EDGAR 10-K Filing

Company CIK: 81362
Filing Year: 2022
Filename: 81362_10-K_2022_0000081362-22-000003.json

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ITEM 1. BUSINESS
Item 1.
Business.
General Description
The Company was organized in 1918, incorporated as a Pennsylvania
business corporation in 1930, and in August 2019
completed the Combination with Houghton to form Quaker Houghton.
Quaker Houghton is the global leader in industrial process
fluids.
With a presence around the world, includi
ng operations in over 25 countries, the Company’s
customers include thousands of
the world’s most advanced and specialized
steel, aluminum, automotive, aerospace, offshore, can,
mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range of formulated
chemical specialty products and offers
chemical management services (which we refer to as “Fluidcare
TM
”) for various heavy industrial and manufacturing applications
throughout its four segments: Americas; Europe, Middle East and Africa
(“EMEA”); Asia/Pacific; and Global Specialty Businesses.
The major product lines of Quaker Houghton include metal removal fluids,
cleaning fluids, corrosion inhibitors, metal drawing
and forming fluids, die cast mold releases, heat treatment and quenchants,
metal forging fluids, hydraulic fluids, specialty greases,
offshore sub-sea energy control fluids, rolling
lubricants, rod and wire drawing fluids and surface treatment chemicals.
The following
are the respective contributions to consolidated net sales of each of our principal
product lines representing more than 10% of
consolidated net sales for any of the past three years based on the Company’s
current product line segmentation:
Metal removal fluids
23.4
%
23.9
%
19.9
%
Rolling lubricants
22.2
%
21.8
%
21.9
%
Hydraulic fluids
13.6
%
13.3
%
13.0
%
Sales Revenue
A substantial portion of the Company’s
sales worldwide are made directly through its own employees and its Fluidcare
TM
programs, with the balance sold through distributors and agents.
The Company’s employees typically
visit the plants of customers
regularly, work on
site, and through training and experience, identify production needs which can be resolved
or otherwise addressed
either by utilizing the Company’s existing
products or by applying new formulations developed in its laboratories.
As part of the Company’s Fluidcare
TM
business, certain third-party product sales to customers are managed by the
Company.
Where the Company acts as principal, revenues are recognized on
a gross reporting basis at the selling price negotiated with its
customers.
Where the Company acts as an agent for its customers, revenue is recognized on
a net reporting basis at the amount of the
administrative fee earned by the Company for ordering the goods.
See Note 5 of Notes to Consolidated Financial Statements in Item 8
of this Report.
Competition
The specialty chemical industry comprises a number of companies similar in
size to the Company, as well
as companies larger
and smaller than Quaker Houghton.
The Company cannot readily determine its precise competitive position
in every industry it
serves.
However, the Company estimates it holds a leading
global position in the market for industrial process fluids including
significant global positions in the markets for process fluids in portions of
the automotive and industrial markets, and a leading
position in the market for process fluids to produce sheet steel and aluminum.
The offerings of many of the Company’s
competitors
differ from those of Quaker Houghton; some offer
a broad portfolio of fluids, including general lubricants, while others have more
specialized product ranges.
All competitors provide different levels of technical
services to individual customers.
Competition in the
industry is based primarily on the ability to supply products that meet the needs of
the customer and provide technical services and
laboratory assistance to the customer, and
to a lesser extent, on price.
Major Customers and Markets
In 2021, Quaker Houghton’s
five largest customers (each composed of multiple subsidiaries or divisions
with semi-autonomous
purchasing authority) accounted for approximately 10% of
consolidated net sales, with its largest customer accounting for
approximately 3% of consolidated net sales.
A significant portion of the Company’s
revenues are realized from the sale of process
fluids and services to manufacturers of steel, aluminum, automobiles,
aircraft, industrial equipment, and durable goods and, therefore,
Quaker Houghton is subject to the same business cycles as those experienced
by these manufacturers and their customers.
The Company’s financial
performance is generally correlated to the volume of global production within
the industries it serves, rather
than directly related to the financial performance of its customers.
Furthermore, steel and aluminum customers typically have limited
manufacturing locations compared to metalworking customers and
generally use higher volumes of products at a single location.
Raw Materials
Quaker Houghton uses approximately 3,000
raw materials, including animal fats, vegetable oils, mineral oils, oleochemicals,
ethylene, solvents, surfactant agents, various chemical compounds
that act as additives to our base formulations, and a wide variety of
other organic and inorganic compounds and
various derivatives of the foregoing.
The price of mineral oil and its derivatives can be
affected by the price of crude oil and industry refining
capacity.
Animal fat and vegetable oil prices, as well as the prices of other raw
materials, are impacted by their own unique supply and demand factors,
and by biodiesel consumption which is affected by the price
of crude oil.
Accordingly, significant fluctuations
in the price of crude oil can have a material impact on the cost of these raw
materials.
In addition, many of the raw materials used by Quaker Houghton are
commodity chemicals which can experience
significant price volatility.
As experienced during 2021, the Company’s
earnings have been and could continue to be affected by
market changes in raw material prices.
Reference is made to the disclosure contained in Item 7A of this Report.
Patents and Trademarks
Quaker Houghton has a limited number of patents and patent applications including
patents issued, applied for, or acquired in the
U.S. and in various foreign countries, some of which may prove to be material
to its business, with the earliest patent expiry in 2024.
The Company principally relies on its proprietary formulae and its applications
know-how and experience to meet customer needs.
Quaker Houghton products are identified by numerous trademarks that
are registered throughout its marketing area.
Research and Development-Laboratories
The Company maintains approximately thirty separate laboratory
facilities worldwide that are primarily devoted to applied
research and development.
In addition, the Company maintains quality control labs at each of its manufacturing
facilities.
Quaker
Houghton research and development is directed primarily
toward applied technology since the nature of the Company’s
business
requires continual modification and improvement of formulations to provide
specialty chemicals to satisfy customer requirements.
If
problems are encountered which cannot be resolved by local laboratories,
the problem is referred to one of our ten principal
laboratories, located in Conshohocken, Pennsylvania; Valley
Forge, Pennsylvania; Aurora, Illinois; Santa Fe Springs, California;
Uithoorn, the Netherlands; Coventry,
United Kingdom; Dortmund, Germany; Barcelona, Spain; Turin,
Italy or Qingpu, China.
Research and development costs are expensed as incurred.
Research and development expenses during the years ended
December 31, 2021, 2020 and 2019 were $44.9 million, $40.0 million and
$32.1 million, respectively.
Recent Acquisition Activity
The Company has completed several recent acquisitions that expand its strategic product
offerings and increase the Company's
presence in its core industries.
The Company's 2021 and 2022 acquisitions consist of:
●
In January 2022, the Company acquired a business related to the sealing
and impregnation of metal castings for the
automotive sector, as well as impregnation resin
and impregnation systems for metal parts for approximately $1.4 million.
This business expands the Company's geographic presence in Germany
as well as broadens its product offerings and service
capabilities within its existing impregnation business that was initially entered into
as part of its past acquisition of Norman
Hay.
●
In January 2022, the Company acquired a business that provides pickling
inhibitor technologies for the steel industry,
drawing lubricants and stamping oil for metalworking, and various other
lubrication, rust preventative, and cleaner
applications, for approximately $8.0 million.
This business broadens the Company’s
product offerings within its existing
metals and metalworking business in the Americas
region.
●
In November 2021, the Company acquired a business that provides hydraulic
fluids, coolants, cleaners, and rust preventative
oils for approximately $3.7 million.
This business expands the Company’s
geographic presence in Turkey as well as
broadens its product offerings within its existing metalworking
business.
●
In November 2021, the Company acquired Baron Industries ("Baron"),
a U.S. based privately held company that provides
vacuum impregnation services of castings, powder metal and electrical components
for an initial payment of approximately
$7.1 million.
Baron expands the Company's geographic presence as well as broadens its product
offerings and service
capabilities within its existing impregnation business.
●
In September 2021, the Company acquired the remaining interest in Grindaix-GmbH
(“Grindaix”), a Germany-based, high-
tech provider of coolant control and delivery systems for approximately $2.9
million.
Previously, in February 2021,
the
Company acquired a 38% ownership interest in Grindaix for approximately $1.7
million.
Grindaix expands the Company's
geographic presence in Germany and broadens its product offerings
and service capabilities within its equipment solutions
and fluid intelligence business.
●
In June 2021, the Company acquired certain assets for the Company’s
chemical milling maskants product line for
approximately $2.8 million.
●
In February 2021, the Company acquired a tin-plating solutions business for
the steel end market for approximately $25.0
million.
This business broadens the Company’s product
offerings within its existing metals business globally.
Impact of COVID-19
The global outbreak of COVID-19, and its variants, has negatively impacted
all locations where the Company does business.
Although the Company has now operated in this COVID-19 environment
for almost two years, the full extent of the outbreak and
related business impacts continue to remain uncertain and volatile.
This outbreak has significantly disrupted the operations of the
Company and those of its suppliers and customers.
Management continues to monitor the impact that the COVID-19 pandemic
is
having on the Company,
the overall specialty chemical industry,
and the economies and markets in which the Company operates.
Regulatory Matters
In order to facilitate compliance
with applicable federal, state, and local statutes and regulations relating
to occupational health
and safety and protection of the environment, the Company has an ongoing
program of site assessment for the purpose of identifying
capital expenditures or other actions that may be necessary to comply with
such requirements.
The program includes periodic
inspections of each facility by the Company and/or independent
experts, as well as ongoing inspections and training by on-site
personnel.
Such inspections address operational matters, record keeping, reporting requirements
and capital improvements.
Capital
expenditures directed solely or primarily to regulatory compliance amounted
to approximately $4.2
million, $3.7 million and $4.4
million during the years ended December 31, 2021, 2020 and 2019,
respectively.
Company Segmentation
The Company’s operating
segments, which are consistent with its reportable segments, reflect the structure of the
Company’s
internal organization, the method by which the Company’s
resources are allocated and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
See Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Non-U.S. Activities
Since significant revenues and earnings are generated by non-U.S. operations,
the Company’s financial results are
affected by
currency fluctuations, particularly between the U.S. dollar and the
euro, the British pound sterling, the Brazilian real, the Mexican
peso, the Chinese renminbi and the Indian rupee, and the impact of those currency
fluctuations on the underlying economies.
Reference is made to (i) the foreign exchange risk information
contained in Item 7A of this Report, (ii) the geographic information in
Note 4 of Notes to Consolidated Financial Statements included
in Item 8 of this Report, and (iii) information regarding risks attendant
to foreign operations included in Item 1A of this Report.
Number of Employees
On December 31, 2021, Quaker Houghton had approximately 4,700
full-time employees globally of whom approximately 1,200
were employed by the parent company and its U.S. subsidiaries, and approximately
3,500 were employed by its non-U.S. subsidiaries.
Associated companies of Quaker Houghton (in which it owns 50% or less and has
significant influence) employed approximately 600
people on December 31, 2021.
Core Values
Quaker Houghton considers its employees as its greatest strength in differentiating
our business and strengthening our market
positions.
We have established
core values that are inclusive of embracing diversity and creating a culture
where we learn from and
are inspired by the many cultures, backgrounds and knowledge of our
team members.
The Company’s goal is to have
an organization
that is inclusive of all its people and is representative of the communities
in which we operate.
The Company’s core values
are (i) live safe; (ii) act with integrity; (iii) drive results; (iv) exceed customer
expectations; (v)
embrace diversity; and (vi) do great things together.
Our core values embody who we are as a company,
guide our decisions and
inspire us.
Our commitment to these values, in words and actions, builds a safer,
stronger Quaker Houghton, and these values guide
the Company’s internal conduct
and its relationship with the outside world.
By fostering a culture and environment that exemplifies
our core values, we gain, as a company,
unique perspectives, backgrounds and varying experiences to ensure
continued long-term
success.
The Company respects and values all of its employees and believes inclusion,
diversity and equality are essential pillars to
drive the Company’s success.
Sustainability Report
We report our
progress on Environmental, Social, and Governance (“ESG”) milestones in our
sustainability report, which is
published annually and is available free of charge on our corporate
website at home.quakerhoughton.com/sustainability.
The
Company’s 2020 Sustainability
Report reflects the most recent available data on a variety of topics, including
specific information
relating to the Company’s:
(i) environmental footprint and climate change commitments;
(ii) diversity initiatives; (iii) safety initiatives
and performance;
and (iv) training courses our employees have completed.
Information in these sustainability reports and on our
website are not incorporated by reference in this Report and, accordingly,
should not be considered part of this Report.
Environmental Strategy
In 2020, we established the Board Sustainability Committee, which has specific
responsibility to assist the Board of Directors (the
“Board”) in its assessment, evaluation, and oversight of the Company’s
sustainability programs and initiatives pertaining to the
Company’s business, operations,
and employees.
In formulating our environmental strategy,
our Executive Leadership Team
(“ELT”)
and Board consider certain risks and uncertainties that may materially impact
our financial condition and results of operations.
These
risks and uncertainties are further described in Item 1A of this Report.
In 2021, we set a target to achieve carbon neutrality in our global
operations by 2030 and net zero emissions across our entire
value chain by 2050.
The Company established 15 long-term goals,
based on the results of the Company's 2020 materiality
assessment, which was completed with input from customers, investors, suppliers,
and internal stakeholders.
Our 15 long-term goals
are closely aligned with the United Nations Sustainable Development Goals.
We also identified short
-
and medium-term milestones
that may help support the achievement of our 2030 targets.
Talent
Management and Retention
Maintaining a robust pipeline of talent is crucial to our continued
success and is a key aspect of succession planning efforts across
the organization.
Our ELT
and human resources teams are responsible for attracting and retaining top talent by facilitating
an
environment where employees want to show up to work and do great
things together.
To achieve sustained high performance,
management invests in the development, safety,
and wellbeing of our employees.
Among other metrics, we measure training hours,
turnover, time to hire, and diversity hiring
to assess our progress in these areas.
Additionally, we
regularly evaluate our compensation and benefits packages
for our employees, including health and wellness
benefits, paid-time off policies, monetary compensation,
and educational reimbursements, to ensure that our total compensation and
benefits packages are aligned with our business strategy,
organizational culture, and diversity and inclusion philosophy
while ensuring
that we remain competitive in the markets we serve while following
local and statutory wage and benefits laws and guidelines.
Diversity, Equity,
and Inclusion
As a global company,
we want to build an organization that is inclusive of all people and representative of
the communities in
which we operate.
Quaker Houghton provides equal employment opportunities and does not discriminate
based on age, ethnicity,
gender identity,
disability / medical, race, religion, or sexual orientation.
We believe that diversity and
inclusion are embodied by
having working norms and cultural familiarities whereby employees
feel included, engaged, and rewarded, regardless of their
background or where they sit in the organization.
Inclusion and diversity begin with the Board and ELT.
The Board is comprised of twelve individuals with diverse experience and
credentials, selected for their business acumen and ability to challenge and add
value to management.
Our current Board composition
includes two female and four racially diverse directors out of a total of
twelve directors.
For additional information on the Company’s
leadership, refer to Item 4(a) Information about our Executive Officers
and Item 10.
Directors, Executive Officers and Corporate
Governance.
We published
our workforce demographics in our Sustainability Report.
By publicly disclosing our workforce demographics, we
increase transparency in the composition of our workforce as well as facilitate accountability
in achieving progress in our diversity
goals, including ensuring that diverse candidates are actively considered
for roles throughout the organization.
Workplac
e
Safety
We are committed
to maintaining a strong safety culture and to emphasizing the importance of
our employees’ role in identifying,
mitigating and communicating safety risks.
We maintain policies and
operational practices that communicate a culture where all
levels of employees are responsible for safety.
We believe that
the achievement of superior safety performance is both an important
short-term and long-term strategic goal in managing our operations.
We emphasize ten
“lifesaving” rules which make a significant
difference in preventing serious injuries and fatalities.
We also require
all employees to regularly complete safety training.
Additionally, our
ELT is closely involved
in our safety programs and conducts regular reviews of safety performance
metrics and
reviews the Company’s safety
performance during Company-wide meetings.
Quaker Houghton on the Internet
Financial results, news and other information about Quaker Houghton
can be accessed from the Company’s
website at
https://www.quakerhoughton.com
.
This site includes important information on the Company’s
locations, products and services,
financial reports, news releases and career opportunities.
The Company’s periodic and current reports
on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental schedules filed therewith,
and amendments to those reports, filed with the Securities
and Exchange Commission (“SEC”) are available on the Company’s
website, free of charge, as soon as reasonably practicable after
they are electronically filed with or furnished to the SEC.
Information contained on, or that may be accessed through, the Company’s
website is not incorporated by reference in this Report and, accordingly,
you should not consider that information part of this Report.
Factors that May Affect Our Future Results
(Cautionary Statements under the Private Securities Litigation Reform
Act of 1995)
Certain information included in this Report and other materials filed or
to be filed by Quaker Chemical Corporation with the SEC,
as well as information included in oral statements or other written statements made
or to be made by us, contain or may contain
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 and global supply chain constraints on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity and
remediate any of our material weaknesses in internal control over
financial reporting, and statements regarding the impact of increased
raw material costs and pricing initiatives 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:
•
the potential benefits of the Combination and other acquisitions;
•
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;
•
cost increases in prices of raw materials and the impacts of constraints and
disruptions in the global supply chain;
•
our current and future results and plans including our sustainability goals
;
and
•
statements that include the words “may,”
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities,
operational matters, capital spending, and
financing sources.
From time to time, forward-looking statements are also included in the Company’s
other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,
or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for 2021 and in any
other public statements we make may turn out to be wrong.
This can occur as a result of inaccurate assumptions or as a consequence
of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements, whether
as a result of new information, future
events or otherwise.
However, any further disclosures made on
related subjects in the Company’s subsequent
reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’ products, which
subjects the Company to uncertainties related to downturns in a
customer’s business and unanticipated customer production
slowdowns and shutdowns, including as is currently being experienced by
many automotive industry companies as a result of supply chain disruption.
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,
as well as the
potential for significant increases in raw material costs, supply chain
disruptions, customer financial instability,
worldwide economic
and political disruptions such as the current conflict between Russia and Ukraine
,
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 our customers in the steel, automobile,
aircraft, industrial equipment, and durable goods
industries.
The ultimate impact of COVID-19 on our business will depend on,
among other things, the extent and duration of the
pandemic, the severity of the disease and the number of people infected
with the virus including new variants, the continued
uncertainty regarding global availability,
administration, acceptance and long-term efficacy
of vaccines, or other treatments for
COVID-19 or its variants, the longer-term effects on the
economy of 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, as well as laws and other
governmental programs implemented to address the
pandemic or assist impacted businesses, such as fiscal stimulus and other legislation
designed to deliver monetary aid and other relief.
Other factors could also adversely affect us, including those related
to the Combination and other acquisitions and the integration of
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.
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
this Report and in our quarterly and other reports filed from time to time
with the SEC.
This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors.
There are many factors that may affect our business and
results of operations, including the following risks relating to: (1) the
demand for our products and services and our ability to grow our
customer base; (2) our business operations, including internal and
external factors that may impact our operational continuity; (3) our international
operations; (4) our supply chain; (5) domestic and
foreign taxation and government regulation and oversight; and (6)
more general risk factors that may impact our business.
Risks Related to the Demand for our Products and Services and our
Customer Base
Changes to the industries and markets that we serve could have a material
adverse effect on our liquidity, financial position
and
results of operations.
As the leader in industrial process fluids, the Company is subject to the same business
cycles as those experienced by our
customers that participate in the steel, automobile, aircraft, industrial
equipment, aerospace, aluminum and durable goods industries.
Because demand for our products and services is largely
derived from the global demand for their products, we are subject to
uncertainties related to downturns in our customers’ businesses and unanticipated
shutdowns or curtailments of our customers’
production, including as a result of adverse changes affecting
national, regional and global economies or increased competitive
pressure within our customers’ industries.
Our customers may experience deterioration of their businesses, cash flow shortages
and
difficulty obtaining financing, leading them
to delay or cancel plans to purchase products, and they may not be able to fulfill their
obligations in a timely fashion.
We have limited
ability to adjust our costs contemporaneously with changes in sales; thus, a
significant sudden downturn in sales due to reductions in global production
within the industries we serve and/or weak end-user
markets could have a material adverse effect on our
liquidity, financial position and results
of operations.
Further, our suppliers and
other business partners may experience similar conditions, which
could impact their ability to fulfill their obligations to us and also
result in material adverse effects on our liquidity,
financial position and results of operations.
Changes in competition in the industries and markets we serve could have
a material adverse effect on our liquidity, financial
position and results of operations.
The specialty chemical industry is highly competitive and there are
many companies with significant financial resources and/or
customer relationships that compete with us to provide similar products
and services.
Some competitors may be able to offer more
favorable or flexible pricing and service terms or,
due to their larger size or greater access to resources, may be better able to adapt
to
changes in conditions in our industries, fluctuations in the costs of raw materials
or changes in global economic conditions, potentially
resulting in reduced profitability and/or a loss of market share for us.
The pricing decisions of our competitors could lead us to
decrease our prices which could negatively affect our margins
and profitability.
In addition, our competitors could potentially
consolidate their businesses and gain scale or better position their
product offerings, which could have a negative impact on our
profitability and market share.
Competition in our industry historically has also been based on the ability
to provide products that
meet the needs of the customer and render technical services and laboratory
assistance, which our competitors may be able to
accomplish more effectively than we are able to do.
Further, in connection with obtaining regulatory approval
of the Combination, we
divested certain of Houghton’s products
and related assets to a competitor which they may use to compete with us in certain areas
where we continue to sell those products.
If we are unsuccessful with differentiating ourselves, it could
have a material adverse effect
on our liquidity, financial
position and results of operations and we could lose market share to our compe
titors.
Loss of a significant customer, bankruptcy
of a major customer, or the closure of or significant
reduction in production at a
customer site could have a material adverse effect on our liquidity,
financial position and results of operations.
During 2021, the Company’s
top five largest customers (each composed of multiple subsidiaries or divisions
with semi-
autonomous purchasing authority) together accounted for approximately
10% of our consolidated net sales, with the largest customer
accounting for approximately 3% of our consolidated
net sales.
The loss of a significant customer could have a material adverse effect
on our liquidity, financial
position and results of operations.
Also, a significant portion of our revenues is derived from sales to
customers in the cyclical steel, aerospace, aluminum and automotive
industries, where bankruptcies have occurred in the past and
where companies have periodically experienced financial difficulties.
If a significant customer experiences financial difficulties or
files for bankruptcy protection, we may be unable to collect on our receivables,
and customer manufacturing sites may be closed, or
contracts voided.
The bankruptcy of a major customer could therefore have a material adverse effect
on our liquidity, financial
position and results of operations.
Also, some of our customers, primarily in the steel, aluminum and aerospace industries, often
have
fewer manufacturing locations compared to other metalworking customers
and generally use higher volumes of products at a single
location.
The loss, closure,
or significant reduction in production at one or more of these locations or other major sites of
a significant
customer could have a material adverse effect on our
business.
We may not be able
to timely develop, manufacture and gain market acceptance of new and enhanced
products required to
maintain or expand our business, which could adversely affect
our competitive position and our liquidity, financial
position and
results of operations.
We believe that
our continued success depends on our ability to continuously develop and manufacture
new products and product
enhancements on a timely and cost-effective basis in response
to customer demands for higher performance process chemicals and
other product offerings.
Our competitors may develop new products or enhancements to their products
that offer performance,
features and lower prices that may render our products less competitive
or obsolete, and we may lose business and/or significant
market share.
The development and commercialization of new products requires
significant expenditures over an extended period of
time, and some products that we seek to develop may fail to gain traction or never
become profitable.
In any event, ongoing
investments in research and development for the future do not yield an
immediate beneficial impact on our operating results and
therefore could result in higher costs without a proportional increase in revenues.
In addition, our customers use our specialty chemicals for a broad range
of applications.
Changes in our customers’ products or
processes or changes in regulatory,
legislative or industry requirements may lead our customers to reduce consumption
of the specialty
chemicals that we produce or make them unnecessary or less attractive.
Customers may also adopt alternative materials or processes
that do not require our products.
An example of such evolving customer demands and industry trends is the
movement towards light
weighting of materials and electric vehicles.
Should a customer decide to use a different material due to price,
performance or other
considerations, we may not be able to supply a product that meets the customer’s
new requirements.
Consequently, it is important
that
we develop new products to replace the products that mature and decline
in use.
Despite our efforts, we may not be able to develop
and introduce products incorporating new technologies in a timely manner
that will satisfy our customers’ future needs or achieve
market acceptance.
Moreover, new products may have lower margins
than the products they replace.
Our business, results of
operations, cash flows and margins could be materially
adversely affected if we are unable to manage successfully the maturation
or
obsolescence of our existing products and the introduction of new products.
Risks Related to Business Operations, Including Internal and External Factors
that May Impact Our Operational Continuity
Our ability to profitably operate our consolidated company as anticipated
requires us to effectively identify and consummate the
strategic acquisitions we identify and to successfully integrate
these acquisitions into our consolidated operations.
An inability to
appropriately capitalize on growth, including organic growth and future acquisitions,
could adversely affect our liquidity,
financial
position and results of operations.
We have completed
several acquisitions over the past several years as discussed in Note 2 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Report.
Acquired companies may have significant latent liabilities that may not be
discovered before they are acquired and may not be reflected in the price
we pay.
Acquisitions also could have a dilutive effect on our
financial results and while they generally result in goodwill, goodwill
could be impaired in the future resulting in a charge to earnings.
Our ability to implement our growth strategy may be limited by our
ability to identify appropriate acquisition or joint venture
candidates, our financial resources, including available cash and
borrowing capacity, and our ability
to negotiate and complete suitable
arrangements.
Further, the success of our growth depends on our ability
to navigate risks such as those listed above and successfully
integrate acquisitions, including, but not limited to, our ability to:
●
successfully execute the integration or consolidation of the
acquired or additional business into our existing processes and
operations;
●
develop or modify financial reporting, information systems and other
related financial tools to ensure
overall financial
integrity and adequacy of internal control procedures;
●
identify and take advantage of potential synergies, including
cost reduction opportunities, while retaining legacy business and
other related attributes;
●
adequately address challenges arising from the increased scope, geographic
diversity and complexity of our operations; and
●
further penetrate existing, and expand into new,
markets with the product capabilities acquired in acquisitions.
If we fail to successfully integrate acquisitions into our existing business,
our financial condition and results of operations could
be adversely affected.
We may fail to
obtain the benefits we anticipate from our recently completed or future
acquisitions or joint
ventures and we may not create the appropriate infrastructure to support
such additional growth from organic or acquired businesses,
which could also have a material adverse effect on our liquidity,
financial position and results of operations.
Gulf and its wholly-owned subsidiary, QH Hungary
Holdings Limited, have a significant minority stake in the Company and the
contractual ability to nominate certain directors of the Company,
which may enable them to influence the direction of our business
and significant corporate decisions.
As a result of the Combination, Gulf and its wholly-owned subsidiary,
QH Hungary Holdings Limited (together,
the “Gulf
Affiliates”), have become our largest shareholders.
If they were to make available for sale a portion of their shares, that portion could
represent a significant amount of common stock of the Company being sold
which could have an adverse impact on the Company’s
stock price.
In addition, the Gulf Affiliates currently have the right
to designate three individuals for election to the Board and this right,
together with their share ownership, gives them substantial influence over
our business, including over matters submitted to a vote of
our shareholders, including the election of directors, amendment of our organizational
documents, acquisitions or other business
combinations involving the Company,
and potentially the ability to prevent extraordinary transactions such as a takeover
attempt or
business combination.
The concentration of ownership of our shares held by the Gulf Affiliates may
make some future actions more
difficult without their support.
The Gulf Affiliates, however, among
other provisions in the shareholders agreement, have agreed that
for so long as any of their designees are on the Board, and for six months thereafter,
they will vote all Quaker Houghton shares
consistent with the recommendations of the Board for each director nominee
as reflected in each proxy statement of the Company,
including in support of any Quaker Houghton directors nominated for election
or re-election to the Board (except as would conflict
with their rights to designees on the Board).
Nevertheless, the interests of Gulf may conflict with our interests or the interests of our
other shareholders, though we are not aware of any such existing conflicts of interest at
this time.
Failure to comply with any material provision of our principal credit facility
or other debt agreements could have a material
adverse effect on our liquidity, financial
position and results of operations.
We significantly
increased our level of indebtedness in connection with the closing of
the Combination.
Our principal credit
facility requires the Company to comply with certain provisions
and covenants, and, while we do not currently consider these
provisions and covenants to be overly restrictive, they could become
more difficult to comply with as business or financial conditions
change.
We are also subject to
interest rate risk due to the variable interest rates within the credit facility and if interest rates rise
significantly, these
interest costs would increase as well.
Our principal credit facility contains provisions that are customary
for facilities of its type, including affirmative and negative
covenants, financial covenants and events of default, including
restrictions on (a) the incurrence of additional indebtedness, (b)
investments in and acquisitions of other businesses, lines of business and
divisions, (c) the making of dividends or capital stock
purchases and (d) dispositions of assets.
We may declare
dividends and make share repurchases in annual amounts not exceeding
the
greater of $50 million annually and 20% of consolidated EBITDA (earnings
before interest, taxes, depreciation and amortization) if
we are otherwise in compliance with the credit facility and we may also distribute
certain other amounts to our shareholders if we
satisfy a consolidated net leverage ratio.
Other financial covenants contained in our principal credit facility
include a consolidated
interest coverage test and a consolidated net leverage test.
Customary events of default in the credit facility include, among others,
defaults for non-payment, breach of representations and warranties, non
-performance of covenants, cross-defaults, insolvency,
and a
change of control of the Company in certain circumstances.
If we are unable to comply with the financial and other provisions of
our
principal facility,
we could become in default.
The occurrence of an event of default under the credit facility could result in all loans
and other obligations becoming immediately due and payable and the facility
being terminated.
In addition, deterioration in the
Company’s results of operations
or financial position could significantly increase borrowing costs.
Changes to the LIBOR calculation method or the replacement of LIBOR may have adverse
consequences for the Company that
cannot yet reasonably be predicted.
The Company’s principal
credit facility permits interest on certain borrowings to be calculated based on the
London Interbank
Offered Rate (“LIBOR”).
The LIBOR benchmark has been subject of national, international, and other regulatory
guidance and
proposals for reform and will cease to be provided with certain rates as of December
31, 2021 through June 30, 2023.
In December
2021, the Company entered into the Second Amendment to Credit Agreement
(“Second Amendment”) with Bank of America N.A., to
provide an update for the use of a non-U.S. dollar (“non-USD”) currency LIBOR successor
rate.
The transition away from LIBOR
presents various risks and challenges, including with respect to our borrowings
and hedging arrangements that rely on the LIBOR
benchmark.
Further, the overall financial market may be disrupted as a result
of the phase-out or replacement of LIBOR.
Various
parties are working on industry wide and company specific transition plans
related to derivatives and cash markets exposed to LIBOR.
The U.S. Federal Reserve, in conjunction with the Alternative Reference
Rates Committee, a steering committee comprised of large
U.S. financial institutions, is considering replacing LIBOR with the Secured
Overnight Financing Rate (“SOFR”), a new index
calculated using short-term repurchase agreements,
backed by Treasury securities.
At this time, it remains uncertain what rate will
succeed LIBOR.
It is not possible to predict whether SOFR will attain market traction as a LIBOR replacement
or to predict any other
reforms to LIBOR that may be enacted.
The potential effect of the phase-out or replacement of LIBOR on the Company’s
financial
position or results of operations cannot yet be predicted but may affect
the level of interest payments on our portion of indebtedness
that bear interest at variable rates.
Risks Related to our International Operations
Our global presence subjects us to political and economic risks that could adversely affect
our business, liquidity, financial
position and results of operations.
A significant portion of our revenues and earnings are generated by our non
-U.S. operations.
Our success as a global business
depends, in part, upon our ability to succeed across different legal,
regulatory, economic,
social and political conditions by developing,
implementing and maintaining policies and strategies that are effective
in all of the locations where we do business.
Risks inherent in
our global operations include:
●
increased transportation and logistics costs, or restrictions on transportation
of materials;
●
increased cost or decreased availability of raw materials;
●
trade protection measures including import and export controls, trade embargoes,
and trade sanctions between countries or
regions we serve that could result in our losing access to customers and suppliers
in those countries or regions;
●
unexpected adverse changes in export duties, quotas and tariffs and
difficulties in obtaining export licenses;
●
termination or substantial modification of international trade agreements
that may adversely affect our access to raw
materials and to markets for our products;
●
our agreements with counterparties in countries outside the U.S. may
be difficult for us to enforce and related receivables
may take longer or be difficult for us to collect;
●
difficulties of staffing and managing dispersed
international operations;
●
less protective foreign intellectual property laws, and more generally,
legal systems that may be less developed and
predictable than those in the U.S.;
●
limitations on ownership or participation in local enterprises as well as the potential
for expropriation or nationalization of
enterprises;
●
the impact of widespread public health crises, such as the COVID-19 pandemic;
●
instability in or adverse changes to the economic, political, social, legal or regulatory
conditions in a country or region where
we do business, including hyperinflationary conditions or as a result of
terrorist activities, or as a result of political and/or
military conflict; and
●
complex and dynamic local tax regulations, including changes in foreign
laws and tax rates or U.S. laws and tax rates with
respect to foreign income that may unexpectedly increase the rate at which
our income is taxed, impose new and additional
taxes on remittances, repatriation or other payments by subsidiaries, or
cause the loss of previously recorded tax benefits.
The current global geopolitical and trade environment creates the potential
for increased escalation of domestic and international
tariffs and retaliatory trade policies.
Further changes in U.S. trade policy and additional retaliatory
actions by U.S. trade partners
could result in a worsening of economic conditions.
If we are unable to successfully manage these and other risks associated with
our
international businesses, the risks could have a material adverse effect
on our business, results of operations and financial condition.
Additionally, on January
31, 2020, the United Kingdom’s
(“U.K.”) ended its membership in the European Union (“EU”)
(commonly referred to as “Brexit”).
The U.K. and the EU entered into a trade and cooperation agreement effective
January 1, 2021,
but uncertainty remains regarding its implications and implementation
,
and whether any new trade agreements with other countries or
territories will be agreed upon and implemented and how any such agreements
may impact our business.
The long-term economic,
legal, political and social implications of Brexit, including regarding
data protection in the U.K. and the free movement of goods,
services, and people between the U.K., the EU, and elsewhere, also remains
unclear,
and the precise impact of the Brexit decision will
only become clearer as Brexit progresses.
Brexit has caused and could cause further disruptions to, and create unce
rtainty
surrounding, our business in the U.K. and EU, including affecting our
relationships with our existing and future customers, suppliers
and employees.
Brexit could lead to legal uncertainty and potentially divergent national laws and
regulations as the U.K. determines
which EU laws to replace or replicate.
Brexit could also lead to calls for similar referendums in other European jurisdictions
which
could cause increased economic volatility in the European and global markets.
Uncertainty around these and related issues could lead
to adverse effects on the economy of the U.K. or in the other economies
in which we operate.
There can be no assurance that any or
all of these events will not have a material adverse effect on our business operations,
results of operations and financial condition.
The scope of our international operations subjects us to risks from currency fluctuations
that could adversely affect our liquidity,
financial position and results of operations.
Our non-U.S. operations generate significant revenues and
earnings.
Fluctuations in foreign currency exchange rates may affect
product demand and may adversely affect the profitability
in U.S. dollars of the products and services we provide in international
markets where payment for our products and services is made in the local
currency.
Our financial results are affected by currency
fluctuations, particularly between the U.S. dollar and the euro, the Brazilian
real, the Mexican peso, the Chinese renminbi, and the
Indian rupee, and the impact of those currency fluctuations on the
underlying economies.
During the past three years, sales by our
non-U.S. subsidiaries, which use their local currencies as their functional currency,
accounted for approximately 60% to 70% of our
consolidated net sales.
We generally do not use
financial instruments that expose us to significant risk involving foreign curren
cy
transactions; however, the relative size of our non-U.S.
activities has a significant impact on reported operating results and our net
assets.
Therefore, as exchange rates change, our results can be materially
affected.
Incorporated by reference is the foreign exchange
risk information contained in Item 7A of this Report and the geographic information
in Note 4 of Notes to Consolidated Financial
Statements included in Item 8 of this Report.
Also, we occasionally source inventory in a different country
than that of the intended sale.
This practice can give rise to foreign
exchange risk.
We seek to mitigate this risk through
local sourcing of raw materials in the majority of our locations.
Risks Relating to Our Supply Chain
If we are unable to obtain price increases or contract concessions sufficient to
offset increases in the costs of raw materials, this
can continue to result in a loss of sales, gross profit, and/or market share and can
have a material adverse effect on our liquidity,
financial position and results of operations.
Conversely, if we fail to adjust prices in a declining raw material cost environment,
we
could lose sales, gross profit, and/or market share which could have a material
adverse effect on our liquidity, financial position
and results of operations.
Quaker Houghton uses approximately 3,000 different
raw materials, including animal fats, vegetable oils, mineral oils,
oleochemicals, ethylene, solvents, surfactant agents, various chemical
compounds that act as additives to our base formulations, and a
wide variety of other organic and inorganic
compounds, and various derivatives of the foregoing.
The price of mineral oils and their
derivatives can be affected by the price of crude oil
and industry refining capacity.
Animal fat and vegetable oil prices, as well as the
prices of other
raw materials, are impacted by their own specific supply and demand factors, as well as by
biodiesel consumption
which is also affected by the price of crude oil.
Accordingly, significant
fluctuations in the price of crude oil in the past have had and
are expected to continue to have a material impact on the cost of our raw materials.
In addition, many of the raw materials we use are
commodity chemicals, which can experience significant price volatility.
We generally
attempt to pass through changes in the prices of raw materials to our customers, but we
may be unable to do so (or
may be delayed in doing so).
In addition, raising prices we charge to our customers
in order to offset increases in the prices we pay
for raw materials could cause us to suffer a loss of sales volumes.
Although we have been successful in recovering a substantial
amount of raw material cost increases while retaining our customers as experienced
in 2021, there can be no assurance that we will be
able to continue to offset higher raw material costs or
retain customers in the future.
A significant change in margin or the loss of
customers due to pricing actions could result in a material adverse effect
on our liquidity, financial position
and results of operations
as described within Item 7 of this Report.
Lack of availability of raw materials and issues associated with sourcing from single suppliers
and suppliers in volatile economic
environments could have a material adverse effect on our liquidity,
financial position and results of operations.
The specialty chemical industry periodically experiences supply shortages
for certain raw materials.
In addition, we source some
materials from a single supplier or from suppliers in jurisdictions that have
experienced political or economic instability.
Even if we
have multiple suppliers of a particular raw material, there are occasionally
shortages.
Any significant disruption in supply could affect
our ability to obtain raw materials or satisfactory substitutes or could
increase the cost of such raw materials or substitutes, which
could have a material adverse effect on our liquidity,
financial position and results of operations.
In addition, certain raw materials
that we use are subject to various regulatory laws, and a change in our ability to legally
use such raw materials may impact the
products or services we are able to offer which could negatively
affect our ability to compete and could adversely affect
our liquidity,
financial position and results of operations.
Loss of a significant manufacturing facility or disruptions within our supply
chain or in transportation could have a material
adverse effect on our liquidity, financial
position and results of operations.
Our manufacturing facilities are located throughout the world.
While we have some redundant capabilities, if one of our facilities
is forced to shut down or curtail operations because of damage or other factors,
including natural disasters, labor difficulties or
widespread public health crises, such as the ongoing COVID-19 pandemic,
we may not be able to timely supply our customers.
This
could result in a loss of sales over an extended period or permanently.
While the Company seeks to mitigate this risk through business
continuity and contingency planning and other measures, the loss of production
in any one region over an extended period of time
could have a material adverse effect on our liquidity,
financial position and results of operations.
In addition, the coronavirus
pandemic has caused, and may in the future cause, significant travel disruptions,
quarantines and/or closures, which could result in
disruptions to our manufacturing and production operations at our facilities,
as well as those of our suppliers and customers.
Any
losses due to these events may not be covered by our existing insurance policies
or may be subject to certain deductibles.
We could be
similarly adversely affected by other disruptions to our supply
chain and transportation network.
The Company
relies heavily on railroads, ships, and over-the-road shipping
methods to transport raw materials to its manufacturing facilities and to
transport finished products to customers.
The costs of transporting our products could be negatively affected
by factors outside of our
control, including shipping container shortages or global imbalances in
shipping capabilities, transportation disruptions or rate
increases, increased border controls or closures, extreme weather events,
tariffs, rising fuel costs and capacity constraints.
Significant
delays or increased costs affecting our supply chain, such as we experienced
in 2021 could materially affect our financial condition
and results of operations.
Disruptions at our suppliers have recently and could in the future lead to short term or longer
term increases
in raw material or energy costs and/or reduced availability of materials
or energy,
potentially affecting our financial condition and
results of operations.
Risks Relating to Domestic and Foreign Taxation
and Government Regulation and Oversight
Changes in tax laws could result in fluctuations in our effective tax
rate and have a material effect on our liquidity,
financial
position and results of operation.
We pay income
taxes in the U.S. and various foreign jurisdictions.
Our effective tax rate is derived from a combination of local
tax rates and tax attributes applicable to our operations in the various countries,
states and other jurisdictions in which we operate.
Our effective tax rate and respective tax liabilities could therefore
be materially affected by changes in the mix of earnings in countries
with differing statutory tax rates, changes in tax rates, expiration
or lapses of tax credits or incentives, changes in uncertain tax
positions, changes in the valuation of deferred tax assets and liabilities, or changes
in tax laws or in how they are interpreted or
enforced, including matters such as transfer pricing.
In addition, we are regularly under audit by tax authorities, and the final
decisions of such audits could materially affect our current
tax estimates and tax positions.
See Note 10 and Note 26 of Notes to
Consolidated Financial Statements in Item 8 of this Report for a discussion
of certain income and non-income tax audits and
inspections.
Any of these factors or similar tax-related risks could cause our effective
tax rate and tax-related payments, including any
such payments related to tax liabilities of businesses we have acquired, to
significantly differ from previous periods and current or
future expectations which could have a material effect on our liquidity,
financial position and results of operations.
Pending and future legal proceedings including environmental
matters could have a material adverse effect on our liquidity,
financial position and results of operations, as well as our reputation in the markets it serves.
The Company and its subsidiaries are routinely party to proceedings, cases, and
requests for information from, and negotiations
with, various claimants and federal and state agencies relating to various
legal matters, including tax and environmental matters.
See
Note 10 and Note 26 of Notes to Consolidated Financial Statements in Item
8 of this Report, which describes uncertain tax positions
and tax audits and inspections, as well as certain information concerning
pending asbestos-related litigation against an inactive
subsidiary, amounts
accrued associated with certain environmental, non-capital remediation costs and
other potential commitments or
contingencies.
