Quaker Chemical Corporation — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Quaker Chemical Corporation, doing business as Quaker Houghton, is a global provider of industrial process fluids and Fluidcare services serving steel, aluminum, automotive, aerospace, mining, metalworking and other industrial customers in more than 25 countries. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $449.1 million | $367.2 million | $1,314.1 million | $1,031.8 million |
| Gross profit | $145.1 million | $140.2 million | $455.8 million | $371.4 million |
| Gross margin | 32.3% | 38.2% | 34.7% | 36.0% |
| Operating income | $36.0 million | $34.9 million | $119.7 million | $24.7 million |
| Net income attributable to Quaker | $31.1 million | $27.3 million | $103.2 million | $(8.8) million |
| Diluted EPS | $1.73 | $1.53 | $5.76 | $(0.50) |
| Adjusted EBITDA | $66.2 million | $63.9 million | $213.4 million | $156.5 million |
| Adjusted EBITDA margin | 14.7% | 17.4% | 16.2% | 15.2% |
Reported net margins were approximately 6.9% in Q3 2021 and 7.9% for the first nine months of 2021. The company declared dividends of $0.415 per share in Q3 and $1.205 per share for the first nine months.
Q3 sales increased 22%, driven by approximately 10% higher volumes, including 4% from acquisitions, 10% from pricing and product mix, and 2% from foreign currency translation. Nine-month sales increased 27%, reflecting volume growth of 18%, pricing and mix of 5%, and favorable currency translation of 4%.
At September 30, 2021, cash and cash equivalents were $141.4 million, down from $181.8 million at December 31, 2020. Total debt was $900.7 million, including $839.3 million of long-term debt after debt issuance costs. Net debt was approximately $759.3 million. The company reported approximately $197 million of unused revolver capacity, net of letters of credit, and approximately $39 million of unused capacity under other arrangements.
Operating cash flow was $2.5 million for the first nine months, compared with $112.0 million in the prior-year period. Investing cash outflows were $30.1 million, including $32.0 million for acquisitions and $12.8 million of capital expenditures. Financing cash outflows were $10.5 million, including $28.6 million of term-loan repayments and $21.2 million of dividends, partially offset by $39.1 million of net revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially year over year, particularly for the nine-month period, because the prior year included a $38.0 million non-cash impairment charge and a $22.7 million pension settlement charge.
- Gross margins declined materially in Q3, from 38.2% to 32.3%, as raw-material inflation, logistics constraints and supply-chain disruptions outpaced pricing recovery.
- Adjusted EBITDA increased only 3% in Q3 despite 22% sales growth, reflecting margin pressure and higher selling, general and administrative expenses.
- Operating cash flow declined by $109.5 million year over year, primarily because accounts receivable and inventories increased with higher sales, higher input costs and precautionary inventory builds.
- All four reportable segments increased Q3 sales. EMEA operating earnings rose 16% and Americas earnings rose 1%, while Asia/Pacific earnings declined 15% and Global Specialty Businesses earnings declined 2% because of cost and supply-chain pressures.
- The company completed or advanced several acquisitions, including a tin-plating solutions business, additional interests in Grindaix, and chemical-maskants assets. Two additional acquisitions closed in November 2021 for approximately $10 million upfront, plus potential earn-outs of approximately $4 million; these were not included in Q3 results.
Guidance, Outlook, Risks and Unusual Items
Management expected gross margins to remain challenged by raw-material and supply-chain pressures, but anticipated sequential product-margin improvement as price increases took effect. Near-term risks included power restrictions in China, automotive semiconductor shortages and normal fourth-quarter seasonality. For 2022, management expected sales and earnings growth above normal long-term trends, supported by end-market growth, market-share gains and improved pricing recovery.
Management continued to expect approximately $75 million of Combination-related cost synergies in 2021 and $80 million in 2022. Additional integration and restructuring costs were expected through 2022. The QH restructuring program targets approximately 400 global headcount reductions and facility closures.
- COVID-19 remained a material uncertainty affecting customers, suppliers, staffing, logistics, demand and liquidity, although all 31 production facilities were operating at the filing date.
- Flooding at the Conshohocken headquarters and an electrical fire at a North American production facility caused property damage and a temporary production shutdown. The company recorded a $1.7 million insurance receivable and received $1.0 million of advance insurance payments, but had not recorded any potential business-interruption recovery.
- Brazilian subsidiaries recognized approximately $13.3 million of non-income tax credits, expected to offset future Brazilian federal taxes.
- The company had approximately $30.8 million of gross uncertain tax liabilities, including interest and penalties, and expected a $2.6 million payment to Italy in the fourth quarter of 2021 related to tax proceedings.
- Environmental liabilities included approximately $5.7 million accrued for Houghton-related matters, with estimated discounted costs of approximately $5.5 million to $6.5 million. The company also disclosed asbestos litigation and groundwater remediation exposures.
- The company was not in compliance with effective disclosure controls as of September 30, 2021 because previously identified material weaknesses remained in risk assessment and revenue price-and-quantity controls. Management stated that remediation controls had been implemented but not fully tested.
Management stated that existing cash, expected operating cash flow and available liquidity should be sufficient for at least the next twelve months, including dividends, integration costs, pension contributions, capital expenditures, acquisitions and contingencies. The company was in compliance with its debt covenants at September 30, 2021.
Most Important Facts for Investors to Verify
- Whether pricing actions fully offset continuing raw-material, freight and supply-chain inflation and restore gross margins.
- The sustainability and cash realization of the stated $75 million 2021 and $80 million 2022 synergy targets, net of remaining integration and restructuring costs.
- Working-capital normalization and recovery of operating cash flow after the substantial receivables and inventory build.
- Debt reduction, revolver usage, covenant headroom and the August 2024 maturity of the principal credit facility.
- Final purchase-price allocations and performance of 2021 acquisitions, including the November acquisitions and potential earn-outs.
- Insurance recoveries and operational effects from the flooding and fire, including any business-interruption claim.
- Progress in testing and remediating the material weaknesses in internal controls, especially revenue price and quantity controls.
- Exposure to COVID-19 resurgences, automotive semiconductor shortages, China power restrictions, customer cyclicality and foreign-exchange volatility.