Quaker(KWR) - 2023 Q4 - Annual Report

Part I Business Quaker Houghton leads in industrial process fluids, serving diverse industries globally with a focus on R&D, sustainability, and human capital management Principal Product Line Contributions to Net Sales | Major Product Line | 2023 (%) | 2022 (%) | 2021 (%) | | :--- | :--- | :--- | :--- | | Metal removal fluids | 23.6 % | 22.9 % | 23.4 % | | Rolling lubricants | 19.5 % | 20.8 % | 22.2 % | | Hydraulic fluids | 14.1 % | 14.1 % | 13.6 % | - In 2023, the company's five largest customers accounted for approximately 12% of consolidated net sales, with the largest single customer representing about 3%[16] Research and Development Expenses | Year | R&D Expense (USD Million) | | :--- | :--- | | 2023 | $50.3 | | 2022 | $46.0 | | 2021 | $44.9 | - In February 2024, the company acquired I.K.V. Tribologie IKVT for approximately €27.0 million to strengthen its position in high-performance lubricants and greases[22] - The company has set a target to achieve carbon neutrality in its global operations by 2030 and net zero emissions across its entire value chain by 2050[32] - As of December 31, 2023, Quaker Houghton had approximately 4,400 full-time employees globally, with about 900 in the U.S. and 3,500 in non-U.S. subsidiaries[27] Risk Factors The company faces significant risks from cyclical demand, operational challenges, international market volatility, supply chain, and regulatory compliance - Demand for the company's products is highly dependent on the business cycles of its customers in the steel, automotive, aircraft, and durable goods industries[58] - The top five customers accounted for approximately 12% of 2023 consolidated net sales, making the loss of a significant customer a material risk[60] - Variable rate indebtedness subjects the company to interest rate risk; rising rates increase debt service obligations and could negatively affect customer demand[71][73] - Non-U.S. subsidiaries accounted for approximately 60% to 70% of consolidated net sales over the past three years, exposing the company to significant foreign currency fluctuation risk[78] - The company uses approximately 3,000 different raw materials, and significant price fluctuations, particularly for commodity chemicals and materials linked to crude oil, can materially impact costs[81] - Cybersecurity incidents pose a significant risk. The company relies on IT systems for daily operations, and a breach could lead to data leaks, operational disruption, and potential liability under regulations like GDPR and CCPA[105][106][107] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[119] Cybersecurity The company's cybersecurity risk management, overseen by the Audit Committee, follows the NIST framework with 24/7 monitoring and no material incidents reported - The Board, primarily through the Audit Committee, oversees management's approach to cybersecurity risks, with management providing updates at least quarterly[122] - The company's cybersecurity risk management program is based on the National Institute of Standards and Technology (NIST) framework, covering identification, protection, detection, response, and recovery[125] - The company operates global cybersecurity operations centers for 24/7 monitoring and incident response and conducts annual penetration and disaster recovery tests with third parties[125][133] Properties Quaker Houghton's global operations are supported by numerous owned and leased facilities, with headquarters in Conshohocken, Pennsylvania, and most owned properties mortgage-free - The corporate headquarters and a laboratory are located in Conshohocken, Pennsylvania[127] - Principal facilities are located globally, including sites in California, Illinois, and Ohio (Americas); Netherlands, Germany, and the U.K. (EMEA); and China, India, and Australia (Asia/Pacific)[127] - Most principal facilities are owned by the company and were mortgage-free as of December 31, 2023, with some key locations being leased[128] Legal Proceedings The company is involved in various legal and environmental proceedings, with management expecting no material adverse effect on financial condition or operations - The company is party to various legal proceedings, including environmental matters. For detailed information, refer to Note 25 of the Notes to Consolidated Financial Statements[131] Mine Safety Disclosures This item is not applicable to the company - Not applicable[132] Information about our Executive Officers This section provides biographical information for the company's executive officers as of February 29, 2024, detailing their age, position, and business experience Executive Officers as of February 29, 2024 | Name | Age | Position | | :--- | :--- | :--- | | Andrew E. Tometich | 57 | Chief Executive Officer and President | | Joseph A. Berquist | 52 | Executive Vice President, Chief Commercial Officer | | Jeewat Bijlani | 47 | Executive Vice President, Chief Strategy Officer | | Jeffrey L. Fleck | 53 | Senior Vice President, Chief Global Supply Chain Officer | | Shane W. Hostetter | 42 | Executive Vice President, Chief Financial Officer | | Melissa Leneis | 41 | Executive Vice President, Chief Human Resources Officer | | Anna Ransley | 46 | Senior Vice President, Chief Digital Information Officer | | Dr. David Slinkman | 59 | Senior Vice President, Chief Technology Officer | | Robert T. Traub | 59 | Senior Vice President, General Counsel and Corporate Secretary | | Jeffrey J. Kutz | 64 | Vice President, Chief Accounting Officer | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with cash dividends increasing in 2023 and a new $150 million share repurchase program authorized in February 2024 Cash Dividends Declared per Share | Year | Total Dividends per Share ($) | | :--- | :--- | | 2023 | $1.78 | | 2022 | $1.70 | Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Oct 2023 | 15,038 | $189.09 | | Nov 2023 | 30 | $175.71 | | Dec 2023 | 111 | $207.55 | | Total | 15,179 | $158.68 | - In October 2023, 14,618 shares were released to the company from an indemnification escrow account related to the Houghton combination to satisfy tax audit settlements[143] - The 2015 Share Repurchase Program was terminated on February 28, 2024, and a new program authorizing up to $150 million in repurchases was approved[143][183] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2023 performance showed increased net sales and significant net income recovery, driven by gross margin improvements and strong operating cash flow Executive Summary The company's 2023 performance saw a 1% net sales increase to $1.95 billion, significant net income recovery, and 25% Adjusted EBITDA growth, driven by improved margins and strong cash flow 2023 Key Financial Results vs. 2022 | Metric | 2023 (USD) | 2022 (USD) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,953.3M | $1,943.6M | +1% | | Net Income (Loss) | $112.7M | ($15.9M) | N/A | | Diluted EPS | $6.26 | ($0.89) | N/A | | Non-GAAP Net Income | $137.6M | $105.3M | +30.7% | | Non-GAAP Diluted EPS | $7.65 | $5.87 | +30.3% | | Adjusted EBITDA | $320.4M | $257.2M | +25% | - The 1% increase in net sales was driven by a 7% increase in selling price/mix and 1% favorable FX, offset by a 7% decline in sales volumes[149] - Net operating cash flow increased significantly to $279.0 million in 2023 from $41.8 million in 2022, driven by improved operating performance and better working capital management[152] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgments and estimates, particularly for credit losses, tax exposures, and the valuation of goodwill and other intangible assets - The consolidated allowance for credit losses was $13.3 million as of December 31, 2023, compared to $13.5 million in 2022[155] - The company's consolidated goodwill was $512.5 million at the end of 2023. No impairment was recorded in 2023, but a $93.0 million impairment charge was taken for the EMEA reporting unit in Q4 2022[160][161] - The EMEA reporting unit's goodwill is sensitive to impairment risk. A 3.0 percentage point increase in the WACC or a 4.0 percentage point decline in the compound annual revenue growth rate could lead to full impairment of its remaining goodwill[162] Liquidity and Capital Resources The company's cash increased to $194.5 million in 2023, driven by $279.0 million in operating cash flow, used primarily for debt repayment and a new $150 million share repurchase program Cash Flow Summary (2023 vs. 2022) | Cash Flow Activity | 2023 (USD Million) | 2022 (USD Million) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $279.0 | $41.8 | | Net Cash Used in Investing Activities | ($27.6) | ($40.2) | | Net Cash (Used in) Provided by Financing Activities | ($238.6) | $24.7 | - As of December 31, 2023, the company had $744.5 million in borrowings outstanding under its Credit Facility and approximately $465.7 million of unused capacity under its revolver[171] - In Q1 2023, the company entered into $300.0 million of three-year interest rate swaps to convert a portion of its variable-rate debt to a fixed rate, managing interest rate risk[173] - A new share repurchase program authorizing up to $150 million was approved on February 28, 2024, replacing the previous 2015 program[183] Contractual Obligations as of December 31, 2023 (in thousands) | Contractual Obligations | Total (USD Thousands) | 2024 (USD Thousands) | 2025 (USD Thousands) | 2026 (USD Thousands) | 2027 (USD Thousands) | 2028 (USD Thousands) | 2029 and Beyond (USD Thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $755,046 | $23,250 | $36,955 | $36,914 | $647,899 | $10,028 | $— | | Interest obligations | $155,556 | $46,855 | $44,948 | $42,601 | $20,977 | $175 | $— | | Operating leases | $39,694 | $13,130 | $9,027 | $6,840 | $3,543 | $1,909 | $5,245 | | Purchase obligations | $1,285,259 | $1,282,910 | $783 | $783 | $783 | $— | $— | | Total | $2,266,986 | $1,384,494 | $96,439 | $87,496 | $673,461 | $12,127 | $12,969 | Non-GAAP Measures The company utilizes non-GAAP financial measures, including Adjusted EBITDA and non-GAAP EPS, to offer supplemental performance insights by excluding non-core operational items Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | 2023 (USD Thousands) | 2022 (USD Thousands) | 2021 (USD Thousands) | | :--- | :--- | :--- | :--- | | Net income (loss) attributable to Quaker | $112,748 | ($15,931) | $121,369 | | Depreciation and amortization | $83,020 | $81,514 | $87,728 | | Interest expense, net | $50,699 | $32,579 | $22,326 | | Taxes on income (loss) | $55,585 | $24,925 | $34,939 | | EBITDA | $302,052 | $123,087 | $266,362 | | Adjustments (e.g., Restructuring, Impairment) | $18,327 | $134,063 | $7,747 | | Adjusted EBITDA | $320,379 | $257,150 | $274,109 | Reconciliation of GAAP EPS to Non-GAAP EPS | | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | :--- | | GAAP earnings (loss) per diluted share | $6.26 | ($0.89) | $6.70 | | Adjustments (per share) | $1.39 | $6.76 | $0.18 | | Non-GAAP earnings per diluted share | $7.65 | $5.87 | $6.88 | Operations Consolidated net sales increased 1% in 2023 to $1.95 billion, driven by price/mix gains offsetting volume declines, resulting in improved gross margin and operating income across all segments - 2023 vs. 2022: Net sales increased 1% due to a 7% price/mix increase and 1% favorable FX, offset by a 7% volume decline. Gross margin improved to 36.1% from 31.5%[196][198] - 2022 vs. 2021: Net sales increased 10% due to a 22% price/mix increase, offset by a 7% volume decline and 6% unfavorable FX. Gross margin decreased to 31.5% from 33.8% due to significant raw material cost inflation[208][210] Segment Operating Earnings (in millions) | Segment | 2023 (USD Million) | 2022 (USD Million) | 2021 (USD Million) | | :--- | :--- | :--- | :--- | | Americas | $266.0 | $223.6 | $176.3 | | EMEA | $104.8 | $76.4 | $111.0 | | Asia/Pacific | $118.5 | $105.8 | $109.2 | Quantitative and Qualitative Disclosures About Market Risk Quaker Houghton faces market risks from interest rates, foreign currency, commodity prices, and credit, with mitigation strategies including interest rate swaps and credit loss allowances - A 100 basis point change in interest rates would result in an approximate $7.4 million change to annual interest expense, based on debt levels as of December 31, 2023[237] - A hypothetical 10% strengthening or weakening of key foreign currencies against the U.S. dollar would have impacted 2023 revenues by approximately $100.7 million and pre-tax earnings by about $12.8 million[239] - A one percentage point change in gross margin would have increased or decreased the company's 2023 pre-tax earnings by approximately $19.5 million, highlighting sensitivity to commodity price risk[241] - In Q1 2023, the company entered into $300.0 million of interest rate swaps to convert a portion of its variable-rate debt to a fixed rate, mitigating interest rate risk[238] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2023, including statements of operations, balance sheets, cash flows, and comprehensive notes Consolidated Statement of Operations Highlights (Year Ended Dec 31, in thousands) | | 2023 (USD Thousands) | 2022 (USD Thousands) | 2021 (USD Thousands) | | :--- | :--- | :--- | :--- | | Net sales | $1,953,313 | $1,943,585 | $1,761,150 | | Gross profit | $705,644 | $612,654 | $594,640 | | Operating income | $214,495 | $52,304 | $150,460 | | Net income (loss) attributable to Quaker | $112,748 | ($15,931) | $121,360 | Consolidated Balance Sheet Highlights (As of Dec 31, in thousands) | | 2023 (USD Thousands) | 2022 (USD Thousands) | | :--- | :--- | :--- | | Total current assets | $927,889 | $994,130 | | Total assets | $2,714,211 | $2,821,620 | | Total current liabilities | $367,510 | $354,780 | | Total liabilities | $1,329,289 | $1,543,030 | | Total equity | $1,384,922 | $1,278,580 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, in thousands) | | 2023 (USD Thousands) | 2022 (USD Thousands) | 2021 (USD Thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $279,020 | $41,794 | $48,933 | | Net cash used in investing activities | ($27,621) | ($40,191) | ($49,130) | | Net cash (used in) provided by financing activities | ($238,606) | $24,672 | ($13,465) | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable as there were no changes in or disagreements with accountants on accounting and financial disclosure - Not Applicable[518] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes identified - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2023[519] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[522] Other Information During the fourth quarter ended December 31, 2023, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023[524] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[525] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[528] Executive Compensation Detailed information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the 2024 Proxy Statement[529] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's 2024 Proxy Statement, with a summary of available securities provided Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) ($) | Securities available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 62,853 | $214.40 | 460,407 | | Total | 62,853 | $214.40 | 460,407 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the 2024 Proxy Statement[532] Principal Accountant Fees and Services Information regarding the fees paid to and services provided by the principal accountant, PricewaterhouseCoopers LLP, is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the 2024 Proxy Statement[533] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K report, including an index to consolidated financial statements and various corporate documents - This section provides an index to the financial statements (pages 42-49) and lists all exhibits filed with the report, including material contracts and officer certifications[534][536] Form 10-K Summary The company has elected not to provide a summary of the Form 10-K report under this item - The Company has elected not to include a Form 10-K summary[540]