An adverse result in one or more pending or ongoing matters or any potential future
matter of a similar nature could
materially and adversely affect our liquidity,
financial position, and results of operations, as well as our reputation in the markets
we
serve.
Failure to comply with the complex global regulatory environment in which we operate
could have an adverse impact on our
reputation and/or a material adverse effect on our liquidity,
financial position and results of operations.
We are subject to
government regulation in all of the jurisdictions in which we conduct our business.
Changes in the regulatory
environments
in which we operate, particularly,
but not limited to, the U.S., Mexico, Brazil, China, India, Thailand, Australia, the
U.K. and the EU, could lead to heightened regulatory compliance costs and
scrutiny, could adversely
impact our ability to continue
selling certain products in the U.S. or foreign markets, and/or could otherwise
increase the cost of doing business.
While we seek to
mitigate these risks through a variety of actions,
including receiving Responsible Care Certification, ongoing employee
training, and
employing a comprehensive environmental, health and safety program,
there is no guarantee these actions will prevent all potential
regulatory compliance issues.
For instance, failure to comply with the EU’s
Registration, Evaluation, Authorization and Restriction of
Chemicals (“REACH”) regulations or other similar laws and regulations
could result in our inability to sell certain products or we
could incur fines, ongoing monitoring obligations or other future business consequences,
which could have a material adverse effect
on our liquidity, financial
position and results of operations.
In addition, the U.S. Toxic
Substances Control Act (“TSCA”) requires
chemicals to be assessed against a risk-based safety standard and
that unreasonable risks identified during risk evaluation be
eliminated.
This regulation and other pending initiatives at the U.S. state level, as well as initiatives
in Canada, Asia and other
regions, could potentially require toxicological testing and risk assessments of
a wide variety of chemicals, including chemicals used
or produced by us.
These assessments may result in heightened concerns about the chemicals involved
and additional requirements
being placed on their production, handling, labeling or use.
These concerns and additional requirements could also increase the cost
incurred by our customers to use our chemical products and otherwise
limit their use which could lead to a decrease in demand for
these products.
A decrease in demand due to these issues could have an adverse impact on our business
and results of operation.
Further, we are subject to the U.S. Foreign
Corrupt Practices Act (the “FCPA”),
the U.K. Bribery Act and other anti-bribery,
anti-
corruption and anti-money laundering laws in jurisdictions around
the world.
These and similar laws generally prohibit companies
and their officers, directors, employees and third-party
intermediaries, business partners and agents, from making improper payments
or providing other improper items of value to government officials
or other persons.
While we have policies and procedures and
internal controls designed to address compliance with such laws, including
employee training programs, we cannot guarantee that our
employees and third-party intermediaries, business partners
and agents will not take, or be alleged to have taken, actions in violation
of such policies and laws for which we may be ultimately held responsible.
Detecting, investigating and resolving actual or alleged
violations can be extensive and require a significant diversion of time, resources
and attention from senior management.
Any
violation of these or other applicable anti-bribery,
anti-corruption and anti-money laundering laws could result in whistleblower
complaints, adverse media coverage, investigations, loss of export privileges,
and criminal or civil sanctions, penalties and fines, any
of which could adversely affect our business and financial
condition.
The shipment of goods, services and technology across international
borders subjects us to extensive trade laws and regulations.
Our import activities are governed by the unique customs laws and
regulations in each of the countries where we operate.
Moreover,
many countries, including the U.S., control the export and re-export of
certain goods, services and technology and impose related
export record-keeping and reporting obligations.
Governments may also impose economic sanctions against certain countries, persons
and entities that may restrict or prohibit transactions involving such
countries, persons and entities, which may limit or prevent our
conduct of business in certain jurisdictions.
The laws and regulations concerning import activity,
export record-keeping and reporting, export control and economic
sanctions
are complex and constantly changing.
These laws and regulations can cause delays in shipments and unscheduled operational
downtime.
Moreover, any failure to comply with applicable legal and
regulatory trading obligations could result in criminal and civil
penalties and sanctions such as fines, imprisonment, debarment from governmental
contracts, seizure of shipments and loss of import
and export privileges.
In addition, investigations by governmental authorities as well as legal, social, economic
and political issues in
these countries could have a material adverse effect on our
business, results of operations and financial condition.
We are also subject
to the risks that our employees, joint venture partners and agents outside of
the U.S. may fail to comply with other applicable laws.
Uncertainty related to environmental regulation and industry standards relating
to, as well as physical risks of, climate change and
biodiversity loss, could impact our results of operations and financial position
.
Increased public and stakeholder awareness and concern regarding global
climate change, biodiversity loss, and other
environmental risks may result in more extensive international, regional
and/or federal requirements or industry standards to reduce or
mitigate the effects of these changes.
These regulations could mandate even more restrictive standards or industry
standards than the
voluntary goals that we have established or require changes to be adopted
on a more accelerated time frame.
There continues to be a
lack of consistent climate legislation, which creates economic and regulatory
uncertainty.
Though we are closely following
developments in this area and changes in the regulatory landscape in the U.S.,
we cannot predict how or when those challenges may
ultimately impact our business.
While certain climate change initiatives may result in new business opportunities
for us in the area of
alternative fuel technologies and emissions control, compliance with
these initiatives may also result in additional costs to us
including, among other things, increased production costs, additional
taxes, reduced emission allowances or additional restrictions on
production or operations.
In addition, the potential physical impacts of climate change and biodiversity
loss are highly uncertain and will be particular to the
circumstances developing in various geographical regions.
These may include extreme weather events and long-term changes
in
temperature levels and water availability as well as damaged ecosystems.
The physical risks of climate change and biodiversity loss
may impact our facilities, our customers and suppliers, and the availability
and costs of materials and natural resources, sources and
supply of energy,
product demand and manufacturing.
In particular, climate change serves as a risk multiplier
increasing both the
frequency and severity of natural disasters that may affect
our business operations.
If environmental laws or regulations or industry standards are either
changed or adopted and impose significant operational
restrictions and compliance requirements upon us or our products, or
our operations are disrupted due to physical impacts of climate
change or biodiversity loss, our business, capital expenditures, results of
operations, financial condition and competitive position could
be negatively impacted.
We are subject to stringent labor
and employment laws in many jurisdictions in which we operate, and
our relationship with our
employees could deteriorate which could adversely impact our operations.
A majority of our full-time employees are employed outside the U.S.
In many jurisdictions where we operate, labor and
employment laws grant significant job protection to certain employees including
rights on termination of employment.
In addition, in
certain countries our employees are represented by works councils or are governed
by collective bargaining agreements and we are
often required to consult with and seek the consent or advice of such representatives
.
These regulations and laws, together with our
obligations to seek consent or consult with the relevant unions or works councils,
could have a significant impact on our flexibility in
managing costs and responding to market changes.
While the Company believes it has generally positive relations with its labor
unions and employees, there is no guarantee the Company will be able to successfully
negotiate new or renew labor agreements
without work stoppages, labor difficulties or unfavorable
terms.
If we were to experience any extended interruption of operations at
any of our facilities because of strikes or other work stoppages, our results of operations
and financial condition could be materially
and adversely affected.
We may be
unable to adequately protect our proprietary rights and trade brands, which may
limit our ability to compete in our
markets and could adversely affect our liquidity,
financial position and results of operations.
We have a limited
number of patents and patent applications, including patents issued, applied
for, or acquired in the U.S. and in
various foreign countries, some of which are material to our business.
However, we rely principally on our proprietary
formulae and
the applications know-how and experience to meet customer needs.
Also, our products are identified by trademarks that are registered
throughout our marketing area.
Despite our efforts to protect our proprietary information through
patent and trademark filings, and
the use of appropriate trade secret protections, it is possible that competitors
or other unauthorized third parties may obtain, copy,
use,
disclose or replicate our formulae, products, and processes.
Similarly, third parties
may assert claims against us and our customers
and distributors alleging our products infringe upon third-party intellectual
property rights.
In addition, the laws and/or judicial
systems of foreign countries in which we design, manufacture, market
and sell our products may afford little or no effective protection
of our proprietary technology or trade brands.
Also, security over our global information technology structure
is subject to increasing
risks associated with cyber-crime and other related cyber-security
threats.
These potential risks to our proprietary information, trade
brands and other intellectual property could subject us to increased competition
and a failure to protect, defend or enforce our
intellectual property rights could negatively impact our liquidity,
financial position and results of operations.
General Risk Factors
Our business could be adversely affected by environmental,
health and safety laws and regulations or by potential product, service
or other related liability claims.
The development, manufacture and sale of specialty chemical products and
other related services involve inherent exposure to
potential product liability claims, service level claims, product recalls and
related adverse publicity.
Some customers have and may in
the future require us to represent that our products conform to certain product
specifications provided by them.
Any failure to comply
with such specifications could result in claims or legal action against us.
Any of the foregoing potential product or service risks could
also result in substantial and unexpected expenditures and affect
customer confidence in our products and services, which could have
a
material adverse effect on our liquidity,
financial position and results of operations.
In addition, our business is subject to hazards associated with the manufacturing,
handling, use, storage, and transportation of
chemical materials and products, including historical operations at our
current and former facilities.
These potential hazards could
cause personal injury and loss of life, severe damage to, or destruction of,
property or equipment and environmental contamination or
other environmental damage, which could have an adverse effect
on our business, financial condition or results of operations.
In the
jurisdictions in which we operate, we are subject to numerous U.S. and non-U.S.
national, federal, state and local environmental,
health and safety laws and regulations, including those governing
the discharge of pollutants into the air and water,
the management
and disposal of hazardous substances and wastes and the cleanup
of contaminated properties.
We currently
use, and in the past have
used, hazardous substances at many of our facilities, and we have in the past been,
and may in the future be, subject to claims relating
to exposure to hazardous materials.
We also have
generated, and continue to generate, hazardous wastes at a number of our
facilities.
Liabilities associated with the investigation and cleanup of hazardous
substances, as well as personal injury,
property damages or
natural resource damages arising from the release of, or exposure to, such hazardous
substances, may be imposed in many situations
without regard to violations of laws or regulations or other fault, and
may also be imposed jointly and severally (so that a responsible
party may be held liable for more than its share of the losses involved, or
even the entire loss).
These liabilities may also be imposed
on many different entities, including, for example,
current and prior property owners or operators, as well as entities that arranged for
the disposal of the hazardous substances.
The liabilities may be material and can be difficult to identify or quantify.
In addition, the
occurrence of disruptions, shutdowns or other material operating problems
at our facilities or those of our customers due to any of
these risks could adversely affect our reputation and have
a material adverse effect on our operations as a whole, including
our results
of operations and cash flows, both during and after the period of operational
difficulties.
Further, some of the raw materials we handle
are subject to government regulation that affect the manufacturing
processes,
handling, uses and applications of our products. In addition, our production
facilities and a number of our distribution centers require
numerous operating permits.
Due to the nature of these requirements and changes in our operations, our
operations may exceed limits
under permits or we may not have the proper permits to conduct our operations.
Ongoing compliance with environmental laws, regulations and permits that
impact registration/approval requirements,
transportation and storage of raw materials and finished products, and
storage and disposal of wastes could require us to make changes
in manufacturing processes or product formulations and could have
a material adverse effect on our results of operations.
We may
incur substantial costs, including fines, damages, criminal or civil sanctions
and remediation costs, or experience interruptions in our
operations, including as a result of revocation, non-renewal or modification
of the Company’s operating permits and
revocation of the
Company’s product registrations,
for violations arising under these laws or permit requirements.
Any such revocation, modification or
non-renewal may require the Company to cease or limit the manufacture
and sale of its products at one or more of its facilities, which
may limit or prevent the Company’s
ability to meet product demand or build new facilities and may have a material
adverse effect on
the Company’s business, financial position,
results of operations and cash flows.
Additional information may arise in the future
concerning the nature or extent of our liability with respect to identified
sites, and additional sites may be identified for which we are
alleged to be liable, that could cause us to materially increase our environmental
accrual or the upper range of the costs we believe we
could reasonably incur for such matters.
Increased compliance costs may not affect competitors in the
same way that they affect us
due to differences in product formulations, manufacturing
locations or other factors, and we could be at a competitive disadvantage,
which might adversely affect our financial performance.
We could be subject
to indemnity claims and liable for other payments relating to properties or businesses
we have divested.
In connection with the sale of certain properties and businesses, we agreed
to indemnify the purchasers for certain types of
matters, including certain breaches of representations and
warranties, taxes and certain environmental matters.
With respect to
environmental matters, the discovery of contamination arising
from properties that we have divested may expose us to indemnity
obligations under the sale agreements with the buyers of such properties or
cleanup obligations and other damages under applicable
environmental laws, even if we were not aware of the contamination.
We may not have insurance
coverage for such indemnity
obligations.
Further, we cannot predict the nature or amount of
any indemnity or other obligations we may have to pay the applicable
purchaser.
These payments may be costly and may adversely affect our financial
condition and results of operations.
Our insurance may not fully cover all potential exposures.
We maintain product,
property, business interruption,
casualty, and other general
liability insurance, but this may not cover all
risks associated with the hazards of our business and these coverages
are subject to limitations, including deductibles and coverage
limits.
We may incur
losses beyond the limits, or outside the coverage, of our insurance policies, including
liabilities for
environmental remediation.
In addition, from time to time, various types of insurance for companies in
the specialty chemical
industry have not been available on commercially acceptable terms and,
in some cases, have not been available at all.
We are
potentially at additional risk if one or more of our insurance carriers fail.
Additionally, severe disruptions
in the domestic and global
financial markets could adversely impact the ratings and survival
of some of our insurers.
Future downgrades in the ratings of enough
insurers could adversely impact both the availability of appropriate insurance
coverage and its cost.
In the future, we may not be able
to obtain coverage at current levels, if at all, and our premiums may increase
significantly on coverage that we maintain.
Impairment evaluations of goodwill, intangible assets, investments or other long-lived
assets could result in a reduction in our
recorded asset values which could have a material adverse effect
on our financial position and results of operation.
We perform
reviews of goodwill and indefinite-lived intangible assets on an annual
basis, or more frequently if triggering events
indicate a possible impairment.
We test goodwill
at the reporting unit level by comparing the carrying value of the net assets of the
reporting unit, including goodwill, to the reporting unit's fair value.
Similarly, we test indefinite-lived
intangible assets by comparing
the fair value of the assets to their carrying values.
If the carrying values of goodwill or indefinite-lived intangible assets exceed
their
fair value, the goodwill or indefinite-lived intangible assets would be considered
impaired.
In addition, we perform a review of a
definite-lived intangible asset or other long-lived asset when changes
in circumstances or events indicate a possible impairment.
If
any impairment or related charge is warranted, then our
financial position and results of operations could be materially affected.
See
Note 16 of Notes to Consolidated Financial Statements included in Item 8
of this Report.
Disruption of critical information systems or material breaches in the security
of our systems could adversely affect our business
and our customer relationships and subject us to fines or other regulatory actions.
We rely on
information technology systems to obtain, process, analyze, manage, transmit, and
store electronic information in our
day-to-day operations.
We also rely
on our technology infrastructure in all aspects of our business, including to interact with
customers and suppliers, fulfill orders and bill, collect and make payments,
ship products, provide support to customers, and fulfill
contractual obligations.
Our information technology systems are subject to potential disruptions,
including significant network or
power outages, cyberattacks, computer viruses, other malicious codes,
and/or unauthorized access attempts, any of which, if
successful, could result in data leaks or otherwise compromise our
confidential or proprietary information and disrupt our operations.
Security breaches could result in unauthorized disclosure of confidential
information or personal data belonging to our employees,
partners, customers or suppliers for which we may incur liability.
Cybersecurity threats, attempted intrusions and other incidents, such
as these, are becoming more sophisticated and frequent.
Security breaches and cyber incidents have, from time to time, occurred and
may occur in the future.
Although the breaches and cyber incidents experienced
to date have not had a material impact, there can be
no assurance that our protective measures will prevent security breaches
that could have a significant impact on our business,
reputation and financial results.
We are subject to
the data privacy and protection laws and regulations adopted by federal, state and
foreign legislatures and
governmental agencies in various countries in which we operate, including
the EU General Data Protection Regulation.
Implementing
and complying with these laws and regulations may be more costly or
take longer than we anticipate or could otherwise affect our
business operations.
Breaches, cyber incidents and disruptions, or failure to comply with
laws and regulations related to information security or
privacy could result in legal claims or proceedings against us by governmental
entities or individuals, significant fines, penalties or
judgements, disruption of our operations, remediation requirements,
changes to our business practices, and damage to our reputation.
Therefore, a failure to monitor, maintain
or protect our information technology systems and data integrity effectively
or to anticipate,
plan for and recover from significant disruptions to these systems could have a material
adverse effect on our business, results of
operations or financial condition.
Our business depends on attracting and retaining qualified management
and other key personnel.
Due to the specialized and technical nature of our business, our future performance
is dependent on our ability to attract, develop
and retain qualified management, commercial, technical, and
other key personnel.
Competition for such personnel is intense, and we
may be unable to continue to attract or retain such personnel.
In an effort to mitigate such risks, the Company utilizes retention
bonuses, offers competitive pay and maintains continuous
succession planning, including for our senior executive officers.
However,
there can be no assurance that these mitigating factors will be adequate to attract
or retain qualified management or other key
personnel.
Failure to retain key employees,
failure to successfully transition key roles, or the inability to hire, train, retain and
manage
qualified personnel could also adversely affect our business
.
Increasing scrutiny and changing expectations from stakeholders with respect
to our ESG practices may impose additional costs
on us or expose us to new or additional risks.
Companies across all industries are facing increasing scrutiny from
stakeholders related to their ESG practices.
Investor
advocacy groups, institutional investors, investment funds, and
other influential investors are also increasingly focused on ESG
practices and in recent years have placed increasing importance on
the implications and social cost of their investments.
Regardless of
the industry, investors’
increased focus and activism related to ESG and similar matters may impact access to
capital, as investors may
decide to reallocate capital or to not commit capital as a result of their assessment of
a company’s ESG practices.
We face pressures
from certain stakeholders to prioritize and promote sustainable
practices and reduce our carbon footprint.
Our
stakeholders may pressure us to implement ESG procedures or standards
beyond those we have in place in order to continue engaging
with us, to remain invested in us, or before they will make further investments
in us.
Additionally, we may
face reputational
challenges in the event our ESG procedures or standards do not meet the standards set by
certain constituencies.
We have adopted
certain practices as highlighted in the Company’s
Sustainability Report, including with respect to environmental stewardship.
Further, as we work to align with the recommendations
of the Financial Stability Board’s Task
Force on Climate-related Financial
Disclosures and the Sustainability Accounting Standards Board, we
continue to expand our disclosures in these areas.
This is
consistent with our commitment to executing on a strategy that reflects the
economic, social, and environmental impact we have on
the world while advancing and complementing our business strategy.
Our disclosures on these matters and standards we set for
ourselves or a failure to meet these standards, may influence our
reputation and the value of our brand.
It is possible that our
stakeholders might not be satisfied with our ESG efforts or
the speed of their adoption.
If we do not meet our stakeholders’
expectations, our business and/or our ability to access capital could be
harmed.
Any harm to our reputation resulting from setting
these standards or our failure or perceived failure to meet such standards
could adversely affect our business, financial performance,
and growth.
Additionally, adverse
effects upon our customers’ industries related to the worldwide social and
political environment, including
uncertainty or instability resulting from climate change or biodiversity
loss, changes in political leadership and environmental policies,
changes in geopolitical-social views toward fossil fuels and renewable
energy,
concern about the environmental impact of climate
change or biodiversity loss, and investors’ expectations regarding
ESG matters, may also adversely affect demand for our services.
Any long-term material adverse effect on our customers
or their industries could have a significant financial and operational adverse
impact on our business.
Terrorist
attacks, other acts of violence or war,
natural disasters, widespread public health crises or other uncommon
global events
may affect the markets in which we operate and our profitability which could
adversely affect our liquidity, financial
position and
results of operations.
Terrorist attacks,
other acts of violence or war, natural disasters, widespread
public health crises, including the ongoing COVID-
19 pandemic, or other uncommon global events such as the current conflict
between Russia and Ukraine, may negatively affect our
operations.
There can be no assurance that there will not be terrorist attacks against the U.S. or other locations
where we do business.
Also, other uncommon global events such as earthquakes, hurricanes,
fires and tsunamis cannot be predicted.
Terrorist attacks,
other acts of violence
or armed conflicts, and natural disasters, which may be amplified by ongoing global
climate change and biodiversity loss, may directly impact our physical
facilities and/or those of our suppliers or customers.
In
addition, terrorist attacks or natural disasters may disrupt the global
insurance and reinsurance industries with the result that we may
not be able to obtain insurance at historical terms and levels, if at all, for
all of our facilities.
In addition, available insurance coverage
may not be sufficient to cover all of the damage incurred or,
if available, may be prohibitively expensive.
Widespread public health
crises could also disrupt operations of the Company,
its suppliers and customers which could have a material adverse impact on our
results of operations.
The consequences of terrorist attacks, other acts of violence or armed
conflicts, natural disasters, widespread public health crises
or other uncommon global events can be unpredictable, and we may not be
able to foresee or effectively plan for these events,
resulting in a material adverse effect on our business, results of
operations or financial condition.
The COVID-19 pandemic and its impact on business and economic conditions
have negatively affected our business, results of
operations and financial condition and the extent and duration of
those effects is uncertain.
The COVID-19 pandemic that began in the first quarter of 2020 and the resulting
impacts significantly disrupted the global
economy and financial markets and adversely affected
the Company’s operations as well as those of
its suppliers and customers.
The
Company experienced material disruptions as a result of COVID-19 globally
which negatively impacted all locations where the
Company does business.
Although the Company has now operated in this COVID-19 environment
for almost two years, the full extent of the outbreak and
related business impacts continue to remain uncertain and volatile.
This outbreak has significantly disrupted the operations of the
Company and those of its suppliers and customers.
During the pandemic, the Company initially experienced volume declines and
lower net sales as compared to pre-COVID-19 levels.
In addition, the COVID-19 pandemic and responses to the pandemic have at
times significantly disrupted the global supply chain and have had
a significant impact on raw material prices.
These impacts may
continue to occur and may become more significant and could continue
to result in disruptions in our supply chain and our difficulty
in procuring or inability to procure raw materials necessary for the manufacturing
of our products.
The impact of the COVID-19
pandemic and responses to it has increased and could continue to increase
the costs of making and distributing our products or result
in delays in delivering, or an inability to deliver,
them to our customers.
Given the continuously evolving developments with respect to this pandemic,
the Company cannot, as of the date of this Report,
reasonably estimate the magnitude or the full extent of the impact to its future results of
operations or to the ability of it or its
customers to resume more normal operations, even as certain restrictions are
lifted.
The prolonged pandemic and resurgences of the
outbreak including as new variants continue to emerge,
and continued restrictions on day-to-day life and business operations as well as
increased border controls or closures and transportation disruptions,
may result in volume declines and lower net sales in future
periods.
To the extent
that the Company’s customers and suppliers continue
to be significantly and adversely impacted by COVID-19, this
could reduce the availability,
or result in delays, of materials or supplies to or from the Company,
which in turn could significantly
interrupt the Company’s business operations.
Given this ongoing uncertainty,
the Company cautions that its future results of
operations could be significantly adversely impacted by COVID-19.
Further, management continued to evaluate how
COVID-19
related circumstances, such as remote work arrangements, illness or staffing
shortages and travel restrictions have affected financial
reporting processes and systems, internal control over financial reporting,
and disclosure controls and procedures.
While the
circumstances have presented and are expected to continue to present challenges,
and have necessitated additional time and resources
to be deployed to sufficiently address the challenges
brought on by the pandemic, at this time, management does not believe that
COVID-19 has had a material impact on financial reporting processes, internal
controls over financial reporting, or disclosure controls
and procedures.
Although we have implemented business continuity and emergency
response plans as well as health and safety measures to
permit us to continue to provide services and products to customers and support
our operations, there can be no assurance that the
continued spread of COVID-19 and its variants and efforts to
contain the virus (including, but not limited to, vaccines and treatments,
voluntary and mandatory quarantines, restrictions on travel, limiting
gatherings of people, reduced operations and extended closures of
many businesses and institutions) will not further impact our business, results of
operations and financial condition.
However, given
the unprecedented and continually evolving developments
with respect to this pandemic, the Company cannot, as of the date of this
Report, reasonably estimate with certainty the full extent of the impact to
its future results of operations or to the ability of it or its
customers to resume more normal operations.
A further prolonged outbreak or resurgence and period of continued
restrictions on day-
to-day life and business operations would likely result in volume declines
and lower net sales in future periods as well.
The ultimate significance of COVID-19 impacts on our business will depend
on, among other things, the extent and duration of
the pandemic, the severity of the disease and the number of people infected
with the virus, the development and continued uncertainty
regarding availability,
continued administration and long-term efficacy of vaccines or
other treatments, including on new strains or
mutations of the virus, the longer-term effects
on the economy, including
market volatility, and the measures
taken by governmental
authorities and other third parties restricting day-to-day life and
the length of time that such measures remain in place, as well as laws
and other governmental programs implemented to address the pandemic
or assist impacted businesses, such as fiscal stimulus and
other legislation designed to deliver monetary aid and other relief.
Epidemic diseases could negatively affect various aspects of
our business, make it more difficult to meet our obligations to our
customers, and could result in reduced demand from our customers.
These could have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
Our business could be adversely affected by the effects
of a widespread outbreak of contagious disease, similar to the COVID-19
pandemic.
A significant outbreak of contagious diseases in the human population could result in a widespread
health crisis that could
adversely affect the economies and financial markets of many
countries, resulting in an economic downturn that could affect demand
for our products and likely impact our operating results.
To the extent that
the Company’s customers and
suppliers are materially and
adversely impacted by a widespread outbreak of contagious disease, this could
reduce the availability, or
result in delays, of materials
or supplies to or from the Company,
which in turn could materially interrupt the Company’s
business operations.
The ultimate impact on our business of a widespread outbreak of a contagious disease will depend
on, among other things, the
extent and duration of the outbreak,
the severity of the disease and the number of people infected, the development
and continued
uncertainty regarding availability,
administration and long-term efficacy of a vaccine or other
treatments, the longer-term effects on
the economy, including
market volatility, and
the measures taken by governmental authorities and other third parties restricting day-
to-day life and the length of time that such measures remain in place, as well as laws and
other governmental programs implemented
to address the outbreak or assist impacted businesses, such as fiscal stimulus and
other legislation designed to deliver monetary aid
and other relief.
We have previously identified
material weaknesses in our internal control over financial reporting that could have
resulted in
material misstatements in our financial statements and in the inability of our independent
registered public accounting firm to
provide an unqualified audit opinion which could have a material adverse effect
on us.
As a public company,
we are required to comply with the SEC’s rules implementing
Sections 302 and 404 of the Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, which require management to certify
financial and other information in our quarterly and
annual reports and provide an annual management report on the effectiveness
of controls over financial reporting.
As disclosed under “Item 9A. Controls and Procedures” of this Report, during
the course of preparing our audited financial
statements for the Company’s annual
report on Form 10-K for 2019 and 2020, we, in conjunction with our independent registered
public accounting firm, identified certain material weaknesses.
A material weakness is a deficiency,
or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of annual or interim
financial statements will not be prevented or detected on a timely basis.
During 2020 and 2021, the Company dedicated multiple internal resources
and supplemented those internal resources with
various third-party specialists to assist with the formalization of
a robust and detailed remediation plan.
In undertaking remediation
activities, the Company has established a global network of personnel
to assist local management in understanding control
performance and documentation requirements.
In order to sustain this network, the Company conducts periodic trainings and hosts
discussions to address questions on a current basis.
As of December 31, 2021, the Company has remediated all of the previously
identified material weaknesses and concluded that the Company’s
internal control over financial reporting is effective.
Our Management, including our chief executive officer
and chief financial officer, does not expect
that our internal control over
financial reporting will prevent all errors and all fraud.
A control system, no matter how well designed and operated, can provide
only
reasonable, not absolute, assurance that the control system’s
objectives will be met.
Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.
Controls can
be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the
controls.
Over time, controls may become inadequate because of changes in circumstances or deterioration
in the degree of
compliance with policies or procedures may occur.
Because of the inherent limitations in a cost-effective control
system,
misstatements due to error or fraud may occur and may not be detected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments.
None.

---

ITEM 2. PROPERTIES
Item 2.
Properties.
Quaker Houghton’s corporate
headquarters and a laboratory facility are located in its Americas segment’s
Conshohocken,
Pennsylvania location.
The Company’s other principal facilities in
its America’s segment are located
in Carrollton, Georgia; Zion,
Illinois;
Detroit, Michigan; Dayton, Ohio; Middletown, Ohio; Strongsville,
Ohio; Waterloo, Ontario;
Monterrey, N.L., Mexico;
Rio
de Janeiro, Brazil and Sao Paulo, Brazil.
The Company’s EMEA segment has
principal facilities in Uithoorn, The Netherlands;
Dortmund, Germany; Barcelona, Spain; Navarra, Spain; Karlshamn, Sweden;
Tradate, Italy; and Turin, Italy.
The Company’s
Asia/Pacific segment operates out of its principal facilities located in
Qingpu, China; Songjiang, China; Kolkata, India; Rayong,
Thailand; and Moorabbin, Australia.
The Company’s Global Specialty Businesses
segment operates out of its principal facilities in
Aurora, Illinois; Santa Fe Springs, California; Batavia, New York;
Waukegan, Illinois;
Zion, Illinois; Madison Heights, Michigan;
Lewisburg, Tennessee;
and Coventry, U.K.
With the exception of the Conshohocken, Santa Fe Springs,
Madison Heights, Lewisburg,
Aurora, Karlshamn, Rayong, Coventry,
and Sydney sites, which are leased, the remaining principal facilities are owned by the
Company and, as of December 31, 2021, were mortgage free.
Quaker Houghton also leases sales, laboratory,
manufacturing, and
warehouse facilities in other locations.
Quaker Houghton’s principal
facilities consist of various manufacturing, administrative, warehouse,
and laboratory buildings.
Most of the buildings are of fire-resistant construction and are equipped
with sprinkler systems.
The Company has a program to
identify needed capital improvements that are implemented as management
considers necessary or desirable.
Most locations have raw
material storage tanks, ranging from 1 to 155 at each location with capacities
ranging from 1,000 to 82,000 gallons, and processing or
manufacturing vessels ranging in capacity from 2 to 29,000 gallons.
Each of Quaker Houghton’s
non-U.S. associated companies (in which it owns a 50% or less interest and has significant
influence)
owns or leases a plant and/or sales facilities in various locations,
with the exception of Primex, Ltd.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings.
The Company is a party to proceedings, cases, and requests for information from,
and negotiations with, various claimants and
Federal and state agencies relating to various matters, including environmental
matters.
For information concerning pending asbestos-
related litigation against an inactive subsidiary,
certain environmental non-capital remediation costs and other legal-related
matters,
reference is made to Note 26 of Notes to Consolidated Financial Statements, included
in Item 8 of this Report, which is incorporated
herein by this reference.
The Company is a party to other litigation which management currently believes will not have
a material
adverse effect on the Company’s
results of operations, cash flow or financial condition.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 4(a).
Information about our
Executive Officers.
Set forth below is information regarding the executive officers
of the Company,
each of whom (with the exception of Andrew E.
Tometich) have
been employed by the Company or by Houghton for at least five years, including the respective
positions and offices
with the Company (or Houghton) held by each over the respective periods
indicated.
Each of the executive officers, with the
exception of David A. Will,
is appointed annually to a one year term.
Mr. Will is considered
an executive officer in his capacity as
principal accounting officer for purposes of this Item
4(a).
Name, Age, and Present
Position with the Company
Business Experience During the Past Five
Years
and Period Served as an Officer
Andrew E. Tometich,
Chief Executive Officer and President
Mr. Tometich,
who has been employed by the Company since October 13, 2021, has
served as Chief Executive Officer and President since December
1, 2021.
Prior to
joining the Company, Mr.
Tometich served as Executive Vice
President, Hygiene,
Health and Consumable Adhesives at H.B. Fuller from August 2019 until
September 17, 2021.
Before that, Mr. Tometich
was Senior Vice President,
Specialty Materials Business at Corning Incorporated from September
2017 until
August 2019 and President, Performance Silicones Business Unit at The Dow
Chemical Company from June 2016 until February 2017 after having positions
of
increasing responsibility at Dow Corning Corporation and its subsidiaries
from 1989
through 2016.
Joseph A. Berquist, 50
Executive Vice President,
Chief Strategy
Officer, and Managing Director,
Global
Specialty Businesses
Mr. Berquist, who has been employed
by the Company since 1997, has served as
Executive Vice President,
Chief Strategy Officer, and Managing
Director, Global
Specialty Businesses since September 9, 2021.
Prior to that role, he served as
Senior Vice President, Global Specialty
Businesses and Chief Strategy Officer from
August 2019 to September 8, 2021.
Mr. Berquist served as Vice
President and
Managing Director - North America from April 2010 until July 2019.
Jeewat Bijlani, 45
Senior Vice President,
Managing Director - Americas
Mr. Bijlani has served as Senior
Vice President, Managing Director
- Americas
since he joined the Company in August 2019.
Prior to joining the Company,
Mr.
Bijlani served as President, Americas and Global Strategic Businesses of Houghton
from March 2015 until July 2019.
Shane W.
Hostetter, 40
Senior Vice President,
Chief Financial
Officer
Mr. Hostetter,
who has been employed by the Company since July 2011,
has served
as Senior Vice President, Chief
Financial Officer since April 19, 2021.
Prior to that
role, he served as Vice President,
Finance and Chief Accounting Officer from
August 2019 until April 18, 2021.
He served as Global Controller and Principal
Accounting Officer from September 2014 until July 2019.
Dieter Laininger, 58
Senior Vice President, Managing
Director - Asia / Pacific
Mr. Laininger,
who has been employed by the Company since 1991, has served as
Senior Vice President, Managing
Director - Asia / Pacific since August 2019.
He
served as Vice President and Managing
Director - Asia / Pacific from April 2018
until July 2019, in addition to his role as Vice
President and Managing Director -
South America, a position he assumed in January 2013 and held until
July 2019.
Mr. Laininger also served
as Vice President and Global Leader
- Primary Metals, a
position which he assumed in June 2011 and
held until July 2019.
Wilbert Platzer, 60
Senior Vice President, Global
Operations,
Environmental Health & Safety (“EHS”) and
Procurement
Mr. Platzer,
who has been employed by the Company since 1995, has served as
Senior Vice President, Global Operations,
EHS and Procurement since August
2019.
He previously served as Vice President, Global
Operations, EHS and
Procurement from April 2018 until July 2019.
Prior to that role, Mr. Platzer served
as Vice President and Managing
Director - EMEA from January 2006 through
March 2018.
Name, Age, and Present
Position with the Company
Business Experience During the Past Five
Years
and Period Served as an Officer
Dr. David Slinkman, 57
Senior Vice President, Chief Technology
Officer
Dr.
Slinkman has
served as
Senior Vice
President,
Chief Technology
Officer
since
he joined
the Company
in August 2019.
Prior to
joining the
Company,
Dr.
Slinkman
served as
Vice President
of Technology
of Houghton
from March
2012 until
July 2019.
Adrian Steeples, 61
Senior Vice President, Managing
Director - EMEA
Mr. Steeples, who has been employed
by the Company since 2010, has served as
Senior Vice President, Managing
Director - EMEA since August 2019.
He
previously served as Vice President
and Managing Director - EMEA from April
2018 until July 2019.
Prior to that role, he served as Vice President and
Managing
Director - Asia/Pacific from July 2013 through March 2018.
Robert T. Traub,
Senior Vice President, General
Counsel and
Corporate Secretary
Mr. Traub,
who has been employed by the Company since 2000, has served as
Senior Vice President, General Counsel
and Corporate Secretary since August 2019.
He previously served as Vice President,
General Counsel and Corporate Secretary
from April 2015 until July 2019.
David A. Will, 37
Vice President, Global Controller
and
Principal Accounting Officer
Mr. Will,
who has been employed by the Company since 2014, has served as Vice
President, Global Controller, and Principal
Accounting Officer since April 19, 2021.
Prior to that role, Mr. Will
served as the Corporate Controller from August 2019
until April 18, 2021.
Before that, he served as the Global Assistant Controller from
December 2014 to August 2019.
PART
II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
The Company’s common
stock is listed on the New York
Stock Exchange (“NYSE”) under the trading symbol KWR.
Our Board
declared cash dividends that totaled $1.62 per share of outstanding
common stock or $29.0 million during the year ended December
31, 2021 and $1.56 per share of outstanding common stock or $27.8 million
during the year ended December 31, 2020.
In February
and May 2021, our Board declared quarterly cash dividends of
$0.395 per share of outstanding common stock, payable to shareholders
of record in April 2021 and July 2021, respectively.
Subsequently, our Board declared
quarterly dividends of $0.415 per share of
outstanding common stock in August and November 2021, respectively,
payable to shareholders of record in October 2021 and
January 2022, respectively.
We currently
expect to continue to pay comparable cash dividends on a quarterly basis in the future.
Future declaration of dividends
and the establishment of future record dates and payment dates are subject
to the final determination of
our Board, and will be based on our future financial condition, results of
operations, capital requirements, capital expenditure
requirements, contractual restrictions, anticipated cash needs, business
prospects, provisions of applicable law and other factors our
Board may deem relevant.
There are no restrictions that the Company believes are likely to materially
limit the payment of future dividends.
However,
under the Credit Facility there are certain restrictions, including a limit on dividends
paid not to exceed the greater of $50.0 million
annually and 20% of consolidated EBITDA so long as there is no default under
the Credit Facility.
Reference is made to the
“Liquidity and Capital Resources” disclosure contained in Item 7 of this Report.
As of January 17, 2022, 17,899,286 shares of Quaker common stock
were issued and outstanding and were held by 649
shareholders of record.
Each share of common stock is entitled to one vote per share.
Reference is made to the information in Item 12 of this Report under the
caption “Equity Compensation Plans,” which is
incorporated herein by this reference.
The following table sets forth information concerning shares of
the Company’s common stock acquired
by the Company during
the fourth quarter of 2021 for the period covered by this report:
Issuer Purchases of Equity Securities
(c)
(d)
Total
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
Value of
Shares that
Total
Number
Average
as part of Publicly
May Yet
be
of Shares
Price Paid
Announced Plans
Purchased Under the
Period
Purchased (1)
Per Share (2)
or Programs
Plans or Programs (3)
October 1 - October 31, 2021
-
$
-
-
$
86,865,026
November 1 - November 30, 2021
-
$
-
-
$
86,865,026
December
1 - December 31, 2021
-
$
-
-
$
86,865,026
Total
-
$
-
-
$
86,865,026
(1)
The Company did not acquire any shares of the Company’s
common stock from employees during the fourth quarter of 2021.
All shares that would be acquired from employees are related to the surrender of
Quaker Chemical Corporation shares in
payment of the exercise price of employee stock options exercised or
for the payment of taxes upon exercise of employee
stock options or the vesting of restricted stock.
(2)
The Company did not acquire any shares of the Company’s
common stock from employees during the fourth quarter of 2021.
The price that would be paid for shares acquired from employees pursuant to employee
benefit and share-based compensation
plans is based on the closing price of the Company’s
common stock on the date of exercise or vesting as specified by the plan
pursuant to which the applicable option, restricted stock award, or restricted
stock unit was granted.
(3)
On May 6, 2015, the Board of Directors of the Company approved, and
the Company announced, a share repurchase
program, pursuant to which the Company is authorized to repurchase
up to $100,000,000 of Quaker Chemical Corporation
common stock (the “2015 Share Repurchase Program”), and it has no expiration
date.
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program during
the quarter ended December 31, 2021.
Stock Performance
Graph:
The following
graph compares
the cumulative
total return (assuming
reinvestment of
dividends) from
December 31, 2016 to December
31, 2021 for (i) Quaker’s
common stock, (ii) the S&P MidCap
400 Index (the “MidCap Index”),
and
(iii) the S&P 400
Materials Group Index
(the “Materials Group
Index”).
The graph assumes the
investment of $100 on
December 31,
2016 in each of Quaker’s common stock, the stocks comprising
the MidCap Index and the Materials Group Index, respectively.
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
Quaker
$
100.00
$
119.03
$
141.53
$
132.11
$
205.30
$
188.21
MidCap Index
100.00
116.24
103.36
130.44
148.26
184.97
Materials Group Index
100.00
121.55
96.79
116.99
129.45
171.17

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data.
Reserved.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
As used in this Annual Report on Form 10-K (the “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.
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 years ended December 31, 2020
and 2021; and for the year ended
December 31, 2019, the results of Legacy Quaker plus five months
of Houghton’s operations post-
closing of the Combination on August 1, 2019.
Executive Summary
Quaker Houghton is the 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 U.S.
Overall, the Company’s 2021 performance
was highlighted by the continued recovery from the impacts of COVID-19 in
2020 as
well as the ongoing execution of integration activities and synergy
realization, which led to record net sales and adjusted EBITDA in
2021 despite the continued escalation in raw material cost headwinds
and global supply chain pressures.
Specifically, net sales of
$1,761.2 million in 2021
increased 24% compared to $1,417.7 million in 2020, primarily
due to higher volumes of approximately
13%, including additional net sales from acquisitions of 4%, increases from
selling price and product mix of approximately 8% and
the positive impact from foreign currency translation of 3%.
The increase in sales volumes
compared to 2020 was primarily a result
of continued new business wins and the year-over-year
improvement in end market conditions since the beginning of the COVID-19
pandemic in early 2020, partially offset by lower automotive
sales due to semiconductor shortages and delayed shipments due
to
supply chain challenges that occurred towards the end of 2021.
The increase in selling price and product mix is primarily the result of
the Company’s broad price
increases implemented during 2021 to help offset the unprecedented
increases in raw material costs as well
as global supply chain and logistics cost pressures the Company has experienced
throughout 2021.
The Company’s net income and
earnings per diluted share of $121.4 million and $6.77 in 2021, respectively,
increased compared
to $39.7 million and $2.22 per diluted share, respectively,
in 2020.
Excluding non-recurring items, including costs associated with the
Combination and other non-core items in each period, the Company’s
current year non-GAAP net income and non-GAAP earnings
per diluted share were $122.8 million and $6.85, respectively,
compared to $85.2 million and $4.78, respectively,
in 2020.
The
increase in the Company’s current
year earnings drove a 23% higher adjusted EBITDA to a full year record
of $274.1 million
compared to $222.0 million in 2020, primarily due to the significant increase
in net sales year-over-year as well as higher realized cost
synergies from the Combination, partially offset
by lower gross margins driven by higher raw material and input costs and the
impacts
of disruptions in the global supply chain experienced in 2021 as well as higher selling,
general and administrative expenses (“SG&A”)
including the impact of higher sales on direct selling expenses and additional
SG&A from recent acquisitions.
