Quaker Chemical Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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.)

One Quaker Park, 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 filed all 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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 [X]		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 use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Number of Shares of Common Stock

Outstanding on April 30, 2020

17,758,645

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and March 31, 2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and March 31, 2019	3
	Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and March 31, 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	40
Item 4.	Controls and Procedures.	41
PART II.	OTHER INFORMATION.	42
Item 1.	Legal Proceedings.	42
Item 1A.	Risk Factors.	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	43
Item 6.	Exhibits.	44
Signatures		44

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited).

Quaker Chemical Corporation

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share data)

		Unaudited
		Three Months Ended March 31,
		2020		2019
Net sales		$	378,561	$	211,210
Cost of goods sold (excluding amortization expense - See note 14)			244,710		135,443
Gross profit			133,851		75,767
Selling, general and administrative expenses			98,701		51,455
Indefinite-lived intangible asset impairment			38,000		-
Restructuring and related charges			1,716		-
Combination and other acquisition-related expenses			7,878		4,483
Operating (loss) income			(12,444)		19,829
Other expense, net			(21,175)		(635)
Interest expense, net			(8,461)		(776)
(Loss) income before taxes and equity in net income of associated companies			(42,080)		18,418
Taxes on (loss) income before equity in net income of associated companies			(13,070)		4,929
(Loss) income before equity in net income of associated companies			(29,010)		13,489
Equity in net income of associated companies			666		411
Net (loss) income			(28,344)		13,900
Less: Net income attributable to noncontrolling interest			37		56
Net (loss) income attributable to Quaker Chemical Corporation		$	(28,381)	$	13,844
Earnings per common share data:
	Net (loss) income attributable to Quaker Chemical Corporation common
	shareholders – basic	$	(1.60)	$	1.04
	Net (loss) income attributable to Quaker Chemical Corporation common
	shareholders – diluted	$	(1.60)	$	1.03
	Dividends declared	$	0.385	$	0.370

The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

			Unaudited
			Three Months Ended March 31,
				2020		2019
Net (loss) income			$	(28,344)	$	13,900

Other comprehensive (loss) income, net of tax
	Currency translation adjustments			(54,751)		(432)
	Defined benefit retirement plans			16,957		706
	Current period change in fair value of derivatives			(3,981)		—
	Unrealized (loss) gain on available-for-sale securities			(1,711)		1,273
		Other comprehensive (loss) income		(43,486)		1,547

Comprehensive (loss) income				(71,830)		15,447
Less: Comprehensive income (loss) attributable to noncontrolling interest				95		(55)
Comprehensive (loss) income attributable to Quaker Chemical Corporation			$	(71,735)	$	15,392

The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value and share amounts)

				Unaudited
				March 31,		December 31,
				2020		2019
ASSETS
Current assets
	Cash and cash equivalents			$	316,437	$	123,524
	Accounts receivable, net				357,902		375,982
	Inventories
		Raw materials and supplies			81,827		82,058
		Work-in-process and finished goods			96,041		92,892
	Prepaid expenses and other current assets				43,021		41,516
		Total current assets			895,228		715,972
	Property, plant and equipment, at cost				390,353		398,834
		Less accumulated depreciation			(188,261)		(185,365)
			Property, plant and equipment, net		202,092		213,469
Right of use lease assets					40,496		42,905
Goodwill					592,385		607,205
Other intangible assets, net					1,050,203		1,121,765
Investments in associated companies					84,089		93,822
Deferred tax assets					14,706		14,745
Other non-current assets					41,352		40,433
		Total assets		$	2,920,551	$	2,850,316

