Quaker Chemical Corporation
Management’s Discussion and Analysis
25
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton”,
the “Company”, “we” and “our” refer to Quaker Chemical
Corporation
(doing business as Quaker Houghton),
its subsidiaries, and associated companies, unless the context otherwise
requires.
As used in
this Report, the term Legacy Quaker refers to the Company
prior to the closing of its combination with Houghton International,
Inc.
(“Houghton”) (herein referred to as the “Combination”)
on August 1, 2019.
Throughout the Report, all figures presented, unless
otherwise stated, reflect the results of operations of the
combined company for the three months ended March 31, 2021 and
2020.
Executive Summary
Quaker Houghton is a global leader in industrial process
fluids.
With a presence around the world,
including operations in over
25 countries, our customers include thousands of the world’s
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
companies.
Our high-performing, innovative and sustainable solutions are
backed by best-
in-class technology,
deep process knowledge, and customized services.
Quaker Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the United States.
The Company had a very strong start to 2021, delivering
solid first quarter results which reflect the continued COVID-19
recovery in the Company’s
end-markets and customer demand as well as the on-going execution
of integration activities and synergy
realization.
Specifically, net sales of $429.8
million in the first quarter of 2021 increased 14% compared to
$378.6 million in the first
quarter of 2020, primarily due to higher volumes, which
included additional net sales from acquisitions of 3%, and the
positive impact
from foreign currency translation of 3%.
The increase in sales volumes compared to the first quarter
of 2020 was primarily due to
improved end market conditions and continued market
share gains.
Additional net sales from acquisitions primarily were attributable
to Coral Chemical (“Coral”), which the Company acquired
in December 2020.
The positive net impact from foreign currency
translation was primarily due to the strengthening of the
euro and Chinese renminbi against the U.S. dollar quarter-over-quarter,
partially offset by the ongoing weakening
of the Brazilian real.
The Company had net income in the first quarter
of 2021 of $38.6
million, or $2.15 per diluted share, compared to a first
quarter of 2020 net loss of $28.4 million, or $1.60 per diluted
share.
The
Company’s prior year
first quarter net loss was primarily driven by the first quarter
of 2020 non-cash impairment charge of $38.0
million for certain indefinite-lived intangible assets and
a non-cash $22.7 million settlement charge
related to the termination of a U.S.
defined benefit pension plan.
Excluding these non-recurring items as well as costs associated
with the Combination and other non-
core items in each period, the Company’s
first quarter of 2021 non-GAAP earnings per diluted share
were $2.11 compared to $1.38 in
the prior year first quarter.
The Company’s current
quarter adjusted EBITDA of $77.1 million increased
28% compared to $60.5
million in the first quarter of 2020 primarily due to
the significant increase in net sales quarter over quarter and
incremental realized
cost synergies from the Combination as compared
to the first quarter of 2020.
The Company estimates that it realized cost synergies
associated with the Combination of approximately
$18 million during the first quarter of 2021 compared to
approximately $10 million
during the first quarter of 2020.
See the Non-GAAP Measures section of this Item below,
as well as other items discussed in the
Company’s Consolidated
Operations Review in the Operations section of this Item,
below.
The Company’s first quarter
of 2021 operating performance in each of its four reportable
segments: (i) Americas; (ii) Europe,
Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv)
Global Specialty Businesses, reflect similar drivers to that of
its
consolidated performance.
All four segments had higher net sales compared to the first quarter
of 2020.
The Company’s higher sales
volumes were driven by EMEA and Asia/Pacific, while additional
net sales from Coral benefited the Americas and the
Global
Specialty Businesses.
The growth in Asia/Pacific’s vol
umes compared to the prior year were partially due to
the initial impacts of
COVID-19 in China during the first quarter of 2020,
whereas all of the remaining segments weren’t impacted
as severely until the
second quarter of 2020.
The benefit of higher selling price and product mix positively
impacted most of the segments, and foreign
currency translation benefited all segments except the
Americas which was driven by the ongoing weakening of the Brazilian real
quarter over quarter.
As reported, all of the Company’s
segment operating earnings were higher compared to
the first quarter of 2020
which reflects higher current quarter net sales coupled
with a higher gross margin in all segments as compared
to the prior year first
quarter.
While the Company has experienced higher raw material costs
beginning in the fourth quarter of 2020 and
continuing into
2021, the higher gross margin as compared
to the prior year first quarter was primarily driven by the Company’s
continued execution
of Combination-related logistics, procurement and manufacturing
cost savings initiatives as well as the benefit of higher volumes
in
the current quarter and the related impact from fixed manufacturing
costs.
Direct Selling, general and administrative expenses
(“SG&A”) of each segment were relatively consistent with the
first quarter of 2020 with only Asia/Pacific up as a result of
the
segments strong current quarter performance compared
to the prior year which was negatively impacted by the
initial COVID-19
conditions in China.
In addition, the Company and all of its segments continued to
maintain strong cost control and benefit from
COVID-19 cost savings actions, including lower travel
expenses, as well as the benefits of realized cost savings associated
with the
Combination.
Additional details of each segment’s
operating performance are further discussed in the Company’s
Reportable
Segments Review, in
the Operations section of this Item, below.