The Company’s 2021
operating performance in each of its four reportable segments: (i) Americas; (ii) 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 2020 reflecting the continued rebound in 2021
from the negative impacts of COVID-19 on the Company’s
end
markets as well as continued success of winning new business in each of the
Company’s segments during 2021.
Each of the
Company’s geographic segments
benefited from higher organic sales volumes in 2021
while all of the Company’s segments also
benefitted from additional net sales from acquisitions, the positive impact
from foreign currency translation due to the strengthening of
most major currencies against the U.S. dollar,
and from increases in selling price and product mix.
As reported, each of the
Company’s reportable
segment operating earnings were higher compared to 2020 reflecting the increase
in net sales including the
benefits of acquisitions and other factors mentioned;
however, all of the Company’s
segment’s operating earnings were negatively
impacted by persistent raw material inflation, higher logistics, labor and manufacturing
costs, impacts of disruptions to the global
supply chain as well as higher SG&A which were a result of an increase
in direct selling expenses associated with year-over-year
inflation increases and increases due to the increase in net sales as well as the lower levels
of prior year SG&A as a result of
temporary cost saving measures implemented in response to COVID-19.
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 7, below.
The Company generated net operating cash flow of $48.9 million in 2021
compared to $178.4 million in 2020.
The decrease in
net operating cash flow year-over-year
was primarily driven by a significant change in working capital compared
to the prior year,
mainly increases in accounts receivable, due to higher net sales and in inventory,
due to higher costs as well as building inventories in
response to global supply chain and logistics pressures.
The key drivers of the Company’s operating
cash flow and overall liquidity
are further discussed in the Company’s
Liquidity and Capital Resources section of this Item 7, below.
Overall, the Company’s 2021 results
were good and reflected the Company’s
ability to navigate through persistent raw material
cost pressures, supply chain challenges and automotive semiconductor
shortages.
Increases in net sales in all segments were driven by
the continued year-over-year improvement
in the Company’s end-markets and increased
customer demand from lower levels
experienced during 2020 as a result of COVID-19; however,
each segment was negatively impacted by the significant
escalation of
raw material costs as well as higher levels of SG&A compared to the prior
year which included certain temporary cost saving
measures adopted during the onset of COVID-19.
Continued strong customer demand in 2021 coupled with ongoing new business
wins and the execution of integration activities and synergy realization
helped to partially offset the negative impacts from the
continued escalation of raw material costs and continued supply chain pressures.
As the Company looks toward 2022, the business is well positioned to
continue to outpace market growth rates and deliver value-
added solutions and services to its customers.
Demand remains healthy across most of our end markets; however,
the Company
expects raw material cost pressures and supply chain disruptions to persist throughout
2022.
To mitigate these headwinds,
the
Company continues to implement further price actions and is actively
managing its cost structure.
The Company believes these
actions will begin to drive a recovery in margins as it progresses through
2022.
The Company remains committed to advancing its
customer intimate strategy and sustainability program and delivering
earnings growth in 2022 and beyond.
On-going impact of COVID-19
The global outbreak of COVID-19 has negatively impacted all locations where
the Company does business.
Although the
Company has now operated in this COVID-19 environment for almost
two years, the full extent of the outbreak and related business
impacts continue to remain uncertain and volatile, and therefore the
full extent to which COVID-19 may impact the Company’s
future
results of operations or financial condition is uncertain.
This outbreak has significantly disrupted the operations of the Company
and
those of its suppliers and customers.
During the pandemic, the Company initially experienced volume declines
and lower net sales as
compared to pre-COVID-19 levels, as further described in this section.
Management continues to monitor the impact that the
COVID-19 pandemic is having on the Company,
the overall specialty chemical industry and the economies and markets in which the
Company operates.
The prolonged pandemic and resurgences of the outbreak including as new
variants continue to emerge, and
continued restrictions on day-to-day life and business
operations as well as increased border controls or closures and transportation
disruptions may result in volume declines and lower net sales in future periods.
To the extent that the Company’s
customers and
suppliers continue to be significantly and adversely impacted by
COVID-19, this could reduce the availability,
or result in delays, of
materials or supplies to or from the Company,
which in turn could significantly interrupt the Company’s
business operations.
Given
this ongoing uncertainty,
the Company cautions that its future results of operations could be significantly adversely
impacted by
COVID-19.
Further, management continues to evaluate
how COVID-19-related circumstances, such as remote work arrangements,
illness or staffing shortages and travel restrictions have affected
financial reporting processes and systems, internal control over
financial reporting, and disclosure controls and procedures.
While the circumstances have presented and are expected to continue
to
present challenges, and have necessitated additional time and resources
to be deployed to sufficiently address the challenges brought
on by the pandemic, at this time, management does not believe that COVID-19
has had a material impact on financial reporting
processes, internal controls over financial reporting, or disclosure controls
and procedures.
The Company’s top priority,
especially during this pandemic, is to protect the health and safety of its employees
and customers,
while working to ensure business continuity to meet customers’ needs.
The Company continues to take steps to protect the health and
wellbeing of its people in affected areas through various
actions, including enabling work at home where needed and practicable, and
employing social distancing standards, implementing
travel restrictions where applicable, enhancing onsite hygiene practices, and
instituting visitation restrictions at the Company’s
facilities.
The Company has not and does not expect that it will incur material
expenses implementing these health and safety policies.
All of the Company’s more than 30 production
facilities worldwide are open
and operating and are deemed as essential businesses in the jurisdictions where
they are operating.
The Company believes that to date
it has been able to meet the needs of all its customers across the globe despite
the current economic challenges.
The Company’s fiscal
year 2021 showed year-over-year improvement
from the prior fiscal year and continued a trend of gradual volume improvement which
began in the second half of 2020.
The Company continues to expect that the impacts from COVID-19 will gradually
decline subject
to the effective containment of the virus and its variants and successful
distribution and acceptance of the available vaccines and
treatments.
However, the incidence of reported cases of COVID-19
or a variant in several geographies where the Company has
significant operations remains high and continues to evolve and it remains
highly uncertain as to how long the global pandemic and
related economic challenges will last and when our customers’ businesses will recover
to pre-COVID-19 levels.
The Company took
various actions to temporarily conserve cash and reduce costs since the onset of
the pandemic and these temporary initiatives were
designed and implemented so that the Company could successfully manage
through the challenging COVID-19 situation while
continuing to protect the health of its employees, meet customers’ needs,
maintain the Company’s long-term competitive
advantages
and above-market growth, and enable it to continue to effectively
integrate Houghton.
While the actions taken to date to protect our
workforce, to continue to serve our customers with excellence and to conserve
cash and reduce costs, have been effective thus far,
further actions to respond to the pandemic and its effects may
be necessary as conditions continue to evolve.
Critical Accounting Policies and Estimates
Quaker Houghton’s discussion
and analysis of its financial condition and results of operations are based
upon its consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States (“U.S.
GAAP”).
The preparation of these financial statements requires the Company
to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities.
On an
ongoing basis, the Company evaluates its estimates, including those related
to customer sales incentives, product returns, bad debts,
inventories, property,
plant and equipment (“PP&E”), investments, goodwill, intangible assets, income taxes,
business combinations,
restructuring, incentive compensation plans (including equity-based
compensation), pensions and other postretirement benefits,
contingencies and litigation.
Quaker Houghton bases its estimates on historical experience and on various
other assumptions that are
believed to be reasonable under such circumstances, the results of which
form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources.
However, actual results may differ from
these
estimates under different assumptions or conditions.
Quaker Houghton believes the following critical accounting policies describe
the more significant judgments and estimates used
in the preparation of its consolidated financial statements:
Accounts receivable and inventory exposures:
Quaker Houghton establishes allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments.
If the financial condition of the Company’s
customers
were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
As part of
our terms of trade, we may custom manufacture products for certain large
customers and/or may ship products on a consignment basis.
Further, a significant portion of our revenue
is derived from sales to customers in industries where companies have experienced
past
financial difficulties.
If a significant customer bankruptcy occurs, then we must judge the amount of proceeds,
if any, that may
ultimately be received through the bankruptcy or liquidation process.
These matters may increase the Company’s
exposure should a
bankruptcy occur, and may require
a write down or a disposal of certain inventory as well as the failure to collect receivables.
Reserves for customers filing for bankruptcy protection are established
based on a percentage of the amount of receivables outstanding
at the bankruptcy filing date.
However, initially establishing this reserve
and the amount thereof is dependent on the Company’s
evaluation of likely proceeds to be received from the bankruptcy process, which
could result in the Company recognizing minimal or
no reserve at the date of bankruptcy.
We generally reserve
for large and/or financially distressed customers on a specific review
basis,
while a general reserve is maintained for other customers based on
historical experience.
The Company’s consolidated
allowance for
doubtful accounts was $12.3 million and $13.1 million as of December 31,
and 2020, respectively.
The Company recorded
expense to increase its provision for doubtful accounts by $0.7 million,
$3.6 million and $1.9 million for the years ended December
31, 2021, 2020 and 2019, respectively.
Changing the amount of expense recorded to the Company’s
provisions by 10% would have
increased or decreased the Company’s
pre-tax earnings by $0.1 million, $0.4
million and $0.2 million for the years ended December
31, 2021, 2020 and 2019, respectively.
See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Environmental and litigation reserves:
Accruals
for environmental and litigation matters are recorded when
it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated.
Environmental costs and remediation costs are
capitalized if the costs extend the life, increase the capacity or improve
the safety or efficiency of the property from the date acquired
or constructed, and/or mitigate or prevent contamination in the future.
Estimates for accruals for environmental matters are based on a
variety of potential technical solutions, governmental regulations and
other factors, and are subject to a wide range of potential costs
for remediation and other actions.
A considerable amount of judgment is required in determining the most likely
estimate within the
range of total costs, and the factors determining this judgment may vary
over time.
Similarly, reserves for litigation
and similar
matters are based on a range of potential outcomes and require considerable
judgment in determining the most probable outcome.
If
no amount within the range is considered more probable than any other
amount, the Company accrues the lowest amount in that range
in accordance with generally accepted accounting principles.
See Note 26 of Notes to Consolidated Financial Statements in Item 8 of
this Report.
Realizability of equity investments:
The Company holds equity investments in various foreign companies
where it has the
ability to influence, but not control, the operations of the entity
and its future results.
The Company would record an impairment
charge to an investment if it concluded that a decline in value that was other
than temporary occurred.
Adverse changes in market
conditions, poor operating results of underlying investments, devaluation
of foreign currencies or other events or circumstances could
result in losses or an inability to recover the carrying value of the investments,
potentially leading to an impairment charge in the
future.
The carrying amount of the Company’s
equity investments as of December 31, 2021
was $95.3
million, which included four
investments: $21.5 million for a 32% interest in Primex, Ltd. (Barbados);
$7.1 million for a 50% interest in Nippon Quaker Chemical,
Ltd. (Japan); $0.3 million for a 50% interest in Kelko Quaker Chemical, S.A.
(Panama); and $66.4 million for a 50% interest in Korea
Houghton Corporation (Korea).
The Company also has a 50% interest in a Venezuelan
affiliate, Kelko Quaker Chemical, S.A
(Venezuela).
Due to heightened foreign exchange controls, deteriorating economic circumstances
and other restrictions in Venezuela,
during 2018 the Company concluded that it no longer had significant
influence over this affiliate.
Prior to this determination, the
Company historically accounted for this affiliate under
the equity method.
As of December 31, 2021
and 2020, the Company had no
remaining carrying value for its investment in Venezuela.
See Note 17 of Notes to Consolidated Financial Statements in Item 8 of this
Report.
Tax
exposures, uncertain tax positions and valuation allowances:
Quaker Houghton records expenses and liabilities for taxes
based on estimates of amounts that will be determined as deductible in tax
returns filed in various jurisdictions.
The filed tax returns
are subject to audit, which often occur several years subsequent to
the date of the financial statements.
Disputes or disagreements may
arise during audits over the timing or validity of certain items or deductions,
which may not be resolved for extended periods of time.
The Company also evaluates uncertain tax positions on all income tax
positions taken on previously filed tax returns or expected to be
taken on a future tax return in accordance with FIN 48, which prescribes
the recognition threshold and measurement attributes for
financial statement recognition and measurement of tax positions taken
or expected to be taken on a tax return and, also, whether the
benefits of tax positions are probable or if they will be more likely than not to be sustained upon
audit based upon the technical merits
of the tax position.
For tax positions that are determined to be more likely than not to be sustained upon audit, the
Company
recognizes the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement in the financial
statements.
For tax positions that are not determined to be more likely than not
sustained upon audit, the Company does not recognize
any portion of the benefit in its financial statements.
In addition, the Company’s
continuing practice is to recognize interest and/or
penalties related to income tax matters in income tax expense.
Also, the Company nets its liability for unrecognized tax benefits
against deferred tax assets related to net operating losses or other tax credit carryforward
on the basis that the uncertain tax position is
settled for the presumed amount at the balance sheet date.
Quaker Houghton also records valuation allowances when necessary
to reduce its deferred tax assets to the amount that is more
likely than not to be realized.
While the Company has considered future taxable income and assesses the need for
a valuation
allowance, in the event Quaker Houghton were to determine that it would
be able to realize its deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was
made.
Likewise, should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the
future, an adjustment to the deferred tax asset would be charged
to income in the period such determination was made.
Both
determinations could have a material impact on the Company’s
financial statements.
Pursuant to the Tax
Cuts and Jobs Act (“U.S. Tax
Reform”), the Company recorded a $15.5 million transition tax liability
for
U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries.
As of December 31, 2021, $7.0 million in installment have
been paid with the remaining $8.5 million to be paid through installments in future
years.
However, the Company may also be subject
to other taxes, such as withholding taxes and dividend distribution taxes,
if these undistributed earnings are ultimately remitted to the
U.S.
As of December 31, 2021, the Company has a deferred tax liability of
$8.4 million, which primarily represents the estimate of
the non-U.S. taxes the Company will incur to remit certain previously
taxed earnings to the U.S.
It is the Company’s current intention
to reinvest its future undistributed earnings of non-U.S. subsidiaries to support
working capital needs and certain other growth
initiatives outside of the U.S.
The amount of such undistributed earnings at December 31, 2021
was approximately $377.4
million.
Any tax liability which might result from ultimate remittance of these earnings
is expected to be substantially offset by
foreign tax credits (subject to certain limitations).
It is currently impractical to estimate any such incremental tax expense.
See Note
10 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Goodwill and other intangible assets:
The Company accounts for business combinations under the acquisition
method of
accounting.
This method requires the recording of acquired assets, including separately identifiable
intangible assets, at their
acquisition date fair values.
Any excess of the purchase price over the estimated fair value of the identifiable
net assets acquired is
recorded as goodwill.
The determination of the estimated fair value of assets acquired requires management’s
judgment and often
involves the use of significant estimates and assumptions, including
assumptions with respect to future cash inflows and outflows,
discount rates, royalty rates, asset lives and market multiples, among other
items.
When necessary, the Company consults with
external advisors to help determine fair value.
For non-observable market values, the Company may determine fair value
using
acceptable valuation principles, including the excess earnings, relief
from royalty, lost profit or cost
methods.
The Company amortizes definite-lived intangible assets on a straight-line
basis over their useful lives.
Goodwill and intangible
assets that have indefinite lives are not amortized and are required to be assessed at least annually
for impairment.
The Company
completes its annual goodwill and indefinite-lived intangible asset impairment
test during the fourth quarter of each year, or
more
frequently if triggering events indicate a possible impairment.
The Company’s consolidated
goodwill at both December 31, 2021 and
2020 was $631.2 million.
The Company completed its annual impairment assessment over goodwill during
the fourth quarter of 2021
by performing a qualitative assessment.
Based on the assessment performed, the Company concluded that there
was no evidence of
events or circumstances that would indicate a material change from
the Company’s prior year quantitative
assessment by reporting
unit and, therefore, no impairment charges were
warranted.
The Company’s consolidated indefinite
-lived intangible assets at
December 31, 2021 and 2020 were $196.9 million and $205.1 million,
respectively, which primarily
consists of Houghton and
Fluidcare
TM
trademarks and tradename.
The Company completed its annual indefinite-lived intangible asset impairment assessment
during the fourth quarter of 2021, and determined that no impairment
charge was warranted.
The determination of estimated fair
value of these indefinite-lived intangible assets is based on a relief from royalty
valuation method, which requires management’s
judgment and often involves the use of significant estimates and assumptions,
including assumptions with respect to royalty rates, as
well as revenue growth rates and terminal growth rates.
The Company’s impairment assessment
concluded that the carrying value of
acquired Houghton and Fluidcare
TM
trademarks and tradename intangible assets exceeded fair value by
approximately 61%.
See Note
16 of Notes to Consolidated Financial Statements in Item 8 of this Report.
As previously disclosed, as of March 31, 2020, the Company concluded that
the impact of COVID-19 did not represent a
triggering
event with regards to any of the Company’s
indefinite-lived and long-lived assets, except for the Company’s
Houghton and
Fluidcare
TM
trademarks and tradename indefinite-lived intangible assets.
In the first quarter of 2020, as a result of the impact of
COVID-19 driving a decrease in projected legacy Houghton net sales during
that year and the impact of the sales decline on projected
future legacy Houghton net sales as well as an increase in the weighted average
cost of capital assumption utilized in the quantitative
impairment assessment, the Company concluded that the estimated fair
values of the Houghton and Fluidcare
TM
trademarks and
tradename intangible assets were less than their carrying values.
As a result, an impairment charge of $38.0 million
was recorded
during the first quarter of 2020 to write down the carrying values of these intangible
assets to their estimated fair values.
Pension and Postretirement benefits:
The Company provides certain defined benefit pension and
other postretirement benefits
to current employees, former employees and retirees.
Independent actuaries, in accordance with U.S. GAAP,
perform the required
valuations to determine benefit expense and, if necessary,
non-cash charges to equity for additional minimum pension liabilities.
Critical assumptions used in the actuarial valuation include the weighted
average discount rate, which is based on applicable yield
curve data, including the use of a split discount rate (spot-rate approach)
for the U.S. plans and certain foreign plans, rates of increase
in compensation levels, and expected long-term rates of return
on assets.
If different assumptions were used, additional pension
expense or charges to equity might be required.
The following table highlights the potential impact on the Company’s
pre-tax earnings due to changes in assumptions with respect
to the Company’s defined benefit pension
and postretirement benefit plans, based on assets and liabilities as of December 31,
2021:
1/2 Percentage Point Increase
1/2 Percentage Point Decrease
(dollars in millions)
Foreign
U.S.
Total
Foreign
U.S.
Total
Discount rate (1)
$
(0.2)
$
0.2
$
0.0
$
0.3
$
(0.2)
$
0.1
Expected rate of return on plan
assets (2)
0.5
0.2
0.7
(0.5)
(0.2)
(0.7)
(1)
The weighted-average discount rate used to determine net periodic benefit
costs for the year ended December 31, 2021 was
1.4% for Foreign plans and 2.7% for U.S. plans.
(2)
The weighted average expected rate of return on plan assets used to determine
net periodic benefit costs for the year ended
December 31, 2021 was 2.1% for Foreign plans and 5.8% for U.S. plans.
Restructuring and other related liabilities:
A restructuring related program may consist of charges for
employee severance,
rationalization of manufacturing facilities and other related expenses.
To account for such, the
Company applies the Financial
Accounting Standards Board’s
guidance regarding exit or disposal cost obligations.
This guidance requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred, is estimable, and payment is probable.
See
Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Recently Issued Accounting Standards
See Note 3 of Notes to the Consolidated Financial Statements in Item 8 of this Report
for a discussion regarding recently issued
accounting standards.
Liquidity and Capital Resources
At December 31, 2021, the Company had cash, cash equivalents and
restricted cash of $165.2 million.
Total cash, cash
equivalents and restricted cash was $181.9 million at December
31, 2020.
The $16.7 million decrease in cash, cash equivalents and
restricted cash was the net result $49.1 million of cash used in investing
activities, $13.5 million of cash used in financing activities
and approximately $3.1 million of negative impacts due to the effect
of foreign currency translation on cash, partially offset by $48.9
million of cash provided by operating activities.
Net cash flows provided by operating activities were $48.9 million in
2021 compared to $178.4 million in 2020.
The Company’s
current year net operating cash flow decrease was primarily driven by
a significant change in working capital which more than offset
the Company’s higher earnings in 2021
.
The significant increase in current year net sales resulted in a large
increase in accounts
receivable in 2021 as compared to a significant decrease during
2020 as net sales and the associated accounts receivables significantly
declined in 2020
due to the negative impact from COVID-19.
In addition, the Company has experienced an increase in inventory in
2021 as a result of continued rising raw material costs as well as a build in
inventory to ensure the Company has appropriate stock to
meet customer demands in response to ongoing stress on the global supply
chain.
Net cash flows used in investing activities were $49.1 million in 2021
compared to $71.4 million in 2020.
This $22.3 million
decrease in cash outflows used in investing activities was due to lower cash payments
related to acquisitions during 2021 as a result of
the level of acquisition activity in each year and higher cash proceeds
from the disposition of assets, which includes the sale of certain
held-for-sale real property assets related to the Combination.
Capital expenditures also increased to $21.5 million in 2021 compared
to $17.9 million in 2020 due to the continued strategic and integration related
capital investments the Company has and continues to
make.
Net cash flows used in financing activities were $13.5 million in 2021
compared to $75.3 million in 2020.
The $61.8 million
decrease in net cash outflows from financing activities was primarily
driven by an increase in borrowings in the current year under the
Company’s revolving credit
facility compared to repayments in the prior year which was driven by significant
working capital
investment in the current year described above.
In addition, the Company paid $28.6 million of cash dividend during
2021, a $1.0
million or 4% increase in cash dividends compared to the prior year due to cash dividend
per share increases.
Finally, during 2020,
the Company used $1.0 million to purchase the remaining noncontrolling
interest in one of its South African affiliates.
Prior to this
buyout, this South African affiliate made a distribution
to the prior noncontrolling affiliate shareholder of approximately $0.8
million
in 2020.
There were no similar noncontrolling interest activities in 2021.
The Company’s primary credit facility
(the “Credit Facility”) is comprised of a $400.0 million multicurrency
revolver (the
“Revolver”), a $600.0 million term loan (the “U.S. Term
Loan”), each with the Company as borrower, and
a $150.0 million (as of
August 1, 2019) Euro equivalent term loan (the “Euro Term
Loan” and together with the “U.S. Term
Loan”, the “Term Loans”)
with
Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower,
each with a five year term maturing in August 2024.
Subject
to the consent of the administrative agent and certain other conditions,
the Company may designate additional borrowers.
The
maximum amount available under the Credit Facility can be increased by
up to $300.0 million at the Company’s request
if there are
lenders who agree to accept additional commitments and the Company has
satisfied certain other conditions.
Borrowings under the
Credit Facility bear interest at a base rate or LIBOR plus an applicable margin
based upon the Company’s consolidated
net leverage
ratio.
On December 10, 2021, the Company amended the Credit Facility to include an update
to provide for the use of a non-USD
currency LIBOR successor rate.
The weighted average interest rate incurred on the outstanding borrowings
under the Credit Facility
during the year ended and as of December 31, 2021 was approximately
1.6%.
In addition to paying interest on outstanding principal
under the Credit Facility,
the Company is required to pay a commitment fee ranging from 0.2% to 0.3% depending
on the Company’s
consolidated net leverage ratio to the lenders under the Revolver in respect of
the unutilized commitments thereunder.
The Credit Facility is subject to certain financial and other covenants.
The Company’s initial consolidated net
debt to
consolidated adjusted EBITDA ratio could not exceed 4.25 to 1,
with step downs in the permitted ratio over the term of the Credit
Facility.
As of December 31, 2021, the consolidated net debt to consolidated
adjusted EBITDA ratio may not exceed 3.75 to 1.
The
Company’s consolidated
adjusted EBITDA to interest expense ratio may not be less than 3.0 to 1 over the
term of the agreement.
The
Credit Facility also prohibits the payment of cash dividends
if the Company is in default or if the amount of the dividends
paid
annually exceeds the greater of $50.0 million and 20% of consolidated adjusted
EBITDA unless the ratio of consolidated net debt to
consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no
such limitation on amount.
As of December 31, 2021
and 2020, the Company was in compliance with all of the Credit Facility covenants.
The Term Loans have quarterly
principal
amortization during their five year terms, with 5.0% amortization of
the principal balance due in years 1 and 2, 7.5% in year 3, and
10.0% in years 4 and 5, with the remaining principal amount due at maturity.
The Credit Facility is guaranteed by certain of the
Company’s domestic subsidiaries
and is secured by first-priority liens on substantially all of the assets of the
Company and the
domestic subsidiary guarantors, subject to certain customary exclusions.
The obligations of the Dutch borrower are guaranteed only
by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable interest rates on at least 20%
of its total Term Loans.
In order to
satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $170.0
million notional amounts of three year interest rate swaps at a base rate of 1.64%
plus an applicable margin as provided in the Credit Facility,
based on the Company’s consolidated
net leverage ratio.
At the time the
Company entered into the swaps, and as of December 31, 2021, the
aggregate interest rate on the swaps, including the fixed base rate
plus an applicable margin, was 3.1%.
The Company capitalized $23.7 million of certain third-party debt issuance
costs in connection with executing the Credit Facility.
Approximately $15.5 million of the capitalized costs were attributed to
the Term Loans and recorded
as a direct reduction of long-
term debt on the Company’s Consolidated
Balance Sheet.
Approximately $8.3 million of the capitalized costs were attributed
to the
Revolver and recorded within other assets on the Company’s
Consolidated Balance Sheet.
These capitalized costs are being
amortized into interest expense over the five year term of the Credit Facility.
As of December 31, 2021, the Company had Credit Facility borrowings
outstanding of $889.6 million.
As of December 31, 2020,
the Company had Credit Facility borrowings outstanding of $887.1
million.
The Company has unused capacity under the Revolver of
approximately $184 million, net of bank letters of credit of approximately
$4 million, as of December 31, 2021.
The Company’s other
debt obligations are primarily industrial development bonds
,
bank lines of credit and municipality-related loans, which totaled $11.8
million and $12.1
million as of December 31, 2021
and 2020, respectively.
Total unused capacity under
these arrangements as of
December 31, 2021 was approximately $26 million.
The Company’s total net debt
as of December 31, 2021 was $736.2 million.
The Company estimates that it realized full year cost synergies related
to the Combination in 2021
of approximately $75 million
compared to $58 million in 2020.
The Company has fully achieved its annual target Combination cost synergies
of approximately $80
million going forward.
The Company incurred $18.6 million of total Combination, integration
and other acquisition-related expenses
in 2021, which includes $0.7 million of accelerated depreciation
and is net of a $5.4 million gain on the sale of certain held-for-sale
real property assets and $0.6 million of other income related to an indemnification
asset, described in the Non-GAAP Measures
section of this Item below.
The Company had aggregate net cash outflows of approximately $20.6 million
related to the Combination,
integration and other acquisition-related expenses during 2021.
Comparatively, in 2020, the
Company incurred $30.3 million of total
Combination, integration and other acquisition-related expenses, including
$0.8 million of accelerated depreciation, a $0.6 million loss
on the sale of held-for-sale assets, an $0.8 million of other income related to an indemnification
asset, and aggregate net cash outflows
related to these costs were approximately $29.4 million.
While the Company has incurred significant integration costs in 2019, 2020
and 2021, the Company expects to incur additional integration and operating
costs as well as higher capital expenditures to further
optimize its footprint, processes and other functions over the next several years.
Quaker Houghton’s management
approved, and the Company initiated, a global restructuring plan (the
“QH Program”) in the
third quarter of 2019 as part of its planned cost synergies associated
with the Combination and recorded $26.7 million in restructuring
and related charges in 2019.
The Company recognized an additional $1.4 million and $5.5 million
of restructuring and related charges
in 2021 and 2020, respectively,
as a result of the QH Program.
The QH Program includes restructuring and associated severance costs
to reduce total headcount by approximately 400 people globally and
plans for the closure of certain manufacturing and non-
manufacturing facilities.
In connection with the plans for closure of certain manufacturing and non-manufacturing
facilities, the
Company made a decision to make available for sale certain facilities during
the second quarter of 2020.
During the first quarter of
2021 and fourth quarter of 2020, certain of these facilities were sold
and the Company recognized a gain on disposal of $5.4 million
and a loss on disposal of $0.6 million, respectively,
included within other income (expense), net on the Consolidated Statement of
Income.
The exact timing and total costs associated with the QH Program will depend on a number of
factors and is subject to
change; however, reductions in headcount
and site closures have continued,
and the Company currently expects additional headcount
reductions and site closures to occur into 2022 and estimates that the anticipated
cost synergies realized under the QH Program will
approximate one-times restructuring costs incurred.
The Company made cash payments related to the settlement of restructuring
liabilities under the QH Program during 2021 of approximately $5.3 million
compared to $15.7 million in 2020.
During the first quarter of 2020, the Company completed the termination
of the Legacy Quaker U.S. Pension Plan and funded the
plan on a termination basis with approximately $1.8 million, subject to final
true up adjustments.
In the third quarter of 2020, the
Company finalized the amount of liability and related annuity payments and
received a refund in premium of $1.6 million.
In
addition, the Company recorded a non-cash pension settlement charge
at plan termination of approximately $22.7 million in the first
quarter of 2020.
As of December 31, 2021, the Company’s
gross liability for uncertain tax positions, including interest and penalties,
was $28.7
million.
The Company cannot determine a reliable estimate of the timing of cash flows
by period related to its uncertain tax position
liability.
However, should the entire liability be
paid, the amount of the payment may be reduced by up to $7.3 million as a result of
offsetting benefits in other tax jurisdictions.
During the year ended 2021, the Company recorded $13.1 million of non-income tax
credits for certain of its Brazilian subsidiaries.
The Company expects to utilize these credits to offset certain Brazilian
federal tax
payments over approximately two years, which began in the fourth quarter
of 2021.
See Note 26 of Notes to Consolidated Financial
Statements in Item 8 of this Report.
During the third quarter of 2021, two of the Company’s
locations suffered property damage as a result of flooding and fire.
The
Company maintains property insurance for all of its facilities globally.
The Company, its insurance
adjuster and insurance carrier are
actively managing the remediation and restoration activities associated
with both of these events and at this time the Company has
concluded, based on all available information and discussions with its insurance
adjuster and insurance carrier, that the losses incurred
during 2021 will be covered under the Company’s
property insurance coverage, net of an aggregate deductible of $2.0 million.
The
Company has received payments from its insurers of $2.1 million and has
recorded an insurance receivable associated with these
events of $0.7 million as of December 31, 2021.
The Company and its insurance carrier continue to review the impact on operations
as it relates to a potential business interruption insurance claim; however,
as of the date of this report, the Company cannot reasonably
estimate any probable amount of business interruption insurance
claim recoverable, therefore the Company has not recorded a gain
contingency for a possible business interruption insurance claim as of December
31, 2021.
See Note 26 of Notes to Consolidated
Financial Statements in Item 8 of this Report.
The Company believes that its existing cash, anticipated cash flows from
operations and available additional liquidity will be
sufficient to support its operating requirements and fund
its business objectives for at least the next twelve months and beyond,
including but not limited to, payments of dividends to shareholders, costs
related to the Combination and other acquisitions and as
well as ongoing integration and optimization,
pension plan contributions, capital expenditures, other business opportunities
(including
potential acquisitions),
implementing actions to achieve the Company’s
sustainability goals and other potential contingencies.
The
Company’s liquidity is affected
by many factors, some based on normal operations of our business and
others related to the impact of
the pandemic on our business and on global economic conditions as well as industry
uncertainties, which we cannot predict.
We also
cannot predict economic conditions and industry downturns or the
timing, strength or duration of recoveries.
We may seek,
as we
believe appropriate, additional debt or equity financing which would
provide capital for corporate purposes, working capital funding,
additional liquidity needs or to fund future growth opportunities, including
possible acquisitions and investments.
The timing and
amount of potential capital requirements cannot be determined at this time
and will depend on a number of factors, including the
actual and projected demand for our products, specialty chemical industry
conditions, competitive factors, and the condition of
financial markets, among others.
The following table summarizes the Company’s
contractual obligations as of December 31, 2021, and the effect such
obligations
are expected to have on its liquidity and cash flows in future periods.
Pension and postretirement plan contributions beyond 2021 are
not determinable since the amount of any contribution is heavily dependent
on the future economic environment and investment
returns on pension trust assets.
The timing of payments related to other long-term liabilities which consists primarily
of deferred
compensation agreements and environmental reserves, also cannot
be readily determined due to their uncertainty.
Interest obligations
on the Company’s long-term
debt and capital leases assume the current debt levels will be outstanding for
the entire respective period
and apply the interest rates in effect as of December 31, 2021.
Payments due by period
(dollars in thousands)
2027 and
Contractual Obligations
Total
Beyond
Long-term debt
$
900,633
$
56,759
$
75,553
$
758,045
$
$
$
10,074
Interest obligations
39,975
14,287
13,184
10,751
Capital lease obligations
-
Operating leases
41,395
11,346
9,041
7,017
5,292
4,197
4,502
Purchase obligations
3,652
3,197
-
-
-
Transition tax
8,500
-
1,529
3,099
3,872
-
-
Pension and other postretirement plan
contributions
13,347
13,347
-
-
-
-
-
Other long-term liabilities (See Note 22 of
Notes to Consolidated Financial Statements)
12,040
-
-
-
-
-
12,040
Total contractual
cash obligations
$
1,020,410
$
99,155
$
99,935
$
779,147
$
9,988
$
4,868
$
27,317
Non-GAAP Measures
The information in this Form 10-K filing 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 and non-
GAAP earnings per diluted share.
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 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 attributable
to the Company before depreciation and
amortization, interest expense, net, and taxes on 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 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 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
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.
The following tables reconcile the Company’s
non-GAAP financial measures (unaudited) to their most directly comparable
GAAP financial measures (dollars in thousands, unless otherwise noted,
except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
For the years ended December 31,
Operating income
$
150,466
$
59,360
$
46,134
Houghton combination, integration and other
acquisition-related expenses (a)
24,611
30,446
35,945
Restructuring and related charges (b)
1,433
5,541
26,678
Fair value step up of acquired inventory sold (c)
11,714
Executive transition costs (d)
2,986
-
-
Inactive subsidiary's non-operating litigation costs (e)
-
-
Customer bankruptcy costs (f)
-
1,073
Facility remediation costs, net (g)
1,509
-
-
Charges related to the settlement of a non-core equipment sale (h)
-
-
Indefinite-lived intangible asset impairment (i)
-
38,000
-
Non-GAAP operating income
$
182,625
$
134,036
$
121,928
Non-GAAP operating margin (%) (r)
10.4%
9.5%
10.8%
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and
Non-GAAP Net Income Reconciliations
For the years ended December 31,
Net income attributable to Quaker Chemical Corporation
$
121,369
$
39,658
$
31,622
Depreciation and amortization (a)(p)
87,728
84,494
45,264
Interest expense, net (a)
22,326
26,603
16,976
Taxes on income before
equity in net income of associated companies (q)
34,939
(5,296)
2,084
EBITDA
266,362
145,459
95,946
Equity income in a captive insurance company (j)
(4,993)
(1,151)
(1,822)
Houghton combination, integration and other
acquisition-related expenses (a)
17,917
29,538
35,361
Restructuring and related charges (b)
1,433
5,541
26,678
Fair value step up of acquired inventory sold (c)
11,714
Executive transition costs (d)
2,986
-
-
Inactive subsidiary’s non
-operating litigation cost (e)
-
-
Customer bankruptcy costs (f)
-
1,073
Facility remediation costs, net (g)
2,066
-
-
Charges related to the settlement of a non-core equipment sale (h)
-
-
Indefinite-lived intangible asset impairment (i)
-
38,000
-
Pension and postretirement benefit (income) costs,
non-service components (k)
(759)
21,592
2,805
Gain on changes in insurance settlement restrictions of an inactive
subsidiary and related insurance insolvency recovery (l)
-
(18,144)
(60)
Brazilian non-income tax credits (m)
(13,087)
-
-
Currency conversion impacts of hyper-inflationary economies (n)
1,033
Adjusted EBITDA
$
274,109
$
221,974
$
173,112
Adjusted EBITDA margin (%) (r)
15.6%
15.7%
15.3%
Adjusted EBITDA
$
274,109
$
221,974
$
173,112
Less: Depreciation and amortization - adjusted (a)
87,002
83,732
44,680
Less: Interest expense, net - adjusted (a)
22,326
26,603
14,896
Less: Taxes on income
before equity in net income
of associated companies - adjusted (o)(q)
41,976
26,488
24,825
Non-GAAP net income
$
122,805
$
85,151
$
88,711
Non-GAAP Earnings per Diluted Share Reconciliations
For the years ending December 31,
GAAP earnings per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
6.77
$
2.22
$
2.08
Equity income in a captive insurance company per diluted share (j)
(0.28)
(0.07)
(0.12)
Houghton combination, integration and other
acquisition-related expenses per diluted share (a)
0.79
1.31
2.05
Restructuring and related charges per diluted share (b)
0.07
0.23
1.34
Fair value step up of acquired inventory sold per diluted share (c)
0.03
0.01
0.58
Executive transition costs per diluted share (d)
0.13
-
-
Inactive subsidiary’s non
-operating litigation costs per diluted share (e)
0.04
-
-
Customer bankruptcy costs per diluted share (f)
-
0.02
0.05
Facility remediation costs, net per diluted share (g)
0.09
-
-
Charges related to the settlement of a non-core equipment
sale per diluted share (h)
-
-
0.02
Indefinite-lived intangible asset impairment per diluted share (i)
-
1.65
-
Pension and postretirement benefit costs, non-service
components per diluted share (k)
(0.04)
0.79
0.14
Gain on changes in insurance settlement restrictions of an inactive
subsidiary and related insurance insolvency recovery per diluted share (l)
-
(0.78)
0.00
Brazilian non-income tax credits per diluted share (m)
(0.46)
-
-
Currency conversion impacts of hyper-inflationary economies
per diluted share (n)
0.03
0.02
0.07
Impact of certain discrete tax items per diluted share (o)
(0.32)
(0.62)
(0.38)
Non-GAAP earnings per diluted share (s)
$
6.85
$
4.78
$
5.83
(a)
Houghton combination, integration and other acquisition-related
expenses include certain legal, financial, and other advisory and
consultant costs incurred in connection with post-closing integration
activities including internal control readiness and
remediation, as well as due diligence, regulatory approvals and closing
the Combination.
These costs are not indicative of the
future operating performance of the Company.
Approximately $0.6 million, $1.5 million and $9.4 million for the years ended
December 31, 2021, 2020 and 2019, respectively,
of these pre-tax costs were considered non-deductible for the purpose of
determining the Company’s
effective tax rate, and, therefore, taxes on income before equity in
net income of associated
companies - adjusted reflects the impact of these items.
During 2021, 2020 and 2019, the Company recorded $0.7 million, $0.8
million, and $0.6 million, respectively,
of accelerated depreciation related to certain of the Company’s
facilities, which is
included in the caption “Houghton combination, integration and other
acquisition-related expenses” in the reconciliation of
operating income to non-GAAP operating income and included in the
caption “Depreciation and amortization” in the
reconciliation of net income attributable to the Company to EBITDA, but
excluded from the caption “Depreciation and
amortization - adjusted” in the reconciliation of adjusted EBITDA to
non-GAAP net income attributable to the Company.
During
2019, the Company incurred $2.1 million of ticking fees to maintain the bank
commitment related to the Combination.
These
interest costs are included in the caption “Interest expense, net” in the reconciliation
of net income attributable to the Company to
EBITDA, but are excluded from the caption “Interest expense, net
- adjusted” in the reconciliation of adjusted EBITDA to non-
GAAP net income.
During 2021 and 2020, the Company recorded $0.6 million and $0.8 million, respectively,
of other income
related to an indemnification asset.
During 2021 and 2020, the Company recorded a gain of $5.4 million
and a loss of $0.6
million, respectively,
on the sale of certain held-for-sale real property assets related to
the Combination.
Each of these items are
included in the caption “Houghton combination, integration and other
acquisition expenses” in the reconciliation of GAAP
earnings per diluted share attributable to Quaker Chemical Corporation
common shareholders to Non-GAAP earnings per diluted
share as well as the reconciliation of Net Income attributable to Quaker
Chemical Corporation to Adjusted EBITDA and Non-
GAAP net income See Note 2 and Note 9 of Notes to Consolidated Financial
Statements, which appears in Item 8 of this Report.
(b)
Restructuring and related charges represent the
costs incurred by the Company associated with the QH restructuring program
which was initiated in the third quarter of 2019 as part of the Company’s
plan to realize cost synergies associated with the
Combination.
These costs are not indicative of the future operating performance of the Company.
See Note 7 of Notes to
Consolidated Financial Statements,
which appears in Item 8 of this Report.
(c)
Fair value step up of inventory sold relates to expense associated with selling
inventory of acquired businesses which was
adjusted to fair value as part of purchase accounting.
This increases to costs of goods sold (“COGS”) are not indicative of the
future operating performance of the Company.
(d)
Executive transition costs represent the costs related to the Company’s
search, hiring and transition to a new CEO in connection
with the executive transition that look place in 2021.
These expenses are not indicative of the future operating performance of the
Company.
(e)
Inactive subsidiary’s non
-operating litigation costs represents the charges incurred by
an inactive subsidiary of the Company and
are a result of the termination of restrictions on insurance settlement reserves.
These charges are not indicative of the future
operating performance of the Company.
See Note 26 of Notes to Consolidated Financial Statements, which appears
in Item 8 of
this Report.
(f)
Customer bankruptcy costs represent the cost associated with a specific
reserve for trade accounts receivable related to a customer
who filed for bankruptcy protection.
These expenses are not indicative of the future operating performance
of the Company.
See
Note 13 of Notes to Consolidated Financial Statements, which appears
in Item 8 of this Report.
(g)
Facility remediation costs, net, presents the gross costs associated with remediation,
cleaning and subsequent restoration costs
associated with the property damage to certain of the Company’s
facilities, net of insurance recoveries received.
These charges
are non-recurring and are not indicative of the future operating performance
of the Company.
See Note 26 of Notes to
Consolidated Financial Statements, which appears in Item 8 of this Report.
(h)
Charges related to the settlement of a non-core equipment
sale represent the pre-tax charge related to a one-time, uncommon,
customer settlement associated with a prior sale of non-core equipment.
These charges are not indicative of the future operating
performance of the Company.
(i)
Indefinite-lived intangible asset impairment represents the non-cash
charge taken to write down the value of certain indefinite-
lived intangible assets associated with the Combination.
The Company has no prior history of goodwill or intangible asset
impairments and this charge is not indicative of the future operating
performance of the Company.
See Note 16 of Notes to
Consolidated Financial Statements, which appears in Item 8 of this Report.
(j)
Equity income in a captive insurance company represents the after-tax
income attributable to the Company’s
interest in Primex,
Ltd. (“Primex”), a captive insurance company.