LIABILITIES AND EQUITY
Current liabilities
	Short-term borrowings and current portion of long-term debt			$	38,112	$	38,332
	Accounts and other payables				177,976		170,929
	Accrued compensation				24,819		45,620
	Accrued restructuring				14,548		18,043
	Other current liabilities				85,132		87,010
		Total current liabilities			340,587		359,934
Long-term debt					1,076,292		882,437
Long-term lease liabilities					29,402		31,273
Deferred tax liabilities					190,880		211,094
Other non-current liabilities					120,849		123,212
		Total liabilities			1,758,010		1,607,950
Commitments and contingencies (Note 19)
Equity
	Common stock, $1 par value; authorized 30,000,000 shares; issued and
		outstanding 2020 – 17,752,255 shares; 2019 – 17,735,162 shares			17,752		17,735
	Capital in excess of par value				888,533		888,218
	Retained earnings				377,362		412,979
	Accumulated other comprehensive loss				(121,524)		(78,170)
		Total Quaker shareholders’ equity			1,162,123		1,240,762
Noncontrolling interest					418		1,604
Total equity					1,162,541		1,242,366
		Total liabilities and equity		$	2,920,551	$	2,850,316

The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

				Unaudited
				Three Months Ended March 31,
				2020		2019
Cash flows from operating activities
	Net (loss) income			$	(28,344)	$	13,900
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of debt issuance costs			1,187		42
		Depreciation and amortization			21,197		4,859
		Equity in undistributed earnings of associated companies, net of dividends			4,285		(186)
		Deferred compensation, deferred taxes and other, net			(22,988)		(6,842)
		Share-based compensation			4,682		1,012
		Gain on disposal of property, plant, equipment and other assets			(2)		(9)
		Insurance settlement realized			(229)		(190)
		Indefinite-lived intangible asset impairment			38,000		-
		Combination and other acquisition-related expenses, net of payments			(519)		(1,012)
		Restructuring and related charges			1,716		-
		Pension and other postretirement benefits			22,453		(1,346)
	Increase (decrease) in cash from changes in current assets and current
			liabilities, net of acquisitions:
		Accounts receivable			2,322		(5,470)
		Inventories			(10,162)		946
		Prepaid expenses and other current assets			(3,263)		324
		Change in restructuring liabilities			(4,841)		-
		Accounts payable and accrued liabilities			(5,275)		(6,008)
			Net cash provided by operating activities		20,219		20

Cash flows from investing activities
		Investments in property, plant and equipment			(4,892)		(2,537)
		Payments related to acquisitions, net of cash acquired			(3,160)		(500)
		Proceeds from disposition of assets			—		8
		Insurance settlement interest earned			31		65
			Net cash used in investing activities		(8,021)		(2,964)

Cash flows from financing activities
		Payments of long-term debt			(9,371)		-
		Borrowings (repayments) on revolving credit facilities, net			205,500		(24,034)
		(Repayments) borrowings on other debt, net			(185)		86
		Dividends paid			(6,828)		(4,935)
		Stock options exercised, other			(696)		(1,489)
		Purchase of noncontrolling interest in affiliates			(1,047)		-
		Distributions to noncontrolling affiliate shareholders			(751)		-
			Net cash provided by (used in) financing activities		186,622		(30,372)

			Effect of foreign exchange rate changes on cash		(6,424)		1,004

Net increase (decrease) in cash, cash equivalents and restricted cash					192,396		(32,312)
Cash, cash equivalents and restricted cash at the beginning of the period					143,555		124,425
Cash, cash equivalents and restricted cash at the end of the period				$	335,951	$	92,113

The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

Note 1 – Condensed Financial Information

As used in these Notes to Condensed Consolidated Financial Statements, the terms “Quaker”, “Quaker Houghton”, the “Company”, “we”, and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. As used in these Notes to Condensed Consolidated Financial Statements, the term Legacy Quaker refers to the Company prior to the closing of its combination with Houghton International, Inc. (“Houghton”) (herein referred to as the “Combination”). The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles in 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 accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).

Hyper-inflationary economies

Economies that have a cumulative three-year rate of inflation exceeding 100% are considered hyper-inflationary in accordance with U.S. GAAP. A legal entity that operates within an economy deemed to be hyper-inflationary is required to remeasure its monetary assets and liabilities to the applicable published exchange rates and record the associated gains or losses resulting from the remeasurement directly to the Condensed Consolidated Statements of Operations.

