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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
 
 
 
 
FORM
10-Q
 
 
 
 
 
 
QUARTERLY
 
REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
OF 1934
For the quarterly period ended
September 30, 2020
 
OR
 
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
For the transition period from
 
to
 
 
Commission file number
001-12019
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
Pennsylvania
 
23-0993790
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
901 E. Hector Street
,
Conshohocken
,
Pennsylvania
 
19428 – 2380
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
610
-
832-4000
 
Not Applicable
Former name, former address and former fiscal year,
 
if changed since last report.
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value
KWR
New York Stock Exchange
 
Indicate by check mark whether the Registrant (1) has filed all reports
 
required to be filed by Section 13 or 15(d) of the Securities Exchange
 
Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
 
to file such reports), and (2) has been subject to such filing requirements
 
for the past 90
days.
 
Yes
 
 
No
 
 
 
Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required
 
to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter
 
period that the registrant was required to submit such files) .
 
Yes
 
 
No
 
 
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”
 
in Rule 12b-2 of
the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
 
Non-accelerated filer
 
 
Smaller reporting
 
company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
 
for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange
 
Act.
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined
 
in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common
 
stock, as of the latest practicable date.
 
 
 
Number of Shares of Common Stock
Outstanding on October 31, 2020
 
17,831,576
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
PART
 
I
FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements (Unaudited).
 
Quaker Chemical Corporation
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
 
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
$
367,224
$
325,130
$
1,031,825
$
742,209
Cost of goods sold (
excluding amortization expense - See Note 14
)
 
227,032
 
220,073
 
660,396
 
486,224
Gross profit
 
140,192
 
105,057
 
371,429
 
255,985
Selling, general and administrative expenses
 
97,037
 
80,812
 
282,405
 
182,293
Indefinite-lived intangible asset impairment
38,000
Restructuring and related charges
1,383
24,045
3,585
24,045
Combination, integration and other acquisition-related
 
expenses
6,913
14,702
22,786
23,789
Operating income (loss)
 
34,859
(14,502)
 
24,653
 
25,858
Other (expense) income, net
 
(239)
 
203
 
(22,407)
 
(389)
Interest expense, net
(6,837)
(6,102)
(22,109)
(7,611)
Income (loss) before taxes and equity in net income of
associated companies
 
27,783
 
(20,401)
 
(19,863)
 
17,858
Taxes on income
 
(loss) before equity in net income of associated
companies
 
2,245
 
(5,633)
 
(7,603)
 
4,096
Income (loss) before equity in net income of associated
companies
 
25,538
 
(14,768)
 
(12,260)
 
13,762
Equity in net income of associated companies
 
1,804
 
1,787
 
3,536
 
2,806
Net income (loss)
27,342
(12,981)
(8,724)
16,568
Less: Net income attributable to noncontrolling interest
38
72
88
186
Net income (loss) attributable to Quaker Chemical Corporation
$
27,304
$
(13,053)
$
(8,812)
$
16,382
Per share data:
 
 
 
 
Net income (loss) attributable to Quaker Chemical Corporation
common shareholders – basic
$
1.53
$
(0.80)
$
(0.50)
$
1.15
Net income (loss) attributable to Quaker Chemical Corporation
 
common shareholders – diluted
$
1.53
$
(0.80)
$
(0.50)
$
1.14
Dividends declared
$
0.395
$
0.385
$
1.165
$
1.140
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
Quaker Chemical Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
(Dollars in thousands)
 
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income (loss)
 
$
27,342
$
(12,981)
$
(8,724)
$
16,568
Other comprehensive income (loss), net of tax
Currency translation adjustments
33,618
(28,305)
(10,582)
(29,256)
Defined benefit retirement plans
(257)
1,126
16,913
2,354
Current period change in fair value of derivatives
354
(3,738)
Unrealized gain (loss) on available-for-sale securities
556
(81)
453
1,499
Other comprehensive income (loss)
34,271
(27,260)
3,046
(25,403)
Comprehensive income (loss)
61,613
(40,241)
(5,678)
(8,835)
Less: Comprehensive (income) loss attributable to
noncontrolling interest
(56)
22
25
(115)
Comprehensive income (loss) attributable to Quaker Chemical
Corporation
$
61,557
$
(40,219)
$
(5,653)
$
(8,950)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
Quaker Chemical Corporation
Condensed Consolidated Balance
 
Sheets
(Dollars in thousands, except par value and share amounts)
 
Unaudited
September 30,
December 31,
2020
2019
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
$
155,750
$
123,524
Accounts receivable, net
 
338,875
 
375,982
Inventories
 
 
Raw materials and supplies
 
77,893
 
82,058
Work-in-process
 
and finished goods
 
93,434
 
92,892
Prepaid expenses and other current assets
 
52,612
 
41,516
Total current
 
assets
 
718,564
 
715,972
Property, plant and
 
equipment, at cost
 
394,286
 
398,834
Less accumulated depreciation
 
(206,406)
 
(185,365)
Property, plant and
 
equipment, net
 
187,880
 
213,469
Right of use lease assets
39,781
42,905
Goodwill
 
612,144
 
607,205
Other intangible assets, net
 
1,045,040
 
1,121,765
Investments in associated companies
 
92,163
 
93,822
Deferred tax assets
 
13,085
 
14,745
Other non-current assets
 
44,531
 
40,433
Total assets
$
2,753,188
$
2,850,316
LIABILITIES AND EQUITY
 
 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
$
38,630
$
38,332
Accounts and other payables
 
165,582
 
170,929
Accrued compensation
 
36,994
 
45,620
Accrued restructuring
8,893
18,043
Other current liabilities
 
87,041
 
87,010
Total current
 
liabilities
 
337,140
 
359,934
Long-term debt
 
846,070
 
882,437
Long-term lease liabilities
28,061
31,273
Deferred tax liabilities
 
189,439
 
211,094
Other non-current liabilities
 
126,047
 
123,212
Total liabilities
 
1,526,757
 
1,607,950
Commitments and contingencies (Note 19)
Equity
 
 
Common stock $
1
 
par value; authorized
30,000,000
 
shares; issued and
 
 
outstanding 2020 –
17,830,541
 
shares; 2019 –
17,735,162
 
shares
17,831
17,735
Capital in excess of par value
 
900,602
 
888,218
Retained earnings
 
382,521
 
412,979
Accumulated other comprehensive loss
 
(75,010)
 
(78,170)
Total Quaker
 
shareholders’ equity
 
1,225,944
 
1,240,762
Noncontrolling interest
 
487
1,604
Total equity
1,226,431
1,242,366
Total liabilities and
 
equity
$
2,753,188
$
2,850,316
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
 
Unaudited
Nine Months Ended
September 30,
2020
2019
Cash flows from operating activities
 
 
 
 
 
Net (loss) income
 
$
(8,724)
$
16,568
Adjustments to reconcile net (loss) income to net cash provided
 
by operating activities:
 
 
Amortization of debt issuance costs
 
3,562
 
792
Depreciation and amortization
 
62,818
 
23,868
Equity in undistributed earnings of associated companies,
 
net of dividends
 
1,415
 
(129)
Acquisition-related fair value adjustments related to inventory
229
10,214
Deferred compensation, deferred taxes and other,
 
net
 
(30,657)
 
(17,204)
Share-based compensation
 
17,820
 
3,042
Loss (gain) on disposal of property,
 
plant, equipment and other assets
 
105
 
(111)
Insurance settlement realized
 
(818)
 
(624)
Indefinite-lived intangible asset impairment
38,000
Combination and other acquisition-related expenses, net of
 
payments
2,498
(14,218)
Restructuring and related charges
3,585
24,045
Pension and other postretirement benefits
 
16,219
 
434
Increase (decrease) in cash from changes in current assets and current
 
 
liabilities, net of acquisitions:
Accounts receivable
 
30,225
 
2,655
Inventories
 
2,137
 
1,376
Prepaid expenses and other current assets
 
(113)
 
(10,931)
Change in restructuring liabilities
(12,772)
(4,645)
Accounts payable and accrued liabilities
 
(13,481)
 
344
 
Net cash provided by operating activities
 
112,048
 
35,476
Cash flows from investing activities
 
 
Investments in property,
 
plant and equipment
 
(12,184)
 
(10,112)
Payments related to acquisitions, net of cash acquired
 
(3,132)
 
(798,064)
Proceeds from disposition of assets
11
75
Insurance settlement interest earned
 
41
 
185
 
Net cash used in investing activities
 
(15,264)
 
(807,916)
Cash flows from financing activities
 
 
Payments of term loan debt
 
(28,132)
 
Proceeds from long-term debt
750,000
(Repayments) borrowings on revolving credit facilities,
 
net
 
(16,485)
 
85,966
(Repayments) borrowings on other debt, net
(527)
 
415
Financing-related debt issuance costs
(23,747)
Dividends paid
 
(20,520)
 
(15,003)
Stock options exercised, other
 
2,385
 
733
Purchase of noncontrolling interest in affiliates
(1,047)
Distributions to noncontrolling affiliate shareholders
(751)
 
Net cash (used in) provided by financing activities
 
(65,077)
 
798,364
 
Effect of foreign exchange rate changes on
 
cash
 
(529)
 
(1,889)
Net increase in cash, cash equivalents and restricted cash
 
31,178
 
24,035
Cash, cash equivalents and restricted cash at the beginning
 
of the period
 
143,555
 
124,425
Cash, cash equivalents and restricted cash at the end of
 
the period
$
174,733
$
148,460
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts,
 
unless otherwise stated)
(Unaudited)
 
6
Note 1 – Condensed Financial Information
As used in these Notes to Condensed 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 Condensed 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”).
 
The condensed consolidated financial statements included
 
herein are unaudited and have been prepared in accordance with
generally accepted accounting principles in the United
 
States (“U.S. GAAP”) for interim financial reporting and
 
the United States
Securities and Exchange Commission (“SEC”) regulations.
 
Certain information and footnote disclosures normally
 
included in
financial statements prepared in accordance with U.S. GAAP have
 
been condensed or omitted pursuant to such rules and regulations.
 
In the opinion of management, the financial statements reflect all
 
adjustments which are necessary for a fair statement of the
 
financial
position, results of operations and cash flows for the
 
interim periods.
 
The results for the three and nine months ended September 30,
2020 are not necessarily indicative of the results to be expected
 
for the full year.
 
These financial statements should be read in
conjunction with the Company’s
 
Annual Report filed on Form 10-K for the year ended December
 
31, 2019 (the “2019 Form 10-K”).
 
During the three months ended September 30, 2020,
 
the Company identified and corrected certain immaterial adjustments
 
relating
to the three months ended March 31, 2020 as well as the
 
three and six months ended June 30, 2020.
 
These adjustments related to the
Company’s over-recognition
 
of cost of goods sold (“COGS”) and corresponding under
 
-recognition of inventory,
 
as well as the
associated tax impact of these adjustments, in the Company’s
 
previously issued interim financial statements for the
 
three months
ended March 31, 2020 and the three and six months ended
 
June 30, 2020, respectively.
 
These adjustments impact the Company’s
Americas reportable segment.
 
The cumulative amount of reduction to COGS recorded
 
in the three and nine months ended September
30, 2020 was approximately $
1.7
 
million, with approximately $
0.7
 
million related to the three months ended March 31, 2020 and
approximately $
1.0
 
million related to the three months ended June 30, 2020.
Hyper-inflationary economies
Economies that have a cumulative three-year rate of inflation
 
exceeding
100
% 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 Condensed Consolidated
 
Statements of Operations.
Based on various indices or index compilations currently
 
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 a result, the
Company began applying hyper-inflationary
 
accounting with respect to the Company's wholly owned
 
Argentine subsidiary beginning
July 1, 2018.
 
In addition, Houghton has an Argentina subsidiary to
 
which hyper-inflationary accounting also is applied.
 
As of, and
for the three and nine months ended September 30,
 
2020 and 2019, the Company's Argentine subsidiaries represented
 
less than
1
% of
the Company’s consolidated
 
total assets and net sales, respectively.
 
During the three and nine months ended September 30, 2020,
 
the
Company recorded $
0.2
 
million and $
0.3
 
million, respectively,
 
of remeasurement losses associated with the applicable
 
currency
conversions related to Argentina.
 
Comparatively, during
 
the three and nine months ended September 30, 2019,
 
the Company recorded
$
0.7
 
million and $
0.9
 
million of remeasurement losses associated with the applicable
 
currency conversion related to Argentina.
 
These
losses were recorded within foreign exchange (losses) gains,
 
net, which is a component of other (expense) income,
 
net, in the
Company’s Condensed
 
Consolidated Statements of Operations.
Note 2 – Business Combinations
 
Houghton
On
August 1, 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.
 
Houghton is a
leading global provider of specialty chemicals and technical
 
services for metalworking and other industrial applications.
 
The
Company believes that combining the Legacy Quaker
 
and Houghton products and service offerings allows Quaker
 
Houghton to better
serve its customers in its various end markets.
 
The Combination was subject to certain regulatory
 
and shareholder approvals.
 
At a shareholder meeting held during 2017, the
Company’s shareholders
 
approved the issuance of new shares of the Company’s
 
common stock at closing of the Combination.
 
Also
in 2017, the Company received regulatory approvals for
 
the Combination from China and Australia.
 
The Company received
regulatory approvals from the European Commission
 
(“EC”) during the second quarter of 2019 and the U.S. Federal
 
Trade
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
7
Commission (“FTC”) in July 2019.
 
The approvals from the FTC and the EC required the concurrent
 
divestiture of certain steel and
aluminum related product lines of Houghton, which
 
were sold by Houghton on August 1, 2019 for approximately
 
$
37
 
million in cash.
 
The final remedy agreed with the EC and the FTC was consistent
 
with the Company’s
 
previous expectation that the total divested
product lines would be approximately
3
% of the combined company’s
 
net sales.
The following table summarizes the fair value of consideration
 
transferred in the Combination:
Cash transferred to Houghton shareholders (a)
$
170,829
Cash paid to extinguish Houghton debt obligations
702,556
Fair value of common stock issued as consideration (b)
789,080
Total fair value
 
of consideration transferred
$
1,662,465
(
a)
 
A portion is held in escrow by a third party,
 
subject to indemnification rights that lapse upon the achievement
 
of certain
milestones.
(b)
 
Amount was determined based on approximately
4.3
 
million shares, comprising
24.5
% of the common stock of the Company
immediately after the closing, and the closing price per
 
share of Quaker Chemical Corporation common stock
 
of $
182.27
 
on
August 1, 2019.
The Company accounted for the Combination under the
 
acquisition method of accounting.
 
This method requires the recording of
acquired assets, including separately identifiable
 
intangible assets, at their fair value on the acquisition date.
 
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,
 
including indefinite and definite-lived intangible assets,
 
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, customer attrition rates, royalty
 
rates, asset lives and market multiples, among other items.
 
Fair values were
determined by management using a variety of methodologies
 
and resources, including external independent valuation
 
experts.
 
The
valuation methods included physical appraisals, discounted
 
cash flow analyses, excess earnings, relief from royal
 
ty, and other
appropriate valuation techniques to determine the fair value
 
of assets acquired and liabilities assumed.
The following table presents the final estimated fair
 
values of Houghton net assets acquired:
Measurement
August 1,
Period
August 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
75,821
$
$
75,821
Accounts receivable, net
178,922
178,922
Inventories, net
95,193
95,193
Prepaid expenses and other assets
10,652
666
11,318
Property, plant and
 
equipment
115,529
(66)
115,463
Right of use lease assets
10,673
10,673
Investments in associated companies
66,447
66,447
Other non-current assets
4,710
1,553
6,263
Intangible assets
1,028,400
1,028,400
Goodwill
494,915
4,625
499,540
Total assets purchased
2,081,262
6,778
2,088,040
Short-term borrowings, not refinanced at closing
9,297
9,297
Accounts payable, accrued expenses and other accrued liabilities
150,078
1,127
151,205
Deferred tax liabilities
205,082
4,098
209,180
Long-term lease liabilities
6,607
6,607
Other non-current liabilities
47,733
1,553
49,286
Total liabilities assumed
418,797
6,778
425,575
Total consideration
 
paid for Houghton
1,662,465
1,662,465
Less: cash acquired
75,821
75,821
Less: fair value of common stock issued as consideration
789,080
789,080
Net cash paid for Houghton
$
797,564
$
$
797,564
(1) As
 
previously disclosed in the Company’s
 
2019 Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
8
As of September 30, 2020, the allocation of the purchase
 
price for the Combination has been finalized and the
one-year
measurement period has ended.
 
Houghton assets acquired and liabilities assumed have been assigned
 
to each of the Company’s
reportable segments on a specific identification or allocated
 
basis, as applicable.
 
Measurement period adjustments recorded during
2020 related primarily to increasing the valuation allowances
 
against the deferred tax assets associated with foreign
 
tax credits
acquired as part of the Combination as additional information
 
became available and was used to update the Company’s
 
initial
estimates of expenses allocated to foreign source income
 
and expected creditable foreign taxes.
 
In addition, measurement period
adjustments included
 
the recognition of additional other non-current assets and other non-current
 
liabilities based on additional
information
 
obtained regarding certain tax audits and associated rights to
 
indemnification, and certain non-income tax liabilities
payable upon closing of the Combination in certain
 
countries.
 
Commencing August 1, 2019, the Company’s
 
Consolidated Statements of Operations included the results of
 
Houghton.
 
Net sales
of Houghton subsequent to closing of the Combination
 
and included in the Company’s
 
Consolidated Statements of Operations for the
three and nine months ending September 30, 2019
 
were $
119.5
 
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 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 not been presented in the unaudited pro forma
 
table below as
these costs on a pro forma basis were incurred during the
 
three and nine months ended September 30, 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.
 
Three
Nine
Months Ended
Months Ended
Unaudited Pro Forma
 
September 30,
September 30,
(as if the Combination occurred on
 
January 1, 2018)
2019
2019
Net sales
$
386,396
$
1,170,981
Net income attributable to Quaker Chemical Corporation
22,491
70,533
Combination, integration and other acquisition-related
 
expenses have been and are expected to continue to be significant.
 
The
Company incurred total costs of approximately $
6.9
 
million and $
23.4
 
million for the three and nine months ended September 30,
2020,
 
respectively, primarily
 
for professional fees related to Houghton integration activities.
 
Comparatively,
 
the Company incurred
total costs of approximately $
15.1
 
million and $
25.9
 
million during the three and nine months ended September 30,
 
2019,
respectively, primarily
 
for various professional fees and integration planning and
 
regulatory approval as well as professional fees
associated with closing the Combination.
 
These costs also include $
0.8
 
million of accelerated depreciation charges during
 
the nine
months ended September 30, 2020 and $
0.4
 
million and $
2.1
 
million of interest costs to maintain the bank commitment
 
(“ticking
fees”) for the Combination during the three and nine
 
months ended September 30, 2019, respectively.
 
The Company had current
liabilities related to the Combination, integration and
 
other acquisition-related activities of $
9.1
 
million and $
6.6
 
million as of
September 30, 2020,
 
and December 31, 2019,
 
respectively, primarily recorded
 
within other accrued liabilities on its Condensed
Consolidated Balance Sheets.
 
Norman Hay
On
October 1, 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 acquisition
adds new technologies in automotive, original equipment
 
manufacturer (“OEM”), and aerospace, as well as engineering expertise
which is expected to strengthen the Company’s
 
existing equipment solutions platform.
 
The acquired Norman Hay assets and
liabilities were assigned to the Global Specialty Businesses reportable
 
segment.
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
9
The following table presents the final estimated fair
 
values of Norman Hay net assets acquired:
Measurement
October 1,
Period
October 1, 2019
2019 (1)
Adjustments
(as adjusted)
Cash and cash equivalents
$
18,981
$
$
18,981
Accounts receivable, net
15,471
15,471
Inventories, net
8,213
(49)
8,164
Prepaid expenses and other assets
4,203
138
4,341
Property, plant and
 
equipment
14,981
14,981
Right of use lease assets
10,608
10,608
Intangible assets
51,088
51,088
Goodwill
29,384
(82)
29,302
Total assets purchased
152,929
7
152,936
Long-term debt included current portions
485
485
Accounts payable, accrued expenses and other accrued liabilities
13,488
(732)
12,756
Deferred tax liabilities
12,746
905
13,651
Long-term lease liabilities
8,594
8,594
Total liabilities assumed
35,313
173
35,486
Total consideration
 
paid for Norman Hay
117,616
(166)
117,450
Less: estimated purchase price settlement (2)
3,287
(3,287)
Less: cash acquired
18,981
18,981
Net cash paid for Norman Hay
$
95,348
$
3,121
$
98,469
(1)
 
As previously disclosed in the Company’s
 
2019 Form 10-K.
(2)
 
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.
As of September 30, 2020, the allocation of the purchase
 
price for Norman Hay has been finalized.
Other Acquisitions
In May 2020, the Company acquired Tel
 
Nordic ApS (“TEL”), a company that specializes in lubricants and engineering
 
primarily
in high pressure aluminum die casting for its Europe,
 
Middle East and Africa (“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.
 
