CONSHOHOCKEN, Pa., Nov. 5, 2020 /PRNewswire/ -- Quaker Chemical
Corporation ("the Company", also known as Quaker Houghton; NYSE:
KWR) today announced third quarter results and provided an update
regarding the impact of the COVID-19 pandemic on the Company.
Third quarter of 2020 net sales were $367.2
million, an increase of 13% compared to the third quarter of
2019. The increase was driven by additional net sales due to
the Company's August 1, 2019
combination with Houghton International, Inc. ("Houghton"), which
we refer to as "the Combination", as well as its October 1, 2019 acquisition of the operating
divisions of Norman Hay plc
("Norman Hay"). Current
quarter net sales declined approximately 5% compared to prior year
third quarter pro forma net sales of approximately $386 million, which are adjusted to include the
results of Houghton for the full quarter as well as certain other
pro forma adjustments, described below, including the elimination
of results associated with divested product lines. This
quarter-over-quarter decline in pro forma net sales was primarily
due to lower volumes reflecting the impact from COVID-19 on global
industrial production partially offset by additional net sales from
Norman Hay.
The Company had net income in the third quarter of 2020 of
$27.3 million or $1.53 per diluted share compared to prior year
third quarter net loss of $13.1
million or $0.80 per diluted
share which was impacted by initial inventory fair value
adjustments, restructuring charges and costs related to closing the
Combination. Excluding costs associated with the Combination
and other non-core items in each period, the Company's current
quarter adjusted EBITDA of $63.9
million increased 24% compared to $51.4 million in the third quarter of 2019
primarily due to the Combination, and increased 5% compared to pro
forma prior year third quarter adjusted EBITDA of approximately
$61 million primarily due to the
benefits of cost synergies realized from the Combination and the
benefit of Norman Hay in the current
quarter, again partially offset by the negative impacts of
COVID-19. The Company's third quarter of 2020 non-GAAP net
income increased to $27.7 million
compared to $25.3 million in the
prior year while its non-GAAP earnings per diluted share were
consistent at $1.56 in both periods,
as higher net income was offset by the additional shares issued at
the close of the Combination. The Company's strong earnings
drove net operating cash flow of approximately $67.3 million during the third quarter of 2020,
increasing its year-to-date net operating cash flow to $112.0 million in the first nine months of 2020
compared to $35.5 million in the
first nine months of 2019.
Michael F. Barry, Chairman, Chief
Executive Officer and President, "We experienced a strong rebound
in our business in the third quarter compared to the second quarter
with sales growing by 28% and adjusted EBITDA nearly
doubling. All four business segments had good sequential
growth as our end markets improved from the very poor second
quarter conditions, especially in the Americas and EMEA. Our
adjusted EBITDA growth continued to benefit from our estimated cost
synergies of $17 million in the
quarter as well as estimated market share gains of 2% in the
quarter. Our cash flow generation continues to be strong as
we reduced our net debt by 7% or $58
million this quarter."
Mr. Barry continued, "While we have seen a rebound in many of
our end markets, we are still not back to where we would have
expected our business to be when we started the year. Looking
forward, we expect gradual sequential improvement in our markets as
we progress through the next two years, although given the
uncertainty in our operating environment, the improvement by
quarter is hard to predict. For the fourth quarter we expect
our adjusted EBITDA to be in the range of our third quarter
result. For the full year, we now expect our adjusted EBITDA
to exceed $215 million.
Overall, our integration synergies, additional cost savings
actions, improvement in product margins, and good cash flows are
expected to continue to help us during this challenging time.
As we look forward to 2021, we expect to achieve a 20+% increase in
our adjusted EBITDA as we complete our integration cost synergies,
continue to take share in the marketplace and benefit from a
projected gradual rebound in demand."
Third Quarter 2020 Consolidated Results
Net sales were $367.2 million in
the third quarter of 2020 compared to $325.1
million in the third quarter of 2019. The net sales
increase of 13% quarter-over-quarter includes additional net sales
from acquisitions, primarily Houghton and Norman Hay, of $74.6
million. Excluding net sales related to acquisitions,
current quarter net sales would have declined approximately 10%,
primarily due to an 8% decrease in sales volumes driven by the
negative impact of COVID-19 on global production levels in the
current quarter, as well as a 1% negative impact from foreign
currency translation and a 1% decrease from price and product
mix.
Gross profit in the third quarter of 2020 increased $35.1 million compared to the third quarter of
2019 primarily due to additional gross profit from Houghton and
Norman Hay, as well as higher gross
margins quarter-over-quarter. The Company's gross margin in
the current quarter was 38.2% compared to 32.3% in the third
quarter of 2019 which included a $10.2
million expense associated with selling acquired Houghton
inventory at its fair value. Excluding this one-time increase
to cost of goods sold ("COGS"), the Company estimates that its
gross margin for the third quarter of 2019 would have been
approximately 35.5%. The estimated increase in gross margin
quarter-over-quarter was primarily due to lower COGS as a result of
the Company's progress on Combination-related logistics,
procurement and manufacturing cost savings initiatives.
Selling, general and administrative expenses ("SG&A") in the
third quarter of 2020 increased $16.2
million compared to the third quarter of 2019 due primarily
to additional SG&A from Houghton and Norman Hay, partially offset by lower SG&A
due to the impact of COVID-19 cost savings actions, including lower
travel expenses, and the benefits of realized cost savings
associated with the Combination.
During the third quarter of 2020, the Company incurred
$6.9 million of Combination,
integration and other acquisition-related expenses, primarily for
professional fees related to Houghton integration activities.
Comparatively, the Company incurred $14.7
million of similar expenses in the prior year third quarter,
primarily due to various professional fees related to integration
planning and regulatory approval as well as professional fees
associated with closing the Combination on August 1, 2019.
The Company initiated a restructuring program during the third
quarter of 2019 as part of its global plan to realize cost
synergies associated with the Combination and recorded an initial
$24.0 million restructuring
charge. The Company expects reductions in headcount and site
closures under this program to continue during 2020 and into 2021
and recorded additional restructuring and related charges of
$1.4 million during the current
quarter.