Based on various indices or index compilations currently being used to monitor inflation in Argentina as well as recent economic instability, effective July 1, 2018, Argentina’s economy was considered hyper-inflationary under U.S. GAAP. As a result, the Company began applying hyper-inflationary accounting with respect to the Company's wholly owned Argentine subsidiary beginning July 1, 2018. In addition, Houghton has an Argentina subsidiary to which hyper-inflationary accounting also is applied. As of, and for the three months ended March 31, 2020, the Company's Argentine subsidiaries represented less than 1% of the Company’s consolidated total assets and net sales, respectively. During the three months ended March 31, 2020 and 2019, the Company recorded $0.1 million and $0.2 million, respectively, of remeasurement losses associated with the applicable currency conversions related to Argentina. These losses were recorded within foreign exchange gains (losses), net, which is a component of other expense, net, in the Company’s Condensed Consolidated Statements of Operations.

Note 2 – Business Combinations

Houghton

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

The Combination was subject to certain regulatory and shareholder approvals. At a shareholder meeting held during 2017, the Company’s shareholders approved the issuance of new shares of the Company’s common stock at closing of the Combination. Also in 2017, the Company received regulatory approvals for the Combination from China and Australia. The Company received regulatory approvals from the European Commission (“EC”) during the second quarter of 2019 and the U.S. Federal Trade Commission (“FTC”) in July 2019. The approvals from the FTC and the EC required the concurrent divestiture of certain steel and aluminum related product lines of Houghton, which were sold by Houghton on August 1, 2019 for approximately $37 million in cash. The final remedy agreed with the EC and the FTC was consistent with the Company’s previous expectation that the total divested product lines would be approximately 3% of the combined company’s net sales.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

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

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

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

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

The Company accounted for the Combination under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, at their fair value on the acquisition date. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of assets acquired, including indefinite and definite-lived intangible assets, requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. Fair values were determined by management, using a variety of methodologies and resources, including external independent valuation experts. The valuation methods included physical appraisals, discounted cash flow analyses, excess earnings, relief from royalty, and other appropriate valuation techniques to determine the fair value of assets acquired and liabilities assumed.

The following table presents the current preliminary estimated fair values of Houghton net assets acquired:

				Measurement
		August 1,		Period		August 1, 2019
		2019 (1)		Adjustments		(as adjusted)
Cash and cash equivalents		$	75,821	$	—	$	75,821
Accounts receivable, net			178,922		—		178,922
Inventories, net			95,193		—		95,193
Prepaid expenses and other assets			10,652		207		10,859
Property, plant and equipment			115,529		(66)		115,463
Right of use lease assets			10,673		—		10,673
Investments in associated companies			66,447		—		66,447
Other non-current assets			4,710		1,553		6,263
Intangible assets			1,028,400		—		1,028,400
Goodwill			494,915		(23)		494,892
	Total assets purchased		2,081,262		1,671		2,082,933
Short-term borrowings, not refinanced at closing			9,297		—		9,297
Accounts payable, accrued expenses and other accrued liabilities			150,078		146		150,224
Deferred tax liabilities			205,082		(28)		205,054
Long-term lease liabilities			6,607		—		6,607
Other non-current liabilities			47,733		1,553		49,286
	Total liabilities assumed		418,797		1,671		420,468
	Total consideration paid for Houghton		1,662,465		—		1,662,465
	Less: cash acquired		75,821		—		75,821
	Less: fair value of common stock issued as consideration		789,080		—		789,080
	Net cash paid for Houghton	$	797,564	$	—	$	797,564

(1)As previously disclosed in the Company’s 2019 Form 10-K.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

As of March 31, 2020, the allocation of the purchase price for the Combination has not been finalized and the one-year measurement period has not ended. While not currently expected, further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed. Houghton assets acquired and liabilities assumed have been assigned to each of the Company’s reportable segments on a specific identification or allocated basis, as applicable. Measurement period adjustments recorded during the first quarter of 2020 related primarily to the recognition of other non-current assets and other non-current liabilities based on additional information obtained regarding certain tax audits and associated rights to indemnification.