The allocation of the purchase price of TEL has not been
 
finalized and the
one-year
 
measurement
period has not ended.
 
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.
In March 2020, the Company acquired the remaining
49
% 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 2018 the Company purchased certain formulations and product
 
technology for the mining
industry for $
1.0
 
million, with $
0.5
 
million of the purchase price paid at signing and the remaining
 
$
0.5
 
million of the purchase price
paid during the first quarter of 2019.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
10
Note 3 – Recently Issued Accounting Standards
Recently Issued Accounting Standards
 
Adopted
The Financial Accounting Standards Board (“FASB”)
 
issued Account Standards Update (“ASU”)
 
2020-04,
Reference Rate
Reform (Topic
 
848): Facilitation of the Effects of Reference
 
Rate Reform on Financial Reporting
 
in March 2020.
 
The amendments
provide temporary optional expedients and exceptions for
 
applying 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.
 
As of September 30, 2020, the expedients
provided in ASU 2020-04 do not impact the Company;
 
however, the Company will continue to
 
monitor for potential impacts on its
consolidated financial statements.
The FASB issued
 
ASU 2018-15
, Customer’s
 
Accounting for Implementation Costs Incurred
 
in a Cloud Computing Arrangement
That Is a Service Contract
 
in August 2018 that clarifies the accounting for implementation
 
costs incurred in a cloud computing
arrangement under a service contract.
 
This guidance generally aligns the requirements for capitalizing
 
implementation costs incurred
in a hosting arrangement under a service contract with the
 
requirements for capitalizing implementation costs related
 
to internal-use
software.
 
The guidance within this accounting standard update is effective
 
for annual periods beginning after December 15, 2019 and
should be applied either retrospectively or prospectively
 
to all implementation costs incurred after the date of
 
adoption.
 
Early
adoption was permitted.
 
The Company adopted this standard on a prospective basis, effective
 
January 1, 2020.
 
There was no
cumulative effect of adoption recorded within
 
retained earnings on January 1, 2020.
 
The FASB issued
 
ASU 2018-14,
Disclosure Framework — Changes to
 
the Disclosure Requirements
 
for Defined Benefit Plans
 
in
August 2018 that modifies certain disclosure requirements
 
for fair value measurements.
 
The guidance removes certain disclosure
requirements regarding transfers between levels of
 
the fair value hierarchy as well as certain disclosures related to
 
the valuation
processes for certain fair value measurements.
 
Further, the guidance added certain disclosure
 
requirements including unrealized gains
and losses and significant unobservable inputs used to
 
develop certain fair value measurements.
 
The guidance
 
within this accounting
standard update is effective for annual and interim
 
periods beginning after December 15, 2019, and should be applied
 
prospectively in
the initial year of adoption or prospectively to all periods
 
presented, depending on the amended disclosure requirement.
 
Early
adoption was permitted.
 
The Company adopted this standard on a prospective basis, effective
 
January 1, 2020.
 
ASU 2018-14
addresses disclosures only and will not have an impact
 
on the Company’s consolidated
 
financial statements.
The FASB issued
 
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
 
326): Measurement of Credit
 
Losses on Financial
Instruments
in June 2016 related to the accounting for and disclosure of
 
credit losses.
 
The FASB subsequently
 
issued several
additional accounting standard updates which amended
 
and clarified the guidance, but did not materially change
 
the guidance or its
applicability to the Company.
 
This accounting guidance introduces a new model for
 
recognizing credit losses on financial
instruments, including customer accounts receivable,
 
based on an estimate of current expected credit losses.
 
The guidance within this
accounting standard update is effective for annual
 
and interim periods beginning after December 15, 2019.
 
Early adoption was
permitted.
 
The Company did not early adopt, but did adopt the guidance in
 
this accounting standard update, including all applicable
subsequent updates to this accounting guidance, as required,
 
on a modified retrospective basis, effective January
 
1, 2020.
 
Adoption
did not have a material impact to the Company’s
 
financial statements as expected.
 
However, as a result of this adoption, the Company
recorded a cumulative effect of accounting change
 
that resulted in an increase to its allowance for doubtful accounts
 
of approximately
$
1.1
 
million, a decrease to deferred tax liabilities of $
0.2
 
million and a decrease to retained earnings of $
0.9
 
million.
 
In accordance with this guidance, the Company recognizes
 
an allowance for credit losses reflecting the net amount expected to
 
be
collected from its financial assets, primarily trade accounts
 
receivable.
 
This allowance 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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
11
Recently Issued Accounting Standards
 
Not Yet Adopted
The FASB
 
issued ASU 2020-01,
 
Investments – Equity Securities (To
 
pic 321), Investments – Equity Method and Joint Ventures
(Topic
 
323), and Derivatives and Hedging (Topic
 
815) –Clarifying the Interactions between Topic
 
321, Topic
 
323, and Topic
 
815
 
in
January 2020 clarifying the interaction among the
 
accounting standards related to equity securities, equity method investments,
 
and
certain derivatives.
 
The new guidance, among other things, states that a company
 
should consider observable transactions that require
a company to either apply or discontinue the equity method
 
of accounting, for the purposes of applying the fair val
 
ue measurement
alternative immediately before applying or upon discontinuing
 
the equity method.
 
The new guidance also addresses the measurement
of certain purchased options and forward contracts used
 
to acquire investments.
 
The guidance within this accounting standard update
is effective for annual and interim periods beginning
 
after December 15, 2020 and is to be applied prospectively.
 
Early adoption is
permitted.
 
The Company has not early adopted the guidance and is currently
 
evaluating its implementation.
The FASB issued
 
ASU 2019-12
, Income Taxes
 
(Topic
 
740): Simplifying the Accounting for Income Taxes
 
in December 2019.
 
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 interi
 
m
 
periods beginning after December 15, 2020.
 
Early
adoption is permitted.
 
The Company has not early adopted the guidance and is currently evaluating
 
its implementation.
The FASB issued
 
ASU 2018-13
, Fair Value
 
Measurement (Topic
 
820):
 
Disclosure Framework – Changes to the
 
Disclosure
Requirements for Fair Value
 
Measurement
 
in August 2018 that modifies certain disclosure
 
requirements for employers that sponsor
defined benefit pension or other postretirement plans.
 
The amendments in this accounting standard update remove
 
disclosures that are
no longer considered cost beneficial, clarify the specific
 
requirements of certain disclosures, and add new disclosure requirements
 
as
relevant.
 
The guidance within this accounting standard update is effective
 
for annual periods beginning after December 15, 2020,
 
and
should be applied retrospectively to all periods presented.
 
Early adoption is permitted.
 
The Company has not early adopted the
guidance and is currently evaluating its implementation.
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 Company and the
chief operating decision maker assess its performance.
 
During the third quarter of 2019 and in connection with the Combination,
 
the
Company reorganized its executive management
 
team to align with its new business structure, which reflects the
 
method by which the
chief operating decision maker of the Company assesses its performance
 
and allocates its resources.
 
The Company’s current
reportable segment structure includes
four
 
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.
Although the Company changed its reportable segments in
 
the third quarter of 2019, the calculation of the reportable
 
segments’
measures of earnings remains otherwise generally
 
consistent with past practices.
 
Segment operating earnings for the Company’s
reportable segments are comprised of net sales less COGS and
 
selling, general and administrative expenses (“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, 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 (expense) income, net.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
12
The following table presents information about the performance
 
of the Company’s reportable segments
 
for the three and nine
months ended September 30, 2020 and 2019.
 
Certain immaterial reclassifications within the segment disclosures
 
for the three and
nine months ended September 30, 2019 have been
 
made to conform with the Company’s
 
current customer industry segmentation.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
 
 
 
 
 
 
 
 
 
 
Americas
$
119,540
$
116,691
$
330,012
$
260,663
EMEA
 
94,005
 
82,369
 
276,546
 
183,806
Asia/Pacific
 
84,877
 
74,266
 
226,850
 
165,234
Global Specialty Businesses
 
68,802
 
51,804
 
198,417
 
132,506
Total net sales
$
367,224
$
325,130
$
1,031,825
$
742,209
Segment operating earnings
Americas
$
31,099
$
23,765
$
70,590
$
52,069
EMEA
17,439
13,303
46,269
31,034
Asia/Pacific
27,304
20,404
66,106
45,375
Global Specialty Businesses
 
21,161
 
15,245
 
58,114
 
36,819
Total segment operating
 
earnings
 
97,003
 
72,717
 
241,079
 
165,297
Combination, integration and other acquisition-related
 
expenses
(6,913)
(14,702)
(22,786)
(23,789)
Restructuring and related charges
(1,383)
(24,045)
(3,585)
(24,045)
Fair value step up of inventory sold
 
(10,214)
(226)
(10,214)
Indefinite-lived intangible asset impairment
(38,000)
Non-operating and administrative expenses
(39,786)
(29,203)
(110,282)
(68,621)
Depreciation
 
of corporate assets and amortization
 
(14,062)
 
(9,055)
 
(41,547)
 
(12,770)
Operating income (loss)
 
34,859
(14,502)
24,653
25,858
Other (expense) income, net
(239)
203
(22,407)
(389)
Interest expense, net
 
(6,837)
 
(6,102)
 
(22,109)
 
(7,611)
Income (loss) before taxes and equity in net income of
associated companies
$
27,783
$
(20,401)
$
(19,863)
$
17,858
Inter-segment revenues for the three and nine
 
months ended September 30, 2020 were $
1.7
 
million and $
7.0
 
million for Americas,
$
5.3
 
million and $
16.1
 
million for EMEA, $
0.2
 
million and $
0.5
 
million for Asia/Pacific, and $
1.1
 
million and $
3.4
 
million for Global
Specialty Businesses, respectively.
 
Inter-segment revenues for the three and nine
 
months ended September 30, 2019 were $
2.1
million and $
4.8
 
million for Americas, $
5.3
 
million and $
15.4
 
million for EMEA, less than $
0.1
 
million and $
0.1
 
million for
Asia/Pacific, and $
1.4
 
million and $
4.1
 
million for Global Specialty Businesses, respectively.
 
However, all inter-segment
 
transactions
have been eliminated from each reportable segment’s
 
net sales and earnings for all periods presented in the above tables.
Note 5 – Net Sales and Revenue Recognition
Business Description
The Company develops, produces, and markets a broad
 
range of formulated chemical specialty products and offers
 
chemical
management services (“Fluidcare”) for various heavy
 
industrial and manufacturing applications throughout its four
 
segments.
 
The
Combination increased the Company’s
 
addressable metalworking, metals and industrial end markets, including
 
steel, aluminum,
aerospace, defense, transportation-OEM, transportation
 
-components, offshore sub-sea energy,
 
architectural aluminum, construction,
tube and pipe, can and container,
 
mining, specialty coatings and specialty greases.
 
The Combination also strengthened the product
portfolio of the combined Company.
 
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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
13
A substantial portion of the Company’s
 
sales worldwide are made directly through its own employees
 
and its Fluidcare programs,
with the balance being handled 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 adapting the Company’s
 
existing products or by applying new formulations developed
 
in its laboratories.
 
The specialty
chemical industry comprises many companies similar in
 
size to the Company,
 
as well as companies larger and smaller than Quaker
Houghton.
 
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
 
a more specialized product range.
 
All competitors provide different levels of
technical services to individual customers.
 
Competition in the industry is based primarily on the ability to
 
provide products that meet
the needs of the customer, render
 
technical services and laboratory assistance to the customer and,
 
to a lesser extent, on price.
 
As part of the Company’s
 
Fluidcare business, certain third-party product sales to customers are
 
managed by the Company.
 
Where
the Company acts as a principal, revenues are recognized
 
on a gross reporting basis at the selling price negotiated with
 
its customers.
 
Where the Company acts as an agent, revenue is recognized on
 
a net reporting basis at the amount of the administrative fee earned
 
by
the Company for ordering the goods.
 
In determining whether the Company is acting as a principal
 
or an agent in each arrangement,
the Company considers whether it is primarily responsible
 
for the obligation to provide the specified good, has inventory
 
risk before
the specified good has been transferred to the customer
 
and has discretion in establishing the prices for the specified
 
goods.
 
The
Company transferred third-party products under arrangements
 
recognized on a net reporting basis of $
11.1
 
million and $
29.9
 
million
for the three and nine months ended September 30,
 
2020, respectively, and
 
$
13.6
 
million and $
34.4
 
million for the three and nine
months ended September 30, 2019,
 
respectively.
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, the Company 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 discretely related to the financial performance
of such industries.
 
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.
 
As previously disclosed in its 2019 Form
10-K, during 2019, the Company’s
 
five largest customers (each composed of multiple
 
subsidiaries or divisions with semiautonomous
purchasing authority) accounted for approximately
12
% of consolidated net sales, with its largest customer
 
accounting for
approximately
6
% of consolidated net sales.
Revenue Recognition Model
The Company applies the 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.
 
In
most instances, the Company’s
 
contract with a customer is the customer’s
 
purchase order.
 
For certain customers, the Company may
also enter into a sales agreement which outlines a
 
framework of terms and conditions which apply to all future and
 
subsequent
purchase orders for that customer.
 
In these situations, the Company’s
 
contract with the customer is both the sales agreement as well as
the specific customer purchase order.
 
Because the Company’s contract
 
with a customer is typically for a single transaction or
customer purchase order, the duration
 
of the contract is almost always one year or less.
 
As a result, the Company has elected to apply
certain practical expedients and omit certain disclosures of
 
remaining performance obligations for contracts that have an
 
initial term of
one year or less as permitted by the FASB.
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.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
14
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 recognizes revenue over time as the customer
 
receives and consumes the benefits provided by the Company’s
 
performance;
the Company’s performance
 
creates or enhances an asset that the customer controls as the
 
asset is created or enhanced; or the
Company’s performance
 
does not create an asset with an alternative use to the entity,
 
and the entity has an enforceable right to
payment, including a profit margin, for performance
 
completed to date.
 
For performance obligations not satisfied over time, the
Company determines the point in time at which a customer
 
obtains control of an asset and the Company satisfies a performance
obligation by considering when the Company has a right
 
to payment for the asset; the customer has legal title to the
 
asset; the
Company has transferred physical possession of the asset; the
 
customer has the significant risks and rewards of ownership
 
of the asset;
or the customer has accepted the asset.
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 or other services provided by the Company
 
to the customer, the Company typically satisfies its
 
performance obligations
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 or other service
 
work performed by the Company.
Other Considerations
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.
 
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 (expense) income, net, in its Condensed Consolidated
 
Statements of
Operations,
 
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.
Practical Expedients and Accounting Policy Elections
The Company has made certain accounting policy
 
elections and elected to use certain practical expedients as permitted
 
by the
FASB in applying
 
the guidance on revenue recognition.
 
It is the Company’s policy
 
to 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, it is the Company’s
 
policy to expense costs to obtain a contract as incurred when
 
the expected
period of benefit, and therefore the amortization period,
 
is one year or less.
 
It is also the Company’s accounting
 
policy to exclude
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.
Contract Assets and Liabilities
The Company recognizes a contract asset or receivable
 
on its Condensed Consolidated Balance Sheet when the Company
provides a good or service 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.
 
The Company had
no
material contract assets recorded on its Condensed Consolidated
 
Balance Sheets as of September 30, 2020 or December
 
31, 2019.
 
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.
 
The Company’s
contract liabilities primarily represent deferred revenue
 
recorded for customer payments received by the Company
 
prior to the
Company satisfying the associated performance obligation.
 
Deferred revenues are presented within other current liabilities
 
in the
Company’s Condensed
 
Consolidated Balance Sheets.
 
The Company had approximately $
3.6
 
million and $
2.2
 
million of deferred
revenue as of September 30, 2020 and December 31, 2019
 
,
 
respectively.
 
During the nine months ended September 30, 2020,
 
the
Company satisfied all of the associated performance
 
obligations and recognized into revenue the advanced
 
payments received and
recorded as of December 31, 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
15
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.
 
The Company has provided annual net sales information by
 
major product lines that represent
approximately 10% or more of consolidated net sales in its 2019
 
Form 10-K, and those annual percentages are generally consistent
with the current quarter’s net sales by product
 
line.
 
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 disaggregate the Company’s
 
net sales by segment, geographic region, customer industry,
 
and timing of
revenue recognized for the three and nine months ended September
 
30, 2020 and 2019.
 
Certain immaterial reclassifications within the
disaggregated customer industry disclosures for the
 
three and nine months ended September 30, 2019 have been
 
made to conform with
the Company’s current
 
customer industry segmentation.
Three Months Ended September 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
42,098
$
25,362
$
45,001
$
112,461
Metalworking and other
77,442
68,643
39,876
185,961
119,540
94,005
84,877
298,422
Global Specialty Businesses
39,197
17,429
12,176
68,802
$
158,737
$
111,434
$
97,053
$
367,224
Timing of Revenue Recognized
Product sales at a point in time
$
153,820
$
107,093
$
94,660
$
355,573
Services transferred over time
4,917
4,341
2,393
11,651
$
158,737
$
111,434
$
97,053
$
367,224
 
Three Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
48,600
$
26,377
$
43,264
$
118,241
Metalworking and other
68,091
55,992
31,002
155,085
116,691
82,369
74,266
273,326
Global Specialty Businesses
38,834
5,169
7,801
51,804
$
155,525
$
87,538
$
82,067
$
325,130
Timing of Revenue Recognized
Product sales at a point in time
$
150,904
$
85,579
$
80,359
$
316,842
Services transferred over time
4,621
1,959
1,708
8,288
$
155,525
$
87,538
$
82,067
$
325,130
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
16
Nine Months Ended September 30, 2020
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
121,458
$
80,174
$
122,006
$
323,638
Metalworking and other
208,554
196,372
104,844
509,770
330,012
276,546
226,850
833,408
Global Specialty Businesses
115,722
49,603
33,092
198,417
$
445,734
$
326,149
$
259,942
$
1,031,825
Timing of Revenue Recognized
Product sales at a point in time
$
431,266
$
313,511
$
254,011
$
998,788
Services transferred over time
14,468
12,638
5,931
33,037
$
445,734
$
326,149
$
259,942
$
1,031,825
 
Nine Months Ended September 30, 2019
Consolidated
Americas
EMEA
Asia/Pacific
Total
Customer Industries
Metals
$
129,031
$
75,578
$
100,868
$
305,477
Metalworking and other
131,632
108,228
64,366
304,226
260,663
183,806
165,234
609,703
Global Specialty Businesses
102,149
13,170
17,187
132,506
$
362,812
$
196,976
$
182,421
$
742,209
Timing of Revenue Recognized
Product sales at a point in time
$
352,504
$
194,911
$
177,416
$
724,831
Services transferred over time
10,308
2,065
5,005
17,378
$
362,812
$
196,976
$
182,421
$
742,209
Note 6 – Leases
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 Company has operating leases for certain facilities, vehicles
 
and machinery and equipment with remaining lease terms up
 
to
11
 
years.
 
In addition, the Company has certain land use leases with remaining
 
lease terms up to
95
 
years.
 
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 current
liabilities and long-term lease liabilities on the Condensed
 
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.
 
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, current portion of
long-term debt and long-term debt on the Condensed Consolidated
 
Balance Sheet.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
17
Operating lease expense is recognized on a straight-line
 
basis over the lease term.
 
Operating lease expense for the three and nine
months ended September 30, 2020 was $
3.7
 
million and $
10.6
 
million, respectively.
 
Comparatively, operating lease
 
expense for the
three and nine months ended September 30, 2019 was
 
$
2.5
 
million and $
6.0
 
million, respectively.
 
Short-term lease expense for the
three and nine months ended September 30, 2020 was
 
$
0.2
 
million and $
1.1
 
million, respectively.
 
Comparatively, short-term
 
lease
expense for the three and nine months ended September
 
30, 2019 was $
0.5
 
million and $
0.8
 
million, respectively.
 
The Company has
no
 
material variable lease costs or sublease income for the three or
 
nine months ended September 30, 2020 and 2019.
 
Cash paid for operating leases during the nine months ended September
 
30, 2020 and 2019 was $
10.5
 
million and $
5.9
 
million,
respectively.
 
The Company recorded new right of use lease assets and associated lease liabilities
 
of $
6.1
 
million during the nine
months ended September 30, 2020.
 