Operating income in the third quarter of 2020 was $34.9 million compared to an operating loss of
$14.5 million in the third quarter of
2019. Excluding Combination, integration and other
acquisition-related expenses, restructuring and related charges,
and other expenses that are not indicative of the Company's future
operating performance, the Company's current quarter non-GAAP
operating income increased 25% to $43.2
million compared to $34.5
million in the prior year quarter, primarily due to
additional operating income from Houghton and Norman Hay and the benefits from cost savings
related to the Combination, partially offset by the negative impact
of COVID-19. The Company now expects to realize cost
synergies of approximately $58
million in 2020 (up from $53
million), approximately $75
million in 2021 (up from $65
million) and $80 million in
2022 (up from $75 million). The
Company estimates that it has realized approximately $17 million of cost savings related to the
Combination during the third quarter of 2020, increasing its
synergies realized in 2020 to approximately $40 million.
Other expense, net, was $0.2
million in the third quarter of 2020 compared to other
income, net, of $0.2 million in the
prior year third quarter. The quarter-over-quarter change to
other expense, net, was driven by higher foreign currency
transaction losses in the third quarter of 2020 as compared to the
prior year third quarter, partially offset by lower expenses from
the non-service components of pension and postretirement benefit
costs in the current quarter.
Interest expense, net, increased $0.7
million compared to the prior year third quarter primarily
due to an additional month of borrowings in the current quarter
under the Company's term loans and revolving credit facility to
finance the closing of the Combination on August 1, 2019, as well as higher current quarter
borrowings outstanding as a result of the additional revolver
borrowings in March 2020 at the onset
of the pandemic, partially offset by a decline in overall interest
rates during the current quarter.
The Company's effective tax rates for the third quarters of 2020
and 2019 were an expense of 8.1% compared to a benefit of 27.6%,
respectively. The Company's current quarter effective tax
rate was impacted by certain one-time items, including benefits
related to the impact of recently issued U.S. tax regulations and
other changes in foreign tax credit valuation allowances, a change
in a foreign subsidiary's statutory rate and impacts related to the
Combination. Similarly, the prior year third quarter's tax
rate was impacted by the pre-tax losses driven by the Combination
costs, restructuring charges and inventory fair value expense
previously mentioned. Excluding the impact of these costs and
all other non-core items in each quarter, described in the Non-GAAP
and Pro Forma measures section below, the Company estimates that
its effective tax rates for the third quarters of 2020 and 2019
would have been approximately 24% and 20%, respectively. The
higher estimated current quarter tax rate was driven by a change in
the current quarter earnings footprint to entities with higher
statutory tax rates as well as a cumulative year-to-date tax
benefit recorded during the third quarter of 2019 as a result of
one of its subsidiaries receiving approval for the renewal of a
concessionary 15% tax rate compared to its 25% statutory tax
rate. The concessionary tax rate was available to the
Company's subsidiary during all quarters of 2020.
Equity in net income of associated companies was consistent at
$1.8 million in both the third
quarters of 2020 and 2019.
Foreign exchange negatively impacted the Company's current
quarter results by approximately $0.18 per diluted share, primarily due to higher
foreign exchange transaction losses quarter-over-quarter and, to a
lesser extent, an aggregate negative impact from foreign currency
translation on earnings.
First Nine Months 2020 Consolidated Results
Net sales were $1,031.8 million in
the first nine months of 2020 compared to $742.2 million in the first nine months of
2019. The net sales increase of 39% year-over-year includes
additional net sales from acquisitions, primarily Houghton and
Norman Hay, of $407.4 million. Excluding net sales from
acquisitions, current year net sales would have declined
approximately 16% due to a 13% decrease in sales volumes associated
with the negative impacts of COVID-19 on global production levels,
as well as a 2% negative impact from foreign currency translation
and a 1% decrease from price and product mix.
Gross profit in the first nine months of 2020 increased
$115.4 million compared to the first
nine months of 2019 primarily due to additional gross profit from
Houghton and Norman Hay. The
Company's gross margin in the current period was 36.0% compared to
34.5% in 2019, which includes a $10.2
million expense associated with selling Houghton's inventory
at fair value. Excluding this one-time increase to COGS, the
Company estimates that its gross margin for the first nine months
of 2019 would have been 35.9%, relatively consistent with the
current year.
SG&A in the first nine months of 2020 increased $100.1 million compared to the first nine months
of 2019 due primarily to additional SG&A from Houghton and
Norman Hay, partially offset by the
same drivers described in the third quarter description noted
above.
During the first nine months of 2020, the Company incurred
$22.8 million of Combination,
integration and other acquisition-related expenses, primarily for
professional fees related to Houghton integration activities.
Comparatively, the Company incurred $23.8
million of similar expenses in the prior year, primarily due
to various professional fees related to integration planning and
regulatory approval as well as professional fees associated with
closing the Combination.
As noted above, the Company initiated a restructuring program
during the third quarter of 2019 as part of its global plan to
realize cost synergies associated with the Combination.
During the first nine months of 2020, the Company recorded
additional restructuring and related charges of $3.6 million. Comparatively, the Company
incurred restructuring and related charges of $24.0 million during the first nine months of
2019.
During the first quarter of 2020, the Company recorded a
$38.0 million non-cash impairment
charge to write down the value of certain indefinite-lived
intangible assets associated with the Combination. This
non-cash impairment charge is related to certain acquired Houghton
trademarks and tradenames and is primarily the result of the
current year negative impacts of COVID-19 on their estimated fair
values. There were no other impairment charges in 2020 or in
the prior year.
Operating income in the first nine months of 2020 was
$24.7 million compared to
$25.9 million in the first nine
months of 2019. Excluding Combination, integration and other
acquisition-related expenses, restructuring and related charges,
the non-cash indefinite-lived intangible asset impairment charge,
and other expenses that are not indicative of the Company's future
operating performance, the Company's non-GAAP operating income
increased to $90.4 million for the
first nine months of 2020 compared to $84.3
million in the prior year period, primarily due to
additional operating income from Houghton and Norman Hay and the benefits from cost savings
related to the Combination, partially offset by the negative impact
of COVID-19.