The Company holds a 32% investment in and has significant influence over
Primex, and therefore accounts for this investment under the equity method of
accounting.
The income attributable to Primex is
not indicative of the future operating performance of the Company
and is not considered core to the Company’s operations.
(k)
Pension and postretirement benefit (income) costs, non-service components
represent the pre-tax, non-service components of the
Company’s pension and postretirement
net periodic benefit cost in each period.
These costs are not indicative of the future
operating performance of the Company.
The year ended December 31, 2020 includes a $22.7 million settlement charge
for the
Company’s termination
of the Legacy Quaker U.S. Pension Plan.
See Note 21 of Notes to Consolidated Financial Statements,
which appears in Item 8 of this Report.
(l)
Gain on changes in insurance settlement restrictions of an inactive subsidiary
and related insurance insolvency recovery
represents income associated with the gain on the termination of restrictions
on insurance settlement reserves and the cash
receipts from an insolvent insurance carrier for previously submitted
claims by an inactive subsidiary of the Company.
This other
income is not indicative of the future operating performance of the Company.
See Notes 9 and 26 of Notes to Consolidated
Financial Statements, which appears in Item 8 of this Report.
(m)
Brazilian non-income tax credits represent indirect tax credits related to certain
of the Company’s Brazilian subsidiaries
prevailing in a legal claim as well as the Brazil Supreme Court ruling on these non
-income tax matters.
The non-income tax
credit is non-recurring and not indicative of the future operating performance
of the Company.
See Note 26 of Note to
Consolidated Financial Statements, which appears in Item 8 of this Report.
(n)
Currency conversion impacts of hyper-inflationary economies represents
the foreign currency remeasurement impacts associated
with the Company’s affiliates
whose local economies are designated as hyper-inflationary under
U.S. GAAP.
An entity which
operates within an economy deemed to be hyper-inflationary
under U.S. GAAP is required to remeasure its monetary assets and
liabilities to the applicable published exchange rates and record the
associated gains or losses resulting from the remeasurement
directly to the Consolidated Statements of Income.
Venezuela’s
economy has been considered hyper-inflationary under
U.S.
GAAP since 2010, while Argentina’s
economy has been considered hyper-inflationary beginning
July 1, 2018.
In addition, the
Company’s Argentine
Houghton subsidiary also applies hyper-inflationary accounting.
During 2021, 2020 and 2019, the
Company incurred non-deductible, pre-tax charges
related to the Company’s Argentine
affiliates.
The charges incurred related to
the immediate recognition of foreign currency remeasurement in the
Consolidated Statements of Income associated with these
entities are not indicative of the future operating performance of the Company.
See Notes 1, 9 and 17 of Notes to Consolidated
Financial Statements, which appears in Item 8 of this Report.
(o)
The impacts of certain discrete tax items includes
the impact of changes in certain valuation allowances
recorded on certain of the
Company’s foreign
tax credits, tax law changes in foreign jurisdictions, changes in withholding tax rates, the
tax impacts of non-
income tax credits associated with certain of the Company’s
Brazilian subsidiaries and the associated impact on previously
accrued for distributions at certain of the Company’s
Asia/Pacific subsidiaries, the one-time deferred tax benefit recorded on the
transfer of intangible assets between the Company’s
subsidiaries as well as the offsetting impact and amortization
of a deferred
tax benefit the Company recorded during 2020 and 2019 related to
similar intercompany intangible asset transfers.
Additionally,
the 2019 amounts include certain transition tax adjustments related to adjustments
to adopt U.S. Tax Reform.
See Note 10 of
Notes to Consolidated Financial Statements, which appears in Item
8 of this Report.
(p)
Depreciation and amortization for the years ended December 31, 2021,
2020 and 2019 includes $1.2 million, $1.2 million and
$0.4 million, respectively,
of amortization expense recorded within equity in net income of associated
companies in the
Company’s Consolidated
Statements of Income, which is attributable to the amortization of the fair value step up for
the
Company’s 50% interest Korea Houghton
Corporation as a result of required purchase accounting.
(q)
Taxes on income
before equity in net income of associated companies - adjusted presents the impact
of any current and deferred
income tax expense (benefit), as applicable, of the reconciling items presented
in the reconciliation of net income attributable to
Quaker Chemical Corporation to adjusted EBITDA, and was determined
utilizing the applicable rates in the taxing jurisdictions in
which these adjustments occurred, subject to deductibility.
Houghton combination, integration and other acquisition-related
expenses described in (a) resulted in incremental taxes of $4.2 million
for 2021, $6.9 million for 2020, and $6.7 million for 2019.
Restructuring and related charges described in (b)
resulted in incremental taxes of $0.3 million for 2021, $1.4 million for 2020
and $6.2 million for 2019.
Fair value step up of inventory sold described in (c) resulted in incremental taxes of $0.2 million,
less
than $0.1 million and $2.9 million for 2021, 2020 and 2019, respectively.
Executive transition expenses described in (d) resulted
in incremental taxes of $0.7 million for 2021.
Inactive subsidiary non-operating litigation costs described in (e) resulted in
incremental taxes of $0.2
million for 2021.
Customer bankruptcy costs described in (f) resulted in incremental taxes of $0.1
million in 2020 and $0.3 million in 2019.
Facility remediation costs, net described in (g) results in incremental taxes of $0.5
million for 2021.
Charges related to the settlement of a non-core equipment
sale described in (h) resulted in incremental taxes of
$0.1 million for 2019.
Indefinite-lived intangible asset impairment described in (i) resulted in
incremental taxes of $8.7 million
for 2020.
Pension and postretirement benefit (income) costs, non-service components
described in (k) resulted in a reduction of
taxes of $0.1 million for 2021 and incremental taxes of $7.5 million for 2020,
and $0.7 million for 2019.
Gain on changes in
insurance settlement restrictions of an inactive subsidiary
and related insurance insolvency recovery described in (l) resulted in a
reduction of taxes of $4.2 million in 2020 and less than $0.1 million in
2019.
Brazilian non-income tax credits described in (m)
resulted in a reduction of taxes of $4.8 million for 2021.
The impact of certain discrete items described in (o) resulted in a tax
benefit of $5.8 million for 2021, incremental taxes of $11.2
million for 2020, and a reduction of taxes of $5.7 million in 2019.
(r)
The Company calculates adjusted EBITDA margin
and non-GAAP operating margin as the percentage of adjusted EBITDA
and
non-GAAP operating income to consolidated net sales.
(s)
The Company calculates non-GAAP earnings per diluted share as non
-GAAP net income attributable to the Company per
weighted average diluted shares outstanding using the “two-class share method”
to calculate such in each given period.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet commitments or
obligations as of December 31, 2021.
The Company’s only off-
balance sheet commitments or obligations outstanding as of December 31,
2021 represented approximately $6 million of total bank
letters of credit and guarantees.
The bank letters of credit and guarantees are not significant to the Company’s
liquidity or capital
resources.
See Note 20 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Operations
Consolidated Operations Review - Comparison of 2021 with 2020
Net sales were $1,761.2 million in 2021 compared to $1,417.7 million
in 2020.
The net sales increase of approximately $343.5
million or 24% year-over-year was primarily due to higher sales volumes of
13%, which includes additional net sales from recent
acquisitions of 4%, increases from selling price and product mix of 8% and
the positive impact of foreign currency translation of 3%.
The increase in organic sales volumes compared to 2020
was primarily the result of the continued year-over-year
improvement in end
market conditions from the prior year impacts of COVID-19 and continued
market share gains.
Sales from acquisitions is primarily
driven by the Company’s acquisition
of Coral Chemical Company (“Coral”) in December 2020 and
the tin-plating solutions business
acquired in February 2021.
The increase from selling price and product mix includes the impact of current
year selling price increases
implemented in response to the increases in raw material costs experienced
in 2021.
The positive impact from foreign currency
translation is primarily the result of the strengthening of the Chinese renminbi,
euro, Mexican peso, the Canadian dollar and the
British pound against the U.S. dollar year-over-year.
COGS were $1,166.5 million in 2021 compared to $904.2 million in 2020.
The increase in COGS of 29% was driven by the
associated COGS on the increase in net sales described above, and
continued increases in the Company’s global
raw material costs
compared to the prior year and the impacts of supply constraints in the current year.
Gross profit in 2021 of $594.6 million increased $81.2 million or approximately
16% from 2020, due primarily to the increase in
net sales noted above.
The Company’s reported gross margin
in 2021 was 33.8% compared to 36.2% in 2020.
The lower current year
gross margin is primarily attributable to increased raw materials and
other costs that began in the fourth quarter of 2020 and have
continued throughout 2021 and the impacts of constraints on the world’s
global supply chain partially offset by the Company’s
ongoing pricing initiatives.
SG&A in 2021 increased $38.1 million compared to 2020 due primarily to
the impact of sales increases on direct selling costs,
year-over-year inflation increases, additional
SG&A from recent acquisitions and higher SG&A due to foreign currency
translation,
partially offset by lower incentive compensation year-over
-year as well as the benefits of additional realized cost synergies associated
with the Combination year-over-year.
In addition, SG&A was lower in the prior year period as a result of temporary
cost saving
measures the Company implemented in response to COVID-19.
While the Company continues to manage costs during the on-going
pandemic, it has incurred higher SG&A year-over-year
as the global economy continues to gradually rebound.
During 2021 and 2020, the Company incurred $23.9 million and $29.8
million, respectively, of
Combination, integration and
other acquisition-related expenses primarily for professional fees related
to Houghton integration and other acquisition-related
activities.
See the Non-GAAP Measures section of this Item, above.
The Company initiated a restructuring program during 2019 as part of
its global plan to realize cost synergies associated with the
Combination.
The Company incurred restructuring and related charges for reductions
in headcount and site closures under this
program, net of adjustments to initial estimates for severance, of
an expense of $1.4 million and $5.5 million during 2021 and 2020,
respectively.
See the Non-GAAP Measures section of this Item, above.
Operating income in 2021 was $150.5 million compared to $59.4 million
in 2020.
Excluding Combination, integration and other
acquisition-related expenses, restructuring and related charges and
other non-core items, the Company’s
current year non-GAAP
operating income of $182.6 million increased compared to $134.0
million in the prior year, primarily due
to the increase in net sales
described above and the benefits from cost savings related to the Combination
offset by an increase in SG&A as well as the significant
increases in raw material costs year-over-year.
The Company estimates that it realized cost synergies associated with the
Combination
of approximately $75 million during 2021 compared to approximately
$58 million during 2020.
The Company had other income, net, of $18.9 million in 2021 compared
to other expense, net, of $5.6 million in 2020.
The year-
over-year change was primarily a result of other income related to certain
non-income tax credits recorded by the Company’s
Brazilian subsidiaries, the gain on the sale of certain held-for-sale real property assets and lower
foreign currency transaction losses in
2021 as compared to the prior year.
The Company had non-service components of pension and postretirement
benefit income in the
current year compared to an expense in the prior year as a result of the $22.7
million pension settlement charge directly related to the
termination of the Legacy Quaker U.S. pension plan partially offset
by a $18.1 million gain related to the lapse of restrictions over
certain cash that was previously designated solely for the settlement of
asbestos claims at an inactive subsidiary,
all of which are
described in the Non-GAAP Measures section of this Item, above.
Interest expense, net, decreased $4.3 million compared to 2020 driven
by lower current year average borrowings outstanding as a
result of the additional revolver borrowings drawn during part of 2020
at the onset of the pandemic to add additional liquidity,
coupled
with a decline in overall interest rates year-over-year,
as the weighted average interest rate incurred on borrowings under the
Company’s credit facility was approximately
1.6% during 2021 compared to approximately 2.2% during 2020.
The Company’s effective
tax rates for 2021 and 2020 were an expense of 23.8% and benefit of 19.5%, respectively.
The
Company’s higher current year
effective tax rate is driven by a higher level of pre-tax earnings and
mix of earnings, as well as
deferred tax expense related to the planned repatriation of non-U.S.
earnings.
In addition, the rate was impacted by certain one-time
charges and benefits related to an intercompany intangible
asset transfer and related royalty income recognition offset
by changes in
the valuation allowance for foreign tax credits.
Comparatively, the prior
year effective tax rate was impacted by the tax effect of
certain one-time tax charges and benefits related to a 2020 intercompany
intangible asset transfer, 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.
Excluding the impact of these items as well as all other non-core items in
each year, described in the Non-GAAP Measures
section of this Item, above, the Company estimates that the 2021 and 2020
effective tax rates would have been approximately 26%
and 25%, respectively.
The higher estimated current year tax rate was primarily driven by a higher level of pre
-tax earnings and the
impact of changes in mix of earnings,
deferred taxes related to the planned repatriation of non-U.S. earnings, and provision
to return
adjustments in the prior period.
The Company may experience continued volatility in its effective tax
rates due to several factors,
including the timing of tax audits and the expiration of applicable statutes of
limitations as they relate to uncertain tax positions, the
unpredictability of the timing and amount of certain incentives in various
tax jurisdictions, the treatment of certain acquisition-related
costs and the timing and amount of certain share-based compensation-related
tax benefits, among other factors.
In addition, the
foreign tax credit valuation allowance, or absence thereof, is based on
a number of variables, including forecasted earnings, which
may vary.
Equity in net income of associated companies increased $2.0 million in
2021 compared to 2020, primarily due to higher current
year income from the Company’s interest
in a captive insurance company partially offset by lower earnings
from the Company’s 50%
interest in a joint venture in Korea compared to the prior year.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was less than $0.1 million
in 2021 compared to $0.1 million in 2020
primarily a
result of the first quarter of 2020 acquisition of the remaining ownership
interest in one of the Company’s South
African affiliates
.
Foreign exchange positively impacted the Company’s
yearly results by approximately 6% driven by the positive impact from
foreign currency translation on earnings as well as lower foreign exchange
transaction losses in the current year as compared to the
prior year.
Consolidated Operations Review - Comparison of 2020 with 2019
Net sales were $1,417.7 million in 2020 compared to $1,133.5 million
in 2019.
The net sales increase of 25% year-over-year
includes additional net sales from acquisitions, primarily Houghton
and Norman Hay, of $408.6 million.
Excluding net sales related
to acquisitions, the Company’s prior
year net sales would have declined approximately 11%
which reflects a decrease in sales volumes
of 9%, a negative impact from foreign currency translation of 1% and
a decrease from selling price and product mix of 1%.
The
primary driver of the volume decline in the prior year was the negative
impact of COVID-19 on global production levels.
COGS were $904.2 million in 2020 compared to $741.4 million in
2019.
The increase in COGS of 22% was primarily due to the
inclusion of a full year of Houghton and Norman Hay COGS and $0.8 million of
accelerated depreciation charges in 2020, partially
offset by lower prior year COGS on the decline in net sales due
to COVID-19 and 2019 charges of $11.7
million to increase acquired
inventory to its fair value, described in the Non-GAAP Measures section of this Item
above.
Gross profit in 2020 increased $121.3 million or 31% from 2019 due primarily
to additional gross profit from Houghton and
Norman Hay.
The Company’s reported gross
margin in 2020 was 36.2% compared to 34.6% in 2019, which included
the inventory
fair value step up described above.
Excluding one-time increases to COGS in both periods, the Company
estimates that its gross
margins for 2020 and 2019 would have been 36.3% and 35.7%,
respectively.
The estimated increase in gross margin year-over-year
was primarily due to lower COGS as a result of the Company’s
progress on Combination-related logistics, procurement and
manufacturing cost savings initiatives, partially offset
by the lower sales volumes on certain fixed manufacturing costs.
SG&A in 2020 increased $96.9 million compared to 2019 due primarily to
additional SG&A from Houghton and Norman Hay,
partially offset by the impact of COVID-19 cost savings
actions, including lower travel expenses, and the benefits of realized costs
savings associated with the Combination.
During 2020, the Company incurred $29.8 million of Combination,
integration and other acquisition-related expenses, primarily
for professional fees related to Houghton integration and other acquisition
-related activities.
Comparatively,
the Company incurred
$35.5 million of similar expenses in 2019,
primarily due to various professional fees related to integration planning
and regulatory
approval as well as professional fees associated with closing the Combination.
See the Non-GAAP Measures section of this Item,
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.
The Company recorded additional restructuring and related charges
of $5.5 million during 2020
compared
to $26.7 million during 2019 under this program.
See the Non-GAAP Measures section of this Item, above.
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 negative impacts of COVID-19 on their estimated fair
values.
There were no additional impairment charges in the remainder of
2020 or in 2019.
See the Critical Accounting Policies and
Estimates section as well as the Non-GAAP Measures section, of this Item, above.
Operating income in 2020 was $59.4 million compared to $46.1 million
in 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
during 2020 of $134.0 million increased compared to $121.9 million
in 2019, primarily due to additional operating income from
Houghton and Norman Hay and the benefits from costs savings initiatives related
to the Combination, partially offset by the current
year negative impact due to COVID-19.
The Company’s other
expense, net, was $5.6 million in 2020 compared to $0.3 million in 2019.
The year-over-year increase in
other expense, net was primarily due to the first quarter of 2020 non-cash
settlement charge of $22.7 million associated with the
termination of the Legacy Quaker U.S. Pension Plan, partially offset
by a fourth quarter of 2020 gain of $18.1 million related to the
lapsing of restrictions over certain cash that was previously designated
solely for the settlement of asbestos claims at an inactive
subsidiary of the Company,
which are both described in the Non-GAAP Measures section of this Item, above.
Additionally, the
increase year-over-year in other expense,
net, includes higher foreign currency transaction losses in 2020.
Interest expense, net, increased $9.6 million in 2020 compared to 2019 primarily
due to a full year of borrowings under the
Company’s Credit Facility to
finance the closing of the Combination on August 1, 2019, partially offset
by lower overall interest rates
in the 2020.
The Company’s effective
tax rates for 2020 and 2019 were a benefit of 19.5% and an expense of 7.2%, respectively.
The
Company’s 2020 effective
tax rate was impacted by the tax effect of certain one-time
tax charges and benefits, including deferred tax
benefits related to an intercompany intangible asset transfer,
as well as changes in the valuation allowance for foreign tax credits,
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 2019 effectiv
e
tax rate was primarily impacted by certain non-deductible
costs associated with the Combination as well as a deferred tax benefit related
to a separate intercompany intangible asset transfer.
Excluding the impact of all non-core items in each year,
described in the Non-GAAP measures section of this Item, above, the
Company estimates that its effective tax rates for 2020
and 2019 were approximately 25% and 22%, respectively.
The year-over-year
increase is driven primarily by higher U.S. income taxes resulting from a
change in certain deductions and the taxability of foreign
earnings in the U.S., partially offset by a change in the mix of earnings.
Equity in net income of associated companies increased $2.3 million in
2020 compared to 2019, primarily due to additional
earnings from our 50% interest in a joint venture in Korea partially offset
by lower earnings from the Company’s
interest in a captive
insurance company.
See the Non-GAAP Measures section of this Item, above.
Net income attributable to noncontrolling interest was $0.1 million in
2020 compared to $0.3 million in 2019 primarily a result of
the first quarter of 2020 acquisition of the remaining ownership interest
in one of the Company’s South African
affiliates.
Foreign exchange negatively impacted the Company’s
2020 results by approximately $0.38 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.
Reportable Segments Review - Comparison of 2021 with 2020
The Company’s reportable
segments reflect the structure of the Company’s
internal organization, the method by which the
Company’s resources are allocated
and the manner by which the chief operating decision maker of the Company
assesses its
performance.
The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty
Businesses.
The three geographic segments are composed of the net sales and operations
in each respective region, excluding net
sales and operations managed globally by the Global Specialty Businesses
segment, which includes the Company’s
container, metal
finishing, mining, offshore, specialty coatings, specialty grease and
Norman Hay businesses.
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and SG&A directly
related to the respective segment’s product
sales.
Operating expenses not directly attributable to the net sales of each respective
segment, such as certain corporate and administrative costs, Combination,
integration and other acquisition-related expenses,
Restructuring and related charges, and COGS related
to acquired inventory sold, which is adjusted to fair value as part of purchase
accounting, are not included in segment operating earnings.
Other items not specifically identified with the Company’s
reportable
segments include interest expense, net, and other income (expense),
net.
Americas
Americas represented approximately 33% of the Company’s
consolidated net sales in 2021.
The segment’s net sales were $572.6
million, an increase of $122.5 million or 27% compared to 2020.
The increase in net sales was driven by a benefit in selling price and
product mix of 11%, increases in organic
volumes of approximately 10%, additional net sales from acquisitions of 5%, and the
positive impact of foreign currency translation of 1%.
The current year organic volume increase was driven by the continued
improvement in end market conditions compared to the prior year which
was impacted by COVID-19.
The increase in selling price
and product mix is primarily driven by price increases implemented
to help offset the significant increases in raw material and other
input costs incurred during 2021.
The foreign exchange impact was primarily driven by the strengthening of
the Mexican peso against
the U.S. dollar, as this exchange rate averaged
20.27 in 2021 compared to 21.34 during 2020.
This segment’s operating earnings were
$124.9 million, an increase of $28.5 million or 30% compared to 2020.
The increase in segment operating earnings reflects the higher
net sales, described above, partially offset by lower gross
margins driven by the continued raw material cost increases and
global
supply chain and logistics pressures coupled with higher SG&A including
an increase in direct selling costs associated with higher net
sales, SG&A from acquisitions and an increase in SG&A as the prior year
included temporary cost savings measures implemented in
response to the onset of the COVID-19 pandemic.
EMEA
EMEA represented approximately 27% of the Company’s
consolidated net sales in 2021.
The segment’s net sales were $480.1
million, an increase of $96.9 million or 25% compared to 2020.
The increase in net sales was driven by a benefit from selling price
and product mix of 10%, increases in organic volumes of
approximately 9%, the positive impact of foreign currency translation of 4%,
and additional net sales from acquisitions of 2%.
The increase in selling price and product mix is primarily driven by price increases
implemented to offset the significant increase in raw
material and other input costs incurred during 2021.
The current year volume
increase was driven by the continued improvement in end market conditions
compared to the prior year which was heavily impacted
by COVID-19.
The foreign exchange impact was primarily driven by the strengthening
of the euro against the U.S. dollar as this
exchange rate averaged 1.18 in 2021 compared to 1.14 in 2020.
This segment’s operating earnings were
$85.2 million, an increase of
$16.0 million or 23% compared to 2020.
The increase in segment operating earnings reflects the higher net sales described
above,
partially offset by lower current year gross margins
driven by the continued raw material cost increases and global supply chain and
logistics pressures as well as higher SG&A including increases in direct selling
costs associated with higher net sales as well as
increases as the prior year included temporary cost savings measures implemented
in response to the onset of the COVID-19
pandemic.
Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’s
consolidated net sales in 2021.
The segment’s net sales were
$388.2 million, an increase of approximately $72.9 million or 23%
compared to 2020.
The increase in net sales year-over-year was
driven by increases in volumes of approximately 15%, the positive impact
of foreign currency translation of 5%, increases from
selling price and product mix of 2% and additional net sales from
acquisitions of 1%.
The current year volume increase was driven by
the continued improvement in end market conditions compared to the prior
year which was impacted by COVID-19.
The foreign
exchange impact was primarily due to the strengthening of the Chinese renminbi
against the U.S. dollar as this exchange rate averaged
6.45 in 2021 compared to 6.90 in 2020.
This segment’s operating earnings were
$96.3 million, an increase of $8.0 million or 9%
compared to 2020.
The increase in segment operating earnings was driven by the higher net sales described above,
partially offset by
lower gross margins driven by the continued raw material cost increases
and global supply chain and logistics pressures as well as
higher direct selling costs associated with higher net sales and an increase
in SG&A as the prior year included temporary cost savings
measures implemented in response to the onset of the COVID-19 pandemic
.
Global Specialty Businesses
Global Specialty Businesses represented approximately 18% of the
Company’s consolidated net sales in
2021.
The segment’s net
sales were $320.2 million, an increase of $51.2 million or 19% compared
to 2020.
The increase in net sales was driven by increases in
selling price and product mix, including Norman Hay,
of 14%, additional net sales from acquisitions of 8%, and the positive impact
of
foreign currency translation of 2% partially offset by volume declines
of approximately 5%.
Both the changes in selling price and
product mix and sales volumes were primarily driven by higher amounts of
shipments of a lower priced product in the Company’s
mining business in the prior year.
The foreign exchange impact was a result of similar strengthening of certain
currencies in EMEA
and Americas as described above.
This segment’s
operating earnings were $90.6 million, an increase of $10.9 million or 14%
compared to 2020.
The increase in segment operating earnings reflects the higher net sales, described
above, partially offset by lower
gross margins in the current year coupled with higher SG&A, including
an increase in direct selling costs associated with higher net
sales, SG&A from acquisitions and an increase in SG&A as the prior year
included temporary cost savings measures implemented in
response to the onset of the COVID-19 pandemic.
Reportable Segments Review - Comparison of 2020 with 2019
Americas
Americas represented approximately 32% of the Company’s
consolidated net sales in 2020.
The segment’s net sales were $450.2
million, an increase of $58.0 million or 15% compared to 2019.
The increase in net sales reflects additional net sales from
acquisitions of $120.4 million, primarily a result of the inclusion of
seven additional months of Houghton net sales, as the
Combination closed on August 1, 2019.
Excluding net sales from acquisitions, the segment’s
net sales decreased by approximately
16% due to lower volumes of 12% and a negative impact of foreign
currency translation of 4%.
The volume decline was driven by
the economic slowdown that began in late March and continued throughout
2020 due to the impacts of COVID-19.
The foreign
exchange impact was primarily due to the weakening of the Brazilian real
and the Mexican peso against the U.S. dollar,
as these
exchange rates averaged 5.10 and 21.34, respectively,
in 2020 compared to 3.94 and 19.24, respectively in 2019.
This segment’s
operating earnings were $96.4 million, an increase of $18.1 million or
23% compared to 2019.
The increase in segment operating
earnings reflects the inclusion of a full year of Houghton net sales, noted,
above, and the impacts on gross margins and SG&A due to
the Combination’s cost synergies
and costs savings actions related to COVID-19 year-over-year,
partially offset by the impact of
COVID-19 on sales volumes and higher COGS and SG&A due to seven additional
months of Houghton in 2020.
EMEA
EMEA represented approximately 27% of the Company’s
consolidated net sales in 2020.
The segment’s net sales were $383.2
million, an increase of $97.6 million or 34% compared to 2019.
The increase in net sales reflects additional net sales from
acquisitions of $117.9 million, primarily
a result of the inclusion of seven additional months of Houghton net sales, as the
Combination closed on August 1, 2019.
Excluding net sales from acquisitions, the segment’s
net sales decreased year-over-year by
approximately 7% due to lower volumes of 10%, partially offset by
a positive impact of foreign currency translation of 2% and
increases in selling price and product mix of 1%.
The current year volume decline was driven by the economic slowdown that began
in late March and continued throughout 2020 due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the
strengthening of the euro against the U.S. dollar as this exchange rate averaged
1.14 in 2020 compared to 1.12 in 2019.
This
segment’s operating earnings were
$69.2 million, an increase of $22.1 million or 47% compared to 2019.
The increase in segment
operating earnings reflects the inclusion of a full year of Houghton net sales,
noted, above, and the impacts on gross margins and
SG&A due to the Combination’s cost synergies
and costs savings actions related to COVID-19 year-over-year,
partially offset by the
impact of COVID-19 on sales volumes and higher COGS and SG&A due
to seven additional months of Houghton in 2020.
Asia/Pacific
Asia/Pacific represented approximately 22% of the Company’s
consolidated net sales in 2020.
The segment’s net sales were
$315.3 million, an increase of $67.5 million or 27% compared to 2019.
The increase in net sales reflects the inclusion of seven
additional months of Houghton net sales of $79.7 million, as the Combination
closed on August 1, 2019.
Excluding Houghton net
sales, the segment’s net sales decreased
by approximately 5% year-over-year was due
to lower volumes of 3% and decreases in selling
price and product mix of 3% partially offset by the positive
impact of foreign currency translation of 1%.
The current year volume
decline was driven by the economic slowdown that began in the first quarter
of 2020 in China and in late March throughout the rest of
the region due to the impacts of COVID-19.
The foreign exchange impact was primarily due to the strengthening of the Chinese
renminbi against the U.S. dollar.
While this exchange rate averaged 6.90 in each of 2020 and 2019, respectively,
post the closing of
the Combination, this exchange rate strengthened in the last 5 months of 2020
to average 6.72 compared to 7.06 in the last 5 months of
2019, partially offset by the weakening of the Indian rupee against the
U.S. dollar as this exchange rate averaged 73.95 in 2020
compared to 70.35 in 2019.
This segment’s operating earnings were
$88.4 million, an increase of $20.8 million or 31% compared to
2019.
The increase in segment operating earnings reflects the inclusion of incremental
Houghton net sales, noted, above, and the
impacts on gross margins and SG&A due to the Combination’s
cost synergies and costs savings actions related to COVID-19 year-
over-year, partially offset
by the impact of COVID-19 on sales volumes and higher COGS and SG&A due
to seven additional months
of Houghton in 2020.
Global Specialty Businesses
Global Specialty Businesses represented approximately 19% of the
Company’s consolidated net sales in
2020.
The segment’s net
sales were $269.0 million, an increase of $61.1 million or 29% compared
to 2019.
The increase in net sales reflects the inclusion of
seven additional months of Houghton net sales and nine additional months
of Norman Hay net sales, totaling $90.6 million, as the
Combination closed on August 1, 2019 and the Norman Hay acquisition
closed on October 1, 2019.
Excluding Houghton and
Norman Hay net sales, the segment’s
net sales decreased by approximately 14% year-over-year
due to lower volumes of 7%,
decreases in selling price and product mix of 5% and a negative impact from foreign
currency translation of 2%.
The current year
volume decline was primarily due to a decrease in the Company’s
specialty coatings business driven by Boeing’s
decision to
temporarily stop production of the 737 Max aircraft and volume declines
due to the economic slowdown resulting from COVID-19.
Partially offsetting these volume declines, and
contributing to the decrease in selling price and product mix, were higher shipments of
a lower priced product in the Company’s
mining business compared to 2019.
The foreign exchange impact was primarily due to the
weakening of the Brazilian real against the U.S. dollar described
in the Americas section, above.
This segment’s operating earnings
were $79.7 million, an increase of $20.8 million or 35% compared
to 2019.
The increase in segment operating earnings reflects the
inclusion of incremental Houghton and Norman Hay net sales, noted
above, coupled with an increase in gross margin due to the
Company’s progress on Combination
-related logistics, procurement and manufacturing cost savings initiatives, partially
offset by
higher SG&A, including seven additional months of Houghton
and nine additional months of Norman Hay SG&A in 2020.
Environmental Clean-up Activities
The Company is involved in environmental clean-up activities in connection
with an existing plant location and former waste
disposal sites.
This includes certain soil and groundwater contamination the
Company identified in 1992 at AC Products, Inc.
(“ACP”), a wholly owned subsidiary.
In voluntary coordination with the Santa Ana California Regional Water
Quality Board, ACP
has been remediating the contamination.
In 2007, ACP agreed to operate two groundwater treatment systems, so as to hydraulically
contain groundwater contamination emanating from ACP’s
site until such time as the concentrations of contaminants are below
the
current Federal maximum contaminant level for four consecutive
quarterly sampling events.
In 2014, ACP ceased operation at one of
its two groundwater treatment systems, as it had met the above condition
for closure.
In 2020, the Santa Ana Regional Water
Quality
Control Board asked that ACP conduct some additional indoor
and outdoor soil vapor testing on and near the ACP site to confirm that
ACP continues to meet the applicable local standards and ACP has begun the
testing program.
Such testing began in 2020 and
continued into 2021.
As of December 31, 2021, ACP believes it is close to meeting the conditions for closure
of the remaining
groundwater treatment system but continues to operate this system while in
discussions with the relevant authorities.
As of December
31, 2021, the Company believes that the range of potential-known
liabilities associated with the balance of the ACP water remediation
program is approximately $0.1 million to $1.0 million.
The low and high ends of the range are based on the length of operation of the
treatment system as determined by groundwater modeling.
The Company is party to environmental matters related to certain domestic
and foreign properties.
The Company’s Sao Paulo,
Brazil site was required under Brazilian environmental, health and
safety regulations to perform an environmental assessment as part
of a permit renewal process.
Initial investigations identified soil and ground water contamination in
select areas of the site.
The site
has conducted a multi-year soil and groundwater investigation and
corresponding risk assessments based on the result of the
investigations.
In 2017, the site had to submit a new 5-year permit renewal request and was asked to
complete additional
investigations to further delineate the site based on review of the technical
data by the local regulatory agency,
Companhia Ambiental
do Estado de São Paulo (“CETESB”).
Based on review of the updated investigation data, CETESB issued a Technical
Opinion
regarding the investigation and remedial actions taken to date.
The site developed an action plan and submitted it to CETESB in 2018
based on CETESB requirements.
The site intervention plan primarily requires the site, among other actions,
to conduct periodic
monitoring for methane in soil vapors, source zone delineation, groundwater
plume delineation, bedrock aquifer assessment, update
the human health risk assessment, develop a current site conceptual model
and conduct a remedial feasibility study and provide a
revised intervention plan.
In 2019, the site submitted a report on the activities completed including the revised
site conceptual model
and results of the remedial feasibility study and recommended remedial
strategy for the site.
Other environmental matters include
participation in certain payments in connection with four currently
active environmental consent orders related to certain hazardous
waste cleanup activities under the U.S. Federal Superfund statute.
The Company has been designated a potentially responsible party
(“PRP”) by the Environmental Protection Agency along with other
PRPs depending on the site, and has other obligations to perform
cleanup activities at certain other foreign subsidiaries.
These environmental matters primarily require the Company to perform
long-
term monitoring as well as operating and maintenance at each of the applicable
sites.
The Company continually evaluates its obligations related to such matters,
and based on historical costs incurred and projected
costs to be incurred over the next 27 years, has estimated the present value range
of costs for these environmental matters, on a
discounted basis, to be between approximately $5.0 million and $6.0
million as of December 31, 2021, for which $5.6 million is
accrued within other accrued liabilities and other non-current liabilities on
the Company’s Consolidated
Balance Sheet as of
December 31, 2021.
Comparatively, as of
December 31, 2020, the Company had $6.0 million accrued with respect
to these matters.
The Company believes, although there can be no assurance regarding the
outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other environmental
problems of which it is aware.
Approximately $0.4
million and $0.1 million were accrued as of December 31, 2021
and 2020, respectively, to provide for
such anticipated future
environmental assessments and remediation costs.
Notwithstanding the foregoing, the Company cannot be certain that
future liabilities in the form of remediation expenses and
damages will not exceed amounts reserved.
See Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report
General
See Item 7A of this Report, below,
for further discussion of certain quantitative and qualitative disclosures
about market risk.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Quaker Houghton is exposed to the impact of interest rates, foreign
currency fluctuations, changes in commodity prices, and
credit risk.
The current economic environment associated with COVID-19 has led to significant volatility
and uncertainty with each
of these market risks.
See Item 1A. “Risk Factors.” of this Report for additional discussions of
the current and potential risks
associated with the COVID-19 pandemic.
Except as otherwise disclosed below,
the market risks discussed below did not change
materially from December 31, 2020.
Interest Rate Risk.
The Company’s exposure
to changes in interest rates relates primarily to its borrowings under the Credit
Facility.
Borrowings under the Credit Facility bear interest at a specified benchmark
plus an applicable margin based upon the
Company’s consolidated
net leverage ratio and the currency of the borrowing.
In December 2021, the Company entered into the
Second Amendment to provide an update for the use of a non-USD currency LIBOR successor
rate.
At this time, it remains uncertain
what rate will succeed LIBOR for loans denominated in U.S. dollars.
As a result of the variable interest rates applicable under the
Credit Facility, including
with respect to any future successor rate if interest rates rise significantly,
the cost of debt to the Company
could increase as well.
This could have an adverse effect on the Company,
depending on the extent of the Company’s
borrowings
outstanding throughout a given year.
As of December 31, 2021, the Company had outstanding borrowings under
the Credit Facility of
approximately $889.6 million.
The variable interest rate incurred on the outstanding borrowings under
the Credit Facility during the
year ended December 31, 2021 was approximately 1.6%.
If interest rates had changed by 10% during 2021, the Company’s
interest
expense for the period ended December 31, 2021 on its credit facilities, including
the Credit Facility borrowings outstanding post-
closing of the Combination, would have correspondingly
increased or decreased by approximately $0.8 million.
The Credit Facility required the Company to fix its variable interest rates on at least 20%
of its total Term Loans.
In order to
satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $170.0 million notional amounts
of three year interest rate swaps at a base rate of 1.64%
plus an applicable margin as provided in the Credit Facility,
based on the Company’s consolidated
net leverage ratio.
At the time the
Company entered into the swaps and as of December 31, 2021, the aggregate
interest rate on the swaps, including the fixed base rate
plus an applicable margin, was 3.1%.
These interest rate swaps are designated and qualify as cash flow hedges.
The Company has
previously used derivative financial instruments primarily for the
purpose of hedging exposures to fluctuations in interest rates.
Foreign Exchange
Risk
.
A significant portion of the Company’s
revenues and earnings are generated by its foreign operations.
These foreign operations also represent a significant portion of Quake
r
Houghton’s assets and liabilities.
Generally, all of these
foreign operations use the local currency as their functional currency.
Accordingly, Quaker Houghton’s
financial results are affected
by foreign currency fluctuations, particularly between the U.S. dollar
and the euro, the British pound sterling, the Brazilian real, the
Mexican peso, the Chinese renminbi and the Indian rupee.
Quaker Houghton’s results can
be materially affected depending on the
volatility and magnitude of foreign exchange rate changes.
If the euro, the British pound sterling, the Brazilian real, the Mexican
peso, the Chinese renminbi and the Indian rupee had all weakened or strengthened
by 10% against the U.S. dollar, the Company’s
2021 revenues and pre-tax earnings would have correspondingly
decreased or increased by approximately $98.8 million and $11.7
million, respectively.
The Company generally does not use financial instruments that expose
it to significant risk involving foreign currency
transactions.
However, the size of its non-U.S. activities has a significant
impact on reported operating results and the attendant net
assets.
During the past three years, sales by its non-U.S. subsidiaries accounted
for approximately 60% to 70% of its consolidated net
sales.
In addition, the Company occasionally sources inventory among
its worldwide operations.
This practice can give rise to
foreign exchange risk resulting from the varying cost of inventory to the receiving
location, as well as from the revaluation of
intercompany balances.
The Company primarily mitigates this risk through local sourcing efforts.
Commodity Price Risk
.
Many of the raw materials used by Quaker Houghton are
derivatives of commodity chemicals, which can
experience significant price volatility,
and therefore Quaker Houghton’s
earnings can be materially affected by market changes in raw
material prices.
At times, the Company has entered into fixed-price purchase contracts to manage
this risk.
These contracts provide
protection to Quaker Houghton if the prices for the contracted raw materials
rise; however, in certain circumstances, the Company
may not realize the benefit if such prices decline.
A gross margin change of one percentage point, would correspondingly
have
increased or decreased the Company’s
pre-tax earnings by approximately $17.6 million.
Credit Risk
.
Quaker Houghton establishes allowances for doubtful
accounts for estimated losses resulting from the inability of its
customers to make required payments.
If the financial condition of Quaker Houghton’s
customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might
be required.
Downturns in the overall economic climate
may also exacerbate specific customer financial issues.
A significant portion of the Company’s
revenues are derived from sales to
customers in the steel and automotive industries, including some of
our larger customers, where bankruptcies have occurred
in the past
and where companies have experienced past financial difficulties.
Though infrequent, when a bankruptcy occurs, Quaker Houghton
must judge the amount of proceeds, if any,
that may ultimately be received through the bankruptcy or liquidation process.
In addition, as part of its terms of trade, Quaker Houghton may custom
manufacture products for certain large customers and/or
may ship product on a consignment basis.
These practices may increase the Company’s
exposure should a bankruptcy occur and may
require a write-down or disposal of certain inventory due to its estimated obsolescence
or limited marketability as well as of accounts
receivable.
Customer returns of products or disputes may also result in similar issues related to
the realizability of recorded accounts
receivable or returned inventory.
The Company recorded expense to its provision for doubtful accounts by $0.7
million, $3.6 million
and $1.9 million for the years ended December 31, 2021, 2020 and 2019,
respectively.
A change of 10% to the expense recorded to
the Company’s provision would
have increased or decreased the Company’s
pre-tax earnings by $0.1 million, $0.4 million and $0.2
million for the years ended December 31, 2021, 2020 and 2019, respectively.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data.
QUAKER CHEMICAL CORPORATION
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm
(PCAOB ID
)
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of
Directors and Shareholders of Quaker Chemical Corporation
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have audited
the accompanying consolidated balance sheets of Quaker Chemical Corporation
and its subsidiaries (the
“Company”) as of December 31, 2021 and 2020, and the related consolidated
statements of income, of comprehensive income, of
changes in equity and of cash flows for each of the three years in the period ended December
31, 2021, including the related notes
(collectively referred to as the “consolidated financial statements”).
We also have audited
the Company's internal control over
financial reporting as of December 31, 2021, based on criteria established in Internal
Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial
position of
the Company as of December 31, 2021 and 2020, and the results of its operations
and its cash flows for each of the three years in the
period ended December 31, 2021 in conformity with accounting principles
generally accepted in the United States of America.
Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated
financial statements, for maintaining effective internal control
over
financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in Management's
Report on Internal Control over Financial Reporting appearing under
Item 9A.
Our responsibility is to express opinions on the
Company’s consolidated
financial statements and on the Company's internal control over financial reporting based
on our audits.
We
are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether
due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures
to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks.
Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial
statements.
Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk.
Our audits also included
performing such other procedures as we considered necessary in the circumstances.
We believe that our
audits provide a reasonable
basis for our opinions.
As described in Management’s Report
on Internal Control over Financial Reporting, management has excluded
Baron Industries and
Grindaix GmbH from its assessment of internal control over financial reporting
as of December 31, 2021 because they were acquired
by the Company in purchase business combinations during 2021.
We have also excluded Baron
Industries and Grindaix from our
audit of internal control over financial reporting.
Baron Industries and Grindaix are wholly-owned subsidiaries whose total assets and
total revenues excluded from management’s
assessment and our audit of internal control over financial reporting for each entity
represent less than 1% of the related consolidated financial statement amounts
as of and for the year ended December 31, 2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding
the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have
a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements.
Also, projections
of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes
in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period
audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and
that (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments.
The
communication of critical audit matters does not alter in any way our opinion
on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Houghton Trademarks and
Tradename - Annual Impairment Assessment
As described in Note 16 to the consolidated financial statements, the Company’s
consolidated other intangible assets, net balance was
$1,027.8 million as of December 31, 2021, and the indefinite-lived
intangible asset was $196.9 million, which substantially relates to
the Houghton trademarks and tradename.
Management completes its annual indefinite-lived intangible asset impairment test during
the fourth quarter of each year, or more frequently
if triggering events indicate a possible impairment.
