kwr-20201231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended
December 31, 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)
A
Pennsylvania
Corporation
No.
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
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
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
☒
No
☐
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐
No
☒
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 has filed a report on and
attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15
U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit
report.
Yes
☒
No
☐
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Act).
Yes
☐
No
☒
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity
was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter. (The aggregate market value is
computed by reference to the last
reported sale on the New York Stock Exchange on June 30, 2020): $
3,273,904,147
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the
latest practicable date:
17,853,700
shares of Common Stock,
$1.00 Par Value, as of January 31, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to the 2021 Annual Meeting of Shareholders
are incorporated by reference into Part III.
1
QUAKER CHEMICAL CORPORATION
Table of
Contents
Page
Part I
Item 1.
Business.
2
Item 1A.
Risk Factors.
7
Item 1B.
Unresolved Staff Comments.
19
Item 2.
Properties.
19
Item 3.
Legal Proceedings.
19
Item 4.
Mine Safety Disclosures.
19
Item 4(a).
Information about our Executive Officers.
20
Part II
Item 5.
Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
22
Item 6.
Selected Financial Data.
23
Item 7.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
41
Item 8.
Financial Statements and Supplementary Data.
43
Item 9.
Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
100
Item 9A.
Controls and Procedures.
100
Item 9B.
Other Information.
102
Part III
Item 10.
Directors, Executive Officers and Corporate
Governance.
103
Item 11.
Executive Compensation.
103
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
103
Item 13.
Certain Relationships and Related Transactions,
and Director Independence.
103
Item 14.
Principal Accountant Fees and Services.
103
Part IV
Item 15.
Exhibits and Financial Statement Schedules.
104
Item 16.
Form 10-K Summary.
107
2
PART
I
As used in this Annual Report on Form 10-K (the “Report”),
the terms “Quaker Houghton”, the “Company”, “we”,
and “our”
refer to Quaker Chemical Corporation (doing business as Quaker
Houghton), its subsidiaries, and associated companies, unless the
context otherwise requires.
The term Legacy Quaker refers to the Company prior to
the closing of its combination with Houghton
International, Inc. (“Houghton”) (herein referred
to as the “Combination”) on August 1, 2019.
Throughout the Report, all figures
presented, unless otherwise stated, reflect the results of
operations of the combined company for the year ended
December 31, 2020;
and for the year ended December 31, 2019, the results of
Legacy Quaker plus five months of Houghton’s
operations post-closing of
the Combination on August 1, 2019; and for the year
ended December 31, 2018, the results of only Legacy Quaker.
Item 1.
Business.
General Description
The Company was organized in 1918, incorporated
as a Pennsylvania business corporation in 1930,
and in August 2019
completed
the Combination with Houghton to form Quaker Houghton.
Quaker Houghton is a global leader in industrial process
fluids.
With a presence around the world,
including operations in over 25 countries, the Company’s
customers include thousands of
the world’s most advanced
and specialized steel, aluminum, automotive, aerospace,
offshore, can, mining, and metalworking
companies. Quaker Houghton develops, produces, and
markets a broad range of formulated chemical specialty
products and offers
chemical management services (which we refer to as “Fluidcare
TM
”) for various heavy industrial and manufacturing applications
throughout its four segments: Americas; Europe, Middle
East and Africa (“EMEA”); Asia/Pacific; and Global Specialty
Businesses.
The major product lines of Quaker Houghton include
metal removal fluids, cleaning fluids, corrosion inhibitors, metal
drawing
and forming fluids, die cast mold releases, heat treatment
and quenchants, metal forging fluids, hydraulic fluids,
specialty greases,
offshore sub-sea energy control fluids,
rolling lubricants, rod and wire drawing fluids and surface treatme
nt chemicals.
The following
are the respective contributions to consolidated net sales of
each of our principal product lines representing more than 10% of
consolidated net sales for
any of the past three years based on the Company’s
current product line segmentation:
2020
2019
2018
Metal removal fluids
23.9
%
19.9
%
15.4
%
Rolling lubricants
21.8
%
21.9
%
25.5
%
Hydraulic fluids
13.3
%
13.0
%
13.0
%
Houghton Combination
On August 1, 2019, the Company completed the Combination
and acquired all of the issued and outstanding shares of
Houghton
from Gulf Houghton Lubricants, Ltd. (“Gulf”) 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 (the “Share Purchase
Agreement”).