Other expense, net, was $22.4
million in the first nine months of 2020 compared to
$0.4 million in the prior year
period. The year-over-year increase in other expense, net was
primarily due to a first quarter of 2020 non-cash settlement charge
of $22.7 million associated with the
termination of the legacy Quaker U.S. Pension Plan, as well as
higher foreign currency transaction losses in the current year.
Interest expense, net, increased $14.5
million in the first nine months of 2020 compared to the
prior year primarily due to additional borrowings under the
Company's term loans and revolving credit facility to finance the
closing of the Combination.
The Company's effective tax rates for the first nine months of
2020 and 2019 were a benefit of 38.3% and an expense of 22.9%,
respectively. The Company's current year effective tax rate
was impacted by the pre-tax loss for the nine months ended
September 30, 2020, the tax effect of
certain one-time pre-tax costs as well as certain one-time tax
charges and benefits in the current period, including those
mentioned in the three months analysis above as well as those
related to the impact of recently issued U.S. tax regulations and
other changes in the valuation allowance for foreign tax credits
acquired with the Combination, additional charges for uncertain tax
positions relating to certain foreign tax audits, and the tax
impact of the Company's termination of its legacy Quaker U.S.
pension plan. Comparatively, the prior year effective tax
rate was primarily impacted by certain non-deductible costs
associated with the Combination. Excluding the impact of all
non-core items in each quarter, described in the Non-GAAP and Pro
Forma measures section below, the Company estimates that its
effective tax rates were relatively consistent for the first nine
months of 2020 and 2019 at approximately 23% and 22%, respectively.
Equity in net income of associated companies increased
$0.7 million in the first nine months
of 2020 compared to the first nine months of 2019, primarily due to
additional earnings from Houghton's 50% interest in a joint venture
in Korea, partially offset by lower earnings as compared to the
prior year period from the Company's interest in a captive
insurance company.
Foreign exchange negatively impacted the Company's first nine
months of 2020 results by approximately $0.27 per diluted share, primarily due to higher
foreign exchange transaction losses year-over-year and, to a lesser
extent, an aggregate negative impact from foreign currency
translation on earnings.
Cash Flow and Liquidity Highlights
The Company had net operating cash flow of approximately
$67.3 million during the third
quarter of 2020, increasing its year-to-date net operating cash
flow to $112.0 million in the first
nine months of 2020 compared to $35.5
million in the first nine months of 2019. The
$76.5 million increase in net
operating cash flow year-over-year was primarily driven by
additional earnings from Houghton and Norman Hay, releases in working capital as sales
volumes declined due to COVID-19, and lower cash outflows
associated with the Combination.
The Company has no material debt maturities until August 1, 2024. As of September 30, 2020, the Company's total gross
debt was $896.6 million and its cash
on hand was $155.8 million. The
Company's net debt was $740.8
million, and its net debt divided by its trailing twelve
months adjusted EBITDA was approximately 3.4 to 1 as of
September 30, 2020. The
Company's consolidated net leverage ratio, as defined under its
bank agreement, was approximately 2.9 to 1 as of September 30, 2020 compared to a maximum
permitted leverage of 4.25 to 1. Based on current
projections, including multiple forecasted scenarios of future
liquidity and leverage, the Company does not expect any compliance
issues with its bank covenants.
Non-GAAP and Pro Forma Measures
The information included in this press release includes non-GAAP
(unaudited) financial information that includes EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP
operating margin, non-GAAP net income, non-GAAP earnings per
diluted share, and pro forma net sales, net income (loss)
attributable to Quaker Houghton, EBITDA, adjusted EBITDA, and
adjusted EBITDA margin. The Company believes these non-GAAP
financial measures provide meaningful supplemental information as
they enhance a reader's understanding of the financial performance
of the Company, are indicative of future operating performance of
the Company, and facilitate a comparison among fiscal periods, as
the non-GAAP financial measures exclude items that are not
indicative of future operating performance or not considered core
to the Company's operations. Non-GAAP results and pro forma
information are presented for supplemental informational purposes
only and should not be considered a substitute for the financial
information presented in accordance with GAAP.
The Company presents EBITDA which is calculated as net income
(loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on (loss) income
before equity in net income of associated companies. The
Company also presents adjusted EBITDA which is calculated as EBITDA
plus or minus certain items that are not indicative of future
operating performance or not considered core to the Company's
operations. In addition, the Company presents non-GAAP
operating income which is calculated as operating income (loss)
plus or minus certain items that are not indicative of future
operating performance or not considered core to the Company's
operations. Adjusted EBITDA margin and non-GAAP operating
margin are calculated as the percentage of adjusted EBITDA and
non-GAAP operating income to consolidated net sales,
respectively. The Company believes these non-GAAP measures
provide transparent and useful information and are widely used by
analysts, investors, and competitors in our industry as well as by
management in assessing the operating performance of the Company on
a consistent basis.
Additionally, the Company presents non-GAAP net income and
non-GAAP earnings per diluted share as additional performance
measures. Non-GAAP net income is calculated as adjusted
EBITDA, defined above, less depreciation and amortization, interest
expense, net, and taxes on income (loss) before equity in net
income of associated companies, in each case adjusted, as
applicable, for any depreciation, amortization, interest or tax
impacts resulting from the non-core items identified in the
reconciliation of net income (loss) attributable to the Company to
adjusted EBITDA. Non-GAAP earnings per diluted share is
calculated as non-GAAP net income per diluted share as accounted
for under the "two-class share method." The Company believes
that non-GAAP net income and non-GAAP earnings per diluted share
provide transparent and useful information and are widely used by
analysts, investors, and competitors in our industry as well as by
management in assessing the operating performance of the Company on
a consistent basis.