Management completed its
annual impairment assessment during the fourth quarter of 2021 for the Houghton
trademarks and tradename and concluded no
impairment charge was warranted.
The determination of estimated fair value of the Houghton trademarks and
tradename is based on a
relief from royalty valuation method, which requires management’s
judgment and often involves the use of significant estimates and
assumptions with respect to the weighted average cost of capital and royalty rates,
as well as revenue growth rates and terminal growth
rates.
The principal considerations for our determination that performing procedures
relating to the Houghton trademarks and tradename
annual impairment assessment is a critical audit matter are (i) the significant
judgment by management when determining the fair
value of the Houghton trademarks and tradename; (ii) a high degree of
auditor judgment, subjectivity,
and effort in performing
procedures and evaluating management’s
significant assumptions related to the royalty rate, revenue growth rates, and terminal
growth rates; and (iii) the audit effort involved the use of professionals with specialized
skill and knowledge.
Addressing the matter involved performing procedures and evaluating
audit evidence in connection with forming our overall opinion
on the consolidated financial statements.
These procedures included testing the effectiveness of controls
relating to management’s
indefinite-lived intangible assets annual impairment assessment, including
controls over the valuation of the Houghton trademarks and
tradename.
These procedures also included, among others (i) testing management’s
process for determining the fair value estimate;
(ii) evaluating the appropriateness of the relief from royalty valuation
method; (iii) testing the completeness and accuracy of
underlying data used in the method; and (iv) evaluating the reasonableness
of significant assumptions related to the royalty rate,
revenue growth rates and terminal growth rates.
Evaluating management’s assumptions
related to the royalty rate, revenue growth
rates, and terminal growth rates involved evaluating whether the
assumptions used by management were reasonable considering (i) the
current and past performance of the legacy Houghton business; (ii) the consistency
with external market and industry data; and (iii)
whether these assumptions were consistent with evidence obtained in other
areas of the audit.
Professionals with specialized skill and
knowledge were used to assist in the evaluation of the relief from royalty valuation
method and the royalty rate assumption.
/s/
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 1, 2022
We have served
as the Company’s auditor since at least 1972.
We have not been able
to determine the specific year we began serving
as auditor of the Company.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME
(
Dollars in thousands, except per share data
)
Year
Ended December 31,
Net sales
$
1,761,158
$
1,417,677
$
1,133,503
Cost of goods sold (excluding amortization expense - See Note 16)
1,166,518
904,234
741,386
Gross profit
594,640
513,443
392,117
Selling, general and administrative expenses
418,856
380,752
283,828
Indefinite-lived intangible asset impairment
-
38,000
-
Restructuring and related charges
1,433
5,541
26,678
Combination, integration and other acquisition-related expenses
23,885
29,790
35,477
Operating income
150,466
59,360
46,134
Other income (expense), net
18,851
(5,618)
(254)
Interest expense, net
(22,326)
(26,603)
(16,976)
Income before taxes and equity in net income of associated companies
146,991
27,139
28,904
Taxes on income
before equity in net income of associated companies
34,939
(5,296)
2,084
Income before equity in net income of associated companies
112,052
32,435
26,820
Equity in net income of associated companies
9,379
7,352
5,064
Net income
121,431
39,787
31,884
Less: Net income attributable to noncontrolling interest
Net income attributable to Quaker Chemical Corporation
$
121,369
$
39,658
$
31,622
Per share data:
Net income attributable to Quaker Chemical Corporation
common
shareholders - basic
$
6.79
$
2.23
$
2.08
Net income attributable to Quaker Chemical Corporation common
shareholders - diluted
$
6.77
$
2.22
$
2.08
The accompanying notes are an integral part
of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(
Dollars in thousands
)
Year
Ended December 31,
Net income
$
121,431
$
39,787
$
31,884
Other comprehensive (loss) income, net of tax
Currency translation adjustments
(46,952)
41,601
4,779
Defined benefit retirement plans
Net gain (loss) arising during the period, other
9,210
8,827
(6,289)
Amortization of actuarial loss
1,078
2,308
2,458
Amortization of prior service gain
(69)
(151)
Current period change in fair value of derivatives
2,226
(3,278)
(320)
Unrealized (loss) gain on available-for-sale securities
(2,945)
2,091
2,093
Other comprehensive (loss) income
(37,376)
51,480
2,570
Comprehensive income
84,055
91,267
34,454
Less: Comprehensive income attributable to noncontrolling
interest
(78)
(37)
(287)
Comprehensive income attributable to Quaker Chemical Corporation
$
83,977
$
91,230
$
34,167
The accompanying notes are an integral part
of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
(
Dollars in thousands, except par value
)
December 31,
ASSETS
Current assets
Cash and cash equivalents
$
165,176
$
181,833
Accounts receivable, net
430,676
372,974
Inventories, net
264,531
187,764
Prepaid expenses and other current assets
59,871
50,156
Total current
assets
920,254
792,727
Property, plant and equipment,
net
197,520
203,883
Right of use lease assets
36,635
38,507
Goodwill
631,194
631,212
Other intangible assets, net
1,027,782
1,081,358
Investments in associated companies
95,278
95,785
Deferred tax assets
16,138
16,566
Other non-current assets
30,959
31,796
Total assets
$
2,955,760
$
2,891,834
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
56,935
$
38,967
Accounts payable
226,656
191,821
Dividends payable
7,427
7,051
Accrued compensation
38,197
43,300
Accrued restructuring
4,087
8,248
Accrued pension and postretirement benefits
1,548
1,466
Other accrued liabilities
95,617
92,107
Total current
liabilities
430,467
382,960
Long-term debt
836,412
849,068
Long-term lease liabilities
26,335
27,070
Deferred tax liabilities
179,025
192,763
Non-current accrued pension and postretirement benefits
45,984
63,890
Other non-current liabilities
49,615
55,169
Total liabilities
1,567,838
1,570,920
Commitments and contingencies (Note 26)
-
-
Equity
Common stock, $
par value; authorized
30,000,000
shares; issued and outstanding
2021 -
17,897,033
shares; 2020 -
17,850,616
shares
17,897
17,851
Capital in excess of par value
917,053
905,171
Retained earnings
516,334
423,940
Accumulated other comprehensive loss
(63,990)
(26,598)
Total Quaker
shareholders’ equity
1,387,294
1,320,364
Noncontrolling interest
Total equity
1,387,922
1,320,914
Total liabilities and equity
$
2,955,760
$
2,891,834
The accompanying notes are an integral part
of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(
Dollars in thousands
)
Year Ended
December 31,
Cash flows from operating activities
Net income
$
121,431
$
39,787
$
31,884
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs
4,749
4,749
1,979
Depreciation and amortization
86,550
83,246
44,895
Equity in undistributed earnings of associated companies, net of dividends
(8,971)
4,862
(2,115)
Acquisition-related fair value adjustments related to inventory
11,714
Deferred income taxes
(12,506)
(38,281)
(24,242)
Uncertain tax positions (non-deferred portion)
(922)
1,075
Non-current income taxes payable
-
-
Deferred compensation and other, net
(5,325)
(471)
(6,789)
Share-based compensation
11,038
10,996
4,861
(Gain) loss on disposal of property, plant, equipment and other assets
(4,695)
(58)
Insurance settlement realized
-
(1,035)
(822)
Indefinite-lived intangible asset impairment
-
38,000
-
Gain on inactive subsidiary litigation and settlement reserve
-
(18,144)
-
Combination and other acquisition-related expenses, net of payments
(1,974)
(14,414)
Restructuring and related charges
1,433
5,541
26,678
Pension and other postretirement benefits
(6,330)
16,535
(Decrease) increase in cash from changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable
(67,473)
17,170
19,926
Inventories
(84,428)
(3,854)
10,844
Prepaid expenses and other current assets
(21,174)
(4,640)
Change in restructuring liabilities
(5,266)
(15,745)
(8,899)
Accounts payable and accrued liabilities
37,998
22,308
(8,915)
Estimated taxes on income
3,997
8,763
(1,373)
Net cash provided by operating activities
48,933
178,389
82,374
Cash flows from investing activities
Investments in property, plant and equipment
(21,457)
(17,901)
(15,545)
Payments related to acquisitions, net of cash acquired
(42,417)
(56,230)
(893,412)
Proceeds from disposition of assets
14,744
2,702
Insurance settlement interest earned
-
Net cash used in investing activities
(49,130)
(71,385)
(908,632)
Cash flows from financing activities
Payments of long-term debt
(38,011)
(37,615)
-
Proceeds from term loan debt
-
-
750,000
Borrowings (repayments) on revolving credit facilities, net
53,031
(11,485)
147,135
Repayments on other debt, net
(776)
(661)
(8,798)
Financing-related debt issuance costs
-
-
(23,747)
Dividends paid
(28,599)
(27,563)
(21,830)
Stock options exercised, other
3,867
1,370
Purchase of noncontrolling interest in affiliates
-
(1,047)
-
Distributions to noncontrolling affiliate shareholders
-
(751)
-
Net cash (used in) provided by financing activities
(13,465)
(75,255)
844,130
Effect of foreign exchange rate changes on cash
(3,057)
6,591
1,258
Net (decrease) increase in cash, cash equivalents and restricted cash
(16,719)
38,340
19,130
Cash, cash equivalents and restricted cash at the beginning of the period
181,895
143,555
124,425
Cash, cash equivalents and restricted cash at the end of the period
$
165,176
$
181,895
$
143,555
Supplemental cash flow disclosures:
Cash paid during the year for:
Income taxes, net of refunds
$
34,775
$
20,253
$
15,499
Interest
19,298
23,653
19,553
Non-cash activities:
Change in accrued purchases of property, plant and equipment, net
$
2,132
$
(1,376)
$
1,978
The accompanying notes are an integral part
of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY
(
Dollars in thousands, except per share amounts
)
Accumulated
Capital in
other
Common
excess of
Retained
comprehensive
Noncontrollin
stock
par value
earnings
loss
interest
Total
Balance as of December 31, 2018
$
13,338
$
97,304
$
405,125
$
(80,715)
$
1,317
$
436,369
Cumulative effect of an accounting change
-
-
(44)
-
-
(44)
Balance as of January 1, 2019
13,338
97,304
405,081
(80,715)
1,317
436,325
Net income
-
-
31,622
-
31,884
Amounts reported in other comprehensive
income
-
-
-
2,545
2,570
Dividends declared ($
1.525
per share)
-
-
(23,724)
-
-
(23,724)
Shares issued related to the Combination
4,329
784,751
-
-
-
789,080
Shares issued upon exercise of stock options
and other
-
-
-
Shares issued for employee stock purchase plan
-
-
-
Share-based compensation plans
4,819
-
-
-
4,861
Balance as of December 31, 2019
17,735
888,218
412,979
(78,170)
1,604
1,242,366
Cumulative effect of an accounting change
-
-
(911)
-
-
(911)
Balance as of January 1, 2020
17,735
888,218
412,068
(78,170)
1,604
1,241,455
Net income
-
-
39,658
-
39,787
Amounts reported in other comprehensive
income (loss)
-
-
-
51,572
(92)
51,480
Dividends declared ($
1.56
per share)
-
-
(27,786)
-
-
(27,786)
Acquisition of noncontrolling interest
-
(707)
-
-
(340)
(1,047)
Distributions to noncontrolling affiliate
shareholders
-
-
-
-
(751)
(751)
Shares issued upon exercise of stock options
and other
6,714
-
-
-
6,780
Share-based compensation plans
10,946
-
-
-
10,996
Balance as of December 31, 2020
17,851
905,171
423,940
(26,598)
1,320,914
Net income
-
-
121,369
-
121,431
Amounts reported in other comprehensive
(loss) income
-
-
-
(37,392)
(37,376)
Dividends declared ($
1.62
per share)
-
-
(28,975)
-
-
(28,975)
Shares issued upon exercise of stock options
and other
1,677
-
-
-
1,694
Share-based compensation plans
10,205
-
-
-
10,234
Balance as of December 31, 2021
$
17,897
$
917,053
$
516,334
$
(63,990)
$
$
1,387,922
The accompanying notes are an integral part of these consolidated financial statements.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 1 - Significant Accounting Policies
As used in these Notes to Consolidated Financial Statements, the terms
“Quaker,” “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 these Notes to Consolidated Financial Statements, 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”).
Principles of consolidation:
All majority-owned subsidiaries are included in the Company’s
consolidated financial statements,
with appropriate elimination of intercompany balances and transactions.
Investments in associated companies (less than majority-
owned and in which the Company has significant influence) are accounted
for under the equity method.
The Company’s share of net
income or losses in these investments in associated companies is included in
the Consolidated Statements of Income.
The Company
periodically reviews these investments for impairments and, if necessary,
would adjust these investments to their fair value when a
decline in market value or other impairment indicators are deemed to be other
than temporary.
See Note 17 of Notes to Consolidated
Financial Statements.
The Company is not the primary beneficiary of any variable interest entities (“VIEs”)
and therefore the
Company’s consolidated
financial statements do not include the accounts of any VIEs.
Translation of foreign
currency:
Assets and liabilities of non-U.S. subsidiaries and associated companies are translated into
U.S. dollars at the respective rates of exchange prevailing at the end of the year.
Income and expense accounts are translated at
average exchange rates prevailing during the year.
Translation adjustments resulting from this process are
recorded directly in equity
as accumulated other comprehensive (loss) income (“AOCI”) and
will be included as income or expense only upon sale or liquidation
of the underlying entity or asset.
Generally, all of the Company’s
non-U.S. subsidiaries use their local currency as their functional
currency.
Cash and cash equivalents:
The Company invests temporary and excess funds in money market securities and financial
instruments having maturities within 90 days. The Company considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company has not experienced losses from the aforementioned
investments.
Accounts receivable and allowance for doubtful accounts:
Trade accounts receivable subject the Company to credit risk.
Trade accounts receivable are recorded at the
invoiced amount and generally do not bear interest.
The allowance for doubtful
accounts is the Company’s best estimate of
the amount of expected credit losses with its existing accounts receivable.
The Company
adopted ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
on
a modified retrospective basis, effective January 1, 2020.
The Company recognizes an allowance for credit losses, which represents
the portion of the receivable that the Company does not
expect to collect over its contractual life, considering past events and reasonable
and supportable forecasts of future economic
conditions.
The Company’s allowance for credit losses on
its trade accounts receivable is based on specific collectability facts and
circumstances for each outstanding receivable and customer,
the aging of outstanding receivables, and the associated collection risk
the Company estimates for certain past due aging categories, and also,
the general risk to all outstanding accounts receivable based on
historical amounts determined to be uncollectible.
The Company does not have any off-balance-sheet credit exposure related
to its
customers.
See Note 13 of Notes to Consolidated Financial Statements.
Inventories:
Inventories are valued at the lower of cost or net realizable value,
and are valued using the first-in, first-out method.
See Note 14 of Notes to Consolidated Financial Statements.
Right of use lease assets and lease liabilities:
The Company determines if an arrangement is a lease at its inception.
This
determination generally depends on whether the arrangement conveys
the right to control the use of an identified fixed asset explicitly
or implicitly for a period of time in exchange for consideration.
Control of an underlying asset is conveyed if the Company obtains
the rights to direct the use of, and obtains substantially all of the economic benefits from
the use of, the underlying asset.
Lease
expense for variable leases and short-term leases is recognized when
the obligation is incurred.
The lease term for all of the Company’s
leases includes the non-cancellable period of the lease plus any additional periods
covered by an option to extend the lease that the Company is reasonably certain
it will exercise.
Operating leases are included in right
of use lease assets, other accrued liabilities and long-term lease liabilities on the Consolidated
Balance Sheet.
Right of use lease assets
and liabilities are recognized at each lease’s
commencement date based on the present value of its lease payments over its respective
lease term.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The Company uses the stated borrowing rate for a lease when readily determinable.
When a stated borrowing rate is not available
in a lease agreement, the Company uses its incremental borrowing rate
based on information available at the lease’s
commencement
date to determine the present value of its lease payments.
In determining the incremental borrowing rate used to present value each
of
its leases, the Company considers certain information including fully
secured borrowing rates readily available to the Company and its
subsidiaries.
The Company has immaterial finance leases, which are included in
Property, plant and equipment (“PP&E”)
,
current
portion of long-term debt and long-term debt on the Consolidated Balance
Sheet.
Long-lived assets:
PP&E is stated at gross cost, less accumulated depreciation.
Depreciation is computed using the straight-
line method on an individual asset basis over the following estimated useful lives: buildings
and improvements,
to
years; and
machinery and equipment,
to
years.
The carrying values of long-lived assets are evaluated whenever changes in circumstances
or
current events indicate the carrying amount of such assets may not be
recoverable.
An estimate of undiscounted cash flows produced
by the asset, or the appropriate group of assets, is compared with the carrying value to
determine whether an impairment exists.
If
necessary, the Company
recognizes an impairment loss for the difference between the carrying
amount of the assets and their
estimated fair value.
Fair value is based on current and anticipated future cash flows.
Upon sale or other dispositions of long-lived
assets, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount, less
proceeds from disposals, is recorded in the Consolidated Statements of Income.
Expenditures for renewals or improvements that
increase the estimated useful life or capacity of the assets are capitalized, whereas
expenditures for repairs and maintenance are
expensed when incurred.
See Notes 9 and 15 of Notes to Consolidated Financial Statements.
Capitalized software:
The Company capitalizes certain costs in connection with developing or obtaining
software for internal
use, depending on the associated project.
These costs are amortized over a period of
to
years once the assets are ready for their
intended use.
In connection with the implementations and upgrades to the Company’s
global transaction, consolidation and other
related systems, approximately $
3.6
million and $
2.3
million of net costs were capitalized in PP&E on the Company’s
Consolidated
Balance Sheets at December 31, 2021 and 2020, respectively.
Goodwill and other intangible assets:
The Company records goodwill, definite-lived intangible
assets and indefinite-lived
intangible assets at fair value at the date of acquisition.
Goodwill and indefinite-lived intangible assets are not amortized but
tested for
impairment at least annually.
These tests will be performed more frequently if triggering events indicate
potential impairment.
Definite-lived intangible assets are amortized on a straight-line basis over their estimated
useful lives, generally for periods ranging
from
to
years.
The Company continually evaluates the reasonableness of the useful lives of these assets, consistent
with the
discussion of long-lived assets, above.
See Note 16 of Notes to Consolidated Financial Statements.
Revenue recognition:
The Company applies the Financial Accounting Standards Board’s
(“FASB’s”)
guidance on revenue
recognition which requires the Company to recognize revenue in an amount
that reflects the consideration to which the Company
expects to be entitled in exchange for goods or services transferred
to its customers.
To do this, the Company
applies the five-step
model in the FASB’s
guidance, which requires the Company to: (i) identify the contract
with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the
contract; and (v) recognize revenue when, or as, the Company satisfies a performance
obligation.
The Company identifies a contract with a customer when a sales agreement indicates
approval and commitment of the parties;
identifies the rights of the parties; identifies the payment terms; has commercial
substance; and it is probable that the Company will
collect the consideration to which it will be entitled in exchange for the goods
or services that will be transferred to the customer.
The Company identifies a performance obligation in a contract for each promised
good or service that is separately identifiable
from other obligations in the contract and for which the customer can benefit
from the good or service either on its own or together
with other resources that are readily available to the customer.
The Company determines the transaction price as the amount of
consideration it expects to be entitled to in exchange for fulfilling the performance
obligations, including the effects of any variable
consideration, significant financing elements, amounts payable to the customer
or noncash consideration.
For any contracts that have
more than one performance obligation, the Company allocates the transaction
price to each performance obligation in an amount that
depicts the amount of consideration to which the Company expects to be entitled
in exchange for satisfying each performance
obligation.
In accordance with the last step of the FASB’s
guidance, the Company recognizes revenue when, or as, it satisfies the
performance obligation in a contract by transferring control of a promised
good or providing the service to the customer.
The
Company typically satisfies its performance obligations and recognizes
revenue at a point in time for product sales, generally when
products are shipped or delivered to the customer,
depending on the terms underlying each arrangement.
In circumstances where the
Company’s products are on
consignment, revenue is generally recognized upon usage or consumption by the customer.
For any
Fluidcare
TM
or other services provided by the Company to the customer,
the Company typically satisfies its performance obligations
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
and recognizes revenue over time, as the promised services are performed.
The Company uses input methods to recognize revenue
over time related to these services, including labor costs and time incurred.
The Company believes that these input methods represent
the most indicative measure of the Fluidcare
TM
or other service work performed by the Company.
The Company does not have standard payment terms for all customers,
however the Company’s general
payment terms require
customers to pay for products or services provided after the performance
obligation is satisfied.
The Company does not have
significant financing arrangements with its customers.
Therefore, the Company does not adjust the promised amount of consideration
for the effects of a significant financing component as the Company
expects, at contract inception, that the period between when the
Company transfers a promised good or service to the customer and when the
customer pays for that good or service will be one year or
less.
In addition, the Company expenses costs to obtain a contract as incurred
when the expected period of benefit, and therefore the
amortization period, is one year or less.
In addition, the Company excludes from the measurement of the transaction price all taxes
assessed by a governmental authority that are both imposed on and concurrent
with a specific revenue-producing transaction and
collected by the entity from a customer,
including sales, use, value added, excise and various other taxes.
Lastly, the Company has
elected to account for shipping and handling activities that occur after the
customer has obtained control of a good as a fulfilment cost,
rather than an additional promised service.
The Company does not have significant amounts of variable consideration in
its contracts
with customers and where applicable, the Company’s
estimates of variable consideration are not constrained.
The Company records certain third-party license fees in other income
(expense), net, in its Consolidated Statement of Income,
which generally include sales-based royalties in exchange for the license of
intellectual property.
These license fees are recognized in
accordance with their agreed-upon terms and when performance obligations are
satisfied, which is generally when the third party has a
subsequent sale.
The Company recognizes a contract asset or receivable on its Consolidated Balance Sheet
when the Company performs a service
or transfers a good in advance of receiving consideration.
A receivable is the Company’s right to consideration
that is unconditional
and only the passage of time is required before payment of that consideration
is due.
A contract asset is the Company’s right
to
consideration in exchange for goods or services that the Company has transferred
to a customer.
A contract liability is recognized when the Company receives consideration,
or if it has the unconditional right to receive
consideration, in advance of performance.
A contract liability is the Company’s
obligation to transfer goods or services to a customer
for which the Company has received consideration, or a specified amount
of consideration is due, from the customer.
See Note 5 of Notes to Consolidated Financial Statements.
Research and development costs:
Research and development costs are expensed as incurred and are included
in selling, general
and administrative expenses (“SG&A”).
Research and development expenses were $
44.9
million, $
40.0
million and $
32.1
million for
the years ended December 31, 2021, 2020 and 2019, respectively.
Environmental liabilities and expenditures:
Accruals for environmental matters are recorded when it is probable
that a liability
has been incurred and the amount of the liability can be reasonably estimated.
If there is a range of estimated liability and no amount
in that range is considered more probable than another,
then the Company records the lowest amount in the range in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”).
Environmental costs and remediation costs are
capitalized if the costs extend the life, increase the capacity or improve
safety or efficiency of the property from the date acquired or
constructed, and/or mitigate or prevent contamination in the future.
See Note 26 of Notes to Consolidated Financial Statements.
Asset retirement obligations:
The Company follows the FASB’s
guidance regarding asset retirement obligations, which
addresses the accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
retirement costs.
Also, the Company follows the FASB’s
guidance for conditional asset retirement obligations (“CARO”),
which
relates to legal obligations to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on
a future event that may or may not be within the control of the entity.
In accordance with this guidance, the Company records a
liability when there is enough information regarding the timing of the CARO to perform
a probability-weighted discounted cash flow
analysis.
As of December 31, 2021 and 2020, the Company had limited exposure
to such obligations and had immaterial liabilities
recorded for such on its Consolidated Balance Sheets.
Pension and other postretirement benefits:
The Company maintains various noncontributory retirement plans,
covering a
portion of its employees in the U.S. and certain other countries, including
the Netherlands, the United Kingdom (“U.K.”), Mexico,
Sweden, Germany and France.
These retirement plans are subject to the provisions of FASB’s
guidance regarding employers’
accounting for defined benefit pension plans.
The plans of the remaining non-U.S. subsidiaries are, for the most part, either
fully
insured or integrated with the local governments’ plans and are not subject
to the provisions of the guidance.
The guidance requires
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
that employers recognize on a prospective basis the funded status of their
defined benefit pension and other postretirement plans on
their consolidated balance sheet and, also, recognize as a component of AOCI,
net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of
net periodic benefit cost.
In addition, the guidance
requires that an employer recognize a settlement charge in
their consolidated statement of income when certain events occur,
including plan termination or the settlement of certain plan liabilities.
A settlement charge represents the immediate recognition
into
expense of a portion of the unrecognized loss within AOCI on the balance sheet in
proportion to the share of the projected benefit
obligation that was settled.
The measurement date for the Company’s
postretirement benefits plan is December 31.
The Company’s global pension
investment policies are designed to ensure that pension assets are invested in a manner
consistent
with meeting the future benefit obligations of the pension plans and maintaining
compliance with various laws and regulations
including the Employee Retirement Income Security Act of 1974.
The Company establishes strategic asset allocation percentage
targets and benchmarks for significant asset classes with the aim of
achieving a prudent balance between return and risk.
The
Company’s investment horizon
is generally long term, and, accordingly,
the target asset allocations encompass a long-term
perspective of capital markets, expected risk and return and perceived future
economic conditions while also considering the profile of
plan liabilities.
To the extent feasible,
the short-term investment portfolio is managed to match the short
-term obligations, the
intermediate portfolio duration is matched to reduce the risk of volatility in
intermediate plan distributions, and the total return
portfolio is managed to maximize the long-term real growth of plan
assets.
The critical investment principles of diversification,
assessment of risk and targeting the optimal expected returns for
given levels of risk are applied.
The Company’s investment
guidelines prohibit the use of securities such as letter stock and other unregistered
securities, commodities or commodity contracts,
short sales, margin transactions, private placements
(unless specifically addressed by addendum), or any derivatives, options or futures
for the purpose of portfolio leveraging.
The target asset allocation is reviewed periodically and is determined
based on a long-term projection of capital market outcomes,
inflation rates, fixed income yields, returns, volatilities and correlation
relationships.
The interaction between plan assets and benefit
obligations is periodically studied to assist in establishing such strategic asset allocation
targets.
Asset performance is monitored with
an overall expectation that plan assets will meet or exceed benchmark performance
over rolling five year periods.
The Company’s
pension committee, as authorized by the Company’s
Board of Directors (the “Board”), has discretion to manage the assets within
established asset allocation ranges approved by senior management
of the Company.
See Note 21 of Notes to Consolidated Financial
Statements.
Comprehensive income (loss):
The Company presents other comprehensive income (loss) in its Statements of Comprehensive
Income.
The Company follows the FASB’s
guidance regarding the disclosure of reclassifications from AOCI
which requires the
disclosure of significant amounts reclassified from each component of
AOCI, the related tax amounts and the income statement line
items affected by such reclassifications.
See Note 23 of Notes to Consolidated Financial Statements.
Income taxes and uncertain tax positions:
The provision for income taxes is determined using the asset and liability approach
of accounting for income taxes.
Under this approach, deferred taxes represent the future tax consequences expected
to occur when the
reported amounts of assets and liabilities are recovered or paid.
The provision for income taxes represents income taxes paid or
payable for the current year and the change in deferred taxes during the year.
Deferred taxes result from differences between the
financial and tax bases of the Company’s
assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are
enacted.
Valuation
allowances are recorded to reduce deferred tax assets when it is more likely than not
that a tax benefit will not be
realized.
The FASB’s
guidance regarding accounting for uncertainty in income taxes prescribes the
recognition threshold and
measurement attributes for financial statement recognition and measurement
of tax positions taken or expected to be taken on a tax
return.
The guidance further requires the determination of whether the benefits
of tax positions are probable or more likely than not
sustained upon audit based upon the technical merits of the tax position.
For tax positions that are determined to be more likely than
not sustained upon audit, a company recognizes the largest amount
of benefit that is greater than
% likely of being realized upon
ultimate settlement in the financial statements.
For tax positions that are not determined to be more likely than not sustained upon
audit, a company does not recognize any portion of the benefit in the financial statements.
Additionally, the
Company monitors and
adjusts for derecognition, classification, and penalties and interest in interim
periods, with appropriate disclosure and transition
thereto.
Also, the amount of interest expense and income related to uncertain tax positions is computed
by applying the applicable
statutory rate of interest to the difference between the
tax position recognized, including timing differences, and the amount previously
taken or expected to be taken in a tax return.
The Company recognizes
interest and/or penalties related to income tax matters in
income tax expense.
Finally, when applicable, the
Company nets its liability for unrecognized tax benefits against deferred
tax assets
related to net operating losses or other tax credit carryforwards that would apply
if the uncertain tax position were settled for the
presumed amount at the balance sheet date.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Pursuant to the Tax Cuts and
Jobs Act (“U.S. Tax
Reform”),
specifically the one-time tax on deemed repatriation (the “Transition
Tax”),
the Company has provided for U.S. income tax on its undistributed earnings of non-U.S.
subsidiaries, however, the Company
is
subject to and will incur other taxes, such as withholding taxes and dividend
distribution taxes, if these undistributed earnings were
ultimately remitted to the U.S.
The Company currently intends to reinvest its future undistributed
earnings of non-U.S. subsidiaries to
support working capital needs and certain other growth initiatives of
those subsidiaries.
However, in certain cases the Company has
and may in the future change its indefinite reinvestment assertion for any or
all of these undistributed earnings.
In this case, the
Company would estimate and record a tax liability and corresponding
tax expense for the amount of non-U.S. income taxes it would
incur to ultimately remit these earnings to the U.S.
See Note 10 of Notes to Consolidated Financial Statements.
Derivatives:
The Company is exposed to the impact of changes in interest rates, foreign currency fluctuations,
changes in
commodity prices and credit risk.
The Company utilizes interest rate swap agreements to enhance its ability to manage
risk, including
exposure to variability in interest payments associated with its variable rate debt.
Derivative instruments are entered into for periods
consistent with the related underlying exposures and do not constitute positions
independent of those exposures.
As of December 31,
2021 and 2020, the Company had certain interest rate swap agreements
that were designated as cash flow hedges.
Interest rate swaps
are entered into with a limited number of counterparties, each of which allows for net
settlement of all contracts through a single
payment in a single currency in the event of a default on or termination of any one
contract.
The Company records these instruments
on a net basis within the Consolidated Balance Sheets.
The effective portion of the change in fair value of the agreement is recorded
in AOCI and will be recognized in the Consolidated Statements of Income when the
hedge item affects earnings or losses or it
becomes probable that the forecasted transaction will not occur.
See Note 25 of Notes to Consolidated Financial Statements.
Fair value measurements:
The Company utilizes the FASB’s
guidance regarding fair value measurements, which establishes a
common definition for fair value to be applied to guidance requiring use
of fair value, establishes a framework for measuring fair
value and expands disclosure about such fair value measurements.
Specifically, the guidance utilizes
a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels.
See Notes 21 and 24 of Notes to
Consolidated Financial Statements.
The following is a brief description of those three levels:
•
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly.
These
include quoted prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or
liabilities in markets that are not active.
•
Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.
Share-based compensation:
The Company applies the FASB’s
guidance regarding share-based payments, which
requires the
recognition of the fair value of share-based compensation as a component
of expense.
The Company has a long-term incentive
program (“LTIP”)
for key employees which provides for the granting of options to purchase stock at prices not
less than its market
value on the date of the grant.
Most options become exercisable within
three years
after the date of the grant for a period of time
determined by the Company,
but not to exceed
seven years
from the date of grant.
Restricted stock awards and restricted stock units
issued under the LTIP
program are subject to time vesting generally over a
one
to
three year
period.
In addition, as part of the
Company’s Annual Incentive Plan,
nonvested shares may be issued to key employees, which generally would
vest over a
two
to
five
year period.
In addition, while the FASB’s
guidance permits the Company to make an accounting policy election
to account for forfeitures as
they occur for service condition aspects of certain share-based awards, the
Company has decided not to elect this accounting policy
and instead has elected to continue utilizing a forfeiture rate assumption.
Based on historical experience, the Company has assumed a
forfeiture rate of
% on certain of its nonvested stock awards.
The Company will record additional expense if the actual forfeiture
rate is lower than estimated and will record a recovery of prior expense if the
actual forfeiture is higher than estimated.
The Company also issues performance-dependent stock awards as a component
of its LTIP.
The fair value of the performance-
dependent stock awards is based on their grant-date market value adjusted
for the likelihood of attaining certain pre-determined
performance goals and is calculated by utilizing a Monte Carlo simulation
model.
Compensation expense is recognized on a straight-
line basis over the vesting period, generally
three years
.
See Note 8 of the Notes to Consolidated Financial Statements.
Earnings per share:
The Company follows the FASB’s
guidance regarding the calculation of earnings per share for nonvested
stock awards with rights to non-forfeitable dividends.
The guidance requires nonvested stock awards with rights to non-forfeitable
dividends to be included as part of the basic weighted average share calculation
under the two-class method.
See Note 11 of Notes to
Consolidated Financial Statements.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Segments:
The Company’s operating
segments, which are consistent with its reportable segments, reflect the
structure of the
Company’s internal organization,
the method by which the Company’s
resources are allocated and the manner by which the chief
operating decision maker assesses the Company’s
performance
.
See Note 4 of Notes to Consolidated Financial Statements.
Hyper-inflationary accounting:
Economies that have a cumulative three year rate of inflation exceeding
% are considered
hyper-inflationary in accordance with U.S. GAAP.
A legal entity that operates within an economy deemed to be hyper-inflationary
is
required to remeasure its monetary assets and liabilities to the applicable published
exchange rates and record the associated gains or
losses resulting from the remeasurement directly to the Consolidated Statements of
Income.
Based on various indices or index compilations being used to monitor inflation
in Argentina as well as recent economic
instability, effective
July 1, 2018, Argentina’s
economy was considered hyper-inflationary under U.S. GAAP.
As of, and for the year
ended December 31, 2021, the Company's Argentine subsidiaries represented
less than
% of the Company’s consolidated total assets
and net sales, respectively.
During the years ended December 31, 2021, 2020 and 2019, the Company recorded
$
0.6
million, $
0.4
million, and $
1.0
million, respectively, of remeasurement
losses associated with the applicable currency conversions related to
Argentina.
Business combinations:
The Company accounts for business combinations under the acquisition method
of accounting.
This
method requires the recording of acquired assets, including separately
identifiable intangible assets, and assumed liabilities at their
respective acquisition date estimated fair values.
Any excess of the purchase price over the estimated fair value of the identifiable
net
assets acquired is recorded as goodwill.
The determination of the estimated fair value of assets acquired and liabilities assumed
requires significant estimates and assumptions.
Based on the assessment of additional information during the measurement period,
which may be up to one year from the acquisition date, the Company may record
adjustments to the estimated fair value of assets
acquired and liabilities assumed.
See Note 2 of Notes to Consolidated Financial Statements.
Restructuring activities:
Restructuring programs consist of employee severance, rationalization of
manufacturing or other
facilities and other related items.
To account for such programs,
the Company applies FASB’s
guidance regarding exit or disposal
cost obligations.
This guidance requires that a liability for a cost associated with an exit or disposal activity
be recognized when the
liability is incurred, is estimable, and payment is probable.
See Note 7 of Notes to Consolidated Financial Statements.
Reclassifications:
Certain information has been reclassified to conform to the current year presentation.
Accounting estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities and disclosure of
contingencies at the date of the financial statements and the reported amounts
of net sales and expenses during the reporting period.
Actual results could differ from such estimates.
Note 2 - Business Combinations
2021 Acquisitions
In November 2021, the Company acquired Baron Industries (“Baron”),
a privately held Company that provides vacuum
impregnation services of castings, powder metals and electrical components for
its Global Specialty Businesses reportable segment for
$
11.0
million, including an initial cash payment of $
7.1
million, subject to post-closing adjustments as well as certain earn-out
provisions currently estimated at $
3.9
million that are payable at different times from 2022 through
2025.
The earn-out provisions
could total a maximum of $
4.5
million.
The Company allocated $
8.0
million of the purchase price to intangible assets, $
1.1
million of
property, plant and
equipment and $
1.5
million of other assets acquired net of liabilities assumed, which includes $
0.3
million of cash
acquired.
In addition, the Company recorded $
0.4
million of goodwill, none of which is expected to be tax deductible.
Intangible
assets comprised $
7.2
million of customer relationships to be amortized over
15 years
; and $
0.8
million of existing product technology
to be amortized over
13 years
.
In November 2021, the Company acquired a business that provides
hydraulic fluids, coolants, cleaners, and rust preventative oils
in Turkey for its EMEA reportable segment
for
3.2
million EUR or approximately $
3.7
million.
In September 2021, the Company acquired the remaining interest in Grindaix
-GmbH (“Grindaix”), a Germany-based, high-tech
provider of coolant control and delivery systems for its Global Specialty Businesses reportable
segment for
2.4
million EUR or
approximately $
2.9
million, which is gross of approximately $
0.3
million of cash acquired.
Previously, in February
2021, the
Company acquired a
% ownership interest in Grindaix for
1.4
million EUR or approximately $
1.7
million.
The Company recorded
its initial investment as an equity method investment within the Condensed Consolidated
Financial Statements and accounted for the
purchase of the remaining interest as a step acquisition whereby the Company
remeasured the previously held equity method
investment to its fair value.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
In June 2021, the Company acquired certain assets for its chemical milling
maskants product line in the Global Specialty
Businesses reportable segment for
2.3
million EUR or approximately $
2.8
million.
In February 2021, the Company acquired a tin-plating solutions business for
the steel end market for $
25.0
million.
This
acquisition is part of each of the Company’s
geographic reportable segments.
The Company allocated $
19.6
million of the purchase
price to intangible assets, comprised of $
18.3
million of customer relationships, to be amortized over
19 years
; $
0.9
million of existing
product technology to be amortized over
14 years
; and $
0.4
million of a licensed trademark to be amortized over
3 years
.
In addition,
the Company recorded $
5.0
million of goodwill, all of which is expected to be tax deductible in various jurisdictions
in which we
operate.
Factors contributing to the purchase price that resulted in goodwill included
the acquisition of business processes and
personnel that will allow Quaker Houghton to better serve its customers.
As of December 31, 2021, the allocation of the purchase price of the 2021
acquisitions has not been finalized and the one year
measurement period has not ended for any of these acquisitions.
Further adjustments may be necessary as a result of the Company’s
on-going assessment of additional information related to the fair value
of assets acquired and liabilities assumed.
The results of operations of the 2021 acquired assets and businesses subsequent
to the respective acquisition dates are included in
the Consolidated Statements of Income for the year ended December
31, 2021.
Applicable transaction expenses associated with these
acquisitions are included in Combination, integration and other acquisition
-related expenses in the Company’s Consolidated
Statements of Income.
Certain pro forma and other information is not presented, as the operations of the acquired
assets and
businesses are not considered material to the overall operations of the Company
for the periods presented.
2022 Acquisitions
In January 2022, the Company acquired a business related to the sealing and impregnation
of metal castings for the automotive
sector, as well as impregnation resin and
impregnation systems for metal parts, for its Global Specialty Business reporting segment for
approximately
1.2
million EUR or approximately $
1.4
million.
This business expands the Company's geographic presence in
Germany as well as broadens its product offerings and
service capabilities within its existing impregnation business that was initially
entered into as part of its past acquisition of Norman Hay.
Also in in January 2022, the Company acquired a business that provides
pickling inhibitor technologies for the steel industry,
drawing lubricants and stamping oil for metalworking, and various other
lubrication, rust preventative, and cleaner applications, for its Americas reportable
segment for approximately $
8.0
million.
This
business broadens the Company’s
product offerings within its existing metals and metalworking business
in the Americas region.
The results of operations of these two January 2022 acquisitions are not included
in the Consolidated Statements of Income
because the date of closing for each was subsequent to December 31, 2021.
Preliminary purchase price allocation of assets acquired
and liabilities assumed have not been presented as that information is not
available as of the date of these Consolidated Financial
Statements.
Houghton
In August 2019, the Company completed the Combination, whereby
the Company acquired all of the issued and outstanding
shares of Houghton from Gulf Houghton Lubricants, Ltd. and certain
other selling shareholders in exchange for a combination of cash
and shares of the Company’s common
stock in accordance with the Share Purchase Agreement dated April 4,
2017.
Commencing August 1, 2019, the Company’s
Consolidated Statements of Income included the results of Houghton.
Net sales of
Houghton subsequent to closing of the Combination and included in the Company’s
Consolidated Statements of Income for the year
ended December 31, 2019 were $
299.8
million.
The following unaudited pro forma consolidated financial information
has been
prepared as if the Combination had taken place on January 1, 2018.
The unaudited pro forma results include certain adjustments to
each company’s historical
actual results, including: (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 Legacy Quaker and Houghton; (iv) elimination
of results associated with the divested product lines; (v)
adjustment to interest expense, net, to reflect the impact of the financing
and capital structure of the combined Company; and (vi)
adjustment for certain Combination,
integration and other acquisition-related costs to reflect such costs as if they were
incurred in the
period immediately following the pro-forma closing of the
Combination on January 1, 2018.
The adjustments described in (vi)
include an expense recorded in costs of goods sold (“COGS”) associated with selling
inventory acquired in the Combination which
was adjusted to fair value as part of purchase accounting, restructuring expense incurred
associated with the Company’s global
restructuring program initiated post-closing of the Combination
and certain other integration costs incurred post-closing included in
combination and other acquisition-related expenses.
These costs have been presented in the unaudited pro forma table below
as these
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
costs on a pro forma basis were incurred during the year ended December 31,
2018.
Unaudited pro forma results are not necessarily
indicative of the results that would have occurred if the acquisition had occurred
on the date indicated, or that may result in the future
for various reasons, including the potential impact of revenue and cost
synergies on the business.
For the
year ending
Unaudited Pro Forma
December 31,
(as if the Combination occurred on January 1,
2018)
Net sales
$
1,562,427
Net income attributable to Quaker Chemical Corporation
94,537
Combination,
integration and other acquisition-related expenses have been and are expected to
continue to be significant.
The
Company incurred total costs of $
18.6
million, $
30.3
million and $
38.0
million for the years ended December 31, 2021, 2020 and
2019, respectively, related
to the Combination,
integration and other acquisition-related activities.
These costs included certain legal,
financial and other advisory and consultant costs incurred in connection with
post-closing integration activities including internal
control readiness and remediation,
as well as due diligence, regulatory approvals and closing the Combination.
These costs also
included
interest costs to maintain the bank commitment (“ticking fees”) for the Combination
during the year ended December 31,
2019,
accelerated depreciation charges during the years ended December
31, 2021, 2020 and 2019, a gain on the sale of a held-for-sale
real property during the year ended December 31, 2021, a loss on the sale of a held-for-sale
asset during the year ended December 31,
2020, and recorded income related to indemnification rights during the
years ended December 31, 2021 and 2020.
