Quaker(KWR) - 2023 Q4 - Annual Results

Executive Summary & Consolidated Results Overview This chapter provides an overview of Quaker Houghton's financial performance, highlighting key consolidated results for Q4 and full year 2023, along with strategic highlights Fourth Quarter 2023 Consolidated Results Q4 2023 saw a 4% net sales decrease, but Quaker Houghton achieved a $20.2 million net income and 13% Adjusted EBITDA growth, reversing a prior year net loss Q4 2023 Consolidated Financial Performance | Metric | Q4 2023 ($ in thousands) | Q4 2022 ($ in thousands) | Change (%) | | :----------------------------------- | :----------------------- | :----------------------- | :--------- | | Net sales | 467,109 | 484,808 | -3.65% | | Net income (loss) attributable to Quaker Chemical Corporation | 20,198 | (75,957) | N/A | | Net income (loss) attributable to Quaker Chemical Corporation common shareholders – diluted | 1.12 | (4.24) | N/A | | Non-GAAP net income | 31,949 | 25,001 | 27.79% | | Non-GAAP earnings per diluted share | 1.78 | 1.39 | 28.06% | | Adjusted EBITDA | 76,964 | 67,923 | 13.31% | * The decrease in Q4 2023 net sales was primarily driven by a ~4% decrease in selling price and product mix and a ~1% decrease in sales volumes, partially offset by a 1% favorable foreign currency translation[4] * Adjusted EBITDA increased by approximately 13% year-over-year in Q4 2023, primarily reflecting an improvement in gross margins[5] Full Year 2023 Highlights & CEO Commentary For the full year 2023, Quaker Houghton achieved record net sales and earnings, demonstrating significant profitability improvement and generating record operating cash flow FY 2023 Consolidated Financial Performance | Metric | FY 2023 ($ in thousands) | FY 2022 ($ in thousands) | Change (%) | | :----------------------------------- | :----------------------- | :----------------------- | :--------- | | Net sales | 1,953,313 | 1,943,585 | 0.50% | | Net income (loss) attributable to Quaker Chemical Corporation | 112,748 | (15,931) | N/A | | Net income (loss) attributable to Quaker Chemical Corporation common shareholders – diluted | 6.26 | (0.89) | N/A | | Non-GAAP net income | 137,643 | 105,320 | 30.69% | | Non-GAAP earnings per diluted share | 7.65 | 5.87 | 30.32% | | Adjusted EBITDA | 320,379 | 257,150 | 24.59% | | Operating cash flow | 279,000 | N/A | N/A | * Quaker Houghton delivered record full year adjusted EBITDA of $320.4 million and operating cash flow of $279.0 million in 2023[6] * The Board of Directors approved a new share repurchase program of up to $150 million of its common stock, effective immediately with no expiration date[6] Business Outlook & Segment Performance This chapter outlines the company's forward-looking expectations for market conditions and earnings growth, alongside a detailed analysis of segment-specific financial results for Q4 and full year 2023 Business Outlook The company anticipates current market conditions to persist through the first half of 2024 but expects to achieve another year of earnings growth due to ongoing strategic actions and new business wins * Current market conditions are expected to persist through the first half of 2024[7] * The Company expects to deliver another year of earnings growth in 2024, benefiting from advancing its enterprise strategy and earning new business[7] * The balance sheet and cash generation capabilities are strong, with a commitment to capital allocation priorities aimed at enhancing shareholder value[7] Fourth Quarter and Full Year 2023 Segment Results In Q4 2023, Americas net sales declined, while EMEA and Asia/Pacific net sales remained consistent; for the full year, all segments saw increased operating earnings due to improved margins * The Company's reportable segments are Americas, EMEA, and Asia/Pacific, following a reorganization effective January 1, 2023[8][30] Segment Net Sales Analysis Americas segment net sales declined in Q4 2023 due to lower volumes and price/mix, while EMEA and Asia/Pacific maintained consistent net sales, with full year 2023 showing increased selling price and product mix across all segments Segment Net Sales by Region | Segment | Q4 2023 Net Sales ($ in thousands) | Q4 2022 Net Sales ($ in thousands) | FY 2023 Net Sales ($ in thousands) | FY 2022 Net Sales ($ in thousands) | | :---------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Americas | 226,564 | 243,937 | 977,095 | 946,516 | | EMEA | 135,745 | 135,769 | 571,347 | 562,508 | | Asia/Pacific | 104,800 | 105,102 | 404,871 | 434,561 | | Total | 467,109 | 484,808 | 1,953,313 | 1,943,585 | * Americas Q4 2023 net sales declined due to decreased sales volumes and selling price/product mix, partially offset by favorable foreign currency translation[10][11] * EMEA Q4 2023 net sales were consistent year-over-year, as increased sales volumes and favorable foreign currency translation were offset by a decline in selling price and product mix[10] * Asia/Pacific Q4 2023 net sales were also consistent, with increased sales volumes offsetting declines in selling price/product mix and unfavorable foreign currency translation[10] * Selling price and product mix increased in all segments for the full year 2023 compared to 2022[11] Segment Operating Earnings Analysis All three segments experienced an increase in operating earnings for both Q4 and full year 2023, primarily attributed to improved operating margins consistent with ongoing initiatives Segment Operating Earnings by Region | Segment | Q4 2023 Operating Earnings ($ in thousands) | Q4 2022 Operating Earnings ($ in thousands) | FY 2023 Operating Earnings ($ in thousands) | FY 2022 Operating Earnings ($ in thousands) | | :---------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Americas | 61,756 | 59,547 | 266,036 | 223,629 | | EMEA | 23,735 | 17,562 | 104,811 | 76,364 | | Asia/Pacific | 31,854 | 29,696 | 118,458 | 105,842 | | Total | 117,345 | 106,805 | 489,305 | 405,835 | * Operating earnings increased in all three segments in Q4 2023 compared to the prior year, and also for the full year 2023[13] * The increase in operating earnings was primarily driven by an improvement in operating margins across all segments, consistent with the Company's ongoing margin improvement initiatives[13] Financial Position & Strategic Actions This chapter details Quaker Houghton's improved cash flow and liquidity, along with recent strategic developments including an acquisition and a new share repurchase program Cash Flow and Liquidity Quaker Houghton significantly improved its net operating cash flow in 2023, reaching a record $279.0 million, while also reducing total gross debt to $755.6 million and net debt to approximately $561.1 million * The Company generated $279.0 million in net operating cash flow for the full year 2023, a significant improvement of $237.2 million compared to $41.8 million in 2022[14] * Total gross debt decreased to $755.6 million at December 31, 2023, from $933.6 million at the end of 2022[15] * Net debt was approximately $561.1 million as of December 31, 2023, with a net debt to trailing twelve months adjusted EBITDA ratio of approximately 1.8x[15] Recent Strategic Developments In February 2024, Quaker Houghton expanded its EMEA segment through the acquisition of I.K.V. Tribologie (IKVT), and the Board of Directors approved a new $150 million share repurchase program * In February 2024, Quaker Houghton acquired I.K.V. Tribologie (IKVT) and its subsidiaries for approximately 27.0 million EUR ($29.1 million)[17] * IKVT specializes in high-performance lubricants and greases for automotive, aerospace, electronics, and other industrial markets, and will be part of the Company's EMEA segment[17] * The Board of Directors approved a new share repurchase program, authorizing the Company to repurchase up to $150 million of its common stock, effective immediately[18] Non-GAAP Financial Measures This chapter explains Quaker Houghton's use of non-GAAP financial measures, providing reconciliations for operating income, EBITDA, and earnings per diluted share, along with notes on adjustments and segment reporting Explanation of Non-GAAP Measures Quaker Houghton utilizes non-GAAP financial measures to provide supplemental information, excluding non-recurring or non-core items to offer a clearer understanding of financial performance and facilitate comparisons * Non-GAAP financial measures (EBITDA, adjusted EBITDA, non-GAAP operating income, non-GAAP net income, non-GAAP EPS) are provided as supplemental information to enhance understanding of financial performance, indicate future operating performance, and facilitate comparison among fiscal periods[19] * These non-GAAP measures exclude items not indicative of future