Quaker Chemical Corporation
08/04/2022 | Press release | Distributed by Public on 08/04/2022 14:48
Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)
kwr20220630
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
☒
QUARTERLYREPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934
For the transition period fromto
Commission file number
001-12019
QUAKER CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
23-0993790
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
19428 - 2380
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
610
-
832-4000
Not Applicable
Former name, former address and former fiscal year,if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filedall reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subjectto such filing requirements for the past 90
days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submittedelectronically, every Interactive Data File required to be submitted pursuant to Rule 405of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was requiredto submit such files) .
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and"emerging growth company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to usethe extended transition period for complying with any newor revised
financial accounting standards provided pursuant to Section 13(a) ofthe Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).Yes
☐
No
☒
Indicate the number of shares outstanding of each of theissuer's classes of common stock, as of the latest practicable date.
Number of Shares of Common Stock
Outstanding on July 31, 2022
17,929,045
1
QUAKER CHEMICAL CORPORATIONAND CONSOLIDATEDSUBSIDIARIES
Page
PARTI.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and June 30, 2021
2
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and June 30, 2021
3
Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and June 30, 2021
5
Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2022 and June 30, 2021
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
26
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
43
Item 4.
Controls and Procedures.
44
PARTII
OTHER INFORMATION.
Item 1.
Legal Proceedings.
45
Item 1A.
Risk Factors.
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
45
Item 6.
Exhibits.
46
Signatures
46
2
PARTI
FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited).
Quaker Chemical Corporation
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net sales
$
492,388
$
435,262
$
966,559
$
865,045
Cost of goods sold (
excluding amortization expense - See Note 13
)
342,824
280,811
670,924
554,400
Gross profit
149,564
154,451
295,635
310,645
Selling, general and administrative expenses
115,830
108,679
227,625
212,989
Restructuring and related (credits) charges, net
(1)
298
819
1,473
Combination, integration and other acquisition-related expenses
1,832
6,658
5,885
12,473
Operating income
31,903
38,816
61,306
83,710
Other (expense) income, net
(8,399)
14,010
(10,605)
18,697
Interest expense, net
(6,494)
(5,618)
(11,839)
(11,088)
Income before taxes and equity in net (loss) income of
associated companies
17,010
47,208
38,862
91,319
Taxes on income beforeequity in net (loss) income of associated
companies
1,374
15,218
4,240
25,907
Income before equity in net (loss) income of associated
companies
15,636
31,990
34,622
65,412
Equity in net (loss) income of associated companies
(1,265)
1,610
(430)
6,820
Net income
14,371
33,600
34,192
72,232
Less: Net income attributable to noncontrolling interest
28
30
33
47
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Per share data:
Net income attributable to Quaker Chemical Corporation
common shareholders - basic
$
0.80
$
1.88
$
1.91
$
4.04
Net income attributable to Quaker Chemical Corporation
common shareholders - diluted
$
0.80
$
1.88
$
1.91
$
4.03
Dividends declared
$
0.415
$
0.395
$
0.830
$
0.790
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Unaudited
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net income
$
14,371
$
33,600
$
34,192
$
72,232
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(76,433)
16,165
(83,299)
(9,296)
Defined benefit retirement plans
1,407
397
1,903
1,689
Current period change in fair value of derivatives
575
452
1,675
1,014
Unrealized (loss) gain on available-for-sale securities
(567)
279
(1,567)
(2,746)
Other comprehensive (loss) income
(75,018)
17,293
(81,288)
(9,339)
Comprehensive (loss) income
(60,647)
50,893
(47,096)
62,893
Less: Comprehensiveincome (loss) attributable to
noncontrolling interest
5
(38)
(1)
(53)
Comprehensive (loss) income attributable to Quaker Chemical
Corporation
$
(60,642)
$
50,855
$
(47,097)
$
62,840
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
Unaudited
June 30,
December 31,
2022
2021
ASSETS
Current assets
Cash and cash equivalents
$
202,348
$
165,176
Accounts receivable, net
465,352
430,676
Inventories
Raw materials and supplies
163,055
129,382
Work-in-processand finished goods
150,387
135,149
Prepaid expenses and other current assets
64,674
59,871
Total currentassets
1,045,816
920,254
Property, plant and equipment,at cost
432,068
434,344
Less: Accumulated depreciation
(239,571)
(236,824)
Property, plant and equipment,net
192,497
197,520
Right of use lease assets
36,317
36,635
Goodwill
610,167
631,194
Other intangible assets, net
962,580
1,027,782
Investments in associated companies
83,678
95,278
Deferred tax assets
10,897
16,138
Other non-current assets
28,804
30,959
Total assets
$
2,970,756
$
2,955,760
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
14,485
$
56,935
Accounts payable
246,345
226,656
Dividends payable
7,437
7,427
Accrued compensation
29,359
38,197
Accrued restructuring
3,812
4,087
Accrued pension and postretirement benefits
1,541
1,548
Other accrued liabilities
97,746
95,617
Total currentliabilities
400,725
430,467
Long-term debt
972,369
836,412
Long-term lease liabilities
25,695
26,335
Deferred tax liabilities
156,468
179,025
Non-current accrued pension and postretirement benefits
42,755
45,984
Other non-current liabilities
42,178
49,615
Total liabilities
1,640,190
1,567,838
Commitments and contingencies (Note 18)
Equity
Common stock $
1
par value; authorized
30,000,000
shares; issued and
outstanding 2022 -
17,919,750
shares; 2021 -
17,897,033
shares
17,920
17,897
Capital in excess of par value
921,642
917,053
Retained earnings
535,621
516,334
Accumulated other comprehensive loss
(145,246)
(63,990)
Total Quakershareholders' equity
1,329,937
1,387,294
Noncontrolling interest
629
628
Total equity
1,330,566
1,387,922
Total liabilities and equity
$
2,970,756
$
2,955,760
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Unaudited
Six Months Ended
June 30,
2022
2021
Cash flows from operating activities
Net income
$
34,192
$
72,232
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of debt issuance costs
2,236
2,375
Depreciation and amortization
41,036
44,188
Equity in undistributed earnings of associated companies, net of dividends
3,400
(6,715)
Acquisition-related fair value adjustments related to inventory
-
801
Deferred compensation, deferred taxes and other,net
(10,223)
(13,849)
Share-based compensation
5,433
6,134
Loss on extinguishment of debt
5,246
-
Loss (gain) on disposal of property,plant, equipment and other assets
15
(5,356)
Combination and other acquisition-related expenses, net of payments
(3,880)
(2,305)
Restructuring and related charges
819
1,473
Pension and other postretirement benefits
(2,269)
(2,223)
(Decrease) increase in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(51,944)
(47,252)
Inventories
(58,427)
(57,020)
Prepaid expenses and other current assets
(5,558)
(20,111)
Change in restructuring liabilities
(797)
(4,214)
Accounts payable and accrued liabilities
32,298
22,274
Net cash used in operating activities
(8,423)
(9,568)
Cash flows from investing activities
Investments in property,plant and equipment
(15,138)
(6,974)
Payments related to acquisitions, net of cash acquired
(9,383)
(29,424)
Proceeds from disposition of assets
85
14,744
Net cash used in investing activities
(24,436)
(21,654)
Cash flows from financing activities
Payments of long-term debt
(668,500)
(19,065)
Proceeds from long-term debt
750,000
-
Borrowings on revolving credit facilities, net
16,703
29,433
Repayments on other debt, net
(155)
(219)
Financing-related debt issuance costs
(3,734)
-
Dividends paid
(14,862)
(14,113)
Stock options exercised, other
(821)
(416)
Net cash provided by (used in) financing activities
78,631
(4,380)
Effect of foreign exchange rate changes on cash
(8,600)
(683)
Net increase (decrease) in cash and cash equivalents
37,172
(36,285)
Cash and cash equivalents at the beginning of the period
165,176
181,895
Cash and cash equivalents at the end of the period
$
202,348
$
145,610
The accompanying notes are an integral part of these unaudited condensed consolidatedfinancial statements.
6
Quaker Chemical Corporation
Condensed Consolidated Statements of Changes in Equity
(Dollars in thousands, except per share amounts)
(Unaudited)
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at December 31, 2020
$
17,851
$
905,171
$
423,940
$
(26,598)
$
550
$
1,320,914
Net income
-
-
38,615
-
17
38,632
Amounts reported in other
comprehensive loss
-
-
-
(26,630)
(2)
(26,632)
Dividends ($
0.395
per share)
-
-
(7,062)
-
-
(7,062)
Share issuance and equity-based
compensation plans
24
3,577
-
-
-
3,601
Balance at March 31, 2021
$
17,875
$
908,748
$
455,493
$
(53,228)
$
565
$
1,329,453
Net income
-
-
33,570
-
30
33,600
Amounts reported in other
comprehensive gain
-
-
-
17,285
8
17,293
Dividends ($
0.395
per share)
-
-
(7,062)
-
-
(7,062)
Share issuance and equity-based
compensation plans
3
2,114
-
-
-
2,117
Balance at June 30, 2021
$
17,878
$
910,862
$
482,001
$
(35,943)
$
603
$
1,375,401
Balance at December 31, 2021
$
17,897
$
917,053
$
516,334
$
(63,990)
$
628
$
1,387,922
Net income
-
-
19,816
-
5
19,821
Amounts reported in other
comprehensive loss
-
-
-
(6,271)
1
(6,270)
Dividends ($
0.415
per share)
-
-
(7,434)
-
-
(7,434)
Share issuance and equity-based
compensation plans
15
1,646
-
-
-
1,661
Balance at March 31, 2022
$
17,912
$
918,699
$
528,716
$
(70,261)
$
634
$
1,395,700
Net income
-
-
14,343
-
28
14,371
Amounts reported in other
comprehensive loss
-
-
-
(74,985)
(33)
(75,018)
Dividends ($
0.415
per share)
-
-
(7,438)
-
-
(7,438)
Share issuance and equity-based
compensation plans
8
2,943
-
-
-
2,951
Balance at June 30, 2022
$
17,920
$
921,642
$
535,621
$
(145,246)
$
629
$
1,330,566
The accompanying notes are an integral partof these unaudited condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
7
Note 1 - Basis of Presentation and Description of Business
Basis of Presentation
As used in these Notes to Condensed Consolidated Financial Statements ofthis Quarterly Report on Form 10-Q for the period
ended June 30, 2022 (the "Report"),the terms "Quaker Houghton,"the "Company,""we," and "our" refer to Quaker Chemical
Corporation (doing business as Quaker Houghton), its subsidiaries, andassociated companies, unless the context otherwise requires.
As used in these Notes to Condensed Consolidated Financial Statements,the "Combination" refers to the legacy Quaker combination
with Houghton International, Inc. ("Houghton").The condensed consolidated financial statements included herein are unauditedand
have been prepared in accordance with generally accepted accounting principlesin the United States ("U.S. GAAP") for interim
financial reporting and the United States Securities and Exchange Commission("SEC") regulations.Certain information and footnote
disclosures normally included in financial statements prepared in accordancewith U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations.In the opinion of management, the financial statements reflect all adjustmentsconsisting only
of normal recurring adjustments which are necessary for a fair statement ofthe financial position, results of operations and cash flows
for the interim periods.The results for the six months ended June 30, 2022 are not necessarily indicative of theresults to be expected
for the full year.These financial statements should be read in conjunction with the Company'sAnnual Report filed on Form 10-K for
the year ended December 31, 2021 (the "2021 Form 10-K").
Description of Business
The Company was organized in 1918, incorporated as a Pennsylvaniabusiness corporation in 1930, and in August 2019
completed the Combination with Houghton to form Quaker Houghton.Quaker Houghton is the global leader in industrial process
fluids.With a presence around the world, includingoperations in over
25
countries, the Company's customersinclude thousands of
the world's most advanced and specializedsteel, aluminum, automotive, aerospace, offshore, can,mining, and metalworking
companies.Quaker Houghton develops, produces, and markets a broad range of formulatedchemical specialty products and offers
chemical management services (which the Company refers to as "Fluidcare
TM
") for various heavy industrial and manufacturing
applications throughout its
four
segments: Americas; Europe, Middle East and Africa ("EMEA"); Asia/Pacific; andGlobal Specialty
Businesses.
Hyper-inflationary economies
Based on various indices or index compilations being used to monitor inflationin Argentina as well as economic instability,
effective July 1, 2018, Argentina'seconomy was considered hyper-inflationary under U.S. GAAP.As of, and for the three and six
months ended June 30, 2022, the Company's Argentinesubsidiaries represented less than
1
% of the Company's consolidatedtotal
assets and net sales, respectively.During the three and six months ended June 30, 2022, the Company recorded less than $
0.1
million
and $
0.2
million, respectively, of remeasurementlosses associated with the applicable currency conversions related to Argentina.
Comparatively,during the three and six months ended June 30, 2021, the Company recorded$
0.1
million and $
0.3
million,
respectively, of remeasurementlosses associated with the applicable currency conversionsrelated to Argentina.These losses were
recorded within foreign exchange losses, net, which is a component of other(expense) income, net, in the Company's Condensed
Consolidated Statements of Income.
Note 2 - Business Acquisitions
2022 Acquisitions
In January 2022, the Company acquired a business that provides picklinginhibitor technologies for the steel industry,drawing
lubricants and stamping oil for metalworking, and various other lubrication,rust preventative, and cleaner applications, for its
Americas reportable segment for approximately $
8.0
million.This business broadens the Company'sproduct offerings within its
existing metals and metalworking business in the Americas region.The Company allocated $
5.6
million of the purchase price to
intangible assets, comprised of $
5.1
million of customer relationships to be amortized over
14 years
; and $
0.5
million of existing
product technologies to be amortized over
14 years
.In addition, the Company recorded $
1.8
million of goodwill related to expected
value not allocated to other acquired assets, all of which is expected to be tax deductiblein various jurisdictions in which the
Company operates.
In January 2022, the Company acquired a business related to the sealing and impregnationof metal castings for the automotive
sector, as well as impregnation resin andimpregnation systems for metal parts, for its Global Specialty Businesses reportable segment
for approximately
1.2
million EUR or approximately $
1.4
million.This business expands the Company's geographic presence in
Germany as well as broadens its product offerings andservice capabilities within its existing impregnation business.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
8
The results of operations of the 2022 acquisitions subsequent to the respectiveacquisition dates are included in the unaudited
Condensed Consolidated Statements of Income for the six month period endedJune 30, 2022.Applicable transaction expenses
associated with these acquisitions are included in Combination,integration and other acquisition-related expenses in the Company's
unaudited Condensed Consolidated Statements of Income.Certain pro forma and other information is not presented, as the operations
of the acquisitions are not considered material to the overall operationsof the Company for the periods presented.
Previous Acquisitions
In November 2021, the Company acquired Baron Industries ("Baron"),a privately held Company that provides vacuum
impregnation services of castings, powder metals and electrical components forits Global Specialty Businesses reportable segment for
$
11.0
million, including an initial cash payment of $
7.1
million, subject to post-closing adjustments as well as certain earn-out
provisions initially estimated at $
3.9
million that are payable at different times from 2022 through2025.The earn-out provisions
could total a maximum of $
4.5
million.The Company allocated $
8.0
million of the purchase price to intangible assets, $
1.1
million of
property, plant andequipment and $
1.5
million of other assets acquired net of liabilities assumed, which includes $
0.3
million of cash
acquired.In addition, the Company recorded $
0.4
million of goodwill, all of which is expected to be tax deductible.Intangible assets
comprised $
7.2
million of customer relationships to be amortized over
15 years
; and $
0.8
million of existing product technology to be
amortized over
13 years
.
In November 2021, the Company acquired a business that provides hydraulicfluids, coolants, cleaners, and rust preventative oils
in Turkey for its EMEA reportable segment for
3.2
million EUR or approximately $
3.7
million.
In September 2021, the Company acquired the remaining interest in Grindaix-GmbH ("Grindaix"), a Germany-based, high-tech
provider of coolant control and delivery systems for its Global Specialty Businesses reportablesegment for
2.4
million EUR or
approximately $
2.9
million, which is gross of approximately $
0.3
million of cash acquired.Previously, in February2021, the
Company acquired a
38
% ownership interest in Grindaix for
1.4
million EUR or approximately $
1.7
million.The Company recorded
its initial investment as an equity method investment within the Condensed ConsolidatedFinancial Statements and accounted for the
purchase of the remaining interest as a step acquisition whereby the Companyremeasured the previously held equity method
investment to its fair value.
In June 2021, the Company acquired certain assets for its chemical millingmaskants product line in the Global Specialty
Businesses reportable segment for
2.3
million EUR or approximately $
2.8
million.
In February 2021, the Company acquired a tin-plating solutions businessfor the steel end market for $
25.0
million.This
acquisition is part of each of the Company'sgeographic reportable segments.The Company allocated $
19.6
million of the purchase
price to intangible assets, comprised of $
18.3
million of customer relationships, to be amortized over
19 years
; $
0.9
million of existing
product technology to be amortized over
14 years
; and $
0.4
million of a licensed trademark to be amortized over
3 years
.In addition,
the Company recorded $
5.0
million of goodwill related to expected value not allocated to other acquiredassets, all of which is
expected to be tax deductible in various jurisdictions in which we operate.Factors contributing to the purchase price that resulted in
goodwill included the acquisition of business processes and personnelthat will allow Quaker Houghton to better serve its customers.
