Quaker(KWR) - 2023 Q3 - Quarterly Report

markdown [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited condensed consolidated financial statements for Quaker Chemical Corporation show a slight decrease in net sales for the third quarter of 2023 compared to 2022, but a significant increase in net income and operating income, driven by improved gross margins; for the nine-month period, both net sales and net income increased year-over-year; the balance sheet indicates a decrease in total assets and total liabilities since year-end 2022; cash flow from operations improved substantially in the first nine months of 2023 compared to the same period in 2022, primarily due to higher net income and favorable changes in working capital [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net sales** | $490.6M | $492.2M | $1.49B | $1.46B | | **Gross profit** | $183.3M | $160.7M | $534.5M | $456.4M | | **Operating income** | $59.5M | $44.6M | $166.2M | $105.9M | | **Net income attributable to Quaker Chemical Corporation** | $33.7M | $25.9M | $92.6M | $60.0M | | **Diluted EPS** | $1.87 | $1.44 | $5.14 | $3.35 | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $198.4M | $181.0M | | **Total current assets** | $966.3M | $994.1M | | **Total assets** | $2.73B | $2.82B | | **Long-term debt** | $805.0M | $933.6M | | **Total liabilities** | $1.39B | $1.54B | | **Total Quaker shareholders' equity** | $1.34B | $1.28B | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) - Net cash provided by operating activities significantly improved to **$199.5M** for the nine months ended Sep 30, 2023, compared to a use of **$(26.3M)** in the prior-year period. This was driven by higher net income and favorable changes in working capital, particularly accounts receivable and inventories[19](index=19&type=chunk) | Cash Flow Activity (Nine Months Ended Sep 30) | 2023 | 2022 | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $199.5M | $(26.3M) | | **Net cash used in investing activities** | $(25.8M) | $(29.6M) | | **Net cash (used in) provided by financing activities** | $(150.5M) | $46.6M | | **Net increase (decrease) in cash and cash equivalents** | $17.4M | $(26.3M) | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) - In Q1 2023, the company reorganized its management and business structure, resulting in three reportable segments: Americas, EMEA, and Asia/Pacific. The previous Global Specialty Businesses segment was eliminated, and its operations were reallocated. Prior period information has been recast to align with this new structure[24](index=24&type=chunk) - The company initiated a global cost and optimization program in Q4 2022, targeting a reduction of approximately **100** positions globally to improve its cost structure. The program is expected to continue throughout 2023[48](index=48&type=chunk) - In Q1 2023, the company entered into **$300.0 million** notional amounts of three-year interest rate swaps to convert a portion of its variable-rate debt to a fixed rate, managing exposure to interest rate risk[75](index=75&type=chunk)[88](index=88&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management reported strong Q3 2023 results despite a challenging economic environment; net sales were nearly flat year-over-year at **$490.6 million**, as price/mix increases and favorable currency translation offset a **4%** volume decline; gross margin significantly improved to **37.4%** from **32.7%**, driving net income up to **$33.7 million** from **$25.9 million** in Q3 2022; the company generated strong operating cash flow of **$199.5 million** in the first nine months of 2023, a significant improvement from the prior year, due to higher earnings and better working capital management; management remains focused on execution amid macroeconomic uncertainty and expects higher earnings and cash flow for the full year 2023 compared to 2022 [Consolidated Operations Review](index=39&type=section&id=Consolidated%20Operations%20Review) - **Q3 2023 vs. Q3 2022:** - Net sales decreased by less than **1%** to **$490.6 million**, as a **2%** increase in price/mix and **2%** favorable FX impact were offset by a **4%** decline in sales volumes[136](index=136&type=chunk) - Gross margin improved significantly to **37.4%** from **32.7%**, driven by value-based pricing initiatives implemented in 2022[138](index=138&type=chunk) - SG&A increased by **6%** to **$122.8 million** due to higher labor-related and incentive compensation costs[139](index=139&type=chunk) - Operating income rose to **$59.5 million** from **$44.6 million**[142](index=142&type=chunk) - **Nine Months 2023 vs. Nine Months 2022:** - Net sales increased **2%** to **$1.49B**, driven by an **11%** increase in price/mix, which offset a **9%** volume decline[149](index=149&type=chunk) - Gross margin expanded to **36.0%** from **31.3%** due to pricing initiatives and moderating raw material costs[151](index=151&type=chunk) - Operating income grew to **$166.2 million** from **$105.9 million**[156](index=156&type=chunk) [Reportable Segments Review](index=41&type=section&id=Reportable%20Segments%20Review) | Segment (Q3 2023 vs Q3 2022) | Net Sales | % Change | Operating Earnings | % Change | Key Drivers | | :--- | :--- | :--- | :--- | :--- | :--- | | **Americas** | $245.9M | -3% | $69.1M | +4% | Sales volumes down 8%, offset by price/mix and FX. Earnings up on improved margins. | | **EMEA** | $139.6M | +4% | $27.9M | +80% | Price/mix and FX gains offset 9% volume decline. Strong earnings growth from higher sales and margins. | | **Asia/Pacific** | $105.1M | +2% | $31.0M | +16% | Sales volumes up 6%, partially offset by unfavorable FX. Earnings up on higher sales and improved margins. | [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) - Cash and cash equivalents increased by **$17.4 million** to **$198.4 million** in the first nine months of 2023. The increase was driven by strong operating cash flow of **$199.5 million**, which was partially offset by **$150.5 million** used in financing activities (primarily debt repayment) and **$25.8 million** in investing activities[106](index=106&type=chunk) - The company's total net debt was **$627.5 million** as of September 30, 2023. The company was in compliance with all credit facility covenants and had approximately **$414 million** of unused capacity under its revolver[111](index=111&type=chunk)[112](index=112&type=chunk) - A global cost and optimization program initiated in late 2022 is expected to generate full run-rate cost savings of approximately **$20 million** by the end of 2024, with total cash costs estimated at **1** to **1.5** times the savings[119](index=119&type=chunk) [Non-GAAP Measures](index=35&type=section&id=Non-GAAP%20Measures) | Metric (Q3) | 2023 | 2022 | | :--- | :--- | :--- | | **Adjusted EBITDA** | $84.4M | $70.3M | | **Adjusted EBITDA Margin** | 17.2% | 14.3% | | **Non-GAAP EPS** | $2.05 | $1.74 | - Non-GAAP adjustments primarily exclude items not considered core to operations, such as restructuring charges, strategic planning expenses, currency impacts from hyper-inflationary economies, and certain acquisition-related expenses[124](index=124&type=chunk)[125](index=125&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk.) The company's primary market risk exposure is to interest rate fluctuations due to its variable-rate credit facility; as of September 30, 2023, outstanding borrowings under the facility were **$814.8 million**; to mitigate this risk, in the first quarter of 2023, the company entered into interest rate swaps with a notional amount of **$300.0 million** to convert a portion of its variable-rate debt to a fixed rate - The company is exposed to interest rate risk from its variable-rate Credit Facility, which had **$814.8 million** in borrowings outstanding as of September 30, 2023[184](index=184&type=chunk) - To manage interest rate risk, the company entered into **$300.0 million** of three-year interest rate swaps in Q1 2023, converting a portion of its variable-rate borrowings to an average fixed rate of **3.64%** plus an applicable margin[185](index=185&type=chunk) [Controls and Procedures](index=46&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023; there were no changes during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[186](index=186&type=chunk) - No material changes to the company's internal control over financial reporting occurred during the third quarter of 2023[187](index=187&type=chunk) [PART II. OTHER INFORMATION](index=47&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=47&type=section&id=Item%201.%20Legal%20Proceedings.) The company refers to Note 18 of the Condensed Consolidated Financial Statements for information on legal proceedings; the note indicates no new material litigation and states that adequate accruals of approximately **$6 million** have been made for ongoing matters as of September 30, 2023 - For details on legal proceedings, the report incorporates by reference the information in Note 18 of the financial statements[190](index=190&type=chunk) - As of September 30, 2023, the company has accrued approximately **$6 million** for ongoing environmental and litigation matters, with no significant changes reported during the quarter[93](index=93&type=chunk) [Risk Factors](index=47&type=section&id=Item%201A.%20Risk%20Factors.) The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors described in the company's 2022 Form 10-K[191](index=191&type=chunk) [Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities](index=47&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%2C%20Use%20of%20Proceeds%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) During the third quarter of 2023, the company acquired **2,791** shares of its common stock from employees; these acquisitions were related to the payment of exercise prices for stock options or for tax withholding upon the vesting of restricted stock; no shares were repurchased under the publicly announced 2015 Share Repurchase Program | Period (2023) | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July | 2,661 | $195.06 | | August | 130 | $204.79 | | September | 0 | N/A | | **Total Q3** | **2,791** | **$195.37** | - All shares purchased during the quarter were acquired from employees in connection with equity compensation plans and not as part of the publicly announced share repurchase program[192](index=192&type=chunk) [Other Information](index=47&type=section&id=Item%205.%20Other%20Information.) On August 31, 2023, Jeewat Bijlani, Executive Vice President and Chief Strategy Officer, entered into a Rule 10b5-1 written trading arrangement; the plan covers the potential sale of up to **2,900** shares and the exercise and sale of up to **6,338** shares from stock options, effective from December 1, 2023, to July 31, 2024 - On August 31, 2023, an executive officer, Jeewat Bijlani, entered into a Rule 10b5-1 trading plan for the potential sale of company common stock and shares from stock options, scheduled to run from December 2023 to July 2024[194](index=194&type=chunk) [Exhibits](index=48&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents