Quaker Chemical Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Quaker Chemical Corporation, doing business as Quaker Houghton, is a global supplier of industrial process fluids, specialty chemicals, and Fluidcare services for steel, aluminum, automotive, aerospace, mining, metalworking, and other industrial customers. This unaudited report covers the three months ended March 31, 2023. The Company reorganized its executive management structure and now reports three segments: Americas, EMEA, and Asia/Pacific; prior-period segment information was recast.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $500.1 million | $474.2 million | 5% |
| Gross profit | $173.5 million | $146.1 million | 19% |
| Gross margin | 34.7% | 30.8% | Up 390 bps |
| Operating income | $49.9 million | $29.4 million | 70% |
| Net income attributable to Quaker | $29.5 million | $19.8 million | 49% |
| Diluted EPS | $1.64 | $1.11 | 48% |
| Adjusted EBITDA | $78.8 million | $60.4 million | 30% |
| Adjusted EBITDA margin | 15.8% | 12.7% | Up 310 bps |
| Operating cash flow | $37.8 million | $(6.3) million | Improved $44.1 million |
Reported net sales benefited from approximately 19% price and product-mix improvement, partly offset by an 11% decline in organic volumes and a 3% unfavorable foreign-currency effect. SG&A increased 7% to $119.5 million, primarily due to inflationary labor costs and higher incentive compensation. Interest expense increased to $13.2 million from $5.3 million because of higher rates and borrowing costs. The effective tax rate increased to 27.7% from 13.1%.
Cash and cash equivalents were $189.9 million at March 31, 2023, compared with $181.0 million at December 31, 2022. Net cash used in investing activities was $6.2 million, including $6.2 million of capital expenditures. Net cash used in financing activities was $24.9 million, including debt repayments of approximately $15.0 million and $7.8 million of dividends paid.
Total debt was $942.8 million and net debt was approximately $752.9 million at quarter-end. The Company had approximately $311 million of unused Revolver capacity, approximately $35 million of unused capacity under other arrangements, and was in compliance with all credit-facility covenants. The $1.4 billion Credit Facility matures in June 2027. The Company entered into $300 million of three-year interest-rate swaps, with an aggregate rate of approximately 5.2% including the applicable margin.
Segment results and material changes
- Americas: Sales increased 19% to $251.4 million; segment operating earnings increased 47% to $66.1 million. Price and mix rose 22%, while organic volumes declined 4%.
- EMEA: Sales increased 4% to $152.4 million; segment operating earnings increased 19% to $27.6 million. Price and mix rose 19%, offset by an 11% volume decline and a 4% currency headwind.
- Asia/Pacific: Sales declined 16% to $96.3 million; segment operating earnings nevertheless increased 13% to $27.7 million, supported by margin recovery. Organic volumes declined 22% and currency reduced sales by 6%.
Gross-margin recovery reflected value-based pricing actions implemented to offset raw-material and other input-cost inflation. Q1 2023 had no combination, integration, or acquisition-related expenses, compared with $4.1 million in Q1 2022. Restructuring charges increased to $4.0 million from $0.8 million. Strategic planning expenses were $2.1 million versus $3.1 million.
Guidance, outlook, risks, and unusual items
Management expects to deliver higher 2023 earnings than in 2022 and cited positive momentum from pricing, margin recovery, and execution. The Company expects approximately $20 million of full run-rate cost savings from its global cost and optimization program by the end of 2024. Cash costs are expected to equal approximately 1.0 to 1.5 times the savings, although timing and final costs remain subject to change. The program included planned reductions of approximately 75 positions globally, with $6.8 million of restructuring accruals expected to be settled over the following twelve months.
Management believes existing cash, operating cash flow, and available liquidity will fund operating needs, dividends, pension contributions, capital expenditures, potential acquisitions, and known contingencies for at least the next twelve months. Principal risks include weaker customer demand and production slowdowns, recessionary conditions, inflation and raw-material costs, supply-chain disruption, higher interest rates, foreign-exchange volatility, the Russia-Ukraine conflict, COVID-19 effects, customer financial instability, tax uncertainties, and acquisition integration risks.
- Insurance recoveries related to prior flooding and electrical-fire damage totaled $5.7 million cumulatively; the Company recognized a $0.8 million gain in Q1 2023.
- Environmental and litigation accruals were approximately $6 million at March 31, 2023. Management reported no new matter expected to have a material adverse effect.
- A seller claim related to the Coral acquisition remains outstanding, with the Company estimating potential exposure of $0 to $1.5 million.
- Uncertain tax positions, including interest and penalties, totaled $20.2 million gross; potential offsetting tax benefits could reduce any payment by up to $6.3 million.
- The Company’s effective tax rate may remain volatile because of audits, uncertain tax positions, incentives, acquisition-related costs, and share-based compensation.
Investor verification points
- Verify whether price increases can continue to offset volume declines, inflation, and customer demand weakness.
- Monitor Asia/Pacific and EMEA volumes, including effects from China-related disruptions and the Russia-Ukraine conflict.
- Assess leverage, interest-rate exposure, covenant compliance, and the impact of variable-rate debt despite the new interest-rate swaps.
- Track execution, timing, and cash costs of the global cost and optimization program and the expected $20 million run-rate savings.
- Reconcile adjusted EBITDA and non-GAAP EPS to GAAP results, particularly restructuring, strategic planning, insurance, tax, and other excluded items.
- Review developments in tax audits, environmental and litigation matters, insurance claims, and the Coral acquisition dispute.