operating performance or not considered core to the Company's operations[19] * Definitions are provided for EBITDA (net income before D&A, interest, taxes), adjusted EBITDA (EBITDA +/- non-core items), non-GAAP operating income (operating income +/- non-core items), and non-GAAP net income/EPS (adjusted EBITDA less adjusted D&A, interest, and taxes)[20][21] Non-GAAP Operating Income and Margin Reconciliations This section provides a reconciliation of GAAP operating income to non-GAAP operating income and margin for the three and twelve months ended December 31, 2023 and 2022, adjusting for specific items Non-GAAP Operating Income and Margin Reconciliation | Metric | Q4 2023 ($ in thousands) | Q4 2022 ($ in thousands) | FY 2023 ($ in thousands) | FY 2022 ($ in thousands) | | :-------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Operating income (loss) | 48,253 | (53,611) | 214,495 | 52,304 | | Non-GAAP operating income | 50,884 | 48,984 | 227,774 | 177,891 | | Non-GAAP operating margin (%) | 10.9% | 10.1% | 11.7% | 9.2% | EBITDA, Adjusted EBITDA, and Non-GAAP Net Income Reconciliations This section details the reconciliation from GAAP net income to EBITDA, Adjusted EBITDA, and non-GAAP net income for the three and twelve months ended December 31, 2023 and 2022, by adjusting for various non-core items EBITDA, Adjusted EBITDA, and Non-GAAP Net Income Reconciliation | Metric | Q4 2023 ($ in thousands) | Q4 2022 ($ in thousands) | FY 2023 ($ in thousands) | FY 2022 ($ in thousands) | | :-------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Net income (loss) attributable to Quaker Chemical Corporation | 20,198 | (75,957) | 112,748 | (15,931) | | EBITDA | 71,591 | (33,083) | 302,052 | 123,087 | | Adjusted EBITDA | 76,964 | 67,923 | 320,379 | 257,150 | | Adjusted EBITDA margin (%) | 16.5% | 14.0% | 16.4% | 13.2% | | Non-GAAP net income | 31,949 | 25,001 | 137,643 | 105,320 | Non-GAAP Earnings per Diluted Share Reconciliations This section provides a reconciliation of GAAP earnings per diluted share to non-GAAP earnings per diluted share for the three and twelve months ended December 31, 2023 and 2022, by adjusting for various non-core items Non-GAAP Earnings per Diluted Share Reconciliation | Metric | Q4 2023 ($) | Q4 2022 ($) | FY 2023 ($) | FY 2022 ($) | | :-------------------------------------------------------------------------------- | :---------- | :---------- | :---------- | :---------- | | GAAP earnings (loss) per diluted share attributable to Quaker Chemical Corporation common shareholders | 1.12 | (4.24) | 6.26 | (0.89) | | Non-GAAP earnings per diluted share | 1.78 | 1.39 | 7.65 | 5.87 | Notes on Non-GAAP and Segment Measures This section provides detailed explanations for adjustments made in non-GAAP reconciliations and clarifies the company's segment reporting structure, which was reorganized effective January 1, 2023 * Combination, integration, and other acquisition-related expenses (credits) in 2022 included legal, financial, and advisory costs for integration activities and other acquisitions, as well as income/expenses related to indemnification assets and a gain from the sale of real property assets[28] * Depreciation and amortization adjustments include amortization expense related to the fair value step-up for a Houghton joint venture in Korea[28] * Adjusted taxes on income include current and deferred income tax impacts of reconciling items and specific tax charges/benefits not considered core or indicative of future performance, such as tax law changes, valuation allowance adjustments, and withholding taxes for repatriation of non-U.S. earnings[28] * The Company reorganized its executive management team and business structure into three reportable segments: Americas, EMEA, and Asia/Pacific, effective January 1, 2023, with prior period information recast accordingly[27][30] Consolidated Financial Statements This chapter presents Quaker Houghton's unaudited consolidated financial statements, including statements of operations, balance sheets, and cash flows for the specified periods Consolidated Statements of Operations The unaudited consolidated statements of operations present the company's financial performance for the three and twelve months ended December 31, 2023 and 2022, detailing net sales, gross profit, operating expenses, and net income (loss) Consolidated Statements