As it relates to the fourth quarter and full year 2020 expected
adjusted EBITDA, 2021 projected adjusted EBITDA growth and other
forward-looking information described further above, the Company
has not provided guidance for comparable GAAP measures or a
quantitative reconciliation of forward-looking non-GAAP financial
measures to the most directly comparable U.S. GAAP measure because
it is unable to determine with reasonable certainty the ultimate
outcome of certain significant items necessary to calculate such
measures without unreasonable effort. These items include,
but are not limited to, certain non-recurring or non-core items the
Company may record that could materially impact net income, as well
as the impact of COVID-19. These items are uncertain, depend
on various factors, and could have a material impact on the U.S.
GAAP reported results for the guidance period.
The Company's reference to trailing twelve months adjusted
EBITDA within this press release refers to the twelve month period
ended September 30, 2020 adjusted
EBITDA of $217.1 million, which
includes the nine months ended September 30,
2020 adjusted EBITDA of $156.5
million, as presented in the non-GAAP reconciliations below,
as well as the three months ended December
31, 2019 adjusted EBITDA of $60.6
million, as presented in the non-GAAP reconciliations
included in the Company's fourth quarter and full year 2019 results
press release dated March 2,
2020.
The following tables reconcile the Company's non-GAAP financial
measures (unaudited) to their most directly comparable GAAP
(unaudited) financial measures (dollars in thousands unless
otherwise noted, except per share amounts):
Non-GAAP Operating
Income and Margin Reconciliations
|
|
|
|
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating income
(loss)
|
|
$
34,859
|
|
$
(14,502)
|
|
$
24,653
|
|
$
25,858
|
Fair value step up of
inventory sold
|
|
—
|
|
10,214
|
|
226
|
|
10,214
|
Houghton combination,
integration and other
|
|
|
|
|
|
|
|
|
acquisition-related
expenses (a)
|
|
6,913
|
|
14,702
|
|
23,442
|
|
23,789
|
Restructuring and
related charges
|
|
1,383
|
|
24,045
|
|
3,585
|
|
24,045
|
Customer bankruptcy
costs
|
|
—
|
|
—
|
|
463
|
|
—
|
Charges related to the
settlement of a non-core
|
|
|
|
|
|
|
|
|
equipment
sale
|
|
—
|
|
—
|
|
—
|
|
384
|
Indefinite-lived
intangible asset impairment
|
|
—
|
|
—
|
|
38,000
|
|
—
|
Non-GAAP operating
income
|
|
$
43,155
|
|
$
34,459
|
|
$
90,369
|
|
$
84,290
|
Non-GAAP operating
margin (%)
|
|
11.8%
|
|
10.6%
|
|
8.8%
|
|
11.4%
|
EBITDA, Adjusted
EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income
Reconciliations
|
|
|
Three Months
Ended
September
30,
|
|
Nine Months
Ended
September
30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income (loss)
attributable to Quaker Chemical
Corporation
|
$
27,304
|
|
$
(13,053)
|
|
$
(8,812)
|
|
$
16,382
|
Depreciation and
amortization (a)(b)
|
21,022
|
|
14,312
|
|
63,764
|
|
24,014
|
Interest expense, net
(c)
|
6,837
|
|
6,102
|
|
22,109
|
|
7,611
|
Taxes on income (loss)
before equity in net income
of associated companies
(d)
|
2,245
|
|
(5,633)
|
|
(7,603)
|
|
4,096
|
EBITDA
|
$
57,408
|
|
$
1,728
|
|
$
69,458
|
|
$
52,103
|
Equity income in a
captive insurance company
|
(542)
|
|
(524)
|
|
(697)
|
|
(1,260)
|
Fair value step up of
inventory sold
|
—
|
|
10,214
|
|
226
|
|
10,214
|
Houghton combination,
integration and other acquisition-related expenses (a)
|
6,913
|
|
14,702
|
|
22,679
|
|
23,789
|
Restructuring and
related charges
|
1,383
|
|
24,045
|
|
3,585
|
|
24,045
|
Customer bankruptcy
costs
|
—
|
|
—
|
|
463
|
|
—
|
Charges related to the
settlement of a non-core
equipment sale
|
—
|
|
—
|
|
—
|
|
384
|
Indefinite-lived
intangible asset impairment
|
—
|
|
—
|
|
38,000
|
|
—
|
Pension and
postretirement benefit costs,
non-service components
|
(1,375)
|
|
513
|
|
22,491
|
|
2,304
|
Currency conversion
impacts of hyper- inflationary economies
|
154
|
|
728
|
|
278
|
|
891
|
Adjusted
EBITDA
|
$
63,941
|
|
$
51,406
|
|
$
156,483
|
|
$
112,470
|
Adjusted EBITDA
margin (%)
|
17.4%
|
|
15.8%
|
|
15.2%
|
|
15.2%
|
|
|
|
|
Adjusted
EBITDA
|
$
63,941
|
|
$
51,406
|
|
$
156,483
|
|
$
112,470
|
Less: Depreciation and
amortization (b)
|
21,022
|
|
14,312
|
|
63,002
|
|
24,014
|
Less: Interest
expense, net - adjusted (c)
|
6,837
|
|
5,747
|
|
22,109
|
|
5,531
|
Less: Taxes on income
(loss) before equity in net
|
|
|
|
|
|
|
|
income of associated
companies – adjusted (d)
|
8,337
|
|
6,086
|
|
15,473
|
|
17,913
|
Non-GAAP net
income
|
$
27,745
|
|
$
25,261
|
|
$
55,899
|
|
$
65,012
|
Non-GAAP Earnings
per Diluted Share Reconciliations
|
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
GAAP earnings (loss)
per diluted share attributable to Quaker
