by almost all companies in 2020
posed an
unprecedented challenge, but the Company’s
first quarter of 2021 results continue to demonstrate that it can
successfully navigate
through market downturns by responding quickly to
changing market conditions and delivering on the benefits it anticipated
from the
Combination with Houghton.
As the Company looks forward, it expects to experience
continued short-term headwinds from higher
raw material costs and supply chain pressures, with the
magnitude of these raw material cost increases being considerably higher
than
the Company previously expected due to stress on global
supply chains, weather related shutdowns and unexpected supplier
shutdowns.
However, the Company does expect
to achieve additional selling price increases to offset
these rising raw material costs,
but there will be a lag effect on our gross margin
as these price increases catchup to our rising raw material costs.
Despite these near
term headwinds, the Company continues to expect 2021
to result in a step change in its profitability from 2020 as the Company
completes its integration cost synergies, continues
to take further share in the marketplace, benefits from the projected
gradual
rebound in demand, and sees the positive impact of its recent
acquisitions.
On-going impact of COVID-19
The global outbreak of COVID-19 has negatively impacted
all locations where the Company does business.
Although the
Company has now operated in this COVID-19 environment
for a year, the full extent of the outbreak
and related business impacts
remain uncertain and volatile, and therefore the full
extent to which COVID-19 may impact the Company’s
future results of
operations or financial condition is uncertain.
This outbreak has significantly disrupted the operations of the
Company and those of its
suppliers and customers.
The Company has experienced volume declines and lower
net sales as compared to pre-COVID-19 levels as
a result of the outbreak, as further described in this section.
Management continues to monitor the impact that the COVID-19
pandemic is having on the Company,
the overall specialty chemical industry and the economies and
markets in which the Company
operates.
Given the speed and frequency of the continuously evolving developments
with respect to this pandemic, the Company
cannot, as of the date of this Report, reasonably estimate
the magnitude or the full extent of the impact to its future results
of
operations or to the ability of it or its customers to resume
more normal operations, even as certain restrictions are lifted.
The
prolonged pandemic and a resurgence
of the outbreak, and continued restrictions on day-to-day
life and business operations may result
in volume declines and lower net sales in future periods
as compared to pre-COVID-19 levels.
To the extent that
the Company’s
customers and suppliers continue to be significantly and
adversely impacted by COVID-19, this could reduce the
availability, or result
in delays, of materials or supplies to or from the Company
,
which in turn could significantly interrupt the Company’s
business
operations.
Given this ongoing uncertainty,
the Company cautions that its future results of operations could
be significantly adversely
impacted by COVID-19.
Further, management continues to
evaluate how COVID-19-related circumstances, such
as remote work
arrangements, illness or staffing shortages
and travel restrictions have affected financial reporting
processes and systems, internal
control over financial reporting, and disclosure controls and
procedures.
While the circumstances have presented and are expected
to
continue to present challenges, and have necessitated
additional time and resources to be deployed to sufficiently
address the
challenges brought on by the pandemic, at this time, management
does not believe that COVID-19 has had a material impact on
financial reporting processes, internal controls over financial
reporting, or disclosure controls and procedures.
The Company’s top
priority is, and especially during this pandemic remains, to protect the health
and safety of its employees and
customers, while working to ensure business continuity
to meet customers’ needs.
The Company continues to take steps to protect the
health and wellbeing of its people in affected
areas through various actions, including enabling work at home
where needed and
possible, and employing social distancing standards,
implementing travel restrictions where applicable, enhancing onsite hygiene
practices, and instituting visitation restrictions at the Company’s
facilities.
The Company has not and does not expect that it will incur
material expenses implementing these health and safety
policies.
All of the Company’s 31
production facilities worldwide are open
and operating and are deemed as essential businesses
in the jurisdictions where they are operating.
The Company believes that to date
it has been able to meet the needs of all its customers across
the globe despite the current economic challenges.
The Company’s first
quarter of 2021 continued the trend of gradual sequential
quarterly improvement which began in the second half
of 2020.
However,
demand still remains uncertain as many customers maintained
reduced production levels into the first quarter of 2021.
The Company
continues to expect that the impact from COVID-19
will gradually improve subject to the effective containment
of the virus and its