The shares were bought for an aggregate purchase consideration
consisting of: (i) $170.8 million in cash; (ii) the
issuance of approximately 4.3 million shares of the
Company’s common stock, $1.00
par value per share, comprising 24.5% of the
common stock outstanding upon the closing of the Combination;
and (iii) the Company’s refinancing
of Houghton’s net indebtedness
as of the closing of the Combination of approximately
$702.6 million.
Houghton is a leading global provider of specialty chemicals and
technical services for metalworking and other industrial
applications, and, the combination with Legacy Quaker
created a leading global supplier of industrial process fluids.
The
Combination expanded the Company’s
addressable metalworking, metals and industrial end markets, including
steel, aluminum,
aerospace, defense, transportation-original equipment
manufacturer (“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.
Notable Recent Acquisition Activity
In December 2020, the Company completed its acquisition
of Coral Chemical Company (“Coral”), a privately held,
U.S.-based
provider of metal finishing fluid solutions, for approximately
$53 million, net of cash acquired.
Coral provides technical expertise and
product solutions for pre-treatment, metalworking and wastewater
treatment applications to the beverage can and general industrial
end markets.
In February 2021, the Company acquired certain assets related to
tin-plating solutions primarily for steel end markets for
approximately $25 million.
Impact of COVID-19
During 2020, the global outbreak of COVID-19 and
subsequent pandemic 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
pandemic and related business impacts remains
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.
The pandemic has disrupted the operations of the
Company and its suppliers and customers and, as a result,
the Company experienced volume declines and lower net sales during
2020
as further described in Item 7 of this Report.
The initial impact was at its China subsidiaries in the first quarter
of 2020 and beginning
3
in late March continued throughout 2020 in the rest of
the business as the pandemic led to a global economic slowdown.
Management
continues to monitor the impact of the COVID-19
pandemic on the Company,
the overall specialty chemical industry and the
economies and markets in which the Company operates.
Sales Revenue
A substantial portion of the Company’s
sales worldwide are made directly through its own employees
and its Fluidcare programs,
with the balance sold through distributors and agents.
The Company’s employees typically
visit the plants of customers regularly,
work on site, and through training and experience,
identify production needs which can be resolved or otherwise addressed
either by
utilizing the Company’s
existing products or by applying new formulations developed
in its laboratories.
The Company recognizes revenue in an amount that
reflects the consideration that the Company expects to receive
in exchange
for the goods or services transferred to its customers.
To do this, the Company
applies a five-step model that 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.
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 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.
The Company transferred third-party products under arrangements resulting
in net reporting of
$42.5 million,
$48.0 million and $47.1 million for the years ended December
31, 2020,
2019 and 2018,
respectively.
Competition
The specialty chemical industry comprises a number
of companies similar in size to the Company,
as well as companies larger
and smaller than Quaker Houghton.
The Company cannot readily determine its precise position in
every industry it serves.
However,
the Company estimates it holds a leading global position
in the market for industrial process fluids including significant
global
positions in the markets for process fluids in portions of
the automotive and industrial markets, and a leading position in
the market for
process fluids to produce sheet steel and aluminum.
The offerings of many of the Company’s
competitors differ from those of Quaker
Houghton; some offer a broad portfolio of
fluids, including general lubricants, while others have more
specialized product ranges.
All
competitors provide different levels of technical
services to individual customers.
Competition in the industry is based primarily on
the ability to supply products that meet the needs of the
customer and provide technical services and laboratory assistance
to the
customer, and to a lesser extent, on
price.
Major Customers and Markets
In 2020,
Quaker Houghton’s five largest
customers (each composed of multiple subsidiaries or divisions
with semi-autonomous
purchasing authority) accounted for approximately
10% of consolidated net sales, with its largest customer
accounting for
approximately 3% of consolidated net sales.
A significant portion of the Company’s
revenues are realized from the sale of process
fluids and services to manufacturers of steel, aluminum,
automobiles, aircraft, industrial equipment, and durable goods and,
therefore,
Quaker
Houghton is subject to the same business cycles as those experienced
by these manufacturers and their customers.