Combination and other acquisition-related expenses have been and are expected to continue to be significant. The Company incurred total costs of $8.3 million and $5.3 million for the three months ended March 31, 2020 and 2019, respectively, related to the Combination and other acquisition-related activities. These costs included certain legal, financial and other advisory and consultant costs related to due diligence, regulatory approvals and integration planning and post-closing integration activities. These costs also include $0.5 million of accelerated depreciation charges during the three months ended March 31, 2020 and $0.9 million of interest costs to maintain the bank commitment (“ticking fees”) for the Combination during the three months ended March 31, 2019. The Company had current liabilities related to the Combination and other acquisition-related activities of $6.1 million and $6.6 million as of March 31, 2020 and December 31, 2019, respectively, primarily recorded within other accrued liabilities on its Condensed Consolidated Balance Sheets.

Norman Hay

On October 1, 2019, the Company completed its acquisition of the operating divisions of Norman Hay plc (“Norman Hay”), a private U.K. company that provides specialty chemicals, operating equipment, and services to industrial end markets. The acquisition adds new technologies in automotive, original equipment manufacturer (“OEM”), and aerospace, as well as engineering expertise which is expected to strengthen the Company’s existing equipment solutions platform. The acquired Norman Hay assets and liabilities were assigned to the Global Specialty Businesses reportable segment. The original purchase price was 80.0 million GBP, on a cash-free and debt-free basis, subject to routine and customary post-closing adjustments related to working capital and net indebtedness levels.

The following table presents the preliminary estimated fair values of Norman Hay net assets acquired:

				Measurement
		October 1,		Period		October 1, 2019
		2019 (1)		Adjustments		(as adjusted)
Cash and cash equivalents		$	18,981	$	—	$	18,981
Accounts receivable, net			15,471		—		15,471
Inventories, net			8,213		—		8,213
Prepaid expenses and other assets			4,203		—		4,203
Property, plant and equipment			14,981		—		14,981
Right of use lease assets			10,608		—		10,608
Intangible assets			51,088		—		51,088
Goodwill			29,384		(166)		29,218
	Total assets purchased		152,929		(166)		152,763
Long-term debt included current portions			485		—		485
Accounts payable, accrued expenses and other accrued liabilities			13,488		(708)		12,780
Deferred tax liabilities			12,746		708		13,454
Long-term lease liabilities			8,594		—		8,594
	Total liabilities assumed		35,313		—		35,313
	Total consideration paid for Norman Hay		117,616		(166)		117,450
	Less: estimated purchase price settlement (2)		3,287		(3,287)		—
	Less: cash acquired		18,981		—		18,981
	Net cash paid for Norman Hay	$	95,348	$	3,121	$	98,469

(1) As previously disclosed in the Company’s 2019 Form 10-K.

(2) The Company finalized its post-closing adjustments for the Norman Hay acquisition and paid approximately 2.5 million GBP during the first quarter of 2020 to settle such adjustments.

As of March 31, 2020, the allocation of the purchase price for Norman Hay has not been finalized and the one-year measurement period has not ended. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

Other Acquisitions

In March 2020, the Company acquired the remaining 49% ownership interest in one of its South African affiliates, Quaker Chemical South Africa Limited (“QSA”) for 16.7 million ZAR, or approximately $1.0 million, from its joint venture partner PQ Holdings South Africa. QSA is a part of the Company’s Europe, Middle East and Africa (“EMEA”) reportable segment. As this acquisition was a change in an existing controlling ownership, the Company recorded $0.7 million of excess purchase price over the carrying value of the non-controlling interest in Capital in excess of par value. In addition, subsequent to the date of these Condensed Consolidated Financial Statements, in May 2020 the Company acquired a company from Denmark for an approximately $3 million note, which will be settled subsequent to the filing of this Form 10-Q in the second quarter of 2020 with the Company’s common stock. In 2018 the Company purchased certain formulations and product technology for the mining industry for $1.0 million, with $0.5 million of the purchase price paid at signing and the remaining $0.5 million of the purchase price paid during the first quarter of 2019.

Note 3 – Recently Issued Accounting Standards

Recently Issued Accounting Standards Adopted

The Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract in August 2018 that clarifies the accounting for implementation costs incurred in a cloud computing arrangement under a service contract. This guidance generally aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement under a service contract with the requirements for capitalizing implementation costs related to internal-use software. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. There was no cumulative effect of adoption recorded within retained earnings on January 1, 2020.

