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:
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
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
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.
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
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,
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
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.
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
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
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.
We are subject
to government regulation in all of the jurisdictions in which
we conduct our business.
Changes in the regulatory
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.
Further, we are subject to the
U.S. Foreign Corrupt Practices Act (the “FCPA”),
the U.K. Bribery Act and other anti-bribery,
anti-
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
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.
The shipment of goods, services and technology
across international borders subjects us to extensive trade laws and
regulations.
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.
The laws and regulations concerning import activity,
export record-keeping and reporting, export control and
economic sanctions
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.
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.
We have 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 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
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.
Breaches, cyber incidents and disruptions, or failure to
comply with laws and regulations related to information security or
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.
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.
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.
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.
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.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
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.
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.
Item 4.
Mine Safety Disclosures.
Not Applicable.
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,
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.
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,
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
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,
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.
PART
II
Item 5.
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.
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.
12/31/2015
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.
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.
Item 7.
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.
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
- The Company has taken steps to protect the health and wellbeing
of its people in affected areas through various
actions, including enabling work at home where needed and
possible, and employing social distancing standards,
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
- Currently, 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.
●
Our Business Conditions
- The Company’s second
half of 2020 showed solid improvement over the first half,
which was
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
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
- The Company took various actions to temporarily conserve
cash and reduce costs during 2020.
Some of these
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:
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 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:
Accruals for environmental and litigation matters are
recorded when it is probable that a
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.
Realizability of equity investments:
The Company holds equity investments in various foreign
companies where it has the
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:
Quaker Houghton records expenses and liabilities for taxes
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.
Goodwill and other intangible assets:
The Company accounts for business combinations und
er the acquisition method of
accounting.
This method requires the recording of acquired assets, including
separately identifiable intangible assets, at their
acquisition date fair values.
Any excess of the purchase price over the estimated fair value of
the identifiable net assets acquired is
recorded as goodwill.
The determination of the estimated fair value of assets acquired
requires management’s judgment
and often
involves the use of significant estimates and assumptions,
including assumptions with respect to future cash inflows
and outflows,
discount rates, royalty rates, asset lives and market multiples, among
other items.
When necessary, the Company
consults with
external advisors to help determine fair value.
For non-observable market values, the Company may determine
fair value using
acceptable valuation principles, including the excess earnings,
relief from royalty,
lost profit or cost methods.
The Company amortizes definite-lived intangible assets on
a straight-line basis over their useful lives.
Goodwill and intangible
assets that have indefinite lives are not amortized and are
required to be assessed at least annually for impairment.
The Company
completes its annual goodwill and indefinite lived intangible
asset impairment test during the fourth quarter of each
year, 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.
Pension and Postretirement benefits:
The Company provides certain defined benefit pension
and other 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:
A restructuring related program may consist of charges
for employee severance,
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
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%.
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
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
Beyond
Long-term debt
$
898,789
$
38,686
$
57,754
$
76,856
$
715,155
$
$
10,166
Interest obligations
52,997
14,514
13,703
12,583
10,444
1,227
Capital lease obligations
Operating leases
43,544
12,342
8,395
6,220
4,610
3,836
8,141
Purchase obligations
2,377
2,279
-
-
-
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.
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,
Operating income
$
59,360
$
46,134
$
87,781
Fair value step up of inventory sold (a)
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)
1,073
-
Charges related to the settlement of a non-core
equipment sale (e)
-
-
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,
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)
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)
1,073
-
Charges related to the settlement of a non-core
equipment sale (e)
-
-
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)
1,033
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
Less: Taxes on income
before equity in net income
of associated companies - adjusted (l)(n)
26,488
24,825
22,978
Non-GAAP net income
$
85,151
$
88,711
$
82,491
Non-GAAP Earnings per Diluted Share Reconciliations
For the years ending December 31,
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
acquisition-related expenses per diluted share (b)
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
sale per diluted share (e)
-
0.02
-
Indefinite-lived intangible asset impairment per diluted
share (f)
1.65
-
-
Pension and postretirement benefit costs, non-service
components per diluted share (h)
0.79
0.14
0.13
Gain on changes in insurance settlement restrictions of an
inactive
subsidiary and related insurance insolvency recovery per diluted
share (i)
(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
per diluted share (k)
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.
(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.
(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.
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.
Consolidated Operations Review - Comparison of 2019
with 2018
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
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.
Reportable Segments Review - Comparison of 2020
with 2019
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are
allocated and the manner by which the chief operating decision
maker 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.
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
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.
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
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.
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.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
QUAKER CHEMICAL CORPORATION
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
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.
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.
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.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME
(
Dollars in thousands, except per share data
)
Year
Ended December 31,
Net sales
$
1,417,677
$
1,133,503
$
867,520
Cost of goods sold (excluding amortization expense -
See Note 16)
904,234
741,386
555,206
Gross profit
513,443
392,117
312,314
Selling, general and administrative expenses
380,752
283,828
207,872
Indefinite-lived intangible asset impairment
38,000
-
-
Restructuring and related charges
5,541
26,678
-
Combination, integration and other acquisition-related
expenses
29,790
35,477
16,661
Operating income
59,360
46,134
87,781
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
27,139
28,904
83,098
Taxes on income
before equity in net income of associated companies
(5,296)
2,084
25,050
Income before equity in net income of associated companies
32,435
26,820
58,048
Equity in net income of associated companies
7,352
5,064
1,763
Net income
39,787
31,884
59,811
Less: Net income attributable to noncontrolling intere
st
Net income attributable to Quaker Chemical Corporation
$
39,658
$
31,622
$
59,473
Per share data:
Net income attributable to Quaker Chemical Corporatio
n
common
shareholders - basic
$
2.23
$
2.08
$
4.46
Net income attributable to Quaker Chemical Corporation
common
shareholders - diluted
$
2.22
$
2.08
$
4.45
The accompanying notes are an integral
part of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(
Dollars in thousands
)
Year
Ended December 31,
Net income
$
39,787
$
31,884
$
59,811
Other comprehensive income (loss), net of tax
Currency translation adjustments
41,601
4,779
(17,519)
Defined benefit retirement plans
Net gain (loss) arising during the period, other
8,827
(6,289)
1,119
Amortization of actuarial loss
2,308
2,458
2,507
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
2,091
2,093
(1,728)
Other comprehensive income (loss)
51,480
2,570
(15,705)
Comprehensive income
91,267
34,454
44,106
Less: Comprehensive income attributable to noncontrolling
interest
(37)
(287)
(248)
Comprehensive income attributable to Quaker Chemical Corporation
$
91,230
$
34,167
$
43,858
The accompanying notes are an integral
part of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED BALANCE
SHEETS
(
Dollars in thousands, except par value and share amounts
)
December 31,
ASSETS
Current assets
Cash and cash equivalents
$
181,833
$
123,524
Accounts receivable, net
372,974
375,982
Inventories, net
187,764
174,950
Prepaid expenses and other current assets
50,156
41,516
Total current
assets
792,727
715,972
Property, plant and
equipment, net
203,883
213,469
Right of use lease assets
38,507
42,905
Goodwill
631,212
607,205
Other intangible assets, net
1,081,358
1,121,765
Investments in associated companies
95,785
93,822
Deferred tax assets
16,566
14,745
Other non-current assets
31,796
40,433
Total assets
$
2,891,834
$
2,850,316
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
38,967
$
38,332
Accounts payable
191,821
164,101
Dividends payable
7,051
6,828
Accrued compensation
43,300
45,620
Accrued restructuring
8,248
18,043
Accrued pension and postretirement benefits
1,466
3,405
Other accrued liabilities
92,107
83,605
Total current
liabilities
382,960
359,934
Long-term debt
849,068
882,437
Long-term lease liabilities
27,070
31,273
Deferred tax liabilities
192,763
211,094
Non-current accrued pension and postretirement benefits
63,890
56,828
Other non-current liabilities
55,169
66,384
Total liabilities
1,570,920
1,607,950
Commitments and contingencies (Note 26)
Equity
Common stock, $
1.00
par value; authorized
30,000,000
shares; issued and outstanding
2020 -
17,850,616
shares; 2019
-
17,735,162
shares
17,851
17,735
Capital in excess of par value
905,171
888,218
Retained earnings
423,940
412,979
Accumulated other comprehensive loss
(26,598)
(78,170)
Total Quaker
shareholders’ equity
1,320,364
1,240,762
Noncontrolling interest
1,604
Total equity
1,320,914
1,242,366
Total liabilities and
equity
$
2,891,834
$
2,850,316
The accompanying notes are an integral
part of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(
Dollars in thousands
)
Year Ended
December 31,
Cash flows from operating activities
Net income
$
39,787
$
31,884
$
59,811
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs
4,749
1,979
Depreciation and amortization
83,246
44,895
19,714
Equity in undistributed earnings of associated companies, net of dividends
4,862
(2,115)
2,784
Acquisition-related fair value adjustments related to inventory
11,714
-
Deferred income taxes
(38,281)
(24,242)
8,197
Uncertain tax positions (non-deferred portion)
1,075
(89)
Non-current income taxes payable
-
(8,181)
Deferred compensation and other, net
(471)
(6,789)
2,914
Share-based compensation
10,996
4,861
3,724
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
38,000
-
-
Gain on inactive subsidiary litigation and settlement reserve
(18,144)
-
-
Combination and other acquisition-related expenses, net of payments
(14,414)
2,727
Restructuring and related charges
5,541
26,678
-
Pension and other postretirement benefits
16,535
(1,392)
Increase (decrease) in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
17,170
19,926
(2,822)
Inventories
(3,854)
10,844
(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
22,308
(8,915)
Estimated taxes on income
8,763
(1,373)
4,932
Net cash provided by operating activities
178,389
82,374
78,779
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
2,702
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
-
750,000
-
(Repayments) borrowings on revolving credit facilities, net
(11,485)
147,135
(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
3,867
1,370
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)
844,130
(46,905)
Effect of foreign exchange rate changes on cash
6,591
1,258
(6,141)
Net increase in cash, cash equivalents and restricted cash
38,340
19,130
13,375
Cash, cash equivalents and restricted cash at the beginning of the period
143,555
124,425
111,050
Cash, cash equivalents and restricted cash at the end of the period
$
181,895
$
143,555
$
124,425
Supplemental cash flow disclosures:
Cash paid during the year for:
Income taxes, net of refunds
$
20,253
$
15,499
$
19,617
Interest
23,653
19,553
2,417
Non-cash activities:
Change in accrued purchases of property, plant and equipment, net
$
(1,376)
$
1,978
$
The accompanying notes are an integral
part of these consolidated financial statements.