As of December
31, 2021 and 2020, the Company had current liabilities related to the Combination
and other acquisition-related activities of $
5.5
million and $
7.5
million, respectively, primarily
recorded within other accrued liabilities on its Consolidated Balance Sheets.
Other Previous Acquisitions
In December 2020, the Company completed its acquisition of Coral Chemical
Company (“Coral”), a privately held, U.S.-based
provider of metal finishing fluid solutions.
The acquisition provides technical expertise and product solutions for pre-treatment,
metalworking and wastewater treatment applications to the beverage
cans and general industrial end markets.
The acquired Coral
assets and liabilities were assigned to the Americas and Global Specialty Businesses reportable
segments.
The original purchase price
was approximately $
54.1
million, subject to routine and customary post-closing adjustments related to working
capital and net
indebtedness levels.
The following table presents the final estimated fair values of Coral net assets acquired:
Measurement
December 22,
December 22,
Period
2020 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
$
-
$
Accounts receivable
8,473
-
8,473
Inventories
4,527
-
4,527
Prepaid expenses and other assets
-
Property, plant and equipment
10,467
11,119
Intangible assets
30,300
(500)
29,800
Goodwill
2,814
3,618
Total assets purchased
57,720
58,676
Long-term debt including current portions and finance leases
Accounts payable, accrued expenses and other accrued liabilities
3,482
-
3,482
Total liabilities assumed
3,665
4,221
Total consideration
paid for Coral
54,055
54,455
Less: estimated purchase price settlement
-
Less: cash acquired
-
Net cash paid for Coral
$
53,097
$
-
$
53,097
(1)
As previously disclosed in the Company’s
2020 Form 10-K.
Measurement period adjustments recorded during the year ended December
31, 2021 include certain adjustments related to
refining original estimates for assets and liabilities for certain acquired finance
leases, as well as an adjustment to reflect the expected
settlement of post-closing working capital and net indebtedness true ups to the initial
purchase price.
The Company continues to work
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
with the seller to finalize certain post-closing adjustments and the above
table includes the Company’s best estimate
as of December
31, 2021.
As of December 31, 2021, the allocation of the purchase price for Coral has been finalized
and the
one year
measurement
period has ended.
In May 2020, the Company acquired Tel
Nordic ApS (“TEL”), a company that specializes in lubricants and engineering primaril
y
in high pressure aluminum die casting for its EMEA reportable segment.
Consideration paid was in the form of a convertible
promissory note in the amount of
20.0
million DKK, or approximately $
2.9
million, which was subsequently converted into shares of
the Company’s common stock.
An adjustment to the purchase price of approximately
0.4
million DKK, or less than $
0.1
million, was
made as a result of finalizing a post-closing settlement in the second
quarter of 2020.
The Company allocated approximately $
2.4
million of the purchase price to intangible assets to be amortized over
17 years
.
In addition, the Company recorded approximately
$
0.5
million of goodwill, related to expected value not allocated to other acquired
assets, none of which will be tax deductible.
As of
December 31, 2021, the allocation of the purchase price of TEL was finalized
and the one year measurement period ended.
In March 2020, the Company acquired the remaining
% ownership interest in one of its South African affiliates, Quaker
Chemical South Africa Limited (“QSA”) for
16.7
million ZAR, or approximately $
1.0
million, from its joint venture partner PQ
Holdings South Africa.
QSA is a part of the Company’s EMEA reportable
segment.
As this acquisition was a change in an existing
controlling ownership, the Company recorded $
0.7
million of excess purchase price over the carrying value of the noncontrolling
interest in Capital in excess of par value.
In October 2019, the Company completed its acquisition of the operating
divisions of Norman Hay plc (“Norman Hay”), a private
U.K. company that provides specialty chemicals, operating equipment, and
services to industrial end markets.
The original purchase
price was
80.0
million GBP,
on a cash-free and debt-free basis, subject to routine and customary
post-closing adjustments related to
working capital and net indebtedness levels.
The Company finalized its post-closing adjustments for the
Norman Hay acquisition and
paid approximately
2.5
million GBP during the first quarter of 2020 to settle such adjustments.
Note 3 - Recently Issued Accounting Standards
Recently Issued Accounting Standards
Adopted
The Financial Accounting Standards Board (“FASB”)
issued Account Standards Update (“ASU”)
ASU 2019-12
, Income Taxes
(Topic
740): Simplifying the Accounting for Income Taxes
in December 2019 to simplify the accounting for income taxes.
The
guidance within this accounting standard update removes
certain exceptions, including the exception to the incremental approach for
certain intra-period tax allocations, to the requirement to recognize
or not recognize certain deferred tax liabilities for equity method
investments and foreign subsidiaries, and to the general methodology for
calculating income taxes in an interim period when a year-to-
date loss exceeds the anticipated loss for the year.
Further, the guidance simplifies the accounting related
to franchise taxes, the step
up in tax basis for goodwill, current and deferred tax expense, and codification
improvements for income taxes related to employee
stock ownership plans.
The guidance is effective for annual and interim periods beginning
after December 15, 2020.
The Company
adopted this standard,
as required, effective January 1, 2021.
There was no cumulative effect of adoption recorded within retained
earnings on January 1, 2021.
The FASB issued ASU 2020
, Reference Rate Reform (Topic
848): Facilitation of the Effects of Reference Rate Reform
on
Financial Reporting
in March 2020.
The FASB subsequently
issued ASU 2021-01
, Reference Rate Reform (Topic
848): Scope
in
January 2021 which clarified the guidance but did not materially change
the guidance or its applicability to the Company.
The
amendments provide temporary optional expedients and exceptions
for applying U.S. GAAP to contract modifications, hedging
relationships and other transactions to ease the potential accounting
and financial reporting burden associated with transitioning away
from reference rates that are expected to be discontinued, including
the London Interbank Offered Rate (“LIBOR”).
ASU 2020-04 is
effective for the Company as of March 12, 2020 and generally can
be applied through December 31, 2022.
On December 10, 2021,
the Company entered into a Second Amendment to Credit Agreement (“Second
Amendment”) with Bank of America N.A., an update
to provide for the use of a non-USD currency LIBOR successor rate.
The Company
elected to apply the expedients provided in ASU
2020-04 with respect to the Second Amendment.
The Company will continue to monitor for potential impacts related to its USD-
based LIBOR rates.
See Note 20 of Notes to Consolidated Financial Statements..
Note 4 - Business Segments
The Company’s operating
segments, which are consistent with its reportable segments, reflect the structure of the Company’s
internal organization, the method by which the Company’s
resources are allocated and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has
four
reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
The three geographic segments are composed of the net sales and operations in
each respective region, excluding net sales and operations managed globally
by the Global Specialty Businesses segment, which
includes the Company’s container,
metal finishing, mining, offshore, specialty coatings, specialty grease
and Norman Hay businesses.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Segment operating earnings for each of the Company’s
reportable segments are comprised of the segment’s
net sales less directly
related COGS and SG&A.
Operating expenses not directly attributable to the net sales of each respective
segment, such as certain
corporate and administrative costs, Combination, integration and other
acquisition-related expenses, and Restructuring and related
charges, are not included in segment operating earnings.
Other items not specifically identified with the Company’s
reportable
segments include interest expense, net and other income (expense),
net.
The following tables present information about the performance of the Company’s
reportable segments for the years ended
December 31, 2021, 2020 and 2019.
Net sales
Americas
$
572,643
$
450,161
$
392,121
EMEA
480,126
383,187
285,570
Asia/Pacific
388,160
315,299
247,839
Global Specialty Businesses
320,229
269,030
207,973
Total
net sales
$
1,761,158
$
1,417,677
$
1,133,503
Segment operating earnings
Americas
$
124,863
$
96,379
$
78,297
EMEA
85,209
69,163
47,014
Asia/Pacific
96,318
88,356
67,512
Global Specialty Businesses
90,632
79,690
58,881
Total
segment operating earnings
397,022
333,588
251,704
Combination, integration and other acquisition-related expenses
(23,885)
(29,790)
(35,477)
Restructuring and related charges
(1,433)
(5,541)
(26,678)
Fair value step up of acquired inventory sold
(801)
(226)
(11,714)
Indefinite-lived intangible asset impairment
-
(38,000)
-
Non-operating and administrative expenses
(157,864)
(143,202)
(104,572)
Depreciation of corporate assets and amortization
(62,573)
(57,469)
(27,129)
Operating income
150,466
59,360
46,134
Other income (expense), net
18,851
(5,618)
(254)
Interest expense, net
(22,326)
(26,603)
(16,976)
Income before taxes and equity in net income of
associated companies
$
146,991
$
27,139
$
28,904
The following tables present information regarding the Company’s
reportable segments’ assets and long-lived assets, including
certain identifiable assets as well as an allocation of shared assets, as of December
31, 2021, 2020 and 2019:
Segment assets
Americas
$
983,521
$
969,551
$
926,122
EMEA
714,659
697,821
688,663
Asia/Pacific
750,970
713,004
685,476
Global Specialty Businesses
506,610
511,458
550,055
Total segment assets
$
2,955,760
$
2,891,834
$
2,850,316
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Segment long-lived assets
Americas
$
129,321
$
122,302
$
139,170
EMEA
69,990
69,344
56,108
Asia/Pacific
123,130
119,233
126,166
Global Specialty Businesses
37,951
59,091
69,184
Total segment long-lived
assets
$
360,392
$
369,970
$
390,628
The following tables present information regarding the Company’s
reportable segments’ capital expenditures and depreciation for
identifiable assets for the years ended December 31, 2021, 2020 and 2019:
Capital expenditures
Americas
$
9,678
$
6,451
$
6,404
EMEA
6,767
3,844
3,263
Asia/Pacific
2,264
5,688
3,857
Global Specialty Businesses
2,748
1,918
2,021
Total segment capital
expenditures
$
21,457
$
17,901
$
15,545
Depreciation
Americas
$
12,074
$
12,322
$
7,500
EMEA
6,936
6,813
4,560
Asia/Pacific
4,596
4,672
3,458
Global Specialty Businesses
3,043
3,544
2,248
Total segment depreciation
$
26,649
$
27,351
$
17,766
During the years ended December 31, 2021, 2020 and 2019, the Company
had approximately $
1,198.4
million, $
963.2
million
and $
719.8
million of net sales, respectively,
attributable to non-U.S. operations.
As of December 31, 2021, 2020 and 2019, the
Company had approximately $
155.2
million, $
176.6
million and $
174.4
million of long-lived assets, respectively,
attributable to non-
U.S. operations.
Inter-segment revenue for the years ended December
31, 2021, 2020 and 2019 was $
12.2
million, $
9.1
million and $
7.3
million
for Americas, $
29.0
million, $
22.0
million and $
20.3
million for EMEA, $
1.6
million, $
0.6
million and $
0.2
million for Asia/Pacific
and $
7.4
million, $
4.7
million and $
5.4
million for Global Specialty Businesses, respectively.
However, all inter-segment transactions
have been eliminated from each reportable operating segment’s
net sales and earnings for all periods presented in the above tables.
Note 5 - Net Sales and Revenue Recognition
Arrangements Resulting in Net Reporting
As part of the Company’s Fluidcare
TM
business, certain third-party product sales to customers are managed by the Company.
The
Company transferred third-party products under arrangements resulting
in net reporting of $
71.7
million, $
42.5
million and $
48.0
million for the years ended December 31, 2021, 2020 and 2019, respectively.
Customer Concentration
A significant portion of the Company’s
revenues are realized from the sale of process fluids and services to manufacturers of
steel, aluminum, automobiles, aircraft, industrial equipment, and durable
goods.
During the year ended December 31, 2021, the
Company’s five largest
customers (each composed of multiple subsidiaries or divisions with semiautonomous
purchasing authority)
accounted for approximately
% of consolidated net sales, with its largest customer accounting
for approximately
% of consolidated
net sales.
Contract Assets and Liabilities
The Company had no material contract assets recorded on its Consolidated
Balance Sheets as of December 31, 2021 and 2020.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The Company had approximately $
7.0
million and $
4.0
million of deferred revenue as of December 31, 2021 and 2020,
respectively.
During the years ended December 31, 2021 and 2020, respectively,
the Company satisfied all of the associated
performance obligations and recognized into revenue the advance payments
received and recorded as of December 31, 2020 and 2019,
respectively.
Disaggregated Revenue
The Company sells its various industrial process fluids, its specialty chemicals
and its technical expertise as a global product
portfolio.
The Company generally manages and evaluates its performance by segment first, and
then by customer industry,
rather than
by individual product lines.
Also, net sales of each of the Company’s major product
lines are generally spread throughout all three of
the Company’s geographic
regions, and in most cases, approximately proportionate to the level of total
sales in each region.
The following tables present disaggregated information regarding
the Company’s net sales, first by major product
lines that
represent more than
% of the Company’s consolidated net sales for any
of the years ended December 31, 2021, 2020 and 2019, and
followed then by a disaggregation of the Company’s
net sales by segment, geographic region, customer industry,
and timing of
revenue recognized for the years ended December 31, 2021, 2020 and
2019.
Metal removal fluids
23.4
%
23.9
%
19.9
%
Rolling lubricants
22.2
%
21.8
%
21.9
%
Hydraulic fluids
13.6
%
13.3
%
13.0
%
Net sales for the year ending December 31, 2021
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
210,340
$
141,950
$
207,160
$
559,450
Metalworking and other
362,303
338,176
181,000
881,479
572,643
480,126
388,160
1,440,929
Global Specialty Businesses
186,859
80,541
52,829
320,229
$
759,502
$
560,667
$
440,989
$
1,761,158
Timing of Revenue Recognized
Product sales at a point in time
$
724,357
$
527,083
$
429,130
$
1,680,570
Services transferred over time
35,145
33,584
11,859
80,588
$
759,502
$
560,667
$
440,989
$
1,761,158
Net sales for the year ending December 31, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
163,135
$
107,880
$
168,096
$
439,111
Metalworking and other
287,026
275,307
147,203
709,536
450,161
383,187
315,299
1,148,647
Global Specialty Businesses
154,796
68,164
46,070
269,030
$
604,957
$
451,351
$
361,369
$
1,417,677
Timing of Revenue Recognized
Product sales at a point in time
$
580,663
$
434,549
$
352,917
$
1,368,129
Services transferred over time
24,294
16,802
8,452
49,548
$
604,957
$
451,351
$
361,369
$
1,417,677
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Net sales for the year ending December 31, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
171,784
$
100,605
$
141,870
$
414,259
Metalworking and other
220,337
184,965
105,969
511,271
392,121
285,570
247,839
925,530
Global Specialty Businesses
149,428
30,115
28,430
207,973
$
541,549
$
315,685
$
276,269
$
1,133,503
Timing of Revenue Recognized
Product sales at a point in time
$
525,802
$
310,274
$
269,228
$
1,105,304
Services transferred over time
15,747
5,411
7,041
28,199
$
541,549
$
315,685
$
276,269
$
1,133,503
Note 6 - Leases
The Company has operating leases for certain facilities, vehicles and machinery
and equipment with remaining lease terms up to
years.
In addition, the Company has certain land use leases with remaining lease terms up
to
years.
Operating lease expense is recognized on a straight-line basis over the
lease term.
Operating lease expense for the years ended
December 31, 2021, 2020 and 2019 was $
14.1
million, $
14.2
million, and $
9.4
million, respectively.
Short-term lease expense for the
years ended December 31, 2021, 2020 and 2019 was $
0.9
million, $
1.3
million and $
1.5
million, respectively.
The Company has
no
material variable lease costs or sublease income for the years ended
December 31, 2021, 2020 and 2019.
Cash paid for operating leases during the years ended December 31, 2021, 2020
and 2019 was $
13.9
million, $
14.1
million and
$
9.2
million, respectively.
The Company recorded new right of use lease assets and associated lease liabilities of
$
11.1
million during
the year ended December 31, 2021.
Supplemental balance sheet information related to the Company’s
leases is as follows:
December 31,
December 31,
Right of use lease assets
$
36,635
$
38,507
Other accrued liabilities
9,976
10,901
Long-term lease liabilities
26,335
27,070
Total operating lease liabilities
$
36,311
$
37,971
Weighted average
remaining lease term (years)
5.6
6.0
Weighted average
discount rate
4.22%
4.20%
Maturities of operating lease liabilities as of December 31, 2021 were
as follows:
December 31,
For the year ended December 31, 2022
$
11,346
For the year ended December 31, 2023
9,041
For the year ended December 31, 2024
7,017
For the year ended December 31, 2025
5,292
For the year ended December 31, 2026
4,197
For the year ended December 31, 2027 and beyond
4,502
Total lease payments
41,395
Less: imputed interest
(5,084)
Present value of lease liabilities
$
36,311
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 7 - Restructuring and Related Activities
The Company’s management approved
a global restructuring plan (the “QH Program”) as part of its plan to realize certain cost
synergies associated with the Combination in
the third quarter of 2019.
The QH Program includes restructuring and associated
severance costs to reduce total headcount by approximately
people globally, as well as plans for
the closure of certain
manufacturing and non-manufacturing facilities.
The exact timing and total costs associated with the QH Program will depend on
a
number of factors and is subject to change; however,
the Company currently expects reduction in headcount and site closures to
continue to occur into 2022 under the QH Program.
Employee separation benefits will vary depending on local regulations within
certain foreign countries and will include severance and other benefits.
All costs incurred to date relate to severance costs to reduce headcount,
including customary and routine adjustments to initial
estimates for employee separation costs, as well as costs to close certain facilities
and are recorded in Restructuring and related
charges in the Company’s
Consolidated Statements of Income.
As described in Note 4 of Notes to Consolidated Financial Statements,
Restructuring and related charges are not included
in the Company’s calculation of reportable
segments’ measure of operating
earnings and therefore these costs are not reviewed by or recorded
to reportable segments.
Activity in the Company’s accrual
for restructuring under the QH Program for the years ended December 31, 2021 and 2020
is as
follows:
QH Program
Accrued restructuring as of December 31, 2019
$
18,043
Restructuring and related charges
5,541
Cash payments
(15,745)
Currency translation adjustments
Accrued restructuring as of December 31, 2020
8,248
Restructuring and related charges
1,433
Cash payments
(5,266)
Currency translation adjustments
(328)
Accrued restructuring as of December 31, 2021
$
4,087
In connection with the plans for closure of certain manufacturing
and non-manufacturing facilities, the Company has made a
decision to make available for sale certain facilities.
During the years ended December 31, 2021 and 2020, certain of these facilities
were sold and the Company recognized a gain of $
5.4
million in 2021 and a loss of approximately $
0.6
million in 2020 which is
included within other income (expense), net on the Consolidated Statement of
Income.
Additionally, certain buildings
and land with
an aggregate book value of approximately $
0.7
million continues to be held-for-sale as of December 31, 2021
and are recorded in
prepaid expenses and other current assets on the Company’s
Consolidated Balance Sheet.
The Company will continue to evaluate for
future decisions about making certain other facilities available for
sale.
Note 8 - Share-Based Compensation
The Company recognized the following share-based compensation expense
in its Consolidated Statements
of Income for the years
ended December 31, 2021, 2020 and 2019:
Stock options
$
1,235
$
1,491
$
1,448
Non-vested stock awards and restricted stock units
5,438
5,012
3,206
Non-elective and elective 401(k) matching contribution in stock
1,553
3,112
-
Employee stock purchase plan
-
-
Director stock ownership plan
Performance stock units
1,911
-
Total share-based
compensation expense
$
11,038
$
10,996
$
4,861
Share-based compensation expense is recorded in SG&A, except for $
0.9
million, $
1.5
million and $
0.9
million during the years
ended December 31, 2021, 2020 and 2019, respectively,
recorded within Combination,
integration and other acquisition-related
expenses.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Stock Options
Stock option activity under all plans is as follows:
Weighted
Weighted
Average
Average
Exercise
Remaining
Aggregate
Number of
Price
Contractual
Intrinsic
Options
(per option)
Term
(years)
Value
Options outstanding as of January 1, 2021
110,336
$
143.51
Options granted
25,250
245.17
Options exercised
(22,540)
143.49
Options forfeited
(3,362)
190.65
Options outstanding as of December 31, 2021
109,684
$
165.47
4.8
$
7,550
Options expected to vest after December 31, 2021
67,680
$
178.10
5.4
$
3,929
Options exercisable as of December 31, 2021
42,004
$
145.12
3.9
$
3,621
The total intrinsic value of options exercised during the years ended December
31, 2021, 2020 and 2019 was approximately $
2.7
million, $
6.5
million and $
2.5
million, respectively.
Intrinsic value is calculated as the difference between the current
market price of
the underlying security and the strike price of a related option.
A summary of the Company’s outstanding
stock options as of December 31, 2021 is as follows:
Weighted
Average
Weighted
Weighted
Number
Remaining
Average
Number
Average
Range of
of Options
Contractual
Exercise Price
of Options
Exercise Price
Exercise Prices
Outstanding
Term
(years)
(per option)
Exercisable
(per option)
$
49.01
-
$
80.00
-
$
72.12
$
72.12
$
80.01
-
$
100.00
1,309
-
87.30
1,309
87.30
$
120.01
-
$
150.00
43,482
5.2
136.62
12,873
136.59
$
150.01
-
$
180.00
40,593
3.7
154.23
27,111
153.88
$
220.01
-
$
250.00
23,589
6.2
245.15
-
-
109,684
4.8
165.47
42,004
145.12
As of December 31, 2021, unrecognized compensation expense related
to options granted in 2021, 2020 and 2019 was $
1.8
million, $
1.2
million and $
0.3
million, respectively,
to be recognized over a weighted average period of
1.9
years.
The Company granted stock options under its LTIP
plan that are subject only to time vesting generally over a
three year
period
during 2021, 2020, 2019 and 2018.
For the purposes of determining the fair value of stock option awards, the Company
used a Black-
Scholes option pricing model
and primarily used the assumptions set forth in the table below:
Number of stock options granted
25,250
49,115
51,610
35,842
Dividend yield
0.85
%
0.99
%
1.12
%
1.37
%
Expected volatility
37.33
%
31.57
%
26.29
%
24.73
%
Risk-free interest rate
0.60
%
0.36
%
1.52
%
2.54
%
Expected term (years)
4.0
4.0
4.0
4.0
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The fair value of these options is being amortized on a straight-line basis over
the respective vesting period of each award.
The
compensation expense recorded on each award during the years ended
December 31, 2021, 2020 and 2019, respectively,
is as follows:
2021 Stock option awards
$
$
-
$
-
2020 Stock option awards
-
2019 Stock option awards
2018 Stock option awards
2017 Stock option awards
-
Restricted Stock Awards
Activity of non-vested restricted stock awards granted under the Company’s
LTIP
plan is shown below:
Number of
Weighted Average
Grant
Shares
Date Fair Value
(per share)
Nonvested awards, December 31, 2020
71,768
$
151.17
Granted
23,536
242.29
Vested
(23,638)
157.63
Forfeited
(2,973)
172.15
Nonvested awards, December 31, 2021
68,693
$
179.26
The fair value of the non-vested stock is based on the trading price of the Company’s
common stock on the date of grant.
The
Company adjusts the grant date fair value for expected forfeitures based
on historical experience for similar awards.
As of December
31, 2021, unrecognized compensation expense related to these awards was $
5.1
million, to be recognized over a weighted average
remaining period of
1.5
years.
Restricted Stock Units
Activity of non-vested restricted stock units granted under the Company’s
LTIP
plan is shown below:
Number of
Weighted Average
Grant
Units
Date Fair Value
(per unit)
Nonvested awards, December 31, 2020
10,845
$
147.70
Granted
2,791
245.49
Vested
(2,570)
155.34
Forfeited
(89)
141.77
Nonvested awards, December 31, 2021
10,977
$
170.82
The fair value of the non-vested restricted stock units is based on the trading price
of the Company’s common
stock on the date of
grant.
The Company adjusts the grant date fair value for expected forfeitures based on
historical experience for similar awards.
As of
December 31, 2021, unrecognized compensation expense related
to these awards was $
0.8
million, to be recognized over a weighted
average remaining period of
1.8
years.
Performance Stock Units
The Company grants performance-dependent stock awards (“PSUs”) as a component
of its LTIP,
which will be settled in a
certain number of shares subject to market-based and time-based vesting conditions.
The number of fully vested shares that may
ultimately be issued as settlement for each award may range from
% up to
% of the target award, subject to the achievement of
the Company’s total shareholder
return (“TSR”) relative to the performance of the Company’s
peer group, the S&P Midcap 400
Materials group.
The service period required for the PSUs is
three years
and the TSR measurement period for the PSUs is generally
from January 1 of the year of grant through December 31 of the year prior
to issuances of the shares upon settlement.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Compensation expense for PSUs is measured based on their grant date fair value
and is recognized on a straight-line basis over
the
three year
vesting period.
The grant-date fair value of the PSUs was estimated using a Monte Carlo
simulation on the grant date
and using the following assumptions
set forth in the table below:
CEO Grant
2021 (1)
Fully vested shares
3,775
12,103
18,485
Risk-free interest rate
0.65
%
0.29
%
0.28
%
Dividend yield
0.72
%
0.64
%
1.13
%
Expected term (years)
3.0
3.0
3.0
(1)
On September 2, 2021, the Board appointed Andrew Tometich
to serve as CEO and entered into an Employment Agreement,
and granted an equity award consisting of a mix of time-based restricted
stock and PSUs.
As of December 31, 2021, there was approximately $
4.3
million of total unrecognized compensation cost related to PSUs which
the Company expects to recognize over a weighted-average period
of
1.4
years.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering a majority
of its U.S. employees.
The Company matches
%
of the first
% of compensation that is contributed to the plan, with a maximum matching contribution
of
% of compensation.
Additionally, the plan
provides for non-elective nondiscretionary contributions on behalf of participants
who have completed one year
of service equal to
% of the eligible participant's compensation.
Beginning in April 2020 and continuing through March 2021, the
Company matched both non-elective and elective 401(k) contributions
in fully vested shares of the Company’s
common stock rather
than cash.
For the years ended December 31, 2021, and 2020, total contributions were $
1.5
million and $
3.1
million, respectively.
Employee Stock Purchase Plan
In 2000, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby
employees may purchase Company stock
through a payroll deduction plan.
Purchases were made from the plan and credited to each participant’s
account on the last day of
each calendar month in which the organized securities
trading markets in the U.S. were open for business (the “Investment
Date”).
The purchase price of the stock was
% of the fair market value on the Investment Date.
The plan was compensatory, and
the
%
discount was expensed on the Investment Date.
All employees, including officers, were eligible to participate
in this plan.
A
participant could withdraw all uninvested payment balances credited
to a participant’s account at any time.
An employee whose stock
ownership of the Company exceeds
five percent
of the outstanding common stock was not eligible to participate in this plan.
Effective January 1, 2020, the Company discontinued
the ESPP.
2013 Director Stock Ownership Plan
In 2013, the Company adopted the 2013 Director Stock Ownership Plan (the
“Plan”), to encourage the Directors to increase their
investment in the Company,
which was approved at the Company’s May 2013
shareholders’ meeting.
The Plan authorizes the
issuance of up to
75,000
shares of Quaker common stock in accordance with the terms of the Plan in payment
of all or a portion of the
annual cash retainer payable to each of the Company’s
non-employee directors in 2013 and subsequent years during the term of the
Plan.
Under the Plan, each director who, on May 1
of the applicable calendar year, owns less than
% of the annual cash retainer
for the applicable calendar year, divided
by the average of the closing price of a share of Quaker Common Stock as reported by
the
composite tape of the New York
Stock Exchange for the previous calendar year (the “Threshold Amount”), is required
to receive
%
of the annual cash retainer in Quaker common stock and
% of the retainer in cash, unless the director elects to receive a greater
percentage of Quaker common stock, up to
% of the annual cash retainer for the applicable year.
Each director who owns more
than the Threshold Amount may elect to receive common stock in payment
of a percentage (up to
%) of the annual cash retainer.
The annual retainer is $
0.1
million and the retainer payment date is June 1.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 9 - Other Income (Expense), net
Other income (expense), net, for the years ended December 31,
2021, 2020 and 2019 are as follows:
Income from third party license fees
$
1,367
$
$
1,035
Foreign exchange (losses) gains, net
(3,821)
(6,082)
Gain (loss) on disposals of property,
plant, equipment and other
assets, net
4,695
(871)
Non-income
tax refunds and other related credits
15,155
3,345
1,118
Pension and postretirement benefit income (costs), non-service
components
(21,592)
(2,805)
Gain on changes in insurance settlement restrictions of an inactive
subsidiary and related insurance insolvency recovery
-
18,144
Other non-operating income, net
Total other income
(expense), net
$
18,851
$
(5,618)
$
(254)
Gain (loss) on disposals of property,
plant, equipment and other assets, net, includes losses related to certain fixed
assets disposals
resulting from the property damage caused by flooding of the Company’s
Conshohocken, Pennsylvania headquarters in 2021,
described in Note 26 of Notes to Consolidated Financial Statements, as well as a gain
in 2021 and a loss in 2020 on the sale of certain
held-for-sale real property assets related to the Combination,
described in Note 7 of Notes to Consolidated Financial Statements.
Non-
income tax refunds and other related credits during the year ended
December 31, 2021 includes certain non-income tax credits for the
Company’s Brazilian subsidiaries
described in Note 26 of Notes to Consolidated Financial Statements.
Pension and postretirement
benefit income (costs), non-service components during the year ended December
31, 2020 include a $
1.6
million refund in premium
and a $
22.7
million non-cash settlement charge related to the Legacy Quaker
U.S. Pension Plan, as described in Note 21 of Notes to
Consolidated Financial Statements.
Gain on changes in insurance settlement restrictions of an inactive subsidiary
and related
insurance insolvency recovery relate to the termination of restrictions over
certain cash that was previously designated solely to be
used for settlement of asbestos claims at an inactive subsidiary of the Company
and cash proceeds from an insolvent insurance carrier
with respect to previously filed recovery claims.
See Note 12, Note 19 and Note 26 of Notes to Consolidated Financial Statements.
Foreign exchange (losses) gains, net, during the years ended December
31, 2021, 2020 and 2019, include foreign currency transaction
losses of approximately $
0.6
million, $
0.4
million and $
1.0
million, respectively,
related to hyper-inflationary accounting for the
Company’s Argentine
subsidiaries.
See Note 1 of Notes to Consolidated Financial Statements.
Note 10 - Taxes
on Income
On December 22, 2017, the U.S. government enacted comprehensive
tax legislation commonly referred to as U.S. Tax
Reform.
U.S. Tax Reform
implemented a new system of taxation for non-U.S. earnings which eliminated U.S. federal
income taxes on
dividends from certain foreign subsidiaries and imposed a one-time transition
tax on the deemed repatriation of undistributed earnings
of certain foreign subsidiaries that is payable over eight years.
Following numerous regulations, notices, and other formal guidance
published by the Internal Revenue Service (“I.R.S.”), U.S.
Department of Treasury,
and various state taxing authorities, the Company completed its accounting
for the transition tax and has
elected to pay its $
15.5
million transition tax in installments over eight years as permitted under
U.S. Tax Reform.
As of December
31, 2021, $
7.0
million in installments have been paid with the remaining $
8.5
million to be paid through installments in future years.
As of December 31, 2021, the Company has a deferred tax liability of
$
8.4
million on certain undistributed foreign earnings,
which primarily represents the Company’s
estimate of the non-U.S. income taxes the Company will incur to ultimately remit certain
earnings to the U.S.
The Company’s reinvestment
assertions are further explained below.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Taxes on income
before equity in net income of associated companies for the years ended December
31, 2021, 2020 and 2019 are
as follows:
Current:
Federal
$
$
(1,359)
$
(239)
State
2,115
1,171
Foreign
44,375
33,173
26,213
47,445
32,985
26,326
Deferred:
Federal
(3,863)
(28,437)
(9,267)
State
(3,117)
(3,087)
(396)
Foreign
(5,526)
(6,757)
(14,579)
Total
$
34,939
$
(5,296)
$
2,084
The components of earnings before income taxes for the years ended December
31, 2021, 2020 and 2019 are as follows:
U.S.
$
7,263
$
(66,585)
$
(46,697)
Foreign
139,728
93,724
75,601
Total
$
146,991
$
27,139
$
28,904
Total deferred
tax assets and liabilities are composed of the following as of December
31, 2021 and 2020:
Retirement benefits
$
11,860
$
15,237
Allowance for doubtful accounts
2,155
2,316
Insurance and litigation reserves
Performance incentives
2,881
5,914
Equity-based compensation
1,920
1,282
Prepaid expense
Operating loss carryforward
18,544
16,693
Foreign tax credit and other credits
16,285
24,873
Interest
9,940
16,812
Restructuring reserves
1,121
Right of use lease assets
8,322
9,346
Inventory reserves
2,941
2,225
Research and development
8,832
7,974
Other
2,846
3,005
88,292
108,396
Valuation
allowance
(17,400)
(21,511)
Total deferred tax
assets, net
$
70,892
$
86,885
Depreciation
11,580
15,473
Foreign pension and other
2,332
1,807
Intangibles
197,066
222,794
Lease liabilities
8,421
9,151
Outside basis in equity investment
5,999
7,938
Unremitted Earnings
8,381
5,919
Total deferred tax
liabilities
$
233,779
$
263,082
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The Company has $
10.6
million of deferred tax assets related to state net operating losses.
A partial valuation allowance of $
8.0
million has been established against this amount resulting in a net $
2.6
million expected future benefit.
Management analyzed the
expected impact of the reversal of existing taxable temporary differences,
considered expiration dates, analyzed current state tax laws,
and determined that $
2.6
million of state net operating loss carryforwards will be realized based on
the reversal of deferred tax
liabilities.
These state net operating losses are subject to various carryforward
periods of
years to
years or an indefinite
carryforward period.
An additional $
0.5
million of valuation allowance was established for other net state deferred tax assets.
The Company has $
8.0
million of deferred tax assets related to foreign net operating loss carryforwards.
A partial valuation
allowance of $
2.5
million has been established against the $
8.0
million due to the expected expiration of these losses before they are
able to be utilized.
These foreign net operating losses are subject to various carryforward periods with the
majority having an
indefinite carryforward period.
An additional partial valuation allowance of $
0.6
million has been established against certain other
foreign deferred tax assets.
In conjunction with the Combination, the Company acquired foreign tax
credit deferred tax assets of $
41.8
million expiring
between 2019 and 2028.
Foreign tax credits may be carried forward for
years.
Management analyzed the expected impact of the
utilization of foreign tax credits based on certain assumptions such as projected
U.S. taxable income, overall domestic loss recapture,
and annual limitations due to the ownership change under the Internal Revenue
Code.
The Company had a foreign tax credit carry
forward of $15.9 million and $
24.9
million as of December 31, 2021 and 2020, respectively,
with a $5.8 million and $
10.2
million
valuation allowance as of December 31, 2021 and 2020, respectively,
reflecting the amount of credits that are not expected to be
utilized before expiration.
The Company also acquired disallowed interest deferred tax assets of $
14.0
million as part of the Combination.
Disallowed
interest may be carried forward indefinitely.
Management analyzed the expected impact of the utilization of disallowed interest
carryforwards based on projected US taxable income and determined
that the Company will utilize all expected future benefits by
2022.
As of December 31, 2021, the Company had a net realizable disallowed interest carryforward
of $
9.4
million on its balance
sheet.
As of December 31, 2021, the Company had deferred tax liabilities of $
178.0
million primarily related to the step-up in
intangibles resulting from the Combination and Norman Hay acquisition.
As part of the Combination, the Company acquired a
% interest in the Korea Houghton Corporation joint venture and has
recorded a $
6.0
million deferred tax liability for its outside basis difference.
The following are the changes in the Company’s
deferred tax asset valuation allowance for the years ended December 31, 2021,
2020 and 2019:
Effect of
Balance at
Purchase
Additional
Allowance
Exchange
Balance
Beginning
Accounting
Valuation
Utilization
Rate
at End
of Period
Adjustments
Allowance
and Other
Changes
of Period
Valuation
Allowance
Year
ended December 31, 2021
$
21,511
$
-
$
$
(4,470)
$
$
17,400
Year
ended December 31, 2020
$
13,834
$
7,148
$
2,738
$
(2,153)
$
(56)
$
21,511
Year
ended December 31, 2019
$
7,520
$
13,752
$
$
(8,227)
$
(43)
$
13,834
The Company’s net deferred
tax assets and liabilities are classified in the Consolidated Balance Sheets as of December
31, 2021
and 2020 as follows:
Non-current deferred tax assets
$
16,138
$
16,566
Non-current deferred tax liabilities
179,025
192,763
Net deferred tax liability
$
(162,887)
$
(176,197)
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The following is a reconciliation of income taxes at the Federal statutory rate with income taxes
recorded by the Company for the
years ended December 31, 2021, 2020 and 2019.
Certain immaterial reclassifications within the presentation of the reconciliation
of
income taxes have been made to the years ended December 31, 2020
and 2019:
Income tax provision at the Federal statutory tax rate
$
30,868
$
5,699
$
6,070
Unremitted earnings
1,841
(2,308)
(4,383)
Tax law changes
/ reform
1,955
(1,059)
(416)
U.S. tax on foreign operations
10,479
5,140
Pension settlement
-
(2,247)
-
Foreign derived intangible income
(8,698)
(7,339)
(1,699)
Non-deductible acquisition expenses
1,743
Withholding taxes
6,584
7,809
8,621
Foreign tax credits
(14,725)
(4,699)
(3,787)
Share-based compensation
(540)
Foreign tax rate differential
3,090
1,139
1,444
Research and development credit
(1,685)
(1,018)
(830)
Uncertain tax positions
1,990
State income tax provisions, net
(1,446)
(2,245)
(117)
Non-deductible meals and entertainment
Intercompany transfer of intangible assets
4,347
(4,384)
(5,318)
Miscellaneous items, net
(2,530)
(495)
Taxes on income before
equity in net income of associated companies
$
34,939
$
(5,296)
$
2,084
Pursuant to U.S. Tax
Reform, the Company recorded a $
15.5
million transition tax liability for U.S. income taxes on the
undistributed earnings of non-U.S. subsidiaries.
However, the Company may also be subject to other
taxes, such as withholding taxes
and dividend distribution taxes, if these undistributed earnings are
ultimately remitted to the U.S.
As a result of the Combination,
additional third-party debt was incurred resulting in the Company re-evaluating
its global cash strategy in order to meet its goal of
reducing leverage in upcoming years.
As of December 31, 2021, the Company has a deferred tax liability $
8.4
million, which
primarily represents the estimate of the non-U.S. taxes the Company
will incur to ultimately remit these earnings to the U.S.
It is the
Company’s current intention
to reinvest its additional undistributed earnings of non-U.S. subsidiaries to support
working capital needs
and certain other growth initiatives outside of the U.S.
The amount of such undistributed earnings at December 31, 2021 was
approximately $
377.4
million.
Any tax liability which might result from ultimate remittance of these earnings
is expected to be
substantially offset by foreign tax credits (subject to certain limitations).
It is currently impractical to estimate any such incremental
tax expense.
As of December 31, 2021, the Company’s
cumulative liability for gross unrecognized tax benefits was $
22.5
million. The
Company had accrued approximately $
3.1
million for cumulative penalties and $
3.1
million for cumulative interest as of December
31, 2021.
As of December 31, 2020, the Company’s
cumulative liability for gross unrecognized tax benefits was $
22.2
million. The
Company had accrued approximately $
3.9
million for cumulative penalties and $
3.0
million for cumulative interest as of December
31, 2020.
The Company continues to recognize interest and penalties associated with uncertain
tax positions as a component of tax expense
on income before equity in net income of associated companies in its Consolidated
Statements of Income.
The Company recognized a
benefit of $
0.5
million for penalties and an expense of $
0.3
million for interest (net of expirations and settlements) in its Consolidated
Statement of Income for the year ended December 31, 2021, an expense of
less than $
0.1
million for penalties and $
0.6
million for
interest (net of expirations and settlements) in its Consolidated Statement
of Income for the year ended December 31, 2020, and a
credit of $
0.2
million for penalties and an expense of $
0.2
million for interest (net of expirations and settlements) in its Consolidated
Statement of Income for the year ended December 31, 201
9.
The Company estimates that during the year ending December 31, 2022,
it will reduce its cumulative liability for gross
unrecognized tax benefits by approximately $
2.3
million due to the expiration of the statute of limitations with regard to certain tax
positions.
This estimated reduction in the cumulative liability for unrecognized tax
benefits does not consider any increase in liability
for unrecognized tax benefits with regard to existing tax positions or any increase
in cumulative liability for unrecognized tax benefits
with regard to new tax positions for the year ending December 31, 2022.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
A reconciliation of the beginning and ending amounts of unrecognized
tax benefits for the years ended December 31, 2021, 2020
and 2019, respectively,
is as follows:
Unrecognized tax benefits as of January 1
$
22,152
$
19,097
$
7,050
Increase (decrease) in unrecognized tax benefits taken in prior periods
1,002
2,025
(28)
Increase in unrecognized tax benefits taken in current period
2,915
3,095
1,935
Decrease in unrecognized tax benefits due to lapse of statute of limitations
(2,631)
(3,659)
(1,029)
Increase in unrecognized tax benefits due to acquisition
-
11,301
(Decrease) increase due to foreign exchange rates
(974)
(132)
Unrecognized tax benefits as of December 31
$
22,464
$
22,152
$
19,097
The amount of net unrecognized tax benefits above that, if recognized, would
impact the Company’s tax expense
and effective tax
rate is $
15.2
million, $
14.7
million and $
13.3
million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company and its subsidiaries are subject to U.S. Federal income tax,
as well as the income tax of various state and foreign
tax jurisdictions.
Tax years that remain
subject to examination by major tax jurisdictions include Italy from 2007, Brazil from
,
the Netherlands, Mexico and China from
, Mexico, Canada, Germany,
Spain, U.S. and the United Kingdom from
, India
from fiscal year beginning April 1,
and ending March 31, 2020, and various U.S. state tax jurisdictions from
.
As previously reported, the Italian tax authorities have assessed additional
tax due from the Company’s subsidiary,
Quaker Italia
S.r.l., relating to the tax years 2007
through 2015.
The Company has filed for competent authority relief from these assessments under
the Mutual Agreement Procedures (“MAP”) of the Organization
for Economic Co-Operation and Development for all years except
2007.
In 2020, the respective tax authorities in Italy,
Spain, and Netherland reached agreement with respect to the MAP proceedings,
which the Company has accepted.
As of December 31, 2021, the Company has received $
1.6
million in refunds from the Netherlands
and Spain and has an accrual for $
2.4
million due to Italy.
In February 2022, the Company received a settlement notice from the
Italian taxing authorities confirming the amount due of $
2.6
million, having granted the Company’s
request to utilize its remaining net
operating losses to partially offset the liability.