The FASB issued ASU 2018-14, Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans in August 2018 that modifies certain disclosure requirements for fair value measurements. The guidance removes certain disclosure requirements regarding transfers between levels of the fair value hierarchy as well as certain disclosures related to the valuation processes for certain fair value measurements. Further, the guidance added certain disclosure requirements including unrealized gains and losses and significant unobservable inputs used to develop certain fair value measurements. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019, and should be applied prospectively in the initial year of adoption or prospectively to all periods presented, depending on the amended disclosure requirement. Early adoption was permitted. The Company adopted this standard on a prospective basis, effective January 1, 2020. ASU 2018-14 addresses disclosures only and will not have an impact on the Company’s consolidated financial statements.

The FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in June 2016 related to the accounting for and disclosure of credit losses. The FASB subsequently issued several additional accounting standard updates which amended and clarified the guidance, but did not materially change the guidance or its applicability to the Company. This accounting guidance introduces a new model for recognizing credit losses on financial instruments, including customer accounts receivable, based on an estimate of current expected credit losses. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019. Early adoption was permitted. The Company did not early adopt, but did adopt the guidance in this accounting standard update, including all applicable subsequent updates to this accounting guidance, as required, on a modified retrospective basis, effective January 1, 2020. Adoption did not have a material impact to the Company’s financial statements as expected. However, as a result of this adoption, the Company recorded a cumulative effect of accounting change that resulted in an increase to its allowance for doubtful accounts of $0.5 million, a decrease to deferred tax liabilities of $0.1 million and a decrease to retained earnings of $0.4 million.

In accordance with this guidance, the Company recognizes an allowance for credit losses reflecting the net amount expected to be collected from its financial assets, primarily trade accounts receivable. This allowance represents the portion of the receivable that the Company does not expect to collect over its contractual life, considering past events and reasonable and supportable forecasts of future economic conditions. The Company’s allowance for credit losses on its trade accounts receivable is based on specific collectability facts and circumstances for each outstanding receivable and customer, the aging of outstanding receivables and the associated collection risk the Company estimates for certain past due aging categories, and also, the general risk to all outstanding accounts receivable based on historical amounts determined to be uncollectible.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

Recently Issued Accounting Standards Not Yet Adopted

The FASB issued Account Standards Update (“ASU”) 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 in January 2020 clarifying the interaction among the accounting standards related to equity securities, equity method investments, and certain derivatives. The new guidance, among other things, states that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting, for the purposes of applying the fair value measurement alternative immediately before applying or upon discontinuing the equity method. The new guidance also addresses the measurement of certain purchased options and forward contracts used to acquire investments. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2020 and is to be applied prospectively. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in December 2019 to simplify the accounting for income taxes. The guidance within this accounting standard update removes certain exceptions, including the exception to the incremental approach for certain intra-period tax allocations, to the requirement to recognize or not recognize certain deferred tax liabilities for equity method investments and foreign subsidiaries, and to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Further, the guidance simplifies the accounting related to franchise taxes, the step up in tax basis for goodwill, current and deferred tax expense, and codification improvements for income taxes related to employee stock ownership plans. The guidance is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement in August 2018 that modifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this accounting standard update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of certain disclosures, and add new disclosure requirements as relevant. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2020, and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

Note 4 – Business Segments

The Company’s operating segments, which are consistent with its reportable segments, reflect the structure of the Company’s internal organization, the method by which the Company’s resources are allocated and the manner by which the Company and the chief operating decision maker assess its performance. During the third quarter of 2019 and in connection with the Combination, the Company reorganized its executive management team to align with its new business structure, which reflects the method by which the chief operating decision maker of the Company assesses its performance and allocates its resources. The Company’s current reportable segment structure includes four segments: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which includes the Company’s container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses. All prior period information for Legacy Quaker has been recast to reflect these four segments as the Company’s new reportable segments. Prior to the Company’s re-segmentation during the third quarter of 2019, the Company’s historical reportable segments were four geographic regions: (i) North America; (ii) EMEA; (iii) Asia/Pacific; and (iv) South America.

