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
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 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
offsetting benefits in other tax jurisdictions.