Quaker Chemical Corporation 2020 Form 10-K Summary
Business context and reporting period
Quaker Chemical Corporation, doing business as Quaker Houghton, filed its Form 10-K for the fiscal year ended December 31, 2020. The company develops and supplies industrial process fluids and related technical services to steel, aluminum, automotive, aerospace, mining, metalworking and other manufacturing customers through four segments: Americas, EMEA, Asia/Pacific and Global Specialty Businesses.
Year-over-year comparisons are affected by the August 1, 2019 Houghton combination and the October 2019 Norman Hay acquisition. The 2020 results include a full year of both businesses, while 2019 includes only post-closing periods.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,417.7 million | $1,133.5 million | +25% |
| Gross profit | $513.4 million | $392.1 million | +31% |
| Reported gross margin | 36.2% | 34.6% | +160 basis points |
| Operating income | $59.4 million | $46.1 million | +29% |
| Net income attributable to Quaker | $39.7 million | $31.6 million | +25% |
| Diluted earnings per share | $2.22 | $2.08 | +7% |
| Adjusted EBITDA | $222.0 million | $173.1 million | +28% |
| Adjusted EBITDA margin | 15.7% | 15.3% | +40 basis points |
| Net cash provided by operating activities | $178.4 million | $82.4 million | +117% |
Excluding acquired revenue, 2020 sales declined approximately 11%, reflecting a 9% volume decline, a 1% foreign-currency headwind and a 1% decrease from pricing and product mix. COVID-19 reduced customer production and demand across all segments.
- Cash, cash equivalents and restricted cash were $181.9 million at December 31, 2020, compared with $143.6 million at December 31, 2019.
- Total debt was $899.1 million before debt issuance costs; total net debt was $717.3 million, down approximately 12%, or $94 million, during 2020.
- Credit Facility borrowings were $887.1 million, with approximately $234 million of unused revolver capacity after letters of credit.
- The company repaid $49.1 million of debt in 2020 and remained in compliance with all credit facility covenants.
- Capital expenditures were $17.9 million, and cash dividends paid were $27.6 million. The declared annual dividend was $1.56 per share.
Material changes versus the prior comparable period
- Acquisitions added $408.6 million of reported sales, primarily from the full-year contribution of Houghton and Norman Hay. Coral Chemical was acquired in December 2020 for approximately $53.1 million net of cash acquired.
- Reported operating income benefited from acquired operations and cost savings but was reduced by $38.0 million of non-cash indefinite-lived intangible impairment, $29.8 million of combination and acquisition-related expenses and $5.5 million of restructuring charges.
- Combination-related cost synergies reached approximately $58 million in 2020, compared with $7 million in 2019, exceeding the original $35 million estimate.
- Operating cash flow increased primarily from the full-year contribution of acquired businesses, working-capital benefits, lower acquisition and restructuring cash outflows and lower cash taxes.
- All four reportable segments recorded higher reported sales and operating earnings, but underlying sales excluding acquisitions declined in each segment because of COVID-19-related volume reductions.
- The company adopted the current expected credit loss standard in 2020; adoption reduced retained earnings by approximately $0.9 million and increased the allowance for doubtful accounts by approximately $1.1 million.
Guidance, outlook, risks and unusual items
Management expects a gradual improvement in COVID-19 impacts during 2021 and described 2021 as potentially a step change in profitability, supported by completion of integration synergies, market-share gains, an anticipated demand recovery and recent acquisitions. Management also identified near-term headwinds from higher raw-material costs and weaker automotive volumes related to semiconductor shortages. It expects combination-related cost synergies of approximately $75 million in 2021 and $80 million in 2022.
- COVID-19 remains a material uncertainty affecting demand, customer and supplier operations, staffing, supply chains, liquidity, asset valuations and financial reporting processes.
- The company recorded a $38.0 million first-quarter impairment of Houghton and Fluidcare trademarks and tradename intangible assets. No additional impairment was recorded in the fourth quarter, but further deterioration could result in additional charges.
- The company recorded a $22.7 million non-cash pension settlement charge upon termination of the Legacy Quaker U.S. Pension Plan and recognized an $18.1 million gain related to the release of restrictions on insurance settlement proceeds associated with an inactive subsidiary’s asbestos claims.
- The QH restructuring program targets approximately 350 fewer employees and facility closures. Restructuring and site-closure activities are expected to continue into 2021.
- Material weaknesses remained in internal control over financial reporting as of December 31, 2020, involving risk assessment and controls over revenue pricing, quantity and customer data. Management and PwC concluded that controls were not effective, although the company stated that the weaknesses did not result in a material misstatement of the 2020 financial statements.
- Key risks include cyclical customer demand, raw-material price volatility and availability, foreign-exchange exposure, variable-rate debt and LIBOR transition, acquisition integration, customer credit losses, environmental and tax contingencies, cybersecurity and regulatory compliance.
- An indirect-tax matter has a recorded liability of $1.5 million and an indemnification receivable of approximately $1.1 million; the company estimates a possible net exposure range of approximately $0.4 million to $34 million.
- Environmental liabilities include approximately $6.0 million accrued for Houghton-related matters and an estimated $0.1 million to $1.0 million range for the AC Products remediation program.
- The company believes existing cash, operating cash flow and available liquidity will fund operations and planned obligations for at least the next twelve months.
Most important facts for investors to verify
- Assess organic sales, volume trends and margins separately from the substantial Houghton and Norman Hay acquisition contribution.
- Monitor 2021 demand recovery, automotive and semiconductor-related production constraints, raw-material inflation and the company’s ability to pass through cost increases.
- Verify debt reduction, covenant compliance, revolver availability and the timing of approximately $715 million of scheduled 2024 debt maturities.
- Track completion of the QH integration program, achievement of projected $75 million and $80 million synergy targets, and remaining restructuring cash costs.
- Follow remediation of the revenue-related and risk-assessment material weaknesses, including whether management and the auditor determine controls effective in 2021.
- Review sensitivity to goodwill and trademark valuations, given the $38.0 million 2020 impairment and significant intangible-asset balances.
- Monitor the indirect-tax inspection, environmental matters, asbestos-related claims and other uncertain tax positions.
- Confirm the impact of the February 2021 acquisition of tin-plating assets, which occurred after year-end and was not included in 2020 results.