Though the Company changed its reportable segments in the third quarter of 2019, the calculation of the reportable segments’ measures of earnings remains otherwise generally consistent with past practices. Segment operating earnings for the Company’s reportable segments are comprised of net sales less cost of goods sold (“COGS”) and selling, general and administrative expenses (“SG&A”) directly related to the respective segment’s product sales. Operating expenses not directly attributable to the net sales of each respective segment are not included in segment operating earnings, such as certain corporate and administrative costs, Combination and other acquisition-related expenses, and restructuring and related charges. Other items not specifically identified with the Company’s reportable segments include interest expense, net and other expense, net.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

The following table presents information about the performance of the Company’s reportable operating segments for the three months ended March 31, 2020 and 2019:

		Three Months Ended
		March 31,
		2020		2019
Net sales
	Americas	$	129,896	$	72,225
	EMEA		104,839		52,425
	Asia/Pacific		73,552		46,167
	Global Specialty Businesses		70,274		40,393
Total net sales		$	378,561	$	211,210

Segment operating earnings
	Americas	$	29,188	$	14,339
	EMEA		18,359		8,793
	Asia/Pacific		19,541		12,812
	Global Specialty Businesses		20,560		10,604
Total segment operating earnings			87,648		46,548
Combination and other acquisition-related expenses			(7,878)		(4,483)
Restructuring and related charges			(1,716)		—
Indefinite-lived intangible asset impairment			(38,000)		—
Non-operating and administrative expenses			(38,451)		(20,348)
Depreciation of corporate assets and amortization			(14,047)		(1,888)
Operating (loss) income			(12,444)		19,829
Other expense, net			(21,175)		(635)
Interest expense, net			(8,461)		(776)
(Loss) income before taxes and equity in net income of associated companies		$	(42,080)	$	18,418

Inter-segment revenues for the three months ended March 31, 2020 and 2019 were $2.9 million and $1.4 million for Americas, $5.5 million and $5.3 million for EMEA, $0.1 million and less than $0.1 million for Asia/Pacific and $1.3 million and $1.5 million for Global Specialty Businesses, respectively. However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented in the above tables.

Note 5 – Net Sales and Revenue Recognition

Business Description

The Company develops, produces, and markets a broad range of formulated chemical specialty products and offers chemical management services (“Fluidcare”) for various heavy industrial and manufacturing applications throughout its four segments. The Combination increased the Company’s addressable metalworking, metals and industrial end markets, including steel, aluminum, aerospace, defense, transportation-OEM, transportation-components, offshore sub-sea energy, architectural aluminum, construction, tube and pipe, can and container, mining, specialty coatings and specialty greases. The Combination also strengthened the product portfolio of the combined Company. The major product lines of Quaker Houghton include metal removal fluids, cleaning fluids, corrosion inhibitors, metal drawing and forming fluids, die cast mold releases, heat treatment and quenchants, metal forging fluids, hydraulic fluids, specialty greases, offshore sub-sea energy control fluids, rolling lubricants, rod and wire drawing fluids and surface treatment chemicals.

A substantial portion of the Company’s sales worldwide are made directly through its own employees and its Fluidcare programs, with the balance being handled through distributors and agents. The Company’s employees typically visit the plants of customers regularly, work on site, and, through training and experience, identify production needs which can be resolved or otherwise addressed either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The specialty chemical industry comprises many companies similar in size to the Company, as well as companies larger and smaller than Quaker Houghton. The offerings of many of the Company’s competitors differ from those of Quaker Houghton; some offer a broad portfolio of fluids, including general lubricants, while others have a more specialized product range. All competitors provide different levels of technical services to individual customers. Competition in the industry is based primarily on the ability to provide products that meet the needs of the customer, render technical services and laboratory assistance to the customer and, to a lesser extent, on price.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

(Unaudited)

As part of the Company’s Fluidcare business, certain third-party product sales to customers are managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers. Where the Company acts as an agent, revenue is recognized on a net reporting basis at the amount of the administrative fee earned by the Company for ordering the goods. In determining whether the Company is acting as a principal or an agent in each arrangement, the Company considers whether it is primarily responsible for the obligation to provide the specified good, has inventory risk before the specified good has been transferred to the customer and has discretion in establishing the prices for the specified goods. The Company transferred third-party products under arrangements recognized on a net reporting basis of $12.5 million and $10.4 million for the three months ended March 31, 2020 and 2019, respectively.