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
$
13,308
93,528
365,936
(65,100)
1,946
$
409,618
Cumulative effect of an accounting change
-
-
(754)
-
-
(754)
Balance as of January 1, 2018
13,308
93,528
365,182
(65,100)
1,946
408,864
Net income
-
-
59,473
-
59,811
Amounts reported in other comprehensive loss
-
-
-
(15,615)
(90)
(15,705)
Dividends declared ($
1.465
per share)
-
-
(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
3,706
-
-
-
3,724
Balance as of December 31, 2018
13,338
97,304
405,125
(80,715)
1,317
436,369
Cumulative effect of an accounting change
-
-
(44)
-
-
(44)
Balance as of January 1, 2019
13,338
97,304
405,081
(80,715)
1,317
436,325
Net income
-
-
31,622
-
31,884
Amounts reported in other comprehensive income
-
-
-
2,545
2,570
Dividends declared ($
1.525
per share)
-
-
(23,724)
-
-
(23,724)
Shares issued related to the Combination
4,329
784,751
-
-
-
789,080
Shares issued upon exercise of stock options
and other
-
-
-
Shares issued for employee stock purchase plan
-
-
-
Share-based compensation plans
4,819
-
-
-
4,861
Balance as of December 31, 2019
17,735
888,218
412,979
(78,170)
1,604
1,242,366
Cumulative effect of an accounting change
-
-
(911)
-
-
(911)
Balance as of January 1, 2020
17,735
888,218
412,068
(78,170)
1,604
1,241,455
Net income
-
-
39,658
-
39,787
Amounts reported in other comprehensive income
-
-
-
51,572
(92)
51,480
Dividends declared ($
1.560
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
6,714
-
-
-
6,780
Share-based compensation plans
10,946
-
-
-
10,996
Balance as of December 31, 2020
$
17,851
$
905,171
$
423,940
$
(26,598)
$
$
1,320,914
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
)
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.
See Note 17 of Notes to Consolidated
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:
The Company invests temporary and excess funds in money market securities and financial
instruments having maturities within 90 days. The Company considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company has not experienced losses from the aforementioned
investments.
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,
to
years; and machinery and equipment,
to
years.
The carrying values of long-lived assets are evaluated
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.
See Notes 9 and 15 of Notes to Consolidated Financial
Statements.
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
to
years once the assets are ready for their
intended use.
In connection with the implementations and upgrades to
the Company’s global transaction,
consolidation and other
related systems, approximately
$2.3
million and
$2.6
million of net costs were capitalized in PP&E on the
Company’s Consolidated
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
to
years.
The Company continually evaluates the reasonableness of
the useful lives of these assets, consistent with the
discussion of long-lived assets, above.
See Note 16 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
)
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.
See Note 5 of Notes to Consolidated
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.
The Company
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.
See Note 13 of Notes to Consolidated Financial Statements.
Research and development costs
Research and development costs are expensed as incurred
and are included in selling, general
and administrative expenses (“SG&A”).
Research and development expenses were
$40.0
million,
$32.1
million and
$24.5
million for
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.
See Note 26 of Notes to Consolidated Financial Statements.
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.
As of December 31, 2020 and 2019, the Company
had limited exposure to such obligations and had immaterial
liabilities
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
)
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.
See Note 21 of Notes to Consolidated Financial Statements.
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.
See Note 23 of Notes to Consolidated Financial Statements.
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
% 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
)
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.
See Note 25 of Notes to Consolidated Financial Statements.
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.
See Notes 21 and 24 of Notes to
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
after the date of the grant for a period of time
determined by the Company,
but not to exceed
seven years
from the date of grant.
Restricted stock awards and restricted stock units
issued under the LTIP
program are subject to time vesting generally over a
one
to
three-year
period.
In addition, as part of the
Company’s Annual Incentive
Plan, nonvested shares may be issued to key employees,
which generally would vest over a
two
to
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
% 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.
See Note 11 of Notes to
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
)
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
no
remaining carrying value for its investment in Kelko
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.
During the years ended December 31, 2020, 2019 and 2018, the Company recorded $0.4
million, $1.0 million, and $0.7 million, respectively, of remeasurement losses associated with the applicable currency conversions
related to Venezuela and Argentina.
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.
See Note 2 of Notes to Consolidated Financial Statements.
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.
See Note 7 of Notes to Consolidated Financial Statements.
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
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.
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
$
million in cash.
The final remedy agreed with the EC and the FTC was consistent
with the Company’s
previous expectation that the total divested
product lines would be approximately
% 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
)
The following table summarizes the fair value of consideration
transferred in the Combination:
Cash transferred to Houghton shareholders (a)
$
170,829
Cash paid to extinguish Houghton debt obligations
702,556
Fair value of common stock issued as consideration (b)
789,080
Total fair value
of consideration transferred
$
1,662,465
(a)
A portion is held in escrow by a third party,
subject to indemnification rights that lapse upon the achievement
of certain
milestones.
(b)
Amount was determined based on approximately
4.3
million shares, comprising
24.5
% of the common stock of the Company
immediately after the closing, and the closing price per
share of Quaker Chemical Corporation common stock
of $
182.27
on
August 1, 2019.
The Company accounted for the Combination under the
acquisition method of accounting.
This method requires the recording of
acquired assets, including separately identifiable
intangible assets, at their fair value on the acquisition date.
Any excess of the
purchase price over the estimated fair value of
the identifiable net assets acquired is recorded as goodwill.
The determination of the
estimated fair value of assets acquired, 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
$
75,821
$
-
$
75,821
Accounts receivable
178,922
-
178,922
Inventories
95,193
-
95,193
Prepaid expenses and other assets
10,652
11,318
Property, plant and
equipment
115,529
(66)
115,463
Right of use lease assets
10,673
-
10,673
Investments in associated companies
66,447
-
66,447
Other non-current assets
4,710
1,553
6,263
Intangible assets
1,028,400
-
1,028,400
Goodwill
494,915
4,625
499,540
Total assets purchased
2,081,262
6,778
2,088,040
Short-term borrowings, not refinanced at closing
9,297
-
9,297
Accounts
payable, accrued expenses and other accrued liabilities
150,078
1,127
151,205
Deferred tax liabilities
205,082
4,098
209,180
Long-term lease liabilities
6,607
-
6,607
Other non-current liabilities
47,733
1,553
49,286
Total liabilities assumed
418,797
6,778
425,575
Total consideration
paid for Houghton
1,662,465
-
1,662,465
Less: cash acquired
75,821
-
75,821
Less: fair value of common stock issued as consideration
789,080
-
789,080
Net cash paid for Houghton
$
797,564
$
-
$
797,564
(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
measurement period has
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
)
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.
The Company allocated $
1,028.4
million of the purchase price to intangible assets, including certain
measurement period
adjustments, comprised of $
242.0
million of trademarks and tradename, to which management has
assigned indefinite lives; $
677.3
million of customer relationships, to be amortized over
to
years; and $
109.1
million of existing product technology,
to be
amortized over
years.
In addition, the Company recorded $
499.5
million of goodwill, including measurement period adjustments,
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.
Commencing August 1, 2019, the Company’s
Consolidated Statements of Income included the results of
Houghton.
Net sales of
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 $
299.8
million.
The following unaudited pro forma consolidated financial information
has been
prepared as if the Combination had taken place
on January 1, 2018.
The unaudited pro forma results include certain adjustments to
each company’s historical
actual results, including: (i) additional depreciation and 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
December 31,
(as if the Combination occurred on
January 1, 2018)
Net sales
$
1,562,427
$
1,654,588
Net income attributable to Quaker Chemical Corporation
94,537
35,337
Combination,
integration and other acquisition-related expenses have been
and are expected to continue to be significant.
The
Company incurred total costs of $
30.3
million, $
38.0
million and $
19.5
million for the years ended December 31, 2020, 2019 and
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 $
7.5
million and $
6.6
million, respectively,
primarily recorded within other accrued liabilities on its Consolidated
Balance
Sheets.
Norman Hay
In
October 2019
, the Company completed its acquisition of the operating divisions
of
Norman Hay plc
(“Norman Hay”), a private
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
)
assigned to the Global Specialty Businesses reportable segment.
The original purchase price was
80.0
million GBP,
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 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
$
18,981
$
-
$
18,981
Accounts receivable
15,471
-
15,471
Inventories
8,213
(49)
8,164
Prepaid expenses and other assets
4,203
4,341
Property, plant and
equipment
14,981
-
14,981
Right of use lease assets
10,608
-
10,608
Intangible assets
51,088
-
51,088
Goodwill
29,384
(82)
29,302
Total assets purchased
152,929
152,936
Long-term debt included current portions
-
Accounts payable, accrued expenses and other accrued
liabilities
13,488
(732)
12,756
Deferred tax liabilities
12,746
13,651
Long-term lease liabilities
8,594
-
8,594
Total liabilities assumed
35,313
35,486
Total consideration
paid for Norman Hay
117,616
(166)
117,450
Less: estimated purchase price settlement (2)
3,287
(3,287)
-
Less: cash acquired
18,981
-
18,981
Net cash paid for Norman Hay
$
95,348
$
3,121
$
98,469
(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
2.5
million GBP
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
measurement period has ended.