Supplemental balance sheet information related to the Company’s
 
leases is as follows:
September 30,
December 31,
2020
2019
Right of use lease assets
$
39,781
$
42,905
Other current liabilities
11,185
11,177
Long-term lease liabilities
28,061
31,273
Total operating
 
lease liabilities
$
39,246
$
42,450
Weighted average
 
remaining lease term (years)
6.0
6.2
Weighted average
 
discount rate
4.21%
4.21%
Maturities of operating lease liabilities as of September
 
30, 2020 were as follows:
September 30,
2020
For the remainder of 2020
$
4,689
For the year ended December 31, 2021
11,584
For the year ended December 31, 2022
8,019
For the year ended December 31, 2023
5,912
For the year ended December 31, 2024
4,387
For the year ended December 31, 2025 and beyond
11,583
Total lease payments
46,174
Less: imputed interest
(6,928)
Present value of lease liabilities
$
39,246
Note 7 – Restructuring and Related Activities
As previously disclosed in its 2019 Form 10-K, in the third quarter of 2019, 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. The QH
Program includes restructuring and associated severance costs to reduce total headcount by approximately 350 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 during 2020 and into 2021 under the QH Program and estimates that anticipated cost
synergies realized from the QH Program will approximate one-times the restructuring costs incurred. 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 as well as costs to close certain facilities and are
 
recorded
in restructuring and related charges in the
 
Company’s Condensed Statements
 
of Operations.
 
As described in Note 4 of Notes to
Condensed 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
18
Activity in the Company’s
 
accrual for restructuring under the QH Program for the nine months ended
 
September 30, 2020 is as
follows:
QH Program
Accrued restructuring as of December 31, 2019
$
18,043
Restructuring and related charges
3,585
Cash payments
(12,772)
Currency translation adjustments
 
37
Accrued restructuring as of September 30, 2020
$
8,893
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.
 
As a result, certain buildings and land with an aggregate
book value of approximately $
12.8
 
million have been reclassified to other current assets from property,
 
plant and equipment as of
September 30, 2020.
 
Note 8 – Share-Based Compensation
The Company recognized the following share-based compensation
 
expense in its Condensed Consolidated Statements of
Operations for the three and nine months ended
 
September 30, 2020 and 2019:
 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Stock options
$
353
$
455
$
1,138
$
888
Non-vested restricted stock awards and restricted stock
 
units
1,259
867
3,782
2,005
Non-elective and elective 401(k) matching contribution in
 
stock
910
2,072
Employee stock purchase plan
21
68
Director stock ownership plan
243
27
337
81
Performance stock units
280
560
Annual incentive plan
7,102
9,931
Total share-based
 
compensation expense
$
10,147
$
1,370
$
17,820
$
3,042
Share-based compensation expense is recorded in SG&A,
 
except for approximately $
0.4
 
million and $
1.2
 
million for the three
and nine months ended September 30, 2020, respectively,
 
and $
0.3
 
million and $
0.4
 
million for the three and nine months ended
September 30, 2019,
 
respectively, recorded
 
within Combination, integration and other acquisition-related expenses.
 
The increase in
total share-based compensation expense for the nine months
 
ended September 30, 2020 includes performance stock unit
 
s, annual
incentive
 
plan accruals, and non-elective and elective 401(k) matching
 
contributions
 
in stock as components
 
of share-based
compensation beginning in 2020, described further
 
below.
Stock Options
 
During the first quarter of 2020, the Company granted
 
stock options under its long-term incentive plan (“LTIP”)
 
that are subject
only to time-based vesting over a
three
-year period.
 
For the purposes of determining the fair value of stock option
 
awards, the
Company used a Black-Scholes option pricing model and
 
the assumptions set forth in the table below:
Number of options granted
49,115
Dividend yield
0.99
%
Expected volatility
31.57
%
Risk-free interest rate
0.36
%
Expected term (years)
4.0
The fair value of these options is amortized on a straight
 
-line basis over the vesting period.
 
As of September 30, 2020,
unrecognized compensation expense related to all stock options
 
granted was $
1.8
 
million, to be recognized over a weighted average
remaining period of
2.0
 
years.
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
19
Restricted Stock Awards
 
and Restricted Stock Units
 
During the nine months ended September 30, 2020, the
 
Company granted
27,841
 
non-vested restricted shares and
6,030
 
non-
vested restricted stock units under its LTIP
 
,
 
subject to time-based vesting, generally over a three-year period.
 
The fair value of these
grants 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 of these awards for expected forfeitures based
 
on historical experience.
 
As of September 30, 2020, unrecognized compensation
expense related to the non-vested restricted shares was $
5.7
 
million, to be recognized over a weighted average remaining
 
period of
1.7
years, and unrecognized compensation expense
 
related to non-vested restricted stock units was $
1.0
 
million, to be recognized over a
weighted average remaining period of
2.1
 
years.
Performance Stock Units
In March 2020, the Company included 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
0
% up to
200
% 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
from January 1, 2020 through December 31, 2022.
 
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: (i) a risk-free
 
rate of
0.28
%; (ii) an expected term of
3.0
 
years; and (iii) a three-year daily
historical volatility for each of the companies in the
 
peer group, including Quaker Houghton.
 
As of September 30, 2020, the Company estimates that it will
 
issue approximately
28,000
 
fully vested shares as of the settlement
date of the award based on the conditions of the
 
PSUs and Company’s closing
 
stock price on September 30, 2020.
 
As of September
30, 2020, there was approximately $
2.8
 
million of total unrecognized compensation cost related to PSUs which
 
the Company expects
to recognize over a weighted-average period of
2.5
 
years.
Annual Incentive Plan
The Company maintains an Annual Incentive Plan
 
(“AIP”), which may be settled in cash or a certain number of
 
shares subject to
performance-based and time-based vesting conditions.
 
It is the Company’s current
 
intention to settle the 2020 AIP in shares, and
therefore, expense associated with the AIP in 2020 is recorded
 
as a component of share-based compensation expense.
 
The number of
fully vested shares that may ultimately be issued as settlement
 
for each award is subject to the achievement of the Company’s
performance against certain internal financial and non-financial
 
metrics and approval by the Company’s
 
Compensation Committee.
 
Compensation expense for the AIP is measured based on the estimated
 
total value of the award.
 
The number of shares that will
ultimately be issued under the AIP award will be equal
 
to the final value of the award converted into a number of shares based on
 
the
trading price of the Company’s
 
common stock on the date of settlement.
 
As of September 30, 2020, the Company estimates that it
will issue approximately
74,000
 
fully vested shares as of the settlement date of the award
 
based on the conditions of the AIP,
 
the
Company’s projected
 
performance against its performance metrics and Company’s
 
closing stock price on September 30, 2020.
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
50
%
of the first
6
% of compensation that is contributed to the plan, with a maximum
 
matching contribution of
3
% of compensation.
 
Additionally, the
 
plan provides for non-elective nondiscretionary contributions
 
on behalf of participants who have completed one year
of service equal to
3
% of the eligible participant's compensation.
 
The Company’s matching contributions
 
and non-elective
contributions may be made in cash or in fully vested shares
 
of the Company’s common
 
stock.
 
Beginning in April 2020,
 
the Company
began matching both non-elective and elective 401(k)
 
contributions in fully vested shares of its common stock rather than
 
cash.
 
For
the three and nine months ended September 30, 2020,
 
total contributions were $
0.9
 
million and $
2.1
 
million, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
20
Note 9 – Pension and Other Postretirement
 
Benefits
The components of net periodic benefit (income) cost for
 
the three and nine months ended September 30, 2020 and
 
2019 are as
follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Other
Other
Postretirement
Postretirement
Pension Benefits
Benefits
Pension Benefits
Benefits
2020
2019
2020
2019
2020
2019
2020
2019
Service cost
$
1,227
$
993
$
2
$
2
$
3,565
$
2,956
$
5
$
5
Interest cost
1,527
1,852
25
36
4,782
4,068
77
107
Expected return on plan assets
(3,526)
(2,140)
(7,246)
(4,102)
Settlement charge
22,667
Actuarial loss amortization
626
799
15
2,288
2,348
46
Prior service cost amortization
(42)
(34)
(123)
(117)
Net periodic benefit (income)
cost
$
(188)
$
1,470
$
42
$
38
$
25,933
$
5,153
$
128
$
112
In the fourth quarter of 2018, the Company began the process of terminating its Legacy Quaker non-contributory 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 Internal Revenue Service (“I.R.S.”) and amended the Legacy Quaker U.S. Pension Plan to comply with
final regulations of the Internal Revenue Code. The Company 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 accumulated other comprehensive income (loss) (“AOCI”) on the balance sheet as of the plan termination date.
 
Employer Contributions
The Company previously disclosed in its 2019 Form 10-K
 
that it expected to make minimum cash contributions of $
10.0
 
million
to its U.S. and foreign pension plans and approximately
 
$
0.4
 
million to its other postretirement benefit plans in 2020.
 
As of
September 30, 2020, $
6.9
 
million and $
0.2
 
million of contributions have been made to the Company’s
 
U.S. and foreign pension plans
and its other postretirement benefit plans, respectively.
 
This excludes the $
1.8
 
million of additional funding made in the first quarter
of 2020, as required, to terminate the Legacy Quaker U.S.
 
Pension Plan, noted above.
Note 10 – Other (Expense) Income, Net
 
The components of other (expense) income, net, for the
 
three and nine months ended September 30, 2020 and 2019 are
 
as
follows:
Three Months Ended
Nine Months Ended
September 30,
 
September 30,
 
2020
2019
2020
2019
Income from third party license fees
$
190
$
242
$
702
$
655
Foreign exchange (losses) gains, net
(1,897)
376
(3,080)
(5)
(Loss) gain on fixed asset disposals, net
(24)
72
(105)
111
Non-income tax refunds and other related credits
82
2,131
1,047
Pension and postretirement benefit income (costs),
 
non-service components
1,375
(513)
(22,491)
(2,304)
Other non-operating income, net
117
(56)
436
107
Total other
 
(expense) income, net
$
(239)
$
203
$
(22,407)
$
(389)
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
21
Pension and postretirement benefit income (costs), non-service
 
components during both the three and nine months
 
ended
September 30, 2020 includes the $
1.6
 
million refund in premium described in Note 9 of Notes to Condensed
 
Consolidated Financial
Statements.
 
In addition, this line also includes $
22.7
 
million related to the Legacy Quaker U.S. Pension Plan non-cash
 
settlement
charge during the nine months ended September
 
30, 2020, also described in Note 9 of Notes to Condensed Consolidated
 
Financial
Statements.
Note 11 – Income Taxes
 
and Uncertain Income Tax
 
Positions
The Company’s effective
 
tax rate for the three and nine months ended September 30, 2020
 
was an expense of
8.1
% and a benefit
of
38.3
%, respectively, compared
 
to a benefit of
27.6
% and an expense of
22.9
%, respectively, for the
 
three and nine months ended
September 30, 2019.
 
The Company’s effective
 
tax rate for the three and nine months ended September 30,
 
2020 was impacted by the
pre-tax loss for the nine months ended September
 
30, 2020, the tax effect of certain one-time pre
 
-tax costs as well as certain tax
charges and benefits in the current period related
 
to the impact of recently issued tax regulations and other changes
 
in foreign tax
credit valuation allowances, discussed below,
 
tax law changes in foreign jurisdictions, and the tax impact
 
of the Company’s
termination of its Legacy Quaker U.S. Pension Plan.
 
Applying the recently issued tax regulations resulted in a $
5.0
 
million discrete
benefit on the foreign tax credit valuation allowance
 
and a $
2.1
 
million benefit on the 2019 return to provision adjustment,
 
both
recognized in the third quarter of 2020.
 
Comparatively, the
 
three and nine months ended September 30, 2019 effectiv
 
e
 
tax rates were
impacted by certain non-deductible costs associated with the
 
Combination and withholding tax expense associated with the
 
assumed
repatriation of previously untaxed current earnings and profits of
 
certain of the Company’s foreign
 
subsidiaries, partially offset by
favorable return to provision adjustments in the current
 
year and certain share-based compensation-related tax benefits for
 
deductions
in excess of compensation costs associated with stock option exercises.
 
Additionally, in the third
 
quarter of 2019, the Company
recorded a cumulative year-to-date tax benefit
 
as a result of one of its subsidiaries receiving approval
 
for the renewal of the
concessionary
15
% tax rate compared to its
25
% statutory tax rate.
On March 27, 2020, in response to COVID-19 and its detrimental
 
impact to the global economy,
 
the Coronavirus Aid, Relief and
Economic Security Act (the “CARES Act”) was enacted into
 
law, providing a stimulus
 
to the U.S. economy in the form of various
individual and business assistance programs as well as temporary
 
changes to existing tax law.
 
The changes include a postponement of
certain tax payments, deferral of the employer’s
 
portion of the social security tax and certain other payroll-related
 
incentives, and an
increase in the interest expense limitation under Section
 
163(j) of the Internal Revenue Code from
30
% to
50
% for the 2019 and 2020
tax years.
 
ASC 740 requires the tax effects of changes in tax laws or
 
rates to be recorded in the period of enactment.
 
Under the
CARES Act, the Company has the option to use its 2019
 
adjusted taxable income in determining its interest expense
 
limitation under
Section 163(j).
 
While the Company is still considering whether to make this election
 
for 2020, the current year tax provision takes
into account this potential election and associated tax
 
benefit, which offsets an increase to the Company’s
 
foreign tax credit valuation
allowance recognized during the current quarter primarily
 
driven by changes in current year projected taxable income
 
due to the
negative impacts from COVID-19.
 
In addition, the Company reviewed its existing deferred tax assets in
 
light of COVID-19 and
determined that, at this time, no change in valuation
 
allowance is required except with regard to its foreign tax credits as
 
noted below.
 
While the ultimate impact of COVID-19 on the Company’s
 
results of operations is still uncertain, the Company will continue
 
to assess
future changes in projected taxable income to determine
 
if they result in additional changes to any of the Company’s
 
valuation
allowances.
 
As previously disclosed in its 2019 Form 10-K, the Company
 
had a deferred tax liability of $
8.2
 
million at December 31, 2019,
which primarily represents the Company’s
 
estimate of non-U.S. taxes it will incur to repatriate certain foreign
 
earnings to the U.S.
 
During the first nine months of 2020, the Company
 
made certain adjustments to the deferred tax liability to
 
take into account a tax law
change enacted in the first quarter in a certain foreign
 
jurisdiction, the inclusion of other earnings to be repatriated,
 
and the actual
repatriation of earnings, resulting in a deferred tax liability
 
of $
6.4
 
million as of September 30, 2020.
 
As previously disclosed in its 2019 Form 10-K, 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 10 years. The
Company analyzes the expected impact of the utilization of foreign tax credits based on projected U.S. taxable income, overall
domestic loss recapture, annual limitations due to the ownership change limitations provided by the Internal Revenue Code, and
enacted tax law amongst other factors.
 
As of December 31, 2019, the Company had net realizable foreign
 
tax credits of $
32.7
 
million
on its balance sheet expected to be utilized between
2020 and 2026
.
 
As of September 30, 2020, the Company had net realizable
foreign tax credits of $
26.0
 
million on its balance sheet expected to be utilized between
2020 and 2026
.
 
The change in net realizable
foreign tax credits during the first nine months of 2020
 
was primarily driven by the Company's update to its initial opening balance
sheet estimate with respect to acquired Houghton foreign
 
tax credit deferred tax assets, described in Note 2 of Notes
 
to Condensed
Consolidated Financial Statements, as well as approximately
 
$
0.5
 
million of tax benefit for the nine months ended September 30, 2020
based on revised taxable income projections and changes
 
to the interest expense limitation under the CARES Act amongst
 
other
factors.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
22
The Company continues to recognize interest and penaltie
 
s
 
associated with uncertain tax positions as a component of
 
taxes on
income (loss) before equity in net income of associated
 
companies in its Condensed Consolidated Statements of Operations.
 
The
Company recognized a credit for interest of $
0.2
 
million and an expense of $
0.4
 
million and an expense for penalties of less than $
0.1
million and $
0.5
 
million in its Condensed Consolidated Statement of Operations for
 
the three and nine months ended September 30,
2020, respectively.
 
Comparatively, the Company
 
recognized an expense for interest of $
0.1
 
million and $
0.4
 
million and an expense
for penalties of less than $
0.1
 
million and $
0.1
 
million for the three and nine months ended September 30,
 
2019, respectively.
 
As of
September 30, 2020, the Company had accrued $
2.7
 
million for cumulative interest and $
4.2
 
million for cumulative penalties in its
Condensed Consolidated Balance Sheets, compared
 
to $
2.3
 
million for cumulative interest and $
3.1
 
million for cumulative penalties
accrued at December 31, 2019.
As of September 30, 2020, the Company’s
 
cumulative liability for gross unrecognized tax benefits was $
21.7
 
million, an increase
of $
2.6
 
million from the $
19.1
 
million cumulative liability accrued as of December
 
31, 2019.
 
During the nine months ended September 30, 2020
 
and 2019, the Company recognized a decrease of $
1.9
 
million and $
1.5
million, respectively,
 
in its cumulative liability for gross unrecognized tax benefits due
 
to the expiration of the applicable statutes of
limitations for certain tax years.
The Company estimates that during the year ending December
 
31, 2020 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, 2020.
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 Brazil from
2000
, Italy from
2006
,
China from
2010
, Canada from
2011
, the Netherlands and the United Kingdom from
2014
, Spain from
2015
, Mexico, Germany,
 
and
the U.S. from
2016
, India from fiscal year beginning April 1, 2017 and ending
 
March 31,
2018
, and various U.S. state tax jurisdictions
from
2009
.
 
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 related to
 
these assessments
under the Mutual Agreement Procedures (“MAP”) of the
 
Organization for Economic Co-Operation and Development
 
(“OECD”) for
all years except
 
2007.
 
During the second quarter of 2020, the Company received notification
 
that the Italian and Dutch competent
authorities reached an agreement as part of the MAP involving
 
tax years 2008 through 2015.
 
The Company has tentatively agreed to
the reduced tax assessments and has recorded $
1.3
 
million of additional reserves for uncertain tax positions for the
 
open tax years that
is consistent with the tentative agreement reached involving
 
tax years 2008 through 2015.
 
As of September 30, 2020, the Company
believes it has adequate reserves for uncertain tax
 
positions with respect to this matter.
Houghton Italia, S.r.l
 
is also currently involved in a corporate income tax audit with the
 
Italian tax authorities covering tax years
2014 through 2018.
 
As part of the purchase accounting related to the Combination,
 
the Company has established a $
5.4
 
million
reserve for uncertain tax positions relating to this audit.
 
Since this reserve relates to tax periods prior to the Combination,
 
the
Company has submitted an indemnification claim
 
against funds held in escrow by Houghton’s
 
former owners for certain tax liabilities
arising pre-Combination.
 
As a result, a corresponding $
5.4
 
million indemnification receivable has also been established
 
through
purchase accounting that would offset the
 
$
5.4
 
million in tax liabilities booked through purchase accounting.
 
These amounts relate to
the 2014 to 2018 audit periods as well as the seven-month
 
period in 2019 prior to the Combination.
 
As of September 30, 2020, the
Company believes it has adequate reserves for uncertain
 
tax positions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
23
Note 12 – Earnings Per Share
The following table summarizes earnings per share calculations
 
for the three and nine months ended September 30, 2020 and
2019:
Three Months Ended
 
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Basic earnings (loss) per common share
 
 
 
Net income (loss) attributable to Quaker Chemical Corporation
$
 
27,304
$
(13,053)
$
 
(8,812)
$
16,382
Less: (income) loss allocated to participating securities
 
(113)
 
46
 
44
 
(40)
Net income (loss) available to common shareholders
$
 
27,191
$
(13,007)
$
 
(8,768)
$
16,342
Basic weighted average common shares outstanding
17,743,538
16,185,724
17,704,662
14,271,121
Basic earnings (loss) per common share
$
1.53
$
(0.80)
$
(0.50)
$
1.15
Diluted earnings (loss) per common share
Net income (loss) attributable to Quaker Chemical Corporation
$
27,304
$
(13,053)
$
 
(8,812)
$
16,382
Less: (income) loss allocated to participating securities
(113)
 
46
 
44
 
(40)
Net income (loss) available to common shareholders
$
27,191
$
(13,007)
$
(8,768)
$
16,342
Basic weighted average common shares outstanding
17,743,538
16,185,724
17,704,662
14,271,121
Effect of dilutive securities
57,327
42,850
Diluted weighted average common shares outstanding
17,800,865
16,185,724
17,704,662
14,313,971
Diluted earnings (loss) per common share
$
1.53
$
(0.80)
$
(0.50)
$
1.14
During the third quarter of 2019, the Company issued
 
approximately
4.3
 
million shares of common stock, comprising
24.5
% of
the common stock of the Company immediately after
 
the closing, as a component of the consideration transferred in the Combination.
Certain stock options and restricted stock units are not included
 
in the diluted earnings (loss) per share calculation because
 
the effect
would have been anti-dilutive.
 