A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of steel, aluminum, automobiles, aircraft, industrial equipment, and durable goods, and, therefore, the Company is subject to the same business cycles as those experienced by these manufacturers and their customers. The Company’s financial performance is generally correlated to the volume of global production within the industries it serves, rather than discretely related to the financial performance of such industries. Furthermore, steel and aluminum customers typically have limited manufacturing locations compared to metalworking customers and generally use higher volumes of products at a single location. As previously disclosed in its 2019 Form 10-K, during 2019, the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing authority) accounted for approximately 12% of consolidated net sales, with its largest customer accounting for approximately 6% of consolidated net sales.

Price	156.75	EPS	2
Shares	16	P/E	84
MCap	2,537	P/FCF	72
Net Debt	678	EBIT	44
TEV	3,215	TEV/EBIT	74
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-11
10-K	2019-12-31	Filed 2020-03-20
10-Q	2019-09-30	Filed 2019-11-12
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-02
10-K	2018-12-31	Filed 2019-02-28
10-Q	2018-09-30	Filed 2018-11-01
10-Q	2018-06-30	Filed 2018-07-30
10-Q	2018-03-31	Filed 2018-04-30
10-K	2017-12-31	Filed 2018-02-28
10-Q	2017-09-30	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-27
10-Q	2017-03-31	Filed 2017-05-01
10-K	2016-12-31	Filed 2017-02-28
10-Q	2016-09-30	Filed 2016-10-26
10-Q	2016-06-30	Filed 2016-07-27
10-Q	2016-03-31	Filed 2016-04-27
10-K	2015-12-31	Filed 2016-02-25
10-Q	2015-09-30	Filed 2015-10-28
10-Q	2015-06-30	Filed 2015-07-30
10-Q	2015-03-31	Filed 2015-04-29
10-K	2014-12-31	Filed 2015-02-26
10-Q	2014-09-30	Filed 2014-10-28
10-Q	2014-06-30	Filed 2014-07-31
10-Q	2014-03-31	Filed 2014-04-29
10-K	2013-12-31	Filed 2014-02-28
10-Q	2013-09-30	Filed 2013-10-29
10-Q	2013-06-30	Filed 2013-07-29
10-Q	2013-03-31	Filed 2013-04-29
10-K	2012-12-31	Filed 2013-03-06
10-Q	2012-09-30	Filed 2012-10-30
10-Q	2012-06-28	Filed 2012-07-30
10-Q	2012-03-31	Filed 2012-04-30
10-K	2011-12-31	Filed 2012-03-07
10-Q	2011-09-30	Filed 2011-10-25
10-Q	2011-06-30	Filed 2011-07-27
10-Q	2011-03-31	Filed 2011-04-26
10-K	2010-12-31	Filed 2011-03-02
10-Q	2010-09-30	Filed 2010-10-26
10-Q	2010-06-30	Filed 2010-07-29
10-Q	2010-03-31	Filed 2010-04-27
10-K	2009-12-31	Filed 2010-03-03

8-K	2020-05-19
8-K	2020-05-13
8-K	2020-05-11
8-K	2020-03-27
8-K	2020-03-17
8-K	2020-03-02
8-K	2019-11-12
8-K	2019-10-18
8-K	2019-08-29
8-K	2019-08-01
8-K	2019-08-01
8-K	2019-08-01
8-K	2019-07-11
8-K	2019-07-02
8-K	2019-05-08
8-K	2019-05-02
8-K	2019-03-13
8-K	2019-02-28
8-K	2018-12-14
8-K	2018-11-01
8-K	2018-08-01
8-K	2018-07-30
8-K	2018-05-29
8-K	2018-05-09
8-K	2018-04-30
8-K	2018-02-28

EX-3.2	exhibit32.htm
EX-10.2	exhibit102.htm
EX-31.1	exhibit311.htm
EX-31.2	exhibit312.htm
EX-32.1	exhibit321.htm
EX-32.2	exhibit322.htm

KWR 10Q Quarterly Report

Quaker Chemical Earnings 2020-03-31