Chemical Corporation common shareholders (e)
|
$
1.53
|
|
$
(0.80)
|
|
$
(0.50)
|
|
$
1.14
|
Equity income in a
captive insurance company per diluted
share
|
(0.03)
|
|
(0.03)
|
|
(0.04)
|
|
(0.09)
|
Fair value step up of
inventory sold per diluted share
|
—
|
|
0.47
|
|
0.01
|
|
0.53
|
Houghton combination,
integration and other acquisition-
related expenses per diluted share (a)
|
0.30
|
|
0.75
|
|
1.03
|
|
1.50
|
Restructuring and
related charges per diluted share
|
0.06
|
|
1.13
|
|
0.15
|
|
1.28
|
Customer bankruptcy
costs per diluted share
|
—
|
|
—
|
|
0.02
|
|
—
|
Charges related to the
settlement of a non-core equipment
sale per diluted share
|
—
|
|
—
|
|
—
|
|
0.02
|
Indefinite-lived
intangible asset impairment per diluted share
|
—
|
|
—
|
|
1.65
|
|
—
|
Pension and
postretirement benefit costs, non-service
components per diluted share
|
(0.06)
|
|
0.02
|
|
0.83
|
|
0.12
|
Currency conversion
impacts of hyper-inflationary
economies per diluted share
|
0.01
|
|
0.05
|
|
0.02
|
|
0.06
|
Transition tax
adjustments per diluted share
|
—
|
|
(0.03)
|
|
—
|
|
(0.03)
|
Impact of certain
discrete tax items per diluted share
|
(0.25)
|
|
—
|
|
(0.02)
|
|
—
|
Non-GAAP earnings per
diluted share (e)
|
$
1.56
|
|
$
1.56
|
|
$
3.15
|
|
$
4.53
|
|
|
(a)
|
The Company recorded
$0.8 million of accelerated depreciation expense during the nine
months ended September 30, 2020, related to the Combination, of
which $0.7 million was recorded in COGS and $0.1 million was
recorded in Combination, integration and other acquisition-related
expenses. This amount is recorded within COGS is included in
the caption Houghton combination, integration and other
acquisition-related expenses in the reconciliation of Operating
income (loss) to Non-GAAP operating income and GAAP earnings (loss)
per diluted share attributable to Quaker Chemical Corporation
common shareholders to Non-GAAP earnings per diluted share.
In addition, this amount is recorded within the caption
Depreciation and amortization in the reconciliation of Net income
(loss) attributable to Quaker Chemical Corporation to Adjusted
EBITDA; however, it is excluded in the reconciliation of Adjusted
EBITDA to Non-GAAP net income. There was no similar
accelerated depreciation expense in the three months ended
September 30, 2020 or the three and nine months ended September 30,
2019.
|
|
|
(b)
|
Depreciation and
amortization for the three and nine months ended September 30, 2020
includes approximately $ÂÂÂ0.2 million and $0.9 million,
respectively, of amortization expense recorded within equity in net
income of associated companies in the Statements of Operations,
attributable to the amortization of the fair value step up for
Houghton's 50% interest in a joint venture in Korea as a result of
required purchase accounting. Comparatively, the three and
nine months ended September 30, 2019 includes $0.1 million of
similar amortization expense recorded within equity in net income
of associated companies.
|
|
|
(c)
|
Interest expense, net
– adjusted excludes $0.4 million and $2.1 million for the three and
nine months ended September 30, 2019, respectively, of interest
costs the Company incurred to maintain the bank commitment to
finance the Combination, prior to executing the Company's credit
facility and closing the Combination on August 1, 2019.
|
|
|
(d)
|
Taxes on income
(loss) before equity in net income of associated companies –
adjusted includes the Company's tax expense adjusted for the impact
of any current and deferred income tax expense (benefit), as
applicable, of the reconciling items presented in the
reconciliation of Net income (loss) attributable to Quaker Chemical
Corporation to adjusted EBITDA, above, determined utilizing the
applicable rates in the taxing jurisdictions in which these
adjustments occurred, subject to deductibility. In addition,
this caption also includes the impact of certain specific tax
charges and benefits which the Company does not consider core or
indicative of future performance, including tax benefits of $4.5
million and $0.4 million in the three and nine months ended
September 30, 2020 and incremental tax expense of $0.4 million
during both the three and nine months ended September 30,
2019.
|
|
|
(e)
|
The Company's
calculation of GAAP and non-GAAP earnings (loss) per diluted share
attributable to Quaker Chemical Corporation common shareholders for
the three and nine months ended September 30, 2020 and 2019 was
impacted by the 4.3 million share issuance in connection with
closing the Combination. As a result, the per diluted share
result for each of the first three quarters of 2019, as reported on
a standalone basis, may not add up to the per diluted share result
for the nine months ended September 30, 2019.