The Company allocated $
51.1
million of the purchase price to intangible assets, comprised
of $
36.9
million of customer relationships,
to be amortized over
to
years; $
7.5
million of existing product technology,
to be amortized over
years; $
6.3
million of
trademarks, to be amortized over
to
years; and $
0.4
million of non-compete agreements, to be amortized over
to
years.
In
addition, the Company recorded $
29.3
million of goodwill related to expected value not allocated to
other acquired assets, none of
which will be tax deductible.
Factors contributing to the purchase price that resulted
in goodwill included the acquisition of
management, 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
Coral Chemical Company
(“Coral”), a privately held, U.S.-based
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 $
54.1
million, subject to routine and customary post-closing adjustments related
to working capital and net
indebtedness levels.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
The following table presents the preliminary estimated fair
values of Coral net assets acquired:
December 22,
Cash and cash equivalents
$
Accounts receivable
8,473
Inventories
4,527
Prepaid expenses and other assets
Property, plant and
equipment
10,467
Intangible assets
30,300
Goodwill
2,814
Total assets purchased
57,720
Long-term debt included current portions
Accounts payable, accrued expenses and other accrued liabilities
3,482
Total liabilities assumed
3,665
Total consideration
paid for Coral
54,055
Less: cash acquired
Net cash paid for Coral
$
53,097
The Company allocated $
30.3
million of the purchase price to intangible assets, comprised
of $
22.0
million of customer
relationships, to be amortized over
to
years; $
4.7
million of existing product technology,
to be amortized over
to
years;
$
3.6
million of trademarks, to be amortized over
years.
In addition, the Company recorded $
2.8
million of goodwill related to
expected value not allocated to other acquired assets, none
of which will be tax deductible.
Factors contributing to the purchase price
that resulted in goodwill included the acquisition of
management, 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
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.
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
$
million.
The results of operations of the acquired assets are not
included in the Consolidated Statements of Income, because the
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
20.0
million DKK, or approximately $
2.9
million, which was
subsequently converted into shares of the Company’s
common stock.
An adjustment to the purchase price of approximately
0.4
million DKK, or less than $
0.1
million, was made as a result of finalizing a post-closing
settlement in the second quarter of 2020.
The
Company allocated approximately $
2.4
million of the purchase price to intangible assets to be amortized
over
years.
In addition,
the Company recorded approximately $
0.5
million of goodwill, related to expected value not allocated to
other acquired assets, none
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
)
In March 2020, the Company acquired the remaining
% ownership interest in one of its South African affiliates,
Quaker
Chemical South Africa Limited (“QSA”) for
16.7
million ZAR, or approximately $
1.0
million, from its joint venture partner PQ
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 $
0.7
million of excess purchase price over the carrying value of
the noncontrolling
interest in Capital in excess of par value.
In March 2018, the Company purchased certain formulations
and product technology for the mining industry for $
1.0
million.
The Company allocated the entire purchase price to intangible
assets representing formulations and product technology,
to be
amortized over
years.
In accordance with the terms of the applicable purchase agreement,
$
0.5
million of the purchase price was
paid at signing, and the remaining $
0.5
million of the purchase price was paid during the first quarter of 2019.
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
in March 2020.
The amendments provide temporary optional expedients and
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
in August 2018 that clarifies the accounting for implementation
costs incurred in a cloud computing
arrangement under a service contract.
This guidance generally aligns the requirements for capitalizing
implementation costs incurred
in a hosting arrangement under a service contract with the
requirements for capitalizing implementation costs related
to internal-use
software.
The guidance within this accounting standard update is effective
for annual periods beginning after December 15, 2019 and
should be applied either retrospectively or 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
in
August 2018 that modifies certain disclosure requirements
for fair value measurements.
The guidance removes certain disclosure
requirements regarding transfers between levels of
the fair value hierarchy as well as certain disclosures related
to the valuation
processes for certain fair value measurements.
Further, the guidance added certain disclosure
requirements including unrealized gains
and losses and significant unobservable inputs used to
develop certain fair value measurements.
The guidance within this accounting
standard update is effective for annual and
interim periods beginning after December 15, 2019, and should
be applied prospectively in
the initial year of adoption or prospectively to all periods
presented, depending on the amended disclosure requirement.
Early
adoption was permitted.
The Company adopted this standard on a prospective basis, effective
January 1, 2020.
ASU 2018-14
addresses disclosures only and will not
have an impact on the Company’s
consolidated financial statements.
The FASB issued
ASU 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
)
resulted in an increase to its allowance for doubtful
accounts of approximately $
1.1
million, a decrease to deferred tax liabilities of
$
0.2
million and a decrease to retained earnings of $
0.9
million.
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,
Investments - Equity Securities (To
pic 321), Investments - Equity Method and Joint Ventures
(Topic
323), and Derivatives and Hedging (Topic
815) -Clarifying the Interactions between Topic
321, Topic
323, and Topic
in
January 2020 clarifying the interaction among the
accounting standards related to equity securities, equity method investments,
and
certain derivatives.
The new guidance, among other things, states that a company
should consider observable transactions that require
a company to either apply or discontinue the equity method
of accounting, for the purposes of applying the fair value
measurement
alternative immediately before applying or upon discontinuing
the equity method.
The new guidance also addresses the measurement
of certain purchased options and forward contracts used
to acquire investments.
The guidance within this accounting standard update
is effective for annual and interim periods beginning
after December 15, 2020 and is to be applied prospectively.
Early adoption is
permitted.
The Company 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
in December 2019.
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
)
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.
Net sales
Americas
$
450,161
$
392,121
$
297,601
EMEA
383,187
285,570
216,984
Asia/Pacific
315,299
247,839
192,502
Global Specialty Businesses
269,030
207,973
160,433
Total
net sales
$
1,417,677
$
1,133,503
$
867,520
Segment operating earnings
Americas
$
96,379
$
78,297
$
62,686
EMEA
69,163
47,014
36,119
Asia/Pacific
88,356
67,512
53,739
Global Specialty Businesses
79,690
58,881
42,931
Total
segment operating earnings
333,588
251,704
195,475
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
59,360
46,134
87,781
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
$
27,139
$
28,904
$
83,098
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:
Segment assets
Americas
$
969,551
$
926,122
$
180,037
EMEA
697,821
688,663
149,984
Asia/Pacific
713,004
685,476
205,424
Global Specialty Businesses
511,458
550,055
174,220
Total segment assets
$
2,891,834
$
2,850,316
$
709,665
Segment long-lived assets
Americas
$
122,302
$
139,170
$
60,745
EMEA
69,344
56,108
23,383
Asia/Pacific
119,233
126,166
26,217
Global Specialty Businesses
59,091
69,184
26,949
Total segment long-lived
assets
$
369,970
$
390,628
$
137,294
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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:
Capital expenditures
Americas
$
6,451
$
6,404
$
3,401
EMEA
3,844
3,263
2,081
Asia/Pacific
5,688
3,857
6,059
Global Specialty Businesses
1,918
2,021
1,345
Total segment capital
expenditures
$
17,901
$
15,545
$
12,886
Depreciation
Americas
$
12,322
$
7,500
$
4,225
EMEA
6,813
4,560
3,434
Asia/Pacific
4,672
3,458
2,552
Global Specialty Businesses
3,544
2,248
1,985
Total segment depreciation
$
27,351
$
17,766
$
12,196
During the years ended December 31, 2020, 2019 and 2018,
the Company had approximately
$963.2
million,
$719.8
million and
$534.6
million of net sales, respectively,
attributable to non-U.S. operations.
As of December 31, 2020, 2019 and 2018, the Company
had approximately
$176.6
million,
$174.4
million and
$60.8
million of long-lived assets, respectively,
attributable to non-U.S.
operations.
Inter-segment revenue for the years ended December
31, 2020, 2019 and 2018 was
$9.1
million,
$7.3
million and
$8.3
million for
Americas,
$22.0
million,
$20.3
million and
$21.9
million for EMEA,
$0.6
million,
$0.2
million and
$0.5
million for Asia/Pacific and
$4.7
million,
$5.4
million and
$5.3
million for Global Specialty Businesses, respectively.
However, all inter-segment
transactions
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
)
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 $
42.5
million, $
48.0
million and $
47.1
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
)
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 $
4.0
million and $
2.2
million of deferred revenue as of December 31, 2020 and 2019,
respectively.
During the years ended December 31,
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
)
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.
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
%
Net sales for the year ending December 31, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
163,135
$
107,880
$
168,096
$
439,111
Metalworking and other
287,026
275,307
147,203
709,536
450,161
383,187
315,299
1,148,647
Global Specialty Businesses
154,796
68,164
46,070
269,030
$
604,957
$
451,351
$
361,369
$
1,417,677
Timing of Revenue Recognized
Product sales at a point in time
$
580,663
$
434,549
$
352,917
$
1,368,129
Services transferred over time
24,294
16,802
8,452
49,548
$
604,957
$
451,351
$
361,369
$
1,417,677
Net sales for the year ending December 31, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
171,784
$
100,605
$
141,870
$
414,259
Metalworking and other
220,337
184,965
105,969
511,271
392,121
285,570
247,839
925,530
Global Specialty Businesses
149,428
30,115
28,430
207,973
$
541,549
$
315,685
$
276,269
$
1,133,503
Timing of Revenue Recognized
Product sales at a point in time
$
525,802
$
310,274
$
269,228
$
1,105,304
Services transferred over time
15,747
5,411
7,041
28,199
$
541,549
$
315,685
$
276,269
$
1,133,503
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Net sales for the year ending December 31, 2018
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
164,263
$
101,028
$
120,627
$
385,918
Metalworking and other
133,338
115,956
71,875
321,169
297,601
216,984
192,502
707,087
Global Specialty Businesses
122,165
16,613
21,655
160,433
$
419,766
$
233,597
$
214,157
$
867,520
Timing of Revenue Recognized
Product sales at a point in time
$
408,402
$
233,372
$
206,112
$
847,886
Services transferred over time
11,364
8,045
19,634
$
419,766
$
233,597
$
214,157
$
867,520
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
years.
