Business Context and Reporting Period
Quaker Chemical Corporation, doing business as Quaker Houghton, is a global supplier of industrial process fluids, specialty chemicals, and related Fluidcare services to metals, automotive, aerospace, mining, and other industrial customers. This unaudited Form 10-Q covers the three and six months ended June 30, 2023. The company reorganized its reporting structure into Americas, EMEA, and Asia/Pacific segments; prior-period segment data was recast.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net sales | $495.4 million | $492.4 million | $995.6 million | $966.6 million |
| Gross profit | $177.7 million | $149.6 million | $351.1 million | $295.6 million |
| Gross margin | 35.9% | 30.4% | 35.3% | 30.6% |
| Operating income | $56.8 million | $31.9 million | $106.7 million | $61.3 million |
| Net income attributable to Quaker | $29.3 million | $14.3 million | $58.9 million | $34.2 million |
| Diluted EPS | $1.63 | $0.80 | $3.27 | $1.91 |
| Adjusted EBITDA | $80.2 million | $58.5 million | $159.0 million | $118.9 million |
| Adjusted EBITDA margin | 16.2% | 11.9% | 16.0% | 12.3% |
Net cash provided by operating activities was $116.1 million in the first six months of 2023, compared with cash used of $8.4 million in the prior-year period. Capital expenditures were $17.0 million. Cash dividends paid were $15.6 million, and dividends declared were $0.435 per share per quarter.
Cash and cash equivalents were $189.4 million at June 30, 2023, compared with $181.0 million at December 31, 2022. Total debt was $885.1 million, including $873.9 million under the Credit Facility, resulting in reported net debt of $695.7 million. The company had approximately $364 million of unused Revolver capacity, net of letters of credit, and was in compliance with all credit facility covenants.
Material Changes Versus Prior Comparable Period
- Q2 sales increased 1%, while six-month sales increased 3%. Pricing and product mix contributed approximately 11% in Q2 and 15% for the first six months, offset by volume declines of approximately 10% and 11%, respectively.
- Gross margin improved substantially as value-based pricing offset raw-material, manufacturing, supply-chain, and logistics inflation.
- Q2 operating income rose 78% and six-month operating income rose 74%. SG&A increased 3% in Q2 and 5% for the six months due primarily to labor inflation and higher incentive compensation.
- Interest expense increased to $12.7 million in Q2 and $26.0 million for the six months, compared with $6.5 million and $11.8 million, respectively, because of higher interest rates.
- The effective tax rate increased to 34.2% in Q2 and 31.2% for the six months, compared with 8.1% and 10.9% in the prior-year periods, reflecting tax-credit valuation changes, foreign tax items, withholding taxes, and prior-year benefits.
- Operating cash flow improved materially because of stronger earnings and a favorable working-capital shift, including lower accounts receivable and inventory balances.
Segment Performance
| Segment | Q2 Sales | Year-over-Year Sales | Q2 Operating Earnings | Year-over-Year Earnings |
|---|---|---|---|---|
| Americas | $253.2 million | +7% | $69.0 million | +32% |
| EMEA | $143.5 million | -1% | $25.6 million | +27% |
| Asia/Pacific | $98.7 million | -11% | $28.0 million | +12% |
Americas benefited from pricing and favorable currency effects. EMEA was pressured by lower volumes, softer markets, and the Russia-Ukraine conflict. Asia/Pacific experienced lower volumes and unfavorable currency translation, including weaker demand in China, but margins improved.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific numerical full-year revenue or earnings guidance in the filing. It expects higher earnings and cash flow in 2023 compared with 2022 and cited positive first-half momentum, while emphasizing an uneven and uncertain macroeconomic environment.
- A global cost and optimization program targeting approximately $20 million of full run-rate savings by the end of 2024 is expected to require cash costs of approximately 1.0 to 1.5 times savings. Approximately 80 positions were targeted for reduction, and $5.0 million of restructuring charges were recorded in the first six months of 2023.
- The company expects additional strategic-planning, process-optimization, integration, restructuring, and capital expenditures in 2023 and thereafter.
- Interest-rate exposure remains material. A 100-basis-point change was estimated to affect 2023 interest expense by approximately $8.7 million before considering hedging. The company entered into $300 million of interest-rate swaps; the aggregate swap rate was approximately 5.2% at June 30, 2023.
- Foreign-exchange losses, including $1.6 million of hyper-inflationary remeasurement losses for the first six months, and ongoing currency translation affected results.
- Other unusual items included $1.0 million of facility-remediation insurance recoveries, a prior-year $6.8 million debt-extinguishment loss, and non-core strategic-planning and restructuring costs.
- Environmental matters and litigation were accrued at approximately $6 million. A Coral acquisition-related claim has a stated potential exposure range of $0 to $1.5 million. Spanish and Italian tax audits were ongoing without established reserves at June 30, 2023.
- The company expects approximately $5.2 million of 2023 contributions to U.S. and foreign pension plans and approximately $0.2 million to other postretirement plans.
Management believes existing cash, operating cash flow, and available liquidity will support operations, dividends, capital expenditures, pension contributions, growth opportunities, and known contingencies for at least the next twelve months. Principal risks include cyclical customer demand, recession, raw-material inflation, supply-chain disruptions, higher interest rates, foreign-exchange movements, geopolitical conflict, customer financial instability, tax-rate volatility, and acquisition integration.
Important Facts for Investors to Verify
- Whether pricing actions can continue to offset declining volumes, inflation, and softer end-market demand.
- The sustainability of the 35%+ gross margin and 16% adjusted EBITDA margin achieved in the first half.
- Progress toward the $20 million cost-savings target, total restructuring costs, and associated cash payments.
- Debt reduction, interest-rate exposure, covenant compliance, and available Revolver capacity as rates change.
- Performance and volume recovery in Asia/Pacific and EMEA, including effects from China demand and the Russia-Ukraine conflict.
- Future effective tax rates, foreign-tax-credit valuation changes, and outcomes of ongoing tax audits.
- Resolution of environmental, litigation, insurance, and acquisition-related contingencies.