All of the Company’s potentially
 
dilutive shares for the nine months ended September
 
30, 2020 and
the three months ended September 30, 2019 are anti-dilutive
 
and not included in the dilutive earnings (loss) per share
 
calculations
because of the Company’s
 
net loss for the periods.
 
There were
no
 
anti-dilutive shares excluded from the diluted earnings per share
calculations for the three months ending September 30,
 
2020 and the nine months ended September 30, 2019.
 
Note 13 – Restricted Cash
The Company has 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 are restricted and can 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
 
have been deposited into interest bearing
accounts that earned less than $
0.1
 
million in the nine months ended September 30, 2020, compared
 
to $
0.2
 
million in the nine months
ended September 30, 2019.
 
The interest was offset by $
0.8
 
million of payments during the nine months ended September
 
30, 2020,
compared to $
0.6
 
million of payments in the nine months ended September 30, 2019.
 
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,
 
and will remain until
the restrictions lapse or the funds are exhausted via payments of
 
claims and costs of defense.
The following table provides a reconciliation of cash,
 
cash equivalents and restricted cash as of September 30, 2020 and
 
2019,
and December 31, 2019 and 2018:
September 30,
December 31,
2020
2019
2019
2018
Cash and cash equivalents
$
155,750
$
128,161
$
123,524
$
104,147
Restricted cash included in other current assets
82
460
353
Restricted cash included in other assets
18,901
19,839
19,678
20,278
Cash, cash equivalents and restricted cash
$
174,733
$
148,460
$
143,555
$
124,425
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
24
Note 14 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
 
nine months ended September 30, 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 acquired
531
531
Currency translation and other adjustments
 
(7,262)
725
10,907
38
4,408
Balance as of September 30, 2020
$
209,123
$
134,274
$
152,634
$
116,113
 
$
612,144
Other adjustments in the table above include updates
 
to the Company’s allocation
 
of the Houghton purchase price and associated
goodwill to each of the Company’s
 
reportable segments during the first nine months of 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
Business.
Gross carrying amounts and accumulated amortization
 
for definite-lived intangible assets as of September 30, 2020 and
December 31, 2019 were as follows:
Gross Carrying
Accumulated
Amount
Amortization
2020
2019
2020
2019
Customer lists and rights to sell
$
796,163
 
$
792,362
 
$
85,751
 
$
49,932
Trademarks, formulations and product
 
technology
 
156,837
 
 
157,049
 
 
27,872
 
 
21,299
Other
 
6,288
 
 
6,261
 
 
5,725
 
 
5,776
Total definite
 
-lived intangible assets
$
959,288
 
$
955,672
 
$
119,348
 
$
77,007
The Company amortizes definite-lived intangible assets on
 
a straight-line basis over their useful lives.
 
The Company recorded
$
14.0
 
million and $
41.7
 
million of amortization expense for the three and nine
 
months ended September 30, 2020, respectively.
 
Comparatively,
 
the Company recorded $
9.2
 
million and $
12.8
 
million of amortization expense for the three and nine months
 
ended
September 30, 2019, respectively.
 
Estimated annual aggregate amortization expense for
 
the current year and subsequent five years is as follows:
For the year ended December 31, 2020
$
55,447
For the year ended December 31, 2021
55,830
For the year ended December 31, 2022
55,673
For the year ended December 31, 2023
55,451
For the year ended December 31, 2024
55,025
For the year ended December 31, 2025
54,354
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.
 
The Company continuously evaluates if triggering events indicate
 
a possible impairment in one or more of its
reporting units or indefinite-lived or long-lived assets.
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
reporting units or indefinite-lived and long-lived assets, except
 
for the Company’s Houghton
 
and Fluidcare trademark and tradename
indefinite-lived intangible assets.
 
The determination of estimated fair value of the Houghton
 
and Fluidcare trademark 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”)
 
as well as projected
net sales.
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
25
the Houghton and Fluidcare trademark and tradename
 
intangible assets were less than their carrying values.
 
As a result, an
impairment charge of $
38.0
 
million to write down the carrying values of these intangible
 
assets to their estimated fair values was
recorded in the first quarter of 2020.
 
The Company’s estimate of fair
 
value and the carrying value of these Houghton and Fluidcare
trademark and tradename indefinite-lived intangible assets as of
 
September 30, 2020 was $
204.0
 
million.
 
Comparatively, these
indefinite-lived intangible assets totaled $
242.0
 
million as of December 31, 2019.
 
In addition, the Company has other indefinite-lived
intangible assets totaling $
1.1
 
million as of both September 30, 2020 and December 31,
 
2019.
 
As of September 30, 2020, the Company continued to
 
evaluate the on-going 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 this 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 intangible
 
assets were not
recoverable.
 
The Company concluded that the impact of COVID-19 did not represent
 
a triggering event as of September 30, 2020
with regards to any of the Company’s
 
reporting units or indefinite-lived and long-lived intangible
 
assets.
While the Company concluded that the impact of COVID-19
 
did not represent a triggering event as of September 30,
 
2020 for
any of its other long-lived or indefinite-lived assets or reporting
 
units, the Company will continue to evaluate the impact of COVID-19
on the Company’s current
 
and projected results.
 
If the current economic conditions worsen or projections
 
of the timeline for recovery
are significantly extended, then the Company may conclude
 
in the future that the impact from COVID-19 requires
 
the need to perform
further interim quantitative impairment tests, which could
 
result in additional impairment charges in the future.
 
Note 15 – Debt
 
Debt as of September 30, 2020 and December 31,
 
2019 includes the following:
As of September 30, 2020
As of December 31, 2019
Interest
Outstanding
 
Interest
Outstanding
 
Rate
Balance
Rate
Balance
Credit Facilities:
Revolver
1.65%
$
155,000
3.20%
$
171,169
U.S. Term Loan
1.65%
577,500
3.20%
600,000
EURO Term Loan
1.50%
152,123
1.50%
151,188
Industrial development bonds
5.26%
10,000
5.26%
10,000
Bank lines of credit and other debt obligations
Various
1,950
Various
2,608
Total debt
$
896,573
$
934,965
Less: debt issuance costs
(11,873)
(14,196)
Less: short-term and current portion of long-term debts
(38,630)
(38,332)
Total long
 
-term debt
$
846,070
$
882,437
Credit facilities
The Company’s primary
 
credit facility (as amended, the “New 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 New 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 New Credit Facility bear interest at a
 
base rate or LIBOR plus an applicable margin
 
based upon the Company’s
consolidated net leverage ratio.
 
There are LIBOR replacement provisions that contemplate a further
 
amendment if and when LIBOR
ceases to be reported.
 
The interest rate incurred on the outstanding borrowings under
 
the New Credit Facility during the nine months
ended September 30, 2020 was approximately
2.2
%.
 
As of September 30, 2020, the interest rate on the outstanding borrowings
 
under
the New Credit Facility was approximately
1.9
%.
 
In addition to paying interest on outstanding principal under
 
the New 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 $
239
 
million, net of bank letters of credit of approximately $
6
 
million, as of September
30, 2020.
 
The New Credit Facility is subject to certain financial
 
and other covenants.
 
The Company’s initial consolidated net debt to
consolidated adjusted EBITDA ratio cannot exceed 4.25 to 1, with step downs in the permitted ratio over the course of the New Credit
Facility. The Company’s consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1. The New Credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
26
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 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 September 30, 2020
and December 31, 2019, the Company was in compliance with all of the New Credit Facility covenants.
 
The Term Loans have
quarterly principal amortization during their respective
 
five-year maturities, 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 nine
months ended September 30, 2020,
 
the Company made three quarterly amortization payments
 
related to the Ter
 
m
 
Loans totaling
$
28.1
 
million.
 
The New 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 New 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 New 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
 
New Credit Facility, based on
 
the Company’s consolidated
 
net leverage ratio.
 
At the time the Company entered into the swaps, and
 
as of September 30, 2020, the aggregate interest rate on the
 
swaps, including the
fixed base rate plus an applicable margin, was
3.1
%.
 
See Note 18 of Notes to Condensed Consolidated Financial Statements.
The Company capitalized $
23.7
 
million of certain third-party debt issuance costs in connection
 
with executing the New 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
 
Condensed 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 Condensed Consolidated
 
Balance Sheet.
 
These
capitalized costs are being amortized into interest expense
 
over the five-year term of the New Credit Facility.
 
As of September 30,
2020 and December 31, 2019, the Company had $
11.9
 
million and $
14.2
 
million, respectively, of debt
 
issuance costs recorded as a
reduction of long-term debt.
 
As of September 30, 2020 and December 31, 2019, the
 
Company had $
6.3
 
million and $
7.6
 
million,
respectively, of
 
debt issuance costs recorded within other assets.
 
Industrial development bonds
As of September 30, 2020 and December 31, 2019
 
,
 
the Company had fixed rate, industrial development authority
 
bonds totaling
$
10.0
 
million in principal amount due in 2028.
 
These bonds have similar covenants to the New Credit Facility noted
 
above.
Bank lines of credit and other
 
debt obligations
The Company has certain unsecured bank lines of credit
 
and discounting facilities in one of its 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 September
 
30, 2020 was approximately $
38
 
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 September 30, 2020 were approximately $12 million.
For the three and nine months ended September 30, 2020
 
,
 
the Company incurred the following debt related expenses included
within Interest expense, net, in the Condensed Consolidated
 
Statements of Operations:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest expense
$
5,957
$
5,761
$
19,621
$
8,258
Amortization of debt issuance costs
1,188
792
3,562
792
Total
$
7,145
$
6,553
$
23,183
$
9,050
Based on the variable interest rates associated with the New
 
Credit Facility, as of September
 
30, 2020 and December 31, 2019,
the amounts at which the Company’s
 
total debt were recorded are not materially different
 
from their fair market value.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
27
Note 16 – Equity
The following tables present the changes in equity,
 
net of tax, for the three and nine months ended September 30,
 
2020 and 2019:
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at June 30, 2020
$
17,800
$
896,108
$
362,265
$
(109,264)
$
432
$
1,167,341
Net income (loss)
27,304
38
27,342
Amounts reported in other comprehensive
 
income
34,254
17
34,271
Dividends ($
0.395
 
per share)
(7,048)
(7,048)
Share issuance and equity-based
compensation plans
31
4,494
4,525
Balance at September 30, 2020
$
17,831
$
900,602
$
382,521
$
(75,010)
$
487
$
1,226,431
Balance at June 30, 2019
$
13,338
$
97,602
$
424,448
$
(78,881)
$
1,454
$
457,961
Net (loss) income
(13,053)
72
(12,981)
Amounts reported in other comprehensive
 
loss
(27,166)
(94)
(27,260)
Dividends ($
0.385
 
per share)
(6,826)
(6,826)
Shares issued related to the Combination
4,329
784,751
789,080
Share issuance and equity-based
compensation plans
64
3,412
3,476
Balance at September 30, 2019
$
17,731
$
885,765
$
404,569
$
(106,047)
$
1,432
$
1,203,450
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
28
Accumulated
Capital in
Other
Common
Excess of
Retained
Comprehensive
Noncontrolling
Stock
Par Value
Earnings
Loss
Interest
Total
Balance at 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 at January 1, 2020
17,735
888,218
412,068
(78,170)
1,604
1,241,455
Net (loss) income
(8,812)
88
(8,724)
Amounts reported in other comprehensive
 
income (loss)
3,160
(114)
3,046
Dividends ($
1.165
 
per share)
(20,735)
(20,735)
Acquisition of noncontrolling interest
(707)
(340)
(1,047)
Distribution to noncontrolling interest
affiliate shareholders
(751)
(751)
Share issuance and equity-based
compensation plans
96
13,091
13,187
Balance at September 30, 2020
$
17,831
$
900,602
$
382,521
$
(75,010)
$
487
$
1,226,431
Balance at December 31, 2018
$
13,338
$
97,304
$
405,125
$
(80,715)
$
1,317
$
436,369
Cumulative effect of an accounting change
(44)
(44)
Balance at January 1, 2019
13,338
97,304
405,081
(80,715)
1,317
436,325
Net income
16,382
186
16,568
Amounts reported in other comprehensive
 
loss
(25,332)
(71)
(25,403)
Dividends ($
1.140
0 per share)
(16,894)
(16,894)
Shares issued related to the Combination
4,329
784,751
789,080
Share issuance and equity-based
compensation plans
64
3,710
3,774
Balance at September 30, 2019
$
17,731
$
885,765
$
404,569
$
(106,047)
$
1,432
$
1,203,450
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
29
The following tables show the reclassifications from and
 
resulting balances of AOCI for the three and nine months
 
ended
September 30, 2020 and 2019:
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
 
Translation
Pension
Available-for
 
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at June 30, 2020
$
(88,637)
$
(17,363)
$
1,148
$
(4,412)
$
(109,264)
Other comprehensive income (loss) before
 
reclassifications
33,601
(901)
810
460
33,970
Amounts reclassified from AOCI
584
(104)
480
Current period other comprehensive income (loss)
33,601
(317)
706
460
34,450
Related tax amounts
60
(150)
(106)
(196)
Net current period other comprehensive income (loss)
 
33,601
(257)
556
354
34,254
Balance at September 30, 2020
$
(55,036)
$
(17,620)
$
1,704
$
(4,058)
$
(75,010)
Balance at June 30, 2019
$
(50,296)
$
(29,323)
$
738
$
$
(78,881)
Other comprehensive (loss) income before
reclassifications
(28,211)
679
(6)
(27,538)
Amounts reclassified from AOCI
728
(96)
632
Current period other comprehensive (loss) income
(28,211)
1,407
(102)
(26,906)
Related tax amounts
(281)
21
(260)
Net current period other comprehensive (loss) income
(28,211)
1,126
(81)
(27,166)
Balance at September 30, 2019
$
(78,507)
$
(28,197)
$
657
$
$
(106,047)
Defined
Unrealized
Currency
Benefit
Gain (Loss) in
 
Translation
Pension
Available-for
 
-
Derivative
Adjustments
Plans
Sale Securities
Instruments
Total
Balance at December 31, 2019
$
(44,568)
$
(34,533)
$
1,251
$
(320)
$
(78,170)
Other comprehensive (loss) income before
reclassifications
(10,468)
(409)
802
(4,855)
(14,930)
Amounts reclassified from AOCI
25,550
(229)
25,321
Current period other comprehensive (loss) income
(10,468)
25,141
573
(4,855)
10,391
Related tax amounts
(8,228)
(120)
1,117
(7,231)
Net current period other comprehensive (loss) income
(10,468)
16,913
453
(3,738)
3,160
Balance at September 30, 2020
$
(55,036)
$
(17,620)
$
1,704
$
(4,058)
$
(75,010)
Balance at December 31, 2018
$
(49,322)
$
(30,551)
$
(842)
$
$
(80,715)
Other comprehensive (loss) income before
 
reclassifications
(29,185)
760
2,133
(26,292)
Amounts reclassified from AOCI
2,192
(235)
1,957
Current period other comprehensive (loss) income
(29,185)
2,952
1,898
(24,335)
Related tax amounts
(598)
(399)
(997)
Net current period other comprehensive (loss) income
(29,185)
2,354
1,499
(25,332)
Balance at September 30, 2019
$
(78,507)
$
(28,197)
$
657
$
$
(106,047)
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 noncontrolling interest are
 
related to currency translation adjustments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
30
Note 17 – Fair Value
 
Measurements
 
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 September 30, 2020
Total
Using Fair Value
 
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
$
1,803
$
$
1,803
$
Total
$
1,803
$
$
1,803
$
 
Fair Value
 
Measurements at December 31, 2019
Total
Using Fair Value
 
Hierarchy
Assets
Fair Value
Level 1
Level 2
Level 3
Company-owned life insurance
 
$
1,782
$
$
1,782
$
Total
$
1,782
$
$
1,782
$
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
 
September 30, 2020 or December 31, 2019, respectively,
 
so related
disclosures have not been included.
 
Note 18 – Hedging Activities
As previously disclosed in its 2019 Form 10-K, in order to
 
satisfy certain requirements of the New Credit Facility as well as to
manage the Company’s exposure
 
to variable interest rate risk associated with the New Credit Facility,
 
in November 2019, the
Company entered into $
170.0
 
million notional amounts of three-year interest rate swaps.
 
See Note 15 of Notes to Condensed
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 affects earnings or it becomes
 
probable that the forecasted
transaction will not occur.
 
The Company has previously used derivative financial instruments primarily
 
for the purposes of hedging
exposures to fluctuations in interest rates.
 
The Company did not utilize derivatives designated as cash
 
flow hedges during the three
and nine months ended September 30, 2019.
 
The balance sheet classification and fair values of the
 
Company’s derivative instruments,
 
which are Level 2 measurements, are as
follows:
Fair Value
Condensed Consolidated
September 30,
December 31,
Balance Sheet Location
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
Other non-current liabilities
$
5,271
$
415
$
5,271
$
415
The following table presents the net unrealized loss deferred to
 
AOCI:
September 30,
December 31,
2020
2019
Derivatives designated as cash flow hedges:
Interest rate swaps
AOCI
$
4,058
$
320
$
4,058
$
320
The following table presents the net loss reclassified from
 
AOCI to earnings:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Amount and location of expense reclassified
from AOCI into Expense (Effective Portion)
Interest expense, net
$
(640)
$
$
(1,105)
$
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
31
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 Condensed
Consolidated Balance Sheets.
Note 19 – Commitments and Contingencies
The Company previously disclosed in its 2019 Form 10-K
 
that AC Products, Inc. (“ACP”), a wholly owned subsidiary,
 
has been
operating a groundwater treatment system to hydraulically
 
contain groundwater contamination emanating from ACP’s
 
site, the
principal contaminant of which is perchloroethylene.
 
As of September 30, 2020, ACP believes it is close to meeting
 
the conditions for
closure of the groundwater treatment system, but continues
 
to operate
 
this system while in discussions with the relevant authorities.
 
As of September 30, 2020, 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.
 
Costs of operation include the operation and
maintenance of the extraction well, groundwater monitoring
 
and program management.
 
The Company previously disclosed in its 2019 Form 10-K
 
that 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.
 
During the three and nine months ended September
 
30, 2020,
 
there have been no significant
changes to the facts or circumstances of this previously
 
disclosed matter, aside from on-going
 
claims and routine payments associated
with this litigation.
 
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
 
$
0.5
 
million (excluding costs of
defense).
The Company previously disclosed in its 2019 Form 10-K
 
that as a result of the closing of the Combination, the Company
 
is now
party to Houghton environmental matters related to certain
 
domestic and foreign properties currently or previously
 
owned.
 
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 three and nine months ended September 30,
 
2020, there have been no significant changes to the
facts or circumstances of these previously disclosed matters,
 
aside from on-going monitoring and maintenance activities
 
and routine
payments associated with each of the 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 28 years, has estimated the present value
 
range of costs for all
of the Houghton environmental matters, on a discounted
 
basis, to be between approximately $
5
 
million and $
6
 
million as of
September 30, 2020, for which $
5.7
 
million was accrued within other accrued liabilities and other non-current
 
liabilities on the
Company’s Condensed
 
Consolidated Balance Sheet as of September 30, 2020.
 
Comparatively, as of
 
December 31, 2019, the
Company had $
6.6
 
million accrued for 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 $
0.1
million and $
0.2
 
million were accrued as of September 30, 2020 and December
 
31, 2019, respectively, to
 
provide for such anticipated
future environmental assessments and remediation
 
costs.
 
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.
Note 20 – COVID-19 Global Pandemic
In early 2020, a global outbreak of COVID-19 occurred
 
initially in China and then across all locations where the Company does
business, and which continued into the third quarter.
 
In March 2020, the World
 
Health Organization formally identified the COVID-
19 outbreak as a pandemic.
 
In an effort to halt the outbreak of COVID-19,
 
the governments of impacted countries, including but not
limited to the United States, the European Union, and China, have
 
taken various actions to reduce its spread, including travel
restrictions, shutdowns of businesses deemed nonessential,
 
and stay-at-home or similar orders.
 
This outbreak and associated
measures to reduce its spread have caused significant disruption
 
s
 
to the operations of the Company and its suppliers and customers.
 
The disruptions and negative impact to the Company
 
include significant volume declines and lower net sales initially at its China
subsidiaries in the first quarter of 2020 and subsequently,
 
beginning late March and continuing into the third quarter,
 
at almost all of
its other sites as the global economy slowed significantly
 
in response to the pandemic.
 
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.
 
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
 
- Continued
(Dollars in thousands, except share and per share amounts
 
,
 
unless otherwise stated)
(Unaudited)
 
32
Further, management continues to
 
evaluate how COVID-19-related circumstances, such as remote
 
work arrangements, have
affected financial reporting processes, internal control
 
over financial reporting, and disclosure controls and procedures.
 