In addition, the Company has certain land use leases with remaining
lease terms up to
years.
The lease term for all of the
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
on the Consolidated Balance Sheet.
Right of use lease assets and liabilities are recognized
at
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 $
14.2
million and $
9.4
million, respectively.
Short-term lease expense for the years ended
December 31, 2020 and 2019 was $
1.3
million and $
1.5
million, respectively.
The Company has
no
material variable lease costs or
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 $
14.1
million and $
9.2
million,
respectively.
The Company recorded new right of use lease assets and associated lease liabilities
of $
6.9
million during the year
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
)
Supplemental balance sheet information related to the Company’s
leases is as follows:
December 31,
December 31,
Right of use lease assets
$
38,507
$
42,905
Other accrued liabilities
10,901
11,177
Long-term lease liabilities
27,070
31,273
Total operating
lease liabilities
$
37,971
$
42,450
Weighted average
remaining lease term (years)
6.0
6.2
Weighted average
discount rate
4.20%
4.21%
Maturities of operating lease liabilities as of December
31, 2020 were as follows:
December 31,
For the year ended December 31, 2021
$
12,342
For the year ended December 31, 2022
8,395
For the year ended December 31, 2023
6,220
For the year ended December 31, 2024
4,610
For the year ended December 31, 2025
3,836
For the year ended December 31, 2026 and beyond
8,141
Total lease payments
43,544
Less: imputed interest
(5,573)
Present value of lease liabilities
$
37,971
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
people globally, as well as plans
for the closure of certain
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
)
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
26,678
Cash payments
(8,899)
Currency translation adjustments
Accrued restructuring as of December 31, 2019
18,043
Restructuring and related charges
5,541
Cash payments
(15,745)
Currency translation adjustments
Accrued restructuring as of December 31, 2020
$
8,248
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 $
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 continues to be held-
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:
Stock options
$
1,491
$
1,448
$
1,053
Non-vested stock awards and restricted stock units
5,012
3,206
2,459
Non-elective and elective 401(k) matching contribution in
stock
3,112
-
-
Employee stock purchase plan
-
Director stock ownership plan
Performance stock units
-
-
Annual incentive plan (1)
-
-
-
Total share-based
compensation expense
$
10,996
$
4,861
$
3,724
(1) Refer to the section entitled
Annual Incentive Plan
below for additional information.
Share-based compensation expense is recorded in SG&A,
except for $
1.5
million, $
0.9
million and $
0.1
million during the years
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
)
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
144,412
$
137.15
Options granted
49,115
136.64
Options exercised
(83,191)
128.42
Options outstanding as of December 31, 2020
110,336
$
143.51
5.2
$
12,015
Options expected to vest after December 31, 2020
92,890
$
144.86
5.6
$
9,990
Options exercisable as of December 31, 2020
17,446
$
136.32
3.4
$
2,025
The total intrinsic value of options exercised during the years ended
December 31, 2020, 2019 and 2018 was approximately
$6.5
million,
$2.5
million and
$2.0
million, respectively.
Intrinsic value is calculated as the difference between
the current market price of
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)
$
70.01
-
$
80.00
2,133
1.0
$
72.12
2,133
$
72.12
$
80.01
-
$
90.00
1,309
1.0
87.30
1,309
87.30
$
90.01
-
$
130.00
-
-
-
-
-
$
130.01
-
$
140.00
51,732
6.0
136.54
2,617
134.60
$
140.01
-
$
150.00
-
-
-
-
-
$
150.01
-
$
160.00
55,162
4.8
154.14
11,387
154.37
110,336
5.2
143.51
17,446
136.32
As of December 31, 2020, unrecognized compensation expense
related to options granted in 2020, 2019 and 2018 was
$1.2
million,
$0.3
million and less than
$0.1
million, respectively, to be
recognized over a weighted average period of
1.9
years.
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:
Number of stock options granted
49,115
51,610
35,842
42,477
Dividend yield
0.99
%
1.12
%
1.37
%
1.49
%
Expected volatility
31.57
%
26.29
%
24.73
%
25.52
%
Risk-free interest rate
0.36
%
1.52
%
2.54
%
1.67
%
Expected term (years)
4.0
4.0
4.0
4.0
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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 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
64,500
$
152.67
Granted
28,244
145.63
Vested
(19,195)
148.15
Forfeited
(1,781)
150.27
Nonvested awards, December 31, 2020
71,768
$
151.17
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
million, to be recognized over a weighted average
remaining period of
1.6
years.
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
8,655
$
152.09
Granted
6,030
141.65
Vested
(1,791)
141.92
Forfeited
(2,049)
153.50
Nonvested awards, December 31, 2020
10,845
$
147.70
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
million, to be recognized over a weighted
average remaining period of
2.0
years.
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
0.28
%; (ii) an expected term of
3.0
years; and (iii) a three-year daily
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
)
As of December 31, 2020, the Company estimates that it will issue
approximately
20,000
fully vested shares as of the settlement
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 $
2.5
million of total unrecognized compensation cost related to PSUs which
the Company expects
to recognize over a weighted-average period of
2.2
years.
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 $
3.1
million.
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
75,000
shares of Quaker common stock in accordance with
the terms of the Plan in payment of all or a portion of the
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 $
0.1
million and the retainer payment date is June 1.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Note 9 - Other Expense, net
Other expense, net, for the years ended December 31, 2020,
2019 and 2018 are as follows:
Income from third party license fees
$
$
1,035
$
Foreign exchange (losses) gains, net
(6,082)
(807)
(Loss) gain on fixed asset disposals, net
(871)
Non-income
tax refunds and other related credits
3,345
1,118
Pension and postretirement benefit costs, non-service components
(21,592)
(2,805)
(2,285)
Gain on changes in insurance settlement restrictions of an
inactive
subsidiary and related insurance insolvency recovery
18,144
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
$
1.6
million refund in premium and a $
22.7
million non-cash settlement charge related to the
Legacy Quaker U.S. Pension Plan, as
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
$
0.4
million, $
1.0
million and $
0.4
million, respectively,
related to
hyper-inflationary accounting for the Company’s
Argentine subsidiaries, and specific to 2018,
a foreign currency transaction gain of
approximately $
0.4
million related to the liquidation of an inactive legal entity.
See Note 1 of Notes to Consolidated Financial
Statements.
(Loss) gain on fixed asset disposals, net, during the year
ended December 31, 2020 and 2018, included $
0.6
million loss
and a $
0.6
million gain, respectively,
on the sale of held-for-sale assets related to the Combination.
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 $
15.5
million transition tax in installments over eight years as permitted
under U.S. Tax
Reform.
As of December
31, 2020, $
7.0
million in installments have been paid with the remaining
$
8.5
million to be paid through installments in future years.
As of December 31, 2020, the Company has a deferred
tax liability of $
5.9
million on certain undistributed foreign earnings,
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
)
Taxes on income
before equity in net income of associated companies for the
years ended December 31, 2020, 2019 and 2018 are
as follows:
Current:
Federal
$
(1,359)
$
(239)
$
6,583
State
1,171
(1,844)
Foreign
33,173
26,213
12,114
32,985
26,326
16,853
Deferred:
Federal
(28,437)
(9,267)
7,859
State
(3,087)
(396)
(173)
Foreign
(6,757)
(14,579)
Total
$
(5,296)
$
2,084
$
25,050
The components of earnings before income taxes for the
years ended December 31, 2020, 2019 and 2018 are as follows:
U.S.
$
(66,585)
$
(46,697)
$
27,387
Foreign
93,724
75,601
55,711
Total
$
27,139
$
28,904
$
83,098
Total deferred
tax assets and liabilities are composed of the following
as of December 31, 2020 and 2019:
Retirement benefits
$
15,237
$
15,142
Allowance for doubtful accounts
2,316
2,253
Insurance and litigation reserves
1,002
Performance incentives
5,914
7,213
Equity-based compensation
1,282
1,050
Prepaid expense
2,976
Insurance settlement
-
3,895
Operating loss carryforward
16,693
16,044
Foreign tax credit and other credits
24,873
34,384
Interest
16,812
11,479
Restructuring reserves
1,121
2,167
Right of use lease assets
9,346
10,015
Royalties and license fees
-
2,156
Inventory reserves
2,225
2,163
Research and development
7,974
2,580
Other
3,005
1,317
108,396
115,836
Valuation
allowance
(21,511)
(13,834)
Total deferred
tax assets, net
$
86,885
$
102,002
Depreciation
15,473
17,754
Foreign pension and other
1,807
1,269
Amortization and other
222,794
254,359
Lease liabilities
9,151
9,965
Outside basis in equity investment
7,938
6,776
Unremitted Earnings
5,919
8,228
Total deferred
tax liabilities
$
263,082
$
298,351
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
The Company has $
11.3
million of deferred tax assets related to state net operating
losses.
A partial valuation allowance of $
8.0
million has been established against this amount resulting
in a net $
3.3
million expected future benefit.
Management analyzed the
expected impact of the reversal of existing taxable temporary
differences, considered expiration dates, analyzed
current state tax laws,
and determined that $
3.3
million of state net operating loss carryforwards will be
realized based on the reversal of deferred tax
liabilities.
These state net operating losses are subject to various
carryforward periods of
years to
years or an indefinite
carryforward period.