As of June 30, 2022, the allocation of the purchase price of all of the Company's2022 acquisitions, Grindaix, the acquisition in
Turkey,and Baron have not been finalized and the one-year measurement period has not ended.Further adjustments may be
necessary as a result of the Company'son-going assessment of additional information related to the fair value ofassets acquired and
liabilities assumed.
In December 2020, the Company acquired Coral Chemical Corporation("Coral"), a privately held U.S.-based provider of metal
finishing fluid solutions.Subsequent to the acquisition, the Company and the sellers of Coral (the "Sellers") have workedto finalize
certain post-closing adjustments.During the second quarter of 2022, after failing to reach resolution,the Sellers filed suit asserting
certain amounts owed related to tax attributes of the acquisition.Based on the facts and circumstances of the claim asserted by the
Sellers, the Company believes the potential range of exposure for this claim is $
0
to $
1.5
million.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
9
Note 3 - Recently Issued Accounting Standards
Recently Issued Accounting StandardsAdopted
The FASB issued ASU 2020-04,
Reference Rate Reform (Topic848): Facilitation of the Effects of Reference Rate Reformon
Financial Reporting
in March 2020.The FASB subsequentlyissued ASU 2021-01,
Reference Rate Reform (Topic848): Scope
in
January 2021 which clarified the guidance but did not materially changethe guidance or its applicability to the Company.The
amendments provide temporary optional expedients and exceptionsfor applying U.S. GAAP to contract modifications, hedging
relationships and other transactions to ease the potential accountingand financial reporting burden associated with transitioning away
from reference rates that are expected to be discontinued, includingthe London Interbank Offered Rate ("LIBOR").ASU 2020-04 is
effective for the Company as of March 12, 2020 and generally canbe applied through December 31, 2022.On June 17, 2022, the
Company entered into an amendment to its primary credit facility which,among other things, provided for the use of a USD currency
LIBOR successor rate (the Secured Overnight Financing Rate ("SOFR")).See Note 14 of Notes to Condensed Consolidated Financial
Statements.
Note 4 - Business Segments
The Company's operatingsegments, which are consistent with its reportable segments, reflect the structure of theCompany's
internal organization, the method by which the Company'sresources are allocated and the manner by which the chief operating
decision maker assesses the Company'sperformance.The Company has
four
reportable 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 globallyby the Global Specialty Businesses segment.The Global
Specialty Businesses segment includes the Company'scontainer, metal finishing,mining, offshore, specialty coatings, specialty
grease and Norman Hay businesses.
Segment operating earnings for each of the Company'sreportable segments are comprised of the segment'snet sales less directly
related cost of goods sold ("COGS") and selling, general and administrativeexpenses ("SG&A").Operating expenses not directly
attributable to the net sales of each respective segment, such as certain corporateand 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'sreportable segments include Interest expense, net and Other (expense) income,
net.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
10
The following table presents information about the performance ofthe Company's reportable segments forthe three and six
months ended June 30, 2022 and 2021.
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net sales
Americas
$
172,747
$
139,673
$
326,891
$
274,544
EMEA
123,053
123,436
248,740
243,250
Asia/Pacific
99,828
91,559
204,062
188,265
Global Specialty Businesses
96,760
80,594
186,866
158,986
Total net sales
$
492,388
$
435,262
$
966,559
$
865,045
Segment operating earnings
Americas
$
33,785
$
33,648
$
63,005
$
65,882
EMEA
13,283
23,405
30,049
48,649
Asia/Pacific
22,226
23,227
44,133
50,705
Global Specialty Businesses
27,841
24,209
52,876
48,378
Total segment operatingearnings
97,135
104,489
190,063
213,614
Combination, integration and other acquisition-related expenses
(1,832)
(6,658)
(5,885)
(12,473)
Restructuring and related credits (charges), net
1
(298)
(819)
(1,473)
Fair value step up of acquired inventory sold
-
-
-
(801)
Non-operating and administrative expenses
(48,579)
(43,077)
(92,042)
(84,069)
Depreciation of corporate assets and amortization
(14,822)
(15,640)
(30,011)
(31,088)
Operating income
31,903
38,816
61,306
83,710
Other (expense) income, net
(8,399)
14,010
(10,605)
18,697
Interest expense, net
(6,494)
(5,618)
(11,839)
(11,088)
Income before taxes and equity in net (loss) income of
associated companies
$
17,010
$
47,208
$
38,862
$
91,319
Inter-segment revenues for the three and six months endedJune 30, 2022, were $
3.3
million and $
6.2
million for Americas, $
12.4
million and $
21.3
million for EMEA, $
0.1
million and $
0.4
million for Asia/Pacific, and $
2.0
million and $
3.7
million for Global
Specialty Businesses, respectively.Inter-segment revenues for the three and six months endedJune 30, 2021, were $
2.4
million and
$
5.7
million for Americas, $
6.3
million and $
15.1
million for EMEA, $
0.4
million and $
0.5
million for Asia/Pacific, and $
2.1
million
and $
4.1
million for Global Specialty Businesses, respectively.However, all inter-segment transactionshave been eliminated from
each reportable operating segment'snet sales and earnings for all periods presented in the above tables.
Note 5 - Net Sales and Revenue Recognition
Arrangements Resulting in Net Reporting
As part of the Company's Fluidcare
TM
business, certain third-party product sales to customers are managed by theCompany.
The
Company transferred third-party products under arrangements recognizedon a net reporting basis of $
20.5
million and $
40.3
million
for the three and six months ended June 30, 2022, respectively,and $
16.7
million and $
34.5
million for the three and six months ended
June 30, 2021, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
11
Customer Concentration
A significant portion of the Company'srevenues are realized from the sale of process fluids and services to manufacturers of
steel, aluminum, automobiles, aerospace,industrial and agricultural equipment, and durable goods.As previously disclosed in the
Company's 2021 Form 10-K, duringthe year ended December 31, 2021, the Company'sfive largest customers (each composed of
multiple subsidiaries or divisions with semiautonomous purchasing authority)accounted for approximately
10
% of consolidated net
sales, with its largest customer accounting for approximately
3
% of consolidated net sales.
Contract Assets and Liabilities
The Company had no material contract assets recorded on its CondensedConsolidated Balance Sheets as of June 30, 2022 or
December 31, 2021.
The Company had approximately $
6.6
million and $
7.0
million of deferred revenue as of June 30, 2022 and December 31, 2021,
respectively.For the six months ended June 30, 2022, the Company satisfied all of the associatedperformance obligations and
recognized into revenue the advance payments received and recordedas of December 31, 2021.
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicalsand its technical expertise as a global product
portfolio.The Company generally manages and evaluates its performance by segment first, andthen by customer industry,rather than
by individual product lines.Also, net sales of each of the Company's major productlines are generally spread throughout all three of
the Company's geographicregions, and in most cases, approximately proportionate to the level of totalsales in each region.
The following tables disaggregate the Company'snet sales by segment, geographic region, customer industry,and timing of
revenue recognized for the three and six months ended June 30, 2022and 2021.
Three Months Ended June 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
63,373
$
37,586
$
55,596
$
156,555
Metalworking and other
109,374
85,467
44,232
239,073
172,747
123,053
99,828
395,628
Global Specialty Businesses
62,367
21,324
13,069
96,760
$
235,114
$
144,377
$
112,897
$
492,388
Timing of Revenue Recognized
Product sales at a point in time
$
225,135
$
136,622
$
110,190
$
471,947
Services transferred over time
9,979
7,755
2,707
20,441
$
235,114
$
144,377
$
112,897
$
492,388
Three Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
51,799
$
35,634
$
48,207
$
135,640
Metalworking and other
87,874
87,802
43,352
219,028
139,673
123,436
91,559
354,668
Global Specialty Businesses
46,183
21,678
12,733
80,594
$
185,856
$
145,114
$
104,292
$
435,262
Timing of Revenue Recognized
Product sales at a point in time
$
177,227
$
137,838
$
101,264
$
416,329
Services transferred over time
8,629
7,276
3,028
18,933
$
185,856
$
145,114
$
104,292
$
435,262
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
12
Six Months Ended June 30, 2022
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
119,533
$
74,425
$
110,883
$
304,841
Metalworking and other
207,358
174,315
93,179
474,852
326,891
248,740
204,062
779,693
Global Specialty Businesses
119,631
41,345
25,890
186,866
$
446,522
$
290,085
$
229,952
$
966,559
Timing of Revenue Recognized
Product sales at a point in time
$
426,419
$
273,825
$
224,815
$
925,059
Services transferred over time
20,103
16,260
5,137
41,500
$
446,522
$
290,085
$
229,952
$
966,559
Six Months Ended June 30, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
98,592
$
69,908
$
97,950
$
266,450
Metalworking and other
175,952
173,342
90,315
439,609
274,544
243,250
188,265
706,059
Global Specialty Businesses
91,439
41,950
25,597
158,986
$
365,983
$
285,200
$
213,862
$
865,045
Timing of Revenue Recognized
Product sales at a point in time
$
348,821
$
269,000
$
207,663
$
825,484
Services transferred over time
17,162
16,200
6,199
39,561
$
365,983
$
285,200
$
213,862
$
865,045
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machineryand equipment with remaining lease terms up to
10 years
.Operating lease expense is recognized on a straight-line basis over the lease term. In addition,the Company has certain land
use leases with remaining lease terms up to
93 years
.
The Company has
no
material variable lease costs, sublease income or finance leases for three and six months endedJune 30,
2022 and 2021. The following table sets forth the components of the Company'slease cost for three and six months ended June 30,
2022 and 2021:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Operating lease expense
$
3,519
$
3,548
$
6,928
$
7,160
Short-term lease expense
205
283
424
534
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
13
Supplemental cash flow information related to the Company'sleases is as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating leases
$
3,442
$
3,489
$
6,807
$
7,068
Non-cash lease liabilities activity:
Leased assets obtained in exchange for new
operating lease liabilities
3,385
825
8,074
3,875
Supplemental balance sheet information related to the Company'sleases is as follows:
June 30,
December 31,
2022
2021
Right of use lease assets
$
36,317
$
36,635
Other current liabilities
10,452
9,976
Long-term lease liabilities
25,695
26,335
Total operating lease liabilities
$
36,147
$
36,311
Weighted averageremaining lease term (years)
5.6
5.6
Weighted averagediscount rate
4.14%
4.22%
Maturities of operating lease liabilities were as follows:
June 30,
2022
For the remainder of 2022
$
6,201
For the year ended December 31, 2023
10,076
For the year ended December 31, 2024
7,815
For the year ended December 31, 2025
5,749
For the year ended December 31, 2026
4,449
For the year ended December 31, 2027 and beyond
6,678
Total lease payments
40,968
Less: imputed interest
(4,821)
Present value of lease liabilities
$
36,147
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 400 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 depend on a
number of factors and are subject to change; however, the Company currently expects reduction in headcount and site closures under
the QH Program to continue to occur throughout 2022 and into 2023. 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,including customary and routine adjustments to initial
estimates for employee separation costs, as well as costs to close certain facilitiesand are recorded in Restructuring and related
charges in the Company'sCondensed Consolidated Statements of Income.As described in Note 4 of Notes to Condensed
Consolidated Financial Statements, restructuring and related chargesare not included in the Company'scalculation of reportable
segments' measure of operating earnings and therefore these costs are not reviewedby or recorded to reportable segments.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
14
Activity in the Company's accrualfor restructuring under the QH Program for the six months ended June 30, 2022is as follows:
QH Program
Accrued restructuring as of December 31, 2021
$
4,087
Restructuring and related charges
819
Cash payments
(797)
Currency translation adjustments
(297)
Accrued restructuring as of June 30, 2022
$
3,812
Note 8 - Share-Based Compensation
The Company recognized the following share-based compensation expensein its Condensed Consolidated Statements of Income
for the three and six months ended June 30, 2022 and 2021:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Stock options
$
469
$
332
$
736
$
640
Non-vested stock awards and restricted stock units
1,667
1,290
3,215
2,686
Non-elective and elective 401(k) matching contribution in stock
-
-
-
1,553
Director stock ownership plan
20
216
44
419
Performance stock units
815
517
1,438
836
Total share-basedcompensation expense
$
2,971
$
2,355
$
5,433
$
6,134
Share-based compensation expense is recorded in SG&A, except for $
0.1
million and $
0.2
million for the three and six months
ended June 30, 2022, respectively,and $
0.2
million and $
0.5
million for the three and six months ended June 30, 2021, respectively,
recorded within Combination, integration and other acquisition-relatedexpenses.
Stock Options
During the first six months of 2022, the Company granted stock options underits long-term incentive plan ("LTIP")that are
subject only to time vesting over a
three
year period.For the purposes of determining the fair value of stock option awards, the
Company used a Black-Scholes option pricing model and the assumptions set forthin the table below:
March 2022
Grant
Number of options granted
27,077
Dividend yield
0.80
%
Expected volatility
38.60
%
Risk-free interest rate
2.07
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight-line basis over thevesting period.As of June 30, 2022, unrecognized
compensation expense related to all stock options grantedwas $
2.4
million, to be recognized over a weighted average remaining
period of
1.6
years.
Restricted Stock Awardsand Restricted Stock Units
During the six months ended June 30, 2022, the Company granted
25,743
non-vested restricted shares and
4,490
non-vested
restricted stock units under its LTIP,which are subject to time-based vesting, generally over a
three year
period.The fair value of
these grants is based on the trading price of the Company'scommon stock on the date of grant.The Company adjusts the grant date
fair value of these awards for expected forfeitures based on historical experience.As of June 30, 2022, unrecognized compensation
expense related to the non-vested restricted shares was $
6.2
million, to be recognized over a weighted average remaining periodof
1.8
years, and unrecognized compensation expense related to non-vestedrestricted stock units was $
1.2
million, to be recognized over a
weighted average remaining period of
2.1
years.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
15
Performance Stock Units
The Company grants performance-dependent stock awards ("PSUs") as a componentof 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
0
% up to
200
% of the target award, subject to the achievement of
the Company's total shareholderreturn ("TSR") relative to the performance of the Company'speer group, the S&P Midcap 400
Materials group.The service period required for the PSUs is three years and the TSR measurementperiod for the PSUs is generally
from January 1 of the year of grant through December 31 of the year priorto issuance of the shares upon settlement.
Compensation expense for PSUs is measured based on their grant date fair valueand 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 Carlosimulation on the grant date
and using the following assumptions set forth in the table below:
March 2022
Grant
Number of PSUs granted
16,820
Risk-free interest rate
2.11
%
Dividend yield
0.93
%
Expected term (years)
3.0
As of June 30, 2022, based on the conditions of the PSUs and performance to date foreach award, the Company estimates that it
will
no
t issue any fully vested shares as of the applicable settlement date of all outstanding PSUs awards.As of June 30, 2022, there
was approximately $
5.5
million of total unrecognized compensation cost related to PSUs which the Companyexpects to recognize
over a weighted-average period of
2.1
years.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majorityof its U.S. employees.The Company matches
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum matching contribution of
3
% of compensation.
Additionally, the planprovides for non-elective nondiscretionary contributions on behalf of participantswho have completed one year
of service equal to
3
% of the eligible participants' compensation.Beginning in April 2020 and continuing through March 2021, the
Company matched both non-elective and elective 401(k) contributionsin fully vested shares of the Company's commonstock rather
than cash.There were
no
matching contributions in stock for the three and six months ended June 30, 2022.For the six months ended
June 30, 2021, total contributions were $
1.5
million.
Note 9 - Pension and Other PostretirementBenefits
The components of net periodic benefit (income) cost for the three andsix months ended June 30, 2022 and 2021 are as follows:
ThreeMonths Ended June 30,
Six Months Ended June 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2022
2021
2022
2021
2022
2021
2022
2021
Service cost
$
174
$
316
$
8
$
2
$
354
$
632
$
-
$
3
Interest cost
1,317
1,094
2
10
2,677
2,184
11
21
Expected return on plan assets
(2,012)
(2,093)
-
-
(4,097)
(4,175)
-
-
Actuarial loss amortization
248
857
(23)
-
505
1,712
(47)
-
Prior service cost amortization
2
3
(9)
-
5
5
(8)
-
Net periodic benefit (income)
cost
$
(271)
$
177
$
(22)
$
12
$
(556)
$
358
$
(44)
$
24
Employer Contributions
As of June 30, 2022, $
1.7
million and $
0.1
million of contributions have been made to the Company'sU.S. and foreign pension
plans and its other postretirement benefit plans, respectively.Taking into considerationcurrent minimum cash contribution
requirements, the Company currently expects to make full year cash contributionsof approximately $
6.6
million to its U.S. and
foreign pension plans and approximately $
0.2
million to its other postretirement benefit plans in 2022
.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
16
Note 10 - Other (Expense) Income, Net
The components of other (expense) income, net, for the three and six months ended June30, 2022 and 2021 are as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Income from third party license fees
$
249
$
373
$
653
$
712
Foreign exchange losses, net
(2,026)
(838)
(3,931)
(2,316)
(Loss) gain on disposals of property,plant, equipment and other
assets, net
(38)
(54)
(15)
5,356
Non-income tax refunds and other related (expense) credits
(417)
14,295
(1,739)
14,392
Pension and postretirement benefit income,
non-service components
475
129
954
253
Loss on extinguishment of debt
(6,763)
-
(6,763)
-
Other non-operating income, net
121
105
236
300
Total other (expense)income, net
$
(8,399)
$
14,010
$
(10,605)
$
18,697
Non-income tax refunds and other related (expense) credits duringthe three and six months ended June 30, 2022, includes
adjustments to Combination-related indemnification assets associated with thesettlement of certain income tax audits at certain of the
Company's Italian and Germanaffiliates for tax periods prior to August 1, 2019.See Note 11 of Notes to Condensed Consolidated
Financial Statements.During the second quarter of 2022, the Company recorded a loss on extinguishmentof debt of approximately
$
6.8
million which includes the write-off of certain previously unamortizeddeferred financing costs as well as a portion of the third
party and creditor debt issuance costs incurred to execute an amendmentto the Company's primary credit facility.See Note 14 of
Notes to the Condensed Consolidated Financial Statements.