The
Company’s financial performance
is generally correlated to the volume of global production
within the industries it serves, rather than
directly related to the financial performance of its customers.
Furthermore, steel and aluminum customers typically have limited
manufacturing locations compared to metalworking
customers and generally use higher volumes of products at a single
location.
Raw Materials
Quaker Houghton uses approximately 3,000 raw materials,
including animal fats, vegetable oils, mineral oils, oleochemicals,
ethylene, solvents, surfactant agents, various chemical compounds
that act as additives to our base formulations, and a wide variety
of
other organic and inorganic compounds
and various derivatives of the foregoing.
The price of mineral oil and its derivatives can be
affected by the price of crude oil and industry
refining capacity.
Animal fat and vegetable oil prices, as well as the prices of
other raw
materials, are impacted by their own unique supply
and demand factors, and by biodiesel consumption which
is affected by the price
of crude oil.
Accordingly, significant fluctuations
in the price of crude oil can have a material impact on
the cost of these raw
materials.
In addition, many of the raw materials used by Quaker
Houghton are commodity chemicals which can experience
significant price volatility.
Accordingly, the
Company’s earnings could be
affected by market changes in raw material prices.
Reference is made to the disclosure contained in Item 7A
of this Report.
Patents and Trademarks
Quaker Houghton has a limited number of patents and patent
applications including patents issued, applied for,
or acquired in the
U.S. and in various foreign countries, some of which may
prove to be material to its business, with the earliest patent expiry
in 2021.
The Company principally relies on its proprietary formulae
and its applications know-how and experience to meet
customer needs.
Quaker Houghton products are identified by numerous trademarks
that are registered throughout its marketing area.
4
Research and Development—Laboratories
The Company maintains approximately thirty separate laboratory
facilities worldwide that are primarily devoted to applied
research and development.
In addition, the Company maintains quality control labs at
each of its manufacturing facilities.
Quaker
Houghton research and development is directed primarily
toward applied technology since the nature of the Company’s
business
requires continual modification and improvement of formulations
to provide specialty chemicals to satisfy customer requirements.
If
problems are encountered which cannot be resolved
by local laboratories, the problem is referred to one of our ten principal
laboratories, located in Conshohocken, Pennsylvania; Valley
Forge, Pennsylvania; Aurora, Illinois; Santa Fe Springs,
California;
Uithoorn, the Netherlands; Coventry,
United Kingdom; Dortmund, Germany; Barcelona, Spain; Turin,
Italy or Qingpu, China.
Research and development costs are expensed as incurred.
Research and development expenses during the years ended
December 31, 2020,
2019 and 2018 were $40.0 million,
$32.1 million and $24.5 million, respectively.
Regulatory Matters
In order to facilitate compliance with applicable federal,
state, and local statutes and regulations relating to occupational
health
and safety and protection of the environment, the Company
has an ongoing program of site assessment for the
purpose of identifying
capital expenditures or other actions that may be
necessary to comply with such requirements.
The program includes periodic
inspections of each facility by the Company and/or independent
experts, as well as ongoing inspections and training by on-site
personnel.
Such inspections address operational matters, record keeping, reporting
requirements and capital improvements.
Capital
expenditures directed solely or primarily to regulatory
compliance amounted to approximately $3.7
million, $4.4 million and $1.5
million during the years ended December 31, 2020,
2019 and 2018,
respectively.
Company Segmentation
The Company’s operating
segments, which are consistent with its reportable segments,
reflect the structure of the Company’s
internal organization, the method by which
the Company’s resources are allocated
and the manner by which the Company and the
chief operating decision maker assess performance.
The Company’s reportable segments
are: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
See Note 4 of Notes to Consolidated Financial Statements in Item
8 of this Report,
incorporated herein by this reference.
Non-U.S. Activities
Since significant revenues and earnings are generated by
non-U.S. operations, the Company’s
financial results are affected by
currency fluctuations, particularly between the U.S.
dollar and the euro, the British pound sterling, the Brazilian
real, the Mexican
peso, the Chinese renminbi and the Indian rupee,
and the impact of those currency fluctuations on the underlying economies.
Incorporated by reference is (i) the foreign exchange
risk information contained in Item 7A of this Report, (ii)
the geographic
information in Note 4 of Notes to Consolidated Financial
Statements included in Item 8 of this Report, and (iii) information