An additional $
1.0
million of valuation allowance was established for other net
state deferred tax assets.
The Company has $
5.4
million of deferred tax assets related to foreign net operating
loss carryforwards.
A partial valuation
allowance of $
1.7
million has been established against the $
5.4
million due to the expected expiration of these losses before
they are
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 $
0.6
million has been established against certain other
foreign deferred tax assets.
In conjunction with the Combination, the Company
acquired foreign tax credit deferred tax assets of $
41.8
million expiring
between 2019 and 2028.
Foreign tax credits may be carried forward for
years.
As of December 31, 2019, the foreign tax credit
carry forward was $
33.7
million with an $
8.2
million valuation allowance recorded against the deferred
tax asset.
Management
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 $
24.9
million with a $
10.2
million valuation
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 $
14.0
million as part of the Combination.
Disallowed
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 $
15.7
million on its balance
sheet.
As of December 31, 2020, the Company had deferred tax
liabilities of $
222.8
million primarily related to the step-up in
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 $
7.9
million deferred tax liability for its outside basis difference.
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
$
13,834
$
7,148
$
2,738
$
(2,153)
$
(56)
$
21,511
Year
ended December 31, 2019
$
7,520
$
13,752
$
$
(8,227)
$
(43)
$
13,834
Year
ended December 31, 2018
$
7,401
$
-
$
$
(471)
$
(60)
$
7,520
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:
Non-current deferred tax assets
$
16,566
$
14,745
Non-current deferred tax liabilities
192,763
211,094
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
)
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:
Income tax provision at the Federal statutory tax rate
$
5,699
$
6,070
$
17,458
Unremitted earnings
(2,308)
(4,383)
7,857
Tax law changes
/ reform
(1,059)
(416)
(3,118)
Sub part F / Global intangible low taxed income
5,140
2,095
Pension settlement
(2,247)
-
-
Foreign derived intangible income
(7,339)
(1,699)
(1,034)
Non-deductible acquisition expenses
1,743
1,019
Withholding taxes
7,809
8,621
1,161
Foreign tax credits
(4,699)
(3,787)
(1,911)
Share-based compensation
(540)
Foreign tax rate differential
1,081
Research and development credit
(475)
(306)
(230)
Uncertain tax positions
1,990
(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)
$
2,084
$
25,050
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.
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 $
5.9
million, which
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 $
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.
As of December 31, 2020, the Company’s
cumulative liability for gross unrecognized tax benefits was $
22.2
million. The
Company had accrued approximately $
3.9
million for cumulative penalties and $
3.0
million for cumulative interest as of December
31, 2020.
As of December 31, 2019, the Company’s
cumulative liability for gross unrecognized tax benefits was $
19.1
million. The
Company had accrued approximately $
3.1
million for cumulative penalties and $
2.3
million for cumulative interest as of December
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
million for penalties and $
0.6
million for interest (net of expirations and settlements) in its Consolidated
Statement of Income for the year ended December 31,
2020, a credit of $
0.2
million for penalties and an expense of $
0.2
million for
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
million for penalties and a credit of $
0.1
million for interest (net of expirations and settlements)
in its Consolidated
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
million due to the expiration of the statute of limitations with regard
to certain tax
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
)
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:
Unrecognized tax benefits as of January 1
$
19,097
$
7,050
$
6,761
Increase (decrease) in unrecognized tax benefits taken
in prior periods
2,025
(28)
(183)
Increase in unrecognized tax benefits taken in current period
3,095
1,935
2,023
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
11,301
-
Increase (decrease) due to foreign exchange rates
(132)
(259)
Unrecognized tax benefits as of December
$
22,152
$
19,097
$
7,050
The amount of net unrecognized tax benefits above that, if
recognized, would impact the Company’s
tax expense and effective tax
rate is $
14.7
million, $
13.3
million and $
2.2
million for the years ended December 31, 2020, 2019
and 2018, respectively.
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,
and ending March 31, 2019, and various U.S. state tax jurisdictions
from
.
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 $
0.9
million to finalize these
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 $
5.8
million reserve for uncertain tax positions relating to matters
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 $
5.8
million indemnification receivable has also been
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 $
0.9
million as of December 31, 2020.
Of
this amount, $
0.8
million relates to tax periods prior to the Combination and
therefore the Company has submitted an indemnification
claim with Houghton’s
former owners for any tax liabilities arising pre-Combination.
As a result, a corresponding $
0.8
million
indemnification receivable has also been established
to offset the $
0.8
million tax liability.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Note 11 - Earnings Per Share
The following table summarizes earnings per share calculations
for the years ended December 31, 2020, 2019 and 2018:
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
39,658
$
31,622
$
59,473
Less: income allocated to participating securities
(148)
(90)
(253)
Net income available to common shareholders
$
39,510
$
31,532
$
59,220
Basic weighted average common shares outstanding
17,719,792
15,126,928
13,268,047
Basic earnings per common share
$
2.23
$
2.08
$
4.46
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
39,658
$
31,622
$
59,473
Less: income allocated to participating securities
(148)
(90)
(252)
Net income available to common shareholders
$
39,510
$
31,532
$
59,221
Basic weighted average common shares outstanding
17,719,792
15,126,928
13,268,047
Effect of dilutive securities
31,087
36,243
36,685
Diluted weighted
average common shares outstanding
17,750,879
15,163,171
13,304,732
Diluted earnings per common share
$
2.22
$
2.08
$
4.45
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
4.3
million shares issued as a component of the consideration transferred
in the Combination, comprising
24.5
% 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
in 2020,
in 2019 and
1,808
in 2018.
Note 12 - Restricted Cash
Prior to December 2020, the Company had restricted cash recorded in other assets related to proceeds from an inactive subsidiary
of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an
original total value of $35.0 million.
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.
The proceeds of the settlement and release agreements
were deposited
into interest bearing accounts which earned less then $
0.1
million and $
0.2
million in the years ended December 31, 2020 and 2019,
respectively, offset
by $
1.0
million and $
0.8
million of net payments during 2020 and 2019, respectively.
Due to the restricted nature
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 $
18.1
million gain
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:
Cash and cash equivalents
$
181,833
$
123,524
$
104,147
$
89,879
Restricted cash included in other current assets
-
-
Restricted cash included in other assets
-
19,678
20,278
21,171
Cash, cash equivalents and restricted cash
$
181,895
$
143,555
$
124,425
$
111,050
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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
million and
$387.7
million,
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
$
11,716
$
3,582
$
(2,187)
$
$
13,145
Year
ended December 31, 2019
$
5,187
$
1,925
$
(322)
$
4,926
$
11,716
Year
ended December 31, 2018
$
5,457
$
$
(295)
$
(468)
$
5,187
Included in exchange rate changes and other adjustments for
the year ended December 31, 2019 are the allowance for
doubtful
accounts of $
5.0
million related to the acquired receivables in connection with
the Combination and Norman Hay acquisition.
See
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 $
0.3
million to other assets related to certain customer receivables due
greater than a year.
Note 14 - Inventories
Inventories, net, as of December 31, 2020 and 2019 were
as follows:
Raw materials and supplies
$
86,148
$
82,058
Work in
process, finished goods and reserves
101,616
92,892
Total inventories,
net
$
187,764
$
174,950
Note 15 - Property,
Plant and Equipment
Property, plant and
equipment as of December 31, 2020 and 2019 were as follows:
Land
$
33,009
$
34,686
Building and improvements
135,595
130,462
Machinery and equipment
246,242
225,636
Construction in progress
8,407
8,050
Property, plant and
equipment, at cost
423,253
398,834
Less: accumulated depreciation
(219,370)
(185,365)
Total property,
plant and equipment, net
$
203,883
$
213,469
As of December 31, 2020, PP&E includes $
0.4
million of finance lease assets and future minimum lease payments.
In connection
with the plans for closure of certain facilities, certain buildings and land with an aggregate book value of approximately $10.0 million
continue to be held-for-sale as of December 31, 2020 and are recorded in other current assets on the Company’s Consolidated Balance
Sheet.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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
$
28,464
$
17,423
$
13,149
$
24,297
$
83,333
Goodwill additions
188,494
114,167
130,091
91,545
524,297
Currency translation adjustments
(573)
1,428
(1,513)
(425)
Balance as of December 31, 2019
216,385
133,018
141,727
116,075
607,205
Goodwill additions
1,485
-
1,329
3,345
Currency translation and other
adjustments
(4,628)
6,613
16,363
2,314
20,662
Balance as of December 31, 2020
$
213,242
$
140,162
$
158,090
$
119,718
$
631,212
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 $
2.6
million decrease
in the Americas, a $
1.4
million decrease in EMEA, a $
8.0
million increase in Asia/Pacific and a $
0.5
million increase in Global
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
Customer lists and rights to sell
$
839,551
$
792,362
$
99,806
$
49,932
Trademarks, formulations and product
technology
166,448
157,049
30,483
21,299
Other
6,372
6,261
5,824
5,776
Total definite
-lived intangible assets
$
1,012,371
$
955,672
$
136,113
$
77,007
The Company recorded $
55.9
million, $
26.7
million and $
7.3
million of amortization expense during the years ended December
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
$
58,752
For the year ended December 31, 2022
58,590
For the year ended December 31, 2023
58,361
For the year ended December 31, 2024
57,935
For the year ended December 31, 2025
57,263
The Company has four indefinite-lived intangible
assets totaling $
205.1
million as of December 31, 2020, including $
204.0
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 $
243.1
million as of December 31, 2019.
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
)
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 $
38.0
million, primarily related to the Houghton trademarks and
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 $
95.8
million, which includes
investments of $
68.3
million in Houghton Korea; $
19.4
million in Primex; $
7.8
million in Nippon Japan; and $
0.3
million in Kelko
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
no
remaining carrying value for its investment in Kelko Venezuela.