|
Pro Forma Adjusted Measures and Reconciliations
The Company has provided certain unaudited pro forma financial
information in this press release. The unaudited pro forma
financial information is based on the historical consolidated
financial statements and results of both Quaker and Houghton, and
has been prepared to illustrate the effects of the
Combination. The unaudited pro forma financial information
has been presented for informational purposes only and is not
necessarily indicative of Quaker Houghton's past results of
operations, nor is it indicative of the future operating results of
Quaker Houghton and should not be considered a substitute for the
financial information presented in accordance with GAAP. The
Company has not provided pro forma financial information as it
relates to the acquired operating divisions of Norman Hay plc based on materiality. The
following schedules present the Company's unaudited pro forma 2019
financial information (see footnote a) for net sales, as well as
net (loss) income attributable to Quaker Houghton and the
applicable reconciliation to EBITDA and adjusted EBITDA on a pro
forma non-GAAP basis (dollars in millions unless otherwise
noted):
|
Three months
ended September 30, 2019
|
|
As
Reported
|
|
Houghton
|
Divestitures
(b)
|
Other
(c)
|
|
Pro Forma
*
|
Net sales
|
$
325
|
|
$
72
|
|
$
(9)
|
|
$
(2)
|
|
$
386
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
attributable to
Quaker Houghton
|
$
(13)
|
|
$
(7)
|
|
$
(1)
|
|
$
2
|
|
$
(20)
|
Depreciation and
amortization
|
14
|
|
4
|
|
—
|
|
0
|
|
19
|
Interest expense,
net
|
6
|
|
5
|
|
—
|
|
(2)
|
|
9
|
Taxes on (loss) income
(d)
|
(6)
|
|
4
|
|
(0)
|
|
0
|
|
(2)
|
EBITDA *
|
2
|
|
6
|
|
(1)
|
|
0
|
|
7
|
Combination,
integration and
other acquisition-related
expenses
|
15
|
|
40
|
|
—
|
|
—
|
|
55
|
Gain on sale of
divested assets
|
—
|
|
(35)
|
|
—
|
|
—
|
|
(35)
|
Fair value step up of
Houghton
inventory sold
|
10
|
|
—
|
|
—
|
|
—
|
|
10
|
Restructuring and
related charges
|
24
|
|
—
|
|
—
|
|
—
|
|
24
|
Other addbacks
(e)
|
1
|
|
0
|
|
—
|
|
—
|
|
1
|
Adjusted EBITDA
*
|
$
51
|
|
$
11
|
|
$
(1)
|
|
$
0
|
|
$
61
|
Adjusted EBITDA margin
* (%)
|
16%
|
|
15%
|
|
13%
|
|
-5%
|
|
16%
|
|
|
|
Nine months
ended September 30, 2019
|
|
As
Reported
|
|
Houghton
|
|
Divestitures
(b)
|
|
Other
(c)
|
|
Pro Forma
*
|
Net sales
|
$
742
|
|
$
475
|
|
$
(34)
|
|
$
(13)
|
|
$
1,171
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to
Quaker Houghton
|
$
16
|
|
$
(3)
|
|
$
(6)
|
|
$
9
|
|
$
16
|
Depreciation and
amortization
|
24
|
|
31
|
|
—
|
|
3
|
|
58
|
Interest expense,
net
|
8
|
|
33
|
|
—
|
|
(14)
|
|
26
|
Taxes on income (loss)
(d)
|
4
|
|
(1)
|
|
(2)
|
|
3
|
|
4
|
EBITDA *
|
52
|
|
60
|
|
(8)
|
|
1
|
|
104
|
Combination,
integration and
other acquisition-related
expenses
|
24
|
|
44
|
|
—
|
|
—
|
|
68
|
Gain on sale of
divested assets
|
—
|
|
(35)
|
|
—
|
|
—
|
|
(35)
|
Fair value step up of
Houghton
inventory sold
|
10
|
|
—
|
|
—
|
|
—
|
|
10
|
Restructuring and
related charges
|
24
|
|
—
|
|
—
|
|
—
|
|
24
|
Other addbacks
(e)
|
2
|
|
(0)
|
|
—
|
|
—
|
|
2
|
Adjusted EBITDA
*
|
$
112
|
|
$
68
|
|
$
(8)
|
|
$
1
|
|
$
173
|
Adjusted EBITDA margin
* (%)
|
15%
|
|
14%
|
|
24%
|
|
-4%
|
|
15%
|
|
|
*
|
Certain amounts
may not calculate due to rounding, including EBITDA, Adjusted
EBITDA, Adjusted EBITDA margin (%) as well as the total pro forma
financial results as presented for combined Quaker
Houghton
|
|
|
(a)
|
As reported results
for the three and nine months ended September 30, 2019 include two
months of Houghton's operations as the Combination closed on August
1, 2019. Houghton reflects the results prior to closing of
the Combination, including the month of July 2019 for the three
months ended September 30, 2019 and year-to-date July 2019,
for the nine months ended September 30, 2019. Pro forma
results for the three and nine months ended September 30, 2020 have
not been presented above because the actual results for Quaker
Houghton as presented in this press release are the applicable
comparative results.
|
|
|
(b)
|
Divestitures includes the elimination of results
associated with divested product lines.
|
|
|
(c)
|
Other includes: (i)
additional depreciation and amortization expense based on the
initial estimates of fair value step up and estimated useful lives
of depreciable fixed assets, definite-lived intangible assets and
investment in associated companies acquired; (ii) adoption of
required accounting guidance and alignment of related accounting
policies; (iii) elimination of transactions between Quaker and
Houghton; and (iv) an adjustment to interest expense, net, to
reflect the impact of the new financing and capital structure of
the combined Company.
|
|
|
(d)
|
Taxes on income
(loss) related to the Divestiture and Other reflect each tax
effected at the U.S. tax rate of 21%.
|
|
|
(e)
|
Other addbacks
includes: (i) equity income in a captive insurance company; (ii)
currency conversion impacts of hyper-inflationary economies;
(iii) pension and postretirement benefit costs, non-service
components; and for the nine months ended September 30, 2019,
charges related to the settlement of a non-core equipment sale.
|
Forward-Looking Statements
This press release contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements can be identified by the fact that
they do not relate strictly to historical or current facts.
We have based these forward-looking statements, including
statements regarding the potential effects of the COVID-19 pandemic
on the Company's business, results of operations, or financial
condition and expectations regarding our liquidity position and our
continued compliance with the terms of the Company's credit
facility on our current expectations about future events.
These forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations, anticipations,
intentions, financial condition, results of operations, future
performance, and business, including but not limited to the
potential benefits of the Combination, the impacts on our business
as a result of the COVID-19 pandemic and any projected global
economic rebound or anticipated positive results due to Company
actions taken in response to the pandemic, and our current and
future results and plans and statements that include the words
"may," "could," "should," "would," "believe," "expect,"
"anticipate," "estimate," "intend," "plan" or similar
expressions. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those projected in such statements. A
major risk is that demand for the Company's products and services
is largely derived from the demand for its customers' products,
which subjects the Company to uncertainties related to downturns in
a customer's business and unanticipated customer production
shutdowns. Other major risks and uncertainties include, but
are not limited to, the primary and secondary impacts of the
COVID-19 pandemic, including actions taken in response to the
pandemic by various governments, which could exacerbate some or all
of the other risks and uncertainties faced by the Company,
including the potential for significant increases in raw material
costs, supply chain disruptions, customer financial stability,
worldwide economic and political conditions, foreign currency
fluctuations, significant changes in applicable tax rates and
regulations, future terrorist attacks and other acts of violence.