Loss (gain) on disposals of property,plant, equipment and other assets, net, during the six months ended June 30, 2021,includes a
gain on the sale of certain held-for-sale real property assets relatedto the Combination.
Note 11 - Income Taxesand Uncertain Income TaxPositions
The Company's effectivetax rates for the three and six months ended June 30, 2022 were
8.1
% and
10.9
%, respectively,
compared to
32.2
% and
28.4
% for the three and six months ended June 30, 2021, respectively.The Company's effectivetax rate for
the six months ended June 30, 2022 was largely driven bystate tax benefits, changes in the valuation allowance for foreign tax credits
due to recently issued legislative guidance,the impact of audit settlements reached with German and Italian tax authorities, a deferred
tax benefit associated with an intercompany asset transfer,a reduction in reserves for uncertain tax positions relating to management
fees, withholding taxes for increased forecasted dividends and the effectsof lower pre-tax earnings and the mix of such earnings.In
addition, the Company incurred higher tax expense during the three and six months endedJune 30, 2022 at one of its subsidiaries as it
accrued taxes at a statutory tax rate of
25
% while it awaits recertification of a concessionary
15
% tax rate, which was available to the
Company during all of 2021.Comparatively,the prior year effective tax rates were largely impactedby the sale of a subsidiary which
included certain held-for-sale real property assets related to the Combination,changes in foreign tax credit valuation allowances, tax
law changes in a foreign jurisdiction and the income tax impacts of certainnon-income tax credits recorded by the Company's
Brazilian subsidiaries.
As of December 31, 2021, the Company had a deferred tax liability of $
8.4
million on certain undistributed foreign earnings,
which primarily represents the Company'sestimate of non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S.As of June 30, 2022 this deferred tax liability balance was $
7.4
million.As of June 30, 2022, the Company's
cumulative liability for gross unrecognized tax benefits was $
17.8
million, a decrease of approximately $
4.7
million from the
cumulative liability accrued as of December 31, 2021.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
17
The Company continues to recognize interest and penalties associated with uncertaintax positions as a component of taxes on
income before equity in net income of associated companies in its CondensedConsolidated Statements of Income.The Company
recognized a benefit for interest of less than $
0.1
million and $
0.3
million and an expense of less than of $
0.1
million and a benefit of
$
1.5
million for penalties in its Condensed Consolidated Statement of Income forthe three and six months ended June 30, 2022,
respectively, and recognizedan expense for interest of approximately $
0.2
million and $
0.2
million and a benefit of less than $
0.1
million and $
0.2
million for penalties in its Condensed Consolidated Statement of Income forthe three and six months ended June 30,
2021, respectively.As of June 30, 2022, the Company had accrued $
2.6
million for cumulative interest and $
1.5
million for
cumulative penalties in its Condensed Consolidated Balance Sheets, comparedto $
3.1
million for cumulative interest and $
3.1
million
for cumulative penalties accrued at December 31, 2021.
During the six months ended June 30, 2022 and 2021, the Company recognizeddecreases of $
3.5
million and $
0.8
million,
respectively,in its cumulative liability for gross unrecognized tax benefits due to the settlementof income tax audits with both the
Italian and German tax authorities, as well as the expiration of the applicablestatutes of limitations for certain tax years.
The Company estimates that during the year ending December 31, 2022it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
4.2
million due to the settlement of income tax audits and the expiration of the statute of
limitations with regard to certain tax positions.This estimated reduction in the cumulative liability for unrecognizedtax benefits does
not consider any increase in liability for unrecognized tax benefits with regardto existing tax positions or any increase in cumulative
liability for unrecognized tax benefits with regard to new tax positions forthe year ending December 31, 2022.
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 subjectto examination by major tax jurisdictions include Italy from
2007
, Brazil from
2011
,
Germany from
2015
, the Netherlands and Mexico from
2016
, Canada, China, Spain and the U.S. from
2017
, the United Kingdom
from
2018
, India from fiscal year beginning April 1, 2017 and ending March 31,
2018
, and various U.S. state tax jurisdictions from
2011
.
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 has 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 the Netherlands reached agreement with respect to the MAP
proceedings which the Company had accepted.
As of June 30, 2022, the Company received $
1.6
million in refunds from the
Netherlands and Spain.In February 2022, the Company received a settlement notice from the Italian taxingauthorities confirming the
amount due of $
2.6
million, having granted the Company's requestto utilize its remaining net operating losses to partially offsetthe
liability.As of June 30, 2022, the Company has paid the full settlement amount, of which approximately$
0.1
million may be
refundable.
Houghton Italia, S.r.l is also involvedin a corporate income tax audit with the Italian tax authorities covering tax years
2014
through
2018
.During the fourth quarter of 2021, the Company settled a portion of the Houghton Italia,S.r.l. corporate income tax
audit with the Italian tax authorities for the tax years 2014 and 2015.During the six months ended June 30, 2022, the Company
settled tax years 2016 through 2018 for a total of $
2.1
million.In total, the Company has now settled all years 2014 through 2018 for
$
3.7
million.Accordingly, the Company hasreleased all reserves relating to this audit for the settled tax years.As a result of the
settlement and reserve release the Company recognized a net benefitto the tax provision of $
2.0
million during the first six months of
2022.The Company has an indemnification receivable of $
3.6
million in connection with its claim against the former owners of
Houghton for any pre-Combination tax liabilities arising from this matter.
As previously reported, Houghton Deutschland GmbH is also underaudit by the German tax authorities for the tax years
2015
through
2017
.In the second quarter of 2022 the Company settled the corporate tax audit for thetax years 2015-2017 with the German
tax authorities for a total of $
0.1
million.The Company has an indemnification receivable of $
0.3
million in connection with its claim
against the former owners of Houghton for any pre-Combination taxliabilities arising from this matter.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
18
Note 12 - Earnings Per Share
The following table summarizes earnings per share calculations forthe three and six months ended June 30, 2022 and 2021:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Less: income allocated to participating securities
(58)
(134)
(136)
(287)
Net income available to common shareholders
$
14,285
$
33,436
$
34,023
$
71,898
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,830,218
17,793,915
Basic earnings per common share
$
0.80
$
1.88
$
1.91
$
4.04
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Less: income allocated to participating securities
(58)
(134)
(136)
(287)
Net income available to common shareholders
$
14,285
$
33,436
$
34,023
$
71,898
Basic weighted average common shares outstanding
17,834,329
17,802,366
17,830,218
17,793,915
Effect of dilutive securities
7,048
47,155
17,186
52,095
Diluted weighted average common shares outstanding
17,841,377
17,849,521
17,847,404
17,846,010
Diluted earnings per common share
$
0.80
$
1.88
$
1.91
$
4.03
Certain stock options, restricted stock units and PSUs are not includedin the diluted earnings per share calculation when the
effect would have been anti-dilutive.The calculated amount of anti-diluted shares not included were
33,039
and
24,731
for the three
and six months ended June 30, 2022, respectively,and
6,793
and
2,952
for the three and six months ended June 30, 2021, respectively.
Note 13 - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June 30, 2022were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2021
$
214,023
$
135,520
$
162,458
$
119,193
$
631,194
Goodwill additions
1,752
-
-
32
1,784
Currency translation adjustments
237
(9,969)
(8,185)
(4,894)
(22,811)
Balance as of June 30, 2022
$
216,012
$
125,551
$
154,273
$
114,331
$
610,167
Gross carrying amounts and accumulated amortization for definite-livedintangible assets as of June 30, 2022 and December 31,
2021 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2022
2021
2022
2021
Customer lists and rights to sell
$
828,690
$
853,122
$
167,145
$
147,858
Trademarks, formulations and producttechnology
156,262
163,974
41,640
38,747
Other
6,269
6,309
5,933
5,900
Total definite-livedintangible assets
$
991,221
$
1,023,405
$
214,718
$
192,505
The Company amortizes definite-lived intangible assets on a straight-line basis overtheir useful lives.The Company recorded
$
14.7
million and $
29.2
million of amortization expense for the three and six months ended June30, 2022, respectively.
Comparatively,the Company recorded $
15.0
million and $
29.8
million of amortization expense for the three and six months ended
June 30, 2021, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
19
Estimated annual aggregate amortization expense for the current yearand subsequent five years is as follows:
For the year ended December 31, 2022
$
57,515
For the year ended December 31, 2023
57,349
For the year ended December 31, 2024
56,760
For the year ended December 31, 2025
55,970
For the year ended December 31, 2026
55,752
For the year ended December 31, 2027 and beyond
522,946
The Company had four indefinite-lived intangible assets totaling$
186.1
million as of June 30, 2022, including $
185.0
million of
indefinite-lived intangible assets for trademarks and tradename associatedwith the Combination.Comparatively, the Company had
four indefinite-lived intangible assets for trademarks and tradenametotaling $
196.9
million as of December 31, 2021.
The Company completes its annual goodwill and indefinite-lived intangibleasset impairment test during the fourth quarter of
each year, or more frequently if triggeringevents indicate a possible impairment.The Company continually evaluates financial
performance, economic conditions and other relevant developmentsin assessing if a triggering event indicates that it is more likely
than not that the carrying value of any of the Company'sreporting units or indefinite-lived or long-lived assets is not recoverable.
The
Company continues to monitor various financial, economic andgeopolitical conditions impacting the Company,including the Russia-
Ukraine war and the Company's decisionto cease operations in Russia, raw material, supply chain, and logistics cost escalation,and
rising interest rates and cost of capital among other factors.The Company concluded that these and other factors which have and
continue to impact the Company did not represent a triggering event as of June 30, 2022.The Company continues to take action to
offset these headwinds including, but not limited to, implementingselling price increases aimed at offsetting raw material costs and
ongoing inflationary pressures.However, if the Company is unable to successfullyimplement these actions and future or projected
financial performance declines, then it is possible any of these financial, economicor geopolitical conditions could represent a
triggering event in the future and could lead to a potential impairment of theCompany's reporting unit goodwillor other indefinite-
lived or long-lived assets.
Note 14 - Debt
Debt as of June 30, 2022 and December 31, 2021 includes the following:
As of June 30, 2022
As of December 31, 2021
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Original Revolver
-
$
-
1.62%
$
211,955
Original U.S. TermLoan
-
-
1.65%
540,000
Original Euro TermLoan
-
-
1.50%
137,616
Amended Revolver
3.05%
228,658
-
-
Amended U.S. TermLoan
3.08%
600,000
-
-
Amended Euro TermLoan
1.50%
148,917
-
-
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
1,495
Various
1,777
Total debt
$
989,070
$
901,348
Less: debt issuance costs
(2,216)
(8,001)
Less: short-term and current portion of long-term debts
(14,485)
(56,935)
Total long-term debt
$
972,369
$
836,412
Credit facilities
The Company, its whollyowned subsidiary,Quaker Chemical B.V.,as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the "Original Credit Facility").The Original Credit Facility was comprised of a $
400.0
million
multicurrency revolver (the "Original Revolver"), a $
600.0
million term loan (the "Original U.S. TermLoan"), each with the
Company as borrower, and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the "Original Euro TermLoan") with
Quaker Chemical B.V.,a Dutch subsidiary of the Company as borrower,each with a five-year term, maturing in
August 2024
.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
20
During June 2022, the Company,and its wholly owned subsidiary,Quaker Houghton B.V.,as borrowers, Bank of America, N.A.,
as administrative agent, U.S. Dollar swing line lender and letter of creditissuer, Bank of America Europe Designated Active
Company, as EuroSwing Line Lender, certain guarantors and other lendersentered into an amendment to the Original Credit Facility
(the "Amended Credit Facility"). The Amended Credit Facility established(A) a new $
150.0
million Euro equivalent senior secured
term loan (the "Amended Euro TermLoan"), (B) a new $
600.0
million senior secured term loan (the "Amended U.S. TermLoan"),
and (C) a new $
500.0
million senior secured revolving credit facility (the "Amended Revolver").The Company has the right to
increase the amount of the Amended Credit Facility by an aggregate amountnot to exceed the greater of $
300.0
million or
100
% of
Consolidated EBITDA, subject to certain conditions including the agreementto provide financing by any lender providing such
increase).In addition, the Amended Credit Facility also:
(i) eliminatedthe requirement that material foreign subsidiaries must guaranty the Original EuroTerm Loan;
(ii) replacedthe U.S. Dollar borrowings reference rate from LIBOR to SOFR;
(iii) extended the maturity date of the Original Credit Facility from August 2024 to June 2027;and
(iv) effected certain other changes to the Original CreditFacility as set forth in the Amended Credit Facility.
The Company used the proceeds of the Amended Credit Facility to repayall outstanding loans under the Original Credit Facility,
unpaid accrued interest and fees on the closing date under the OriginalCredit Facility and certain expenses and fees.U.S. Dollar-
denominated borrowings under the Amended Credit Facility bearinterest, at the Company's election, atthe base rate or term SOFR
plus an applicable rate ranging from
1.00
% to
1.75
% for term SOFR loans and from
0.00
% to
0.75
% for base rate loans, depending
upon the Company's consolidatednet leverage ratio.Loans based on term SOFR also include a spread adjustment equal to
0.10
% per
annum.Borrowings under the Amended Credit Facility denominated in currencies otherthan U.S. Dollars bear interest at the
alternative currency term rate plus the applicable rate ranging from
1.00
% to
1.75
%.
The Amended Credit Facility contains affirmativeand negative covenants, financial covenants and events of default, including
without limitation restrictions on (a) the incurrence of additionalindebtedness;(b) investments in and acquisitions of other businesses,
lines of business and divisions; (c) the making of dividends or capital stockpurchases;and (d) dispositions of assets.Dividends and
share repurchases are permitted in annual amounts not exceeding the greaterof $
75
million annually and
25
% of consolidated
EBITDA if there is no default.All restricted payments may be made if there is no default and if the consolidatednet leverage ratio is
less than
2.50
to
1.00
.
Financial covenants contained in the Amended Credit Facility includea consolidated interest coverage ratio test and a
consolidated net leverage ratio test.The consolidated net leverage ratio at the end of a quarter may not begreater than
4.00
to
1.00
,
subject to a permitted increase during a four-quarterperiod after certain acquisitions.The Company has the option of replacing the
consolidated net leverage ratio test with a consolidated senior net leverage ratiotest if the Company issues certain types of unsecured
notes, subject to certain limitations.Events of default in the Amended Credit Facility include without limitationdefaults for non-
payment, breach of representations and warranties, non-performanceof covenants, cross-defaults, insolvency,and a change of control
in certain circumstances.The occurrence of an event of default under the Amended Credit Facility could resultin all loans and other
obligations becoming immediately due and payable and the AmendedCredit Facility being terminated.As of June 30, 2022, the
Company was in compliance with all of the Amended Credit Facility covenants.
The weighted average variable interest rate incurred on the outstandingborrowings under the Original Credit Facility and the
Amended Credit Facility during the six months ended June 30,2022 was approximately
2.0
%. As of June 30, 2022, the interest rate on
the outstanding borrowings under the Amended Credit Facility was approximately
2.8
%.In addition to paying interest on outstanding
principal under the Original Credit Facility,the Company was required to pay a commitment fee ranging from
0.2
% to
0.3
%
depending on the Company's consolidatednet leverage ratio under the Original Revolver in respect of the unutilized commitments
thereunder.As part of the Amended Credit Facility,the Company is required to pay a commitment fee ranging from
0.150
% to
0.275
% related to unutilized commitments under the Amended Revolver,depending on the Company'sconsolidated net leverage
ratio.The Company had unused capacity under the Amended Revolver ofapproximately $
268
million, net of bank letters of credit of
approximately $
4
million, as of June 30, 2022.
The Company previously capitalized $
23.7
million of certain third-party debt issuance costs in connection with executing the
Original Credit Facility.Approximately $
15.5
million of the capitalized costs were attributed to the Original TermLoans and
recorded as a direct reduction of Long-term debt on the CondensedConsolidated Balance Sheet.Approximately $
8.3
million of the
capitalized costs were attributed to the Original Revolver and recordedwithin Other assets on the Condensed Consolidated Balance
Sheet.These capitalized costs were being amortized into Interest expense overthe
five year
term of the Original Credit Facility.As
of December 31, 2021, the Company had $
8.0
million of debt issuance costs recorded as a reduction of Long-term debt attributableto
the Original Credit Facility.As of December 31, 2021, the Company had $
4.3
million of debt issuance costs recorded within Other
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
21
assets attributable to the Original Credit Facility.Prior to executing the Amended Credit Facility,the Company had $
6.6
million of
debt issuance costs recorded as a reduction of Long-term debt attributableto the Original Credit Facility and $
3.5
million of debt
issuance costs recorded within Other assets attributable to the OriginalCredit Facility.