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,
Houghton Korea
$
5,241
$
2,337
$
-
Nippon Japan
Kelko Panama
Kelko Venezuela
-
-
(138)
Primex
1,151
1,822
Total equity
in net income of associated companies
$
7,352
$
5,064
$
1,763
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
)
Note 18 - Other Non-Current Assets
Other non-current assets as of December 31, 2020
and 2019 were as follows:
Uncertain tax positions
$
7,209
$
4,993
Pension assets
6,748
-
Debt issuance costs
5,919
7,571
Indemnification assets
7,615
4,006
Supplemental retirement income program
1,961
1,782
Restricted insurance settlement
-
19,678
Other
2,344
2,403
Total other
assets
$
31,796
$
40,433
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:
Non-income taxes
$
26,080
$
21,176
Current income taxes payable
13,124
7,503
Professional fees, legal, and acquisition-related accruals
11,437
17,103
Short-term lease liabilities
10,901
11,177
Selling expenses and freight accruals
10,475
11,350
Customer advances and sales return reserves
6,380
5,554
Other
13,710
9,742
Total other
accrued liabilities
$
92,107
$
83,605
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
1.65%
$
160,000
3.20%
$
171,169
U.S. Term Loan
1.65%
570,000
3.20%
600,000
EURO Term Loan
1.50%
157,062
1.50%
151,188
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
2,072
Various
2,608
Total debt
$
899,134
$
934,965
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
$
849,068
$
882,437
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Credit facilities
The Company’s primary
credit facility (as amended, 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 variable interest rate incurred on the outstanding borrowings under
the Credit Facility during the year
ended December 31, 2020 was approximately
2.2
%.
As of December 31, 2020, the variable interest rate on the outstanding
borrowings under the Credit Facility was approximately
1.6
%.
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 Company has unused
capacity under the Revolver of approximately $
million, net of bank letters of credit of approximately $
million, as of December
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 $
6.3
million of ticking fees.
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 adjusted EBITDA may not exceed 4.00 to 1. The Company’s
consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1 over the term of the agreement. The Credit
Facility also prohibits the payment of cash dividends 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.
During the year ended December 31, 2020, the
Company made four quarterly amortization payments
related to the Term Loans
totaling $
37.6
million.
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
%.
See Note 25 of Notes to Consolidated Financial Statements.
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 and 2019,
the Company had
$
11.1
million and $
14.2
million, respectively,
of debt issuance costs recorded as a reduction of long-term
debt.
As of December 31,
2020 and 2019, the Company had $
5.9
million and $
7.6
million, respectively,
of debt issuance costs recorded within other assets.
Industrial development bonds
As of December 31, 2020 and 2019, the Company
had fixed rate, industrial development authority bonds totaling $
10.0
million in
principal amount due in
.
These bonds have similar covenants to the Credit Facility noted
above.
The Company also had a $
5.0
million industrial development authority bond bearing
interest at a rate of
5.60
%, which matured
and was paid off during the fourth quarter of
.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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 $
million.
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
$
million.
The Company incurred the following debt related expenses
included within Interest expense, net, in the Consolidated
Statements
of Income:
Year
Ended December 31,
Interest expense
$
23,552
$
16,788
$
6,158
Amortization of debt issuance costs
4,749
1,979
Total
$
28,301
$
18,767
$
6,228
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:
$
38,795
57,850
76,943
715,227
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
Foreign
U.S.
Total
Foreign
U.S.
Total
U.S.
U.S.
Change in benefit obligation
Gross benefit obligation at beginning
of year
$
217,893
$
153,723
$
371,616
$
111,316
$
58,734
$
170,050
$
4,266
$
4,106
Service cost
4,340
4,831
3,507
3,941
Interest cost
3,416
2,923
6,339
3,046
3,313
6,359
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
-
-
-
85,658
86,414
172,072
-
-
Actuarial loss (gain)
16,834
12,414
29,248
13,616
10,862
24,478
(864)
Translation differences and
other
14,981
-
14,981
5,695
-
5,695
-
-
Gross benefit obligation at end of year
$
247,675
$
109,969
$
357,644
$
217,893
$
153,723
$
371,616
$
3,234
$
4,266
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Other Post-
Pension Benefits
Retirement Benefits
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
$
195,099
$
120,550
$
315,649
$
94,826
$
49,415
$
144,241
$
-
$
-
Actual return on plan assets
20,367
10,759
31,126
13,458
10,663
24,121
-
-
Employer contributions
6,912
2,302
9,214
5,223
1,087
6,310
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
-
-
-
81,068
65,919
146,987
-
-
Translation differences
13,876
-
13,876
5,499
-
5,499
-
-
Fair value of plan assets at end of year
$
228,789
$
73,481
$
302,270
$
195,099
$
120,550
$
315,649
$
-
$
-
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
$
6,748
$
-
$
6,748
$
-
$
-
$
-
$
-
$
-
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)
1,271
-
1,271
-
-
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
3,116
(31,006)
(27,890)
(1,249)
13,387
12,138
(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
million
($109.5
million U.S. and
$234.9
million Foreign) and
$366.0
million (
$152.9
million U.S. and approximately
$213.1
million Foreign) as of December 31, 2020 and
2019, respectively.
Information for pension plans with an accumulated benefit
obligation in excess of plan assets:
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
32,373
$
109,969
$
142,342
$
217,893
$
153,723
$
371,616
Accumulated benefit obligation
30,892
109,540
140,432
213,060
152,930
365,990
Fair value of plan assets
18,074
73,481
91,555
195,099
120,550
315,649
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Information for pension plans with a projected
benefit obligation in excess of plan assets:
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
32,373
$
109,969
$
142,342
$
217,893
$
153,723
$
371,616
Fair value of plan assets
18,074
73,481
91,555
195,099
120,550
315,649
Components of net periodic benefit costs - pension plans:
Foreign
U.S.
Total
Foreign
U.S.
Total
Service cost
$
4,340
$
$
4,831
$
3,507
$
$
3,941
Interest cost
3,416
2,923
6,339
3,046
3,313
6,359
Expected return on plan assets
(4,262)
(4,810)
(9,072)
(3,668)
(3,227)
(6,895)
Settlement loss
(88)
22,667
22,579
-
Curtailment charge
(1,155)
-
(1,155)
-
-
-
Actuarial loss amortization
2,110
2,996
2,348
3,105
Prior service (credit) cost
amortization
(167)
-
(167)
(165)
-
(165)
Net periodic benefit cost
$
2,970
$
23,381
$
26,351
$
3,735
$
2,868
$
6,603
Foreign
U.S.
Total
Service cost
$
3,426
$
$
3,809
Interest cost
2,254
1,847
4,101
Expected return on plan assets
(2,228)
(2,803)
(5,031)
Settlement loss
-
Actuarial loss amortization
2,276
3,157
Prior service (credit) cost amortization
(175)
(116)
Net periodic benefit cost
$
4,160
$
1,762
$
5,922
Other changes recognized in other comprehensive
income - pension plans:
Foreign
U.S.
Total
Foreign
U.S.
Total
Net (gain) loss arising during
the period
$
(1,594)
$
1,536
$
(58)
$
3,826
$
3,926
$
7,752
Effect of plan amendment
Recognition of amortization in net
periodic benefit cost
Settlement (loss)
(39)
(22,667)
(22,706)
-
-
-
Prior service credit (cost)
1,325
1,375
-
Actuarial loss
(758)
3,967
3,209
(1,015)
(2,347)
(3,362)
Curtailment Recognition
(3)
-
(3)
-
-
-
Effect of exchange rates on amounts
included in AOCI
1,535
-
1,535
(61)
-
(61)
Total recognized
in other
comprehensive loss (income)
(17,114)
(16,648)
2,946
1,579
4,525
Total recognized
in net periodic
benefit cost and other
comprehensive loss (income)
$
3,436
$
6,267
$
9,703
$
6,681
$
4,447
$
11,128
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
Foreign
U.S.
Total
Net gain arising during period
$
(663)
$
$
(210)
Recognition of amortization in net periodic benefit
cost
Prior service credit (cost)
(59)
Actuarial loss
(883)
(2,276)
(3,159)
Effect of exchange rates on amounts included
in AOCI
(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
$
1,899
$
(120)
$
1,779
Components of net periodic benefit costs - other postretirement
plan:
Service cost
$
$
$
Interest cost
Actuarial loss amortization
(5)
-
Net periodic benefit costs
$
$
$
Other changes recognized in other comprehensive
income - other postretirement benefit
plans:
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
U.S. Plans:
Discount rate
2.19
%
3.06
%
2.05
%
2.98
%
Rate of compensation increase
6.00
%
6.00
%
N/A
N/A
Foreign
Plans:
Discount rate
1.79
%
1.83
%
N/A
N/A
Rate of compensation increase
2.74
%
2.58
%
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
)
Weighted-average
assumptions used to determine net periodic benefit costs for the
years ended December 31, 2020 and
2019:
Other Postretirement
Pension Benefits
Benefits
U.S. Plans:
Discount rate
3.11
%
4.08
%
2.99
%
4.03
%
Expected long-term return on
plan assets
6.50
%
5.75
%
N/A
N/A
Rate of compensation increase
6.00
%
5.50
%
N/A
N/A
Foreign Plans:
Discount rate
2.30
%
2.30
%
N/A
N/A
Expected long-term return on
plan assets
2.20
%
3.13
%
N/A
N/A
Rate of compensation increase
2.79
%
2.87
%
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:
Health care cost trend rate for next year
5.70
%
5.90
%
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
4.50
%
4.50
%
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
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
)
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
percent of investments in
equity securities,
percent of investments in fixed income securities, and
percent of other non-related investments, primarily
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.