This amendment to the tax assessment is expected to result in the Company
recognizing tax expense of $
0.6
million in Q1 2022.
Houghton Italia, S.r.l is also involved
in a corporate income tax audit with the Italian tax authorities covering tax years 2014
through 2018.
As of December 31, 2021, the Company has a $
5.0
million reserve for uncertain tax positions relating to matters
related to this audit.
Because the reserve relates to the tax periods prior to August 1, 2019, the tax liability
was established through
purchase accounting related to the Combination.
The Company has also submitted an indemnification claim against funds held in
escrow by Houghton’s former owners
and as a result, a corresponding $
5.9
million indemnification receivable has also been
established through purchase accounting.
During the fourth quarter of 2021, the Company settled a portion of the
Houghton Italia,
S.r.l. corporate income tax
audit with the Italian tax authorities for the tax years 2014 and 2015.
The Company remains under audit
for tax years 2016 through 2018 and believes it has adequate reverses
for the remaining uncertain tax positions.
Houghton Deutschland GmbH is also under audit by the German tax authorities for
tax years 2015 through 2017.
Based on
preliminary audit findings, primarily related to transfer pricing,
the Company has recorded a reserve for $
0.4
million as of December
31, 2021.
Of this amount, $
0.3
million relates to tax periods prior to the Combination and therefore the Company
has submitted an
indemnification claim with Houghton’s
former owners for any tax liabilities arising pre-Combination.
As a result, a corresponding
indemnification receivable has also been established.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 11 - Earnings Per Share
The following table summarizes earnings per share calculations for
the years ended December 31, 2021, 2020 and 2019:
Basic earnings per common share
Net income attributable to Quaker Chemical Corporation
$
121,369
$
39,658
$
31,622
Less: income allocated to participating securities
(480)
(148)
(90)
Net income available to common shareholders
$
120,889
$
39,510
$
31,532
Basic weighted average common shares outstanding
17,805,034
17,719,792
15,126,928
Basic earnings per common share
$
6.79
$
2.23
$
2.08
Diluted earnings per common share
Net income attributable to Quaker Chemical Corporation
$
121,369
$
39,658
$
31,622
Less: income allocated to participating securities
(479)
(148)
(90)
Net income available to common shareholders
$
120,890
$
39,510
$
31,532
Basic weighted average common shares outstanding
17,805,034
17,719,792
15,126,928
Effect of dilutive securities
50,090
31,087
36,243
Diluted weighted average common shares outstanding
17,855,124
17,750,879
15,163,171
Diluted earnings per common share
$
6.77
$
2.22
$
2.08
The Company’s calculation
of earnings per diluted share attributable to Quaker Chemical Corporation common
shareholders for
the year ended December 31, 2019 was impacted by the variability of
its reported earnings during the year and the approximately
4.3
million shares issued as a component of the consideration transferred in
the Combination, comprising
24.5
% of the common stock of
the Company immediately after the closing.
Certain stock options, restricted stock units and PSUs are not included in the diluted
earnings per share calculation when the effect would
have been anti-dilutive.
The calculated amount of anti-diluted shares not
included were
4,070
in 2021,
in 2020 and
in 2019.
Note 12 - Restricted Cash
Prior to December 2020, the Company had restricted cash recorded in other assets related to proceeds from an inactive subsidiary
of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an
original total value of $35.0 million.
The proceeds of both settlements were restricted and could only be used
to pay claims and costs
of defense associated with the subsidiary’s
asbestos litigation.
The proceeds of the settlement and release agreements were deposited
into interest bearing accounts which earned less then $
0.1
million and $
0.2
million in the years ended December 31, 2020, and 2019,
respectively, offset
by $
1.0
million and $
0.8
million of net payments during 2020 and 2019, respectively.
Due to the restricted nature
of the proceeds, a corresponding deferred credit was established in other
non-current liabilities for an equal and offsetting amount that
continued until the restrictions lapsed.
During December 2020, the restrictions ended on these previously received
insurance
settlements and the Company transferred
the cash into an operating account.
In connection with the termination in restrictions, the Company recognized
an $
18.1
million gain
on its Consolidated Statement of Income in Other income (expense
), net, for the amount of previously restricted cash, net of the
estimated liability to pay claims and associated with the inactive subsidiary’s
asbestos litigation as of December 31, 2020.
Therefore,
due to these restrictions ending, there is
no
restricted cash for the year ended December 31, 2021.
See Notes 18, 22 and 26 of Notes to
Consolidated Financial Statements.
The following table provides a reconciliation of cash, cash equivalents
and restricted cash as December 31, 2021, 2020, 2019 and
2018:
Cash and cash equivalents
$
165,176
$
181,833
$
123,524
$
104,147
Restricted cash included in other current assets
-
-
Restricted cash included in other assets
-
-
19,678
20,278
Cash, cash equivalents and restricted cash
$
165,176
$
181,895
$
143,555
$
124,425
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 13 - Accounts Receivable and Allowance for Doubtful Accounts
As of December 31, 2021 and 2020, the Company had gross trade accounts receivable
totaling $
443.0
million and $
386.1
million,
respectively.
The following are changes in the allowance for doubtful accounts during the years
ended December 31, 2021, 2020 and 2019:
Exchange Rate
Balance at
Changes
Write-Offs
Changes
Balance
Beginning
to Costs and
Charged to
and Other
at End
of Period
Expenses
Allowance
Adjustments
of Period
Allowance for Doubtful Accounts
Year
ended December 31, 2021
$
13,145
$
$
(946)
$
(518)
$
12,334
Year
ended December 31, 2020
$
11,716
$
3,582
$
(2,187)
$
$
13,145
Year
ended December 31, 2019
$
5,187
$
1,925
$
(322)
$
4,926
$
11,716
Included in exchange rate changes and other adjustments for the year
ended December 31, 2019 are the allowance for doubtful
accounts of $
5.0
million related to the acquired receivables in connection with the Combination and
Norman Hay acquisition.
Note 14 - Inventories
Inventories, net, as of December 31, 2021 and 2020 were as follows:
Raw materials and supplies
$
129,382
$
86,148
Work in process,
finished goods and reserves
135,149
101,616
Total inventories, net
$
264,531
$
187,764
Note 15 - Property,
Plant and Equipment
Property, plant and equipment
as of December 31, 2021 and 2020 were as follows:
Land
$
30,793
$
33,009
Building and improvements
134,313
135,595
Machinery and equipment
252,779
246,242
Construction in progress
16,459
8,407
Property, plant and equipment,
at cost
434,344
423,253
Less: accumulated depreciation
(236,824)
(219,370)
Total property,
plant and equipment, net
$
197,520
$
203,883
As of December 31, 2021, PP&E includes $
0.8
million of finance lease assets and future minimum lease payments.
In connection
with the plans for closure of certain facilities, certain buildings and land with an aggregate book value of approximately $0.7 million
continue to be held-for-sale as of December 31, 2021 and are recorded in prepaid expenses and other current assets on the Company’s
Consolidated Balance Sheet.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 16 - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the years ended December 31,
2021 and 2020 were as follows:
Global
Specialty
Americas
EMEA
Asia/Pacific
Businesses
Total
Balance as of December 31, 2019
$
216,385
$
133,018
$
141,727
$
116,075
$
607,205
Goodwill additions
1,485
-
1,329
3,345
Currency translation and other
adjustments
(4,628)
6,613
16,363
2,314
20,662
Balance as of December 31, 2020
213,242
140,162
158,090
119,718
631,212
Goodwill additions
1,490
3,380
1,308
2,624
8,802
Currency translation and other
adjustments
(709)
(8,022)
3,060
(3,149)
(8,820)
Balance as of December 31, 2021
$
214,023
$
135,520
$
162,458
$
119,193
$
631,194
Other adjustments in the table above includes updates to the Company’s
allocation of the Houghton purchase price and associated
goodwill to each of the Company’s
reportable segments during the year ended December 31, 2020, including
a $
2.6
million decrease
in the Americas, a $
1.4
million decrease in EMEA, a $
8.0
million increase in Asia/Pacific and a $
0.5
million increase in Global
Specialty Businesses.
Gross carrying amounts and accumulated amortization for definite-lived
intangible assets as of December 31, 2021 and 2020 were
as follows:
Gross Carrying
Accumulated
Amount
Amortization
Customer lists and rights to sell
$
853,122
$
839,551
$
147,858
$
99,806
Trademarks, formulations and product
technology
163,974
166,448
38,747
30,483
Other
6,309
6,372
5,900
5,824
Total definite-lived
intangible assets
$
1,023,405
$
1,012,371
$
192,505
$
136,113
The Company recorded $
59.9
million, $
55.9
million and $
26.7
million of amortization expense during the years ended December
31, 2021, 2020 and 2019, respectively.
Amortization is recorded within SG&A in the Company’s
Consolidated Statements of Income.
Estimated annual aggregate amortization expense for the subsequent
five years is as follows:
For the year ended December 31, 2022
$
59,900
For the year ended December 31, 2023
59,727
For the year ended December 31, 2024
59,138
For the year ended December 31, 2025
58,383
For the year ended December 31, 2026
58,108
The Company has four indefinite-lived intangible assets totaling $
196.9
million as of December 31, 2021, including $
195.8
million of indefinite-lived intangible assets for trademarks and tradename associated
with the Combination.
Comparatively, the
Company had four indefinite-lived intangible assets for trademarks and
tradename totaling $
205.1
million as of December 31, 2020.
The Company completes its annual goodwill and indefinite-lived intangible
asset impairment test during the fourth quarter of
each year, or more frequently if triggering
events indicate a possible impairment in one or more of its reporting units.
The Company
completed its annual impairment assessment during the fourth quarter
of 2021 and concluded
no
impairment charge was warranted.
The Company continually evaluates financial performance, economic
conditions and other relevant developments in assessing if an
interim period impairment test for one or more of its reporting units is necessary.
As of March 31, 2020, the Company evaluated the initial impact of COVID-19
on the Company’s operations,
and the volatility
and uncertainty in the economic outlook as a result of COVID-19 to determine
if they indicated it was more likely than not that the
carrying value of any of the Company’s
reporting units or indefinite-lived or long-lived assets was not recoverable.
The Company
concluded that the impact of COVID-19 did not represent a triggering
event as of March 31, 2020 with regards to the Company’s
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
reporting units or indefinite-lived and long-lived assets, except for the Company’s
Houghton and Fluidcare
TM
trademarks
and
tradename indefinite-lived intangible assets.
The determination of estimated fair value of the Houghton and Fluidcare
TM
trademarks and tradename indefinite-lived assets was
based on a relief from royalty valuation method which requires management’s
judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to the
weighted average cost of capital (“WACC”)
and royalty rates, as
well as revenue growth rates and terminal growth rates.
In the first quarter of 2020, as a result of the impact of COVID-19 driving
a
decrease in projected legacy Houghton net sales in the current year
and the impact of the current year decline on projected future
legacy Houghton net sales as well as an increase in the WACC
assumption utilized in the quantitative impairment assessment,
the
Company concluded that the estimated fair values of the Houghton and
Fluidcare
TM
trademarks and tradename intangible assets were
less than their carrying values.
As a result, an impairment charge of $
38.0
million, primarily related to the Houghton trademarks and
tradename, to write down the carrying values of these intangible assets to their estimated
fair values was recorded in the first quarter
of 2020.
Note 17 - Investments in Associated Companies
As of December 31, 2021, the Company held a
% investment in and had significant influence over Nippon Quaker Chemical,
Ltd. (“Nippon Japan”), Kelko Quaker Chemical, S.A. (“Kelko Panama”)
and Houghton Korea acquired in 2019 in connection with the
Combination, and held a
% investment in and had significant influence over Primex, Ltd. (“Primex”).
The carrying amount of the Company’s
equity investments as of December 31, 2021 was $
95.3
million, which includes
investments of $
66.4
million in Houghton Korea; $
21.5
million in Primex; $
7.1
million in Nippon Japan; and $
0.3
million in Kelko
Panama.
The Company also has a
% equity interest in Kelko Venezuela.
Due to heightened foreign exchange controls, deteriorating
economic circumstances and other restrictions in Venezuela,
during 2018 the Company concluded that it no longer had significant
influence over this affiliate.
Prior to this determination, the Company historically accounted for this affiliate
under the equity method.
As of December 31, 2021 and 2020, the Company had
no
remaining carrying value for its investment in Kelko Venezuela.
The following table is a summary of equity income in associated companies by
investment for the years ending December 31,
2021, 2020 and 2019:
Year
Ended December 31,
Houghton Korea
$
3,808
$
5,241
$
2,337
Nippon Japan
Kelko Panama
Grindaix (1)
(37)
-
-
Primex
4,993
1,151
1,822
Total equity in net
income of associated companies
$
9,379
$
7,352
$
5,064
(1) In February 2021, the Company acquired a
% ownership interest in Grindaix.
From that date through September 2021
when the Company purchased the remaining interest of Grindaix, the
Company accounted for its
% interest under the
equity method of accounting and recorded equity in net income of associated
companies.
See Note 2 of Notes to
Consolidated Financial Statements.
As the Combination closed on August 1, 2019, the Company included five
months of equity income from Houghton Korea in its
December 31, 2019 Consolidated Statement of Income.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 18 - Other Non-Current Assets
Other non-current assets as of December 31, 2021 and 2020 were as follows:
Pension assets
$
7,916
$
6,748
Uncertain tax positions
6,931
7,209
Indemnification assets
6,630
7,615
Debt issuance costs
4,267
5,919
Supplemental retirement income program
2,269
1,961
Other
2,946
2,344
Total other non
-current assets
$
30,959
$
31,796
As of December 31, 2021 and 2020, indemnification assets relates to certain
Houghton foreign subsidiaries for which the
Company expects it will incur additional tax amounts which are subject
to indemnification under the terms of the Combination share
and purchase agreement.
These indemnification assets have a corresponding uncertain tax position recorded
in other non-current
liabilities.
As of December 31, 2021 and 2020, one of the Company’s
foreign pension plan’s fair value of
plan assets exceeded its
gross benefit obligation and was therefore over-funded,
which is represented by the line Pension assets in the table above.
See Notes
10, 12, 21 and 22 of Notes to Consolidated Financial Statements.
Note 19 - Other Accrued Liabilities
Other accrued liabilities as of December 31, 2021 and 2020 were as follows:
Non-income taxes
$
23,725
$
26,080
Current income taxes payable
16,642
13,124
Professional fees, legal, and acquisition-related accruals
12,264
11,437
Selling expenses and freight accruals
11,695
10,475
Short-term lease liabilities
9,976
10,901
Customer advances and sales return reserves
7,965
6,380
Interest rate swap
1,782
-
Other
11,568
13,710
Total other accrued
liabilities
$
95,617
$
92,107
Note 20 - Debt
Debt as of December 31, 2021 and 2020 includes the following:
As of December 31, 2021
As of December 31, 2020
Interest
Outstanding
Interest
Outstanding
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.62%
$
211,955
1.65%
$
160,000
U.S. Term Loan
1.65%
540,000
1.65%
570,000
EURO Term Loan
1.50%
137,616
1.50%
157,062
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
1,777
Various
2,072
Total debt
$
901,348
$
899,134
Less: debt issuance costs
(8,001)
(11,099)
Less: short-term and current portion of long-term debts
(56,935)
(38,967)
Total long-term debt
$
836,412
$
849,068
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Credit facilities
The Company’s primary credit facility
(as amended, the “Credit Facility”) is comprised of a $
400.0
million multicurrency
revolver (the “Revolver”), a $
600.0
million term loan (the “U.S. Term
Loan”), each with the Company as borrower,
and a $
150.0
million (as of August 1, 2019) Euro equivalent term loan (the “EURO Term
Loan” and together with the “U.S. Term
Loan”, the
“Term Loans”)
with Quaker Chemical B.V.,
a Dutch subsidiary of the Company as borrower, each
with a
five year
term maturing in
August 2024
.
Subject to the consent of the administrative agent and certain other conditions, the Company
may designate additional
borrowers.
The maximum amount available under the Credit Facility can be increased by up
to $
300.0
million at the Company’s
request if there are lenders who agree to accept additional commitments and
the Company has satisfied certain other conditions.
Borrowings under the Credit Facility bear interest at a base rate or LIBOR plus an
applicable margin based upon the Company’s
consolidated net leverage ratio.
On December 10, 2021, the Company entered into the Second Amendment with Bank of America
N.A., to include among other things, an update to provide for use of a non-USD
currency LIBOR successor rate.
The variable interest
rate incurred on the outstanding borrowings under the Credit Facility as of and
during the year ended December 31, 2021 was
approximately
1.6
%.
In addition to paying interest on outstanding principal under the Credit Facility,
the Company is required to pay
a commitment fee ranging from
0.2
% to
0.3
% depending on the Company’s consolidated
net leverage ratio to the lenders under the
Revolver in respect of the unutilized commitments thereunder.
The Company has unused capacity under the Revolver of
approximately $
million, net of bank letters of credit of approximately $
million, as of December 31, 2021.
The Credit Facility is subject to certain financial and other covenants
.
The Company’s initial consolidated net
debt to
consolidated adjusted EBITDA ratio could not exceed
4.25
to 1, with step downs in the permitted ratio over the term of the Credit
Facility.
As of December 31, 2021, the consolidated net debt to adjusted EBITDA
may not exceed
3.75
to 1.
The Company’s
consolidated adjusted EBITDA to interest expense ratio cannot be less than
3.0
to 1 over the term of the agreement.
The Credit
Facility also prohibits the payment of cash dividends if the Company
is in default or if the amount of the dividend paid annually
exceeds the greater of $
50.0
million and
% of consolidated adjusted EBITDA unless the ratio of consolidated net debt
to
consolidated adjusted EBITDA is less than
2.0
to 1, in which case there is no such limitation on amount.
As of December 31, 2021
and December 31, 2020, the Company was in compliance with all of the Credit Facility covenants.
The Term Loans have quarterly
principal amortization during their five year terms, with
5.0
% amortization of the principal balance due in years 1 and 2,
7.5
% in year
3, and
10.0
% in years 4 and 5, with the remaining principal amount due at maturity.
During the year ended December 31, 2021, the
Company made four quarterly amortization payments related to the
Term Loans totaling $
38.0
million.
The Credit Facility is
guaranteed by certain of the Company’s
domestic subsidiaries and is secured by first priority liens on substantially all of the assets of
the Company and the domestic subsidiary guarantors, subject to certain
customary exclusions.
The obligations of the Dutch borrower
are guaranteed only by certain foreign subsidiaries on an unsecured basis.
The Credit Facility required the Company to fix its variable interest rates on at least
% of its total Term Loans.
In order to
satisfy this requirement as well as to manage the Company’s
exposure to variable interest rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three year interest rate swaps at a base rate of
1.64
%
plus an applicable margin as provided in the Credit Facility,
based on the Company’s consolidated
net leverage ratio.
At the time the
Company entered into the swaps, and as of December 31, 2021,
the aggregate interest rate on the swaps, including the fixed base rate
plus an applicable margin, was
3.1
%.
See Note 25 of Notes to Consolidated Financial Statements.
The Company capitalized $
23.7
million of certain third-party debt issuance costs in connection with executing
the Credit Facility.
Approximately $
15.5
million of the capitalized costs were attributed to the Term
Loans and recorded as a direct reduction of long-
term debt on the Company’s Consolidated
Balance Sheet.
Approximately $
8.3
million of the capitalized costs were attributed to the
Revolver and recorded within other assets on the Company’s
Consolidated Balance Sheet.
These capitalized costs are being
amortized into interest expense over the
five year
term of the Credit Facility.
As of December 31, 2021 and 2020, the Company had
$
8.0
million and $
11.1
million, respectively, of debt
issuance costs recorded as a reduction of long-term debt.
As of December 31,
2021 and 2020, the Company had $
4.3
million and $
5.9
million, respectively, of
debt issuance costs recorded within other non-current
assets.
Industrial development bonds
As of December 31, 2021 and 2020, the Company had fixed rate, industrial
development authority bonds totaling $
10.0
million in
principal amount due in
.
These bonds have similar covenants to the Credit Facility noted above.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Bank lines of credit and other debt obligations
The Company has certain unsecured bank lines of credit and discounting
facilities in certain foreign subsidiaries, which are not
collateralized.
The Company’s other debt obligations
primarily consist of certain domestic and foreign low interest rate or interest-
free municipality-related loans, local credit facilities of certain foreign subsidiaries
and capital lease obligations.
Total unused
capacity under these arrangements as of December 31, 2021, was approximately
$
million.
In addition to the bank letters of credit described in the “Credit facilities” subsection
above, the Company’s only other
off-balance
sheet arrangements include certain financial and other guarantees.
The Company’s total bank letters
of credit and guarantees
outstanding as of December 31, 2021 were approximately $
million.
The Company incurred the following debt related expenses included
within Interest expense, net, in the Consolidated Statements
of Income:
Year
Ended December 31,
Interest expense
$
19,089
$
23,552
$
16,788
Amortization of debt issuance costs
4,749
4,749
1,979
Total
$
23,838
$
28,301
$
18,767
Based on the variable interest rates associated with the Credit Facility,
as of December 31, 2021 and 2020, the amounts at which
the Company’s total debt were recorded
are not materially different from their fair market value.
At December 31, 2021, annual maturities on long-term borrowings maturing
in the next five fiscal years (excluding the reduction
to long-term debt attributed to capitalized and unamortized debt issuance costs)
are as follows:
$
56,978
75,765
758,241
Note 21 - Pension and Other Postretirement
Benefits
The following table shows the funded status of the Company’s
plans’ reconciled
with amounts reported in the Consolidated
Balance Sheets as of December 31, 2021 and 2020:
Other Post-
Pension Benefits
Retirement Benefits
Foreign
U.S.
Total
Foreign
U.S.
Total
U.S.
U.S.
Change in benefit obligation
Gross benefit obligation at beginning
of year
$
247,675
$
109,969
$
357,644
$
217,893
$
153,723
$
371,616
$
3,234
$
4,266
Service cost
1,245
4,340
4,831
Interest cost
2,594
1,737
4,331
3,416
2,923
6,339
Employee contributions
-
-
-
-
Effect of plan amendments
-
-
-
-
(78)
-
Curtailment gain
-
-
-
(2,324)
-
(2,324)
-
-
Plan settlements
(541)
-
(541)
(2,316)
(53,494)
(55,810)
-
-
Benefits paid
(6,869)
(5,064)
(11,933)
(5,087)
(6,138)
(11,225)
(182)
(250)
Plan expenses and premiums paid
(74)
-
(74)
(135)
-
(135)
-
-
Transfer in of business acquisition
-
-
-
-
-
-
Actuarial (gain) loss
(4,160)
(3,769)
(7,929)
16,834
12,414
29,248
(992)
(864)
Translation differences and other
(10,873)
-
(10,873)
14,981
-
14,981
-
-
Gross benefit obligation at end of year
$
228,752
$
103,420
$
332,172
$
247,675
$
109,969
$
357,644
$
2,010
$
3,234
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Other Post-
Pension Benefits
Retirement Benefits
Foreign
U.S.
Total
Foreign
U.S.
Total
U.S.
U.S.
Change in plan assets
Fair value of plan assets at
beginning of year
$
228,789
$
73,481
$
302,270
$
195,099
$
120,550
$
315,649
$
-
$
-
Actual return on plan assets
7,201
8,116
20,367
10,759
31,126
-
-
Employer contributions
4,289
2,063
6,352
6,912
2,302
9,214
Employee contributions
-
-
-
-
Plan settlements
(541)
-
(541)
(2,316)
(53,494)
(55,810)
-
-
Benefits paid
(6,869)
(5,065)
(11,934)
(5,087)
(6,138)
(11,225)
(182)
(250)
Plan expenses and premiums paid
(74)
-
(74)
(135)
(498)
(633)
-
-
Translation differences
(9,694)
-
(9,694)
13,876
-
13,876
-
-
Fair value of plan assets at end of year
$
216,886
$
77,680
$
294,566
$
228,789
$
73,481
$
302,270
$
-
$
-
Net benefit obligation recognized
$
(11,866)
$
(25,740)
$
(37,606)
$
(18,886)
$
(36,488)
$
(55,374)
$
(2,010)
$
(3,234)
Amounts recognized in the balance
sheet consist of:
Non-current assets
$
7,916
$
-
$
7,916
$
6,748
$
-
$
6,748
$
-
$
-
Current liabilities
(191)
(1,137)
(1,328)
(568)
(612)
(1,180)
(220)
(286)
Non-current liabilities
(19,591)
(24,603)
(44,194)
(25,066)
(35,876)
(60,942)
(1,790)
(2,948)
Net benefit obligation recognized
$
(11,866)
$
(25,740)
$
(37,606)
$
(18,886)
$
(36,488)
$
(55,374)
$
(2,010)
$
(3,234)
Amounts not yet reflected in net
periodic benefit costs and included in
accumulated other comprehensive loss:
Prior service (cost) credit
(22)
(26)
-
Accumulated (loss) gain
(19,163)
(9,763)
(28,926)
(21,976)
(5,532)
(27,508)
1,034
AOCI
(19,185)
(9,720)
(28,905)
(22,002)
(5,482)
(27,484)
1,080
Cumulative employer contributions
in excess of or (below) net
periodic benefit cost
7,319
(16,020)
(8,701)
3,116
(31,006)
(27,890)
(3,090)
(3,358)
Net benefit obligation recognized
$
(11,866)
$
(25,740)
$
(37,606)
$
(18,886)
$
(36,488)
$
(55,374)
$
(2,010)
$
(3,234)
The accumulated benefit obligation for all defined benefit pension plans was
$
321.5
million ($
103.4
million U.S. and $
218.1
million Foreign) and $
344.4
million ($
109.5
million U.S. and approximately $
234.9
million Foreign) as of December 31, 2021 and
2020, respectively.
Information for pension plans with an accumulated benefit obligation
in excess of plan assets:
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
138,963
$
103,420
$
242,383
$
32,373
$
109,969
$
142,342
Accumulated benefit obligation
128,268
103,420
231,688
30,892
109,540
140,432
Fair value of plan assets
119,181
77,680
196,861
18,074
73,481
91,555
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Information for pension plans with a projected benefit obligation
in excess of plan assets:
Foreign
U.S.
Total
Foreign
U.S.
Total
Projected benefit obligation
$
138,963
$
103,420
$
242,383
$
32,373
$
109,969
$
142,342
Fair value of plan assets
119,181
77,680
196,861
18,074
73,481
91,555
Components of net periodic benefit costs - pension plans:
Foreign
U.S.
Total
Foreign
U.S.
Total
Service cost
$
$
$
1,245
$
4,340
$
$
4,831
Interest cost
2,594
1,737
4,331
3,416
2,923
6,339
Expected return on plan assets
(4,686)
(3,611)
(8,297)
(4,262)
(4,810)
(9,072)
Settlement loss (gain)
-
(88)
22,667
22,579
Curtailment charge
-
-
-
(1,155)
-
(1,155)
Actuarial loss amortization
2,252
3,248
2,110
2,996
Prior service cost (credit)
amortization
(167)
-
(167)
Net periodic benefit (income) cost
$
(360)
$
$
$
2,970
$
23,381
$
26,351
Foreign
U.S.
Total
Service cost
$
3,507
$
$
3,941
Interest cost
3,046
3,313
6,359
Expected return on plan assets
(3,668)
(3,227)
(6,895)
Settlement loss
-
Actuarial loss amortization
2,348
3,105
Prior service credit amortization
(165)
-
(165)
Net periodic benefit cost
$
3,735
$
2,868
$
6,603
Other changes recognized in other comprehensive
income - pension plans:
Foreign
U.S.
Total
Foreign
U.S.
Total
Net (gain) loss arising during
the period
$
(388)
$
(448)
$
(836)
$
(1,594)
$
1,536
$
(58)
Effect of plan amendment
Recognition of amortization in net
periodic benefit cost
Settlement loss
(83)
(2,252)
(2,335)
(39)
(22,667)
(22,706)
Prior service (cost) credit
-
(7)
(7)
1,325
1,375
Actuarial (loss) gain
(954)
(6,925)
(7,879)
(758)
3,967
3,209
Curtailment Recognition
(3)
-
(3)
(3)
-
(3)
Effect of exchange rates on amounts
included in AOCI
(1,390)
-
(1,390)
1,535
-
1,535
Total recognized
in other
comprehensive (income) loss
(2,818)
(9,632)
(12,450)
(17,114)
(16,648)
Total recognized
in net periodic
benefit cost and other
comprehensive (income) loss
$
(3,178)
$
(8,700)
$
(11,878)
$
3,436
$
6,267
$
9,703
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Foreign
U.S.
Total
Net loss arising during period
$
3,826
$
3,926
$
7,752
Recognition of amortization in net periodic benefit
cost
Prior service credit
-
Actuarial loss
(1,015)
(2,347)
(3,362)
Effect of exchange rates on amounts included
in AOCI
(61)
-
(61)
Total recognized
in other comprehensive loss
2,946
1,579
4,525
Total recognized
in net periodic benefit cost and
other comprehensive loss
$
6,681
$
4,447
$
11,128
Components of net periodic benefit costs - other postretirement
plan:
Service cost
$
$
$
Interest cost
Actuarial loss amortization
(82)
(5)
-
Prior service credit amortization
(31)
-
-
Net periodic benefit costs
$
(85)
$
$
Other changes recognized in other comprehensive
income - other postretirement benefit plans:
Net (gain) loss arising during period
$
(992)
$
(864)
$
Recognition of amortizations in net periodic
benefit cost
(78)
-
-
Prior service credit
-
-
Actuarial gain amortization
-
Total recognized
in other comprehensive (income)
loss
(957)
(859)
Total recognized
in net periodic benefit cost and
other comprehensive (income) loss
$
(1,042)
$
(782)
$
Weighted-average
assumptions used to determine benefit obligations as of December 31, 2021 and 2020:
Other Postretirement
Pension Benefits
Benefits
U.S. Plans:
Discount rate
2.58
%
2.19
%
2.45
%
2.05
%
Rate of compensation increase
N/A
6.00
%
N/A
N/A
Foreign
Plans:
Discount rate
1.71
%
1.79
%
N/A
N/A
Rate of compensation increase
2.21
%
2.74
%
N/A
N/A
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Weighted-average
assumptions used to determine net periodic benefit costs for the years ended December 31,
2021 and
2020:
Other Postretirement
Pension Benefits
Benefits
U.S. Plans:
Discount rate
2.67
%
3.11
%
1.90
%
2.99
%
Expected long-term return on
plan assets
5.75
%
6.50
%
N/A
N/A
Rate of compensation increase
6.00
%
6.00
%
N/A
N/A
Foreign Plans:
Discount rate
1.38
%
2.30
%
N/A
N/A
Expected long-term return on
plan assets
2.06
%
2.20
%
N/A
N/A
Rate of compensation increase
2.52
%
2.79
%
N/A
N/A
The long-term rates of return on assets were selected from within the reasonable
range of rates determined by (a) historical real
returns for the asset classes covered by the investment policy and (b) projections
of inflation over the long-term period during which
benefits are payable to plan participants.
See Note 1 of Notes to Consolidated Financial Statements for further
information.
Assumed health care cost trend rates as of December
31, 2021 and 2020:
Health care cost trend rate for next year
5.65
%
5.70
%
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
4.00
%
4.50
%
Year
that the rate reaches the ultimate trend rate
Plan Assets and Fair Value
The Company’s pension plan
target asset allocation and the weighted-average asset allocations as of December
31, 2021 and 2020
by asset category were as follows:
Asset Category
Target
U.S. Plans
Equity securities
%
%
%
Debt securities
%
%
%
Other
%
%
%
Total
%
%
%
Foreign Plans
Equity securities
%
%
%
Debt securities
%
%
%
Other
%
%
%
Total
%
%
%
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
As of December 31, 2021 and 2020, “Other” consisted principally of cash
and cash equivalents, and investments in real estate
funds.
The following is a description of the valuation methodologies used for
the investments measured at fair value, including the
general classification of such instruments pursuant to the valuation
hierarchy,
where applicable:
Cash and
Cash Equivalents
Cash and
cash equivalents
consist
of cash and
money market
funds and
are classified
as Level
1 investments.
Commingled Funds
Investments
in the U.S.
pension
plan and
foreign
pension
plan commingled
funds represent
pooled institutional
investments,
including
primarily
collective
investment
trusts.
These commingled funds are not available on an exchange or in an active market
and these investments are valued using
their net
asset value
(“NAV”), which is
generally
based on
the underlying
asset values
of the
investments
held in the
trusts.
As of December 31, 2021, the foreign pension plan commingled funds
included approximately
percent of investments in
equity securities,
percent of investments in fixed income securities, and
percent of other non-related investments, primarily
real estate.
Pooled Separate
Accounts
Investments
in the U.S.
pension
plan pooled
separate
accounts
consist of
annuity
contracts
and are
valued based
on the reported
unit value
at year
end.
Units of
the pooled
separate
account
are not traded
on an exchange
or in an
active market;
however, valuation
is
based on
the underlying
investments
of each
pooled separate
account
and are
classified
as Level
2 investments.
As of December 31,
2021, the U.S. pension plan pooled separate accounts included approximately 49 percent of investments in equity securities and 51
percent of investments in fixed income securities.
Fixed Income
Government
Securities
Investments in foreign pension plans fixed income government securities were
valued using third party pricing services
which are based on a combination of quoted market prices on an exchange
in an active market as well as proprietary pricing
models and
inputs
using observable
market data
and are
classified
as Level
2 investments.
Insurance
Contract
Investments in the foreign pension plan insurance contract are valued at
the highest value available for the Company at year
end, either the reported cash surrender value of the contract or the vested benefit
obligation.
Both the cash surrender value and
the vested benefit obligation are determined based on unobservable inputs, which
are contractually or actuarially determined,
regarding returns, fees, the present value of the future cash flows of the contract
and benefit obligations.
The contract is classified
as a Level 3 investment.
Diversified
Equity
Securities
- Registered
Investment
Companies
Investments
in the foreign
pension
plans diversified
equity securities
of registered
investment
companies
are based
upon the
quoted redemption
value of
shares in
the fund
owned by
the plan
at year end.
The shares
of the fund
are not
available
on an exchange
or in an
active market;
however, the
fair value
is determined
based on
the underlying
investments
in the
fund as
traded on
an exchange
in an active
market and
are classified
as Level
2 investments.
Fixed Income
- Foreign Registered
Investment
Companies
Investments
in the foreign
pension
plans fixed
income securities
of foreign
registered
investment
companies
are based
upon the
quoted redemption
value of
shares in
the fund
owned by
the plan
at year end.
The shares
of the fund
are not
available
on an exchange
or in an
active market;
however, the
fair value
is determined
based on
the underlying
investments
in the
fund as
traded on
an exchange
in an active
market and
are classified
as Level
2 investments.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Diversified Investment Fund - Registered Investment
Companies
Investments
in the foreign
pension
plan diversified
investment
fund of
registered
investment
companies
are based
upon the
quoted
redemption
value of
shares in
the fund
owned by
the plan
at year
end.
This fund
is not available
on an exchange
or in an
active market
and this
investment
is valued
using its
NAV,
which is
generally
based on
the underlying
asset values
of the investments
held.
As of
December
31, 2021,
the diversified
investment
funds included
approximately
percent
of investments
in equity
securities,
percent
of investments
in fixed
income
securities,
and
percent
of other
alternative
investments.
Other - Alternative Investments
Investments
in the foreign
pension
plans include
certain other
alternative
investments
such as
inflation
and interest
rate swaps.
These investments
are valued
based on
unobservable
inputs,
which are
contractually
or actuarially
determined,
regarding
returns,
fees,
the present
value of
future cash
flows of
the contract
and benefit
obligations.
These alternative
investments
are classified
as Level
investments.
Real Estate
The U.S. and foreign pension plans’
investment in real estate consists of investments
in property funds.
The funds’
underlying investments consist of real property which are valued using unobservable
inputs.
These property
funds are classified
as a Level 3 investment.
As of December 31, 2021 and 2020, the U.S. and foreign plans’ investments
measured at fair value on a recurring basis were as
follows:
Fair Value
Measurements at December 31, 2021
Total
Using Fair Value
Hierarchy
U.S. Pension Assets
Fair Value
Level 1
Level 2
Level 3
Pooled separate accounts
$
72,721
$
-
$
72,721
$
-
Real estate
4,959
-
-
4,959
Subtotal U.S. pension plan assets in fair value hierarchy
$
77,680
$
-
$
72,721
$
4,959
Total U.S. pension
plan assets
$
77,680
Foreign Pension Assets
Cash and cash equivalents
$
1,989
$
1,989
$
-
$
-
Insurance contract
99,527
-
-
99,527
Diversified equity securities - registered investment companies
10,999
-
10,999
-
Fixed income - foreign registered investment companies
3,593
-
3,593
-
Fixed income government securities
35,339
-
35,339
-
Real estate
6,588
-
-
6,588
Other - alternative investments
6,979
-
-
6,979
Sub-total of foreign pension assets in fair value hierarchy
$
165,014
$
1,989
$
49,931
$
113,094
Commingled funds measured at NAV
2,300
Diversified investment fund -
registered investment
companies measured at NAV
49,572
Total foreign pension
assets
$
216,886
Total pension
assets in fair value hierarchy
$
242,694
$
1,989
$
122,652
$
118,053
Total pension
assets measured at NAV
51,872
Total pension
assets
$
294,566
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Fair Value
Measurements at December 31, 2020
Total
Using Fair Value
Hierarchy
U.S. Pension Assets
Fair Value
Level 1
Level 2
Level 3
Pooled separate accounts
$
69,385
$
-
$
69,385
$
-
Real estate
4,096
-
-
4,096
Subtotal U.S. pension plan assets in fair value hierarchy
$
73,481
$
-
$
69,385
$
4,096
Total U.S. pension
plan assets
$
73,481
Foreign Pension Assets
Cash and cash equivalents
$
$
$
-
$
-
Insurance contract
112,920
-
-
112,920
Diversified equity securities - registered investment companies
8,851
-
8,851
-
Fixed income - foreign registered investment companies
3,711
-
3,711
-
Fixed income government securities
37,579
-
37,579
-
Real estate
5,679
-
-
5,679
Other - alternative investments
10,638
-
-
10,638
Sub-total of foreign pension assets in fair value hierarchy
$
180,012
$
$
50,141
$
129,237
Commingled funds measured at NAV
2,368
Diversified investment fund -
registered investment
companies measured at NAV
46,409
Total foreign pension
assets
$
228,789
Total pension
assets in fair value hierarchy
$
253,493
$
$
119,526
$
133,333
Total pension
assets measured at NAV
48,777
Total pension
assets
$
302,270
Certain investments that are measured at fair value using the NAV
per share (or its equivalent) have not been classified in the fair
value hierarchy.
The fair value amounts presented for these investments in the preceding
tables are intended to permit reconciliation
of the fair value hierarchies to the line items presented in the statements of net assets available
for benefits.
Changes in the fair value of the plans’ Level 3 investments during the years
ended December 31, 2021 and 2020 were as follows:
Insurance
Alternative
Contract
Real Estate
Investments
Total
Balance as of December 31, 2019
$
92,657
$
9,581
$
9,436
$
111,674
Purchases
3,902
4,909
Settlements
(2,027)
-
-
(2,027)
Unrealized gains (losses)
8,917
(16)
(171)
8,730
Currency translation adjustment
9,471
10,047
Balance as of December 31, 2020
112,920
9,775
10,638
133,333
Purchases
1,722
(78)
(334)
1,310
Settlements
(1,812)
-
-
(1,812)
Unrealized (losses) gains
(5,031)
1,926
(3,282)
(6,387)
Currency translation adjustment
(8,272)
(76)
(43)
(8,391)
Balance as of December
31, 2021
$
99,527
$
11,547
$
6,979
$
118,053
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
In the fourth quarter of 2018, the Company began the process of terminating
its Legacy Quaker noncontributory U.S. pension
plan (“Legacy Quaker U.S. Pension Plan”).
During the third quarter of 2019, the Company received a favorable termination
determination letter from the I.R.S. and completed the Legacy Quaker
U.S. Pension Plan termination during the first quarter of 2020.
In order to terminate the Legacy Quaker U.S. Pension Plan in accordance
with I.R.S. and Pension Benefit Guaranty Corporation
requirements, the Company was required to fully fund the Legacy Quaker
U.S. Pension Plan on a termination basis and the amount
necessary to do so was approximately $
1.8
million, subject to final true up adjustments.
In the third quarter of 2020, the Company
finalized the amount of the liability and related annuity payments and
received a refund in premium of approximately $
1.6
million.
In
addition, the Company recorded a non-cash pension settlement charge
at plan termination of approximately $
22.7
million.
This
settlement charge included the immediate recognition
into expense of the related unrecognized losses within AOCI on the balance
sheet as of the plan termination date.
In connection with the Combination, the Company indirectly acquired all of
Houghton’s defined benefit pension
plans, which are
included in the tables set forth above.
The pension plans cover certain U.S. salaried and hourly employees
as well as certain
employees in the U.K., France and Germany.
The Houghton U.S. plans provide benefits based on an employee’s
years of service and
compensation received for the highest five consecutive years of
earnings.
The foreign plans provide benefits based on a formula of
years and service and a percentage of compensation which varies among
the various countries.
The Company contributes to a multiemployer defined benefit pension
plan under terms of a collective bargaining union contract
(the Cleveland Bakers and Teamsters
Pension Fund, Employer Identification Number: 34-0904419-001).
The expiration date of the
collective bargaining contract is
May 1, 2022
.
As of January 1, 2020, the last valuation date available for the multiemployer plan,
total plan liabilities were approximately $
million.
As of December 31, 2020, the multiemployer pension plan had total plan assets
of approximately $
million.
The Company’s contribution
rate to the multiemployer pension plan is specified in the collective
bargaining union contract and contributions are made
to the plan based on its union employee payroll.
The Company contributed $
0.2
million during the year ended December 31, 2021.
The Employee Retirement Income Security Act of 1974, as amended by
the Multi-
Employer Pension Plan Amendments Act of 1980, imposes certain contingent
liabilities upon an employer who is a contributor to a
multiemployer pension plan if the employer withdraws from the plan
or the plan is terminated or experiences a mass withdrawal.
While the Company may also have additional liabilities imposed by
law as a result of its participation in the multiemployer defined
benefit pension plan, there is
no
liability as of December 31, 2021.
The Pension Protection Act of 2006 (the “PPA”)
also added special funding and operational rules generally applicable to plan
years beginning after 2007 for multiemployer plans with certain classifications based
on a multitude of factors (including, for
example, the plan’s funded
percentage, cash flow position and whether the plan is projected to experience
a minimum funding
deficiency).
The plan to which the Company contributes is in “critical” status.
Plans in the “critical” status classification must adopt
measures to improve their funded status through a funding improvement
or rehabilitation plan which may require additional
contributions from employers (which may take the form of a surcharge
on benefit contributions) and/or modifications to retiree
benefits.