In connection with executing the Amended Credit Facility,the Company recorded a loss on extinguishment of debt of
approximately $
6.8
million which includes the write-off of certain previouslyunamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurredto execute the Amended Credit Facility.Also in connection with
executing the Amended Credit Facility,during the second quarter of 2022, the Company capitalized $
2.2
million of certain third-party
and creditor debt issuance costs.Approximately $
0.7
million of the capitalized costs were attributed to the Amended Euro TermLoan
and Amended U.S. TermLoan.These costs were recorded as a direct reduction of Long-term debt on theCondensed Consolidated
Balance Sheet.Approximately $
1.5
million of the capitalized costs were attributed to the Amended Revolver andrecorded within
Other assets on the Condensed Consolidated Balance Sheet.These capitalized costs, as well as the previously capitalized costs that
were not written off will collectively be amortized into Interest expenseover the five-year term of the Amended Credit Facility.As of
June 30, 2022, the Company had $
2.2
million of debt issuance costs recorded as a reduction of Long-termdebt on the Condensed
Consolidated Balance Sheet and $
4.8
million of debt issuance costs recorded within Other assets on the Condensed Consolidated
Balance Sheet.
The Original Credit Facility required the Company to fix its variable interestrates on at least
20
% of its total Original Term
Loans.In order to satisfy this requirement as well as to manage the Company'sexposure to variable interest rate risk associated with
the Original 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 Original Credit Facility,based on the Company's
consolidated net leverage ratio.At the time the Company entered into the swaps, and as of June 30, 2022,the aggregate interest rate
on the swaps, including the fixed base rate plus an applicable margin,was
3.1
%.The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.As of June 30, 2022, the Company has not amended its
current interest rate swaps.See Note 17 of Notes to Condensed Consolidated Financial Statements.
Industrial development bonds
As of June 30, 2022 and December 31, 2021, the Company had fixed rate,industrial development authority bonds totaling $
10.0
million in principal amount due in
2028
.These bonds have similar covenants to the Amended Credit Facility noted above.
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 obligationsprimarily consist of certain domestic and foreign low interest rate or interest-
free municipality-related loans, local credit facilities of certain foreign subsidiariesand capital lease obligations.Total unused
capacity under these arrangements as of June 30, 2022 was approximately$
28
million.
In addition to the bank letters of credit described in the "Credit facilities" subsection above, the Company's other off-balance
sheet arrangements include certain financial and other guarantees. The Company's total bank letters of credit and guarantees
outstanding as of June 30, 2022 were approximately $5 million.
The Company incurred the following debt related expenses includedwithin Interest expense, net, in the Condensed Consolidated
Statements of Income:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Interest expense
$
6,134
$
4,813
$
10,880
$
9,463
Amortization of debt issuance costs
1,049
1,188
2,236
2,375
Total
$
7,183
$
6,001
$
13,116
$
11,838
Based on the variable interest rates associated with the AmendedCredit Facility, as of June 30,2022 and the Original Credit
Facility as of December 31, 2021, the amounts at which the Company'stotal debt were recorded are not materially different from their
fair market value.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
22
On June 30, 2022, annual maturities on the Amended Credit Facility in the nextfive fiscal years (excluding the reduction to
long-term debt attributed to capitalized and unamortized debt issuance costs)are as follows:
`
June 30,
2022
For the remainder of 2022
$
4,681
For the year ended December 31, 2023
18,723
For the year ended December 31, 2024
23,404
For the year ended December 31, 2025
37,446
For the year ended December 31, 2026
37,446
For the year ended December 31, 2027
855,875
Total payments
$
977,575
Note 15 - Accumulated Other Comprehensive Income
The following tables show the reclassifications from and resulting balancesof accumulated other comprehensive income
("AOCI") for the three and six months ended June 30, 2022 and 2021:
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at March 31, 2022
$
(56,710)
$
(12,676)
$
(603)
$
(272)
$
(70,261)
Other comprehensive (loss) income before
reclassifications
(76,400)
1,650
(1,043)
747
(75,046)
Amounts reclassified from AOCI
-
218
325
-
543
Related tax amounts
-
(461)
151
(172)
(482)
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Balance at March 31, 2021
$
(28,334)
$
(22,175)
$
317
$
(3,036)
$
(53,228)
Other comprehensive income (loss) before
reclassifications
16,157
(260)
341
586
16,824
Amounts reclassified from AOCI
-
852
2
-
854
Related tax amounts
-
(195)
(64)
(134)
(393)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
23
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2021
$
(49,843)
$
(13,172)
$
397
$
(1,372)
$
(63,990)
Other comprehensive (loss) income before
reclassifications
(83,267)
2,082
(2,320)
2,175
(81,330)
Amounts reclassified from AOCI
-
447
336
-
783
Related tax amounts
-
(626)
417
(500)
(709)
Balance at June 30, 2022
$
(133,110)
$
(11,269)
$
(1,170)
$
303
$
(145,246)
Balance at December 31, 2020
$
(2,875)
$
(23,467)
$
3,342
$
(3,598)
$
(26,598)
Other comprehensive (loss) income before
reclassifications
(9,302)
521
(404)
1,316
(7,869)
Amounts reclassified from AOCI
-
1,714
(3,083)
-
(1,369)
Related tax amounts
-
(546)
741
(302)
(107)
Balance at June 30, 2021
$
(12,177)
$
(21,778)
$
596
$
(2,584)
$
(35,943)
All reclassifications related to unrealized gain (loss) in available-for-sale securities relateto the Company's equityinterest in a
captive insurance company and are recorded in equity in net incomeof associated companies.The amounts reported in other
comprehensive income for noncontrolling interest are related to currencytranslation adjustments.
Note 16 - Fair ValueMeasurements
The Company has valued its company-owned life insurance policies at fair value.These assets are subject to fair value
measurement as follows:
Fair ValueMeasurements at June 30, 2022
Total
Using Fair ValueHierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,112
$
-
$
2,112
$
-
Total
$
2,112
$
-
$
2,112
$
-
Fair ValueMeasurements at December 31, 2021
Total
Using Fair ValueHierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,533
$
-
$
2,533
$
-
Total
$
2,533
$
-
$
2,533
$
-
The fair values of Company-owned life insurance assets are based on quotesfor like instruments with similar credit ratings and
terms.The Company did not hold any Level 3 investments as of June 30, 2022 orDecember 31, 2021, respectively,so related
disclosures have not been included.
Note 17 - Hedging Activities
In order to satisfy certain requirements of the Original Credit Facility as well as to managethe Company's exposure to variable
interest rate risk associated with the Original Credit Facility,in November 2019, the Company entered into $
170.0
million notional
amounts of
three year
interest rate swaps.See Note 14 of Notes to Condensed Consolidated Financial Statements.These interest rate
swaps are designated as cash flow hedges and, as such, the contracts are marked-to-marketat each reporting date and any unrealized
gains or losses are included in AOCI to the extent effectiveand reclassified to interest expense in the period during which the
transaction affects earnings or it becomes probablethat the forecasted transaction will not occur.
In June 2022, the Company amended the Original Credit Facility.See Note 14 of Notes to the Condensed Consolidated Financial
Statements.The Amended Credit Facility does not require the Company to fix variableinterest rates on any portion of its borrowings.
The balance sheet classification and fair values of the Company'sderivative instruments, which are Level 2 measurements, are as
follows:
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
24
Fair Value
Condensed Consolidated
June 30,
December 31,
Balance Sheet Location
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
Prepaid expenses and other current assets
$
394
$
-
Other accrued liabilities
-
1,782
$
394
$
1,782
The following table presents the net unrealized (gain) loss deferred to AOCI:
June 30,
December 31,
2022
2021
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
(303)
$
1,372
$
(303)
$
1,372
The following table presents the net loss reclassified from AOCI to earnings:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Amount and location of expense reclassified
from AOCI into expense (effective portion)
Interest expense, net
$
(378)
$
(659)
$
(1,015)
$
(1,302)
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 defaulton or termination of any one contract.As such, in
accordance with the Company's accountingpolicy, these derivative instrumentsare recorded on a net basis within the Condensed
Consolidated Balance Sheets.
Note 18 - Commitments and Contingencies
The Company previously disclosed in its 2021 Form 10-K that AC Products, Inc.("ACP"), a wholly owned subsidiary,in 2007,
agreed to operate two groundwater treatment systems, so as to hydraulicallycontain groundwater contamination emanating from
ACP's site until such time as the concentrationsof contaminants are below the current Federal maximum contaminantlevel for four
consecutive quarterly sampling events. In 2014, ACP ceased operationat one of its two groundwater treatment systems, as it had met
the above condition for closure. As of June 30, 2022, ACP continues to operatethe second groundwater treatment system, while the
Company discusses with the relevant authorities whether the second groundwatertreatment system meets the conditions for closure.
In addition, the Santa Ana Regional WaterQuality Control Board requested that ACP conduct additional indoorand outdoor soil
vapor testing on and near the ACP site to confirm that ACP continues tomeet the applicable local soil vapor standards.As of June 30,
2022, ACP performed such testing and is awaiting the review of the results fromthe Santa Ana Regional WaterQuality Control
Board.
As of June 30, 2022, the Company believes that the range of potential-knownliabilities 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.Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring andprogram management.
The Company previously disclosed in its 2021 Form 10-K that an inactivesubsidiary of the Company that was acquired in 1978
sold certain products containing asbestos, primarily on an installed basis, andis among the defendants in numerous lawsuits alleging
injury due to exposure to asbestos.During the three and six months ended June 30, 2022, there have been nosignificant changes to
the facts or circumstances of this previously disclosed matter,aside from on-going claims and routine payments associated with this
litigation.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 overthe next 50 years for these claims is approximately $
0.3
million (excluding costs of defense).
The Company previously disclosed in its 2021 Form 10-K that it is party to certain environmentalmatters related to certain
domestic and foreign properties.These environmental matters primarily require the Companyto perform long-term monitoring and
maintenance at each of the applicable sites.During the three and six months ended June 30, 2022, there have been no significant
changes to the facts or circumstances of these previously disclosed matters,aside from on-going monitoring and maintenance
activities and routine payments associated with each of the sites.The Company continually evaluates its obligations related to such
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts,unless otherwise stated)
(Unaudited)
25
matters, and based on historical costs incurred and projected costs to be incurredover the next approximately 30 years, has estimated
the range of costs for all of these environmental matters, on a discountedbasis, to be between approximately $
5.0
million and $
6.0
million as of June 30, 2022, for which $
5.5
million was accrued within other accrued liabilities and other non-currentliabilities on the
Company's Condensed ConsolidatedBalance Sheet as of June 30, 2022.Comparatively, as of December31, 2021, the Company had
$
5.6
million accrued for with respect to these matters.
Although there can be no assurance regarding the outcome of otherunrelated environmental matters, the Company believes that it
has made adequate accruals for costs associated with other environmental problemsfor which it is aware, and has accrued $
0.4
million
as of both June 30, 2022 and December 31, 2021, respectively,to provide for such anticipated future environmental assessments and
remediation costs.
The Company previously disclosed in its 2021 Form 10-K that during the first six monthsof 2021, one of the Company's
Brazilian subsidiaries received a notice that it had prevailed on an existinglegal claim in regard to certain non-income (indirect) taxes
that had been previously charged and paid.The matter specifically related to companies' rights to exclude the state tax on goods
circulation (a valued-added-tax or VATequivalent, known in Brazil as "ICMS") from the calculation of certain additional indirect
taxes (specifically the program of social integration ("PIS") and contributionfor the financing of social security ("COFINS")) levied
by the Brazilian States on the sale of goods.In May 2021, the Brazilian Supreme Court concluded that ICMS shouldnot be included
in the tax base of PIS and COFINS, and confirmed the methodology for calculating thePIS and COFINS tax credit claims to which
taxpayers are entitled.The Company's Brazilian entities had previouslyfiled legal or administrative disputes on this matter and are
entitled to receive tax credits and interest dating back five years preceding thedate of their legal claims.As a result of these court
rulings in the first six months of 2021, the Company recognized non-incometax credits of
67.0
million BRL or approximately $
13.3
million, which includes approximately $
8.4
million for the PIS and COFINS tax credits as well as interest on these tax credits of $
4.9
million.The tax credits to which the Company'sBrazilian subsidiaries are entitled are claimable once registered with the Brazilian
tax authorities which the Company subsequently completed.These tax credits can be used to offset future Brazilian federal taxesand
the Company currently anticipates using the full amount of credits during thefive year period of time permitted.
In connection with obtaining regulatory approvals for the Combination,certain steel and aluminum related product lines of
Houghton were divested in August 2019. The Company previously disclosedin its 2021 Form 10-K that in July 2021, the entity that
acquired these divested product lines submitted an indemnification claimfor certain alleged breaches of representation made by
Houghton in the agreement pursuant to which such assets had been divested.The Company responded to the subject matters of the
indemnification claim and during the first quarter of 2022, thematter was resolved consistent with the Company'sexpectations and
position that there were no amounts owed by the Company.
The Company previously disclosed in its 2021 Form 10-K that two of the Company'slocations suffered property damages as a
result of flooding and fire, respectively.The Company maintains property insurance for all of its facilities globally.During the six
months ended June 30, 2022, there have been no significant changes tothe facts or circumstances of these previously disclosed
matters, aside from the on-going restoration of both sites.The Company, its insuranceadjuster and insurance carrier are actively
managing the remediation and restoration activities associated with theseevents and at this time the Company has concluded, based on
all available information and discussions with its insurance adjuster andinsurance carrier, that the losses were covered underthe
Company's property insurancecoverage, net of an aggregate deductible of $
2.0
million.The Company has received payments from
its insurers of $
2.1
million and has recorded an insurance receivable associated with these events (anda gain on insurance recoveries
for losses incurred) of $
0.9
million as of June 30, 2022.
The Company is party to other litigation which management currentlybelieves 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.
Quaker Chemical Corporation
Management's Discussion and Analysis
26
Item 2.
Management's Discussion and Analysisof Financial Condition and Results of Operations
.
As used in this 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 the
"Combination" refers to the legacy Quaker combination with HoughtonInternational, Inc. ("Houghton") on August 1, 2019.
Executive Summary
Quaker Houghton is the global leader in industrial process fluids.With a presence around the world, including operationsin over
25 countries, our customers include thousands of the world'smost advanced and specialized steel, aluminum, automotive, aerospace,
offshore, container,mining, and metalworking companies.Our high-performing, innovative and sustainable solutions are backedby
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 secondquarter of 2022 performance reflected continued progress navigatingthrough a myriad of
financial, economic and geopolitical headwinds, including persistent andsignificant raw material cost escalation and overall
inflationary pressures, supply chain and logistics challenges,production and distribution disruptions due to COVID-19 related actions
in China, the direct and indirect impacts of the ongoing war in Ukraineand foreign currency volatility.Despite these challenges, net
sales in the second quarter of 2022 were a record $492.4 million, representingan increase of approximately 13% compared to $435.3
million in the second quarter of 2021.This was primarily driven by an increase in selling price and product mix of approximately
22% and additional net sales from acquisitions of 1%, partially offsetby a decline in organic sales volumes of 4% and the unfavorable
impact from foreign currency translation of 6%.The increase in selling price and product mix is primarily the result ofstrategic price
increases implemented to help offset the ongoing inflationarypressures that began during 2021 and have continued into 2022.The
decline in organic sales volumes was primarily attributableto COVID-19 related disruptions in China, the wind-down of the tolling
agreement for products previously divested related to the Combination,the impact of the war in Ukraine and the Company'songoing
value-based pricing initiatives.
The Company generated net income in the second quarter of 2022 of $14.3million, or $0.80 per diluted share, compared to net
income of $33.6 million, or $1.88 per diluted share in the second quarter of2021.Excluding non-recurring and non-core items in each
period, the Company's secondquarter of 2022 non-GAAP earnings per diluted share were $1.32 comparedto $1.82 in the prior year
quarter and the Company's currentquarter adjusted EBITDA was $58.5 million compared to $70.1 million inthe second quarter of
2021.These results were primarily driven by lower gross margins inthe current quarter due to a significant increase in raw material
and other input costs as well as the direct and indirect impacts of global supplychain disruptions, the unfavorable impact of foreign
currency, and to a lesser extent,by higher selling, general and administrative expenses ("SG&A").See the Non-GAAP Measures
section of this Item below,as well as other items discussed in the Company'sConsolidated Operations Review in the Operations
section of this Item, below.
The Company's second quarterof 2022 operating performance in each of its four reportable segments: (i) Americas;(ii) Europe,
Middle East and Africa ("EMEA"); (iii) Asia/Pacific; and (iv) Global SpecialtyBusinesses, reflect similar drivers to that of its
consolidated performance as each of the Company'sreportable segments net sales benefitted year-over-year from double-digit
increases in selling price and product mix and additional net sales fromacquisitions, while those increases in net sales for most
segments were partially offset by lower organicsales volumes and the unfavorable impact of foreign currency translation.Organic
volumes for the Global Speciality Businesses increased in the secondquarter of 2022 compared to the prior year quarter due to strong
demand for this segment's products.Operating earnings for the Global Specialty Businesses and Americasincreased compared to the
prior year quarter, whereas operating earningsfor Asia/Pacific and EMEA declined, due to the persistent and significantinflationary
pressures on raw materials and other costs, the impact of COVID-19 disruptionsin China, and the negative impact of foreign currency
translation, partially offset by continued pricerealization.Sequentially, operating earnings increasedin Global Speciality Businesses
and the Americas driven by higher selling prices, and was relatively consistentin Asia/Pacific.Operating margins for the three
aforementioned segments increased sequentially,as price realization was able to help offset the inflationary pressureson each of the
segment's gross margins.Additional details of each segment's operating performanceare further discussed in the Company's
Reportable Segments Review,in the Operations section of this Item, below.
