Quaker Chemical Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Quaker Houghton is a global supplier of industrial process fluids, specialty chemicals and related Fluidcare services, serving steel, aluminum, automotive, aerospace, mining, metalworking and other industrial customers in more than 25 countries. The filing reports unaudited results for the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $492.4 million | $435.3 million | $966.6 million | $865.0 million |
| Gross profit | $149.6 million | $154.5 million | $295.6 million | $310.6 million |
| Gross margin | 30.4% | 35.5% | 30.6% | 35.9% |
| Operating income | $31.9 million | $38.8 million | $61.3 million | $83.7 million |
| Net income attributable to Quaker | $14.3 million | $33.6 million | $34.2 million | $72.2 million |
| Diluted EPS | $0.80 | $1.88 | $1.91 | $4.03 |
| Adjusted EBITDA | $58.5 million | $70.1 million | $118.9 million | $147.2 million |
| Adjusted EBITDA margin | 11.9% | 16.1% | 12.3% | 17.0% |
Six-month operating cash flow was a use of $8.4 million, compared with a use of $9.6 million in the prior-year period. Capital expenditures were $15.1 million and acquisition payments were $9.4 million. Cash and cash equivalents were $202.3 million at June 30, 2022, compared with $165.2 million at December 31, 2021.
Total debt was $989.1 million at June 30, 2022, including $972.4 million of long-term debt. Management reported total net debt of $786.7 million. The company had approximately $268 million of unused capacity under its amended revolving credit facility, net of letters of credit, and approximately $28 million of additional unused capacity under other arrangements.
Dividends declared were $0.415 per share in the second quarter and $0.830 per share for the first six months, compared with $0.395 and $0.790, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Second-quarter sales increased 13%; six-month sales increased 12%. Price and product mix contributed approximately 22% in the quarter and 19% year to date, while acquisitions contributed approximately 1% and 2%, respectively.
- Sales growth was partly offset by lower organic volumes of approximately 4% in the quarter and 5% year to date, as well as unfavorable foreign-currency translation of 6% and 4%, respectively.
- Gross margin declined sharply because raw-material, supply-chain and logistics costs increased faster than pricing actions could offset them. SG&A increased 7% in both the quarter and first six months.
- Net income and adjusted EBITDA declined substantially, reflecting lower margins, higher operating expenses, foreign exchange effects and lower equity income from associated companies.
- Americas second-quarter sales increased 24% and segment operating earnings were essentially flat. EMEA sales declined slightly and operating earnings fell 43%; Asia/Pacific sales increased 9% and operating earnings fell 4%; Global Specialty Businesses sales increased 20% and operating earnings increased 15%.
- Other expense included a $6.8 million loss on extinguishment of debt in Q2 2022. The prior-year periods benefited from $13.3 million of Brazilian non-income tax credits and, for the first six months of 2021, a $5.4 million gain on the sale of real property.
- The effective tax rate was 8.1% in Q2 2022 and 10.9% for the first six months, compared with 32.2% and 28.4%, respectively, in 2021. The company expects tax-rate volatility because of audits, tax settlements, foreign tax credits, incentives and changes in uncertain tax positions.
- Currency translation caused a significant decline in accumulated other comprehensive income, which was a loss of $145.2 million at June 30, 2022 versus a loss of $64.0 million at December 31, 2021.
Debt, liquidity and financing changes
In June 2022, Quaker amended and extended its primary credit facility to June 2027. The amended facility includes a $600 million U.S. term loan, a $150 million euro-equivalent term loan and a $500 million multicurrency revolver. U.S.-dollar borrowings generally bear interest at a base rate or term SOFR plus a margin determined by leverage.
Borrowings under the amended facility were approximately $977.6 million at June 30, 2022, with an interest rate of approximately 2.8%. The company was in compliance with all credit-facility covenants. The facility limits dividends and share repurchases under specified conditions and requires compliance with interest-coverage and net-leverage tests.
Management believes existing cash, expected operating cash flows and available liquidity will fund operations, dividends, capital expenditures, pension contributions, acquisition integration, potential acquisitions and known contingencies for at least the next 12 months and beyond. However, first-half operating cash flow was negative because of investment in receivables and inventories.
Outlook, management commentary and risks
Management expects sequential gross-margin expansion and earnings growth in the second half of 2022, while continuing to pursue price increases, cost controls and operational improvements. This is an outlook statement rather than a formal quantitative earnings guidance range.
- Persistent raw-material inflation, supply-chain and logistics constraints, rising interest rates and foreign-exchange volatility remain significant pressures.
- COVID-19 restrictions in China disrupted production and volumes, particularly in Shanghai and the Asia/Pacific segment.
- The company ceased operations in Russia during the quarter. Russia, Ukraine and Belarus historically represented less than 2% of consolidated sales and less than 1% of consolidated assets, but the company is monitoring receivables and has increased allowances where warranted.
- The QH restructuring program is expected to continue through 2022 and into 2023, including additional headcount reductions and facility closures. The program targets an approximate global headcount reduction of 400 people, although total timing and costs remain subject to change.
- The company continues to monitor goodwill and intangible-asset impairment risks related to economic, geopolitical, inflationary and operating conditions. It concluded that no triggering event existed as of June 30, 2022.
- Known contingencies include an estimated $0.1 million to $1.0 million range for groundwater remediation, approximately $0.3 million of projected asbestos liability over the next 50 years excluding defense costs, and approximately $5.0 million to $6.0 million of discounted environmental costs, of which $5.5 million was accrued.
- Sellers of Coral Chemical filed a claim concerning tax attributes; the company estimates potential exposure of zero to $1.5 million.
- Variable-rate debt creates sensitivity to higher interest rates. The company estimated that a 10% change in interest rates would have affected first-half 2022 credit-facility interest expense by approximately $2 million.
Most important facts for investors to verify
- Whether pricing actions continue to offset raw-material, logistics and supply-chain inflation without causing further volume erosion.
- Whether the expected second-half gross-margin expansion and earnings growth materialize.
- Operating cash flow and working-capital requirements, particularly receivables and inventory levels.
- Net leverage, interest expense and covenant headroom under the amended credit facility as interest rates rise.
- The financial impact of the Russia exit, China disruptions, foreign-currency movements and broader geopolitical conditions.
- Progress, cash costs and ultimate savings from the QH restructuring and strategic transformation programs.
- Tax-rate normalization and the resolution of uncertain tax positions, audits and related indemnification receivables.
- Potential impairment indicators for goodwill and intangible assets, and developments in environmental, litigation and acquisition-related contingencies.