While the
circumstances have presented and are expected to continue
 
to present challenges, at this time, management does not believe
 
that
COVID-19 has had a material impact on financial reporting
 
processes, internal control over financial reporting, and
 
disclosure
controls and procedures.
 
The full extent of the COVID-19 pandemic related
 
business and travel restrictions and changes to business and
 
consumer
behavior intended to reduce its spread are uncertain as of
 
the date of this Report as COVID-19 and the responses of governmental
authorities continue to evolve globally.
 
The Company cannot reasonably estimate the magnitude of the effects
 
these conditions will
have on the Company’s
 
operations as they are subject to significant uncertainties relating
 
to the ultimate geographic spread of the
virus, the incidence and severity of the disease, the duration
 
or resurgence of the outbreak, the length of the
 
travel restrictions and
business closures imposed by governments of impacted
 
countries, and the economic response by governments of impacted countries.
 
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.
 
Such impacts could grow and become more significant to the
 
Company’s operations
and the Company’s liquidity
 
or financial position.
 
Therefore, given the speed and frequency of continuously
 
evolving developments
with respect to this pandemic, the Company cannot reasonably
 
estimate the magnitude or the full extent to which COVID-19
 
may
impact the Company’s results
 
of operations, liquidity or financial position.
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
33
Item 2.
 
Management’s Discussion and Analysis
 
of Financial Condition and Results of Operations
.
As used in this Report, the terms “Quaker Houghton”,
 
the “Company”, “we” and “our” refer to Quaker Chemical
 
Corporation
(doing business as Quaker Houghton), its subsidiaries, and
 
associated companies, unless the context otherwise requires.
 
The term
Legacy Quaker refers to the Company prior to closing
 
its combination with Houghton International, Inc. (“Houghton”)
 
(herein
referred to as the “Combination”) on August 1, 2019.
 
Throughout this Quarterly Report on Form 10-Q (the “Report”),
 
all figures
presented, unless otherwise stated, reflect the results of
 
operations of the combined company for the three and nine
 
months ended
September 30, 2020 and for the three and nine months
 
ended September 30, 2019 include the results of two months
 
of Houghton’s
operations post-closing of the Combination on August 1,
 
2019.
 
Executive Summary
Quaker Houghton is a global leader in industrial process
 
fluids.
 
With a presence around the world,
 
including operations in over
25 countries, our customers include thousands of the world’s
 
most advanced and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
 
companies.
 
Our high-performing, innovative and sustainable solutions are
 
backed by best-
in-class technology,
 
deep process knowledge, and customized services. Quaker
 
Houghton is headquartered in Conshohocken,
Pennsylvania, located near Philadelphia in the United
 
States.
The Company’s third
 
quarter of 2020 performance continued to be affected
 
by the COVID-19 pandemic and its impact on the
global economy,
 
including most of the Company’s
 
end customers.
 
However, the Company is pleased with its third
 
quarter
performance as it showed 28% sequential growth in
 
net sales compared to the second quarter of 2020.
 
Compared to the prior year,
third quarter net sales of $367.2 million increased 13% compared
 
to $325.1 million in the third quarter of 2019 due primarily to
 
the
inclusion of $74.6 million of Houghton and Norman Hay
 
plc (“Norman Hay”) net sales.
 
Excluding Houghton and Norman Hay net
sales, the Company’s net
 
sales would have declined approximately 10% quarter-over-quarter,
 
primarily driven by a decrease in sales
volumes of 8% due to the negative impacts of COVID-19
 
on global production levels in the current quarter.
 
The Company’s gross
profit and selling, general and administrative expenses (“SG&A”)
 
also increased due to the inclusion of Houghton and Norman
 
Hay,
but both also benefited from the realization of cost savings
 
associated with synergies achieved with the
 
Combination as well as the
impact of lower SG&A due to further cost saving measures
 
put in place to help offset the impacts of COVID-19.
The Company reported third quarter of 2020 net
 
income of $27.3 million or $1.53 per diluted share compared
 
to third quarter of
2019 net loss of $13.1 million or $0.80 per diluted share.
 
The third quarter of 2019 net loss was impacted by initial
 
inventory fair
value adjustments, restructuring charges and
 
Combination costs that were high due to the Combination’s
 
August 1, 2019 completion.
 
Excluding costs associated with the Combination and
 
other
 
non-core items in each period, the Company’s
 
adjusted EBITDA of $63.9
million in the third quarter of 2020 increased 24% compared to
 
$51.4 million in the prior year quarter,
 
primarily due to the
Combination, the inclusion of Norman Hay and the benefits of
 
cost savings realized from the Combination, which were
 
partially offset
by the current quarter negative impacts of COVID-19.
 
The Company’s non-GAAP earnings
 
per diluted share were $1.56 in both the
third quarters of 2020 and 2019, as higher net income was offset
 
by an additional 4.3 million shares issued as part of
 
the consideration
for the Combination.
 
See the Non-GAAP Measures section of this Item below,
 
as well as other items discussed in the Company’s
Consolidated Operations Review in the Operations
 
section of this Item, below.
During the third quarter of 2019 and in connection with the
 
Combination, the Company established a new reportable
 
segment
structure that consists of four segments: (i) Americas; (ii)
 
Europe, Middle East and Africa (“EMEA”); (iii) Asia/Pacific;
 
and (iv)
Global Specialty Businesses.
 
The Company’s 2020
 
operating performance by reportable segment reflected the positive
 
impact of
Houghton’s performance
 
in all of its segments and Norman Hay in its Global Specialty
 
Businesses segment.
 
Without the inclusion of
Houghton and Norman Hay,
 
net sales would have been lower in all segments compared
 
to the prior year, primarily driven by declines
in volume due to the negative impacts of COVID-19 on
 
the Company’s end markets.
 
As reported, all of the Company’s
 
segment
operating earnings were higher compared to the third
 
quarter of 2019 driven by the inclusion of Houghton and
 
Norman Hay and cost
synergies achieved with the Combination partially
 
offset by the negative impacts of 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,
below.
The Company had net operating cash flow of approximately
 
$67.3 million in the third quarter of 2020 compared
 
to $13.1 million
in the third quarter of 2019, resulting in an increase in
 
its current year-to-date net operating cash flow to $112.0
 
million compared to
$35.5 million in the first nine months of 2019.
 
The increase in net operating cash flow year-over-year
 
was driven by the inclusion of
Houghton and Norman Hay earnings, releases in working
 
capital primarily due to the volume declines related to COVID-19
 
and lower
cash outflows associated with the Combination.
 
The key drivers of the Company’s
 
operating cash flow and working capital are
further discussed in the Company’s
 
Liquidity and Capital Resources section of this Item,
 
below.
Overall, the Company’s
 
third quarter results were negatively impacted by the continuing
 
effects of COVID-19, but the
Company’s performance
 
also showed good positive trends across the globe when compared
 
sequentially to the second quarter of
2020.
 
Notably, the Company
 
continues to see lower production in most of its end markets
 
compared to the prior year with the most
significant reductions in the automotive and aerospace
 
industries.
 
Despite these challenges, the Company was able
 
to generate
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
34
significant net operating cash flow,
 
continue to pay its regular dividends, pay down its debt and continue
 
to execute its integration
plans for the Combination.
 
The current global economic slowdown and other impacts
 
due to COVID-19 pose an unprecedented challenge, but the
 
Company
expects to successfully navigate this downturn
 
as the Company has demonstrated the ability,
 
now and in the past, to respond quickly
to changing market conditions.
 
The Company also expects to maintain sufficient
 
liquidity and to remain in compliance with all of its
debt covenants despite these difficult economic
 
times.
 
The Company expects that its integration synergies
 
and additional cost savings
actions as well as continuing share gains in the marketplace
 
will help the Company during these challenging times.
 
These factors,
coupled with the benefit of a projected gradual rebound
 
in demand in the Company’s end
 
markets, are expected to drive significant
adjusted EBITDA growth in 2021 and 2022.
Impact of COVID-19
 
In early 2020, the global outbreak of COVID-19
 
negatively impacted all locations where the Company does
 
business.
 
Although
the Company has now operated during several quarters
 
in this COVID-19 environment, the full extent of the outbreak
 
and related
business impacts 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
its suppliers and customers.
 
The Company has experienced significant volume declines and
 
lower net sales as further described in this
section, initially at its China subsidiaries
 
in the first quarter of 2020 and, subsequently,
 
beginning in late March and continuing into the
third quarter, throughout the rest of
 
the business due to the global economic slowdown brought
 
on by COVID-19.
 
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.
 
 
Given the speed and frequency of 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 a
resurgence in outbreak, and continued restrictions
 
on day-to-day life and business operations may result in volume
 
declines and lower
net sales in future periods as compared to pre-COVID-19
 
levels.
 
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, including
 
the results for the remainder of 2020, could be
significantly adversely impacted by COVID-19.
 
Further, management continues to
 
evaluate how COVID-19-related circumstances, such as remote
 
work arrangements, 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, at this time, management
 
does not believe
that COVID-19 has had a material impact on financial
 
reporting processes, internal controls over financial reporting,
 
and disclosure
controls and procedures.
 
For additional information regarding the potential impact of COVID-19,
 
see Item 1A of Part II of this
Report.
 
The Company’s top
 
priority is, and especially during this pandemic remains, to protect the health
 
and safety of its employees and
customers, while working to ensure business continuity
 
to meet customers’ needs:
 
 
Our People
 
– The Company has taken steps to protect the health and wellbeing
 
of its people in affected areas through various
actions, including enabling work at home where needed and
 
possible, 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 does not expect that it will incur material
 
expenses implementing health and safety
policies for employees, contractors, and customers.
 
 
 
Our Operations
 
– Currently, all of
 
the Company’s 34 production
 
facilities worldwide are open and operating and are
 
deemed
as essential businesses in the jurisdictions where they are
 
operating.
 
The Company believes it has been able to meet the
needs of all its customers across the globe despite the
 
current economic challenges.
 
 
 
Our Business Conditions
 
– The Company’s third
 
quarter of 2020 results showed solid improvement over the second
 
quarter
of 2020, which was consistent with expectations that
 
April and May would be the worst months of the year and
 
that the
Company would show gradual quarterly improvement
 
sequentially throughout the remainder of the year.
 
However, demand
still remained somewhat deflated compared to pre-COVID-19
 
levels as many customers maintained reduced production
levels during the third quarter of 2020.
 
Excluding Houghton and Norman Hay net sales, all four of the
 
Company’s reportable
segments showed declines in net sales due to COVID-19
 
during the third quarter of 2020 compared to the prior year,
 
with the
Americas and EMEA being the most impacted and Asia/Pacific being
 
the least impacted.
 
The Company currently still
expects that the impact from COVID-19 will gradually
 
improve sequentially each quarter subject to the effective
 
containment
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
35
of the virus and its effects.
 
However, the incidence of reported cases of
 
COVID-19 appears to be again increasing in several
geographies where we have significant operations 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.
 
 
 
Our Actions
 
– The Company has taken actions to conserve cash and
 
reduce costs.
 
Some of the actions taken include
eliminating all discretionary expenditures, delaying or
 
freezing salary increases where legally permitted, reducing executives’
salaries, lowering targeted capital expenditures
 
by approximately 30%, and accelerating and fine-tuning the Company’s
integration plan.
 
These initiatives have been designed and implemented so that
 
the Company can successfully manage
through this challenging 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 Company has taken a number of actions to protect
 
our workforce, to continue to serve our customers
with excellence and to conserve cash and reduce costs, which
 
have been effective thus far, further
 
actions to respond to the
pandemic and its effects may be necessary as
 
conditions continue to evolve.
 
Liquidity and Capital Resources
At September 30, 2020, the Company had cash, cash equivalents
 
and restricted cash of $174.7 million, including
 
approximately
$19.0 million of restricted cash.
 
Total cash, cash
 
equivalents and restricted cash was $143.6 million at December 31,
 
2019, which
included $20.0 million of restricted cash.
 
The $31.1 million increase in cash, cash equivalents and restricted
 
cash was the net result of
$
112.0
 
million of cash provided by operating activities partially offset
 
by $
65.0
 
million of cash used in financing activities and $15.3
million of cash used in investing activities as well as a $0.5
 
million negative impact due to the effect of foreign
 
currency translation on
cash.
 
Net cash flows provided by operating activities were $112.0
 
million in the first nine months of 2020 compared to $35.5
 
million in
the first nine months of 2019.
 
The Company’s current
 
year net operating cash flow increase was largely due to
 
the inclusion of
Houghton and Norman Hay earnings, r
eleases in working capital primarily due to the volume declines
 
related to COVID-19, lower
cash outflows associated with the Combination
 
and higher cash dividends received from its associated companies
 
year-over-year
including $
5.0
 
million received from the Company’s
 
joint venture in Korea in the first quarter of 2020.
 
Net cash flows used in investing activities were $
15.3
 
million in the first nine months of 2020 compared to $807.9 million
 
in the
first nine months of 2019.
 
This significant decrease in cash outflows used in investing activities was due
 
to the prior year payments
related to the closing of the Combination on August 1,
 
2019.
 
In addition, the Company had higher investments in property,
 
plant and
equipment due to the inclusion of Houghton and Norman
 
Hay capital expenditures in 2020 including higher expenditures related
 
to
integrating the companies during the nine months ended
 
September 30, 2020.
 
Also, in the current year, the Company
 
finalized the
post-closing adjustment related to Norman Hay and
 
made an additional payment of approximately $
3.2
 
million.
 
Net cash flows used in financing activities were $65.0
 
million in the first nine months of 2020 compared to cash provided in
financing activities of $798.4 million in the first nine
 
months of 2019.
 
The $863.4 million decrease in net cash flows was due
primarily to additional term loan and revolving credit facility
 
borrowings in the prior year to close the Combination compared
 
to $
28.1
 
million of current year debt repayments in accordance with
 
its term loan agreements and a net $16.5 million reduction
 
in borrowings
under the Company’s revolving
 
credit facilities in the current year.
 
The net reduction in borrowings in the current year includes the
drawdown in March 2020 of most of the available capacity
 
under the Revolver as a precautionary measure to supplement
 
cash on
hand at the onset of the pandemic which was subsequently
 
repaid in September 2020.
 
Also, as part of the Combination, the Company
incurred and paid debt issuance costs of approximately
 
$23.7 million in the prior year.
 
In addition, the Company paid $
20.5
 
million of
cash dividends during the first nine months of 2020, a
 
$
5.5
 
million or
37
% increase in cash dividends compared to the prior year,
primarily due to the approximately 4.3 million shares issued
 
at closing of the Combination, as well as both the current
 
year and prior
year cash dividend per share increases.
 
Finally, during the
 
first nine months of 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 the first nine
 
months of 2020.
 
There
were no similar noncontrolling interest activities in the first
 
nine months of 2019.
 
As previously disclosed in its Annual Report on Form 10
 
-K for the year ended December 31, 2019 (the “2019 Form
 
10-K”), on
August 1, 2019, the Company completed the Combination,
 
whereby the Company acquired all of the issued and
 
outstanding shares of
Houghton from Gulf Houghton Lubricants, Ltd. in accordance with
 
the Share Purchase Agreement dated April 4, 2017.
 
The final
purchase consideration was comprised of: (i) $170.8 million
 
in cash; (ii) the issuance of approximately 4.3 million shares of
 
common
stock of the Company with par value of $1.00, comprising
 
24.5% of the common stock of the Company
 
at closing; and (iii) the
Company’s refinancing
 
of $702.6 million of Houghton’s
 
indebtedness at closing.
 
Cash acquired in the Combination was $75.8
million.
 
Prior to the Combination, the Company secured commitments
 
from certain banks for a new credit facility (as amended,
 
the
“New Credit Facility”).
 
Concurrent with the closing of the Combination on August
 
1, 2019, the New Credit Facility became effective,
replacing the Company’s
 
previous credit facility.
 
See Note 2 and Note 15 of Notes to Condensed Consolidated
 
Financial Statements.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
36
As of September 30, 2020, the Company had New Credit
 
Facility borrowings outstanding of $884.6 million.
 
As of December 31,
2019, the Company had New Credit Facility borrowings
 
outstanding of $922.4 million.
 
The Company has unused capacity under the
Revolver of approximately $239 million, net of bank letters
 
of credit of approximately $6 million, as of September 30,
 
2020.
 
The
Company’s other debt obl
 
igations are primarily industrial development bonds, bank lines of credit
 
and municipality-related loans,
which totaled $12.0 million as of September 30, 2020
 
and $12.6 million as of December 31, 2019, respectively.
 
Total unused capacity
under these arrangements as of September 30, 2020 was approximately
 
$38 million.
 
The Company’s total net debt as
 
of September
30, 2020 was $740.8 million.
 
As of September 30, 2020 and December 31, 2019, the
 
Company was in compliance with all of its bank
covenants, including those under the New Credit Facility.
 
The New 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 New 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 New Credit Facility, based
 
on the Company’s consolidated
 
net leverage ratio.
At the time the Company entered into the swaps, and
 
as of September 30, 2020, this aggregate rate was 3.1%.
 
The Company currently expects to realize Combination
 
cost synergies on a pro forma combined company basis
 
of $58 million in
2020, $75 million in 2021 and $80 million in 2022, which
 
are increases from the Company’s
 
previous expectations of $53 million,
$65 million and $75 million, respectively.
 
The Company estimates that it realized approximately $40 million
 
of cost savings during
the first nine months of 2020 on a combined company
 
pro forma basis.
 
The Company expects to incur additional costs and
 
make associated cash payments to integrate Quaker and
 
Houghton and
continue realizing the Combination’s
 
total anticipated cost synergies.
 
The Company expects cash payments,
including those pursuant
to the QH Program, described below,
 
but excluding incremental capital expenditures related to the
 
Combination, will be between
approximately 1.0 and 1.2 times its total anticipated 2022
 
cost synergies of $80 million.
 
The Company expects to incur these costs
over a three-year period following the closing of the Combination,
 
with a significant portion of these costs incurred or expected
 
to be
incurred in 2019 and the current year.
 
The Company incurred $23.4 million of total Combination,
 
integration and other acquisition-
related expenses in the first nine months of 2020, including
 
$0.8 million of accelerated depreciation, described in
 
the Non-GAAP
measures of this Item below.
 
The Company had aggregate net cash outflows of
 
approximately $20.9 million related to the
Combination, integration and other acquisition-related
 
expenses during the first nine months of 2020.
 
Comparatively, during
 
the first
nine months of 2019, the Company incurred $25.9
 
million of total Combination, integration and other acquisition
 
-related expenses,
including $2.1 million of ticking fees, described in the Non
 
-GAAP Measures of this Item below,
 
and aggregate net cash outflows
related to these costs were $40.1 million.
 
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 a $24.0
 
million charge.
 
The
QH Program includes restructuring and associated
 
severance costs to reduce total headcount by approximately
 
350 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 resulting in the reclassification of
 
approximately $
12.8
 
million of buildings and land to other current assets
from property,
 
plant and equipment as of September 30, 2020.
 
The Company expects to receive amounts in excess of net book
 
value
for the properties held for sale.
 
Additionally, as a result
 
of the QH Program, the Company recognized $
3.6
 
million of restructuring
and related charges in the first nine months
 
of 2020.
 
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 will
continue to occur during 2020 and into 2021 under the QH Prog
 
ram and estimates that the anticipated cost synergies
 
realized under
this 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 the
 
first nine months of 2020 of approximately $
12.8
 
million compared to $4.6
million in the first nine months of 2019.
 
In the fourth quarter of 2018, the Company began the
 
process of terminating its non-contributory U.S. pension plan (“the Legacy
Quaker U.S. Pension Plan”).
 
The Company 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 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 September 30, 2020, the Company’s
 
gross liability for uncertain tax positions, including interest and
 
penalties, was $
28.6
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 $
8.3
 
million as a result of
offsetting benefits in other tax jurisdictions.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
37
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,
 
including but not
limited to, payments of dividends to shareholders, costs related
 
to the Combination and integration, pension plan contributions,
 
capital
expenditures, other business opportunities 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.
 
Critical Accounting Policies and Estimates
The Company’s critical accounting
 
policies and estimates, as set forth in its 2019 Form 10-K remain
 
materially consistent.
 
However, due to the current impact
 
as well as the volatility and uncertainty in the economic outlook
 
as a result of COVID-19, the
Company re-evaluated certain of its estimates, most notably
 
its estimates and assumptions with regards to goodwill and
 
other
intangible assets during the first quarter of 2020.
 
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.
 
The
Company continuously evaluates if triggering events indicate
 
a possible impairment in one or more of its indefinite
 
-lived or long-lived
assets.
 
As of March 31, 2020, the Company evaluated the initial impact
 
of COVID-19 on the Company’s
 
operations, as well as the
volatility and uncertainty in the economic outlook as a
 
result of COVID-19, to determine if this indicated it was more likely
 
than not
that the carrying value of any of the Company’s
 
indefinite-lived or long-lived assets was not recoverable.
 