As of December 31,
2020, the U.S. pension plan pooled separate accounts included approximately 61 percent of investments in equity securities and 39
percent of investments in fixed income securities.
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
)
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
percent of
investments
in equity
securities,
percent
of investments
in fixed
income securities,
and
percent of
other alternative
investments.
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
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
$
69,385
$
-
$
69,385
$
-
Real estate
4,096
-
-
4,096
Subtotal U.S. pension plan assets in fair value hierarch
y
$
73,481
$
-
$
69,385
$
4,096
Total U.S. pension
plan assets
$
73,481
Foreign Pension Assets
Cash and cash equivalents
$
$
$
-
$
-
Insurance contract
112,920
-
-
112,920
Diversified equity securities - registered investment companies
8,851
-
8,851
-
Fixed income - foreign registered investment companies
3,711
-
3,711
-
Fixed income government securities
37,579
-
37,579
-
Real estate
5,679
-
-
5,679
Other - alternative investments
10,638
-
-
10,638
Sub-total of foreign pension assets in fair value hierarchy
$
180,012
$
$
50,141
$
129,237
Commingled funds measured at NAV
2,368
Diversified investment fund -
registered investment
companies measured at NAV
46,409
Total foreign pension
assets
$
228,789
Total pension
assets in fair value hierarchy
$
253,493
$
$
119,526
$
133,333
Total pension
assets measured at NAV
48,777
Total pension
assets
$
302,270
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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
64,636
-
64,636
-
Real estate
4,060
-
-
4,060
Subtotal U.S. pension plan assets in fair value hierarch
y
$
69,146
$
$
64,636
$
4,060
Commingled funds measured at NAV
51,404
Total U.S. pension
plan assets
$
120,550
Foreign Pension Assets
Cash and cash equivalents
$
1,502
$
1,502
$
-
$
-
Insurance contract
92,657
-
-
92,657
Diversified equity securities - registered investment companies
8,604
-
8,604
-
Fixed income - foreign registered investment companies
3,021
-
3,021
-
Fixed income government securities
32,512
-
32,512
-
Real estate
5,521
-
-
5,521
Other - alternative investments
9,436
-
-
9,436
Sub-total of foreign pension assets in fair value hierarchy
$
153,253
$
1,502
$
44,137
$
107,614
Commingled funds measured at NAV
2,037
Diversified investment fund -
registered investment
companies measured at NAV
39,809
Total foreign pension
assets
$
195,099
Total pension
assets in fair value hierarchy
$
222,399
$
1,952
$
108,773
$
111,674
Total pension
assets measured at NAV
93,250
Total pension
assets
$
315,649
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
$
79,873
2,382
-
$
82,255
Purchases
3,762
-
1,029
4,791
Assets acquired in business combinations
7,058
8,914
16,101
Sales
-
(238)
(278)
(516)
Settlements
(1,730)
-
-
(1,730)
Unrealized (losses) gains
12,199
(960)
11,642
Currency translation adjustment
(1,576)
(24)
(869)
Balance as of December 31, 2019
92,657
9,581
9,436
111,674
Purchases
3,902
4,909
Settlements
(2,027)
-
-
(2,027)
Unrealized gains (losses)
8,917
(16)
(171)
8,730
Currency translation adjustment
9,471
10,047
Balance as of December 31, 2020
$
112,920
$
9,775
$
10,638
$
133,333
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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 $
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 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
May 1, 2022
.
As of January 1, 2019, the last valuation date available for the multiemployer
plan,
total plan liabilities were approximately $
million.
As of December 31, 2019, the multiemployer pension plan
had total plan assets
of approximately $
million.
The Company’s contribution
rate to the multiemployer pension plan is specified in the
collective
bargaining union contract and contributions are
made to the plan based on its union employee payroll.
The Company contributed $
0.1
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
no
liability as of December 31, 2020.
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
million to its pension plans (approximately
$5.9
million U.S. and
$4.1
million Foreign) and approximately
$0.3
million to its other postretirement benefit plan in 2021.
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
$
6,658
$
5,923
$
12,581
$
6,939
5,298
12,237
7,024
6,072
13,096
6,745
6,234
12,979
7,394
6,228
13,622
2025 to 2029
42,522
30,443
72,965
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except share and per share amounts,
unless otherwise stated
)
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 $
2.5
million, $
1.8
million and $
1.6
million for the years ended December 31, 2020, 2019 and 2018,
respectively,
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 $
5.7
million, $
4.0
million and $
3.1
million for
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:
Inactive subsidiary litigation and settlement reserve
$
$
19,678
Non-current income taxes payable
8,500
8,500
Uncertain tax positions (includes interest and penalties)
28,961
24,609
Fair value of interest rate swaps
4,672
Environmental reserves
4,610
5,259
Deferred and other long-term compensation
6,257
6,625
Other
1,627
1,298
Total other
non-current liabilities
$
55,169
$
66,384
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
30,000,000
shares of common stock authorized with a par value
of $
, and
17,850,616
and
17,735,162
shares
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
shares issued for share-based compensation plans and
65,548
shares issued for the exercise of stock
options and other share activity.
The Company is authorized to issue
10,000,000
shares of preferred stock with $
par value, subject to approval by the Board of
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
$
100.0
million of Quaker Chemical Corporation common stock.
The Company has not repurchased any shares under the program
for
the years ended December 31, 2020, 2019 and 2018.
As of December 31, 2020, there was approximately $
86.9
million of common
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
)
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
reclassifications
(17,429)
1,543
(2,622)
-
(18,508)
Amounts reclassified from AOCI
-
3,085
-
3,520
Related tax amounts
-
(1,086)
-
(627)
Balance as of December 31, 2018
(49,322)
(30,551)
(842)
-
(80,715)
Other comprehensive income (loss) before
reclassifications
4,754
(8,088)
2,951
(415)
(798)
Amounts reclassified from AOCI
-
3,169
(301)
-
2,868
Related tax amounts
-
(557)
Balance as of December 31, 2019
(44,568)
(34,533)
1,251
(320)
(78,170)
Other comprehensive income (loss) before
reclassifications
41,693
(6,617)
2,848
(4,257)
33,667
Amounts reclassified from AOCI
-
24,141
(202)
-
23,939
Related tax amounts
-
(6,458)
(555)
(6,034)
Balance as of December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(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
$
1,961
$
-
$
1,961
$
-
Total
$
1,961
$
-
$
1,961
$
-
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
$
1,782
$
-
$
1,782
$
-
Total
$
1,782
$
-
$
1,782
$
-
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
)
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 $
170.0
million notional amounts of three-
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
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
4,672
$
$
4,672
$
The following table presents the net unrealized loss deferred to
AOCI:
December 31,
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
3,598
$
$
3,598
$
The following table presents the net loss reclassified from
AOCI to earnings:
For the Years
Ended
December 31,
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
)
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 $
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.
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
$
0.5
million (excluding costs of defense).
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
million and $
20.0
million, respectively.
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 $
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 for with respect to these
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
)
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 $
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.
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 $
1.5
million in other accrued liabilities, which reflects the low end
of the
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 $
1.1
million, which reflects the amount of the $
1.5
million recorded liability
for which the Company anticipates being indemnified.
The impact of this indirect tax, net of the recorded indemnification
asset, was
approximately $
0.4
million and was recorded as a component of SG&A during
the fourth quarter of 2020.
As noted, the Company
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
$
0.4
million to $
million, which is net of approximately $
million
of estimated income tax deductions and approximately $
million of applicable rights to indemnification from Houghton’s
former
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
)
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.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not Applicable.
Item 9A.
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
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
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.
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.
PART
III
Item 10.
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.
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.
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.
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.
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.
PART
IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
(a)
Exhibits and Financial Statement Schedules
1.
Financial Statements and Supplementary Data
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
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 -
Share Purchase Agreement, dated April 4, 2017, by and among Quaker Chemical Corporation, a Pennsylvania
corporation, Gulf Houghton Lubricants, Ltd., an exempte d company incorporated under the laws of the Cayman Islands,
Global Houghton Ltd., an exempted company incorporated under the laws of the Cayman Islands, and certain members
of the management of Global Houghton Ltd. and Gulf Houghton Lubricants, Ltd., as agent for the Sellers. Incorporated
by reference to Exhibit 10.1 as filed by the Registrant with Form 8-K, filed on April 5, 2017. ***
3.1 -
Amended and Restated Articles of Incorporation (as amended through July 24, 2019). Incorporated by reference to
Exhibit 3.1 as filed by the Registrant with its quarterly report on Form 10-Q on August 1, 2019.
3.2 -
Restated By-laws (effective May 6, 2015, as amended through March 27, 2020). Incorporated by reference to Exhibit
3.2 as filed by Registrant within its quarterly report on Form 10-Q on May 11, 2020.
4.1 -
Registration Rights, dated August 1, 2019, issued to certain members of the management of Global Houghton Ltd. and
Gulf Houghton Lubricants, Ltd. by Quaker Chemical Corporation. Incorporated by reference to Exhibit 4.5 as filed by
Registrant on Form S-3 on August 29, 2019
.
4.2 -
Description of Quaker Houghton common stock. Incorporated by reference to Exhibit 4.2 as filed by the Registrant with
Form 10-K for the year ended 2019.
4.3 -
Convertible Note, Dated May 7, 2020, by and among Quaker Chemical Corporation, TEL Nordic Holdings ApS, and
Lars Skogstad-Jensen. Incorporated by reference to Exhibit 4.3 as filed by Registrant on Form S-3 on May 19, 2020.
10.1 -
Settlement Agreement and Release between Registrant, an inactive subsidiary of the Registrant, and Hartford Accident
and Indemnity Company dated December 12, 2005. Incorporated by reference to Exhibit 10 (nnn) as filed by the
Registrant with Form 10-K for the year 2005.