Furthermore, the Company is subject to the same business
cycles as those experienced by steel, automobile, aircraft,
industrial equipment, and durable goods manufacturers. The
ultimate impact of COVID-19 on our business will depend on, among
other things, the extent, duration and strength of the resurgence
of the pandemic, the severity of the disease and the number of
people infected with the virus, the continued uncertainty regarding
widespread availability of a vaccine, the effects on the economy by
the pandemic, including the resulting market volatility, and by the
measures taken by governmental authorities and other third parties
restricting day-to-day life and business operations and the length
of time that such measures remain in place, and governmental
programs implemented to assist businesses impacted by the COVID-19
pandemic. Other factors could also adversely affect us,
including those related to the Combination and other acquisitions
and the integration of the combined company as well as other
acquired businesses. Our forward-looking statements are
subject to risks, uncertainties and assumptions about the Company
and its operations that are subject to change based on various
important factors, some of which are beyond our control.
These risks, uncertainties, and possible inaccurate assumptions
relevant to our business could cause our actual results to differ
materially from expected and historical results. All
forward-looking statements included in this press release,
including expectations about the improvements in business
conditions during the remainder of 2020 and future periods, are
based upon information available to the Company as of the date of
this press release, which may change. Therefore, we caution
you not to place undue reliance on our forward-looking
statements. For more information regarding these risks and
uncertainties as well as certain additional risks that we face,
refer to the Risk Factors section, which appears in Item 1A of our
Quarterly Report on Form 10-Q for the period ended September 30, 2020, as well as in Item 1A in our
Annual Report on Form 10-K for the year ended December 31,
2019, and in our other reports filed from time to time with the
Securities and Exchange Commission. We do not intend to, and
we disclaim any duty or obligation to, update or revise any
forward-looking statements to reflect new information or future
events or for any other reason. This discussion is provided
as permitted by the Private Securities Litigation Reform Act of
1995.
Conference Call
As previously announced, the Company's investor conference call
to discuss its third quarter performance is scheduled for
November 6, 2020 at 8:30 a.m. (ET). A live webcast of the
conference call, together with supplemental information, can be
accessed through the Company's Investor Relations website at
investors.quakerhoughton.com. You can also access the
conference call by dialing 877-269-7756.
About Quaker Houghton
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. With approximately 4,500 employees,
including chemists, engineers and industry experts, we partner with
our customers to improve their operations so they can run even more
efficiently, even more effectively, whatever comes next.
Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near
Philadelphia in the United
States. Visit quakerhoughton.com to learn more.
Quaker Chemical
Corporation
|
Condensed
Consolidated Statements of Operations
|
(Dollars in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Three Months
Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Net
sales
|
$
367,224
|
|
$
325,130
|
|
$
1,031,825
|
|
$
742,209
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
227,032
|
|
220,073
|
|
660,396
|
|
486,224
|
|
|
|
|
|
|
|
|
Gross
profit
|
140,192
|
|
105,057
|
|
371,429
|
|
255,985
|
%
|
38.2%
|
|
32.3%
|
|
36.0%
|
|
34.5%
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
97,037
|
|
80,812
|
|
282,405
|
|
182,293
|
Indefinite-lived
intangible asset impairment
|
-
|
|
-
|
|
38,000
|
|
-
|
Restructuring and
related charges
|
1,383
|
|
24,045
|
|
3,585
|
|
24,045
|
Combination,
integration and other acquisition-related expenses
|
6,913
|
|
14,702
|
|
22,786
|
|
23,789
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
34,859
|
|
(14,502)
|
|
24,653
|
|
25,858
|
%
|
9.5%
|
|
-4.5%
|
|
2.4%
|
|
3.5%
|
|
|
|
|
|
|
|
|
Other (expense)
income, net
|
(239)
|
|
203
|
|
(22,407)
|
|
(389)
|
Interest expense,
net
|
(6,837)
|
|
(6,102)
|
|
(22,109)
|
|
(7,611)
|
Income (loss) before
taxes and equity in net income of associated companies
|
27,783
|
|
(20,401)
|
|
(19,863)
|
|
17,858
|
|
|
|
|
|
|
|
|
Taxes on income
(loss) before equity in net income of associated
companies
|
2,245
|
|
(5,633)
|
|
(7,603)
|
|
4,096
|
Income (loss) before
equity in net income of associated companies
|
25,538
|
|
(14,768)
|
|
(12,260)
|
|
13,762
|
|
|
|
|
|
|
|
|
Equity in net income
of associated companies
|
1,804
|
|
1,787
|
|
3,536
|
|
2,806
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
27,342
|
|
(12,981)
|
|
(8,724)
|
|
16,568
|
|
|
|
|
|
|
|
|
Less: Net income
attributable to noncontrolling interest
|
38
|
|
72
|
|
88
|
|
186
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to Quaker Chemical Corporation
|
$
27,304
|
|
$
(13,053)
|
|
$
(8,812)
|
|
$
16,382
|
%
|
7.4%
|
|
-4.0%
|
|
-0.9%
|
|
2.2%
|
|
|
|
|
|
|
|
|
Share and per
share data:
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
17,743,538
|
|
16,185,724
|
|
17,704,662