The amount of additional funds that the Company may be obligated to contribute to the
plan in the future cannot be
estimated as such amounts will be likely based on future levels of work
that require the specific use of those union employees covered
by the plan, and the amount of that future work and the number of affected
employees that may be needed is not reasonably estimable.
Cash Flows
Contributions
The Company expects to make minimum cash contributions of approximately$
10.6
million to its pension plans (approximately
$
6.6
million U.S. and $
4.0
million Foreign) and approximately $
0.2
million to its other postretirement benefit plan in 2022.
Estimated Future Benefit Payments
Excluding any impact related to the PPA
noted above, the following benefit payments, which reflect expected
future service, as
appropriate, are expected to be paid:
Other Post-
Pension Benefits
Retirement
Foreign
U.S.
Total
Benefits
$
6,678
$
6,627
$
13,305
$
6,661
6,043
12,704
6,475
6,205
12,680
6,984
6,199
13,183
7,702
6,213
13,915
2027 to 2031
42,577
30,169
72,746
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The Company maintains a plan under which supplemental retirement benefits
are provided to certain officers.
Benefits payable
under the plan are based on a combination of years of service and existing
postretirement benefits.
Included in total pension costs are
charges of $
3.0
million, $
2.5
million and $
1.8
million for the years ended December 31, 2021, 2020 and 2019, respectively,
representing the annual accrued benefits under this plan.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering
a majority of its U.S. employees.
The plan allows for and the
Company previously paid a nonelective contribution on behalf of participants
who have completed one year of service equal to 3% of
the eligible participants’ compensation in the form of Company common
stock.
During 2019 and 2018, the Company made both non-
elective and elective 401(k) matching contributions in cash, rather than stock.
Beginning in April 2020 and continuing through March
2021,
the Company matched both non-elective and elective 401(k) contributions
in fully vested shared of the Company’s common
stock rather than cash.
See Note 8 of Notes to Consolidated Financial Statements.
Total Company
contributions were $
4.8
million,
$
5.7
million and $
4.0
million for the years ended December 31, 2021, 2020 and 2019, respectively.
Note 22 - Other Non-Current Liabilities
Other non-current liabilities as of December 31, 2021 and 2020 were
as follows:
Uncertain tax positions (includes interest and penalties)
$
28,665
$
28,961
Non-current income taxes payable
8,500
8,500
Deferred and other long-term compensation
6,388
6,257
Environmental reserves
4,424
4,610
Inactive subsidiary litigation and settlement reserve
Fair value of interest rate swaps
-
4,672
Other
1,228
1,627
Total other non
-current liabilities
$
49,615
$
55,169
The Fair value of interest rate swaps as of December 31, 2021 has been reclassified to
other accrued liabilities in connection with
the expiration of the swap contract in November 2022.
See Notes 19 and 25 of Notes to Consolidated Financial Statements.
Note 23 - Equity and Accumulated Other Comprehensive Loss
The Company has
30,000,000
shares of common stock authorized with a par value of $
, and
17,897,033
and
17,850,616
shares
issued and outstanding as of December 31, 2021 and 2020, respectively.
The change in shares issued and outstanding during 2021
was primarily related to
29,415
shares issued for share-based compensation plans and
17,002
shares issued for the exercise of stock
options and other share activity.
The Company is authorized to issue
10,000,000
shares of preferred stock with $
par value, subject to approval by the Board.
The Board may designate one or more series of preferred stock and
the number of shares, rights, preferences, and limitations of each
series.
As of December 31, 2021,
no
preferred stock had been issued.
The Company has a share repurchase program that was approved by its Board
in 2015 for the repurchase of up to $
100.0
million
of Quaker Chemical Corporation common stock.
The Company has
no
t repurchased any shares under the program for the years ended
December 31, 2021, 2020 and 2019.
As of December 31, 2021, there was approximately $
86.9
million of common stock remaining to
be purchased under this share repurchase program.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
The following table shows the reclassifications from and resulting balances
of AOCI for the years ended December 31, 2021,
2020 and 2019:
Defined
Unrealized
Gain (Loss) in
Currency
Benefit
Translation
Pension
Available-for-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance as of December 31, 2018
$
(49,322)
$
(30,551)
$
(842)
$
-
$
(80,715)
Other comprehensive income (loss) before
reclassifications
4,754
(8,088)
2,951
(415)
(798)
Amounts reclassified from AOCI
-
3,169
(301)
-
2,868
Related tax amounts
-
(557)
Balance as of December 31, 2019
(44,568)
(34,533)
1,251
(320)
(78,170)
Other comprehensive income (loss) before
reclassifications
41,693
(6,617)
2,848
(4,257)
33,667
Amounts reclassified from AOCI
-
24,141
(202)
-
23,939
Related tax amounts
-
(6,458)
(555)
(6,034)
Balance as of December 31, 2020
(2,875)
(23,467)
3,342
(3,598)
(26,598)
Other comprehensive (loss) income before
reclassifications
(46,968)
11,948
(531)
2,890
(32,661)
Amounts reclassified from AOCI
-
1,459
(3,197)
-
(1,738)
Related tax amounts
-
(3,112)
(664)
(2,993)
Balance as of December 31, 2021
$
(49,843)
$
(13,172)
$
$
(1,372)
$
(63,990)
All reclassifications related to unrealized gain (loss) in available-for-sale securities relate
to the Company’s equity
interest in a
captive insurance company and are recorded in equity in net income
of associated companies.
The amounts reported in other
comprehensive income for non-controlling interest are related to
currency translation adjustments.
Note 24 - Fair Value
Measures
The Company has valued its company-owned life insurance policies at fair value.
These assets are subject to fair value
measurement as follows:
Fair Value
Measurements at December 31, 2021
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
2,533
$
-
$
2,533
$
-
Total
$
2,533
$
-
$
2,533
$
-
Fair Value
Measurements at December 31, 2020
Total
Using Fair Value
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,961
$
-
$
1,961
$
-
Total
$
1,961
$
-
$
1,961
$
-
The fair values of Company-owned life insurance assets are based on quotes
for like instruments with similar credit ratings and
terms.
The Company did not hold any Level 3 investments as of December 31,
2021 or 2020, respectively,
so related disclosures have
not been included.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
Note 25 - Hedging Activities
In order to satisfy certain requirements of the Credit Facility as well as to manage the
Company’s exposure to variable
interest
rate risk associated with the Credit Facility,
in November 2019, the Company entered into $
170.0
million notional amounts of three
year interest rate swaps.
See Note 20 of Notes to Consolidated Financial Statements.
These interest rate swaps are designated as cash
flow hedges and, as such, the contracts are marked-to-market at each reporting
date and any unrealized gains or losses are included in
AOCI to the extent effective and reclassified to interest
expense in the period during which the transaction effects earnings or
it
becomes probable that the forecasted transaction will not occur.
The balance sheet classification and fair values of the Company’s
derivative instruments, which are Level 2 measurements, are as
follows:
Fair Value
Consolidated Balance Sheet
December 31,
Location
Derivatives designated as cash flow hedges:
Interest rate swaps
Other accrued liabilities
$
1,782
$
-
Other non-current liabilities
-
4,672
$
1,782
$
4,672
The following table presents the net unrealized loss deferred to AOCI:
December 31,
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
1,372
$
3,598
$
1,372
$
3,598
The following table presents the net loss reclassified from AOCI to earnings:
For the Years
Ended
December 31,
Amount and location of (expense) income reclassified
from AOCI into (expense) income (Effective Portion)
Interest expense, net
$
(2,649)
$
(1,754)
$
Interest rate swaps are entered into with a limited number of counterparties,
each of which allows for net settlement of all
contracts through a single payment in a single currency in the event of a default on
or termination of any one contract.
As such, in
accordance with the Company’s accounting
policy, these derivative instruments
are recorded on a net basis within the Consolidated
Balance Sheets.
Note 26 - Commitments and Contingencies
In 1992, the Company identified certain soil and groundwater contamination
at AC Products, Inc. (“ACP”), a wholly owned
subsidiary.
In voluntary coordination with the Santa Ana California Regional Water
Quality Board, ACP has been remediating the
contamination, the principal contaminant of which is perchloroethylene
(“PERC”).
In 2004, the Orange County Water
District
(“OCWD”) filed a civil complaint against ACP and other parties seeking
to recover compensatory and other damages related to the
investigation and remediation of the contamination in the groundwater.
Pursuant to a settlement agreement with OCWD, ACP agreed,
among other things, to operate the two groundwater treatment systems to hydraulically
contain groundwater contamination emanating
from ACP’s site until the concentrations
of PERC released by ACP fell below the current Federal maximum contaminant level for
four consecutive quarterly sampling events.
In 2014, ACP ceased operation at one of its two groundwater treatment systems,
as it had
met the above condition for closure.
In 2020, the Santa Ana Regional Water
Quality Control Board asked that ACP conduct some
additional indoor and outdoor soil vapor testing on and near the ACP site to confirm
that ACP continues to meet the applicable local
standards and ACP performed such testing program
work in 2021 and will continue into 2022.
As of December 31, 2021, ACP
believes it is close to meeting the conditions for closure of the remaining groundwater
treatment system but continues to operate this
system while in discussions with the relevant authorities.
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
As of December 31, 2021, the Company believes that the range of potential
-known liabilities associated with the balance of ACP
water remediation program is approximately $
0.1
million to $
1.0
million.
The low and high ends of the range are based on the length
of operation of the treatment system as determined by groundwater modeling.
Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring and
program management.
An inactive subsidiary of the Company that was acquired in 1978
sold certain products containing asbestos, primarily on an
installed basis, and is among the defendants in numerous lawsuits alleging injury
due to exposure to asbestos.
The subsidiary
discontinued operations in 1991 and has no remaining assets other than
proceeds received from insurance settlements.
To date, the
overwhelming majority of these claims have been disposed of without
payment and there have been no adverse judgments against the
subsidiary.
Based on a continued analysis of the existing and anticipated future claims against this subsidiary,
it is currently projected
that the subsidiary’s total liability over
the next 50 years for these claims is approximately $
0.4
million (excluding costs of defense).
Although the Company has also been named as a defendant in certain of these
cases, no claims have been actively pursued against the
Company, and the
Company has not contributed to the defense or settlement of any of these cases pursued against
the subsidiary.
These cases were originally handled by the subsidiary’s
primary and excess insurers who had agreed in 1997 to pay all defense
costs and be responsible for all damages assessed against the subsidiary arising
out of existing and future asbestos claims up to the
aggregate limits of their policies.
A significant portion of this primary insurance coverage was provided
by an insurer that is
insolvent, and the other primary insurers asserted that the aggregate limits
of their policies had been exhausted.
The subsidiary
challenged the applicability of these limits to the claims being brought
against the subsidiary.
In response, two of the three carriers
entered into separate settlement and release agreements with the subsidiary
in 2005 and 2007 for $
15.0
million and $
20.0
million,
respectively.
In 2007, the subsidiary and the remaining primary insurance carrier
entered into a Claim Handling and Funding Agreement, under
which the carrier is paying
% of defense and indemnity costs incurred by or on behalf of the subsidiary
in connection with asbestos
bodily injury claims.
The agreement continues until terminated and can only be terminated by either party
by providing a minimum of
two years prior written notice.
As of December 31, 2021, no notice of termination has been given under
this agreement.
At the end of the term of the agreement, the subsidiary
may choose to again pursue its claim against this insurer regarding the
application of the policy limits.
The Company believes that, if the coverage issues under the primary policies with
the remaining
carrier are resolved adversely to the subsidiary and
all settlement proceeds were used, the subsidiary may have limited additional
coverage from a state guarantee fund established following the insolvency
of one of the subsidiary’s primary
insurers.
Nevertheless,
liabilities in respect of claims may exceed
the assets and coverage available to the subsidiary.
If the subsidiary’s assets and insurance
coverage were to be exhausted, claimants of the subsidiary may actively pursue claims
against the Company because of the parent-subsidiary relationship.
The Company does not believe that such claims would have merit
or that the Company would be held to have liability for any unsatisfied obligations
of the subsidiary as a result of such claims.
After
evaluating the nature of the claims filed against the subsidiary
and the small number of such claims that have resulted in any payment,
the potential availability of additional insurance coverage at the subsidiary
level, the additional availability of the Company’s
own
insurance and the Company’s strong
defenses to claims that it should be held responsible for the subsidiary’s
obligations because of
the parent-subsidiary relationship, the Company believes it is not probable
that the Company will incur losses.
The Company has
been successful to date having claims naming it dismissed during
initial proceedings.
Since the Company may be in this stage of
litigation for some time, it is not possible to estimate additional losses or range of
loss, if any.
The Company is party to environmental matters related to certain domestic
and foreign properties.
These environmental matters
primarily require the Company to perform long-term monitoring
as well as operating and maintenance at each of the applicable sites.
During the year ended December 31, 2021, there have been no significant
changes to the facts or circumstances of these matters, aside
from ongoing monitoring and maintenance activities and routine payments
associated with each of these sites.
The Company
continually evaluates its obligations related to such matters, and
based on historical costs incurred and projected costs to be incurred
over the next 27 years, has estimated the present value range of costs for
all of these environmental matters, on a discounted basis, to
be between approximately $
5.0
million and $
6.0
million as of December 31, 2021, for which $
5.6
million is accrued within other
accrued liabilities and other non-current liabilities on the Company’s
Consolidated Balance Sheet as of December 31, 2021.
Comparatively,
as of December 31, 2020, the Company had $
6.0
million accrued for with respect to these matters.
The Company’s Sao Paulo,
Brazil site was required under Brazilian environmental, health and safety regulations
to perform an
environmental assessment as part of a permit renewal process.
Initial investigations identified soil and ground water contamination
in
select areas of the site.
The site has conducted a multi-year soil and groundwater investigation and corresponding
risk assessments
based on the result of the investigations.
In 2017, the site had to submit a new 5-year permit renewal request and was asked to
complete additional investigations to further delineate the site based on review
of the technical data by the local regulatory agency,
Companhia Ambiental do Estado de São Paulo (“CETESB”).
Based on review of the updated investigation data, CETESB issued a
Technical Opinion
regarding the investigation and remedial actions taken to date.
The site developed an action plan and submitted it
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
to CETESB in 2018 based on CETESB requirements.
The site intervention plan primarily requires the site, amongst other actions,
to
conduct periodic monitoring for methane in soil vapors, source zone
delineation, groundwater plume delineation, bedrock aquifer
assessment, update the human health risk assessment, develop a current
site conceptual model and conduct a remedial feasibility study
and provide a revised intervention plan.
In 2019, the site submitted a report on the activities completed including the revised site
conceptual model and results of the remedial feasibility study and recommended
remedial strategy for the site.
Other environmental matters include participation in certain payments
in connection with four currently active environmental
consent orders related to certain hazardous waste cleanup activities under
the U.S. Federal Superfund statute.
The Company has been
designated a potentially responsible party (“PRP”) by the Environmental
Protection Agency along with other PRPs depending on the
site, and has other obligations to perform cleanup activities at certain
other foreign subsidiaries.
These environmental matters
primarily require the Company to perform long-term monitoring
as well as operating and maintenance at each of the applicable sites.
The Company believes, although there can be no assurance regarding the
outcome of other unrelated environmental matters, that
it has made adequate accruals for costs associated with other environmental
problems of which it is aware.
Approximately $
0.4
million and $
0.1
million were accrued as of December 31, 2021 and 2020, respectively,
to provide for such anticipated future
environmental assessments and remediation costs.
During the fourth quarter of 2020, one of the Company’s
subsidiaries received a notice of inspection from a taxing authority in a
country where certain of its subsidiaries operate which related to a non-income
(indirect) tax that may be applicable to certain products
the subsidiary sells.
During the third quarter of 2021, the Company’s
subsidiary received notice from the
taxing authority that the
inspection was closed, with no tax assessment issued.
Based on this development, during the third quarter of 2021, the Company
reversed its previously recorded $
1.8
million liability related to this matter.
The Company also reversed the associated $
1.1
million
indemnification receivable, as the asserted tax liability in part related
to a Houghton entity acquired in the Combination and for the
periods prior to the Combination, for which the Company would have rights to indemnification
from Houghton’s former owners.
Based on all available information as of the date of this report, the Company
does not anticipate further tax liabilities related to this
matter to be asserted by the taxing authority.
During 2021, one of the Company’s
Brazilian subsidiaries received a notice that it had prevailed on an existing
legal claim in
regard to certain non-income (indirect) taxes that had been previously
charged and paid.
The matter specifically relates to companies’
rights to exclude the state tax on goods circulation
(a valued-added-tax or
VAT
equivalent, known in Brazil as “ICMS”) from the
calculation of certain additional indirect taxes (specifically the program of
social integration (“PIS”) and contribution for the financing
of social security (“COFINS”)) levied by the Brazilian States on the sale of goods.
In May 2021, the Brazilian Supreme Court
concluded that ICMS should not be included in the tax base of PIS and
COFINS, and confirmed the methodology for calculating the
PIS and COFINS tax credit claims to which taxpayers are entitled.
The Company’s Brazilian entities had
previously filed legal or
administrative disputes on this matter and are entitled to receive tax credits and
interest dating back to five years preceding the date of
their legal claims.
As a result of these court rulings, during the second quarter of 2021,
the Company recognized non-income tax
credits of
67.0
million BRL or approximately $
13.3
million, which included approximately $
8.4
million for the PIS and COFINS tax
credits as well as interest on these tax credits of $
4.9
million, and is recorded within prepaid and other current assets on the
Company’s Consolidated
Balance Sheet.
The tax credits to which the Company’s
Brazilian subsidiaries are entitled are claimable
once registered with the Brazilian tax authorities.
The Company submitted its formal claim for tax credits in October 2021.
These tax
credits can be used to offset future Brazilian federal taxes and
the Company currently anticipates using the full amount of credits
during the five year period of time permitted.
During the third quarter of 2021, the Brazilian Supreme Court ruled that interest income
to which companies are entitled for matters such as this claim should not be
taxable, which resulted in a reduction to the estimated
income tax expense associated with the tax credits recorded.
In connection with obtaining regulatory approvals for the Combination,
certain steel and aluminum related product lines of
Houghton were divested in August 2019.
In July 2021, the entity that acquired these divested product lines submitted an
indemnification claim for certain alleged breaches of representation made
by Houghton in the agreement pursuant to which such assets
had been divested.
The Company and the acquirer have agreed to extend the period for
a possible negotiated resolution of this claim
through March 31, 2022 so that both parties can evaluate the other’s
positions with respect to the subject matters of the claim.
The
Company is evaluating the merits of the alleged losses in the indemnification
claim received.
As of the date of this Report, the
Company does not believe it is reasonably possible to determine or quantify
any possible exposure.
During the third quarter of 2021, two of the Company’s
locations suffered property damages as a result of flooding and fire,
respectively.
The Company maintains property insurance for all of its facilities globally.
In Conshohocken, Pennsylvania, the
Company’s global headquarters
as well as its laboratory experienced property damages as a result of flooding from
Hurricane Ida.
Also, one of the Company’s North
American production facilities in its Global Specialty Businesses segment experienced an
electrical
fire that resulted in damage and the temporary shutdown of production,
and also required remediation, cleaning and subsequent
restoration.
The Company, its insurance
adjuster and insurance carrier are actively managing the remediation and restoration activities
associated with these events and at this time the Company has concluded, based
on all available information and discussions with its
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- Continued
(
Dollars in thousands, except per share amounts, unless otherwise stated
)
insurance adjuster and insurance carrier,
that the losses incurred during the third quarter of 2021 will be covered under
the Company’s
property insurance coverage, net of an aggregate deductible of $
2.0
million.
The Company has received payments from its insurers of
$
2.1
million and has recorded an insurance receivable associated with these events
(and a gain on insurance recoveries for losses
incurred) of $
0.7
million as of December 31, 2021.
The Company and its insurance carrier are in early stages of reviewing the impact
of the electrical fire on the production facility’s
operations as it relates to a potential business interruption insurance claim; however,
as of the date of this Report, the Company cannot reasonably estimate any probable
amount of business interruption insurance claim
recoverable, therefore the Company has not recorded a gain contingency
for a possible business interruption insurance claim as of
December 31, 2021.
The Company is party to other litigation which management currently
believes will not have a material adverse effect on the
Company’s results of operations,
cash flows or financial condition. In addition, the Company has an
immaterial amount of contractual
purchase obligations.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not Applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), our management,
including our principal executive officer and principal
financial officer, has evaluated the effectiveness
of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this report.
Based on that
evaluation, our principal executive officer and our principal
financial officer have concluded that, as of December
31, 2021, the end of
the period covered by this Report, our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) were
effective.
Management’s Report on Internal Control
over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is
defined in Rule 13a-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements.
Also,
projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of
changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.
Our management, with the participation of our principal executive officer
and principal financial officer,
assessed the
effectiveness of the Company’s
internal control over financial reporting as of December 31, 2021.
In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in
Internal
Control-Integrated Framework
(2013) (the “COSO framework”).
Based on its assessment, management has concluded that as of
December 31, 2021, the Company’s
internal control over financial reporting is effective based on those
criteria.
Management has excluded the internal controls of Grindaix GmbH and
Baron Industries from our assessment of internal control
over financial reporting as of December 31, 2021, because these entities were acquired
by the Company in purchase business
combinations in September and November 2021, respectively.
Grindaix GmbH and Baron Industries are wholly owned subsidiaries
whose total assets and total revenues excluded from our assessment of internal
control over financial reporting each represent less than
1% of the related consolidated financial statement amounts as of and for
the year ended December 31, 2021.
The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2021 has been
audited by
PricewaterhouseCoopers LLP,
an independent registered public accounting firm, as stated in its report which is included
in “Item 8.
Financial Statements and Supplementary Data.”
Remediation of the Previously Identified Material Weaknesses
As disclosed in “Item 9A. Controls and Procedures.” in the Company’s
2020 Form 10-K, we previously identified certain
deficiencies in our application of the principles associated with the COSO framework
that management concluded constituted material
weaknesses.
We did not
design and maintain effective controls in response to the risks of material
misstatement.
Specifically,
changes to existing controls or the implementation of new controls were not
sufficient to respond to changes to the risks of material
misstatement in financial reporting as a result of becoming a larger,
more complex global organization due to the Combination.
This
material weakness also contributed to an additional material weakness as we did
not design and maintain effective controls over
the
review of pricing, quantity and customer data to verify that revenue
recognized was complete and accurate.
The Company and its Board of Directors are committed to maintaining a strong
internal control environment.
Since identifying
the material weaknesses, the Company has dedicated a significant amount
of time and resources to remediate all of the previously
identified material weaknesses as quickly and effectively
as possible.
During 2020 and 2021, the Company dedicated multiple
internal resources and supplemented those internal resources with various
third-party specialists to assist with the formalization of a
robust and detailed remediation plan.
In undertaking remediation activities, the Company has hired
additional personnel dedicated to
financial and information technology compliance to further supplement
its internal resources. In addition, the Company has
established a global network of personnel to assist local management
in understanding control performance and documentation
requirements.
In order to sustain this network, the Company conducts periodic trainings
and hosts discussions to address questions on
a current basis.
Risk Assessment -
Specific to the material weakness in our risk assessment process that was previously
disclosed in
“Item 9A.
Controls and Procedures.”
in the Company’s 2020 Form
10-K, we previously determined that our risk assessment process was not
designed adequately to respond to changes to the risks of material misstatement to
financial reporting.
In order to remediate this
material weakness, we have designed and implemented an improved
risk assessment process, including identifying and assessing
those risks attendant to the significant changes within the Company as a result of
becoming a larger, more
complex global
organization due to the Combination.
During 2020 and in 2021, a full review was performed of our processes and
controls across
significant and other locations in order to identify and address potential design
gaps.
In addition to individual transactional-level
control enhancements, this review resulted in (i) an enhanced financial statement
risk assessment, (ii) the standardization of existing
legal entity and newly implemented segment quarterly analytics and quarterly
closing packages completed by key financial reporting
personnel, (iii) a global account reconciliation review program and
(iv) enhancements to our quarterly identification and reassessment
of new and existing business and information technology risks that could
affect our financial reporting.
Monitoring is also performed
through our enhanced quarterly controls certification process, whereby
changes in business or information technology processes
or
control owners are identified and addressed timely.
As previously disclosed in the 2020 Form 10-K, this material weakness
remediation was also dependent on the remediation of the Revenue -
Price and Quantity material weakness. During the fourth quarter
of 2021, we completed testing of the operating effectiveness of
the controls (including Revenue-
Price and Quantity) and have
concluded that the material weakness has been remediated as of
December 31, 2021.
Revenue - Price and Quantity -
Specific to the material weakness in our revenue process that was previously
disclosed in
“Item 9A.
Controls and Procedures.”
in the Company’s 2020 Form 10-K,
we did not design and maintain effective controls over the review of
pricing, quantity and customer data to verify that revenue recognized was complete
and accurate.
In order to remediate this material
weakness, the Company redesigned certain aspects of its revenue process and
related controls.
The design included enhancements to
entity-level and transactional-level manual controls as well as IT general
and application controls, which were substantially
implemented during the third quarter of 2021.
During the fourth quarter of 2021, we completed testing of the operating effectiveness
of the controls and have concluded that the material weakness has been remediated
as of December 31, 2021.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management,
including our principal executive officer and principal
financial officer, has evaluated
our internal control over financial reporting to determine whether
any changes to our internal control
over financial reporting occurred during the fourth quarter of the year ended
December 31, 2021, that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Based on that evaluation, there were no changes
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting
during the
fourth quarter of the year ended December 31, 2021.

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information.
Not applicable.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance.
Incorporated by reference is (i) the information beginning
with and including the caption “Proposal 1-Election of Directors and
Nominee Biographies” in Quaker Houghton’s
definitive Proxy Statement relating to the 2022 Annual Meeting of
Shareholders, to be
filed with the Securities and Exchange Commission no later than
120 days after the close of its fiscal year ended December 31, 2021
(the “2022 Proxy Statement”) to, but not including, the sub-caption
“Governance Committee Procedures for Selecting Director
Nominees,” (ii) the information appearing in Item 4(a) of this Report, (iii)
the information in the 2022 Proxy Statement beginning with
and including the sub-caption “Code of Conduct” to, but not including,
the caption “Compensation Committee Interlocks and Insider
Participation,” and (iv) the information in the 2022 Proxy Statement beginning
with and including the sub-caption “Shareholder
Nominations and Recommendations” to, but not including,
the sub-caption “Board Oversight of Risk.”
Information about our
Executive Officers is included in Item 4(a) of this Report.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation.
Incorporated by reference is (i) the information in the 2022 Proxy
Statement beginning with and including the caption
“Compensation Committee Interlocks and Insider Participation” to, but
not including the caption “Stock Ownership of Certain
Beneficial Owners and Management.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Incorporated by reference is the information in the 2022 Proxy Statement
beginning with and including the caption “Stock
Ownership of Certain Beneficial Owners and Management” to, but not including,
the caption “Certain Relationships and Related
Transactions.”
Equity Compensation Plans
The following table sets forth certain information relating to the Company’s
equity compensation plans as of December 31, 2021.
Each number of securities reflected in the table is a reference to shares of Quaker
common stock.
Equity Compensation Plan Information
Number of securities
Number of securities
remaining available for
to be issued upon
Weighted-average
future issuance under
exercise of
exercise price of
equity compensation plans
outstanding options,
outstanding options,
(excluding securities
Plan Category
warrants and rights
warrants and rights
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved
by security holders
109,684
$
165.47
606,155
(1)
Equity compensation plans not approved
by security holders
-
-
-
Total
109,684
$
165.47
606,155
(1)
(1)
As of December 31, 2021, 304,900 of these shares were available for issuance
as restricted stock awards under the Company’s
2001 Global Annual Incentive Plan, 240,004 shares were available for
issuance upon the exercise of stock options and/or as
restricted stock awards and/or restricted stock unit awards under the Company’s
2016 Long-Term Performance
Incentive Plan, and
61,251 shares were available for issuance under the 2013 Director Stock
Ownership Plan.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and
Director Independence.
Incorporated by reference is (i) the information in the 2022 Proxy
Statement beginning with and including the caption “Certain
Relationships and Related Party Transactions”
to, but not including, the caption “Proposal 2 - Ratification of Appointment of
Independent Registered Public Accounting Firm,” (ii) the
information in the 2022 Proxy Statement beginning with and including the
sub-caption “Director Independence” to, but not including, the
sub-caption “Governance Committee Procedures for Selecting Director
Nominees,” and (iii) the information in the 2022 Proxy Statement beginning
with and including the caption “Meetings and
Committees of the Board” to, but not including, the caption “Compensation
Committee Interlocks and Insider Participation.”

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services.
Incorporated by reference is the information in the 2022 Proxy Statement
beginning with and including the sub-caption “Audit
Fees” to, but not including, the statement recommending a vote for ratification
of the appointment of PricewaterhouseCoopers LLP as
the Company’s independent
registered public accounting firm for the year ending December 31, 2022.
PART
IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules.
(a)
Exhibits and Financial Statement Schedules
1.
Financial Statements and Supplementary Data
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
Financial statements of 50% or less owned companies have been omitted because none
of the companies meets the criteria
requiring inclusion of such statements.
3.
Exhibits - filed pursuant to, and numbered in accordance
with Item 601 of Regulation S-K (all of which are under
Commission File number 001-12019, except as otherwise noted):
2.1 -
Share Purchase Agreement, dated April 4, 2017, by and among Quaker Chemical Corporation, a Pennsylvania
corporation, Gulf Houghton Lubricants, Ltd., an exempted company incorporated under the laws of the Cayman Islands,
Global Houghton Ltd., an exempted company incorporated under the laws of the Cayman Islands, and certain members
of the management of Global Houghton Ltd. and Gulf Houghton Lubricants, Ltd., as agent for the Sellers. Incorporated
by reference to Exhibit 10.1 as filed by the Registrant with Form 8-K, filed on April 5, 2017. ***
3.1 -
Amended and Restated Articles of Incorporation (as amended through July 24, 2019). Incorporated by reference to
Exhibit 3.1 as filed by the Registrant with its quarterly report on Form 10-Q on August 1, 2019.
3.2 -
Restated By-laws (effective May 6, 2015, as amended through March 27, 2020). Incorporated by reference to Exhibit
3.2 as filed by Registrant within its quarterly report on Form 10-Q on May 11, 2020.
4.1 -
Registration Rights, dated August 1, 2019, issued to certain members of the management of Global Houghton Ltd. and
Gulf Houghton Lubricants, Ltd. by Quaker Chemical Corporation. Incorporated by reference to Exhibit 4.5 as filed by
Registrant on Form S-3 on August 29, 2019
.
4.2 -
Description of Quaker Houghton common stock. Incorporated by reference to Exhibit 4.2 as filed by the Registrant with
Form 10-K for the year ended 2019.
10.1
-
Claim Handling and Funding Agreement between SB Decking, Inc., an inactive subsidiary of Registrant, and
Employers Insurance Company of Wausau dated September 25, 2007. Incorporated by reference to Exhibit 10(ffff) as
filed by the Registrant with Form 10-Q for the quarter ended September 30, 2007.
10.2
-
Settlement Agreement and Mutual Release entered into between AC Products, Inc., wholly owned subsidiary of
Registrant, and Orange County Water District, effective November 8, 2007. Incorporated by reference to Exhibit
10.47 as filed by the Registrant with Form 10-K for the year ended 2007.
10.3
-
Employment Agreement by and between Registrant and Michael F. Barry dated July 1, 2008. Incorporated by
reference to Exhibit 10.5 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008. †
10.4
-
Change in Control Agreement by and between Registrant and Michael F. Barry dated July 1, 2008. Incorporated by
reference to Exhibit 10.6 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008. †
10.5
-
Employment Agreement by and between L. Willem Platzer and Quaker Chemical B.V., a Netherlands corporation
and a subsidiary of Registrant, dated August 21, 2006. Incorporated by reference to Exhibit 10 as filed by the
Registrant with Form 8-K filed on August 22, 2006. †
10.6
-
Change in Control Agreement by and between Registrant and L. Willem Platzer dated April 2, 2007, effective
January 1, 2007. Incorporated by reference to Exhibit 10(aaaa) as filed by the Registrant with Form 10-Q for the
quarter ended March 31, 2007. †
10.7
-
Memorandum of Employment by and between Registrant and Joseph Berquist dated April 1, 2010. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2010. †
10.8
-
Change in Control Agreement by and between Registrant and Joseph Berquist dated April 1, 2010. Incorporated by
reference to Exhibit 10.3 as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2010.
†
10.9 -
Employment Agreement by and between Registrant and Joseph Berquist dated August 18 2021, effective on
September 9, 2021. Incorporated by reference to Exhibit 10.3 as filed by the registrant with Form 10-Q for the quarter
ended September 30, 2021.
†
10.10 -
Employment Agreement by and between Dieter Laininger and Quaker Chemical B.V., a subsidiary of the registrant,
dated June 1, 2011, effective June 15, 2011. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with
Form 10-Q for the quarter ended June 30, 2011
. †
10.11 -
Change in Control Agreement by and between Registrant and Dieter Laininger dated May 31, 2011, effective June 15,
2011. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter ended June
30, 2011
. †
10.12 -
Employment Agreement by and between Registrant and Andrew Tometich dated September 2, 2021, effective on
October 11, 2021. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q for the quarter
ended September 30, 2021.
. †
10.13 -
C
hange in Control Agreement by and between Registrant and Andrew Tometich dated September 2, 2021, effective on
October 11, 2021. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter
ended on September 30, 2021
.
†
10.14 -
Expatriate Agreement by and between the Registrant and Dieter Laininger, dated September 27, 2017, effective
August 1, 2019. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q, filed on
November 12, 2019.†
10.15 -
Expatriate Agreement by and between the Registrant and Adrian Steeples, dated October 12, 2017, effective August 1,
2019. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q, filed on November 12,
.†
10.16 -
Form of Memorandum of Employment by and between the Registrant and certain executive officers (including Robert
Traub, Jeewat Bijlani, Kym Johnson and David Slinkman). Incorporated by reference to Exhibit 10.3 as filed by the
Registrant with Form 10-Q, filed on November 12, 2019
.†
10.17 -
Form of Change of Control Agreement by and between the Registrant and certain executive officers (including Robert
Traub, Jeewat Bijlani, Kym Johnson and David Slinkman). Incorporated by reference to Exhibit 10.4 as filed by the
Registrant with Form 10-Q, filed on November 12, 2019
.†
10.18 -
Memorandum of Employment by and between Registrant and Mary Dean Hall, dated and effective November 30,
2015. Incorporated by reference to Exhibit 10.60 as filed by the Registrant with Form 10-K for the year ended 2015
.†
10.19 -
Memorandum of Employment by and between the Registrant and Shane Hostetter dated and effective April 19, 2021.
Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q for the quarter ended on March
31, 2021. †
10.20 -
Form of Change of Control Agreement by and between the Registrant and Shane Hostetter dated and effective April
19, 2021. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-Q for the quarter that
ended on March 31, 2021.
†
10.21 -
Memorandum of Employment by and between the Registrant and David Will dated March 22, 2021 and effective
April 19, 2021. Incorporated by reference to Exhibit 10.3 as filed by the Registrant with Form 10-Q for the quarter
ended on March 31, 2021.
†
10.22 -
Terms and Conditions of Employment by and between Quaker Chemical Ltd and Adrian Steeples, dated December 7,
2010. Incorporated by reference to Exhibit 10.19 as filed by the Registrant with Form 10-K for the year ended 2019.†
10.23
-
Amendment to Terms and Conditions of Employment by and between Quaker Chemical Ltd and Adrian Steeples,
dated June 15, 2011. Incorporated by reference to Exhibit 10.20 as filed by the Registrant with Form 10-K for the year
ended 2019. †
10.24
-
Supplemental Retirement Income Program (as amended and restated effective January 1, 2008), approved November
19, 2008. Incorporated by reference to Exhibit 10.58 as filed by the Registrant with Form 10-K for the year ended
2008. †
10.25
-
2013 Director Stock Ownership Plan as approved May 8, 2013. Incorporated by reference to Appendix B to the
Registrant’s definitive proxy statement filed on March 28, 2013. †
10.26
-
Retirement Savings Plan, as amended and restated effective January 22, 2021, approved November 1, 2021. *†
10.27 -
Quaker Houghton Annual Incentive Plan (as amended and restated effective November 17, 2021). *†
10.28
-
2011 Long-Term Performance Incentive Plan. Incorporated by reference to Appendix C to the Registrant’s definitive
proxy statement filed on March 31, 2011
.
†
10.29 -
Form of Restricted Stock Unit Agreement for executive officers and other employees under Registrant’s 2011 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-
Q for the quarter ended March 31, 2012
.
†
10.30 -
2016 Long-Term Performance Incentive Plan. Incorporated by reference to Appendix C to the Registrant’s definitive
proxy statement filed on March 28, 2016. †
10.31 -
Form of Restricted Stock Award Agreement for executive officers and other employees under Registrant’s 2016 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.3 as filed by Registrant with Form 8-K
filed on May 6, 2016. †
10.32 -
Form of Restricted Stock Unit Agreement for executive officers and other employees under Registrant’s 2016 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.4 as filed by Registrant with Form 8-K
filed on May 6, 2016. †
10.33
-
Form of Stock Option Agreement for executive officers and other employees under Registrant’s 2016 Long-Term
Performance Incentive Plan. Incorporated by reference to Exhibit 10.30 as filed by the Registrant with Form 10-K for
the year ended 2019. †
10.34
-
Chief Executive Officer Transition Agreement dated April 22, 2021, effective December 31, 2021. Incorporated by
reference to Exhibit 10.4 as filed by the Registrant with Form 10-Q for the quarter ended on March 31, 2021
. †
10.35
-
Form of Restricted Stock Award Agreement for non-employee directors under Registrant’s 2016 Long-Term
Performance Incentive Plan.
Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q for
the quarter ended on June 30, 2021
. †
10.36
-
Form of Restricted Stock Award Agreement for executive officers and other employees under Registrant’s 2016 Long-
Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.2 as filed by the Registrant with Form 10-
Q for the quarter ended on June 30, 2021.
†
10.37
-
Form of Incentive Stock Option Award Agreement for executive officers and other employees under Registrant’s 2016
Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.3 as filed by the Registrant with
Form 10-Q for the quarter ended on June 30, 2021
. †
10.38
-
Form of Non-Qualified Stock Option Award Agreement for executive officers and other employees under Registrant’s
2016 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.4 as filed by the Registrant
with Form 10-Q for the quarter ended on June 30, 2021.
†
10.39 -
Form of Restricted Stock Unit Award Agreement for executive officers and other employees under Registrant’s 2016
Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.5 as filed by the Registrant with
Form 10-Q for the quarter ended on June 30, 2021.
†
10.40 -
Form of Performance Stock Unit Award Agreement for executive officers and other employees under Registrant’s
2016 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.6 as filed by the Registrant
with Form 10-Q for the quarter ended on June 30, 2021.
†
10.41 -
Financing Agreement by and among Butler County Port Authority and Registrant and Brown Brothers Harriman &
Co. dated May 15, 2008. Incorporated by reference to Exhibit 10.1 as filed by the Registrant with Form 10-Q for the
quarter ended June 30, 2008.
10.42 -
Butler County Port Authority Industrial Development Revenue Bond dated May 15, 2008. Incorporated by reference
to Exhibit 10.7 as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2008.
10.43 -
Senior Secured Credit Facilities Commitment Letter, dated April 4, 2017, by and among Quaker Chemical
Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank AG New
Yor k Branch and Deutsche Bank Securities Inc. Incorporated by reference to Exhibit 10.1 as filed by the Registrant
with Form 8-K, filed on April 7, 2017.
10.44 -
Credit Agreement, dated as of August 1, 2019, among Quaker Chemical Corporation and certain of its subsidiaries,
Banks of America, N.A. and each of the lenders from time to time party thereto. Incorporated by reference to Exhibit
10.3 as filed by Registrant with Form 8-K filed on August 2, 2019.
***
10.45 -
Amendment No. 1, dated as of March 17, 2020, to the Credit Agreement, dated as of August 1, 2019. Incorporated by
reference to Exhibit 10.1 as filed by the Registrant with Form 8-K filed on March 17, 2020.
10.46 -
Amendment No. 2, dated as of December 10, 2021, to the Credit Agreement, dated as of August 1, 2019.*
10.47 -
Shareholder Agreement, dated August 1, 2019, among Quaker Chemical Corporation, Gulf Hungary Holding Korlátolt
Felelősségű Társaság, Gulf Oil International, Ltd. and GOCL Corporation Limited. Inc. Incorporated by reference to
Exhibit 10.1 as filed by Registrant with Form 8-K filed on August 2, 2019
.
10.48 -
Non-Competition and Non-Solicitation Agreement, dated as of August 1, 2019, among Quaker Chemical Corporation,
Gulf Houghton Lubricants Ltd., Gulf Oil International, Ltd., GOCL Corporation Limited and Gulf Oil Lubricants
India, Ltd. Incorporated by reference to Exhibit 10.2 as filed by Registrant with Form 8-K filed on August 2, 2019.***
10.49 -
Escrow Agreement, dated August 1, 2019, among Quaker Chemical Corporation, Gulf Houghton Lubricants, Ltd. and
Citibank N.A. Incorporated by reference to Exhibit 4.4 as filed by Registrant on Form S-3 on August 29, 2019.***
10.50 -
Amendment No 1, effective March 1, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with its quarterly report on Form 10-Q on May 11, 2020. †
10.51 -
Amendment No 2, effective February 10, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.1 as filed by the Registrant with its quarterly report on Form 10-Q on August 5, 2020. †
10.52 -
Amendment No 3, effective April 17, 2020, to the Quaker Houghton Retirement Savings Plan. Incorporated by
reference to Exhibit 10.2 as filed by the Registrant with its quarterly report on Form 10-Q on August 5, 2020. †
21 -
Subsidiaries and Affiliates of the Registrant.*
23 -
Consent of Independent Registered Public Accounting Firm.*
31.1 -
Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.*
31.2 -
Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.*
32.1 -
Certification of Andrew E. Tometich pursuant to 18 U.S.C. Section 1350.**
32.2 -
Certification of Shane W. Hostetter pursuant to 18 U.S.C. Section 1350.**
101.INS -
Inline XBRL Instance Document*
101.SCH -
Inline XBRL Taxonomy
Extension Schema Document*
101.CAL -
Inline XBRL Taxonomy
Calculation Linkbase
Document*
101.DEF -
Inline XBRL Taxonomy
Definition Linkbase Document*
101.LAB -
Inline XBRL Taxonomy
Label Linkbase Document*
101.PRE -
Inline XBRL Taxonomy
Presentation Linkbase Document*
104 -
Cover Page Interactive Data File (formatted as Inline XBRL and contained
in Exhibit 101.INS) *
* Filed herewith.
** Furnished herewith.
*** Certain exhibits and schedules have been omitted, and the Company
agrees to furnish supplementally to the Securities and
Exchange commission a copy of any omitted exhibits and schedules upon
request.
† Management contract or compensatory plan