Quaker Chemical Corporation
Management's Discussion and Analysis
27
The Company had a net operating cash outflow of $8.4 million in the first six monthsof 2022 as compared to a net operating cash
outflow of $9.6 million in the first six months of 2021.The net operating cash outflow in both periods reflects a significant working
capital investment primarily related to higher accounts receivable due tothe increase in net sales as well as higher inventory due
primarily to the rising cost of raw materials and to a lesser extent a build in certaininventory stock in response to global supply chain
and logistics challenges.The key drivers of the Company's operatingcash flow and working capital are further discussed in the
Company's Liquidity and CapitalResources section of this Item, below.
Overall, the Company delivered another quarter of strong net sales growth,driven by strong price realization and above market
growth.The expected decline in earnings was primarily driven by ongoing inflationarypressures, COVID-19 disruptions in China,
unfavorable currency translation, geopolitical issues and other disruptionsthat impacted our customers and end markets.
Notwithstanding, we delivered double-digit year-over-yearincreases in selling price and largely stabilized the Company'sgross
margins on a sequential basis despite continued increasesin our costs.Looking at the remainder of 2022, the Company'sfocus
remains on executing on items within its control.The Company is encouraged by the momentum in its business and resilience of its
end markets, with some regional differences.The Company continues to work with its customers to get the needed pricing tooffset
the persistent inflationary pressures on its margin whilealso exhibiting continued cost controls.Despite significant uncertainty
caused by several macroeconomic factors, the Companycontinues to expect to deliver sequential gross margin expansionand earnings
growth in the second half of 2022.
On-going impact of COVID-19
The global outbreak of COVID-19 in March of 2020 has negatively impactedall locations where the Company does business.
Although the Company has now operated in this COVID-19 environmentfor more than two years, the full extent of the outbreak and
related business impacts continue to remain uncertain and volatile, andtherefore the full extent to which COVID-19 may impact the
Company's future results of operationsor financial condition is uncertain.This outbreak has significantly disrupted the operations of
the Company and those of its suppliers and customers and, at times duringthe pandemic, the Company has experienced volume
declines as compared to pre-COVID-19 levels.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 Companyoperates.The
prolonged pandemic and resurgences of the outbreakincluding as new variants continue to emerge, and continued restrictions onday-
to-day life and business operations such as recent restrictions in China as well as bordercontrols or closures and transportation
disruptions may result in volume declines and lower net sales in future periods.To the extent that the Company'scustomers and
suppliers are adversely impacted by COVID-19, this could reduce theavailability, or result in delays,of materials or supplies to or
from the Company, whichin turn could significantly interrupt the Company'sbusiness operations.Given this ongoing uncertainty,
the Company cautions that its future results of operations could be significantlyand adversely impacted by COVID-19.While the
circumstances have presented and are expected to continue to present challengesand have necessitated additional time and resources
to be deployed to sufficiently address the challengesbrought on by the pandemic at this time, Management does not believe that
COVID-19 has had a material impact on its financial reporting processes, internalcontrols over financial reporting, or disclosure
controls and procedures.
The Company's top priorityis to protect the health and safety of its employees and customers, while working to ensure business
continuity to meet customers' needs.During the pandemic, the Company has taken incremental steps to protectthe health and
wellbeing of its people in affected areas through various actions, includingenabling work at home where needed and practicable, and
employing social distancing standards, implementing travel restrictions whereapplicable, enhancing onsite hygiene practices, and
instituting visitation restrictions at the Company'sfacilities.The Company has not and does not expect that it will incur material
expenses implementing these health and safety policies.All of the Company's more than 30 productionfacilities worldwide are open
and operating and are deemed as essential businesses in the jurisdictions wherethey are operating.The Company continues to expect
that the impacts from COVID-19 will gradually decline subject to the effectivecontainment of the virus and its variants and successful
distribution and acceptance of the available vaccines and treatments; however,the incidence of reported cases of COVID-19 or a
variant in several geographies where the Company has significant operationsremains relatively high.Differing government responses
to these reported cases continues to evolve and it therefore remains highly uncertainas to how long the global pandemic and related
economic challenges will last in each of the jurisdictions where the Company conductsbusiness and when our customers' businesses
will recover to pre-COVID-19 levels.Though the Company was able to supply customers with value added solutions,as a result of
the government-imposed quarantine and lockdown measures implementedat the end of March 2022 and continuing in effect until
early June 2022, the Company's Shanghai,China-based locations were significantly impacted.The negative impact of those measures
on our operations and liquidity was experienced during the second quarter of 2022and the ultimate impact will depend on how
quickly the Chinese economy recovers from the quarantine and lockdownmeasures that were temporarily implemented.While the
actions the Company has taken to date to protect our workforce, to continue toserve our customers with excellence and to conserve
cash and reduce costs as applicable, have been effective thus far,further actions to respond to the pandemic and its effects maybe
necessary as conditions continue to evolve.
Quaker Chemical Corporation
Management's Discussion and Analysis
28
Impact of Political Conflicts
A significant portion of the Company'srevenues and earnings are generated by non-U.S. operations.This subjects the Company
to political and economic risks that could adversely affect the Company'sbusiness, liquidity, financialposition and results of
operations.The existence of military conflicts, for example the Russian invasion of Ukraine,bring inherent risks such as the potential
for supply chain disruptions, increased costs of resources including oil, decreasedtrade activity and other consequences related to
economic or other sanctions.The U.S. government and other nations have imposed significant restrictionson most companies' ability
to do business in Russia as a result of the military conflict between Russia and Ukraine.It is not possible to predict the broader or
longer-term consequences of this conflict, which could include further sanctions,embargoes, regional instability,geopolitical shifts
and adverse effects on macroeconomic conditions,security conditions, currency exchange rates and financial markets.The military
conflict between Russia and Ukraine has had a negative impact on the Company'sability to sell to, ship products to collect payments
from, and support customers in certain regions based on trade restrictions,embargoes and export control law restrictions, andlogistics
restrictions including closures of air space.If this conflict continues or expands, it could increase the costs, risks and adverse impacts
from these new challenges.The Company and its customers and suppliers may also be the subject of increased cyber-attacks.
During the second quarter of 2022, the Company decided to cease its operationsin Russia.The Company's operationsin the
conflict areas including Russia, Ukraine and Belarus historically representedless than 2% of the Company's consolidated netsales
and less than 1% of the Company'sconsolidated total assets.The Company's primary exposurein the conflict areas related to
outstanding customer accounts receivable.The Company is actively monitoring its outstanding Russian receivables for collections
and has recorded incremental allowancesfor doubtful accounts where warranted.
Liquidity and Capital Resources
At June 30, 2022, the Company had cash and cash equivalents of $202.3million.Total cash and cash equivalentswas $165.2
million at December 31, 2021.The $37.2 million increase in cash and cash equivalents was the net result of $78.6million of cash
provided by financing activities partially offset by $8.4 millionof cash used in operating activities, $24.4 million of cash used in
investing activities and $8.6 million negative impact due to the effectof foreign currency translation.
Net cash flows used in operating activities were $8.4 million in the first six monthsof 2022 compared to net cash flows used in
operating activities of $9.6 million in the first six months of 2021.The net operating cash outflow in both periods reflects working
capital investment primarily related to higher accounts receivable due tothe increase in net sales and higher inventory due primarily to
the rising cost of raw materials and to a lesser extent a build in certain inventoryin response to global supply chain and logistics
challenges.The slight improvement in operating cash flow year-over-yearis a result of a lower working capital investment partially
offset by lower earnings in the first six months of 2022 comparedto the first six months of 2021.
Net cash flows used in investing activities were $24.4 million in thefirst six months of 2022 compared to $21.7 million in the first
six months of 2021.This increase in cash outflows was a result of lower cash proceeds from the disposition ofassets which included
the sale of certain held-for-sale real property assets relatedto the Combination in the prior year period, and higher capital expenditures
in the current year largely related to certain infrastructureand sustainability-related spending.These increases in cash used in
investing activities were partially offset by lower cashpayments related to acquisitions as a result of the level of acquisition activity in
each year.See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 ofthis Report.
Net cash flows provided by financing activities were $78.6 million in the firstsix months of 2022 compared to net cash flows
used in financing activities of $4.4 million in the first six months of 2021.The increase in net cash flows was primarily related to an
increase in borrowings in the current year under the Company'scredit facility, which was amendedand extended, as further described
below, in the secondquarter of 2022.In addition, the Company paid $14.9 million of cash dividends during the first six monthsof
2022, a $0.7 million or 5% increase in cash dividends compared to the prioryear.
The Company, its whollyowned subsidiary,Quaker Chemical B.V.,as borrowers, Bank of America, N.A., as administrative
agent, U.S. Dollar swing line lender and letter of credit issuer,and the other lenders party thereto, entered into a credit agreement on
August 1, 2019, as amended (the "Original Credit Facility").During June 2022, the Company,and its wholly owned subsidiary,
Quaker Houghton B.V.,as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swingline lender and letter of
credit issuer, Bank of America EuropeDesignated Active Company,as Euro Swing Line Lender, certain guarantorsand other lenders
entered into an amendment to the Original Credit Facility (the "AmendedCredit Facility").The Company used the proceeds of the
Amended Credit Facility to repay all outstanding loans under the OriginalCredit Facility, as well as accrued interestand fees, and to
terminate the revolving credit commitments under the Original CreditFacility.
Quaker Chemical Corporation
Management's Discussion and Analysis
29
The Company's Amended CreditFacility is comprised of a $500.0 million multicurrency revolver,a $600.0 million term loan and
a $150.0 million (as of June 17, 2022) Euro equivalent term loan (collectively,the "Amended Term Loans")with the Company and
Quaker Houghton B.V.,as borrowers, each with a five-year term maturing in June 2027.Subject to the consent of the Administrative
Agent and certain other conditions, the Company may designate additionalborrowers. The Company has the right to increase the
amount of the Amended Credit Facility by an aggregate amount notto exceed the greater of (i) $300 million and (ii) 100% of
Consolidated EBITDA, subject to certain conditions, includingthe agreement to provide financing by any Lender providing any such
increase. U.S. Dollar-denominated borrowingsunder the Amended Credit Facility bear interest, at the Company'selection, at the base
rate or term Secured Overnight Financing Rate ("SOFR") plus an applicablerate ranging from 1.00% to 1.75% for term SOFR loans
and from 0.00% to 0.75% for base rate loans, depending upon theCompany's consolidated net leverageratio.Loans based on term
SOFR also include a spread adjustment equal to 0.10% per annum.Borrowings under the Amended Credit Facility denominated in
currencies other than U.S. Dollars bear interest at the alternative currencyterm rate plus the applicable rate ranging from 1.00% to
1.75%. In addition to paying interest on outstanding principal underthe Amended Credit Facility, the Companyis required to pay a
commitment fee ranging from 0.15% to 0.275% depending on theCompany's consolidated net leverageratio to the Lenders under the
Amended Revolver in respect of the unutilized commitments thereunder.
The Amended Credit Facility contains affirmativeand negative covenants, financial covenants and events of default that are
customary for agreements of this nature.The Amended Credit Facility contains a number of customary business covenants,including
without limitation restrictions on (a) the incurrence of additionalindebtedness by the Company or certain of its subsidiaries, (b)
investments in and acquisitions of other businesses, lines of business anddivisions by the Company or certain of its subsidiaries, (c)
the payment of dividends or capital stock purchases by the Companyor certain of its subsidiaries and (d) dispositions of assets by the
Company or certain of its subsidiaries.Dividends and share repurchases are permitted in annual amountsnot exceeding the greater of
$75 million annually and 25% of Consolidated EBITDA if there is no default.All restricted payments may be made if there is no
default and if the consolidated net leverage ratio is less than 2.50to 1.00.
Financial covenants contained in the Amended Credit Facility includea consolidated interest coverage ratio test and a
consolidated net leverage ratio test.The consolidated net leverage ratio at the end of a quarter may not begreater than 4.00 to 1.00,
subject to a permitted increase during a four quarter periodafter certain acquisitions.The Company has the option of replacing the
consolidated net leverage ratio test with a consolidated senior net leverage ratiotest if the Company issues certain types of unsecured
debt, subject to certain customary limitations. Customary events ofdefault in the Amended Credit Facility include without limitation
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.The occurrence of an event of default under the Amended Credit Facility
could result in all loans and other obligations becoming immediatelydue and payable and the Amended Credit Facility being
terminated.
The Original Credit Facility required the Company to fix its variable interestrates on at least 20% of its total Original Term
Loans.In order to satisfy this requirement as well as to manage the Company'sexposure to variable interest rate risk associated with
the Original Credit Facility,in November 2019, the Company entered into $170.0 million notionalamounts of three year interest rate
swaps at a base rate of 1.64% plus an applicable margin as providedin the Original Credit Facility, basedon the Company's
consolidated net leverage ratio.At the time the Company entered into the swaps, and as of June 30, 2022,the aggregate interest rate
on the swaps, including the fixed base rate plus an applicable margin,was 3.1%.The Amended Credit Facility does not require the
Company to fix variable interest rates on any portion of its borrowings.
The Company previously capitalized $23.7 million of certain third-partydebt issuance costs in connection with the Original
Credit Facility.Approximately $15.5 million of the capitalized costs were attributedto the Original Term Loans and recordedas a
direct reduction of Long-term debt on the Condensed ConsolidatedBalance Sheet.Approximately $8.3 million of the capitalized
costs were attributed to the Original Revolver and recorded within Otherassets on the Condensed Consolidated Balance Sheet.These
capitalized costs were being amortized into Interest expense overthe five-year term of the Original Credit Facility.As of December
31, 2021, the Company had $8.0 million of debt issuance costs recordedas a reduction of Long-term debt attributable to the Original
Credit Facility.As of December 31, 2021, the Company had $4.3 million of debt issuancecosts recorded within Other assets
attributable to the Original Credit Facility.Prior to executing the Amended Credit Facility,the Company had $6.6 million of debt
issuance costs recorded as a reduction of Long-term debt attributableto the Original Credit Facility and $3.5 million of debt issuance
costs recorded within Other assets attributable to the Original Credit Facility.In connection with executing the Amended Credit
Facility, the Companyrecorded a loss on extinguishment of debt of approximately $6.8 million whichincludes the write-off of certain
previously unamortized deferred financing costs as well as a portion ofthe third party and creditor debt issuance costs incurred to
execute the Amended Credit Facility.Also in connection with executing the Amended Credit Facility,during the second quarter of
2022, the Company capitalized $2.2 million of certain third-partydebt issuance costs.Approximately $0.7 million of the capitalized
costs were attributed to the Amended Euro TermLoan and Amended U.S. TermLoan. These costs were recorded as a direct reduction
of Long-term debt on the Condensed Consolidated Balance Sheet.Approximately $1.5 million of the capitalized costs were attributed
to the Amended Revolver and recorded within Other assets on theCondensed Consolidated Balance Sheet.These capitalized costs, as
well as the previously capitalized costs that were not written offwill collectively be amortized into Interest expense over the five-year
Quaker Chemical Corporation
Management's Discussion and Analysis
30
term of the Amended Credit Facility.As of June 30, 2022, the Company had $2.2 million of debt issuancecosts recorded as a
reduction of Long-term debt on the Condensed Consolidated Balance Sheetand $4.8 million of debt issuance costs recorded within
Other assets on the Condensed Consolidated Balance Sheet.
As of June 30, 2022, the Company had Amended Credit Facility borrowings outstandingof $977.6 million.As of December 31,
2021,the Company had Original Credit Facility borrowings outstanding of$889.6 million.The Company has unused capacity under
the Amended Revolver of approximately $268 million, net of bank letters ofcredit of approximately $4 million, as June 30, 2022.
The Company's other debtobligations are primarily industrial development bonds, bank lines of credit and municipality-related loans,
which totaled $11.5 million and $11.8million as of June 30, 2022 and December 31, 2021, respectively.Total unused capacity under
these arrangements as of June 30, 2022 was approximately $28 million.The Company's total net debt as of June30, 2022 was $786.7
million.
The Company incurred $8.3 million of total Combination, integrationand other acquisition-related expenses in the first six
months of 2022, which includes $2.4 million of other expenses related toindemnification assets, described in the Non-GAAP
Measures section of this Item below.Comparatively, in the first six monthsof 2021, the Company incurred $7.6 million of total
Combination, integration and other acquisition-related expenses, whichwas net of a $5.4 million gain on the sale of certain held-for-
sale real property assets and also included $0.5 million of accelerated depreciation.The Company had aggregate net cash outflows of
approximately $9.2 million related to the Combination, integration and other acquisition-related expenses during the first six months
of 2022 as compared to $14.8 million during the first six months of 2021.During the first six months of 2022, the Company incurred
$6.2 million of strategic planning and transformation expenses.The Company expects that these additional operating costs and
associated cash flows, as well as higher capital expenditures relatedto strategic planning, process optimization and the next phase of
the Company's long-term integrationto further optimize its footprint, processes and other functions will continuein 2022 and
potentially extend into the next several years.