of Operations | Metric | Q4 2023 ($ in thousands) | Q4 2022 ($ in thousands) | FY 2023 ($ in thousands) | FY 2022 ($ in thousands) | | :---------------------------------------------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Net sales | 467,109 | 484,808 | 1,953,313 | 1,943,585 | | Gross profit | 171,156 | 156,270 | 705,644 | 612,654 | | Operating income (loss) | 48,253 | (53,611) | 214,495 | 52,304 | | Income (loss) before taxes and equity in net income of associated companies | 34,184 | (68,049) | 153,124 | 7,118 | | Net income (loss) attributable to Quaker Chemical Corporation | 20,198 | (75,957) | 112,748 | (15,931) | | Diluted EPS | 1.12 | (4.24) | 6.26 | (0.89) | Consolidated Balance Sheets The unaudited consolidated balance sheets provide a snapshot of Quaker Houghton's financial position as of December 31, 2023 and 2022, detailing assets, liabilities, and equity Consolidated Balance Sheets | Metric | December 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :------------------------------------ | :--------------------------------- | :--------------------------------- | | Total current assets | 927,889 | 994,137 | | Total assets | 2,714,211 | 2,821,622 | | Total current liabilities | 367,510 | 354,786 | | Long-term debt | 730,623 | 933,561 | | Total liabilities | 1,329,289 | 1,543,037 | | Total Quaker shareholders' equity | 1,384,319 | 1,277,918 | | Total equity | 1,384,922 | 1,278,585 | Consolidated Statements of Cash Flows The unaudited consolidated statements of cash flows outline the cash generated and used by Quaker Houghton across operating, investing, and financing activities for the years ended December 31, 2023 and 2022 Consolidated Statements of Cash Flows | Metric | FY 2023 ($ in thousands) | FY 2022 ($ in thousands) | | :-------------------------------------- | :----------------------- | :----------------------- | | Net cash provided by operating activities | 279,020 | 41,794 | | Net cash used in investing activities | (27,621) | (40,191) | | Net cash (used in) provided by financing activities | (238,606) | 24,672 | | Net increase in cash, cash equivalents and restricted cash | 13,564 | 15,787 | | Cash, cash equivalents and restricted cash at the end of the period | 194,527 | 180,963 | Additional Information This chapter provides important context regarding forward-looking statements, details for the investor conference call, and an overview of Quaker Houghton's global leadership in industrial process fluids Forward-Looking Statements This section contains forward-looking statements based on assumptions and expectations about future events, subject to various risks and uncertainties, with the company disclaiming any obligation to update them * Forward-looking statements are based on assumptions and expectations about future events and are subject to risks and uncertainties[32] * Major risks include demand for products, raw material costs, supply chain disruptions, customer financial instability, rising interest rates, economic recession, geopolitical disruptions, foreign currency fluctuations, and cyber-security breaches[32] * The Company disclaims any duty or obligation to update or revise any forward-looking statements[32] Conference Call Details Quaker Houghton announced details for its investor conference call to discuss fourth quarter and full year 2023 performance, scheduled for March 1, 2024, at 8:30 a.m. ET * An investor conference call to discuss Q4 and full year 2023 performance is scheduled for Friday, March 1, 2024, at 8:30 a.m. ET[33] * A live webcast and supplemental information can be accessed through the Company's Investor Relations website or by dialing 877-269-7756[33] About Quaker Houghton Quaker Houghton is recognized as the global leader in industrial process fluids, operating in over 25 countries and serving a diverse customer base with high-performing, innovative, and sustainable solutions * Quaker Houghton is the global leader in industrial process fluids, with operations in over 25 countries[34] * Customers include thousands of advanced and specialized companies in steel, aluminum, automotive, aerospace, offshore, container, mining, and metalworking industries[34] * The company provides high-performing, innovative, and sustainable solutions, supported by approximately 4,400 employees including chemists, engineers, and industry experts[34]