While the impact of
COVID-19 has already had a negative effect
 
on the Company’s operations
 
and was expected to significantly impact the Company’s
full year 2020 results, in evaluating if a triggering
 
event was present for one or more of the Company indefinite-lived
 
or long-lived
assets, the Company also considered the carrying value
 
and estimated fair value for each asset, as well as the Company’s
 
expected
impact from COVID-19 on each specific asset.
 
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
 
indefinite-lived and long-lived assets, except for the Company’s
 
Houghton
and Fluidcare trademark and tradename indefinite
 
-lived intangible assets.
 
Given the relatively short period of time between the
 
fair value determination for the acquired Houghton and
 
Fluidcare trademark
and tradename indefinite-lived intangible assets as of the
 
closing of the Combination on August 1, 2019, and the 2019 annual
impairment testing date of October 1, the Company’s
 
2019 annual impairment assessment concluded that the $242.0
 
million carrying
value of acquired Houghton and Fluidcare indefinite-lived
 
intangible assets generally approximated fair value, with excess fair value
of less than 5%.
 
Because of the previously concluded relatively narrow gap between
 
fair value and carrying value, the Company
concluded in the first quarter of 2020 that the expected
 
current year impact from COVID-19 on the Company’s
 
net sales represented a
triggering event.
 
As a result of the conclusion, the Company completed an interim
 
quantitative indefinite-lived intangible asset
impairment assessment as of March 31, 2020.
 
The determination of estimated fair value of the Houghton
 
and Fluidcare trademark 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”)
 
as well as projected
net sales.
 
In completing the interim quantitative impairment
 
assessment as of March 31, 2020, the Company used a WACC
assumption of approximately 10% as well as current year
 
forecasted net sales and management’s
 
estimates with respect to future net
sales growth rates specific to legacy Houghton’s
 
net sales.
 
As a result of an increase in the WACC
 
assumption as of March 31, 2020,
compared to the prior year fourth quarter annual impairment
 
assessment, and the significant current year decline in projected
 
legacy
Houghton net sales due to the impact of COVID-19,
 
the Company concluded that the estimated fair values of these intangible
 
assets
were less than their carrying values and that an
 
impairment charge to write down their carrying values
 
to their estimated fair values
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
38
was warranted.
 
This resulted in a first quarter of 2020 non-cash impairment
 
charge of $38.0 million for these indefinite-lived
intangible assets.
 
The Company performed a qualitative assessment over these
 
indefinite-lived intangible assets as of September 30,
2020 and concluded that no further impairment indicators existed.
 
The book value of these assets as of September 30,
 
2020 was
$204.0 million.
 
As of September 30, 2020, the Company continued to
 
evaluate the on-going 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 again this 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 September 30, 2020
with regards to any of the Company’s
 
reporting units or indefinite-lived and long-lived assets.
 
If the current economic conditions
worsen or projections of the timeline for recovery are
 
significantly extended, then the Company may conclude in the
 
future that the
impact from COVID-19 requires
 
the need to perform further interim quantitative impairment tests, which
 
could result in additional
impairment charges in the future.
Non-GAAP Measures
The information in this Report 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
considered 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
 
(loss) attributable to the Company before depreciation and
amortization, interest expense, net, and taxes on (loss) income
 
before equity in net income of associated companies.
 
The Company
also presents adjusted EBITDA which is calculated as EBITDA
 
plus or minus certain items that are not considered indicative of
 
future
operating performance or not considered core to the Company’s
 
operations.
 
In addition, the Company presents non-GAAP operating
income which is calculated as operating income (loss) plus
 
or minus certain items that are not considered indicative of future operating
performance or not considered core to the Company’s
 
operations.
 
Adjusted EBITDA margin and non-GAAP operating
 
margin are
calculated as the percentage of adjusted EBITDA and
 
non-GAAP operating income to consolidated net sales, respectively.
 
The
Company believes these non-GAAP measures provide
 
transparent and useful information and are widely used by analysts, investors,
and competitors in our industry as well as by management
 
in assessing the operating performance of the Company on
 
a consistent
basis.
Additionally, the
 
Company presents non-GAAP net income and non-GAAP earnings
 
per diluted share as additional performance
measures.
 
Non-GAAP net income is calculated as adjusted EBITDA, defined
 
above, less depreciation and amortization, interest
expense, net, and taxes on income (loss) before equity
 
in net income of associated companies, in each cash adjusted,
 
as applicable, for
any depreciation, amortization, interest or tax impacts resulting
 
from the non-core items identified in the reconciliation
 
of net income
(loss) attributable to the Company to adjusted EBITDA.
 
Non-GAAP earnings per diluted share is calculated as non
 
-GAAP net
income per diluted share as accounted for under the
 
“two-class share method.”
 
The Company believes that non-GAAP net income
and non-GAAP earnings per diluted share provide
 
transparent and useful information and are widely used by analysts, investors,
 
and
competitors in our industry as well as by management in
 
assessing the operating performance of the Company on a consistent
 
basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
39
The following tables reconcile the Company’s
 
non-GAAP financial measures (unaudited) to their most
 
directly comparable
GAAP (unaudited) financial measures (dollars in thousands unless
 
otherwise noted, except per share amounts):
Non-GAAP Operating Income and Margin Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Operating income (loss)
$
34,859
$
(14,502)
$
24,653
$
25,858
Fair value step up of inventory sold (a)
10,214
226
10,214
Houghton combination, integration and other
 
 
acquisition-related expenses (b)
6,913
14,702
23,442
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045
Customer bankruptcy costs (d)
463
Charges related to the settlement of a non-core
 
equipment sale (e)
384
Indefinite-lived intangible asset impairment (f)
38,000
Non-GAAP operating income
$
43,155
$
34,459
$
90,369
$
84,290
Non-GAAP operating margin (%) (n)
11.8%
10.6%
8.8%
11.4%
 
EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin
and Non-GAAP Net Income Reconciliations
Three Months Ended
Nine Months Ended
September 30,
 
September 30,
 
2020
2019
2020
2019
Net income (loss) attributable to Quaker Chemical Corporation
$
27,304
$
(13,053)
$
(8,812)
$
16,382
Depreciation and amortization (b)(l)
21,022
14,312
63,764
24,014
Interest expense, net (b)
6,837
6,102
22,109
7,611
Taxes on income
 
(loss) before equity in net income
 
of associated companies (m)
2,245
(5,633)
(7,603)
4,096
EBITDA
57,408
1,728
69,458
52,103
Equity income in a captive insurance company (g)
(542)
(524)
(697)
(1,260)
Fair value step up of inventory sold (a)
10,214
226
10,214
Houghton combination, integration and other
 
acquisition-related expenses (b)
6,913
14,702
22,679
23,789
Restructuring and related charges (c)
1,383
24,045
3,585
24,045
Customer bankruptcy costs (d)
463
Charges related to the settlement of a non-core
 
equipment sale (e)
384
Indefinite-lived intangible asset impairment (f)
38,000
Pension and postretirement benefit (income) costs,
 
non-service components (h)
(1,375)
513
22,491
2,304
Currency conversion impacts of hyper-inflationary economies (i)
154
728
278
891
Adjusted EBITDA
$
63,941
$
51,406
$
156,483
$
112,470
Adjusted EBITDA margin (%) (n)
17.4%
15.8%
15.2%
15.2%
Adjusted EBITDA
$
63,941
$
51,406
$
156,483
$
112,470
Less: Depreciation and amortization (b)
21,022
14,312
63,002
24,014
Less: Interest expense, net - adjusted (b)
6,837
5,747
22,109
5,531
Less: Taxes on income
 
(loss) before equity in net income
 
of associated companies - adjusted (j)(k)(m)
8,337
6,086
15,473
17,913
Non-GAAP net income
$
27,745
$
25,261
$
55,899
$
65,012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
40
Non-GAAP Earnings per Diluted Share Reconciliations
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
GAAP earnings (loss) per diluted share attributable to
Quaker Chemical Corporation common shareholders
$
1.53
$
(0.80)
$
(0.50)
$
1.14
Equity income in a captive insurance company
 
per diluted share (g)
(0.03)
(0.03)
(0.04)
(0.09)
Fair value step up of inventory sold per diluted share (a)
0.47
0.01
0.53
Houghton combination, integration and other
 
 
acquisition-related expenses per diluted share (b)
0.30
0.75
1.03
1.50
Restructuring and related charges per diluted
 
share (c)
0.06
1.13
0.15
1.28
Customer bankruptcy costs per diluted share (d)
0.02
Charges related to the settlement of a non-core
 
equipment
 
sale per diluted share (e)
0.02
Indefinite-lived intangible asset impairment per diluted
 
share (f)
1.65
Pension and postretirement benefit (income) costs,
 
non-service components per diluted share (h)
(0.06)
0.02
0.83
0.12
Currency conversion impacts of hyper-inflationary
 
 
economies per diluted share (i)
0.01
0.05
0.02
0.06
Transition tax adjustments per diluted
 
share (j)
(0.03)
(0.03)
Impact of certain discrete tax items per diluted share (k)
(0.25)
(0.02)
Non-GAAP earnings per diluted share (o)
$
1.56
$
1.56
$
3.15
$
4.53
(a)
 
Fair value step up of inventory sold relates to expense
 
associated with selling inventory of acquired businesses which
 
was
adjusted to fair value as a part of purchase accounting.
 
This increase to COGS is not indicative of the future operating
performance of the Company.
 
(b)
 
Houghton combination, integration and other acquisition-related
 
expenses include certain legal, financial, and other advisory
 
and
consultant costs incurred in connection with due diligence,
 
regulatory approvals, integration planning, and closing
 
the
Combination, as well as certain one-time labor costs associated
 
with the Company’s acquisition-related
 
activities.
 
These costs are
not indicative of the future operating performance of the
 
Company.
 
Approximately $0.3 million and $1.5 million in the three and
nine months ended September 30, 2020, respectively,
 
and approximately $3.4 million and $6.9 million in the three
 
and nine
months ended September 30, 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 (loss)
 
before equity in net income of associated
companies - adjusted reflects the impact of these items.
 
During the nine months ended September 30, 2020, the
 
Company
recorded
 
$0.8 million 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
 
(loss) to
non-GAAP operating income and included in the caption
 
“Depreciation and amortization” in the reconciliation of
 
net income
(loss) attributable to the Company to EBITDA, but excluded
 
from the caption “Depreciation and amortization” in the
reconciliation of adjusted EBITDA to non-GAAP net
 
income attributable to the Company.
 
During the three and nine months
ended September 30, 2019, the Company incurred $0.4
 
million and $2.1 million, respectively,
 
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 (loss) 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.
 
See Note 2 of Notes to Condensed
Consolidated Financial Statements, which appears in Item
 
1 of this Report.
(c)
 
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
Condensed Consolidated Financial Statements, which appears
 
in Item 1 of this Report.
 
(d)
 
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.
(e)
 
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.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
41
(f)
 
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 Houghton
 
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 14 of Notes to
Condensed Consolidated Financial Statements, which appears
 
in Item 1 of this Report.
(g)
 
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 33% investment in and has significant
 
influence over
Primex, and therefore accounts for this interest 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.
(h)
 
Pension and postretirement benefit (income) costs, non-service
 
components represent the pre-tax, non-service component 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 nine months ended September 30, 2020 includes the
 
$22.7 million settlement charge
for the Company’s termination
 
of the Legacy Quaker U.S. Pension Plan.
 
See Note 9 of Notes to Condensed Consolidated
Financial Statements, which appears in Item 1 of this Report.
(i)
 
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.
 
During the three
and nine
 
months ended September 30, 2020 and 2019, the Company
 
incurred non-deductible, pre-tax charges related to the
Company’s Argentine
 
affiliates.
 
These charges related to the immediate recognition
 
of foreign currency remeasurement in the
Condensed Consolidated Statements of Operations associated with
 
these entities are not indicative of the future operating
performance of the Company.
 
See Note 1 of Notes to Condensed Consolidated Financial
 
Statements, which appears in Item 1 of
this Report.
(j)
 
The impacts of certain discrete tax items included the impact of
 
changes in the valuation allowance for foreign tax credits
acquired with the Combination, changes in withholding
 
tax rates and the associated impact on previously accrued
 
for distributions
at certain of the Company’s
 
Asia/Pacific subsidiaries, additional reserves for uncertain
 
tax positions related to tax audits at certain
of the Company’s EMEA
 
subsidiaries, as well as the offsetting impact and
 
amortization of a deferred tax benefit the Company
recorded in the fourth quarter of 2019 related to an intercompany
 
intangible asset transfer.
 
See Note 11 of Notes to Condensed
Consolidated Financial Statements, which appears in Item
 
1 of this Report.
 
(k)
 
Transition tax adjustments include
 
certain tax adjustments recorded by the Company as a result of changes
 
to the Company’s
initial fourth quarter of 2017 estimates associated with U.S. Tax
 
Reform in December 2017.
 
Specifically, the
 
Company had
adjusted the initial amount estimated for the one-time charge
 
on the gross deemed repatriation on previously un
 
taxed accumulated
and current earnings and profits of certain of the Company’s
 
foreign subsidiaries.
 
In addition, the Company had adjusted its
initial estimate of the impact from certain internal revenue
 
code changes associated with the deductibility of certain executive
compensation.
 
These adjustments were based on guidance issued during 2018
 
and 2019 by the I.R.S., the U.S. Treasury and
various state taxing authorities and were the result of
 
specific one-time events that are not indicative of the future operating
performance of the Company.
 
See Note 11 of Notes to Condensed
 
Consolidated Financial Statements, which appears in Item 1
 
of
this Report.
(l)
 
Depreciation and amortization for the three and nine
 
months ended September 30, 2020 includes approximately
 
$0.2 million and
$0.9 million, respectively,
 
and for both the three and nine months ended September 30,
 
2019 includes $0.1 million of
amortization expense recorded within equity in net income
 
of associated companies in the Company’s
 
Condensed Consolidated
Statements of Operations, which is attributable to the
 
amortization of the fair value step up for the Company’s
 
50% interest in a
Houghton joint venture in Korea as a result of required
 
purchase accounting.
(m)
 
Taxes on income
 
(loss) 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 (loss)
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.
 
Fair value step up of inventory sold described in (a)
resulted in incremental taxes of less than $0.1 million during
 
the nine months ended September 30, 2020 and $2.6 million
 
for both
the three and nine months ended September 30, 2019.
 
Houghton combination, integration and other acquisition-related
 
expenses
described in (b) resulted in incremental taxes of approximately
 
$1.7 million and $5.1 million for the three and nine months ended
September 30, 2020, respectively,
 
and $2.8 million and $4.5 million for the three and nine
 
months ended September 30, 2019,
respectively.
 
Restructuring and related charges described in (c) resulted
 
in incremental taxes of $0.4 million and $0.9 million for
the three and nine months ended September 30, 2020,
 
respectively, and $5.6 million
 
for both the three and nine months ended
September 30, 2019.
 
Customer bankruptcy costs described in (d) resulted in
 
incremental taxes of $0.1 million during the nine
months ended September 30, 2020.
 
Charges related to the settlement of a non-core equipment sale described
 
in (e) resulted in
incremental taxes of $0.1 million for the nine months
 
ended September 30, 2019.
 
Indefinite-lived intangible asset impairment
described in (f) resulted in incremental taxes of $8.7 million
 
during the nine months ended September 30, 2020.
 
Pension and
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
42
postretirement benefit (income) costs, non-service components described
 
in (h) resulted in a reduction of taxes of $0.3 million for
the three months ended September 30, 2020 and incremental taxes
 
of $7.7 million for the nine months ended September 30,
 
2020,
and incremental taxes of $0.1 million and $0.5 million for
 
the three and nine months ended September 30, 2019, respectively.
 
Transition tax adjustments described
 
in (k) resulted in incremental taxes of $0.4 million for both
 
the three and nine months ended
September 30, 2019.
 
Tax impact of certain
 
discrete items described in (j) resulted in a tax benefit of $4.5
 
million and $0.4 million
for the three and nine months ended September 30,
 
2020.
 
(n)
 
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.
(o)
 
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.
 
The
calculation of GAAP and non-GAAP earnings (loss) per
 
diluted share for the three and nine months ended September
 
30, 2019
was impacted by the 4.3 million share issuance in connection
 
with the Combination.
 
Therefore, the per diluted share result for
each of the first three quarters of 2019, as reported on
 
a standalone basis, may not sum to the per diluted share
 
result for the nine
months ended September 30, 2019.
Off-Balance Sheet Arrangements
The Company had no material off-balance
 
sheet items, as defined under Item 303(a)(4) of Regulation S-K as of
 
September 30,
2020.
 
The Company’s only off
 
-balance sheet items outstanding as of September 30,
 
2020 represented approximately $
12
 
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 also Note 15 of Notes to Condensed Consolidated Financial
 
Statements, which appears in Item 1 of this Report.
 
Operations
 
Consolidated Operations Review – Comparison of the Third
 
Quarter of 2020 with the Third Quarter
 
of 2019
Net sales were $367.2 million in the third quarter of 2020
 
compared to $325.1 million in the third quarter of 2019.
 
The net sales
increase of 13% quarter-over-quarter includes
 
net sales from acquisitions, primarily Houghton and Norman Hay,
 
of $74.6 million.
 
Excluding net sales related to acquisitions, the Company’s
 
current quarter net sales would have declined approximately
 
10%, which
reflects a decrease
 
in sales volumes of 8%, 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 current
 
quarter was the negative impact of COVID-19
on global production levels.
COGS were $227.0 million in the third quarter of 2020 compared
 
to $220.1 million in the third quarter of 2019.
 
The increase in
COGS of 3% was primarily due to the inclusion of Houghton
 
and Norman Hay sales and associated COGS, partially offset
 
by the
prior year charge of $10.2 million to increase
 
acquired Houghton inventory to its fair value described in the Non
 
-GAAP Measures
section of this Item above, as well as lower COGS on the decline
 
in Legacy Quaker net sales, described above.
Gross profit in the third quarter of 2020 of $140.2 million
 
increased $35.1 million or 33% from the third quarter of 2019, due
primarily to additional gross profit from Houghton and
 
Norman Hay.
 
The Company’s reported gross margin
 
in the current quarter
was 38.2% compared to 32.3% in the third quarter of 2019
 
which includes the inventory fair value step up described
 
above.
 
Excluding the one-time increase to COGS in the prior
 
year, the Company estimates that its gross margin
 
for the third quarter of 2019
would have been approximately 35.5%.
 
The estimated increase in gross margin quarter
 
-over-quarter was primarily due to lower
COGS as a result of the Company’s
 
progress on Combination-related logistics, procurement and
 
manufacturing cost savings
initiatives, as well as a benefit from certain price and product mix
 
in the Company’s raw
 
materials.
SG&A in the third quarter of 2020 increased $16.2 million
 
compared to the third quarter of 2019 due primarily
 
to additional
SG&A from Houghton and Norman Hay.
 
This increase was partially offset by lower SG&A due
 
to the impact of COVID-19 cost
savings actions, including lower travel expenses, and
 
the benefits of realized cost savings associated with the Combination.
During the third quarter of 2020, the Company incurred
 
$6.9 million of Combination, integration and other acquisition-related
expenses, primarily for professional fees related to Houghton
 
integration activities.
 
Comparatively, the Company
 
incurred $14.7
million of similar expenses in the prior year third
 
quarter, primarily due to various professional
 
fees related to integration planning and
regulatory approval as well as professional fees associated
 
with closing the Combination.
 
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 and recorded an initial
 
$24.0 million restructuring charge.
 
The Company expects reductions in
headcount and site closures under this program to continue
 
during 2020 and into 2021.
 
The Company recorded additional
restructuring and related charges of $1.4 million
 
related to this program during the third quarter of 2020.
 
See the Non-GAAP
Measures section of this Item, above.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
43
Operating income in the third quarter of 2020 was $34.9
 
million compared to an
 
operating loss of $14.5 million in the third
quarter of 2019.
 
Excluding Combination, integration and other acquisition-related
 
expenses, restructuring and related charges and
other
 
non-core items, the Company’s
 
current quarter non-GAAP operating income increased 25%
 
to $43.2 million compared to $34.5
million in the prior year quarter, primarily
 
due to additional operating income from Houghton and Norman Hay
 
and the benefits from
cost savings related to the Combination partially offset
 
by the negative impact of COVID-19.
 
The Company had other expense, net, of $0.2 million
 
in the third quarter of 2020 compared to other income, net,
 
of less than $0.2
million in the third quarter of 2019.
 
The quarter-over-quarter change was primarily driven
 
by higher foreign currency transaction
losses in the third quarter of 2020 as compared to the
 
prior year third quarter partially offset by lower
 
expenses from the non-service
components of pension and postretirement benefit costs in
 
the current quarter.
 
