Quaker(KWR) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited financial statements reflect the Houghton acquisition, restructuring costs, and COVID-19 impacts Condensed Consolidated Statements of Operations The company reported a significant net loss in Q2 2020 due to acquisition costs and pandemic-related effects Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $286,040 | $205,869 | $664,601 | $417,079 | | Gross profit | $97,386 | $75,161 | $231,237 | $150,928 | | Operating income (loss) | $2,238 | $20,531 | $(10,206) | $40,360 | | Net (loss) income attributable to Quaker | $(7,735) | $15,591 | $(36,116) | $29,435 | | Diluted (loss) earnings per share | $(0.43) | $1.17 | $(2.03) | $2.20 | - For the six months ended June 30, 2020, the company recorded a $38.0 million impairment charge for an indefinite-lived intangible asset, which was not present in 2019[11] Condensed Consolidated Balance Sheets Total assets slightly increased while equity decreased, driven by higher cash from debt and lower intangible asset values Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $849,238 | $715,972 | | Goodwill | $604,649 | $607,205 | | Other intangible assets, net | $1,044,516 | $1,121,765 | | Total assets | $2,871,526 | $2,850,316 | | Total current liabilities | $282,691 | $359,934 | | Long-term debt | $1,070,306 | $882,437 | | Total liabilities | $1,704,185 | $1,607,950 | | Total equity | $1,167,341 | $1,242,366 | Condensed Consolidated Statements of Cash Flows Operating cash flow improved, and a significant increase in cash resulted from drawing on credit facilities Condensed Consolidated Cash Flow Highlights (in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,662 | $22,409 | | Net cash used in investing activities | $(10,618) | $(5,843) | | Net cash provided by (used in) financing activities | $168,731 | $(35,282) | | Net increase (decrease) in cash | $198,200 | $(17,967) | Notes to Condensed Consolidated Financial Statements Notes detail the Houghton acquisition, restructuring, asset impairment, and significant COVID-19 pandemic impacts - Business Combinations: The company completed its combination with Houghton on August 1, 2019, for a total consideration of $1.66 billion, with integration expenses of $16.5 million in H1 2020[24][26][30] - Restructuring: The 'QH Program' initiated in Q3 2019 aims to achieve cost synergies, with $2.2 million in restructuring charges recorded in the first six months of 2020[73][75] - Goodwill and Intangible Asset Impairment: Due to COVID-19's impact, the company recorded a non-cash impairment charge of $38.0 million in Q1 2020 on intangible assets[109] - COVID-19 Impact: The pandemic caused significant disruptions, including volume declines and lower net sales, with the full extent of future impact remaining uncertain[138][140] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A explains that while acquisitions boosted sales, organic revenue declined significantly due to COVID-19 - Q2 2020 net sales increased 39% to $286.0 million due to acquisitions, but organic sales declined approximately 30% from a 27% drop in sales volumes[146] - In response to COVID-19, the company took actions to conserve cash, including lowering targeted capital expenditures by approximately 30%[159] - As a precautionary measure, the company drew down most of its revolving credit facility in March 2020, increasing cash reserves and total debt[114][163] - The company expects to realize $53 million in Combination cost synergies in 2020, with approximately $22 million realized in the first six months[168] Quantitative and Qualitative Disclosures About Market Risk Market risk exposures remain consistent, though heightened in volatility due to the COVID-19 pandemic - The company acknowledges market risks, noting that the COVID-19 pandemic has led to significant volatility and uncertainty across them[247] Controls and Procedures Disclosure controls were deemed ineffective due to material weaknesses related to the recent business combination - Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to existing material weaknesses[249] - The material weaknesses relate to ineffective risk assessment, revenue controls, and business combination accounting following the Combination[250] - A multi-step remediation plan is being executed, but COVID-19 related challenges may impact the timing of these activities[252] PART II. OTHER INFORMATION Legal Proceedings The company faces ongoing legal matters related to environmental remediation and asbestos litigation - Information regarding legal proceedings is incorporated by reference from Note 19 of the financial statements[257] Risk Factors The primary updated risk factor is the significant and uncertain negative impact of the COVID-19 pandemic - The primary updated risk factor relates to the COVID-19 pandemic, which has negatively affected business through reduced demand and volume declines[259][260] - The pandemic has already led to a non-cash impairment charge and could cause future disruptions to supply chains and debt covenant compliance[261][265] - The ultimate significance of COVID-19 on the business is uncertain and depends on the duration of the pandemic and pace of economic recovery[263] Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered shares for an acquisition and repurchased shares from employees for tax purposes - On May 20, 2020, the company issued 17,894 shares of common stock (valued at approx $2.9 million) in a private placement to acquire Tel Nordic ApS[264] - During the quarter, 3,930 shares were acquired from employees for tax obligations, with no shares repurchased under the public buyback program[266] Exhibits This section lists all exhibits filed with the report, including certifications and interactive data files