|
|
14,271,121
|
Diluted weighted
average common shares outstanding
|
17,800,865
|
|
16,185,724
|
|
17,704,662
|
|
14,313,971
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to Quaker Chemical Corporation common shareholders -
basic
|
$
1.53
|
|
$
(0.80)
|
|
$
(0.50)
|
|
$
1.15
|
Net income (loss)
attributable to Quaker Chemical Corporation common shareholders -
diluted
|
$
1.53
|
|
$
(0.80)
|
|
$
(0.50)
|
|
$
1.14
|
Quaker Chemical
Corporation
|
Condensed
Consolidated Balance Sheets
|
(Dollars in
thousands, except par value and share amounts)
|
|
|
|
|
|
(Unaudited)
|
|
September
30,
|
|
December
31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$
155,750
|
|
$
123,524
|
Accounts receivable,
net
|
338,875
|
|
375,982
|
Inventories,
net
|
171,327
|
|
174,950
|
Prepaid expenses and
other current assets
|
52,612
|
|
41,516
|
Total current
assets
|
718,564
|
|
715,972
|
|
|
|
|
Property, plant and
equipment, net
|
187,880
|
|
213,469
|
Right of use lease
assets
|
39,781
|
|
42,905
|
Goodwill
|
612,144
|
|
607,205
|
Other intangible
assets, net
|
1,045,040
|
|
1,121,765
|
Investments in
associated companies
|
92,163
|
|
93,822
|
Deferred tax
assets
|
13,085
|
|
14,745
|
Other non-current
assets
|
44,531
|
|
40,433
|
Total
assets
|
$
2,753,188
|
|
$
2,850,316
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
Short-term borrowings
and current portion of long-term debt
|
$
38,630
|
|
$
38,332
|
Accounts and other
payables
|
165,582
|
|
170,929
|
Accrued
compensation
|
36,994
|
|
45,620
|
Accrued
restructuring
|
8,893
|
|
18,043
|
Other current
liabilities
|
87,041
|
|
87,010
|
Total current
liabilities
|
337,140
|
|
359,934
|
|
|
|
|
Long-term
debt
|
846,070
|
|
882,437
|
Long-term lease
liabilities
|
28,061
|
|
31,273
|
Deferred tax
liabilities
|
189,439
|
|
211,094
|
Other non-current
liabilities
|
126,047
|
|
123,212
|
Total
liabilities
|
1,526,757
|
|
1,607,950
|
|
|
|
|
Equity
|
|
|
|
Common stock, $1 par
value; authorized 30,000,000 shares; issued and outstanding 2020 -
17,830,541 shares; 2019 - 17,735,162 shares
|
17,831
|
|
17,735
|
Capital in excess of
par value
|
900,602
|
|
888,218
|
Retained
earnings
|
382,521
|
|
412,979
|
Accumulated other
comprehensive loss
|
(75,010)
|
|
(78,170)
|
Total Quaker
shareholders' equity
|
1,225,944
|
|
1,240,762
|
Noncontrolling
interest
|
487
|
|
1,604
|
Total
equity
|
1,226,431
|
|
1,242,366
|
Total liabilities and
equity
|
$
2,753,188
|
|
$
2,850,316
|
Quaker Chemical
Corporation
|
Condensed
Consolidated Statements of Cash Flows
|
(Dollars in
thousands)
|
|
|
|
|
|
(Unaudited)
|
|
Nine Months
Ended
September 30,
|
|
2020
|
|
2019
|
Cash flows from
operating activities
|
|
|
|
Net (loss)
income
|
$
(8,724)
|
|
$
16,568
|
Adjustments to
reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
Amortization of debt
issuance costs
|
3,562
|
|
792
|
Depreciation and
amortization
|
62,818
|
|
23,868
|
Equity in
undistributed earnings of associated companies, net of
dividends
|
1,415
|
|
(129)
|
Acquisition-related
fair value adjustments related to inventory
|
229
|
|
10,214
|
Deferred
compensation, deferred taxes and other, net
|
(30,657)
|
|
(17,204)
|
Share-based
compensation
|
17,820
|
|
3,042
|
Loss (gain) on
disposal of property, plant, equipment and other assets
|
105
|
|
(111)
|
Insurance settlement
realized
|
(818)
|
|
(624)
|
Indefinite-lived
intangible asset impairment
|
38,000
|
|
-
|
Combination and other
acquisition-related expenses, net of payments
|
2,498
|
|
(14,218)
|
Restructuring and
related charges
|
3,585
|
|
24,045
|
Pension and other
postretirement benefits
|
16,219
|
|
434
|
Increase (decrease)
in cash from changes in current assets and current liabilities, net
of acquisitions:
|
|
|
|
Accounts
receivable
|
30,225
|
|
2,655
|
Inventories
|
2,137
|
|
1,376
|
Prepaid expenses and
other current assets
|
(113)
|
|
(10,931)
|
Change in
restructuring liabilities
|
(12,772)
|
|
(4,645)
|
Accounts payable and
accrued liabilities
|
(13,481)
|
|
344
|
Net cash provided by
operating activities
|
112,048
|
|
35,476
|
|
|
|
|
Cash flows from
investing activities
|
|
|
|
Investments in
property, plant and equipment
|
(12,184)
|
|
(10,112)
|
Payments related to
acquisitions, net of cash acquired
|
(3,132)
|
|
(798,064)
|
Proceeds from
disposition of assets
|
11
|
|
75
|
Insurance settlement
interest earned
|
41
|
|
185
|
Net cash used in
investing activities
|
(15,264)
|
|
(807,916)
|
|
|
|
|
Cash flows from
financing activities
|
|
|
|
Payments of term loan
debt
|
(28,132)
|
|
-
|
Proceeds from long
term debt
|
-
|
|
750,000
|
(Repayments)
borrowings on revolving credit facilities, net
|
(16,485)
|
|
85,966
|
(Repayments)
borrowings on other debt, net
|
(527)
|
|
415
|
Financing-related
debt issuance costs
|
-
|
|
(23,747)
|
Dividends
paid
|
(20,520)
|
|
(15,003)
|
Stock options
exercised, other
|
2,385
|
|
733
|
Purchase of
noncontrolling interest in affiliates
|
(1,047)
|
|
-
|
Distributions to
noncontrolling affiliate shareholders
|
(751)
|
|
-
|
Net cash (used in)
provided by financing activities
|
(65,077)
|
|
798,364
|
|
|
|
|
Effect of foreign
exchange rate changes on cash
|
(529)
|
|
(1,889)
|
|
|
|
|
Net increase in cash,
cash equivalents and restricted cash
|
31,178
|
|
24,035
|
Cash, cash
equivalents and restricted cash at the beginning of the
period
|
143,555
|
|
124,425
|
Cash, cash
equivalents and restricted cash at the end of the
period
|
$ 174,733
|
|
$ 148,460
|
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SOURCE Quaker Houghton