Quaker Chemical Corporation 2021 Form 10-K Summary
Business context and reporting period
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. The company operates through four reportable segments: Americas, EMEA, Asia/Pacific, and Global Specialty Businesses.
This Form 10-K covers the fiscal year ended December 31, 2021. Comparisons are primarily with the year ended December 31, 2020, when the combined Quaker-Houghton business was reported for the full year.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $1,761.2 million | $1,417.7 million | Up 24% |
| Gross profit | $594.6 million | $513.4 million | Up 16% |
| Gross margin | 33.8% | 36.2% | Down 240 bps |
| Operating income | $150.5 million | $59.4 million | Up 154% |
| Net income attributable to Quaker | $121.4 million | $39.7 million | Up 206% |
| Diluted EPS | $6.77 | $2.22 | Up $4.55 |
| Adjusted EBITDA | $274.1 million | $222.0 million | Up 23% |
| Adjusted EBITDA margin | 15.6% | 15.7% | Down 10 bps |
| Operating cash flow | $48.9 million | $178.4 million | Down $129.5 million |
Sales growth consisted of approximately 13% higher volumes, including 4% from acquisitions, 8% from selling price and product mix, and 3% from foreign-currency translation. Segment sales increased in the Americas to $572.6 million, EMEA to $480.1 million, Asia/Pacific to $388.2 million, and Global Specialty Businesses to $320.2 million.
The balance sheet at December 31, 2021 included $165.2 million of cash and cash equivalents, $430.7 million of net accounts receivable, $264.5 million of inventory, and total assets of $3.0 billion. Total debt was $901.3 million before debt issuance costs, and total net debt was $736.2 million. Revolver availability was approximately $184 million, net of letters of credit.
Capital expenditures were $21.5 million, compared with $17.9 million in 2020. Cash dividends paid were $28.6 million, and dividends declared totaled $1.62 per share. No shares were repurchased during the fourth quarter; approximately $86.9 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Revenue and earnings benefited from recovery in industrial end markets following the COVID-19-related 2020 downturn, new business wins, acquisitions, pricing actions, and favorable foreign-exchange translation.
- Gross margin declined because raw-material, logistics, labor, manufacturing, and supply-chain costs rose faster than pricing could fully offset them.
- Operating cash flow fell sharply as accounts receivable increased with higher sales and inventory was built to address raw-material inflation and supply-chain constraints.
- Adjusted EBITDA increased to a record $274.1 million, while estimated Combination-related cost synergies increased to approximately $75 million from $58 million in 2020. Management stated that the approximately $80 million annual synergy target had been fully achieved going forward.
- Net income benefited from $18.9 million of other income in 2021, including Brazilian non-income-tax credits and gains on asset dispositions. The prior year included a $38.0 million intangible-asset impairment charge, a $22.7 million pension settlement charge, and an $18.1 million gain related to an inactive subsidiary’s insurance settlement restrictions.
- The company completed several acquisitions, including a tin-plating solutions business, Baron Industries, Grindaix, a Turkish specialty-chemicals business, and selected chemical milling maskant assets. Two additional acquisitions were completed in January 2022 for approximately $9.4 million in aggregate.
- Previously identified material weaknesses in internal control over financial reporting, including revenue price-and-quantity controls, were reported as remediated as of December 31, 2021. Management and PwC concluded that internal control over financial reporting was effective, excluding the controls of two 2021 acquisitions representing less than 1% of consolidated assets and revenues.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative 2022 earnings guidance in the filing. It expects healthy demand across most end markets but anticipates continued raw-material inflation and supply-chain disruption during 2022. Management plans additional pricing actions and cost management and expects margins to begin recovering as those actions take effect.
- Commodity and supply-chain exposure: The company uses approximately 3,000 raw materials and may be unable to pass through cost increases without losing volume or margin. A one-percentage-point change in gross margin would affect pretax earnings by approximately $17.6 million.
- Customer and cyclicality risk: Demand depends on global production in cyclical steel, automotive, aerospace, aluminum, industrial-equipment, and durable-goods markets. The five largest customers represented approximately 10% of 2021 sales; the largest represented approximately 3%.
- COVID-19 and geopolitical risk: Pandemic resurgences, transportation disruption, staffing shortages, customer shutdowns, and geopolitical events, including the Russia-Ukraine conflict referenced in the filing, could affect demand, operations, and supply availability.
- Leverage and interest rates: The principal credit facility matures in August 2024. The company was in compliance with all covenants at year-end; the maximum consolidated net-debt-to-adjusted-EBITDA ratio was 3.75 to 1 and the minimum adjusted-EBITDA-to-interest ratio was 3.0 to 1. Approximately $758.2 million of debt principal is scheduled for maturity or repayment in 2024. Variable-rate debt and the transition away from LIBOR create additional risk.
- Acquisition and integration risk: Future performance depends on integrating acquisitions, realizing synergies, managing goodwill and intangible assets, and completing the remaining restructuring program. Additional headcount reductions and facility closures were expected into 2022.
- Legal, environmental, and tax matters: Environmental liabilities were accrued at approximately $5.6 million, with estimated discounted costs of approximately $5.0 million to $6.0 million. The company also faces asbestos-related litigation involving an inactive subsidiary, tax audits, and an indemnification claim related to previously divested product lines; the filing states that material exposure from the divestiture claim could not reasonably be estimated.
- Property damage: Flooding and fire at two locations resulted in insurance recoveries of $2.1 million and a $0.7 million insurance receivable at year-end. No potential business-interruption recovery was recorded because the amount could not be reasonably estimated.
- Intangible-asset sensitivity: Goodwill was $631.2 million and indefinite-lived intangible assets were $196.9 million at year-end. No 2021 impairment was recorded, but the Houghton trademarks and tradename remain sensitive to revenue growth, royalty rates, and discount-rate assumptions.
Most important facts for an investor to verify
- Whether pricing actions ultimately restore the 2021 gross-margin decline without materially reducing volumes or market share.
- Whether working-capital investment normalizes and operating cash flow improves from the 2021 level.
- The pace of debt reduction and the company’s ability to refinance or repay the substantial 2024 maturities while maintaining dividends and pursuing acquisitions.
- Progress toward completing the QH restructuring program and sustaining the targeted Combination synergies.
- The effect of raw-material prices, logistics costs, foreign exchange, automotive semiconductor shortages, and broader customer production levels on 2022 results.
- Potential impairment risk for Houghton-related intangible assets and the final purchase-price allocations for 2021 acquisitions.
- Developments in environmental, asbestos, tax, divestiture-indemnification, and business-interruption matters.
- Whether the remediated internal controls remain effective as the company integrates new acquisitions and expands its global operations.