Quaker Chemical Corporation Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021; filed August 5, 2021. The interim financial statements are unaudited. Quaker Houghton is a global industrial process-fluids company operating through Americas, EMEA, Asia/Pacific, and Global Specialty Businesses segments.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $435.3 million | $286.0 million | $865.0 million | $664.6 million |
| Gross profit | $154.5 million | $97.4 million | $310.6 million | $231.2 million |
| Gross margin | 35.5% | 34.0% | 35.9% | 34.8% |
| Operating income (loss) | $38.8 million | $2.2 million | $83.7 million | $(10.2) million |
| Net income (loss) attributable to Quaker | $33.6 million | $(7.7) million | $72.2 million | $(36.1) million |
| Diluted EPS | $1.88 | $(0.43) | $4.03 | $(2.03) |
| Adjusted EBITDA | $70.1 million | $32.1 million | $147.2 million | $92.5 million |
| Adjusted EBITDA margin | 16.1% | 11.2% | 17.0% | 13.9% |
- Six-month net cash used in operating activities was $9.6 million versus $44.7 million provided in the prior-year period, primarily because higher sales increased receivables and inventories and the Company restocked amid supply-chain pressures.
- Six-month capital expenditures were $7.0 million. Acquisition-related cash payments were $29.4 million, principally including the $25.0 million tin-plating solutions acquisition.
- Cash, cash equivalents and restricted cash totaled $145.6 million at June 30, 2021, down from $181.9 million at December 31, 2020.
- Total debt was $904.8 million, including $847.2 million of long-term debt. Net debt was reported at $759.2 million. Revolver availability was approximately $206 million, net of letters of credit.
- The Company was in compliance with its debt covenants. The Credit Facility matures in August 2024 and permits a consolidated net debt-to-adjusted EBITDA ratio of up to 4.00 to 1 as of June 30, 2021.
- Dividends declared were $0.395 per share in the quarter and $0.790 per share for the six months, compared with $0.385 and $0.770, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Q2 sales increased 52%, driven by a 40% volume increase, including 5% from acquisitions, an 8% foreign-currency benefit, and approximately 4% from selling price and product mix. Six-month sales increased 30% on 22% higher volume, 4% acquisition contribution, 5% currency benefit, and 3% price and mix.
- All four reportable segments recorded higher Q2 sales and operating earnings. Q2 segment sales increased 73% in Americas, 59% in EMEA, 34% in Asia/Pacific, and 36% in Global Specialty Businesses.
- Profitability improved as end markets recovered from the severe COVID-19 impact in the second quarter of 2020 and Combination-related synergies increased. Higher raw-material costs, logistics constraints, and increased SG&A partially offset the improvement.
- The six-month 2020 results included a $38.0 million non-cash impairment of indefinite-lived Houghton-related intangible assets and a $22.7 million pension settlement charge. No comparable impairment was recorded in 2021.
- Q2 2021 included $13.3 million of Brazilian non-income tax credits and the six-month period included a $5.4 million gain on the sale of held-for-sale real property. These items materially benefited reported earnings and are excluded from management’s non-GAAP measures.
- Combination-related cost synergies were approximately $18.5 million in Q2 and $36.5 million for the six months, compared with approximately $12 million and $22 million, respectively, in 2020.
Guidance, outlook, risks and unusual items
- Management expects 2021 to produce a “step change” in profitability from 2020, supported by integration synergies, market-share gains, recovering demand, and acquisitions. It continues to expect approximately $75 million of Combination cost synergies in 2021 and $80 million in 2022.
- Raw-material costs are expected to continue increasing; the Company is implementing additional price increases. Customer demand and volumes are expected to remain strong, but automotive may face near-term semiconductor-related pressure and normal second-half seasonality.
- Management expects additional restructuring, headcount reductions, and facility closures through 2021 and into 2022. The QH Program targets approximately 400 global headcount reductions.
- COVID-19, including resurgences and variants, remains a significant uncertainty affecting customer demand, supply availability, logistics, operations, liquidity, and potential impairment testing.
- A foreign indirect-tax matter remains uncertain, with a potential assessment range of $0 to approximately $40 million, net of estimated tax deductions and indemnification rights. The Company had recorded a $1.8 million liability and a $1.1 million related indemnification receivable.
- The Company received an indemnification claim in July 2021 related to divested Houghton product lines. It stated that potential exposure could not yet be reasonably determined or quantified.
- Environmental liabilities for Houghton-related sites were estimated at $5.5 million to $6.5 million, with $6.0 million accrued. The ACP groundwater matter had an estimated remaining liability range of $0.1 million to $1.0 million.
- Disclosure controls were not effective as of June 30, 2021 because of material weaknesses in risk assessment and revenue controls over pricing, quantity, and customer data. Management expected to complete implementation of enhanced revenue controls in the third quarter of 2021, but remediation was not yet complete or fully tested.
- Management stated that existing cash, expected operating cash flows, and available liquidity should fund operations and obligations for at least the next twelve months, while noting that pandemic and economic conditions could change this assessment.
Investor verification points
- Verify whether raw-material inflation and supply-chain costs were offset by subsequent pricing actions without sustained gross-margin erosion.
- Track operating cash conversion, receivables, and inventory levels following the six-month operating cash outflow.
- Assess leverage, covenant headroom, revolver availability, and the August 2024 Credit Facility maturity.
- Separate recurring operating earnings from the $13.3 million Brazilian tax credits, $5.4 million property-sale gain, acquisition and restructuring costs, and other non-GAAP adjustments.
- Confirm completion and testing of remediation for the material weaknesses, particularly revenue pricing and quantity controls.
- Monitor COVID-19 effects, automotive semiconductor shortages, customer production levels, currency movements, and raw-material availability.
- Follow developments in the indirect-tax inspection, divestiture-related indemnification claim, environmental matters, and asbestos litigation.