10.2 -
Settlement Agreement and Release between Registrant, an inactive subsidiary of Registrant and Federal Insurance
Company dated March 26, 2007. Incorporated by reference to Exhibit 10(zzz) as filed by the Registrant with Form 10-
Q for the quarter ended March 31, 2007.
10.3 -
Claim Handling and Funding Agreement between SB Decking, Inc., an inactive subsidiary of Registrant, and
Employers Insurance Company of Wausau dated September 25, 2007. Incorporated by reference to Exhibit 10(ffff) as
filed by the Registrant with Form 10-Q for the quarter ended September 30, 2007.
10.4 -
Settlement Agreement and Mutual Release entered into between AC Products, Inc., wholly owned subsidiary of
Registrant, and Orange County Water District, effective November 8, 2007. Incorporated by reference to Exhibit
10.47 as filed by the Registrant with Form 10-K for the year ended 2007.
10.5 -
Employment Agreement by and between Registrant and Michael F. Barry dated July 1, 2008. Incorporated by
reference to Exhibit 10.5 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008. †
10.6 -
Change in Control Agreement by and between Registrant and Michael F. Barry dated July 1, 2008. Incorporated by
reference to Exhibit 10.6 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008. †
10.7 -
Employment Agreement by and between L. Willem Platzer and Quaker Chemical B.V., a Netherlands corporation
and a subsidiary of Registrant, dated August 21, 2006. Incorporated by reference to Exhibit 10 as filed by the
Registrant with Form 8-K filed on August 22, 2006. †
10.8 -
Change in Control Agreement by and between Registrant and L. Willem Platzer dated April 2, 2007, effective
January 1, 2007. Incorporated by reference to Exhibit 10(aaaa) as filed by the Registrant with Form 10-Q for the
quarter ended March 31, 2007. †
10.9 -
Memorandum of Employment by and between Registrant and Joseph Berquist dated April 1, 2010. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2010. †
10.10 -
Change in Control Agreement by and between Registrant and Joseph Berquist dated April 1, 2010. Incorporated by
reference to Exhibit 10.3 as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2010.
†
10.11 -
Employment Agreement by and between Dieter Laininger and Quaker Chemical B.V., a subsidiary of the registrant,
dated June 1, 2011, effe ctive June 15, 2011. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with
Form 10-Q for the quarter ended June 30, 2011
.
†
10.12 -
Change in Control Agreement by and between Registrant and Dieter Laininger dated May 31, 2011, effective June 15,
2011. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter ended June
30, 2011
.
†
10.13 -
Expatriate Agreement by and between the Registrant and Dieter Laininger, dated September 27, 2017, effective
August 1, 2019. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q, filed on
November 12, 2019.†
10.14 -
Expatriate Agreement by and between the Registrant and Adrian Steeples, dated October 12, 2017, effective August 1,
2019. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q, filed on November 12,
.†
10.15 -
Form of Memorandum of Employment by and between the Registrant and certain executive officers (including Robert
Traub, Jeewat Bijlani, Kym Johnson and David Slinkman). Incorporated by reference to Exhibit 10.3 as filed by the
Registrant with Form 10-Q, filed on November 12, 2019
.†
10.16 -
Form of Change of Control Agreement by and between the Registrant and certain executive officers (including Robert
Traub, Jeewat Bijlani, Kym Johnson and David Slinkman). Incorporated by reference to Exhibit 10.4 as filed by the
Registrant with Form 10-Q, filed on November 12, 2019
.†
10.17 -
Memorandum of Employment by and between Registrant and Mary Dean Hall, dated and effective November 30,
2015. Incorporated by reference to Exhibit 10.60 as filed by the Registrant with Form 10-K for the year ended 2015
.†
10.18 -
Change in control agreement by and between Registrant and Mary Dean Hall, dated and effective November 30, 2015.
Incorporated by reference to Exhibit 10.61 as filed by the Registrant with Form 10-K for the year ended 2015
.
†
10.19 -
Terms and Conditions of Employment by and between Quaker Chemical Ltd and Adrian Steeples, dated December 7,
2010. Incorporated by reference to Exhibit 10.19 as filed by the Registrant with Form 10-K for the year ended 2019.†
10.20 -
Amendment to Terms and Conditions of Employment by and between Quaker Chemical Ltd and Adrian Steeples,
dated June 15, 2011. Incorporated by reference to Exhibit 10.20 as filed by the Registrant with Form 10-K for the year
ended 2019. †
10.21 -
Supplemental Retirement Income Program (as amended and restated effective January 1, 2008), approved November
19, 2008. Incorporated by reference to Exhibit 10.58 as filed by the Registrant with Form 10-K for the year ended
2008. †
10.22 -
2013 Director Stock Ownership Plan as approved May 8, 2013. Incorporated by reference to Appendix B to the
Registrant’s definitive proxy statement filed on March 28, 2013. †
10.23 -
Retirement Savings Plan, as amended and restated effective January 1, 2016. Incorporated by reference to Exhibit
10.62 as filed by the Registrant with Form 10-K for the year ended 2015. †
10.24 -
Global Annual Incentive Plan (as amended and restated effective February 24, 2016). Incorporated by reference to
Appendix B to the Registrant’s definitive proxy statement filed on March 28, 2016. †
10.25 -
2011 Long-Term Performance Incentive Plan. Incorporated by reference to Appendix C to the Registrant’s definitive
proxy statement filed on March 31, 2011
.
†
10.26 -
Form of Restricted Stock Unit Agreement for executive officers and other employees under Registrant’s 2011 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-
Q for the quarter ended March 31, 2012
.
†
10.27 -
2016 Long-Term Performance Incentive Plan. Incorporated by reference to Appendix C to the Registrant’s definitive
proxy statement filed on March 28, 2016. †
10.28 -
Form of Restricted Stock Award Agreement for executive officers and other employees under Registrant’s 2016 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.3 as filed by Registrant with Form 8-K
filed on May 6, 2016. †
10.29 -
Form of Restricted Stock Unit Agreement for executive officers and other employees under Registrant’s 2016 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.4 as filed by Registrant with Form 8-K
filed on May 6, 2016. †
10.30 -
Form of Stock Option Agreement for executive officers and other employees under Registrant’s 2016 Long-Term
Performance Incentive Plan. Incorporated by reference to Exhibit 10.30 as filed by the Registrant with Form 10-K for
the year ended 2019. †
10.31 -
Financing Agreement by and among Butler County Port Authority and Registrant and Brown Brothers Harriman &
Co. dated May 15, 2008. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q for the
quarter ended June 30, 2008.
10.32 -
Butler County Port Authority Industrial Development Revenue Bond dated May 15, 2008. Incorporated by reference
to Exhibit 10.7 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008.
10.33 -
Senior Secured Credit Facilities Commitment Letter, dated April 4, 2017, by and among Quaker Chemical
Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank AG New
York Branch and Deutsche Bank Securities Inc. Incorporated by reference to Exhibit 10.1 as filed by the Registrant
with Form 8-K, filed on April 7, 2017.
10.34 -
Credit Agreement, dated as of August 1, 2019, among Quaker Chemical Corporation and certain of its subsidiaries,
Banks of America, N.A. and each of the lenders from time to time party thereto. Incorporated by reference to Exhibit
10.3 as filed by Registrant with Form 8-K filed on August 2, 2019.
***
10.35 -
Amendment No. 1, dated as of March 17, 2020, to the Credit Agreement, dated as of August 1, 2019. Incorporated by
reference to Exhibit 10.1 as filed by the Registrant with Form 8-K filed on March 17, 2020.
10.36 -
Shareholder Agreement, dated August 1, 2019, among Quaker Chemical Corporation, Gulf Hungary Holding Korlátolt
Felelősségű Társaság, Gulf Oil International, Ltd. and GOCL Corporation Limited. Inc. Incorporated by reference to
Exhibit 10.1 as filed by Registrant with Form 8-K filed on August 2, 2019
.
10.37 -
Non-Competition and Non-Solicitation Agreement, dated as of August 1, 2019, among Quaker Chemical Corporation,
Gulf Houghton Lubricants Ltd., Gulf Oil International, Ltd., GOCL Corporation Limited and Gulf Oil Lubricants
India, Ltd. Incorporated by reference to Exhibit 10.2 as filed by Registrant with Form 8-K filed on August 2, 2019.***
10.38 -
Escrow Agreement, dated August 1, 2019, among Quaker Chemical Corporation, Gulf Houghton Lubricants, Ltd. and
Citibank N.A. Incorporated by reference to Exhibit 4.4 as filed by Registrant on Form S-3 on August 29, 2019.***
10.39 -
Amendment No 1, effective March 1, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with its quarterly report on Form 10-Q on May 11, 2020. †
10.40 -
Amendment No 2, effective February 10, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.1 as filed by the Registrant with its quarterly report on Form 10-Q on August 5, 2020. †
10.41 -
Amendment No 3, effective April 17, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with its quarterly report on Form 10-Q on August 5, 2020. †
21 -
Subsidiaries and Affiliates of the Registrant.*
23 -
Consent of Independent Registered Public Accounting Firm.*
31.1 -
Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.*
31.2 -
Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.*
32.1 -
Certification of Michael F. Barry pursuant to 18 U.S.C. Section 1350.**
32.2 -
Certification of Mary Dean Hall pursuant to 18 U.S.C. Section 1350.**
101.INS -
Inline XBRL Instance Document*
101.SCH -
Inline XBRL Taxonomy
Extension Schema Document*
101.CAL -
Inline XBRL Taxonomy
Calculation Linkbase
Document*
101.DEF -
Inline XBRL Taxonomy
Definition Linkbase Document*
101.LAB -
Inline XBRL Taxonomy
Label Linkbase Document*
101.PRE -
Inline XBRL Taxonomy
Presentation Linkbase Document*
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.
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