Quaker Houghton's Managementapproved, and the Company initiated, a global restructuring plan (the"QH Program") in the
third quarter of 2019 as part of its planned cost synergies associatedwith the Combination.The QH Program includes restructuring
and associated severance costs to reduce total headcount by approximately400 people globally and plans for the closure of certain
manufacturing and non-manufacturing facilities.The exact timing and total costs associated with the QH Program depends on a
number of factors and is subject to change; however,reductions in headcount and site closures have occurred, and the Company
currently expects additional headcount reductions and site closures to occurthroughout 2022 and into 2023.The Company made cash
payments related to the settlement of restructuring liabilities underthe QH Program during the first six months of 2022 of
approximately $0.8 million compared to $4.2 million in the first six monthsof 2021.
As of June 30, 2022, the Company'sgross liability for uncertain tax positions, including interest and penalties, was $21.9 million.
The Company cannot determine a reliable estimate of the timing of cashflows by periodrelated to its uncertain tax position liability.
However, should the entire liability be paid,the amount of the payment may be reduced by up to $6.9 million as a result of offsetting
benefits in other tax jurisdictions.
In 2021, two of the Company's locationssuffered significant property damage as a result of floodingand fire.The Company
maintains property insurance for all of its facilities globally.The Company, its insuranceadjuster and insurance carrier are actively
managing the remediation and restoration activities associated with bothof these events and at this time the Company has concluded,
based on all available information and discussions with its insuranceadjuster and insurance carrier, that the losses incurredduring
2021 were covered under the Company'sproperty insurance coverage, net of an aggregate deductible of $2.0million.The Company
has received payments from its insurers of $2.1 million and has recordedan insurance receivable associated with these events of $0.9
million as of June 30, 2022.See Note 18 of Notes to Condensed Consolidated Financial Statements in Item1 of this Report.
The Company believes that its existing cash, anticipated cash flows fromoperations and available additional liquidity will be
sufficient to support its operating requirements and fundits business objectives for at least the next twelve months, including but not
limited to, payments of dividends to shareholders, costs related to ongoingacquisition integration and optimization, pension plan
contributions, capital expenditures, other business opportunities (includingpotential acquisitions), implementing actions to achieve the
Company's sustainabilitygoals and other potential known or anticipated contingencies.The Company believes it has sufficient
additional liquidity to support its operating requirements and to fund its businessobligations for the period beyond the next twelve
months as well, including the aforementioned items which are expectedto recur annually, as well as future principaland interest
payments on the Company's AmendedCredit Facility, tax obligationsand other long-term liabilities.The Company's liquidityis
affected by many factors, some based on normal operations ofour business and others related to the impact of the pandemic and other
global events 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 thetiming, strength or duration of recoveries.We may seek,as we
believe appropriate, additional debt or equity financing which wouldprovide capital for corporate purposes, working capital funding,
additional liquidity needs or to fund future growth opportunities, includingpossible acquisitions and organic investments.The timing
and amount of potential capital requirements cannot be determinedat this time and will depend on a number of factors, including the
Quaker Chemical Corporation
Management's Discussion and Analysis
31
actual and projected demand for our products, specialty chemical industry conditions, competitive factors, and the condition of
financial markets, among others.
Non-GAAP Measures
The information in this Form 10-Q includes non-GAAP (unaudited)financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operatingincome, non-GAAP operating margin, non-GAAPnet income and non-
GAAP earnings per diluted share.The Company believes these non-GAAP financial measures provide meaningfulsupplemental
information as they enhance a reader's understandingof 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 financialmeasures exclude items
that are not considered indicative of future operating performance or notconsidered core to the Company's operations.Non-GAAP
results are presented for supplemental informational purposes onlyand 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 attributableto the Company before depreciation and
amortization, interest expense, net, and taxes on income before equityin net (loss) income of associated companies.The Company
also presents adjusted EBITDA which is calculated as EBITDA plus orminus certain items that are not considered indicative of future
operating performance or not considered core to the Company'soperations.In addition, the Company presents non-GAAP operating
income which is calculated as operating income plus or minus certain items thatare not considered indicative of future operating
performance or not considered core to the Company'soperations.Adjusted EBITDA margin and non-GAAP operating marginare
calculated as the percentage of adjusted EBITDA and non-GAAP operatingincome to consolidated net sales, respectively.The
Company believes these non-GAAP measures provide transparentand useful information and are widely used by investors, analysts,
and peers in our industry as well as by management in assessing the operatingperformance of the Company on a consistent basis.
Additionally, theCompany presents non-GAAP net income and non-GAAP earnings per diluted shareas 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 (loss) incomeof associated companies, in each case adjusted, as applicable, for
any depreciation, amortization, interest or tax impacts resulting fromthe 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 incomeper
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 informationand are widely used by investors, analysts, and peers in
our industry as well as by management in assessing the operating performanceof the Company on a consistent basis.
Certain of the prior period non-GAAP financial measures presentedin the following tables have been adjusted to conform with
current period presentation.The following tables reconcile the Company'snon-GAAP financial measures (unaudited) to their most
directly comparable GAAP (unaudited) financial measures(dollars in thousands unless otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Operating income
$
31,903
$
38,816
$
61,306
$
83,710
Combination, restructuring and other
acquisition-related expenses (a)
1,831
7,082
6,704
15,288
Strategic planning and transformation expenses (b)
3,112
-
6,200
-
Executive transition costs (c)
645
308
1,184
812
Russia-Ukraine conflict related expenses (d)
929
-
2,095
-
Other charges (e)
385
242
476
293
Non-GAAP operating income
$
38,805
$
46,448
$
77,965
$
100,103
Non-GAAP operating margin (%) (l)
7.9%
10.7%
8.1%
11.6%
Quaker Chemical Corporation
Management's Discussion and Analysis
32
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
and Non-GAAP Net Income Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net income attributable to Quaker Chemical Corporation
$
14,343
$
33,570
$
34,159
$
72,185
Depreciation and amortization (a)(j)
20,856
22,344
41,583
44,792
Interest expense, net
6,494
5,618
11,839
11,088
Taxes on income beforeequity in net (loss) income
of associated companies (k)
1,374
15,218
4,240
25,907
EBITDA
43,067
76,750
91,821
153,972
Equity loss (income) in a captive insurance company (f)
1,781
(883)
2,025
(3,963)
Combination, restructuring and other
acquisition-related expenses (a)
2,248
6,956
9,100
9,359
Strategic planning and transformation expenses (b)
3,112
-
6,200
-
Executive transition costs (c)
645
308
1,184
812
Russia-Ukraine conflict related expenses (d)
929
-
2,095
-
Brazilian non-income tax credits (g)
-
(13,293)
-
(13,293)
Loss on extinguishment of debt (h)
6,763
-
6,763
-
Other charges (e)
(54)
219
(253)
318
Adjusted EBITDA
$
58,491
$
70,057
$
118,935
$
147,205
Adjusted EBITDA margin (%) (l)
11.9%
16.1%
12.3%
17.0%
Adjusted EBITDA
$
58,491
$
70,057
$
118,935
$
147,205
Less: Depreciation and amortization - adjusted (a)
20,856
22,218
41,583
44,251
Less: Interest expense, net
6,494
5,618
11,839
11,088
Less: Taxes on incomebefore equity in net income
of associated companies - adjusted (a)(k)
7,466
9,773
16,368
21,512
Non-GAAP net income
$
23,675
$
32,448
$
49,145
$
70,354
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
0.80
$
1.88
$
1.91
$
4.03
Equity loss (income) in a captive insurance company
per diluted share (f)
0.10
(0.05)
0.11
(0.22)
Combination, restructuring and other
acquisition-related expenses per diluted share (a)
0.13
0.30
0.41
0.42
Strategic planning and transformation expenses per
diluted share (b)
0.13
-
0.27
-
Executive transition costs per diluted share (c)
0.03
0.02
0.05
0.04
Russia-Ukraine conflict related expenses per diluted share (d)
0.04
-
0.10
-
Brazilian non-income tax credits per diluted share (g)
-
(0.44)
-
(0.44)
Loss on extinguishment of debt per diluted share (h)
0.29
-
0.29
-
Other charges per diluted share (e)
(0.00)
0.01
(0.01)
0.02
Impact of certain discrete tax items per diluted share (i)
(0.20)
0.10
(0.39)
0.08
Non-GAAP earnings per diluted share (m)
$
1.32
$
1.82
$
2.74
$
3.93
Quaker Chemical Corporation
Management's Discussion and Analysis
33
(a)
Combination, restructuring and other acquisition-related expenses includecertain legal, financial, and other advisory and
consultant costs incurred in connection with the Combination integrationactivities including internal control readiness and
remediation as well as costs incurred by the Company associated with theQH restructuring program,which was initiated in the
third quarter of 2019 as part of the Company'splan to realize cost synergies associated with the Combination.These amounts
also include expense associated with other of the Company'sacquisitions, including cost associated with selling inventory from
acquired businesses which was adjusted to fair value as part of purchaseaccounting.These costs are not indicative of the future
operating performance of the Company.Approximately $0.1 million and $0.2 million for the three and six months endedJune
30, 2022, respectively,and approximately $0.4million and $0.5 million in the three and six months ended June 30, 2021,
respectively, ofthese pre-tax costs were considered non-deductible for the purpose of determining the Company'seffective tax
rate, and, therefore, taxes on income before equity in net income of associatedcompanies - adjusted reflects the impact of these
items.During the three and six months ended June 30, 2022, the Company recorded$0.4 million and $2.4million, respectively,
of other expense related to an indemnification asset, which is includedin the caption "Combination, restructuring and other
acquisition-related expenses" in the reconciliation of GAAP earnings per dilutedshare attributed to Quaker Chemical Corporation
common shareholders to Non-GAAP earnings per diluted share as well as the reconciliationof net income attributable to Quaker
Chemical Corporation to Adjusted EBITDA and Non-GAAP net income.During thethree and six months ended June 30, 2021,
the Company recorded $0.1 million $0.5 million, respectively,of accelerated depreciation related to certain of the Company's
facilities, which is included in the caption "Combination, restructuringand other acquisition-related expenses" in the
reconciliation of operating income to non-GAAP operatingincome and included in the caption "Depreciation and amortization"
in the reconciliation of net income attributable to the Company toEBITDA, 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
the six months ended June 30, 2021, the Company recorded a $5.4 milliongain on the sale of certain held-for-sale real property
assets related to the Combination which is included in the caption "Combination,restructuring and other acquisition-related
expenses" in the reconciliation of GAAP earnings per diluted share attributedto Quaker Chemical Corporation common
shareholders to Non-GAAP earnings per diluted share as well as the reconciliationof net income attributable to Quaker Chemical
Corporation to Adjusted EBITDA and Non-GAAP net income.During the three and six months ended June 30, 2022,
respectively,the Company recorded restructuring and related chargesof less than $0.1 million and $0.8 million, respectively,and
$0.3 million and $1.5 million during the three and six months endedJune 30, 2021, respectively.During the six months ended
June 30, 2021, the Company recorded $0.8 million related to the saleof inventory from acquired businesses which was adjusted
to fair value.See Notes 2, 7, 10 and 11 of Notes to Condensed ConsolidatedFinancial Statements, which appear in Item 1 of this
Report.
(b)
Strategic planning and transformation expenses include certain consultantand advisory expenses for the Company'slong-term
strategic planning, as well as process optimization and the next phaseof the Company's long-term integrationto further optimize
its footprint, processes and other functions.These costs are not indicative of the future operating performance of the Company.
(c)
Executive transition costs represent the costs related to the Company'ssearch, hiring and transition to a new CEO in connection
with the executive transition that took place in 2021 as well as the search,hiring and transition for other officers during the first
six months of 2022.These expenses are one-time in nature and not indicative of the future operating performanceof the
Company.
(d)
Russia-Ukraine conflict related expenses represent the direct costs associatedwith the Company'sexit of operations in Russia
during the second quarter of 2022, primarily for employee separationbenefits, as well as costs associated with establishing
specific reserves or changes to existing reserves for trade accounts receivablewithin the Company's EMEA reportable segment
due to the economic instability associated with certain customer accounts receivableswhich have been directly impacted by the
current economic conflict between Russia and Ukraine or the Company'sdecision to end operations in Russia.These expenses
are not indicative of the future operating performance of the Company.
(e)
Other charges include charges incurredby an inactive subsidiary of the Company as a result of the termination of restrictions on
insurance settlement reserves, non-service components of the Company'spension and postretirement net periodic benefit income
and the foreign currency remeasurement impacts associated with theCompany's affiliates whoselocal economies are designated
as hyper-inflationary under U.S. GAAP.These expenses are not indicative of the future operating performanceof the Company.
See Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements,which appear in Item 1 of this Report.
(f)
Equity loss (income) in a captive insurance company represents the after-taxloss (income) attributable to the Company'sinterest
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 interest under the equity methodof accounting.The loss (income) attributable to
Primex is not indicative of the future operating performance of theCompany and is not considered core to the Company's
operations.
Quaker Chemical Corporation
Management's Discussion and Analysis
34
(g)
Brazilian non-income tax credits represent indirect tax credits related to certainof the Company's Brazilian subsidiaries
prevailing in a legal claim as well as the Brazilian Supreme Court rulingon these non-income tax matters.The non-income tax
credits arising from the claim and court ruling are non-recurringand not indicative of the future operating performance of the
Company.See Note 18 of Notes to Condensed Consolidated Financial Statements, which appearsin Item 1 of this Report.
(h)
In connection with executing the Amended Credit Facility,the Company recorded a loss on extinguishment of debt of
approximately $6.8 million which includes the write-offof certain previously unamortized deferred financing costs as well as a
portion of the third-party and creditor debt issuance costs incurredto execute the Amended Credit Facility.These expenses are
not indicative of the future operating performance of the Company.See Note 14 of Notes to Condensed Consolidated Financial
Statements, which appearsin Item 1 of this Report.
(i)
The impacts of certain discrete tax items include changes in valuationallowances recorded on certain Brazilian branch foreign tax
credits and the recording of deferred taxes on Brazilian branch income.Both of these discrete items related to tax law changes in
the U.S. due to the issuance of final foreign tax credit regulations during theperiod.Additionally, the Companyhas discrete
items related to the release of the reserves for uncertain tax positions settled duringthe quarter and certain taxes, penalties, and
interest due as a result of the settlements.See Note 11 of Notes to Condensed ConsolidatedFinancial Statements, which appears
in Item 1 of this Report.
(j)
Depreciation and amortization for the three and six months ended June 30,2022 includes approximately $0.2 million and $0.5
million, respectively,and for the three and six months ended June 30, 2021 includes $0.3 million and $0.6 million,respectively,
of amortization expense recorded within equity in net loss (income)of associated companies in the Company'sCondensed
Consolidated Statements of income, which is attributable to the amortizationof the fair value step up for the Company's50%
interest in a joint venture in Korea as a result of required purchase accounting.
(k)
Taxes on incomebefore equity in net loss (income) of associated companies - adjusted presents the impactof any current and
deferred income tax expense (benefit), as applicable, of the reconcilingitems presented in the reconciliation of net income
attributable to Quaker Chemical Corporation to adjusted EBITDA, andwas determined utilizing the applicable rates in the taxing
jurisdictions in which these adjustments occurred, subject to deductibility.Combination, restructuring and other acquisition-
related expenses described in (a) resulted in a tax benefit of approximately$0.1 million and incremental taxes of $1.6 million for
the three and six months ended June 30, 2022, respectively,compared to $1.6 million and $2.2 million for the three and six
months ended June 30, 2021, respectively.Strategic planning and transformation expenses describes in (b) above resulted in
incremental taxes of $0.7 million and $1.4 million for the three andsix months ended June 30, 2022, respectively.Executive
transition costs described in (c) resulted in incremental taxes of $0.2million and $0.3 million for the three and six months ended
June 30, 2022, respectively,compared to $0.1 million and $0.2 million for the three and six months endedJune 30, 2021,
respectively.Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxesof $0.2 million and $0.5
million for the three and six months ended June 30, 2022, respectively.Other charges described in (e) resulted in incremental
taxes of less than $0.1 million and a tax benefit of less than $0.1 million forthe three and six months ended June 30, 2022,
respectively, comparedto $0.1 million during each of the three and six months ended June 30, 2021.Brazilian non-income tax
credits described in (g) resulted in incremental taxes of $5.3 million duringthe three and six months ended June 30, 2021.Loss
on extinguishment of debt described in (h) resulted in incrementaltaxes of $1.6 million during the three and six months ended
June 30, 2022.The impact of certain discrete items described in (i) resulted in a tax benefit of$3.5 million and $6.9 million for
the three and six months ended June 30, 2022, respectively,compared to $1.9 million and $1.5 million for the three and six
months ended June 30, 2021, respectively.
(l)
The Company calculates adjusted EBITDA marginand non-GAAP operating margin as the percentage of adjusted EBITDAand
non-GAAP operating income to consolidated net sales.
(m)
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 commitments orobligations as of June 30, 2022.The Company's off-balance
sheet items outstanding as of June 30, 2022 includes approximately $5million of total bank letters of credit and guarantees.The bank
letters of credit and guarantees are not significant to the Company'sliquidity or capital resources.See Note 14 of Notes to Condensed
Consolidated Financial Statements in Item 1 of this Report.
