Quaker Chemical Corporation (Quaker Houghton) — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with the same period in 2021. Quaker Houghton is a global industrial process-fluid company operating in more than 25 countries across four reportable segments: Americas, Europe, Middle East and Africa (EMEA), Asia/Pacific, and Global Specialty Businesses.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $474.2 million | $429.8 million | +10% |
| Gross profit | $146.1 million | $156.2 million | -6% |
| Gross margin | 30.8% | 36.3% | -550 basis points |
| Operating income | $29.4 million | $44.9 million | -35% |
| Operating margin | 6.2% | 10.4% | -420 basis points |
| Net income attributable to Quaker | $19.8 million | $38.6 million | -49% |
| Diluted earnings per share | $1.11 | $2.15 | -48% |
| Adjusted EBITDA | $60.4 million | $77.1 million | -22% |
| Adjusted EBITDA margin | 12.7% | 18.0% | -530 basis points |
| Operating cash flow | $(6.3) million | $(12.6) million | $6.3 million improvement |
Revenue growth was driven by approximately 17% higher selling prices and product mix and 2% from acquisitions, partly offset by a 6% decline in organic volume and a 3% unfavorable foreign-currency impact. Cost of goods sold increased 20% to $328.1 million, as raw-material, logistics, supply-chain, labor, and other input costs rose faster than price realization.
Cash and cash equivalents were $161.6 million at March 31, 2022, compared with $165.2 million at December 31, 2021. Investing cash outflows were $18.2 million, including $8.8 million of capital expenditures and $9.4 million for acquisitions. Financing cash inflows were $20.6 million, including $43.0 million of net revolving-facility borrowings, partly offset by $14.1 million of term-loan payments and $7.4 million of dividends.
Total debt was $926.9 million before debt issuance costs, and total net debt was reported at $765.3 million. The company had approximately $142 million of unused revolver capacity, net of letters of credit, and was in compliance with its credit-facility covenants. The primary credit facility matures in August 2024.
Material changes versus the prior comparable period
- All four segments reported higher sales, primarily from pricing and mix. Segment sales were Americas $154.1 million, EMEA $125.7 million, Asia/Pacific $104.2 million, and Global Specialty Businesses $90.1 million.
- Segment operating earnings declined in Americas to $29.2 million, EMEA to $16.8 million, and Asia/Pacific to $21.9 million. Global Specialty Businesses increased to $25.0 million.
- Higher pricing did not fully offset raw-material and supply-chain inflation, causing substantial margin compression.
- Operating income included $4.1 million of combination, integration, and acquisition-related expenses and $0.8 million of restructuring charges. Strategic planning and transformation expenses were $3.1 million.
- Other income of $4.7 million in Q1 2021 changed to other expense of $2.2 million in Q1 2022. The prior-year period benefited from a $5.4 million gain on the sale of real property, while the current period included indemnification-related expense and higher foreign-exchange losses.
- The effective tax rate decreased to 13.1% from 24.2%, primarily reflecting foreign-tax-credit valuation allowance changes and Italian tax-audit settlements. Management indicated that the underlying adjusted tax rate was approximately 27% versus 25% in the prior-year quarter.
- Operating cash outflow improved year over year, but inventory increased as the company built stock in response to supply-chain challenges and higher raw-material costs.
Guidance, outlook, commentary, and risks
The filing does not provide specific full-year earnings or revenue guidance. Management expects continued aggressive pricing, cost-management actions, restructuring, integration, strategic-planning, process-optimization, and sustainability-related spending during 2022 and subsequent years. Management remains focused on recovering margins and believes existing cash, operating cash flow, and available liquidity will fund operations and obligations for at least the next twelve months.
- Management cited significant uncertainty from raw-material inflation, supply-chain and logistics disruptions, labor costs, COVID-19 restrictions, and the Russia-Ukraine conflict.
- Shanghai operations were significantly affected by government lockdowns beginning in late March 2022; the filing expects the effects to continue into the second quarter, with the ultimate impact dependent on the duration of restrictions.
- Operations in Russia, Ukraine, and Belarus represented less than 2% of consolidated sales and less than 1% of total assets. The company was monitoring receivable collectability, sanctions, logistics, foreign exchange, and possible impairment triggers.
- The company’s restructuring program targets approximately 400 global headcount reductions and facility closures, with additional actions expected throughout 2022.
- Acquisition and integration risks remain, including a seller claim related to the Coral acquisition with estimated exposure of $0 to $1.5 million.
- Environmental matters were accrued at $5.9 million, with estimated discounted costs of approximately $5 million to $6 million. The ACP groundwater-remediation program had an estimated remaining exposure of $0.1 million to $1.0 million.
- Gross liabilities for uncertain tax positions, including interest and penalties, were $24.5 million. The company expects approximately $4.2 million of reductions during 2022 from settlements and expirations, excluding new or additional positions.
- Management stated that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether price increases ultimately catch up with raw-material, logistics, labor, and supply-chain inflation and restore gross margins.
- The duration and financial effect of Shanghai lockdowns, COVID-19 restrictions, and the Russia-Ukraine conflict during Q2 and the remainder of 2022.
- Working-capital trends, particularly inventory and accounts receivable, and the company’s ability to convert earnings into positive operating cash flow.
- Debt reduction, revolver availability, covenant headroom, variable-rate exposure, and the August 2024 credit-facility maturity.
- Progress and total cost of the QH restructuring program, integration activities, and strategic-transformation initiatives.
- Developments in uncertain tax positions, Italian and German tax matters, environmental liabilities, and the Coral acquisition claim.
- Any subsequent full-year guidance or updated margin outlook, which was not provided in this filing.