Interest expense, net, increased $0.7 million compared to
 
the third quarter of 2019 primarily due to an additional month
 
of
borrowings in the current quarter under the Company’s
 
term loans and revolving credit facility to finance the closing
 
of the
Combination on August 1, 2019, as well as higher
 
current quarter borrowings outstanding as a result of the additional
 
revolver
borrowings in March 2020 at the onset of the pandemic,
 
partially offset by a decline in overall interest rates during
 
the current quarter.
The Company’s effective
 
tax rates for the third quarters of 2020 and 2019 were an expense of 8.1%
 
compared to a benefit of
27.6%, respectively.
 
The Company’s current
 
quarter effective tax rate was impacted by certain one
 
-time items including benefits
related to the impact of recently issued U.S. tax regulations
 
and other changes in foreign tax credit valuation allowances,
 
a change in a
foreign subsidiary’s statutory
 
rate and impacts related to the Combination.
 
Similarly, the prior year third
 
quarter tax rate was impacted
by the pre-tax losses driven by Combination costs, restructuring
 
charges and inventory fair value expense previously
 
mentioned.
 
Excluding the impact of these items as well as all other non-core
 
items in each quarter, described in
 
the Non-GAAP Measures section
of this Item, above, the Company estimates that its third quarters
 
of 2020 and 2019 effective tax rates would have
 
been approximately
24% and 20%, respectively.
 
The higher estimated current quarter tax rate was driven
 
by a change in the current quarter earnings
footprint to entities with higher statutory tax rates as well as a
 
cumulative year-to-date tax benefit recorded
 
during the third quarter of
2019 as a result of one of its subsidiaries receiving approval for
 
the renewal of a concessionary 15% tax rate compared to its 25%
statutory tax rate.
 
The concessionary tax rate was available to the Company’s
 
subsidiary during all quarters of 2020.
 
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
 
is based on a
number of variables, including forecasted earnings, which
 
may vary.
 
Equity in net income of associated companies was consistent
 
at $1.8 million in both the third quarters of 2020 and
 
2019.
 
Net income attributable to noncontrolling interest was consistent
 
at less than $0.1 million in both the third quarters of 2020 and
2019.
Foreign exchange negatively impacted the Company’s
 
third quarter results by approximately $0.18 per diluted share,
 
primarily
due to higher foreign exchange transaction losses quarter
 
-over-quarter and to a lesser extent, an aggregate negative
 
impact from
foreign currency translation on earnings.
Consolidated Operations Review – Comparison of the First Nine
 
Months of 2020 with the First Nine Months of 2019
Net sales were $1,031.8 million in the first nine months of
 
2020 compared to $742.2 million in the first nine months of 2019.
 
The
net sales increase of 39% year-over-year includes net
 
sales from acquisitions, primarily Houghton and Norman Hay,
 
of $407.4
million.
 
Excluding net sales related to acquisitions, the Company’s
 
current year net sales would have declined approximately 16%,
which reflects a decrease in sales volumes of 13%, a negative impact
 
from foreign currency translation of 2 % and a decrease from
selling price and product mix of 1%.
 
Consistent with the third quarter of 2020 description above, the primary
 
driver of the volume
decline in the current year was the negative impact of COVID-19
 
on global production levels.
COGS were $660.4 million in the first nine months of
 
2020 compared to $486.2 million in the first nine months
 
of 2019.
 
The
increase in COGS of 36%
 
was primarily due to the inclusion of Houghton and Norman
 
Hay sales and associated COGS and the
current year $0.8 million of accelerated depreciation
 
charges partially offset by the prior
 
year $10.2 million of an inventory fair value
step up charge described in the Non-GAAP Measures
 
section of this Item above, and lower COGS on the decline
 
in legacy Quaker net
sales, described above.
Gross profit in the first nine months of 2020 increased
 
$115.4 million or 45%
 
from the first nine months of 2019, due primarily to
additional gross profit from Houghton and Norman Hay.
 
The Company’s reported gross
 
margin in the current period was 36.0%
compared to 34.5% in the first nine months of 2019,
 
which included the inventory fair value step up described
 
above.
 
Excluding this
one-time increase to COGS in the prior year,
 
the Company estimates that its gross margin for
 
the first nine months of 2019 would
have been relatively consistent with the current year
 
at 35.9%.
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
44
SG&A in the first nine months of 2020 increased
 
$100.1 million compared to the first nine months of 2019
 
due primarily to
additional SG&A from Houghton and Norman Hay,
 
partially offset by the same drivers described in
 
the third quarter description
above.
During the first nine months of 2020, the Company
 
incurred $22.8 million of Combination, integration and other acquisition-
related expenses, primarily for professional fees related
 
to Houghton integration activities.
 
Comparatively,
 
the Company incurred
$23.8 million of similar expenses in the prior year,
 
primarily due to various professional fees related to integration
 
planning and
regulatory approval as well as professional fees associated
 
with closing the Combination.
 
See the Non-GAAP Measures section of
this Item, above.
As described 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 $3.6
million during
 
the first
 
nine months
 
of 2020
 
compared to
 
$24.0 million
 
first nine
 
months of
 
2019.
 
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 current year negative impacts of
 
COVID-19 on their
estimated fair values.
 
There were no impairment charges in the second or third
 
quarters of 2020 or in the prior year.
 
See the Critical
Accounting Policies and Estimates section as well as the Non
 
-GAAP Measures section, of this Item, above.
Operating income in the first nine months of 2020 was $24.7
 
million compared to $25.9 million in the first nine months of
 
2019.
 
Excluding Combination, integration and other acquisition
 
-related expenses, restructuring and related charges,
 
the non-cash indefinite-
lived intangible asset impairment charge, and
 
other non-core items, the Company’s
 
current year non-GAAP operating income of $90.4
million increased compared
 
to $84.3 million in the prior year, primarily
 
due to additional operating income from Houghton and
Norman Hay and the benefits from costs savings related to
 
the Combination partially offset by the negative
 
impact of COVID-19.
The Company’s other
 
expense, net, was $22.4 million in the first nine months of 2020 compared
 
to $0.4 million in the prior year
period.
 
The year-over-year increase in other expense,
 
net was primarily due to 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, described in the Non
 
-GAAP Measures section
of this Item, above, as well as higher foreign currency
 
transaction losses in the current year.
Interest expense, net, increased $14.5 million in the first nine months
 
of 2020 compared to the first nine months of 2019 primarily
due to additional borrowings under the Company’s
 
term loans and revolving credit facility to finance the closing
 
of the Combination
on August 1, 2019.
The Company’s effective
 
tax rates for the first nine months of 2020 and 2019 were a benefit of
 
38.3% and an expense of 22.9%,
respectively.
 
The Company’s current year
 
effective tax rate was impacted by the pre-tax loss for
 
the nine months ended September
30, 2020, the tax effect of certain one-time
 
pre-tax costs as well as certain one-time tax charges and
 
benefits in the current period,
including those mentioned in the three months analysis
 
above as well as those related to the impact of recently issued U.S. tax
regulations and other changes in the valuation allowances
 
for foreign tax credits acquired with the Combination, additional
 
charges
taken for uncertain tax positions related to certain
 
foreign tax audits, and the tax impact of the Company’s
 
termination of its Legacy
Quaker U.S. Pension Plan.
 
Comparatively, the prior
 
year effective tax rate was primarily impacted by certain
 
non-deductible costs
associated with the Combination.
 
Excluding the impact of 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 its first nine months of 2020 and 2019
 
effective tax
rates were relatively consistent at approximately 23%
 
and 22%, respectively.
 
Equity in net income of associated companies increased $
0.7
million in the first nine months of 2020 compared to the
 
first nine
months of 2019, primarily due to additional earnings
 
from Houghton’s 50% interest
 
in a joint venture in Korea partially offset by
lower earnings as compared to the prior year period from
 
the Company’s interest in
 
a captive insurance company.
 
See the Non-GAAP
Measures section of this Item, above.
Net income attributable to noncontrolling interest was $0.1
 
million in the first nine months of 2020 compared to $0.2
 
million in
the first nine months of 2019.
 
Foreign exchange negatively impacted the Company’s
 
first nine months of 2020 results by approximately $0.27 per diluted
 
share,
primarily due to higher foreign exchange transaction
 
losses year-over-year and to a lesser extent, an aggregate
 
negative impact from
foreign currency translation on earnings.
Reportable Segments Review - Comparison of the Third
 
Quarter of 2020 with the Third Quarter of 2019
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.
 
During the third quarter of 2019 and in connection with the Combination,
 
the Company reorganized its executive
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
45
management team to align with its new business structure,
 
which reflects the method by which the Company assesses its performance
and allocates its resources.
 
The Company’s current
 
reportable segment structure includes four 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 are not included in segment operating earnings,
 
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.
 
Other items not specifically identified with the Company’s
 
reportable segments
include interest expense, net, and other (expense) income,
 
net.
Americas
 
Americas represented approximately 32% of the Company
 
’s consolidated net sales in the
 
third quarter of 2020.
 
The segment’s
net sales were $119.5 million,
 
an increase of $2.8 million or 2% compared to the third
 
quarter of 2019.
 
The increase in net sales
reflects the inclusion of one additional month of Houghton
 
net sales of $18.6 million, as the Combination closed on
 
August 1 in the
prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease quarter-over-quarter of approximately
 
13% was due to
lower volumes of 11% and a negative
 
impact of foreign currency translation of 4%, partially offset
 
by increases in selling price and
product mix of 2%.
 
The current quarter volume decline was driven by the economic slowdown
 
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 5.38 and 22.06, respectively,
 
in the third quarter of 2020 compared to 3.97 and 19.43,
 
respectively, in
the third quarter of 2019.
 
This segment’s operating
 
earnings were $31.1 million, an increase of $7.3 million or 31% compared
 
to the
third quarter of 2019.
 
The increase in segment operating earnings reflects the
 
higher net sales with the inclusion of Houghton, noted
above, as well as an increase in gross margin
 
due to the Company’s progress on
 
Combination-related logistics, procurement and
manufacturing cost savings initiatives, and lower SG&A
 
as a result of cost savings actions in response to COVID-19,
 
including lower
travel expenses, and the benefits of realized cost savings
 
associated with the Combination, partially offset by
 
the inclusion of one
additional month of Houghton SG&A.
EMEA
EMEA represented approximately 26% of the Company’s
 
consolidated net sales in the third quarter of 2020.
 
The segment’s net
sales were $94.0 million, an increase of $11.6
 
million or 14% compared to the third quarter of 2019.
 
The increase in net sales reflects
the inclusion of one additional month of Houghton net
 
sales of $19.1 million, as the Combination closed on August 1
 
in the prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease quarter-over-quarter of 9% was due to lower
 
volumes of 15%,
partially offset by a positive impact of foreign
 
currency translation of 4% and increases in selling price and
 
product mix of 2%.
 
The
current quarter volume decline was driven by the economic
 
slowdown 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 1.17 in the third
 
quarter of
2020 compared to 1.11 in the
 
third quarter of 2019.
 
This segment’s operating earnings
 
were $17.4 million, an increase of $4.1 million
or 31% compared to the third quarter of 2019, which
 
reflects the inclusion of Houghton 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.
 
These drivers of the increase in segment operating
 
earnings were partially offset by higher SG&A, including
 
one
additional month of Houghton SG&A, partially offset
 
by cost savings actions in response to COVID-19, including
 
lower travel
expenses, and the benefits of realized cost savings associated
 
with the Combination.
Asia/Pacific
Asia/Pacific represented approximately 23% of the
 
Company’s consolidated net
 
sales in the third quarter of 2020.
 
The segment’s
net sales were $84.9 million, an increase of $10.6 million
 
or 14% compared to the third quarter of 2019.
 
The increase in net sales
reflects the inclusion of one additional month of Houghton
 
net sales of $13.0 million, as the Combination closed on
 
August 1 in the
prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease of 3% quarter-over-quarter was driven
 
by a decrease in
selling price and product mix of 5%, partially offset
 
by higher volumes of 1% and a positive impact of foreign currency
 
translation of
1%.
 
The foreign exchange impact was primarily due to the
 
strengthening of the Chinese renminbi against the U.S. dollar as this
exchange rate averaged 6.92 in the third quarter of 2020
 
compared to 7.02 in the third quarter of 2019.
 
This segment’s operating
earnings were $27.3 million, an increase of $6.9 million
 
or 34% compared to the third quarter of 2019.
 
The increase in segment
operating earnings reflects the inclusion of Houghton
 
net sales noted above, and an increase in gross margin
 
due to the Company’s
progress on Combination-related logistics and
 
procurement and manufacturing cost savings initiatives.
 
Segment SG&A was relatively
consistent quarter-over-quarter as increases from
 
one additional month of Houghton SG&A were largely
 
offset by cost savings actions
in response to COVID-19, including lower travel expenses,
 
and the benefits of realized cost savings associated with the Combination.
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
46
Global Specialty Businesses
Global Specialty Businesses represented approximately
 
19% of the Company’s consolidated
 
net sales in the third quarter of 2020.
 
The segment’s net sales were
 
$68.8 million, an increase of $17.0 million or 33% compared
 
to the third quarter of 2019.
 
The increase
in net sales reflects the inclusion of one additional month
 
of Houghton net sales and the entire quarter of Norman
 
Hay net sales,
totaling $23.8 million, as the Combination closed on August
 
1 and the Norman Hay acquisition occurred on October
 
1 in the prior
year.
 
Excluding Houghton and Norman Hay net sales, the segment’s
 
net sales decrease of 13% quarter-over-quarter
 
was driven by
lower volumes of 5%, decreases in selling price and
 
product mix of 6% and a negative impact from foreign currency
 
translation of
2%.
 
The current quarter 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 continued
 
volume declines due to the economic
slowdown due to the impacts of COVID-19.
 
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 $21.2 million, an increase of
$5.9 million or 39% compared to the third quarter of 2019.
 
The increase in segment operating earnings reflects the
 
inclusion of
incremental Houghton and Norman Hay net sales, noted
 
above, on relatively consistent gross margin levels, partially
 
offset by higher
SG&A, including one additional month of Houghton SG&A
 
and the entire quarter of Norman Hay SG&A.
Reportable Segments Review - Comparison of the First Nine Months
 
of 2020 with the First Nine Months of 2019
 
Americas
Americas represented approximately 32% of the Company’s
 
consolidated net sales in the first nine months of 2020.
 
The
segment’s net sales were $330.0
 
million, an increase of $69.3 million or 27% compared to the first
 
nine months of 2019.
 
The increase
in net sales reflects the inclusion of seven additional months
 
of Houghton net sales of $119.9 million,
 
as the Combination closed on
August 1 in the prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease year-over-year of 19% was
 
due to lower
volumes of 17% and a negative impact of foreign currency
 
translation of 4%, partially offset by increases in selling
 
price and product
mix of 2%.
 
The current year volume decline was driven by the economic
 
slowdown that began in late March and continued
 
into the
third quarter of 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
 
5.01 and 21.62, respectively,
 
in the first
nine months of 2020 compared to 3.88 and 19.25, respectively
 
in the first nine months of 2019.
 
This segment’s operating earnings
were $70.6 million, an increase of $18.5 million or 36%
 
compared to the first nine months of 2019.
 
The increase in segment operating
earnings reflects the inclusion of incremental Houghton
 
net sales, noted, above, and relatively consistent gross margins
 
year-over-year,
partially offset by higher SG&A, including seven
 
additional months of Houghton SG&A in the current year.
EMEA
EMEA represented approximately 27% of the Company’s
 
consolidated net sales in the first nine months of 2020.
 
The segment’s
net sales were $276.5 million, an increase of $92.7
 
million or 50% compared to the first nine months of 2019.
 
The increase in net
sales reflects the inclusion of seven additional months
 
of Houghton net sales of $117.2 million,
 
as the Combination closed on August
1 in the prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease year-over-year of 13% was due
 
to lower volumes
of 15%, partially offset by a positive impact of
 
foreign currency translation of 1% 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 due to the impacts of COVID-
19 and an overall reduced production in certain EMEA
 
countries that began in the second half of 2019 and continued
 
into the third
quarter of 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 in the third quarter of 2020,
 
noted in the quarter-over-quarter comparison above,
 
which reflected the results of
Houghton in both the current and prior year reported
 
figures.
 
This segment’s operating
 
earnings were $46.3 million, an increase of
$15.2 million or 49% compared to the first nine months
 
of 2019.
 
The increase in segment operating earnings reflects the inclusion
 
of
incremental Houghton net sales, noted, above,
 
and relatively consistent gross margins year-over-year,
 
partially offset by higher
SG&A, including seven additional months of Houghton
 
SG&A in the current year.
Asia/Pacific
Asia/Pacific represented approximately 22% of the
 
Company’s consolidated net
 
sales in the first nine months of 2020.
 
The
segment’s net sales were $226.9
 
million, an increase of $61.6 million or 37% compared to the first
 
nine months of 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 in the prior year.
 
Excluding Houghton net sales, the segment’s
 
net sales decrease of 11% year-over-year
 
was driven by
lower volumes of 8%, a negative impact of foreign currency
 
translation of 1% and decreases in selling price and
 
product mix of 2%.
 
The current year volume decline was driven by the
 
economic slowdown that began in the first quarter in China
 
and in late March
throughout the region due to the impacts of COVID-19.
 
The foreign exchange impact was primarily due to the
 
weakening of the
Chinese renminbi and Indian rupee against the U.S.
 
dollar as these exchange rates averaged 6.99 and 74.01,
 
respectively, in the
 
first
nine months of 2020 compared to 6.86 and 70.11,
 
respectively, in the first nine
 
months of 2019.
 
This segment’s operating earnings
were $66.1 million, an increase of $20.7 million or 46%
 
compared to the first nine months of 2019.
 
The increase in segment operating
earnings reflects the inclusion of incremental Houghton
 
net sales, noted, above, and relatively consistent gross margins
 
year-over-year,
partially offset by higher SG&A, including seven
 
additional months of Houghton SG&A in the current year.
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
47
Global Specialty Businesses
Global Specialty Businesses represented approximately
 
19% of the Company’s consolidated
 
net sales in the first nine months of
2020.
 
The segment’s net sales were $198.4
 
million, an increase of $65.9 million or 50% compared to the
 
first nine months of 2019.
 
The increase in net sales reflects the inclusion of seven
 
additional months of Houghton net sales and the full year-to-date
 
nine months
of Norman Hay net sales, totaling $90.6 million, as the
 
Combination closed on August 1 and the Norman Hay acquisition closed
 
on
October 1 in the prior year.
 
Excluding Houghton and Norman Hay net sales, the segment’s
 
net sales decrease of 19% year-over-year
was driven by lower volumes of 6%, decreases in selling price
 
and product mix of 10% and a negative impact from foreign
 
currency
translation of 3%.
 
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
 
continued volume declines due to the
economic slowdown due to the impacts of 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 the
prior year.
 
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 $58.1 million, an increase of $21.3 million
 
or 58% compared to
the first nine months of 2019.
 
The increase in segment operating earnings reflects the inclusion
 
of incremental Houghton and Norman
Hay net sales, noted, above, partially offset by
 
higher SG&A, including seven additional months of Houghton
 
and nine months of
Norman Hay SG&A in the current year.
 
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
Securities and Exchange Commission (“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 on the Company’s
 
business, results of operations, or financial condition
and our expectations to maintain sufficient liquidity
 
and remain compliant with the terms of the Company’s
 
credit facility on our
current expectations about future events.
 
These forward-looking statements include statements with respect
 
to our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations,
 
future performance, and business, including:
 
 
the potential benefits of the Combination;
 
 
the impacts on our business as a result of the COVID-19
 
pandemic and any projected global economic rebound
 
or
anticipated positive results due to Company actions taken
 
in response to the pandemic;
 
our current and future results and plans; and
 
 
statements that include the words “may,”
 
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
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 2019
 
Form 10-K 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 shutdowns.
 
Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19
 
pandemic, including actions taken in response to the pandemic by
various governments, which could exacerbate some
 
or all of the other risks and uncertainties faced by the Company,
 
including the
potential for significant increases in raw material costs, supply
 
chain disruptions, customer financial stability,
 
worldwide economic
and political conditions, foreign currency fluctuations,
 
significant changes in applicable tax rates and regulations, future
 
terrorist
attacks and other acts of violence.
 
Furthermore, the Company is subject to the same business cycles as those
 
experienced by steel,
automobile, aircraft, industrial equipment, and durable
 
goods manufacturers.
 