Quaker Chemical Corporation
Management's Discussion and Analysis
35
Operations
Consolidated Operations Review - Comparison of the Second Quarter of 2022with the Second Quarter of 2021
Net sales were $492.4million in the second quarter of 2022 compared to $435.3 million in the second quarterof 2021.The net
sales increase of $57.1 million or 13% quarter-over-quarter reflects increasesin selling price and product mix of approximately 22%
and additional net sales from acquisitions of 1% partially offsetby the unfavorable impact from foreign currency translationof 6% and
a decline in organic sales volumes of approximately 4%.The increase in selling price and product mix is primarily driven by price
increases implemented to help offset the significantincreases in raw material and other input costs that began during 2021 and
continued into 2022.The decline in organic sales volumes was primarily attributableto COVID-19 related production disruptions in
China, the tolling agreement for products previously divested relatedto the Combination, the ongoing war in Ukraine and the
Company's ongoing value-based pricing initiatives.
COGS were $342.8 million in the second quarter of 2022 comparedto $280.8 million in the second quarter of 2021.The increase
in COGS of $62.0 million or 22% was driven by the continued increases in theCompany's global raw material andsupply chain and
logistics costs compared to the prior year.
Gross profit in the second quarter of 2022 decreased $4.9 million or 3%from the second quarter of 2021.The Company's
reported gross margin in the second quarter of 2022 was 30.4%compared to 35.5% in the second quarter of 2021.The Company's
current quarter gross margin reflects the continued significantincrease in raw material and other input costs experienced throughout
the second quarter of 2022 and the impacts of constraints on the globalsupply chain, partially offset by the Company'songoing value-
based pricing initiatives.
SG&A in the second quarter of 2022 increased $7.2 million or 7% comparedto the second quarter of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation driven higheroperating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section ofthis Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currencytranslation compared to the prior year.
During the second quarter of 2022, the Company incurred $1.8 millionof Combination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghtonintegration and other acquisition-related activities.
Comparatively,the Company incurred $6.7 million of expenses in the prior year second quarter,primarily due to various professional
fees related to legal, financial and other advisory and consultant expensesfor integration activities including internal control readiness
and remediation.See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during the third quarterof 2019 as part of its global plan to realize cost synergies
associated with the Combination.The Company incurred Restructuring and related (credits) chargesfor reductions in headcount and
site closures under this program, net of adjustments to initial estimates for severanceof a credit of less than $0.1 million and a charge
of $0.3 million during the second quarters of 2022 and 2021, respectively.See the Non-GAAP Measures section of this Item, above.
Operating income in the second quarter of 2022 was $31.9 million comparedto $38.8 million in the second quarter of 2021.
Excluding non-recurring and non-core expenses that are not indicative of the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company'scurrent quarter non-GAAP operating income decreased to
$38.8 million compared to $46.4 million in the prior year second quarter primarilydue to the lower gross profit and higher SG&A
described above.
The Company had other expense, net, of $8.4 million in the second quarterof 2022 compared to other income, net of $14.0
million in the second quarter of 2021.The second quarter of 2022 includes a loss on extinguishment of debt of $6.8 millionassociated
with the refinancing of the Original Credit Facility while the second quarterof 2021 included $13.3 million of income related to
certain non-income tax credits recorded by the Company'sBrazilian subsidiaries.See the Non-GAAP Measures section of this Item,
above.In addition, the Company incurred higher foreign exchange transactionlosses in the second quarter of 2022 compared to the
prior year quarter.
Interest expense, net, increased $0.9 million compared to the secondquarter of 2021 as a result of increases in the average
borrowings outstanding in the second quarter of 2022 comparedto the second quarter of 2021 coupled with an increase in interest
rates quarter-over-quarter.
The Company's effectivetax rates for the second quarters of 2022 and 2021 were 8.1% and 32.2%, respectively.The Company's
effective tax rate for the second quarter of 2022 was largelydriven by state tax benefits, a reduction in reserves for uncertain tax
positions relating to management fees, a deferred tax benefit associated withan intercompany asset transfer,withholding taxes for
increased forecasted dividends, and the effects oflower pre-tax earnings and the mix of such earnings.In addition, the Company
incurred higher tax expense during the second quarter of 2022 primarilyrelated to the Company recording earnings in one of its
subsidiaries at a statutory tax rate of 25% while it awaits recertification ofa concessionary 15% tax rate, which was available to the
Company during all of 2021.Comparatively,the prior year quarter effective tax rate was impacted by changesin foreign tax credit
Quaker Chemical Corporation
Management's Discussion and Analysis
36
valuation allowances, tax law changes in foreign jurisdictions as well as the tax impactsof certain non-income tax credits recorded by
the Company's Brazilian subsidiaries.Excluding the impact of non-core items in each quarter,described in the Non-GAAP Measures
section of this Item, above, the Company estimates that its effectivetax rates for both the second quarters of 2022 and 2021 would
have been approximately 24%.The Company expects continued volatility in its effective tax rates dueto several factors, including the
timing and scope of tax audits and the expiration of applicable statutes of limitationsas they relate to uncertain tax positions, the
unpredictability of the timing and amount of certain incentives in varioustax jurisdictions, including the high technology incentive at
one of our subsidiaries based in China which is currently up for triennial renewal,the treatment of certain acquisition-related costs and
the timing and amount of certain share-based compensation-relatedtax benefits, among other factors.
Equity in net income of associated companies decreased $2.9 millionin the second quarter of 2022 compared to the second
quarter of 2021, primarily due to lower current year income fromthe Company's interest in a captive insurancecompany and from the
Company's 50% interest in a joint venturein Korea.See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 millionin both the second quarters of 2022 and 2021.
Foreign exchange unfavorably impacted the Company'ssecond quarter of 2022 results by approximately 11% drivenby the
impact from foreign currency translation on earnings as well as higherforeign exchange transaction losses in the current quarter as
compared to the prior year second quarter.
Consolidated Operations Review - Comparison of the First Six Months of 2022with the First Six Months of 2021
Net sales were $966.6 million in the first six months of 2022 compared to$865.0 million in the first six months of 2021.The net
sales increase of $101.5 million or 12% year-over-year reflects increases in sellingprice and product mix of approximately 19% and
additional net sales from acquisitions of 2% partially offset by a declinein organic sales volumes of approximately 5% and the
unfavorable impact from foreign currency translation of 4%.The increase in selling price and product mix is primarily driven by price
increases implemented to help offset the significantincreases in raw material and other input costs that began during 2021 and
continued into 2022.The decline in sales volumes was primarily attributable to the comparison to a very strongfirst half of 2021, and
primarily the first quarter of 2021, where customers replenishedtheir supply chains, the impact of lower volumes related to the tolling
agreement for products previously divested related to the Combination,the ongoing war in Ukraine, COVID-19 disruptions in China
and the Company's ongoingvalue-based pricing initiatives.
COGS were $670.9 million in the first six months of 2022 comparedto $554.4 million in the first six months of 2021.The
increase in COGS of $116.5 million or21% was driven by the continued increases in the Company'sglobal raw material and supply
chain and logistics costs compared to the prior year.
Gross profit in the first six months of 2022 decreased $15.0 million or 5%from the first six months of 2021.The Company's
reported gross margin in the first six months of 2022 was 30.6% comparedto 35.9% in the first six months of 2021.The Company's
current year gross margin reflects a significant increase inraw material and other input costs and the impacts of constraints on the
global supply chain, partially offset by the Company'songoing value-based pricing initiatives.
SG&A in the first six months of 2022 increased $14.6 million or 7% comparedto the first six months of 2021 due primarily to the
impact of sales increases on direct selling costs, inflation driven higheroperating costs, costs associated with strategic planning and
transformation initiatives (see the Non-GAAP Measures section ofthis Item, above), and additional SG&A from recent acquisitions
partially offset by lower SG&A due to foreign currencytranslation compared to the prior year.In addition, SG&A was lower in the
prior year period as a result of continued temporary cost saving measures theCompany implemented in response to the onset of
COVID-19.
During the first six months of 2022, the Company incurred $5.9 million ofCombination, integration and other acquisition-related
operating expenses primarily for professional fees related to the Houghtonintegration and other acquisition-related activities.
Comparatively,the Company incurred $12.5 million of expenses in the prior year'sfirst six months, primarily due to various
professional fees related to legal, financial and other advisory andconsultant expenses for integration activities including internal
control readiness and remediation.See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during the third quarterof 2019 as part of its global plan to realize cost synergies
associated with the Combination.The Company incurred Restructuring and related charges for reductionsin headcount and site
closures under this program, net of adjustments to initial estimates for severanceof $0.8 million and $1.5 million during the first six
months of 2022 and 2021, respectively.See the Non-GAAP Measures section of this Item, above.
Operating income in the first six months of 2022 was $61.3 million comparedto $83.7 million in the first six months of 2021.
Excluding non-recurring and non-core expenses that are not indicativeof the future operating performance of the Company described
in the Non-GAAP Measures section of this Item, above, the Company'scurrent year non-GAAP operating income decreased to $78.0
million for the first six months of 2022 compared to $100.1 million inthe prior year's first six months primarily due to the lower gross
profit and higher SG&A described above.
Quaker Chemical Corporation
Management's Discussion and Analysis
37
The Company had other expense, net, of $10.6 million in the first six monthsof 2022 compared to other income, net of $18.7
million in the first six months of 2021.The first six months of 2022's results include$6.8 million loss on extinguishment of debt
related to the Company'srefinancing the Original Credit Facility and other expenses of $2.4 million relatedto the impact of certain
adjustments to the Company'sCombination related indemnification receivables, while the prioryear's first six months of 2022 other
income includes $13.3 million of income related to certain non-incometax credits recorded by the Company'sBrazilian subsidiary as
well as a $5.4 million gain on the sale of certain held-for-salereal property assets.See the Non-GAAP Measures section of this Item,
above.In addition, the Company incurred higher foreign exchange transactionlosses in the first six months of 2022 compared to the
prior year period.
Interest expense, net, increased $0.8 million compared to the first six monthsof 2021, due to an increase in the average
borrowings outstanding in the first six months of 2022 coupled with anincrease in interest rates in the current year as compared to the
prior year.
The Company's effectivetax rates for the first six months of 2022 and 2021 were 10.9% and 28.4%, respectively.The
Company's effective tax rate for the six months ended June 30, 2022 was largely drivenby changes in the valuation allowance for
foreign tax credits due to recently issued legislative guidance, impacts dueto settlements reached on certain tax audits, state tax
benefits, a reduction in reserves for uncertain tax positions relating to managementfees, a deferred tax benefit associated with an
intercompany asset transfer, withholdingtaxes for increased forecasted dividends and the effects of lowerpre-tax earnings and the mix
of such earnings.Comparatively, the prior year six montheffective tax rate was impacted by the sale of a subsidiary which included
certain held-for-sale real property assets related to theCombination, certain U.S. tax law changes and the tax impact of certainnon-
income tax credits recorded by the Company'sBrazilian subsidiaries.Excluding the impact of all other non-core items in each period,
described in the Non-GAAP Measures section of this Item, above,the Company estimates that its effectivetax rates for the first six
months of 2022 and 2021 would have been approximately 26% and 24%,respectively.In addition, the Company incurred higher tax
expense during the six months ended June 30, 2022 primarily related tothe Company recording earnings in one of its subsidiaries at a
statutory tax rate of 25% while it awaits recertification of a concessionary15% tax rate, which was available to the Company during
all of 2021.
Equity in net income of associated companies decreased $7.3 millionin the first six months of 2022 compared to the first six
months of 2021, primarily due to lower current year income fromthe Company's interest in a captive insurancecompany and from the
Company's 50% interest in a joint venturein Korea.See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 millionin both the first six months of 2022 and 2021.
Foreign exchange unfavorably impacted the Company'sfirst six months of 2022 results by approximately 7% driven by the
impact from foreign currency translation on earnings as well as higherforeign exchange transaction losses in the current year as
compared to the prior year's first six months.
Reportable Segments Review - Comparison of the Second Quarter of 2022with the Second Quarter of 2021
The Company's reportablesegments reflect the structure of the Company'sinternal organization, the method by which the
Company's resources are allocatedand the manner by which the chief operating decision maker of the Companyassesses its
performance.The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)Asia/Pacific; and (iv) Global Specialty
Businesses.The three geographic segments are composed of the net sales and operationsin each respective region, excluding net
sales and operations managed globally by the Global Specialty Businessessegment, which includes the Company'scontainer, metal
finishing, mining, offshore, specialty coatings, specialtygrease and Norman Hay businesses.
Segment operating earnings for the Company'sreportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment's productsales.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,
Restructuring and related charges, and COGS relatedto acquired inventory sold, which is adjusted to fair value as part of purchase
accounting,are not included in segment operating earnings.Other items not specifically identified with the Company'sreportable
segments include interest expense, net, and other (expense) income, net.
Quaker Chemical Corporation
Management's Discussion and Analysis
38
Americas
Americas represented approximately 35% of the Company'sconsolidated net sales in the second quarter of 2022.The segment's net
sales were $172.7 million, an increase of $33.1 million or 24% comparedto the second quarter of 2021.The increase in net sales was
due to higher selling price and product mix of 28%, additional net sales fromacquisitions of 1% and a favorable impact from foreign
currency translation of 1%, partially offset by a 6% declinein organic sales volumes.The increase in selling price and product mix is
primarily driven by price increases implemented to help offsetthe significant increases in raw material and other input costs that
began during 2021 and continued through the second quarter of 2022.The current quarter decline in organic sales volumes was
primarily driven by the tolling agreement for previously divested productsrelated to the Combination, the Company'songoing value-
based pricing initiatives and lower volumes into the automotive industrydue to the semiconductor supply constraints, partially offset
by net new business wins.This segment's operating earnings were$33.8 million, an increase of $0.1 million compared to the second
quarter of 2021.The increase in segment operating earnings was primarily driven by higher net sales whichwere partially offset by
on-going inflationary pressures on our business.
EMEA
EMEA represented approximately 25% of the Company'sconsolidated net sales in the second quarter of 2022.The segment's
net sales were $123.1 million, a decrease of $0.4 million comparedto the second quarter of 2021.This was driven by higher selling
price and product mix of 21% and additional net sales from acquisitions ofapproximately 1%, partially offset by the unfavorable
impact of foreign currency translation of 15% and a decrease in organicsales volumes of 7%.The increase in selling price and
product mix was primarily driven by price increases implementedto help offset the significant increases in raw material andother
input costs that began during 2021 and continued through the secondquarter of 2022.The decline in organic sales volumes was
primarily driven by the current geopolitical and macroeconomic pressuresincluding the direct and indirect impacts of the ongoing war
in Ukraine and the impact of the economic and other sanctions by othernations on Russia in response to the war, as well as lower
volumes associated with the Company'songoing value-based pricing initiatives, the tolling agreement for productspreviously
divested related to the Combination and softer economic conditions in theregion.The unfavorable foreign exchange impact was
primarily due to the strengthening of the U.S. dollar against the euroas this exchange rate averaged 1.07 in the second quarter of 2022
compared to 1.20 in the second quarter of 2021.This segment's operating earnings were$13.3 million, a decrease of $10.1 million or
43% compared to the second quarter of 2021.The decrease in segment operating earnings was primarily a result of higher net sales
which were more than offset by lower gross marginsdue to inflationary pressures on the Company'scosts exceeding its value-based
pricing actions.Operating earnings were also negatively impacted by foreign currency translation.
Asia/Pacific
Asia/Pacific represented approximately 20% of the Company'sconsolidated net sales in the second quarter of 2022.The
segment's net sales were $99.8million, an increase of $8.3 million or 9% compared to the second quarterof 2021.The increase in net
sales was driven by higher selling price and product mix of 17% partiallyoffset by lower organic sales volumes of 4% and an
unfavorable impact from foreign currency translation of 4%.The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significantincreases in raw material and other input costs that began during 2021and
continued through the second quarter of 2022, partially offsetby a net increase in volumes elsewhere in the region.The decline in
organic sales volumes was primarily driven by lowersales volumes in China as a result of the government imposed COVID-19
quarantine and related production disruptions implementedat the end of March 2022 and continued throughout the second quarter of
2022.The unfavorable foreign exchange impact was primarily due to thestrengthening of the U.S. dollar against the Chinese
renminbi as this exchange rate averaged 6.61 in the second quarter of 2022compared to 6.46 in the second quarter of 2021.This
segment's operating earnings were$22.2 million, a decrease of $1.0 million or 4% compared to the second quarterof 2021.The
decrease in segment operating earnings was primarily a result of highernet sales which was more than offset by lower gross margins
due to inflationary pressures and higher costs as a result of the COVID-19 productiondisruptions in China.
Global Specialty Businesses
Global Specialty Businesses represented approximately 20% of theCompany's consolidated net sales in thesecond quarter of
2022.The segment's net sales were $96.8million, an increase of $16.2 million or 20% compared to the second quarter of 2021.The
increase in net sales was driven by higher selling price and productmix of 11%, additional net sales from acquisitions of 3% andan
increase in organic sales volumes of 10%, partially offsetby the unfavorable impact from foreign currency translationof 4%.The
increase in selling price and product mix was primarily driven by priceincreases implemented to help offset the significant increases
in raw material and other input costs that began during 2021 and continuedthrough the second quarter of 2022.The increase in
organic sales volumes was primarily attributableto a continued favorable demand environment for this segment'sproducts.The
unfavorable foreign exchange impact was primarily due to the strengtheningof the U.S. dollar against the euro as described in the
EMEA section above.This segment's operating earningswere $27.8 million, an increase of $3.6 million or 15% compared to the
second quarter of 2021.The increase in segment operating earnings reflects the higher net sales partially offsetby lower gross
margins in the current year and slightly higher operatingexpenses due to inflationary pressures.
