Quaker Chemical Corporation — Q1 2021 Form 10-Q Summary
Business context and reporting period
Quaker Chemical Corporation, doing business as Quaker Houghton, is a global supplier of formulated industrial process fluids and Fluidcare services to steel, aluminum, automotive, aerospace, mining, metalworking and other industrial customers. Operations span four reportable segments: Americas, EMEA, Asia/Pacific and Global Specialty Businesses.
This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company operated 31 production facilities worldwide and continued integrating Houghton and executing related cost-synergy initiatives.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $429.8 million | $378.6 million | Up 14% |
| Gross profit | $156.2 million | $133.9 million | Up 17% |
| Gross margin | 36.3% | 35.4% | Up 0.9 percentage points |
| Operating income | $44.9 million | $(12.4) million | Improved |
| Operating margin | 10.4% | (3.3)% | Improved |
| Net income attributable to Quaker | $38.6 million | $(28.4) million | Improved |
| Diluted EPS | $2.15 | $(1.60) | Improved |
| Adjusted EBITDA | $77.1 million | $60.5 million | Up 28% |
| Adjusted EBITDA margin | 18.0% | 16.0% | Up 2.0 percentage points |
| Operating cash flow | $(12.6) million | $20.2 million | Down $32.8 million |
Sales growth reflected approximately 5% higher volumes, 3% from acquisitions, 3% from foreign-currency translation and approximately 3% from pricing and product mix. All four reportable segments increased sales and operating earnings.
- Americas sales were $134.9 million, up 4%; segment operating earnings were $32.2 million, up 10%.
- EMEA sales were $119.8 million, up 14%; segment operating earnings were $25.2 million, up 38%.
- Asia/Pacific sales were $96.7 million, up 31%; segment operating earnings were $27.5 million, up 41%.
- Global Specialty Businesses sales were $78.4 million, up 12%; segment operating earnings were $24.2 million, up 18%.
The reported results included $5.4 million of gains from the sale of certain real property, $1.2 million of restructuring charges, $5.8 million of combination and acquisition-related expenses, and $0.8 million of fair-value step-up expense on acquired inventory. The company reported non-GAAP diluted EPS of $2.11 versus $1.38 in the prior-year quarter.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash were $163.5 million at March 31, 2021, compared with $181.9 million at December 31, 2020.
- Operating cash flow was negative because higher sales drove substantial increases in accounts receivable and inventories.
- Investing cash outflow was $15.8 million, including $26.7 million of acquisition payments and $3.9 million of capital expenditures, partially offset by $14.7 million of asset-sale proceeds.
- Financing cash flow was positive $13.0 million, including $30.0 million of net revolving-facility borrowings, $9.6 million of term-loan amortization and $7.1 million of dividends paid.
- Total debt was $913.1 million before debt issuance costs, including $900.7 million of Credit Facility borrowings. Net debt was approximately $749.6 million.
- The company had approximately $204 million of unused Revolver capacity, net of approximately $6 million of letters of credit, plus approximately $40 million of unused capacity under other arrangements.
- The company was in compliance with all Credit Facility covenants. The maximum consolidated net debt-to-adjusted EBITDA ratio was 4.00 to 1, and the minimum adjusted EBITDA-to-interest ratio was 3.0 to 1.
- Management stated that existing cash, expected operating cash flow and available liquidity should fund operating needs and planned commitments for at least the next twelve months.
Material changes versus the prior comparable period
- Results benefited from recovery in end markets and customer demand following the COVID-19 downturn, market-share gains, acquisitions and Houghton-related synergies.
- The prior-year quarter included a $38.0 million non-cash impairment of indefinite-lived Houghton trademarks and tradenames and a $22.7 million non-cash pension settlement charge. Neither charge recurred in Q1 2021.
- Combination-related cost synergies were estimated at approximately $18 million in Q1 2021 versus $10 million in Q1 2020.
- Acquisition activity included a tin-plating solutions business acquired for approximately $25 million and a 38% interest in Grindaix-GmbH acquired for approximately $1.7 million. Purchase-price allocations remained subject to measurement-period adjustments.
- Raw-material costs and supply-chain pressures increased, although pricing actions, volume leverage and procurement, logistics and manufacturing savings supported margins.
- Accounts receivable increased to $411.5 million from $373.0 million at year-end 2020, while inventories increased to $207.8 million from $187.8 million.
- Disclosure controls and internal control over financial reporting remained ineffective because of two previously disclosed material weaknesses: risk assessment and controls over revenue pricing, quantity and customer data. Management reported progress but had not completed remediation.
Guidance, outlook, commentary and risks
Management expected 2021 profitability to show a step change from 2020, supported by continued integration synergies, market-share gains, gradual demand recovery and recent acquisitions. The company continued to expect approximately $75 million of Combination cost synergies in 2021 and $80 million in 2022.
Management also expected additional selling-price increases to offset rising raw-material costs, but warned of a lag before pricing fully catches up with cost inflation. The filing did not provide formal revenue or EPS guidance.
- COVID-19 remained an uncertain risk to customer demand, production levels, supply availability, staffing and global economic conditions. Management could not estimate the full potential impact.
- Raw-material inflation, supplier shutdowns, weather disruptions and broader supply-chain constraints could pressure gross margins and operations.
- Demand is linked to cyclical customer industries, including steel, automotive, aircraft, industrial equipment and durable goods.
- Foreign-currency movements, tax-rate volatility, acquisition integration and the ability to realize projected synergies could affect results.
- Material contingencies included environmental obligations, asbestos litigation, uncertain tax positions and an indirect-tax matter with a possible assessment range of approximately $0.6 million to $38 million, net of estimated tax deductions and indemnification rights.
- The company accrued approximately $5.7 million for Houghton environmental matters and $30.0 million for uncertain tax positions, including interest and penalties.
Investor verification checklist
- Verify the sustainability of volume recovery, pricing actions and the expected $75 million of 2021 Combination synergies.
- Monitor raw-material inflation, supply-chain availability and the timing of margin recovery.
- Reconcile GAAP results with management’s non-GAAP measures and assess the recurrence of gains, restructuring costs, acquisition expenses and other adjustments.
- Track working-capital conversion and whether operating cash flow returns to positive levels after the Q1 accounts-receivable and inventory build.
- Review leverage, covenant headroom, term-loan amortization and the August 2024 Credit Facility maturity.
- Assess progress in remediating the two material weaknesses in internal controls, particularly revenue price-and-quantity controls.
- Update COVID-19, tax, environmental, asbestos and indirect-tax contingencies using subsequent filings.