The ultimate significance of COVID-19 on our business
will depend on, among other things, the extent, duration
 
and strength of resurgence of the pandemic, the severity
 
of the disease and the
 
 
Quaker Chemical Corporation
Management’s Discussion and Analysis
 
 
48
number of people infected with the virus, the continued
 
uncertainty regarding widespread availability of a vaccine,
 
the effects on the
economy by the pandemic, including the resulting
 
market volatility, and by
 
the measures taken by governmental authorities and other
third parties restricting day-to-day life and business operations
 
and the length of time that such measures remain in place, and
governmental programs implemented to assist businesses impacted
 
by the COVID-19 pandemic.
 
Other factors could also adversely
affect us, including those related to the Combination
 
and other acquisitions and the integration of the combined
 
company as well as
other acquired businesses.
 
Our forward-looking statements are subject to risks, uncertainties
 
and assumptions about the Company and
its operations that are subject to change based on various
 
important factors, some of which are beyond our control.
 
These risks,
uncertainties, and possible inaccurate assumptions relevant
 
to our business could cause our actual results to differ
 
materially from
expected and historical results.
 
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, as well as Item 1A in our 2019 Form
 
10-K 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.
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 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.
 
49
Item 3.
 
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.
 
Other than the impact of the COVID-19 pandemic on market risks
 
generally, we believe
 
there has been no other
material change to the information disclosed in Part II,
 
Item 7A, of our 2019 Form 10-K.
 
See Item 1A, “Risk Factors”, of this Report
for additional discussion of the current and potential risks associated
 
with the COVID-19 pandemic.
 
50
Item 4.
 
Controls and Procedures.
 
Evaluation 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 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 not effective
 
as of September 30, 2020 because of the material weaknesses
 
in our internal
control over financial reporting, as described below.
As previously disclosed in “Item 9A. Controls and Procedures.”
 
in the Company’s 2019
 
Form 10-K, through the process of
evaluating risks and corresponding changes to the
 
design of existing or the implementation of new controls in
 
light of the significant
non-recurring transactions that occurred during 2019,
 
including the Combination, the Company identified certain deficiencies in
 
its
application of the principles associated with the Committee
 
of Sponsoring Organization of the Treadway
 
Commission in Internal
Control – Integrated Framework (2013) that management
 
has concluded in the aggregate constitute a material weakness.
 
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.
 
Specifically, management
 
concluded that changes to existing controls or the implementation
 
of new controls were not sufficient to
respond to changes to the risks of material misstatement to
 
financial reporting.
 
As a result of this deficiency in the design and
implementation of an effective risk assessment, this material
 
weakness contributed to certain control deficiencies that
 
management
concluded result in the following additional material weaknesses: (i)
 
we did not design and maintain effective
 
controls over the review
of pricing, quantity and customer data to verify that revenue
 
recognized at certain locations was complete and accurate,
 
and (ii) we did
not design and maintain effective controls over
 
the reliability of data used to support the reasonableness of certain
 
assumptions in the
accounting for business combinations.
 
Notwithstanding these material weaknesses, the Company
 
has concluded that the unaudited condensed consolidated financial
statements included in this Report present fairly,
 
in all material respects, the financial position of the Company as of
 
September 30,
2020 and December 31, 2019, and the results of its operations
 
and its cash flows and changes in equity for both the three and
 
nine
month periods ended September 30, 2020 and 2019, are in
 
conformity with accounting principles generally accepted in
 
the United
States of America.
 
However, these control deficiencies
 
could have resulted in misstatements of interim condensed consolidated
financial statements and disclosures that could
 
have resulted in a material misstatement that would not
 
be prevented or detected.
Remediation Plan Activities.
As previously disclosed in “Item 9A. Controls and Procedures.”
 
in the Company’s 2019
 
Form 10-K,
the Company and its Board of Directors are committed
 
to maintaining a strong internal control environment.
 
During the first nine
months of 2020, management began developing its full remediation
 
plan and executing what will be a multi-step remediation process
to completely and fully remediate the material weaknesses identified
 
and described above.
 
The initial steps the Company has taken
include identifying dedicated internal resources supplemented
 
with third-party specialists to assist with formalizing a robust and
detailed remediation plan, which is in the process of
 
being implemented, and specifically completing an updated
 
risk assessment,
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 as a result of the Combination.
 
The Company is conducting a comprehensive review,
 
and,
as appropriate, is updating its existing internal control
 
framework to ensure that it has identified, developed and deployed the
appropriate business process and information technology
 
general controls to meet the objectives and address the risks identified
through the updated risk assessment process.
 
In undertaking this process and carrying out our remediation
 
plan, the Company has
further supplemented its internal resources that are
 
focused on internal control over financial reporting by
 
hiring additional personnel
dedicated to financial and information technology compliance
 
during 2020.
 
Further, the Company is identifying
 
and implementing
further modifications to strengthen its internal control
 
environment.
 
During the quarter ended September 30, 2020, as a result of
initial remediation activities related to the Company’s
 
previously identified material weaknesses, the Company has modi
 
fied certain
existing controls, or designed and in some instances implemented
 
new controls.
 
It is the Company’s goal to remediate
 
all of the
previously identified material weaknesses as quickly and
 
effectively as possible, however,
 
the impact of COVID-19, including travel
restrictions and remote work arrangements has required
 
the Company to adapt and make changes to its internal controls
 
integration
plans as well as its remediation plans, and has presented
 
and is expected to continue to present challenges with regards
 
to the timing of
the Company’s remediation
 
and integration plan activities.
 
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 quarter ended September 30,
 
2020
that have materially affected, or are reasonably
 
likely to materially affect, our internal control over financial
 
reporting.
 
Based on that
evaluation,
other than the changes discussed above in connection with the
 
changes designed and implemented as a result of the
Company’s remediation
 
plan activities for the previously identified material weakne
 
sses,
there were no changes that have materially
affected, or are reasonably likely to materially
 
affect, our internal control over financial reporting during
 
the quarter ended September
30, 2020.
 
51
PART
 
II.
 
OTHER INFORMATION
Items 3, 4 and 5 of Part II are inapplicable and have been
 
omitted.
Item 1.
 
Legal Proceedings.
 
Incorporated by reference is the information in Note
 
19 of the Notes to the Condensed Consolidated Financial
 
Statements in Part
I, Item 1, of this Report.
Item 1A. Risk Factors.
In addition to the other information set forth in this Report,
 
you should carefully consider the risk set forth below,
 
which updates
the risk factors previously disclosed in Part I, Item 1A
 
of our 2019 Form 10-K, as well as the other risk factors
 
described in the 2019
Form 10-K, which could materially affect our
 
business, financial condition or future results.
 
The risk described below,
 
and the risks
described in our 2019 Form 10-K are not the only risks we
 
face.
 
Additional risks and uncertainties not currently known
 
to us or that
we currently deem to be immaterial also may materially
 
and adversely affect our business, financial condition
 
or operating results.
The outbreak of COVID-19 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.
Beginning in early 2020, there has been an outbreak
 
of COVID-19, initially in China and which has spread
 
globally, including
generally all locations where the Company does business.
 
In March 2020, the World
 
Health Organization formally identified the
COVID-19 outbreak as a pandemic.
 
The COVID-19 pandemic, including the fear of exposure
 
to and the actual effects of the illness,
together with the measures implemented to reduce its spread,
 
including travel restrictions, shutdowns of businesses deemed
nonessential, and large gatherings and shelter
 
-in-place or similar orders, have significantly impacted the global
 
economy.
 
The
pandemic has disrupted global supply chains, lowered
 
equity market valuations, created significant volatility and disruption
 
in
financial markets, and increased unemployment levels.
 
In addition, it has resulted in temporary closures of many businesses, and
although many of the businesses have subsequently re-opened,
 
they may be operating at reduced capacity or subject to additional
temporary shutdowns, while other closures may be prolonged
 
or become permanent.
The scale and scope of the COVID-19 outbreak, the resulting
 
pandemic, and the primary and secondary impacts on
 
the economy
and financial markets have had a significant disruption
 
on the operations of the Company and its suppliers and
 
customers and have
adversely affected the Company’s
 
results of operations and financial condition during the first nine
 
months of 2020 as further
described in Management’s
 
Discussion and Analysis of Financial Condition and Results of
 
Operations included in this Report.
 
The
Company has experienced disruptions as a result of COVID-19,
 
initially at its China subsidiaries in the first quarter of 2020
 
and,
subsequently,
 
beginning in late March and continuing into the third quarter
 
of 2020, throughout the rest of the business due to the
global economic slowdown.
 
We have experienced,
 
and may experience in the future, temporary site or facility closures
 
at our own
facilities or those of our customers in response to
 
government mandates in certain jurisdictions in which we operate.
 
We may also be
required to close certain of our facilities for the safety
 
of our employees in response to positive diagnoses for COVID-19.
 
Even in
facilities that are not closed, we could be affected
 
by reductions in employee availability and productivity,
 
changes in operating
procedures, and increased costs
.
 
The Company anticipates that its future results of
 
operations, including the results for the remainder
of 2020 may continue to be adversely impacted by
 
COVID-19.
 
In particular, the spread of COVID-19 and
 
efforts to contain the virus
have had the following additional effects, which
 
are likely to increase or become exacerbated the longer the
 
crisis continues:
 
reduced the demand for our products and services as many
 
customers have reduced production levels;
 
driven declines in volume and net sales across all reportable
 
segments;
 
required us to adjust certain of our facility operating procedures
 
and to take steps to reduce costs and preserve liquidity;
 
and
 
negatively affected the estimated fair value of
 
certain of the Company’s reporting
 
units or other indefinite-lived or long-lived
assets, namely the Company’s
 
Houghton and Fluidcare trademark and tradename indefinite-lived
 
intangible assets, such that
their estimated fair values were less than their carrying
 
values and required adjustments.
The spread of COVID-19, a further prolonged outbreak,
 
and efforts to contain the virus in some cases have already
 
or could in the
future also:
 
limit the availability and reduce the productivity of our
 
employees;
 
impact our financial reporting systems and processes, internal control
 
over financial reporting, and disclosure controls and
procedures, including our ability to ensure information
 
required to be disclosed in our reports under the Exchange Act
 
is
recorded, processed, summarized and reported within the
 
time periods specified in the SEC’s rules
 
and forms and that such
information is accumulated and communicated to our
 
management, including our chief executive officer
 
and chief financial
officer, as appropriate,
 
to allow for timely decisions regarding required disclosure;
 
present challenges as a result of travel restrictions and remote work
 
arrangements, including impacting the timing of our ERP
system implementations which are an integral part of
 
our integration activities, the timing of the Company’s
 
remediation plan
activities as described in Item 4 Controls and Procedures, of
 
this Report, and the Company’s
 
first year assessment of internal
control over financial reporting for Houghton and Norman
 
Hay, including the
 
implementation of new or enhanced business
 
52
process and information technology general controls,
 
as necessary, to meet the
 
objectives and address the risks identified
once the Company completes its initial design assessment;
 
increase our costs as a result of emergency
 
measures that we may take or that may be imposed on us by regulatory
authorities;
 
cause a delay in customer payments or cause a deterioration
 
of the credit quality of other counterparties that could
 
result in
credit losses or force both customer and supplier bankruptcies;
 
cause delays and disruptions in the availability of and timely
 
delivery of materials and components used in our operations;
 
 
result in our inability to meet the requirements of the covenants
 
in our existing credit facility,
 
including covenants regarding
our consolidated interest coverage ratio and consolidated
 
net leverage ratio, or increase our cost of capital or make additional
capital, including the refinancing of our credit facility,
 
more difficult or available only on terms less favorable
 
to us;
 
impact our liquidity position and cost of and ability to access funds
 
from financial institutions and capital markets;
 
negatively affect the estimated fair values of the
 
Company’s reporting units or other
 
indefinite-lived or long-lived assets; and
 
cause other risks to impact us, including the risks described
 
in the “Risk Factors” section of the 2019 Form 10-K.
Although the Company has implemented business continuity
 
and emergency response plans to permit it to continue
 
to provide
services and products to customers and support the
 
Company’s operations, while also taking
 
health and safety measures such as
implementing worker distancing measures, enhancing
 
on-site hygiene measures, and using a remote workforce where
 
possible, there
can be no assurance that the continued spread of COVID-19 and
 
efforts to contain the virus (including, but not limited
 
to, voluntary
and mandatory quarantines, restrictions on travel, limiting
 
gatherings of people, and 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 the magnitude or 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 into the fourth quarter
 
of 2020 as well,
when compared to the prior year.
The ultimate significance of COVID-19 on our business
 
will depend on, among other things, the extent, duration and
 
strength of
resurgence of the pandemic, the severity of the
 
disease and the number of people infected with the virus, the
 
ultimate geographic
spread of the virus, the continued uncertainty regarding
 
widespread availability of a vaccine, the effects on
 
the economy by the
pandemic, including market volatility,
 
and by 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, and laws or governmental programs implemented to assist
businesses impacted by the COVID-19 pandemic, such as fiscal
 
stimulus and other legislation designed to deliver
 
monetary aid and
other relief.
 
The likelihood of a further impact on the Company that could
 
be material increases the longer the virus impacts economic
activity levels in the United States and across the world.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
53
Item 2.
 
Unregistered Sales of Equity Securities and Use of
 
Proceeds.
Purchases of Equity Securities by
 
the Company
The following table sets forth information concerning
 
shares of the Company’s
 
common stock acquired by the Company during
the period covered by this Report:
(c)
(d)
Total
 
Number of
Approximate Dollar
(a)
(b)
Shares Purchased
 
Value of
 
Shares that
Total
 
Number
Average
as part of
May Yet
 
be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased (1)
Per Share (2)
Plans or Programs
Plans or Programs (3)
July 1 - July 31
29,963
 
$
200.31
 
$
86,865,026
 
August 1 - August 31
514
 
$
194.00
 
$
86,865,026
 
September 1 - September 30
$
$
86,865,026
 
Total
30,477
 
$
200.20
 
$
86,865,026
 
 
(1)
 
All of these shares were acquired from employees upon
 
their 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 price paid for shares acquired from employees pursuant
 
to employee benefit and share-based compensation
 
plans is, in
each case, 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 or restricted
 
stock 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 has no expiration date.
 
There were no shares acquired by the
Company pursuant to the 2015 Share Repurchase Program
 
during the quarter ended September 30, 2020.
Limitation on the Payment of Dividends
The New Credit Facility has limitations on the payment
 
of dividends and other so-called restricted payments.
 
See Note 15 of
Notes to Condensed Consolidated Financial Statements, in
 
Part I, Item I, of this Report.
 
 
 
 
54
Item 6.
 
Exhibits.
 
(a) Exhibits
3.1
3.2
31.1
31.2
32.1
.**
32.2
.**
101.INS
Inline XBRL Instance Document*
101.SCH
Inline XBRL Taxonomy
 
Extension Schema Document*
101.CAL
Inline XBRL Taxonomy
 
Extension Calculation Linkbase Document*
101.DEF
Inline XBRL Taxonomy
 
Extension Definition Linkbase Document*
101.LAB
Inline XBRL Taxonomy
 
Extension Label Linkbase Document*
101.PRE
Inline XBRL Taxonomy
 
Extension Presentation Linkbase Document*
104
Cover Page Interactive Data File (formatted as Inline XBRL and
 
contained in Exhibit 101.INS)*
* Filed herewith.
** Furnished herewith.
 
 
*********
 
Pursuant to the requirements of the Securities Exchange Act
 
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
QUAKER CHEMICAL CORPORATION
 
(Registrant)
 
 
 
 
/s/ Mary Dean Hall
Date: November 5, 2020
 
 
 
Mary Dean Hall, Senior Vice President,
 
Chief Financial
Officer and Treasurer
 
(officer duly authorized on behalf
of, and principal financial officer of, the Registrant)
 
exhibit311
 
 
1
EXHIBIT 31.1
 
 
CERTIFICATION
 
OF CHIEF EXECUTIVE OFFICER OF THE COMPANY
 
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
I, Michael F.
 
Barry, certify that:
 
1.
I have reviewed this quarterly report on Form 10
 
-Q of Quaker Chemical Corporation;
 
2.
Based on my knowledge, this report does not contain
 
any untrue statement of a material fact or omit to state a material
 
fact
necessary to make the statements made, in light of
 
the circumstances under which such statements were made,
 
not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
 
other financial information included in this report, fairly
 
present in all
material respects the financial condition, results of operations
 
and cash flows of the registrant as of, and for,
 
the periods presented
in this report;
 
4.
The registrant’s other certifying
 
officer and I are responsible for establishing and
 
maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and
 
15d-15(e)) and internal control over financial reporting (as defined
 
in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
 
and have:
 
 
(a)
Designed such disclosure controls and procedures, or
 
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
 
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
 
particularly during the period in which this report is
being prepared;
 
 
(b)
Designed such internal control over financial reporting,
 
or caused such internal control over financial reporting
 
to be
designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s
 
disclosure controls and procedures and presented in this report
 
our
conclusions about the effectiveness of the disclosure
 
controls and procedures, as of the end of the period covered
 
by
this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s
 
internal control over financial reporting that occurred during
the registrant’s most recent
 
fiscal quarter (the registrant’s
 
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely
 
to materially affect, the registrant’s
 
internal control over financial
reporting; and
 
5.
The registrant’s other certifying
 
officer and I have disclosed, based on our most recent
 
evaluation of internal control over financial
reporting, to the registrant’s
 
auditors and the audit committee of the registrant’s
 
board of directors (or persons performing the
equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the
 
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
 
the registrant’s ability to record,
 
process, summarize and
report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management
 
or other employees who have a significant role in the
registrant’s internal control
 
over financial reporting.
Date: November 5, 2020
 
/s/ Michael F. Barry
Michael F. Barry
Chief Executive Officer
 
exhibit312
 
 
1
EXHIBIT 31.2
 
 
CERTIFICATION
 
OF CHIEF FINANCIAL OFFICER OF THE COMPANY
 
PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
I, Mary Dean Hall, certify that:
 
1.
I have reviewed this quarterly report on Form 10
 
-Q of Quaker Chemical Corporation;
 
2.
Based on my knowledge, this report does not contain
 
any untrue statement of a material fact or omit to state a material
 
fact
necessary to make the statements made, in light of
 
the circumstances under which such statements were made,
 
not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and
 
other financial information included in this report, fairly
 
present in all
material respects the financial condition, results of operations
 
and cash flows of the registrant as of, and for,
 
the periods presented
in this report;
 
4.
The registrant’s other certifying
 
officer and I are responsible for establishing and
 
maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and
 
15d-15(e)) and internal control over financial reporting (as defined
 
in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant
 
and have:
 
 
(a)
Designed such disclosure controls and procedures, or
 
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
 
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
 
particularly during the period in which this report is
being prepared;
 
 
(b)
Designed such internal control over financial reporting,
 
or caused such internal control over financial reporting
 
to be
designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s
 
disclosure controls and procedures and presented in this report
 
our
conclusions about the effectiveness of the disclosure
 
controls and procedures, as of the end of the period covered
 
by
this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s
 
internal control over financial reporting that occurred during
the registrant’s most recent
 
fiscal quarter (the registrant’s
 
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely
 
to materially affect, the registrant’s
 
internal control over financial
reporting; and
 
5.
The registrant’s other certifying
 
officer and I have disclosed, based on our most recent
 
evaluation of internal control over financial
reporting, to the registrant’s
 
auditors and the audit committee of the registrant’s
 
board of directors (or persons performing the
equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the
 
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
 
the registrant’s ability to record,
 
process, summarize and
report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management
 
or other employees who have a significant role in the
registrant’s internal control
 
over financial reporting.
Date: November 5, 2020
 
/s/ Mary Dean Hall
Mary Dean Hall
Chief Financial Officer
 
exhibit321
 
 
1
EXHIBIT 32.1
 
CERTIFICATION
 
PURSUANT TO 18 U.S.C. SECTION 1350
 
The undersigned hereby certifies that the Form 10-Q Quarterly
 
Report of Quaker Chemical Corporation (the “Company”)
 
for the
quarterly period ended September 30, 2020 filed with the
 
Securities and Exchange Commission (the “Report”) fully complies
 
with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
 
Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition
 
and results of operations of the Company.
 
 
Dated: November 5, 2020
 
 
/s/ Michael F. Barry
 
 
Michael F. Barry
 
 
Chief Executive Officer of Quaker Chemical
 
Corporation
 
exhibit322
 
 
1
EXHIBIT 32.2
 
CERTIFICATION
 
PURSUANT TO 18 U.S.C. SECTION 1350
 
The undersigned hereby certifies that the Form 10-Q Quarterly
 
Report of Quaker Chemical Corporation (the “Company”)
 
for the
quarterly period ended September 30, 2020 filed with the
 
Securities and Exchange Commission (the “Report”) fully complies
 
with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
 
Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition
 
and results of operations of the Company.
 
 
Dated: November 5, 2020
 
 
/s/ Mary Dean Hall
 
 
Mary Dean Hall
 
 
Chief Financial Officer of Quaker Chemical Corporation