Quaker Chemical Corporation
Management's Discussion and Analysis
39
Reportable Segments Review - Comparison of the First Six months of 2022with the First Six months of 2021
Americas
Americas represented approximately 34% of the Company'sconsolidated net sales in the first six months of 2022.The segment's
net sales were $326.9 million, an increase of $52.4 million or 19% comparedto the first six months of 2021.The increase in net sales
was due to higher selling price and product mix of 26%, additional net sales fromacquisitions of 1% and the favorable impacts of
foreign currency translation of 1%, partially offset bya decrease in organic sales volumes of 9%.The increase in selling price and
product mix was primarily driven by price increases implementedto help offset the significant increases in raw material andother
input costs that began during 2021 and have continued into 2022.The current year decline in organic sales volumes was primarily
driven by lower sales volumes into the automotive end market, the tollingagreement for previously divested products related to the
Combination, the prior year period comparison which included astrong rebound from COVID-19 impacts and the Company's
ongoing value-based pricing initiatives, partially offsetby net new business wins.This segment's operating earningswere $63.0
million, a decrease of $2.9 million or 4% compared to the first six months of2021.The decrease in segment operating earnings was
primarily a result of higher net sales which was more than offset bylower gross margins driven by inflationary pressures.
EMEA
EMEA represented approximately 26% of the Company'sconsolidated net sales in the first six months of 2022.The segment's
net sales were $248.7 million, an increase of $5.5 million or 2% comparedto the first six months of 2021.The increase in net sales
was due to higher selling price and product mix of 19% and additionalnet sales from acquisitions of 2%, partially offset by the
unfavorable impact of foreign currency translation of 12% anda decrease in organic sales volumes of 7%.The increase in selling
price and product mix was primarily driven by price increases implementedto help offset the significant increases in raw material and
other input costs that began during 2021 and have continued into 2022.The decline in organic sales volumes was primarily driven by
the current geopolitical and macroeconomic pressures includingthe direct and indirect impacts of the ongoing war in Ukraine and the
impact of the economic and other sanctions by other nations on Russia in responseto the war, lower volumes associated with the
Company's ongoing value-based pricing initiatives, the tolling agreement for products previously divestedrelated to the Combination,
the prior year period comparison which included a strong rebound fromCOVID-19 impacts,and softer economic conditions in the
region in the current period, partially offset by net new business wins.The unfavorable foreign exchange impact was primarily dueto
the strengthening of the U.S. dollar against the euro as this exchange rateaveraged 1.09 in the first six months of 2022 compared to
1.21 in first six months of 2021.This segment's operating earnings were$30.0 million, a decrease of $18.6 million or 38% compared
to the first six months of 2021.The decrease in segment operating earnings was primarily a result of highernet sales which was more
than offset by lower gross margins drivenby significant inflationary pressures and the negative impact of foreigncurrency translation
year-over-year.
Asia/Pacific
Asia/Pacific represented approximately 21% of the Company'sconsolidated net sales in the first six months of 2022.The
segment's net sales were $204.1million, an increase of $15.8 million or 8% compared to the first six months of 2021.The increase in
net sales was driven by higher selling price and product mix of 14% partiallyoffset by lower organic sales volumes of 4% and the
unfavorable impacts of foreign currency translation of 2%.The increase in selling price and product mix was primarily driven by
price increases implemented to help offset the significantincreases in raw material and other input costs that began during 2021and
continued into 2022.The current year decline in organic sales volumes was primarily driven bylower sales volumes in China as a
result of the government imposed COVID-19 quarantine and relatedproduction disruptions implemented at the end of March 2022
and which continued throughout the second quarter of 2022 and the prioryear comparison which included a strong rebound from
COVID-19 impacts as customers replenished their supply chains, partiallyoffset by net new business wins.This segment's operating
earnings were $44.1 million, a decrease of $6.6 million or 13% comparedto the first six months of 2021.The decrease in segment
operating earnings was primarily a result of higher net sales which was morethan offset by lower gross margins driven by significant
inflationary pressures and the unfavorable impact of foreign currencytranslation.
Quaker Chemical Corporation
Management's Discussion and Analysis
40
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of theCompany's consolidated net sales in thefirst six months of
2022.The segment's net sales were $186.9million, an increase of $27.9 million or 18% compared to the first six months of 2021.
The increase in net sales was driven by higher selling price and productmix of 11%, an increase in organic sales volumesof 6% and
additional net sales from acquisitions of 4%, partially offsetby the unfavorable impact from foreign currency translation of
approximately 3%.The increase in selling price and product mix was primarily driven by price increasesimplemented to help offset
the significant increases in raw material and other input costs that began during2021 and continued into 2022.The increase in
organic sales volumes was primarily attributableto a continued favorable demand environment for this segment'sproducts.The
unfavorable foreign exchange impact was primarilydue to the strengthening of the U.S. dollar against the euro described in the EMEA
section above.This segment's operating earningswere $52.9 million, an increase of $4.5 million or 9% compared to the first six
months of 2021.The increase in segment operating earnings reflects higher net sales partially offsetby lower gross margins driven by
inflationary pressures and the negative impact of foreign currencytranslation year-over-year.
Quaker Chemical Corporation
Management's Discussion and Analysis
41
Factors That May Affect Our Future Results
(Cautionary Statements Under the Private Securities Litigation ReformAct of 1995)
Certain information included in this Report and other materials filed orto be filed by Quaker Chemical Corporation with the SEC,
as well as information included in oral statements or other written statements madeor to be made by us, contain or may contain
forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.These statements can be identified by the fact that they do not relate strictly to
historical or current facts.We have basedthese forward-looking statements, including statements regarding the potentialeffects of the
COVID-19 pandemic and global supply chain constraints on the Company'sbusiness, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity andremediate any of our material weaknesses in internal control over
financial reporting, and statements regarding the impact of increasedraw material costs and pricing initiatives on our current
expectations about future events.
These forward-looking statements include statements with respect toour beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, futureperformance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19 pandemic;
•
the timing and extent of the projected impacts on our business as a result of the Ukrainianand Russian conflict and
actions taken by various governments and governmental organizations in response;
•
cost increases and the impacts of constraints and disruptions in the global supplychain;
•
the potential for a variety of macroeconomic events, including the possibility of globalor regional recessions, inflation
generally, cost increases inprices of raw materials such as oil and increasing interest rates, to impact the valueof our
assets or result in asset impairments;
•
our current and future results and plans including our sustainability goals;and
•
statements that include the words "may,""could," "should," "would," "believe," "expect," "anticipate," "estimate,"
"intend," "plan" or similar expressions.
Such statements include information relating to current and future business activities,operational matters, capital spending, and
financing sources.From time to time, forward-looking statements are also included in the Company'sother periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company'sAnnual Report to Shareholders for 2021 and in any
other public statements we make may turn out to be wrong.This can occur as a result of inaccurate assumptions or as a consequence
of known or unknown risks and uncertainties.Many factors discussed in this Report will be important in determining our future
performance.Consequently, actual results maydiffer materially from those that might be anticipated from our forward-looking
statements.
We undertakeno obligation to publicly update any forward-looking statements, whetheras a result of new information, future
events or otherwise.However, any further disclosures made onrelated subjects in the Company's subsequentreports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.A major risk is that demand for the Company'sproducts and services is
largely derived from the demand for our customers' products,which subjects the Company to uncertainties related to downturns in a
customer's business and unanticipated customer productionslowdowns and shutdowns, including as is currently being experienced by
many automotive industry companies as a result of supply chain disruption.Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic,including actions taken in response to the pandemic by
various governments, which could exacerbate some or all of the otherrisks and uncertainties faced by the Company,as well as
inflationary pressures, including the potential for significant increasesin raw material costs, supply chain disruptions, customer
financial instability,rising interest rates and the possibility of economic recession, worldwide economicand political disruptions
including the impacts of the military conflict between Russia and Ukraine,the economic and other sanctions imposed by other nations
on Russia, suspensions of activities in Russia by many multinational companiesand the potential expansion of military activity,
foreign currency fluctuations, significant changes in applicable taxrates and regulations, future terrorist attacks and other acts of
violence.Furthermore, the Company is subject to the same business cycles as those experiencedby our customers in the steel,
automobile, aircraft, industrial equipment, and durable goods industries.The ultimate impact of COVID-19 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 including new variants, the continued uncertainty regardingglobal availability, administration,acceptance and long-
term efficacy of vaccines, or other treatments for COVID-19 orits variants, the longer-term effects on the economy ofthe pandemic,
including the resulting market volatility,and by the measures taken by governmental authorities and other third partiesrestricting day-
to-day life and business operations and the length of time that such measuresremain in place, as well as laws and other governmental
programs implemented to address the pandemic or assist impactedbusinesses, such as fiscal stimulus and other legislation designed to
deliver monetary aid and other relief.Other factors could also adversely affect us, including those relatedto acquisitions and the
Quaker Chemical Corporation
Management's Discussion and Analysis
42
integration of acquired businesses.Our forward-looking statements are subject to risks, uncertainties andassumptions about the
Company and its operations that are subject to change based on various importantfactors, some of which are beyond our control.
These risks, uncertainties, and possible inaccurate assumptions relevantto our business could cause our actual results to differ
materiallyfrom expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-lookingstatements.For more information regarding these
risks and uncertainties as well as certain additional risks that we face, referto the Risk Factors section, which appears in Item 1A in
our 2021 Form 10-K and in our quarterly and other reports filed from time totime with the SEC.This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
Quaker Houghton on the Internet
Financial results, news and other information about Quaker Houghtoncan be accessed from the Company'swebsite at
https://www.quakerhoughton.com.This site includes important information on the Company'slocations, products and services,
financial reports, news releases and career opportunities.The Company's periodic and current reportson Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental schedules filed therewith,and amendments to those reports, filed with the SEC are
available on the Company's website,free of charge, as soon as reasonably practicable after theyare electronically filed with or
furnished to the SEC.Information contained on, or that may be accessed through, the Company'swebsite is not incorporated by
reference in this Report and, accordingly,you should not consider that information part of this Report.
43
Item 3.Quantitative and Qualitative Disclosures About MarketRisk.
We have evaluatedthe information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report onForm
10-K for the year ended December 31, 2021, and we believe there has beenno material change to that information, except the interest
rate risk noted below.
Interest Rate Risk.
The Company's exposureto interest rate risk relates primarily to its outstanding borrowings under its credit facility.During June
2022, the Company entered into an amendment to its primary credit facility(the "Original Credit Facility", or as amended, the
"Amended Credit Facility").See Note 14 of Notes to Condensed Consolidated Financial Statements, which appearsin Item 1 of this
Report.As of June 30, 2022, borrowings under the Amended Credit Facility bear interest at eitherterm SOFR or a base rate, in each
case, plus an applicable margin based upon the Company'sconsolidated net leverage ratio, and, in the case of term SOFR, a spread
adjustment equal to 0.10% per annum.As a result of the variable interest rates applicable under the Amended Credit Facility,if
interest rates rise significantly,the cost of debt to the Company will increase.This can have an adverse effect on the Company,
depending on the extent of the Company'sborrowings outstanding throughout a given year.
As of June 30, 2022, the Company had outstanding borrowings under theAmended Credit Facility of approximately $977.6
million.The interest rate applicable on outstanding borrowings under the AmendedCredit Facility was approximately 2.8% as of
June 30, 2022.As of December 31, 2021, the Company had outstanding borrowings under theOriginal Credit Facility of
approximately $889.6 million. The variable interest rate incurred on the outstandingborrowings under the Original Credit Facility
during the year ended December 31, 2021 was approximately 1.6%.If interest rates had changed by 10% during 2021, the
Company's interest expense forthe period ended December 31, 2021 on its credit facilities, including the OriginalCredit Facility
borrowings outstanding post-closing of the Combination, would have correspondinglyincreased or decreased by approximately $1
million.Likewise, if interest rates had changed by 10% during the six month period ended June30, 2022, the Company's interest
expense for the six month period ended June 30, 2022 on its credit facilities, includingthe Amended Credit Facility borrowings
outstanding, would have correspondingly increased or decreased by approximately$2 million.
The Original Credit Facility required the Company to fix its variable interest rates onat least 20% of its total term loans.In order
to satisfy this requirement as well as to manage the Company'sexposure to variable interest rate risk associated with the Original
Credit Facility, in November2019, the Company entered into $170.0 million notional amounts ofthree year interest rate swaps at a
base rate of 1.64% plus an applicable margin as provided inthe Original Credit Facility, based onthe Company's consolidatednet
leverage ratio.At the time the Company entered into the swaps, and as of June 30, 2022, the aggregateinterest rate on the swaps,
including the fixed base rate plus an applicable margin,was 3.1%.The Amended Credit Facility does not require the Company to fix
variable interest rates on any portion of its borrowings.
44
Item 4.Controls and Procedures.
Evaluation of disclosure controlsand procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), our management, including ourprincipal executive officer and principal financial officer,has
evaluated the effectiveness of our disclosure controlsand 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 principalfinancial officer
have concluded that, as of June 30, 2022, the end of the period covered by this Report, ourdisclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) were effective.
Changes in internal control over financial reporting.
As required by Rule 13a-15(d) under the Exchange Act, our
management, including our principal executive officerand principal financial officer, has evaluatedour internal control over
financial reporting to determine whether any changes to our internal controlover financial reporting occurred during the
quarter ended June 30, 2022 that have materially affected, or arereasonably 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 reportingduring the quarter ended June 30, 2022.
45
PARTII.
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been omitted.
Item 1.Legal Proceedings.
Incorporated by reference is the information in Note 18 of the Notes tothe Condensed Consolidated Financial Statements in Part
I, Item 1, of this Report.
Item 1A. Risk Factors.
The Company's business, financialcondition, results of operations and cash flows are subject to various risks thatcould cause
actual results to vary materially from recent results or from anticipated futureresults.In addition to the other information set forth in
this Report, you should carefully consider the risk factors previously disclosedin Part I, Item 1A of our 2021 Form 10-K.While there
have been no material changes to the risk factors described in our 2021 Form 10-K,reference is made to the developments discussed
under the headings
On-going impact of COVID-19
and
Impact of Political Conflicts
within Part I, Item 2 of this Report.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information concerning shares ofthe Company's common stock acquiredby the Company during
the period covered by this Report:
(c)
(d)
TotalNumber of
Approximate Dollar
(a)
(b)
Shares Purchased
Value ofShares that
TotalNumber
Average
as part of
May Yetbe
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
April 1 - April 30
280
$
162.86
-
$
86,865,026
May 1 - May 31
729
$
147.04
-
$
86,865,026
June 1 - June 30
56
$
149.52
-
$
86,865,026
Total
1,065
$
151.33
-
$
86,865,026
(1)
All of these shares were acquired from employees related to the surrenderof Quaker Chemical Corporation shares in
payment of the exercise price of employee stock options exercised orfor the payment of taxes upon exercise of employee
stock options or the vesting of restricted stock awards or units.
(2)
The price paid for shares acquired from employees pursuant to employeebenefit and share-based compensation plans is
based on the closing price of the Company'scommon stock on the date of exercise or vesting as specified by the plan
pursuant to which the applicable option, restricted stock award, or restrictedstock unit was granted.
(3)
On May 6, 2015, the Board of Directors of the Company approved, and theCompany 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"), and it has no expirationdate.There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program during thequarter ended June 30, 2022.
Limitation on the Payment of Dividends
The Amended Credit Facility has certain limitations on the payment ofdividends and other so-called restricted payments.See
Note 14 of Notes to Condensed Consolidated Financial Statements, in PartI, Item 1, of this Report.
46
Item 6.Exhibits.
(a) Exhibits
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 filed on August 1, 2019.
3.2
-
Restated By-laws (effective May 6, 2015, as amended through March 27, 2020). Incorporated by reference to Exhibit
10.1
-
Amendment No. 3, dated as of June 17, 2022, to the Credit Agreement, dated as of August 1, 2019, as amended.
Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form8-K filed on June 21, 2022.
10.2
-
Memorandum of Employment by and between the Registrant and Melissa Leneis dated May 24, 2022 and effective
July 5, 2022.*†
10.3
-
Form of Change of Control Agreement by and between the Registrant and certain executive officers (including
Melissa Leneis).*†
10.4
-
Memorandum of Employment by and between the Registrant and Dhruwa Rai dated June 23, 2022 and effective July
6, 2022.*†
10.5
-
Form of Change of Control Agreement by and between the Registrant and certain executive officers (including
Dhruwa Rai).*†
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 Chief Executive Officer of the Company Pursuant to 18 U.S. C. Section 1350.**
32.2
-
Certification of Chief Financial Officer of the Company Pursuant to 18 U.S. C. Section 1350.**
101.INS
-
Inline XBRL Instance Document*
101.SCH
-
Inline XBRL TaxonomySchema Document*
101.CAL
-
Inline XBRL TaxonomyCalculation Linkbase Document*
101.DEF
-
Inline XBRL TaxonomyDefinition Linkbase Document*
101.LAB
-
Inline XBRL TaxonomyLabel Linkbase Document*
101.PRE
-
Inline XBRL TaxonomyPresentation Linkbase Document*
104
-
Cover Page Interactive Data File (formatted as Inline XBRL and containedin Exhibit 101.INS)*
*Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan.
*********
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
QUAKER CHEMICAL CORPORATION
(Registrant)
/s/ Shane W. Hostetter
Date: August 4, 2022
Shane W. Hostetter,Senior Vice President, Chief Financial
Officer (officer duly authorized on behalf of, and principal
financial officer of, the Registrant)